<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1998
1933 ACT REGISTRATION NO. 333-46113
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
LLANY SEPARATE ACCOUNT R FOR FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE
(EXACT NAME OF REGISTRANT)
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
(NAME OF DEPOSITOR)
120 Madison Street, Suite 1700, Syracuse, NY 13202
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
Depositor's Telephone Number, including Area Code
(888) 223-1860
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Robert O. Sheppard, Esquire COPY TO:
Lincoln Life & Annuity Company of New York George N. Gingold, Esq.
120 Madison Street, Suite 1700 197 King Philip Drive
Syracuse NY 13202 West Hartford, CT 06117-1409
(NAME AND ADDRESS OF AGENT FOR SERVICE)
</TABLE>
Approximate date of proposed public offering: As soon as
practicable after the effective date of the registration statement.
INDEFINITE NUMBER OF UNITS OF INTEREST IN VARIABLE LIFE INSURANCE CONTRACTS
(TITLE OF SECURITIES BEING REGISTERED)
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
<PAGE>
CROSS REFERENCE SHEET
(RECONCILIATION AND TIE)
REQUIRED BY INSTRUCTION 4 TO FORM S-6
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ITEM OF FORM
N-8B-2 LOCATION IN PROSPECTUS
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1 Cover Page Highlights
2 Cover Page
3 *
4 Distribution of Policies
5 LLANY
6(a) The Variable Account
6(b) *
9 Legal Proceedings
10(a)-(c) Right-to-Examine Period; Surrenders; Accumulation Value;
Reports to Policy Owners
10(d) Right to Exchange for a Fixed Benefit Policy; Policy Loans;
Surrenders; Allocation of Net Premium Payments
10(e) Lapse and Reinstatement
10(f) Voting Rights
10(g)-(h) Substitution of Securities
10(i) Premium Payments; Transfers; Death Benefit; Policy Values;
Settlement Options
11 The Funds
12 The Funds
13 Charges; Fees
14 Issuance
15 Premium Payments; Transfers
16 The Variable Account
17 Surrenders
18 The Variable Account
19 Reports to Policy Owners
20 *
21 Policy Loans
22 *
23 LLANY
24 Incontestability; Suicide; Misstatement of Age or Sex
25 LLANY
26 Fund Participation Agreements
27 The Variable Account
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<TABLE>
<CAPTION>
ITEM OF FORM
N-8B-2 LOCATION IN PROSPECTUS
- ----------------- --------------------------------------------------------------
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28 Directors and Officers of LLANY
29 LLANY
30 *
31 *
32 *
33 *
34 *
35 *
37 *
38 Distribution of Policies
39 Distribution of Policies
40 *
41(a) Distribution of Policies
42 *
43 *
44 The Funds; Premium Payments
45 *
46 Surrenders
47 The Variable Account; Surrenders, Transfers
48 *
49 *
50 The Variable Account
51 Cover Page; Highlights; Premium Payments; Right to Exchange
for a Fixed Benefit Policy
52 Substitution of Securities
53 Tax Matters
54 *
55 *
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* Not Applicable
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
LLANY SEPARATE ACCOUNT R FOR FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
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HOME OFFICE LOCATION: ADMINISTRATIVE OFFICE ADMINISTRATIVE OFFICE
LINCOLN LIFE & LOCATION: MAILING ADDRESS:
ANNUITY ANNUITY AND VARIABLE LIFE ANNUITY AND VARIABLE
COMPANY OF NEW YORK SERVICES CENTER LIFE
120 MADISON STREET METROCENTER SERVICES CENTER
SUITE 1700 350 CHURCH STREET, MVL1 P.O. BOX 150482
SYRACUSE, NY 13202 HARTFORD, CT 06103-1106 HARTFORD, CT 06115-0482
(888)223-1860 (800)552-9898
</TABLE>
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THE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
BENEFITS PAYABLE ON DEATH OF SECOND OF TWO INSUREDS
- --------------------------------------------------------------------------------
Through this prospectus, Lincoln Life & Annuity Company of New York ("LLANY")
offers a flexible premium variable life insurance contract ("POLICY") which pays
death benefits on the death of the second to die of the two Insureds named in
the Policy ("SECOND DEATH"). The Policy allows flexible premium payments and a
choice between two death benefit options. Applicants should carefully consider
whether such a "second-to-die" Policy, which pays a death benefit only on the
Second Death, is appropriate to their financial objectives.
The Policy is funded through one or more of twenty different mutual funds
("FUNDS"), available through LLANY's Separate Account, and LLANY's fixed option,
the Fixed Account. The performance and values of the Funds are not guaranteed or
otherwise assured by LLANY. The Fixed Account, which credits at least 4% per
year interest on principal, is an obligation of, and guaranteed by, LLANY.
Special limits apply to withdrawals and transfers from the Fixed Account. This
Prospectus describes only the Separate Account options unless the Fixed Account
is specifically mentioned.
The Policy's value and (depending on the death benefit option selected) the
Death Benefit Proceeds may vary with the investment return on the Owner's
funding options. Policy values may be used to continue the Policy in force,
borrowed in part, withdrawn in part or, subject to a surrender charge,
surrendered in full. After the Second Death, the Beneficiary may choose among
settlement options equivalent to the Death Benefit Proceeds, or receive the
Death Benefit Proceeds in a lump sum.
Each of the Funds available through the Separate Account has its own investment
objective. The funding options available in the Separate Account are:
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Capital Appreciation Fund
AIM V.I. Diversified Income Fund
AIM V.I. Growth Fund
AIM V.I. Value Fund
BT INSURANCE FUNDS TRUST
BT Equity 500 Index Fund
DELAWARE GROUP PREMIUM FUND, INC.
Emerging Markets Series
Small Cap Value Series
Trend Series
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Equity-Income Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio
Investment Grade Bond Portfolio
LINCOLN NATIONAL MONEY MARKET FUND, INC.
Money Market Fund
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
OCC ACCUMULATION TRUST
Global Equity Portfolio
Managed Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Asset Allocation Fund Class 1
Templeton International Fund Class 1
Templeton Stock Fund Class 1
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance contract with the Policy. This
Prospectus and the Prospectuses of the Funds, furnished with this Prospectus,
should be read carefully to understand the Policy being offered.
The Policy described in this prospectus is available only in New York.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS AVAILABLE AS INVESTMENT OPTIONS THROUGH THE SEPARATE ACCOUNT UNDER THE
POLICY OFFERED BY THIS PROSPECTUS. ALL PROSPECTUSES SHOULD BE READ CAREFULLY TO
UNDERSTAND THE POLICY AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS DATED: JULY , 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
DEFINITIONS..................................... 3
HIGHLIGHTS...................................... 5
PURPOSE OF POLICY............................. 5
INITIAL CHOICES TO BE MADE.................... 5
LEVEL OR VARYING DEATH BENEFIT................ 6
PREMIUM PAYMENTS.............................. 6
SELECTION OF UNDERLYING INVESTMENTS........... 6
CHARGES AND FEES.............................. 6
INFORMATION ABOUT LLANY AND THE SEPARATE
ACCOUNT........................................ 7
PURPOSE OF THE POLICY........................... 8
Personal Circumstances........................ 8
Market, Interest Rate and Credit Risk
Exposure................................... 8
Replacements.................................. 8
APPLICATION..................................... 9
OWNERSHIP....................................... 9
BENEFICIARY..................................... 10
INSUREDS........................................ 10
THE CONTRACT.................................... 10
Policy Specifications......................... 10
PREMIUM FEATURES................................ 10
Additional Premiums; Planned Premiums......... 11
Limits on Right to Make Payments of
Additional and Planned Premiums............ 11
Premium Load; Net Premium Payment........... 11
RIGHT-TO-EXAMINE PERIOD......................... 11
TRANSFERS AND ALLOCATION AMONG ACCOUNTS......... 11
Allocation of Net Premium Payments............ 11
Transfers..................................... 12
Optional Sub-Account Allocation Programs...... 12
Dollar Cost Averaging....................... 12
Automatic Rebalancing....................... 13
INVESTMENT OPTIONS.............................. 13
Fixed Account................................. 13
Variable Account.............................. 14
POLICY VALUES................................... 14
Accumulation Value............................ 15
Variable Account Value........................ 15
Variable Accumulation Unit Value............ 15
Variable Accumulation Units................. 15
Fixed Account and Loan Account Value.......... 16
Net Accumulation Value........................ 16
FUNDS........................................... 16
Substitution of Securities.................... 20
Voting Rights................................. 20
Fund Participation Agreements................. 20
CHARGES AND FEES................................ 20
Deductions Made Monthly....................... 21
Monthly Deduction........................... 21
Cost of Insurance Charge.................... 21
Mortality and Expense Risk Charge and Fund
Expenses..................................... 22
Surrender Charges........................... 24
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CONTENTS PAGE
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Transaction Fee for Excess Transfers.......... 24
DEATH BENEFITS.................................. 24
Death Benefit Options......................... 24
Changes in Death Benefit Options and Specified
Amount....................................... 25
Federal Income Tax Definition of Life
Insurance.................................... 26
NOTICE OF DEATH OF INSUREDS..................... 26
PAYMENT OF DEATH BENEFIT PROCEEDS............... 26
SETTLEMENT OPTIONS.............................. 27
POLICY LIQUIDITY................................ 27
Policy Loans.................................. 27
Partial Surrender............................. 28
Surrender of the Policy....................... 29
Surrender Value............................. 29
Deferral of Payment and Transfers............. 29
ASSIGNMENT; CHANGE OF OWNERSHIP................. 29
LAPSE AND REINSTATEMENT......................... 30
Lapse of a Policy............................. 30
No Lapse Provision.......................... 30
Reinstatement of a Lapsed Policy.............. 30
COMMUNICATIONS WITH LLANY....................... 31
Proper Written Form........................... 31
OTHER POLICY PROVISIONS......................... 31
Issuance...................................... 31
Date of Coverage.............................. 31
Right to Exchange the Policy.................. 31
Paid-up Insurance Option...................... 32
Incontestability.............................. 32
Misstatement of Age or Gender................. 32
Suicide....................................... 32
Nonparticipating Policies..................... 33
TAX ISSUES...................................... 33
Tax Treatment of Death Benefit................ 33
Federal Income Tax Considerations............. 33
Taxation of LLANY............................. 34
Other Considerations.......................... 34
FAIR VALUE OF THE POLICY........................ 34
DIRECTORS AND OFFICERS OF LLANY................. 35
DISTRIBUTION OF POLICIES........................ 37
CHANGES OF INVESTMENT POLICY.................... 37
OTHER CONTRACTS ISSUED BY LLANY................. 37
STATE REGULATION................................ 38
REPORTS TO OWNERS............................... 38
ADVERTISING..................................... 38
YEAR 2000 ISSUES................................ 38
EXPERTS......................................... 39
REGISTRATION STATEMENT.......................... 40
FINANCIAL STATEMENTS............................ 40
Illustrations...................................
Appendices......................................
Appendix 1...................................... 71
Illustration of Accumulation Values, Surrender
Values, and Death Benefit Proceeds........... 71
</TABLE>
2
<PAGE>
DEFINITIONS
ACCUMULATION VALUE: The sum of the Fixed Account Value,
Variable Account Value and the Loan Account Value.
ADMINISTRATIVE OFFICE: The administrative office of Lincoln
Life & Annuity Company of New York, whose mailing address is
P.O. Box 150482, Hartford, CT 06115-0482.
AGE: The age of the subject person at her or his nearest
birthday.
BENEFICIARY: The person designated by the applicant or Owner
to receive any Death Benefit Proceeds payable under the
Policy.
CODE: The Internal Revenue Code of 1986, as amended.
COMMISSION: The Securities and Exchange Commission.
CORRIDOR DEATH BENEFIT: The Death Benefit calculated as a
percentage of the Accumulation Value rather than by
reference to the Specified Amount to satisfy the Internal
Revenue Service definition of "life insurance."
COST OF INSURANCE: The portion of the Monthly Deduction
designed to compensate LLANY (defined below) for the
anticipated cost of paying Death Benefits in excess of the
Accumulation Value, not including riders, supplemental
benefits or monthly expense charges.
COVERAGE DATE: The Policy Anniversary nearest the younger
Insured's age 100, and the date upon which the Policy
matures.
DATE OF ISSUE: The date on which LLANY begins life insurance
coverage under a Policy.
DEATH BENEFIT OPTION: Either of two methods for determining
the Death Benefit Proceeds.
DEATH BENEFIT PROCEEDS: The amount payable to the
Beneficiary upon the Second Death (defined below), in
accordance with the Death Benefit Option elected, before
deduction of the amount necessary to repay any loans in
full, and overdue deductions.
EFFECTIVE DATE: The date on which the initial premium is
applied to the Policy.
FIXED ACCOUNT: The account under which principal is
guaranteed and interest is credited at a rate of not less
than 4% per year. Fixed Account assets are general assets of
LLANY held in LLANY's General Account.
FIXED ACCOUNT VALUE: The portion of the Accumulation Value,
other than the Loan Account Value, held in LLANY's General
Account.
FUND(S): One or more of AIM Variable Insurance Funds, Inc.
-- AIM V.I. Capital Appreciation Fund, AIM V.I. Diversified
Income Fund, AIM V.I. Growth Fund, AIM V.I. Value Fund; BT
Insurance Funds Trust -- BT Equity 500 Index Fund; Delaware
Group Premium Fund, Inc. -- Emerging Markets Series, Small
Cap Value Series, Trend Series; Fidelity Variable Insurance
Products Fund -- Equity-Income Portfolio; Fidelity Variable
Insurance Products Fund II -- Asset Manager Portfolio,
Investment Grade Bond Portfolio; Lincoln National Money
Market Fund, Inc. -- Money Market Fund;
MFS-Registered Trademark- Variable Insurance Trust -- MFS
Emerging Growth Series, MFS Total Return Series, MFS
Utilities Series; Templeton Variable Products Series Fund
(Class 1) -- Templeton Asset Allocation Fund, Templeton
International Fund, Templeton Stock Fund; OCC Accumulation
Trust -- Global Equity Portfolio and Managed Portfolio. Each
of them is an open-end management investment company (mutual
fund) whose shares are available to fund a Variable
Sub-Account under the Policy.
GENERAL ACCOUNT: LLANY's general asset account, in which
assets attributable to the non-variable portion of the
Policies are held.
3
<PAGE>
GRACE PERIOD: The 61-day period following a Monthly
Anniversary Day on which the Policy's Net Accumulation Value
is insufficient to cover the current Monthly Deduction.
LLANY will send notice at least 31 days before the end of
the Grace Period that the Policy will lapse without value
unless a sufficient payment (described in the notification
letter) is received by LLANY.
HOME OFFICE: The Headquarters of Lincoln Life & Annuity
Company of New York, located at 120 Madison Street, Suite
1700, Syracuse, NY 13202.
INITIAL SPECIFIED AMOUNT: The amount (at least $250,000),
originally chosen by the applicant, initially equal to the
Death Benefit. The Specified Amount may be increased or
decreased as described in this Prospectus.
INSURED: Each of the two persons whose lives are insured by
the Policy. Any Death Benefit is payable only on the Second
Death of the Insureds.
LLANY: Lincoln Life & Annuity Company of New York.
LOAN ACCOUNT: The account in which Policy indebtedness
(outstanding loans and interest) accrues once it is
transferred out of the Fixed and Variable Sub-Accounts. The
Loan Account is part of LLANY's General Account.
LOAN ACCOUNT VALUE: The value of the Loan Account.
MONTHLY ANNIVERSARY DAY: The day of the month (as shown in
the Policy Specifications) when LLANY makes the Monthly
Deduction, or the next Valuation Day if that day is not a
Valuation Day or is nonexistent for that month.
MONTHLY DEDUCTION: The monthly deduction made from Net
Accumulation Value; this deduction includes the cost of
insurance, an administrative expense charge, and charges for
supplemental riders or benefits, if applicable.
NET ACCUMULATION VALUE: The Accumulation Value less the Loan
Account Value.
NET AMOUNT AT RISK: The Death Benefit minus the Accumulation
Value.
NET PREMIUM PAYMENT: The portion of a Premium Payment, after
deduction of 8.0% for the premium load, available for
allocation to the Fixed and Variable Sub-Accounts.
NO LAPSE PREMIUM: The cumulative premium required to have
been paid by each Monthly Anniversary Day to prevent the
Policy from lapsing.
OWNER: The person or persons (including non-natural
persons), holding legal ownership rights to the Policy so
long as one or both Insureds are living.
PLANNED PREMIUMS: The amount of premium (as shown in the
Policy Specifications) the applicant chooses to pay LLANY on
a scheduled basis. This is the amount for which LLANY sends
a premium reminder notice.
POLICY: The life insurance contract described in this
Prospectus.
POLICY ANNIVERSARY: The day of the year the Policy was
issued, or the next Valuation Day if that day is not a
Valuation Day or is nonexistent for that year.
POLICY YEAR: Each twelve-month period, beginning on the Date
of Issue, during which the Policy is in effect.
PREMIUM PAYMENT: A premium payment made to LLANY under the
Policy.
RIGHT-TO-EXAMINE PERIOD: The period of time, 10 days,
beginning when the Policy is delivered to the Owner, during
which the Owner may return the Policy and receive a refund
of premiums paid.
SECOND DEATH: The Death of the second of the two Insureds to
die.
4
<PAGE>
SEPARATE ACCOUNT: LLANY Separate Account R for Flexible
Premium Variable Life Insurance. Assets maintained in the
Separate Account are kept separate from the general assets
of LLANY and are not subject to the general liabilities of
LLANY.
SETTLEMENT OPTION(S): Several ways in which the Beneficiary
may receive Death Benefit Proceeds, or in which the Owner
may choose to receive payments upon surrender of the Policy.
SUB-ACCOUNTS: The investment options available under this
Policy, including Fixed and Variable Sub-Accounts.
SURRENDER CHARGE: The amount retained by LLANY upon the full
surrender of the Policy.
SURRENDER VALUE: The amount an Owner can receive in cash by
surrendering the Policy. This equals the Net Accumulation
Value minus the applicable Surrender Charge. All of the
Surrender Value may be applied to one or more of the
Settlement Options.
VALUATION DAY: Every day on which Accumulation Units are
valued; that is any day on which the New York Stock Exchange
is open, except any day on which trading on the Exchange is
restricted, or on which an emergency exists, as determined
by the Commission, so that valuation or disposal of
securities is not practicable.
VALUATION PERIOD: The period of time beginning on the day
following a Valuation Day and ending on the next Valuation
Day. A Valuation Period may be more than one day in length.
VARIABLE ACCOUNT: The aggregate of the Variable Sub-Accounts
of LLANY Separate Account R for Flexible Premium Variable
Life Insurance each invested in shares of a Fund. The
Variable Account is also the Separate Account.
VARIABLE ACCOUNT VALUE: The portion of the Accumulation
Value attributable to the Variable Account.
VARIABLE ACCUMULATION UNIT: A unit of measure used to
calculate the value of a Variable Sub-Account.
HIGHLIGHTS
The Policy is a flexible premium variable life insurance
policy. Its values may be accumulated on a fixed, variable
or combination basis.
PURPOSE OF POLICY
The Policy insures two Insureds. The Death Benefit under the
Policy is payable only on the Second Death of the two
Insureds. The Policy is appropriate when the Owner desires
to provide Death Benefits only after the Second Death. For
example, the Policy may be suitable to insure a dual income
couple who desire to provide support for their dependents in
the event both should die, or when a couple desires to
provide liquidity to their heirs on the Second Death. It
would not be suitable when the need for a source of
replacement income or liquidity will occur after the death
of only a single Insured.
INITIAL CHOICES TO BE MADE
The Owner (initially, the applicant) has at least three
important choices under the Policy. The Owner selects:
1)One of the two Death Benefit Options;
2)The amount and frequency of Premium Payments; and
3)The allocation of Net Premium Payments to underlying
investments.
5
<PAGE>
LEVEL OR VARYING DEATH BENEFIT
There are two death benefit options (each a "DEATH BENEFIT
OPTION"). The amount payable under each is determined as of
the date of the Second Death. The Death Benefit Proceeds are
the greater of the amount payable under (a) the Death
Benefit Option selected and (b) the Corridor Death Benefit
(see page 25). Death Benefit Option 1 provides a death
benefit of the Specified Amount. Death Benefit Option 2
provides a death benefit of the Specified Amount plus the
Accumulation Value as of the end of the Valuation Period in
which LLANY receives Due Proof of Death of both Insureds.
(SEE "DEATH BENEFITS, DEATH BENEFIT OPTIONS"). If the
applicant fails to designate a Death Benefit Option, Death
Benefit Option 1 applies.
It is sometimes possible to change the Death Benefit Option
or the Specified Amount. (SEE "Death Benefit, CHANGES IN
DEATH BENEFIT OPTIONS AND SPECIFIED AMOUNT").
PREMIUM PAYMENTS
The Policy provides for flexible Premium Payments. The Owner
may make an initial Premium Payment, elect a premium payment
plan under which periodic reminder notices will be sent for
Planned Premiums, or make fixed or varying Premium Payments
from time to time, or some combination of these. To the
extent that the Net Accumulation Value is insufficient to
pay required deductions (including the Cost of Insurance), a
Premium Payment will be required to continue the Policy in
force and a premium notice will be sent. If a Premium
Payment required to continue the Policy in force is not
received in a timely manner, the Policy will lapse. If the
Policy lapses it may be reinstated under certain
circumstances. The Policy will not lapse if, on each Monthly
Anniversary, the Owner has met the No Lapse Premium
requirement. (SEE "Lapse and Reinstatement, NO LAPSE
PROVISION") Premium Payments are refundable during the
Right-to-Examine Period. The right of the Owner to make
Premium Payments may be limited by LLANY in certain
circumstances and may be limited by applicable tax laws.
SELECTION OF UNDERLYING INVESTMENTS
The Owner allocates the Net Premium Payments among the
Variable Sub-Accounts in the Separate Account, each of which
invests only in shares of a particular Fund, and the Fixed
Account. The initial Premium Payment is allocated to the
Sub-Accounts after the end of the Right-to-Examine Period
(SEE "Right-To-Examine Period"). Allocations to each Fixed
and Variable Sub-Account must be in whole percentages. At
this time, no more than 18 Sub-Accounts may be opened during
the life of the Policy. LLANY may increase the maximum
number of Sub-Accounts in the future. The values of the
Variable Sub-Accounts are not guaranteed and will vary with
the investment performance of the Funds chosen by the Owner.
CHARGES AND FEES
There is a 8.0% premium load on all Premium Payments. (SEE
"Premium Payments, PREMIUM LOAD").
Monthly Deductions are made for the Cost of Insurance and
any riders. (SEE "Certain Fees and Charges, COST OF
INSURANCE CHARGE").
Monthly Deductions (a flat dollar fee of $12.50 per month
during the first Policy Year and, currently $5 per month
thereafter) and a charge of $0.09 per $1000 of Specified
Amount for the first 20 years of the Policy are made to
compensate LLANY for administrative expenses associated with
Policy issue and ongoing Policy maintenance.
6
<PAGE>
An additional monthly charge of $0.01 per $1,000 of
Specified Amount will also be imposed if the No Lapse
Provision is selected and remains in effect. (SEE "Certain
Fees and Charges, MONTHLY DEDUCTION").
Daily deductions from each Variable Sub-Account are made for
the mortality and expense risk. The current rate of
deduction, stated as an annual percentage of the value of
the Variable Sub-Account, is 0.80%. (SEE "Certain Fees and
Charges, MORTALITY AND EXPENSE RISK CHARGE").
Investment results for each Variable Sub-Account are
affected by each Fund's daily charge for management fees;
these charges vary by Fund and are shown on pages 22-23 of
this Prospectus.
A transaction fee of $25 is imposed for partial surrenders.
(SEE "Policy Liquidity, PARTIAL SURRENDERS").
LLANY reserves the right to impose a $25 charge for each
request for transfers among Fixed and Variable Sub-Accounts
in excess of 12 requests in any Policy Year. (SEE "Certain
Fees and Charges, TRANSACTION FEE FOR EXCESS TRANSFERS").
A surrender charge is deducted from proceeds (excluding
Death Benefit Proceeds) payable to the Owner when the Policy
is surrendered before the fifteenth anniversary of the Date
of Issue or, with respect to any increase in Specified
Amount, before the fifteenth anniversary of the increase.
(SEE "Policy Liquidity, SURRENDER CHARGES").
Interest is charged on Policy loans. (SEE "Policy Liquidity,
POLICY LOANS").
INFORMATION ABOUT LLANY AND THE SEPARATE ACCOUNT
LLANY is a life insurance company chartered under New York
law on June 6, 1996. LLANY's principal offices are located
at 120 Madison Street, Suite 1700, Syracuse, New York 13202.
LLANY is licensed to sell life insurance policies and
annuity contracts in New York.
LLANY is a subsidiary of The Lincoln National Life Insurance
Company, which is a stock life insurance company
incorporated under the laws of Indiana on June 12, 1905.
Lincoln National Life Insurance Company is principally
engaged in offering life insurance policies and annuity
contracts, and ranks among the largest United States stock
life insurance companies in terms of assets and life
insurance in force.
The Lincoln National Life Insurance Company is wholly owned
by Lincoln National Corporation ("LNC"), a publicly held
insurance holding company incorporated under Indiana law on
January 5, 1968. The principal offices of both The Lincoln
National Life Insurance Company and LNC are located at 1300
South Clinton Street, Fort Wayne, Indiana 46802. Through
subsidiaries, LNC engages primarily in the businesses of
insurance and financial services. Administrative services
necessary for the operation of the Variable Account and the
Policies are currently provided by The Lincoln National Life
Insurance Company. However, neither the assets of LNC nor
those of The Lincoln National Life Insurance Company support
the obligations of LLANY under the Policies.
On January 2, 1998, LLANY and The Lincoln National Life
Insurance Company entered into an indemnity reinsurance
transaction whereby 100% of a block of individual life and
annuity business of CIGNA Corporation was reinsured. On May
21, 1998, LLANY and The Lincoln National Life Insurance
Company announced their intentions to acquire certain
domestic individual life insurance business from Aetna, Inc.
via a 100% indemnity reinsurance transaction. The
transaction is expected to close in the fall of 1998.
7
<PAGE>
LLANY Separate Account R for Flexible Premium Variable Life
Insurance ("SEPARATE ACCOUNT" or "VARIABLE ACCOUNT") is a
separate account of LLANY organized on January 29, 1998.
Under New York insurance law, the income, gains and losses
from separate account assets are credited to or charged
against the account, without regard to other income, gains
or losses of LLANY.
Lincoln Financial Advisors Corporation ("LFA") is the
principal underwriter for the Policies. (See "Distribution
of Policies").
The Separate Account is registered with the Commission as a
unit investment trust under the Investment Company Act of
1940 ("1940 ACT") and is subject to the law of the state in
which the Policy is delivered. See also "Investment Options
-- Variable Account" at pages 14-15 of this Prospectus.
PURPOSE OF THE POLICY
PERSONAL CIRCUMSTANCES
The Policy generally provides a greater death benefit for
the same amount of premium, or the same death benefit for a
lower premium, than would a policy on the life of only one
of the Insureds. This is possible because the probability of
two deaths within a given period of time is less than the
probability of a single death. This Policy may be
appropriate in any situation in which death benefit proceeds
are not required until after the death of both Insureds. For
example, a husband and wife who plan to use the marital
deduction for estate tax purposes on the first death would
not ordinarily need liquidity to pay estate taxes until
after the Second Death. The Policy would also be appropriate
in the case of a dual income couple, in which each has
significant earning capacity, whose dependents will need
replacement funds to provide support only after the Second
Death. Such funds could be used to pay for a variety of
needs of dependents, including support, medical treatment
and education.
Applicants should consult with their professional advisors
concerning the appropriateness of the Policy in their
circumstances, and as to whether all appropriate legal, tax
and financial factors have been taken into consideration.
MARKET, INTEREST RATE AND CREDIT RISK EXPOSURE
The use of variable life insurance rather than traditional
life insurance provides greater opportunities and
corresponding risks. If Death Benefit Option 2 is chosen,
favorable investment performance may increase death
benefits, by increasing the Net Accumulation Value, or
reduce the amount of required premium payments, by funding
the cost of insurance with before-tax Policy Value
accumulations. On the other hand, unfavorable investment
performance may cause a relative decline in death benefits
if Death Benefit Option 2 is chosen, or increase the amount
of premium payments required to avoid lapse. Such premium
payments could be required at times when the Owner's
resources most constrain his or her ability to pay them.
Through selection among the underlying investments, an Owner
may decide the degree of risk exposure best suited to the
Owner's particular needs and circumstances. An applicant who
is averse to market and interest rate risk, or wishes to
provide a fixed amount of liquidity upon the Second Death,
should strongly consider the purchase of a non-variable
second-to-die life insurance policy. LLANY will provide
information about such a policy on request to the
Administrative Office.
REPLACEMENTS
Before purchasing the Policy to replace, or to be funded
with proceeds borrowed or withdrawn from, an existing life
insurance policy, a number of matters should be
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considered by the applicant. First, the applicant should
consider whether any commission will be paid to an agent or
any other person with respect to the replacement. Second,
the applicant should consider whether coverages and
comparable values are available from the Policy, as compared
to his or her existing policy. For example, the Insureds may
no longer be insurable, or the contestability period may
have elapsed with respect to the underlying policy, while
the Policy could be contested. The Owner should consider
similar matters before deciding to replace the Policy or
withdraw funds from the Policy for the purchase of funding a
new policy of life insurance.
APPLICATION
Any person who wants to buy a Policy must first complete an
application on a form provided by LLANY.
A complete application identifies the prospective Insureds
and provides sufficient information about them to permit
LLANY to begin underwriting the risks under the Policy. A
medical history and examination of each of the Insureds is
required. LLANY may decline to provide insurance on the
lives of the Insureds or, if it agrees to provide insurance,
it may place one or both Insureds into a special
underwriting category (these include preferred, non-smoker
standard, smoker standard, non-smoker substandard and smoker
substandard). The amount of the Cost of Insurance deducted
monthly from the Policy value after issue varies among the
underwriting categories as well as by age and gender of the
Insureds.
The applicant will select the Beneficiary or Beneficiaries
who are to receive Death Benefit Proceeds payable on the
Second Death, the initial face amount (the "INITIAL
SPECIFIED AMOUNT") of the Death Benefit and which of two
methods of computing the Death Benefit is to be used. (See
"Death Benefits", DEATH BENEFIT OPTIONS"). The applicant
will also indicate both the frequency and amount of Premium
Payments. (See "Premium Features"). The applicant must also
determine how Policy values are initially to be allocated
among the available funding options following the expiration
of the Right-to-Examine Period. (See "Right-to-Examine
Period").
OWNERSHIP
The Owner is the person or persons named as "OWNER" in the
application, and on the Date of Issue will usually be
identified as "OWNER" in the Policy Specifications. If no
person is identified as Owner in the Policy Specifications,
then the Insureds are the Owner. The person or persons
designated to be Owner of the Policy must have, or hold
legal title for the sole benefit of a person who has, an
"insurable interest" in the lives of each of the Insureds
under applicable state law. The Owner may be either or both
of the Insureds, or any other natural person or non-natural
person. The Owner owns and exercises the rights under the
Policy prior to the Second Death.
The Owner is the person who is ordinarily entitled to
exercise the rights under the Policy so long as either of
the Insureds is living. These rights include the power to
select the Beneficiary and the Death Benefit Option. The
Owner generally also has the right to request policy loans,
make partial surrenders or surrender the Policy. The Owner
may also name a new owner, assign the Policy or agree not to
exercise all of the Owner's rights under the Policy.
If the Owner is a person other than the last surviving
Insured, and that Owner dies before the Second Death, the
Owner's rights in the Policy will belong to the Owner's
estate, unless otherwise specified to LLANY.
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BENEFICIARY
The person or persons named in the application as
"BENEFICIARY" are the Beneficiaries under the Policy.
Multiple Beneficiaries will be paid in equal shares, unless
otherwise specified to LLANY.
Except when LLANY 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 LLANY
and submitted to LLANY at its Administrative Office. Unless
the Owner has reserved the right to change the Beneficiary,
such a request must be signed by both the Owner and the
Beneficiary. On recordation, the change of Beneficiary will
be effective as of the date of signature or, if there is no
such date, the date of recordation. No change of Beneficiary
will affect, or prejudice LLANY as to, any payment made or
action taken by LLANY 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 LLANY. If no
named Beneficiary survives the Second Death, any Death
Benefit Proceeds will be paid to the Owner or the Owner's
executor, administrator or assigns.
INSUREDS
There are two Insureds under the Policy. At the Date of
Issue of the Policy the Owner must have an insurable
interest in each of the Insureds. On the Second Death, a
Death Benefit is payable under the Policy.
THE CONTRACT
On issuance, a life insurance contract ("POLICY") will be
delivered to the Owner. The Policy sets forth the terms of
the Policy, as applicable to the Owner, and should be
reviewed by the Owner on receipt to confirm that it sets
forth the features specified in the application. The
ownership and other options set forth in the Policy are
registered, and may be transferred, solely on the books and
records of LLANY. 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, LLANY will issue a replacement on
request. LLANY may impose a Policy replacement fee.
POLICY SPECIFICATIONS
The Policy includes a "POLICY SPECIFICATIONS" page, with
supporting schedules, in which is set forth certain
information applicable to the specific Policy. This
information includes the identity of the Owner, the Date of
Issue, the Initial Specified Amount, the Death Benefit
Option selected, the Insureds, the issue Ages, the
Beneficiary, the initial Premium Payment, the Surrender
Charges, Expense Charges and Fees, Guarantee Maximum Cost of
Insurance Rates and the No Lapse Premium if the No Lapse
Provision has been selected.
PREMIUM FEATURES
The Policy permits flexible premium payments, meaning that
the frequency and the amount of Premium Payments may be
selected by the Owner. After the Initial Premium Payment is
paid there is no minimum premium required, unless to
maintain the No Lapse Provision. (See "Lapse and
Reinstatement, NO LAPSE PROVISION"). The initial Premium
Payment is due on the Effective Date and must be equal to or
exceed the amount necessary to provide for two Monthly
Deductions or, if selected, the No Lapse Premium.
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ADDITIONAL PREMIUMS; PLANNED PREMIUMS
Any later Premium Payments ("ADDITIONAL PREMIUMS")must be
sent directly to the Administrative Office. Additional
Premiums will be credited only when actually received by
LLANY. Premium Payments may be billed with an annual,
semiannual, or quarterly frequency ("PLANNED PREMIUMS").
Pre-authorized automatic Additional Premium Payments can
also be arranged at any time.
Unless specifically otherwise directed, any payment received
(other than any Premium Payment necessary to prevent, or
cure, Policy lapse) will be applied first to reduce Policy
indebtedness. There is no premium load on such payments to
the extent applied to reduce indebtedness.
LIMITS ON RIGHT TO MAKE PAYMENTS OF ADDITIONAL AND PLANNED
PREMIUMS
The Owner may increase Planned Premiums, or pay Additional
Premiums prior to the Coverage Date, subject to the
following limitations and LLANY's right to limit the amount
or frequency of Additional Premiums.
LLANY 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 LLANY 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.
LLANY 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
LLANY 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 LLANY. 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 LLANY for cancellation as
follows. If the Owner mails or delivers the Policy to the
Administrative Office on or before 10 days after delivery of
the Policy (60 days for Policies issued in replacement of
other insurance) ("RIGHT-TO-EXAMINE PERIOD"), LLANY will
refund to the Owner all Premium Payments.
Any Premium Payments received by LLANY before the end of the
Right-to-Examine Period will be held in the Money Market
Fund, 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, any Premium Payments will be
returned within seven days, although any refund of a Premium
Payment made by check may be delayed until the check clears.
TRANSFERS AND ALLOCATION AMONG ACCOUNTS
ALLOCATION OF NET PREMIUM PAYMENTS
The allocation of Net Premium Payments among the Fixed and
Variable Sub-Accounts may be set forth in the application.
An Owner may change the allocation of future Net Premium
Payments at any time. In any allocation, the amount
allocated to any Sub-
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Account must be in whole percentages. No allocation can be
made which would result in a Sub-Account Value of less than
$50. LLANY, at its sole discretion, may waive minimum
balance requirements on the Sub-Accounts. At the present
time, no more than 18 Sub-Accounts may be opened during the
life of the Policy. LLANY may increase the number of
Sub-Accounts in the future.
TRANSFERS
The Owner may make transfers among the Sub-Accounts, on the
terms set forth below, at any time before the younger
Insured reaches or would have reached age 100. The Owner
should carefully consider current market conditions and each
Sub-Account's investment policies and related risks before
allocating money to the Sub-Accounts. See pages 16-23 of
this Prospectus.
Transfer of amounts of at least $500 from one Variable
Sub-Account to another or from the Variable Sub-Accounts to
the Fixed Account are possible at any time. Within 30 days
after each anniversary of the Date of Issue, the Owner may
transfer up to the lesser of $250,000 or 25% of the Fixed
Account Value (as of the preceding anniversary of the Date
of Issue) to one or more Variable Sub-Accounts. Up to 12
transfer requests (a request may involve more than a single
transfer) may be made in any Policy Year without charge, and
any value remaining in a Sub-Account after a transfer must
be at least $500. LLANY reserves the right to impose a
charge for each transfer request in excess of 12 requests in
any Policy Year, except for transfers from a Variable Sub-
Account to the Fixed Account following a change in that
Variable Sub-Account's investment strategy. LLANY may
further limit transfers from the Fixed Account at any time.
Transfers must be made in proper written form. Written
transfer requests received at the Administrative Office by
the close of the New York Stock Exchange (usually 4:00 PM
ET) on a Valuation Day will be effected as of that day.
Otherwise, requests will be effective as of the next
Valuation Day.
Any transfer among the Variable Sub-Accounts or to the Fixed
Account will result in the crediting and cancellation of
Accumulation Units based on the Accumulation Unit values
next determined after the Administrative Office receives a
request in proper written form. Any transfer made which
causes the remaining value of Accumulation Units for a
Variable Sub-Account or the Fixed Account to be less than
$500 will result in those remaining Accumulation Units being
canceled and their aggregate value reallocated
proportionately among the other Variable Sub-Accounts and
the Fixed Account to which Policy values are then allocated.
OPTIONAL SUB-ACCOUNT ALLOCATION PROGRAMS
The Owner may elect to participate in programs providing for
Dollar Cost Averaging or Automatic Rebalancing, but may
participate in only one program at any time.
DOLLAR COST AVERAGING
Dollar Cost Averaging systematically transfers specified
dollar amounts from the Money Market Sub-Account. Transfer
allocations may be made to one or more of the Sub-Accounts
on a monthly or quarterly basis. By making allocations on a
regularly scheduled basis, instead of on a lump sum basis,
an Owner may reduce exposure to market volatility. Dollar
Cost Averaging will not assure a profit or protect against a
declining market. An election to Dollar Cost Average is
subject to the 18 Sub-Account Limitation described under
ALLOCATION OF NET PREMIUM PAYMENTS.
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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. An election is effective within ten
business days, but only if there is sufficient value in the
Money Market Sub-Account. LLANY may, in its sole discretion,
waive Dollar Cost Averaging minimum deposit and transfer
requirements.
Dollar Cost Averaging terminates automatically: (1) if the
number of designated transfers has been completed; (2) if
the value in the Money Market Sub-Account is insufficient to
complete the next transfer; (3) one week after the
Administrative Office receives a request for termination in
proper written form; or (4) if the Policy is surrendered.
Currently, there is no charge for Dollar Cost Averaging, but
LLANY reserves the right to impose a charge.
AUTOMATIC REBALANCING
Automatic Rebalancing periodically restores to a
pre-determined level the percentage of Policy value
allocated to each Variable Sub-Account (e.g. 20% Money
Market, 50% Growth, 30% Utilities). The Fixed Account is not
subject to rebalancing. The pre-determined level is the
allocation initially selected on the application, until
changed by the Owner. If Automatic Rebalancing is elected,
all Net Premium Payments allocated to the Variable
Sub-Accounts will be subject to Automatic Rebalancing.
The Owner may select Automatic Rebalancing on a quarterly,
semi-annual or annual basis. Automatic Rebalancing may be
elected, terminated or the allocation may be changed at any
time; effective within ten business days, upon receipt by
the Administrative Office of a request in proper written
form.
Currently, there is no current charge for Automatic
Rebalancing, but LLANY reserves the right to impose a
charge.
INVESTMENT OPTIONS
FIXED ACCOUNT
Premium Payments allocated to the Fixed Account become part
of LLANY's General Account, and do not participate in the
investment experience of the Variable Account. The General
Account is subject to regulation and supervision by the New
York Insurance Department.
IN RELIANCE ON CERTAIN EXEMPTIONS, EXCLUSIONS AND RULES,
LLANY HAS NOT REGISTERED INTERESTS IN THE FIXED ACCOUNT AS A
SECURITY UNDER THE SECURITIES ACT OF 1933 AND HAS NOT
REGISTERED THE FIXED ACCOUNT AS AN INVESTMENT COMPANY UNDER
THE 1940 ACT. ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY
INTERESTS THEREIN ARE SUBJECT TO REGULATION UNDER THE 1933
ACT OR THE 1940 ACT. LLANY HAS BEEN ADVISED THAT THE STAFF
OF THE SEC HAS NOT MADE A REVIEW OF THE DISCLOSURES WHICH
ARE INCLUDED IN THIS PROSPECTUS WHICH RELATE TO THE GENERAL
ACCOUNT AND TO THE FIXED ACCOUNT UNDER THE CONTRACT. THESE
DISCLOSURES, HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY
APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS
RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE
IN PROSPECTUSES. THIS PROSPECTUS IS GENERALLY INTENDED TO
SERVE AS A DISCLOSURE DOCUMENT ONLY FOR ASPECTS OF THE
POLICY INVOLVING THE VARIABLE ACCOUNT, AND THEREFORE
CONTAINS ONLY SELECTED INFORMATION REGARDING THE FIXED
ACCOUNT. COMPLETE DETAILS REGARDING THE FIXED ACCOUNT ARE IN
THE POLICY.
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Premium Payments allocated to the Fixed Account are
guaranteed to be credited with a minimum interest rate,
specified in the Policy, of at least 4.0%. Interest in
excess of 4.0% may be credited in LLANY's sole discretion.
Such interest rate will be established on a prospective
basis in LLANY's sole discretion and may vary by the Policy
issue year and duration. LLANY may vary the way in which it
credits interest to the Fixed Account from time to time.
ANY INTEREST IN EXCESS OF 4.0% WILL BE DECLARED IN ADVANCE
IN LLANY'S SOLE DISCRETION. POLICY OWNERS BEAR THE RISK THAT
NO INTEREST IN EXCESS OF 4.0% WILL BE DECLARED.
VARIABLE ACCOUNT
LLANY Separate Account R for Flexible Premium Variable Life
Insurance was established on January 29, 1998 pursuant to a
resolution of the Board of Directors of LLANY. The Variable
Account is composed of the Variable Sub-Accounts. Under New
York insurance law, the income, gains and losses, realized
or unrealized, from assets allocated to the Variable Account
are credited to or charged against the Variable Account,
without regard to other income, gains or losses of LLANY.
LLANY owns the assets in the Variable Account, but the
Variable Account assets equal to its reserves and other
liabilities are available first to satisfy the obligation of
LLANY with respect to any obligations of LLANY funded by the
Variable Account, and are not chargeable with liabilities
arising out of any other business conducted by LLANY. LLANY
does not guarantee the Variable Account's investment
performance.
Net Premium Payments received by the Variable Account will
be invested in Fund shares at net asset value. Monies
necessary to fund deductions, charges, transfers and
surrenders from the Variable Account are raised by selling
Fund shares at net asset value. On each Valuation Day, the
Variable Account will purchase or redeem Fund shares for
each Variable Sub-Account based on a netting of all
transactions for each Variable Sub-Account for that day.
Fund shares held in the Variable Account are registered by
book entry on the books maintained by or for the Funds.
The Variable Account is registered with the Commission as a
unit investment trust under the 1940 Act. Registration under
the 1940 Act does not involve supervision of the Variable
Account or LLANY's management or investment practices or
policies by the Commission.
LLANY has other separate accounts, some of which are
registered as unit investment trusts. The other registered
separate accounts hold assets that support different
variable annuity contracts and variable life insurance
policies of LLANY.
POLICY VALUES
The Accumulation Value of the Policy depends on the
performance of the underlying investments. Policy values are
used to fund Policy fees and expenses, including the Cost of
Insurance. Required Premium Payments, if any, will vary
based on the investment performance of the underlying
investments. A market downturn, affecting the Variable
Sub-Accounts upon which the Accumulation Value of a
particular Policy depends, may require Additional Premium
Payments beyond those expected (unless the No Lapse
Provision requirements have been satisfied) to maintain the
level of coverage or to avoid lapse of the Policy. Review of
periodic statements is strongly suggested to determine if
Additional Premium Payments may be necessary to avoid lapse
of the Policy.
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Each Owner will be advised at least annually of the
Accumulation Value, the number of Accumulation Units which
remain credited to the Policy, the current Accumulation Unit
values, the Variable Sub-Account values, the Fixed Account
Value and the Loan Account Value.
ACCUMULATION VALUE
Each Net Premium Payment will be credited to the Policy as
of the end of the Valuation Period in which it is received
at the Administrative Office. The "ACCUMULATION VALUE" of a
Policy is determined by: (1) multiplying the total number of
Variable Accumulation Units credited to the Policy for each
Variable Sub-Account by its appropriate current Variable
Accumulation Unit Value; (2) if a combination of Variable
Sub-Accounts is elected, totaling the resulting values; and
(3) adding any values attributable to the Fixed Account and
the Loan Account. The Accumulation Value will be affected by
Monthly Deductions.
VARIABLE ACCOUNT VALUE
VARIABLE ACCUMULATION UNIT VALUE
When all or a part of a Net Premium Payment is allocated to
a Variable Sub-Account, the amount allocated is converted
into Variable Accumulation Units by dividing the amount
allocated to the Variable Sub-Account by the value of the
Variable Accumulation Unit for the Variable Sub-Account
calculated at the end of the Valuation Period in which it is
received at the Administrative Office. The Variable
Accumulation Unit value for each Variable Sub-Account was
established at $10.00 for the first Valuation Period of the
particular Variable Sub-Account. The Variable Accumulation
Unit value for each Variable Sub-Account would thereafter
vary independently of the other Variable Sub-Accounts and
may increase or decrease from one Valuation Period to the
next. Allocations to Variable Sub-Accounts are made only as
of the end of a day, called the "VALUATION DAY," on which
the New York Stock Exchange is open for business.
VARIABLE ACCUMULATION UNITS
A "VARIABLE ACCUMULATION UNIT" is a unit of measure used in
the calculation of the value of each Variable Sub-Account.
The Variable Accumulation Unit value will be as determined
for the Valuation Period during which a Premium Payment or
request for transfer is received by LLANY. The Variable
Accumulation Unit value for a Variable Sub-Account for any
later Valuation Period is determined as follows:
1.The total value of Fund shares held in the Variable
Sub-Account is calculated by multiplying the number of
Fund shares owned by the Variable Sub-Account at the
beginning of the Valuation Period by the net asset
value per share of the Fund at the end of the Valuation
Period, and adding any dividend or other distribution
of the Fund if an ex-dividend date occurs during the
Valuation Period; minus
2.The liabilities of the Variable Sub-Account at the end
of the Valuation Period; such liabilities include daily
charges imposed on the Variable Sub-Account, and may
include a charge or credit with respect to any taxes
paid or reserved for by LLANY that LLANY determines
result from the operations of the Variable Account; and
3.The result of (2) is divided by the number of Variable
Accumulation Units outstanding at the beginning of the
Valuation Period.
The daily charges imposed on a Variable Sub-Account for any
Valuation Period are equal to the daily mortality and
expense risk charge multiplied by the number of calendar
days
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in the Valuation Period. The amount of monthly deduction
allocated to each Variable Sub-Account will result in the
cancellation of Variable Accumulation Units that have an
aggregate value on the date of such deduction equal to the
total amount by which the Variable Sub-Account is reduced.
The number of Variable Accumulation Units credited to a
Policy will not be changed by any subsequent change in the
value of a Variable Accumulation Unit. Such value may vary
from Valuation Period to Valuation Period to reflect the
investment experience of the Fund used in a particular
Variable Sub-Account and fees and charges under the Policy.
FIXED ACCOUNT AND LOAN ACCOUNT VALUE
The Fixed Account Value and the Loan Account Value reflect
amounts allocated to LLANY's General Account through payment
of premiums or through transfers from the Variable Account.
NET ACCUMULATION VALUE
The "NET ACCUMULATION VALUE" is the Accumulation Value less
the Loan Account Value. The Net Accumulation Value
represents the net value of the Policy and is the basis for
calculating the Surrender Value.
FUNDS
Each of the twenty Variable Sub-Accounts is invested solely
in the shares of one of the twenty Funds available under the
Policies. Each of the Funds is a series of one of six
Massachusetts business trusts, with the exception of three
Maryland corporations. Each such trust or corporation is
registered as an open-end, diversified management investment
company under the 1940 Act. These entities are collectively
referred to herein as the "Series Funds".
The Fund Groups and their investment advisers and
distributors are:
AIM Variable Insurance Funds, Inc. ("AIM V.I. FUND"),
managed by AIM Advisors, Inc., and distributed by AIM
Distributors Inc., 11 Greenway Plaza, Suite 100,
Houston, TX 77046-1173;
BT Insurance Funds Trust ("BT TRUST"), managed by
Bankers Trust Company, Bankers Trust Plaza, New York, NY
10006, and distributed by First Data Distributors, Inc.,
4400 Computer Drive, Westborough, MA 01581;
Delaware Group Premium Fund Inc. ("DELAWARE FUND"),
managed by Delaware Management Company, Inc. and
distributed by Delaware Distributors, L.P., 1818 Market
Street, Philadelphia, PA 19103;
Variable Insurance Products Fund ("FIDELITY VIP I"), and
Variable Insurance Products Fund II ("FIDELITY VIP II"),
managed by Fidelity Management & Research Company and
distributed by Fidelity Distributors Corporation, 82
Devonshire Street, Boston, MA 02103;
Lincoln National Money Market Fund, Inc., ("LINCOLN
NATIONAL FUND") managed by Lincoln Investment
Management, Inc. and distributed by Lincoln Financial
Advisors Corporation, 3811 Illinois Road, Suite 205,
Fort Wayne, IN 46804-1202;
MFS-Registered Trademark- Variable Insurance Trust ("MFS
TRUST"), managed by Massachusetts Financial Services
Company and distributed by MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116;
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Templeton Variable Products Series Fund ("TEMPLETON
TRUST"), managed by Templeton Investment Counsel, Inc.
and its Templeton and Franklin affiliates and
distributed by Franklin/Templeton Distributors, Inc.,
700 Central Avenue, St. Petersburg, FL 33701;
OCC Accumulation Trust ("OCC TRUST"), managed by OpCap
Advisors and distributed by OCC Distributors, One World
Financial Center, New York, NY 10281.
Four Funds of AIM V.I. Fund are available under the
Policies:
AIM V.I. Capital Appreciation Fund;
AIM V.I. Diversified Income Fund.
AIM V.I. Growth Fund;
AIM V.I. Value Fund;
One Fund of BT TRUST is available under the Policies:
Equity 500 Index Fund.
Three Funds of DELAWARE FUND GROUP are available under the
Policies:
Emerging Markets Series;
Small Cap Value Series;
Trend Series.
One Fund of FIDELITY VIP I is available under the Policies:
Equity-Income Portfolio ("Fidelity VIP Equity-Income
Portfolio").
Two Funds of FIDELITY VIP II are available under the
Policies:
Asset Manager Portfolio ("Fidelity VIP II Asset Manager
Portfolio");
Investment Grade Bond Portfolio ("Fidelity VIP II
Investment Grade Bond Portfolio").
One Fund of LINCOLN NATIONAL FUND is available under the
Policies:
Money Market Fund.
Three Funds of MFS Trust are available under the Policies:
MFS Emerging Growth Series;
MFS Total Return Series;
MFS Utilities Series.
Three Funds of TEMPLETON Trust and are available under the
Policies:
Templeton Asset Allocation Fund: Class 1;
Templeton International Fund: Class 1;
Templeton Stock Fund: Class 1.
Two Funds of OCC Accumulation Trust are available under the
Policies:
Global Equity Portfolio;
Managed Portfolio.
The investment advisory fees charged the Funds by their
advisers are shown on pages 22-23 of this Prospectus.
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.
The investment objectives and policies of certain Funds 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 Funds, however, may be higher
or lower than the
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results of such other funds. There can be no assurance, and
no representation is made, that the investment results of
any of the Funds 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
to provide capital appreciation through investments in
common stocks, with emphasis on medium-sized and smaller
emerging growth companies.
AIM V.I. DIVERSIFIED INCOME FUND (Fixed Income -
Intermediate Term Bonds): Seeks to achieve a high level of
current income primarily by investing in a diversified
portfolio of foreign and U.S. government and corporate debt
securities, including lower rated high yield debt securities
(commonly known as "junk bonds").
AIM V.I. GROWTH FUND (Large Cap Stocks): Seeks to provide
growth of capital through investments primarily in common
stocks of leading U.S. companies considered by its adviser
to have strong earnings momentum.
AIM V.I. VALUE FUND (Large Cap Stocks): Seeks to achieve
long-term growth of capital by investing primarily in equity
securities judged by its adviser to be undervalued relative
to the current or projected earnings of the companies
issuing the securities, or relative to current market values
of assets owned by the companies issuing the securities or
relative to the equity markets generally. Income is a
secondary objective.
BT EQUITY 500 INDEX FUND (Large Cap Stocks): Seeks to
replicate as closely as possible the performance of the
Standard & Poor's 500 Composite Stock Price Index, an index
emphasizing large-capitalization stocks, before the
deduction of Fund expenses.
DELAWARE EMERGING MARKETS SERIES (International Stocks): An
international fund which seeks to achieve long-term capital
appreciation by investing primarily in equity securities of
issuers located or operating in emerging countries. Under
normal market conditions, at least 65% of the Series assets
will be invested in equity securities of issuers organized
or having a majority of their assets or deriving a majority
of their operating income in at least three countries that
are considered to be developing or emerging.
DELAWARE SMALL CAP VALUE SERIES (Small Cap Stocks): Seeks
capital appreciation by investing primarily in small- to
mid-cap common stocks whose market value appears low
relative to their underlying value or future earnings and
growth potential. Emphasis also will be placed on securities
of companies that may be temporarily out of favor or whose
value is not yet recognized by the market.
DELAWARE TREND SERIES (Small Cap Stocks): Seeks long-term
capital appreciation by investing primarily in small-cap
common stocks and convertible securities of emerging and
other growth-oriented companies. These securities will have
been judged to be responsive to changes in the marketplace
and to have fundamental characteristics to support growth.
Income is not an objective.
FIDELITY VIP II ASSET MANAGER PORTFOLIO (Balanced or Total
Return): Seeks high total return with reduced risk over the
long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term money market
instruments.
FIDELITY VIP II INVESTMENT GRADE BOND PORTFOLIO (Fixed
Income - Intermediate Term Bonds): Seeks as high a level of
current income as is consistent with the preservation of
capital by investing in a broad range of investment-grade
fixed-income securities.
FIDELITY VIP EQUITY-INCOME PORTFOLIO (Large Cap Stocks):
Seeks reasonable income by investing primarily in
income-producing equity securities, with some potential for
capital appreciation, seeking a yield that exceeds the
composite yield on the securities comprising the Standard
and Poor's 500 Index (S&P 500).
18
<PAGE>
LINCOLN MONEY MARKET FUND (Money Market): Seeks maximum
current income consistent with the preservation of capital,
by investing in a portfolio of short-term money market
instruments maturing within one year from date of purchase.
MFS EMERGING GROWTH SERIES (Large Cap Stocks): Seeks to
provide long-term growth of capital by investing primarily
in common stocks of foreign and domestic insurers.
MFS TOTAL RETURN SERIES (Balanced or Total Return): Seeks
primarily to obtain above-average income (compared to a
portfolio invested entirely in equity securities) consistent
with the prudent employment of capital, and secondarily to
provide a reasonable opportunity for growth of capital and
income.
MFS UTILITIES SERIES (Specialty): Seeks capital growth and
current income (income above that available from a portfolio
invested entirely in equity securities) by investing, under
normal circumstances, at least 65% of its assets in equity
and debt securities of utility companies.
TEMPLETON ASSET ALLOCATION FUND - CLASS 1 (Balanced or Total
Return): Seeks a high level of total return through a
flexible policy of investing in stocks of companies in any
nation, debt securities of companies and governments of any
nation, and in money market instruments. Assets are
allocated among different investments depending upon
worldwide market and economic conditions.
TEMPLETON INTERNATIONAL FUND - CLASS 1 (International
Stocks): Seeks long-term capital growth through a flexible
policy of investing in stocks and debt obligations of
companies and governments outside the United States.
TEMPLETON STOCK FUND - CLASS 1 (Global Stocks): Seeks
capital growth through a policy of investing primarily in
common stocks issued by companies, large and small, in
various nations throughout the world, including the U.S.
OCC ACCUMULATION TRUST GLOBAL EQUITY PORTFOLIO
(International Stocks): Seeks long-term capital appreciation
through a global investment strategy primarily involving
equity securities.
OCC ACCUMULATION TRUST MANAGED PORTFOLIO (Balanced or Total
Return): Seeks growth of capital over time through
investment in a portfolio of common stocks, bonds and cash
equivalents, the percentage of which will vary based on
management's assessments of relative investment values.
The AIM V.I. Diversified Income Fund, Delaware Emerging
Markets Series, Delaware Small Cap Value Series, Fidelity
VIP Equity-Income Portfolio, Fidelity VIP II Asset Manager
Portfolio, MFS Emerging Growth Series, MFS Total Return
Series, MFS Utilities Series, OCC Global Equity Portfolio,
OCC Managed Portfolio, Templeton Asset Allocation Fund,
Templeton International Fund and Templeton Stock Fund may
invest in non-investment grade, high-yield, high-risk debt
securities (commonly referred to as "junk bonds"), as
detailed in the individual Fund Prospectuses.
There is no assurance that the investment objective of any
of the Funds will be met. Each Owner has all of the
investment performance risk for the Variable Sub-Accounts
selected by the Owner. There is investment performance risk
in each of the Variable Sub-Accounts, although the amount of
such risk varies significantly among the Variable
Sub-Accounts. Owners should read each Fund's prospectus
carefully and understand the risks before making or changing
investment choices. Additional Funds may, from time to time,
be made available as underlying investments. The right to
select among Funds will be limited by the terms and
conditions imposed by LLANY, (SEE "Allocation of Net Premium
Payments").
19
<PAGE>
Required premium levels will vary based on market
performance. In a prolonged market downturn, affecting all
Sub-Accounts, additional Premium Payments may be necessary
to maintain the level of coverage or to avoid lapsing of the
Policy. Review of periodic contract statements is strongly
suggested to determine appropriate premium requirements.
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Variable Account or if, in the judgment of
LLANY, further investment in such shares should cease to be
appropriate in view of the purpose of the Variable Account
or in view of legal, regulatory or federal income tax
restrictions, LLANY may substitute shares of another Fund.
There will be no substitution of securities in any Variable
Sub-Account without prior approval of the Commission.
VOTING RIGHTS
LLANY will vote the shares of each Fund held in the Variable
Account at special meetings of the shareholders of the
particular Fund in accordance with instructions received by
the Administrative Office in proper written form from
persons having a voting interest in the Variable Account.
LLANY 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 LLANY and other
life insurance companies. The Funds do not foresee any
disadvantage to Owners arising out of the fact that shares
may be made available to separate accounts which are used in
connection with both variable annuity and variable life
insurance products. Nevertheless, the Fund Groups' Boards
intend to monitor events in order to identify any material
irreconcilable conflicts which may possibly arise and to
determine what action, if any, should be taken in response
thereto. If such a conflict were to occur, one of the
separate accounts might withdraw its investment in a Fund.
This might force a Fund to sell portfolio securities at
disadvantageous prices.
FUND PARTICIPATION AGREEMENTS
With respect to a Series Fund, the adviser and/or the
distributor, or an affiliate thereof, may compensate LLANY
(or an affiliate) for administrative, distribution, or other
services. It is anticipated that such compensation would be
based on assets of the particular Series Fund attributable
to the Policies along with certain other variable contracts
issued or administered by LLANY (or an affiliate).
CHARGES AND FEES
Charges will be deducted in connection with the Policy to
compensate LLANY 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.
20
<PAGE>
The nature and amount of these charges are as follows:
DEDUCTIONS MADE MONTHLY
There are various expense deductions that are made monthly.
The Monthly Deduction, including the Cost of Insurance
Charge, is made from the Net Accumulation Value.
The Monthly Deductions are deducted proportionately from the
value of each underlying investment subject to the charge.
In the case of Variable Sub-Accounts, Variable Accumulation
Units are canceled and the value of the canceled Variable
Accumulation Units is withdrawn in the same proportion as
their respective values have to the Net Accumulation Value.
The Monthly Deductions are made on the Monthly Anniversary
Day starting on the Date of Issue. The "MONTHLY ANNIVERSARY
DAY" under the Policy is the same day of each month as the
Date of Issue, provided that if there is no such date in a
given month, it is the first Valuation Day of the next
month. If the day that would otherwise be a Monthly
Anniversary Day is not a Valuation Day, then the Monthly
Anniversary Day is the next Valuation Day.
If either Insured is still living when the younger Insured
would have attained Age 100 and the Policy has not been
surrendered, no further Monthly Deductions will be made and
the Variable Account Value will be transferred to the Fixed
Account. The Policy will then remain in force until
surrender or the Second Death.
MONTHLY DEDUCTION
There is a flat dollar Monthly Deduction of $12.50 until the
first Policy Anniversary and, currently, $5 thereafter
(guaranteed not to exceed $10). In addition there is a
Monthly Deduction charge of $0.09 per $1000 of Specified
Amount for the first twenty years of the Policy and for the
first twenty years following an increase in Specified
Amount. If the No Lapse Provision is in effect there will
also be a Monthly Deduction of $0.01 per $1000 of Specified
Amount.
These charges compensate LLANY for administrative expenses
associated with Policy issue and ongoing Policy maintenance
including premium billing and collection, policy value
calculation, confirmations, periodic reports and other
similar matters.
COST OF INSURANCE CHARGE
The Cost of Insurance charge depends on the issue Age,
underwriting category and gender (in accordance with state
law) of both Insureds and the current Net Amount at Risk.
The rate on which the Monthly Deduction for the Cost of
Insurance is based will generally increase as the Insureds
age, although the Cost of Insurance charge could decline if
the Net Amount at Risk drops relatively faster than the Cost
of Insurance Rate increases.
The Cost of Insurance charge is determined by dividing the
Death Benefit at the previous Monthly Anniversary Day by
1.0032737 (the monthly equivalent of an annual rate of 4%),
subtracting the Accumulation Value at the previous Monthly
Anniversary Day, and multiplying the result (the "NET AMOUNT
AT RISK") by the applicable Cost of Insurance Rate as
determined by LLANY. The Guaranteed Maximum Cost of
Insurance Rates, per $1,000 of Net Amount at Risk, for
standard risks are based on the 1980 Commissioners Standard
Ordinary Mortality Tables, Age Nearest Birthday (1980 CSO,
Male or Female); or, for unisex rates, on the 1980 CSO-B
Table.
21
<PAGE>
MORTALITY AND EXPENSE RISK CHARGE AND FUND EXPENSES
EXPENSE DATA
The purpose of the following Table is to assist in the understanding of the
costs and expenses imposed on underlying Funds investments in the Variable
Sub-Accounts. The table reflects expenses of the Variable Account as well as of
the individual Funds underlying the Variable Sub-Accounts. The Mortality and
Expense Risk Charge shown is the currently charged rate of 0.80% per year and is
guaranteed not to exceed 0.90% per year.
FEE TABLE
<TABLE>
<CAPTION>
AIM VARIABLE INSURANCE FUNDS, INC.
--------------------------------------------------------- BT INSURANCE
AIM V.L. FUNDS TRUST
CAPITAL AIM V.I. ------------
APPRECIATION AIM V.I. AIM V.I. DIVERSIFIED EQUITY 500
FUND GROWTH FUND VALUE FUND INCOME FUND INDEX FUND
------------ ------------ ------------ ------------ ------------
<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......................... 0.63% 0.65% 0.62% 0.60% 0.20%
Other Expenses.......................... 0.05% 0.08% 0.08% 0.20% 0.10%(2)
Total Fund Portfolio Annual Expenses.... 0.68%(1) 0.73%(1) 0.70%(1) 0.80%(1) 0.30%(2)
<CAPTION>
DELAWARE GROUP
PREMIUM FUND LINCOLN
----------------------------------------- NATIONAL
EMERGING ------------
MARKET SMALL CAP MONEY MARKET
SERIES TREND SERIES VALUE SERIES 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......................... 0.30% 0.62% 0.60% 0.48%
Other Expenses.......................... 1.20% 0.23% 0.25% 0.11%
Total Fund Portfolio Annual Expenses.... 1.50%(3) 0.85%(3) 0.85%(3) 0.59%
</TABLE>
- ------------------------------
(1) AIM Advisors, Inc. ("AIM") may from time to time voluntarily waive or
reduce its respective fees, Effective May 1, 1998, the Funds reimburse AIM
in an amount up to 0.25% of the average net asset value of each Fund, for
expenses incurred in providing, or assuring that participating insurance
companies provide, certain administrative services, as described in the
accompanying prospectus for the Funds. On a current basis, the fee will
apply only to the average net asset value of each Fund in excess of the net
asset value of each Fund as calculated on April 30, 1998, and AIM will not
seek reimbursement of the cost of any service in excess of the amount
charged by a participating insurance company for providing the services
above. The amount of reimbursements that will be paid by each Fund under
this arrangement for the year ending December 31, 1998 cannot be predicted.
(2) Under the Advisory Agreement with the Advisor, the Funds will pay advisory
fees at the annual percentage rate of .20% of the average daily net assets
of the Equity 500 Index Fund. These fees are accrued daily and paid
monthly. The Advisor has voluntarily undertaken to waive the fees and to
reimburse the Fund for certain expenses so that the Equity 500 Index Fund
total operating expenses will not exceed .30%. Such expense reimbursements
may be terminated at the discretion of the Advisor. If this reimbursement
were not in place, the total operating expenses would be 2.78%. For the
year ended December 31, 1997, the Advisor waived and/or reimbursed expenses
of $65,771 for the Equity 500 Index Fund.
(3) The investment adviser for the Small Cap Value Series and Trend Series is
Delaware Management Company, Inc. ("Delaware Management"). The investment
adviser for the Emerging Markets Series is Delaware International Advisers
Ltd. ("Delaware International"). Effective May 1, 1998 through October 31,
1998, the investment advisers for the Series of DGPF have agreed
voluntarily to waive their management fees and reimburse each Series for
expenses to the extent that total expenses will not exceed 1.50% for the
Emerging Markets Series and 0.85% for the Small Cap Value Series and Trend
Series. The fee ratios shown above have been restated to assume that the
new voluntary limitation took effect January 1, 1997. For the fiscal year
ended December 31, 1997, before waiver and/or reimbursement by the
investment adviser, total Series expenses as a percentage of average daily
net assets were 2.45% for the Emerging Market Series, 0.90% for Small Cap
Value Series (formerly known as "Value Series"), and 0.88% for Trend
Series.
22
<PAGE>
The following table does not reflect the Premium Load or the Monthly Deduction
described at page of this Prospectus. The information set forth should be
considered together with the information provided in this Prospectus under the
heading "Charges and Fees", and in the prospectus for each Fund. All expenses
are expressed as a percentage of the Variable Sub-Account Value.
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE
PRODUCTS FUNDS MFS-REGISTERED TRADEMARK- TEMPLETON VARIABLE PRODUCTS
--------------------------------- VARIABLE INSURANCE TRUST SERIES FUND (CLASS 1) OCC ACCUMULATION
VIP II -------------------------------- ----------------------------------- TRUST
VIP II VIP I INVESTMENT MFS TEMPLETON ---------------------
ASSET EQUITY- GRADE EMERGING MFS TOTAL MFS ASSET TEMPLETON TEMPLETON GLOBAL
MANAGER INCOME BOND GROWTH RETURN UTILITIES ALLOCATION INTERNATIONAL STOCK EQUITY MANAGED
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES FUND FUND FUND PORTFOLIO PORTFOLIO
--------- --------- --------- --------- --------- ---------- --------- ------------- --------- --------- ---------
<S><C> <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%
0.55% 0.50% 0.44% 0.75% 0.75% 0.75% 0.60%(7) 0.69%(7) 0.69%(7) 0.79%(8) 0.80%(8)
0.10% 0.08% 0.14% 0.12%(6) 0.25%(6) 0.25%(6) 0.18%(7) 0.19%(7) 0.19%(7) 0.40%(9) 0.07%(9)
0.65%(4) 0.58%(4) 0.58% 0.87% 1.00%(5) 1.00%(5) 0.78% 0.88% 0.88% 1.19%(10) 0.87%(10)
</TABLE>
- ------------------------------
(4) A portion of the brokerage commissions that certain funds paid was used to
reduce funds expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest
earned on uninvested cash balances was used to reduce custodian and
transfer agent expenses. Including these reductions, Total Fund Portfolio
Annual Expenses would have been 0.64% for the VIP II Asset Manager
Portfolio and 0.57% for the VIP Equity-Income Portfolio.
(5) The Adviser has agreed to bear expenses for each Series, subject to
reimbursement by each Series, such that each Series' "Other Expenses" shall
not exceed 0.25% of the average daily net assets of the Series during the
current fiscal year. Otherwise, "Other Expenses" for the Total Return
Series and Utilities Series would be 0.27% and 0.45% respectively, and
"Total Fund Portfolio Annual Expenses" would be 1.02% and 1.20%
respectively, for these Series. See "Information Concerning Shares of Each
Series Expenses."
(6) Each Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Series' expenses). Any such fee reductions are not
reflected under "Other Expenses."
(7) Management Fees and Total Operating Expenses have been restated to reflect
the management fee schedule approved by shareholders and effective May 1,
1997. See fund prospectus for details. Actual Management Fees and Total
Fund Operating Expenses during 1997 were lower.
(8) Reflects management fees after taking into effect any waiver.
(9) Other Expenses are shown gross of expense offsets afforded the Portfolios
which effectively lowered overall custody expenses.
(10) Total Portfolio Expenses for the Managed Portfolio are limited by OpCap
Advisors so that their respective annualized operating expenses (net of any
expense offsets) do not exceed 1.00% of average daily net assets. Total
Portfolio Expenses for the Global Equity Portfolio are limited to 1.25% of
average daily net assets. Without such limitation and without giving effect
to any expense offsets, the Management Fees, Other Expenses and Total
Portfolio Expenses incurred for the fiscal year ended December 31, 1997
would have been; .80%, .07%, and .87%, respectively, for the Managed
Portfolio and .80%, .40%, and 1.20%, respectively, for the Global Equity
Portfolio.
23
<PAGE>
SURRENDER CHARGES
A generally declining surrender charge ("SURRENDER CHARGE")
will apply if the Policy is totally surrendered or lapses
during the first fifteen years following the Date of Issue
or the first fifteen years following an increase in
Specified Amount. The Surrender Charge varies by Age of the
Insureds, the number of years since the Date of Issue, and
Specified Amount. The charge is in part a deferred sales
charge and in part a recovery of certain first year
administrative costs. Surrender Charge is included in each
Policy and is in compliance with New York's nonforfeiture
law. Examples of the Surrender Charge can be seen in
Appendix I by subtracting "Surrender Value" from "Total
Accumulation Value" on any chosen set of investment return
assumptions.
If the Specified Amount is increased, a new Surrender Charge
will be applicable, in addition to any existing Surrender
Charge. The Surrender Charge applicable to the increase
would be equal to the Surrender Charge on a new Policy whose
Specified Amount was equal to the amount of the increase.
Supplemental Policy Specifications will be sent to the Owner
upon an increase in Specified Amount reflecting the maximum
additional Surrender Charge in the Table of Surrender
Charges. The minimum allowable increase in Specified Amount
is $1,000. LLANY may change this at any time.
If the Specified Amount is decreased while the Surrender
Charge applies, the Surrender Charge will remain the same.
No Surrender Charge is imposed on a partial surrender, but
an administrative fee of $25 is imposed, allocated pro-rata
among the Sub-Accounts from which the partial surrender
proceeds are taken.
Any surrenders may result in tax implications. (SEE "Tax
Matters").
Based on its actuarial determination, LLANY 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 LLANY
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 LLANY, which supports insurance and
annuity obligations.
TRANSACTION FEE FOR EXCESS TRANSFERS
LLANY reserves the right to impose a charge for each
transfer request in excess of 12 in any Policy Year. A
single transfer request may consist of multiple
transactions.
DEATH BENEFITS
The applicant must select the Specified Amount of the Death
Benefit, which may not be less than $250,000 and the Death
Benefit Option. The two Death Benefit Options are described
below. The applicant must consider a number of factors in
selecting the Specified Amount, including the amount of
proceeds required on the Second Death and the Owner's
ability to make Premium Payments. In evaluating this
decision, the applicant should consider that the greater the
Net Amount at Risk, the greater the monthly deductions for
the Cost of Insurance.
DEATH BENEFIT OPTIONS
Two different Death Benefit Options are available under the
Policy. The amount payable under the Policy is the greater
of (a) the Corridor Death Benefit or (b) the amount
determined under the Death Benefit Option in effect on the
date of the Second Death, less (in each case) any
indebtedness under the Policy. In the case of Death Benefit
Option 1, the Specified Amount is reduced by the amount of
any partial surrender. The
24
<PAGE>
"CORRIDOR DEATH BENEFIT" is the applicable percentage (the
"CORRIDOR PERCENTAGE") of the Accumulation Value required to
maintain the Policy as a "life insurance contract" for
Federal income tax purposes. The Corridor Percentage is 250%
through the time the younger Insured reaches or would have
reached Age 40 and decreases in accordance with the table at
page 26 of this Prospectus to 100% when the younger Insured
reaches or would have reached Age 95.
Death Benefit Option 1 provides Death Benefit Proceeds equal
to the Specified Amount (a minimum of $250,000). If Option 1
is selected, the Policy pays level Death Benefit Proceeds
until the Minimum Death Benefit exceeds the Specified
Amount. (See DEATH BENEFITS, FEDERAL INCOME TAX DEFINITION
OF LIFE INSURANCE).
Death Benefit Option 2 provides Death Benefit Proceeds equal
to the sum of the Specified Amount plus the Accumulation
Value as of the Valuation Day immediately after receipt by
LLANY of Due Proof of the Second Death. If Option 2 is
selected, the Death Benefit Proceeds increase or decrease
over time, depending on the amount of premium paid and the
investment performance of the underlying Sub-Accounts.
If for any reason the applicant fails to affirmatively elect
a particular Death Benefit Option, Death Benefit Option 1
shall apply until changed as provided below. The ability of
the Owner to support the Policy is an important factor in
selecting between the Death Benefit Options, because the
greater the Net Amount at Risk at any time, the more that
will be deducted from the value of the Policy to pay the
Cost of Insurance.
Owners who prefer insurance coverage that generally does not
vary in amount and generally has lower Cost of Insurance
Charges should elect Option 1. Owners who prefer to have
favorable investment experience reflected in increased
insurance coverage should select Option 2. Under Option 1,
any Surrender Value at the time of the Second Death will
revert to LLANY.
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 LLANY.
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.
LLANY may at its discretion decline any request for a change
between Death Benefit Options or increase in the Specified
Amount. LLANY may at its discretion decline any request for
change of the Death Benefit Option or reduction of the
Specified Amount if, after the change, the Specified Amount
would be less than the minimum Specified Amount or would
reduce the Specified Amount below the level required to
maintain the Policy as life insurance for purposes of
Federal income tax law.
25
<PAGE>
Any change is effective on the first Monthly Anniversary Day
on or after the date of approval of the request by LLANY,
unless the Monthly Deduction Amount would increase as a
result of the change. In that case, the change is effective
on the first Monthly Anniversary Day on which the
Accumulation Value is equal to or greater than the Monthly
Deduction Amount, as increased.
FEDERAL INCOME TAX DEFINITION OF LIFE INSURANCE
The amount of the Death Benefit must satisfy certain
requirements under the Code if the policy is to qualify as
insurance for federal income tax purposes. The amount of the
Death Benefit Proceeds required to be paid under the Code to
maintain the Policy as life insurance under each of the
Death Benefit Options (See "Insurance Coverage Provisions,
Death Benefit") is equal to the product of the Accumulation
Value and the applicable Corridor Percentage set forth
below.
<TABLE>
<CAPTION>
ATTAINED AGE OF THE
YOUNGER INSURED
(NEAREST BIRTHDAY) CORRIDOR PERCENTAGE
- ------------------- -------------------
<S> <C>
0-40 250%
41 243
42 236
43 229
44 222
45 215
46 209
47 203
48 197
49 191
50 185
51 178
52 171
53 164
54 157
55 150
56 146
57 142
58 138
59 134
60 130
<CAPTION>
ATTAINED AGE OF THE
YOUNGER INSURED
(NEAREST BIRTHDAY) CORRIDOR PERCENTAGE
- ------------------- -------------------
<S> <C>
61 128%
62 126
63 124
64 122
65 120
66 119
67 118
68 117
69 116
70 115
71 113
72 111
73 109
74 107
75-90 105
91 104
92 103
93 102
94 101
95-99 100
</TABLE>
NOTICE OF DEATH OF INSUREDS
Due Proof of Death must be furnished to LLANY 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 LLANY.
PAYMENT OF DEATH BENEFIT PROCEEDS
The Death Benefit Proceeds under the Policy will ordinarily
be paid within seven days, if in a lump sum, or in
accordance with any Settlement Option selected by the Owner
or the Beneficiary after receipt at the Administrative
Office of Due Proof of Death of both Insureds (See
"Settlement Options"). The amount of the Death Benefit
Proceeds under Option 2 will be determined as of the date of
the Second Death. Payment of the Death Benefit Proceeds may
be delayed if the Policy is contested or if Variable Account
values cannot be determined.
26
<PAGE>
The Owner may elect a Settlement Option before the Second
Death; after the Second Death, if the Owner has not
irrevocably selected a Settlement Option, the Beneficiary
may elect one of the Settlement Options. If no Settlement
Option is selected, the Death Benefit Proceeds will be paid
in a lump sum.
If the Policy is assigned as collateral security, LLANY will
pay any amount due the assignee in one lump sum. Any
remaining Death Benefit Proceeds will be paid as elected.
SETTLEMENT OPTIONS
If an Insured is living, the Owner may elect a Settlement
Option and may revoke or change a prior election. The
Beneficiary may make or change an election within 90 days of
the Second Death of the Insured, unless the Owner's election
was stated to be irrevocable.
A request to elect, change, or revoke a Settlement Option
must be received in proper written form by the
Administrative Office before payment of the lump sum or
under any Settlement Option. The first payment under the
Settlement Option selected will become payable on the date
proceeds are settled under the option. Payments after the
first payment will be made on the first day of each month.
Once payments have begun, the Policy cannot be surrendered
and neither the payee nor the Settlement Option may be
changed.
There are at least four Settlement Options:
The first Settlement Option is an annuity for the
lifetime of the payee.
The second Settlement Option is an annuity for the
lifetime of the payee, with monthly payments guaranteed
for 60, 120, 180, or 240 months.
Under the third Settlement Option, LLANY makes monthly
payments for a stated number of years, at least five but
no more than thirty.
The fourth Settlement Option, provides that LLANY pays
interest annually on the sum left with LLANY 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 LLANY 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 LLANY free of
any other assignments. Interest on Policy Loans accrues at
an annual rate of 8%, and loan interest is payable to LLANY
(for its account) once a year in arrears on each Policy
Anniversary, or earlier upon full surrender or other payment
of proceeds of a Policy.
27
<PAGE>
The amount of a loan, plus any accrued but unpaid interest,
is added to the outstanding Policy Loan balance. Unless paid
in advance, any loan interest due will be transferred from
the values in each Fixed and Variable Sub-Account, and
treated as an additional Policy Loan, and added to the Loan
Account Value.
During the first ten Policy Years, LLANY'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, LLANY'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 LLANY 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. LLANY may at its discretion
decline any request for a Policy Loan.
If at any time the total indebtedness against the Policy,
including interest accrued but not due, equals or exceeds
the then current Accumulation Value less Surrender Charges,
the Policy will terminate without value subject to the
conditions in the Grace Period Provision, unless the No
Lapse Provision is in effect. (SEE "Lapse and Reinstatement,
LAPSE OF A POLICY").
If a Policy lapses while a loan is outstanding, adverse tax
consequences may result.
PARTIAL SURRENDER
A partial surrender may be made at any time before the
Second Death, prior to the Coverage Date, by request to the
Administrative Office in proper written form. 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 LLANY. In addition, if following a
partial surrender and the corresponding decrease in the
Specified Amount, the Policy would not comply with the
maximum premium limitations required by federal tax law, the
surrender may be limited to the extent necessary to meet the
federal tax law requirements.
The effect of partial surrenders on the Death Benefit
Proceeds depends on the Death Benefit Option elected under
the Policy. If Death Benefit Option 1 has been elected, a
partial surrender would reduce the Accumulation Value and
the Specified Amount. The reduction in the Specified Amount,
which would reduce any past increases on a last in, first
out basis, reduces the amount of the Death Benefit Proceeds.
28
<PAGE>
If Death Benefit Option 2 has been elected, a partial
surrender would reduce the Accumulation Value, but would not
reduce the Specified Amount. The reduction in the
Accumulation Value reduces the amount of the Death Benefit
Proceeds.
If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, surrenders from each will be made
in proportion to the assets in each Sub-Account at the time
of the surrender, unless LLANY is instructed otherwise in
proper written form at the Administrative Office. LLANY may
at its discretion decline any request for a partial
surrender.
SURRENDER OF THE POLICY
The Owner may surrender the Policy at any time prior to the
Coverage Date. On surrender of the Policy, LLANY will pay to
the Owner, or assignee, the Surrender Value next computed
after receipt of the request in proper written form at the
Administrative Office. Payment of any amount from the
Variable Account on a full surrender will usually be made
within seven calendar days thereafter. All coverage under
the Policy will automatically terminate if the Owner makes a
full surrender.
SURRENDER VALUE
The "SURRENDER VALUE" of a Policy is the amount the Owner
can receive in a lump sum by surrendering the Policy. The
Surrender Value is the Net Accumulation Value less the
Surrender Charge (SEE "Charges and Fees, Surrender Charge").
All or part of the Surrender Value may be applied to one or
more of the Settlement Options. Surrender Values are
illustrated in the Appendix.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the Surrender Value from any Variable
Sub-Accounts will be made within 7 days. Payment or transfer
from the Fixed Account may be deferred up to six months at
LLANY's option. If LLANY 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 LLANY as to, any payment made or action taken by
LLANY before it was recorded. LLANY is not responsible for
any assignment not submitted for recording, nor is LLANY
responsible for the sufficiency or validity of any
assignment. Any assignment is subject to any indebtedness
owed to LLANY at the time the assignment is recorded and any
interest accrued on such indebtedness after recordation of
any assignment.
Once recorded, the assignment remains effective until
released by the assignee in proper written form. So long as
an effective assignment remains outstanding, the Owner will
not be permitted to take any action with respect to the
Policy without the consent of the assignee in proper written
form.
So long as either Insured is living, the Owner may name a
new Owner by recording a change in ownership in proper
written form at the Administrative Office. On recordation,
the change will be effective as of the date of execution of
the document of transfer or, if there is no such date, the
date of recordation. No such change of ownership will
affect,
29
<PAGE>
or prejudice LLANY as to, any payment made or action taken
by LLANY before it was recorded. LLANY 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 LLANY 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, LLANY will send a written notice to the
Owner and any assignee of record. The notice will state the
amount of the Premium Payment or payment of indebtedness on
Policy Loans necessary such that the Net Accumulation Value
is at least equal to two times the Monthly Deduction Amount.
If the minimum required amount set forth in the notice are
not paid to LLANY on or before the day that is the later of
(a) 31 days after the date of mailing of the notice, and (b)
61 days after the date of the Monthly Anniversary Day with
respect to which such notice was sent (together, the "GRACE
PERIOD"), then the policy shall terminate and all coverage
under the policy shall lapse without value. If the Second
Death occurs during the Grace Period, Death Benefit Proceeds
will be paid, but will be reduced, in addition to any other
reductions, by any unpaid Monthly Deductions. If the Second
Death occurs after the Policy has lapsed, no Death Benefit
Proceeds will be paid.
NO LAPSE PROVISION
The applicant may elect the NO LAPSE PROVISION at issue of
the Policy. If this provision is elected and if at each
Monthly Anniversary Day the sum of all Premium Payments less
any policy loans (including any accrued loan interest) and
partial surrenders is at least equal to the sum of the No
Lapse Premiums (as indicated in the Policy Specifications)
due since the Date of Issue of the Policy, the Policy will
not lapse. A Grace Period will be allotted after each
Monthly Anniversary Day on which insufficient premiums have
been paid (see preceding paragraph). The payment of
sufficient additional premiums during the Grace Period will
keep the No Lapse Provision in force.
The No Lapse Provision will be terminated if the Owner fails
to meet the premium requirements, if there is an increase in
Specified Amount or if the Owner changes the Death Benefit
Option. Once the No Lapse Provision is terminated, it cannot
be reinstated.
REINSTATEMENT OF A LAPSED POLICY
After the policy has lapsed due to the failure to make a
necessary payment before the end of an applicable Grace
Period, the policy may be reinstated at any time prior to
the Coverage Date provided: (a) the policy has not been
surrendered; (b) there is an application for reinstatement
in proper written form; (c) evidence of insurability of both
insureds is furnished to LLANY and it agrees to accept the
risk; (d) LLANY 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
30
<PAGE>
Monthly Anniversary Day after the date on which LLANY
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 LLANY approval. The
Accumulation Value at reinstatement will be the Net Premium
Payment then made less the Monthly Deduction due that day.
If the Surrender Value is not sufficient to cover the full
Surrender Charge at the time of lapse, the remaining portion
of the Surrender Charge will also be reinstated at the time
of Policy reinstatement.
COMMUNICATIONS WITH LLANY
PROPER WRITTEN FORM
When ever this Prospectus refers to a communication "IN
PROPER WRITTEN FORM," it means a writing, in form and
substance reasonably satisfactory to LLANY, received at the
Administrative Office.
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 during the first two years following the
issuance of the Policy exchange the Policy for a
substantially comparable flexible premium fixed benefit
adjustable life insurance policy then being offered by
LLANY. No evidence of insurability will be required.
The Owner, the Insured and the Beneficiary under the new
policy will be the same as those under the exchanged Policy
on the date of the exchange. The Accumulation Value under
the new Policy will be equal to the Accumulation Value under
the old Policy on the date the exchange request is received.
The new policy will have a Death Benefit on the exchange
date not more than the Death Benefit of the original Policy
immediately prior to the exchange date. If the Accumulation
Value is insufficient to support the Death Benefit, the
Owner will be required to make additional Premium Payments
in order to 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, LLANY will pay the excess to
the Owner in cash. The exchange may be subject to federal
income tax withholding.
31
<PAGE>
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 LLANY 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
LLANY'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 LLANY are met. The new policy
will not take effect until the date all such requirements
are met.
PAID-UP INSURANCE OPTION
At any time, the Owner may transfer all of the Variable
Account value to the Fixed Account and then surrender the
Policy for reduced guaranteed non-participating paid-up
insurance, to which no monthly administrative fees would
apply.
INCONTESTABILITY
LLANY 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 either Insured was alive during those two years. For any
increase in Specified Amount requiring evidence of
insurability, LLANY 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
either Insured was 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 either Insured commits suicide within two years from the
Date of Issue, the surviving Insured may convert the policy
to a single life flexible premium variable life insurance
policy.
If the Second Death is by suicide, while sane or insane,
within two years from the Date of Issue, LLANY 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, LLANY will
upon the Second Death pay no more than a refund of the
monthly charges for the cost of such additional benefit.
32
<PAGE>
NONPARTICIPATING POLICIES
These are nonparticipating Policies on which no dividends
are payable. These Policies do not share in the profits or
surplus earnings of LLANY.
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. LLANY 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 age 59 1/2 years or disabled.
The Policies offered by this Prospectus may, or may not, be
issued as modified endowment contracts. LLANY 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. LLANY will monitor compliance with these tests.
In addition to meeting the tests required under Section 7702
and Section 7702A, Section 817(h) of the Code requires that
the investments of separate accounts such as the Variable
Account be adequately diversified. Regulations issued by the
Secretary of the Treasury set the standards for measuring
the adequacy of this diversification. A variable life
insurance policy that is not adequately diversified under
these regulations would not be treated as life insurance
under Section 7702 of the Code. To be adequately
diversified, each Variable Sub-Account must meet certain
tests. LLANY believes the Variable Account investments meet
the applicable diversification standards.
Should the Secretary of the Treasury issue additional rules
or regulations limiting the number of funds, transfers
between funds, exchanges of funds or changes in investment
objectives of funds such that the Policy would no longer
qualify as life insurance under Section 7702 of the Code,
LLANY reserves the right to take steps required to remain in
compliance.
33
<PAGE>
LLANY will monitor compliance with these regulations and, to
the extent necessary, will change the objectives or assets
of the Variable Sub-Account investments to remain in
compliance. LLANY 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 LLANY
LLANY is taxed as a life insurance company under the Code.
Since the Variable Account is not a separate entity from
LLANY and its operations form a part of LLANY, 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.
LLANY does not initially expect to incur any Federal income
tax liability that would be chargeable to the Variable
Account. Based upon these expectations, no charge is
currently being made against the Variable Account for
federal income taxes. If, however, LLANY determines that on
a separate company basis such taxes may be incurred, it
reserves the right to assess a charge for such taxes against
the Variable Account.
LLANY may also incur state and local taxes in addition to
premium taxes in New York. 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 LLANY's understanding of Federal income tax laws as
they are currently interpreted by the Internal Revenue
Service. No representation is made as to the likelihood of
continuation of these current laws and interpretations.
FAIR VALUE OF THE POLICY
It is sometime necessary for tax and other reasons to
determine the "fair value" of the Policy. The fair value of
the Policy is measured differently for different purposes.
It is not necessarily the same as the Accumulation Value or
the Net Accumulation Value, although the amount of the Net
Accumulation Value will typically be important in valuing
the Policy for this purpose. For some but not all purposes,
the fair value of the Policy may be the Surrender Value of
the Policy. The fair value of the Policy may be impacted by
developments other than the performance of the underlying
investments. For example, without regard to any other
factor, it increases as the Insureds grow older. Moreover,
on the death of the first of the Insureds to die, it tends
to increase 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.
34
<PAGE>
DIRECTORS AND OFFICERS OF LLANY
The following persons are Directors and Officers of LLANY.
Except as indicated below, the address of each is 120
Madison Street, Suite 1700, Syracuse, New York 13202 and
each has been employed by LLANY or its affiliates for more
than five years.
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S)
WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- -----------------------------------------------------------------------
<S> <C>
ROLAND C. BAKER President [1/95-present], First
DIRECTOR Penn-Pacific Life Insurance Co. Formerly:
1801 S. Meyers Road Chairman and CEO [7/88-1/95], Baker,
Oakbrook Terrace, IL 60181 Rakish, Shipley & Politzer, Inc.
J. PATRICK BARRETT Chairman and Chief Executive Officer,
DIRECTOR CARPAT Investments
4605 Watergap
Manlius, NY 13104
DAVID N. BECKER Vice President and Chief Actuarial
SECOND VICE PRESIDENT AND Officer, The Lincoln National Life
APPOINTED ACTUARY Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46802
THOMAS D. BELL, JR. President and Chief Executive Officer
DIRECTOR [4/95-present], Burson-Marstellar.
230 Park Avenue, South Formerly: Vice Chairman [3/94-5/95],
New York, NY 10003 Gulfstream Aerospace Corp.; Vice Chairman
and Chief Executive Officer [6/89-3/94],
Burson-Marstellar
JON A. BOSCIA President, Lincoln National Corp.
DIRECTOR [1/98-present], Formerly: President and
1300 South Clinton Street Chief Executive Officer [10/96-1/98], and
Fort Wayne, IN 46802 Chief Operating Officer [5/94-10/96], The
Lincoln National Life Insurance Co.
Formerly: President [7/91-5/94] Lincoln
Investment Management Inc.
KATHLEEN R. GORMAN Assistant Vice President, Lincoln Life &
ASSISTANT VICE PRESIDENT Annuity Company of New York
[9/96-present]; Director of Group
Universal Life Operations, Mutual of New
York [10/91-9/96]
JOHN H. GOTTA Senior Vice President and General Manager
SECOND VICE PRESIDENT [1/98-present], The Lincoln National Life
900 Cottage Grove Rd. Insurance Co. Formerly: Senior Vice
Bloomfield, CT 06152 President, Connecticut General Life
Insurance Company [3/96-12/97]; Vice
President, Connecticut Mutual Life
Insurance Company [8/94-3/96]; Vice
President, Connecticut General Life
Insurance Company [3/93-8/94]
PHILIP L. HOLSTEIN President and Treasurer, Lincoln Life &
PRESIDENT AND DIRECTOR Annuity Company of New York [7/96-Present]
Formerly: President, [1/82-7/96] The
Holstein Company, Inc.
HARRY L. KAVETAS Executive Vice President and Chief
DIRECTOR Financial Officer [2/94-present], Eastman
343 State Street Kodak Company. Formerly: Vice President
Rochester, NY 14650-0235 [9/61-12/93], IBM Corporation
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S)
WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- -----------------------------------------------------------------------
<S> <C>
BARBARA S. KOWALCZYK Senior Vice President, Corporation
DIRECTOR Planning [5/94-present], Lincoln National
200 East Berry Street Corp.; Formerly: Senior Vice President
Fort Wayne, IN 46802 [7/92-5/94], Lincoln Investment Management
Co.
MARGEURITE L. LACHMAN Managing Director, Schroder Real Estate
DIRECTOR Associates
437 Madison Avenue, 18th
Floor
New York, NY 10022
LOUIS G. MARCOCCIA Senior Vice President, Business, Finance
DIRECTOR and Administrative Services, Syracuse
Skytop Office Building University
Skytop Road
Syracuse, NY 13244-5300
TROY D. PANNING Second Vice President and Chief Financial
SECOND VICE PRESIDENT AND Officer
CHIEF FINANCIAL OFFICER [11/96-present], Lincoln Life & Annuity
Company of New York; Formerly: Accountant
[9/90-11/96], Ernst & Young LLP
JOHN M. PIETRUSKI Chairman of Board, Texas Biotechnology
DIRECTOR Corp.
One Penn Plaza
Suite 3408
New York, NY 10119
LAWRENCE T. ROWLAND President [97-present] Lincoln
DIRECTOR Reinsurance, Formerly: Senior Vice
One Reinsurance Place President (96), Vice President [94-95]
1700 Magnavox Way Lincoln Reinsurance.
Fort Wayne, IN 46804
GABRIEL L. SHAHEEN President, Chief Executive Officer and
DIRECTOR Director [1/98-present], The Lincoln
1300 South Clinton Street National Life Insurance Co. Formerly:
Fort Wayne, IN 46802 Managing Director, Lincoln National (UK)
PLC [12/96-1/98]; President, Lincoln
National Reinsurance Company [7/94-12/96];
Senior Vice President, Lincoln National
Life Reinsurance Company [1/93-7/95]
ROBERT O. SHEPPARD, ESQ. Assistant Vice President, Lincoln Life &
ASSISTANT VICE PRESIDENT Annuity Company of New York
[7/97-present]; Second Vice President,
Unity Mutual Life Insurance Company
[2/86-7/97]
RICHARD C. VAUGHAN Executive Vice President and Chief
DIRECTOR Financial Officer [1/95-present] Formerly:
200 East Berry Street Senior Vice President [5/92-1/95], Lincoln
Fort Wayne, IN 46802 National Corp.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S)
WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- -----------------------------------------------------------------------
<S> <C>
C. SUZANNE WOMACK Secretary, Lincoln Life & Annuity Company
SECRETARY of New York [7/96-present]; Second Vice
200 East Berry Street President and Secretary, Lincoln National
Fort Wayne, IN 46802 Corporation [5/97-present]; Second Vice
President and Secretary, The Lincoln
National Life Insurance Company
[5/97-present]; Secretary, Lincoln
Financial Advisors Corporation
[6/87-present].
</TABLE>
DISTRIBUTION OF POLICIES
LLANY intends to offer the Policies in New York. Lincoln
Financial Advisors Corporation ("LFA"), 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"). LFA
will be offering the Policies and performing all duties and
functions necessary and prepare for the distribution of the
Policies. The principal business address of LFA is 3811
Illinois Road, Suite 205, Fort Wayne, IN 46804-1202.
The Policy will be sold by individuals, who in addition to
being licensed as life insurance agents for LLANY, are also
registered representatives of The Lincoln National Life
Insurance Company. These representatives ordinarily receive
commission and services fee up to 95% of the first year
premium, plus up to 10% of all other premiums paid. The
local agency receives additional compensation on the first
year premium and all additional premiums. In some
situations, the local agency may elect to share its
commission with the registered representative. Selling
representatives are also eligible for bonuses and non-cash
compensation if certain production levels are reached. All
compensation is paid from LLANY's resources, which include
sales charges made under this Policy.
CHANGES OF INVESTMENT POLICY
LLANY may materially change the investment policy of the
Variable Account. LLANY must inform the Owners and obtain
all necessary regulatory approvals. Any change must be
submitted to the New York Department of Insurance, which
shall disapprove it if deemed detrimental to the interests
of the Owners or if it renders LLANY's operations hazardous
to the public. If an Owner objects, the Policy may be
converted to a substantially comparable fixed benefit life
insurance policy then being offered by LLANY on the life of
the Insured. The Owner has the later of 60 days from the
date of the investment policy change or 60 days from being
informed of such change to make this conversion. LLANY 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 LLANY
LLANY 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 LLANY.
37
<PAGE>
STATE REGULATION
LLANY is subject to the laws of New York governing insurance
companies and to regulation by the New York Insurance
Department. An annual statement in a prescribed form is
filed with the Insurance Department each year covering the
operation of LLANY 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 LLANY's contract liabilities and reserves so that
the Insurance Department may certify the items are correct.
LLANY'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 New York
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
LLANY 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, and
any other information required by the New York
Superintendent of Insurance.
Owners will also be sent annual reports containing financial
statements for the Variable Account and annual and
semi-annual reports of the Funds as required by the 1940
Act.
In addition, Owners will receive statements of significant
transactions, such as changes in Specified Amount, changes
in Death Benefit Option, transfers among Sub-Accounts,
Premium Payments, loans, loan repayments, reinstatement and
termination.
ADVERTISING
LLANY is also ranked and rated by independent financial
rating services, including Moody's, Standard & Poor's, Duff
& Phelps and A.M. Best Company. The purpose of these ratings
is to reflect the financial strength or claims-paying
ability of LLANY. The ratings are not intended to reflect
the investment experience or financial strength of the
Separate Account. LLANY may advertise these ratings from
time to time. In addition, LLANY may include in certain
advertisements, endorsements in the form of a list of
organizations, individuals or other parties which recommend
LLANY or the Policies. Furthermore, LLANY may occasionally
include in advertisements comparisons of currently taxable
and tax deferred investment programs, based on selected tax
brackets, or discussions of alternative investment vehicles
and general economic conditions.
YEAR 2000 ISSUES
LLANY, as part of its year 2000 updating process and in
conjunction with its parent company, The Lincoln National
Life Insurance Company ("Lincoln Life"), is responsible for
the updating of the Variable Account related computer
systems. Many existing computer programs use only two digits
to identify a year in the date field. These programs were
designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results
by or at the year 2000. The Year 2000 issue affects
virtually all companies and organizations.
An affiliate of LLANY, Delaware Service Company (Delaware),
provides substantially all of the necessary accounting and
valuation services for the Variable Account. Delaware,
38
<PAGE>
for its part, is responsible for updating all of its
computer systems, including those which service the Variable
Account, to accommodate the year 2000. LLANY, Lincoln Life,
and Delaware (the Companies) have begun formal discussions
with each other to assess the requirements for their
respective systems to interface properly in order to
facilitate the accurate and orderly operation of the
Variable Account beginning in the year 2000.
The Year 2000 issue is pervasive and complex and affects
virtually every aspect of the businesses of the Companies.
The computer systems of the Companies and their interfaces
with the computer systems of vendors, suppliers, customers
and their interfaces with the computer systems of vendors,
suppliers, customers and other business partners are
particularly vulnerable. The inability to properly recognize
date-sensitive electronic information and to transfer data
between systems could cause errors or even complete failure
of systems, which would result in a temporary inability to
process transactions correctly and engage in normal business
activities for the Variable Account. The Companies
respectively are redirecting significant portions of their
internal information technology efforts and are contracting,
as needed, with outside consultants to help update their
systems to accommodate the year 2000. Also, in addition to
the discussions with each other noted above, the Companies
have respectively initiated formal discussions with other
critical parties that interface with their systems to gain
an understanding of the progress by those parties in
addressing Year 2000 issues. While the Companies are making
substantial efforts to address their own systems and the
systems with which they interface, it is not possible to
provide assurance that operational problems will not occur.
The Companies presently believe that, assuming the
modification of existing computer systems, updates by
vendors and conversion to new software and hardware, the
Year 2000 issue will not pose significant operations
problems for their respective computer systems. In addition,
the Companies are incorporating potential issues surrounding
year 2000 into their contingency planning process, in the
event that, despite these substantial efforts, there are
unresolved Year 2000 problems. If the remediation efforts
noted above are not completed timely or properly, the Year
2000 issue could have a material adverse impact on the
operation of the businesses of the Companies.
The cost of addressing Year 2000 issues and the timeliness
of completion will be closely monitored by management of the
Companies. Nevertheless, there can be no guarantee by LLANY,
Lincoln Life, or Delaware that estimated costs will be
achieved, and actual results could differ significantly from
those anticipated. Specific factors that might cause such
differences include, but are not limited to, the
availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer
problems, and other uncertainties.
EXPERTS
The statutory-basis financial statements and schedules of
LLANY as of December 31, 1997 and 1996, and for the year
ended December 31, 1997 and the period from June 6, 1996
(date of incorporation) to December 31, 1996, appearing in
this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in
their report which also appears elsewhere in this document
and in the registration statement. The financial statements
and schedules audited by Ernst & Young LLP have been
included in this document in reliance on their report given
on their authority as experts in accounting and auditing.
Actuarial matters included in this prospectus have been
examined by Michael J. Roscoe, FSA, as stated in the opinion
filed as an exhibit to the registration statement.
39
<PAGE>
Legal matters in connection with the Policies described
herein are being passed upon by Robert O. Sheppard, Esquire,
as stated in the opinion filed as an exhibit to the
registration statement.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities
and Exchange Commission under the Securities Act of 1933, as
amended, with respect to the Policies offered hereby. This
Prospectus does not contain all the information set forth in
the Registration Statement and amendments thereto and
exhibits filed as a part thereof, to all of which reference
is hereby made for further information concerning the
Variable Account, LLANY, 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.
FINANCIAL STATEMENTS
On the following pages appear the audited statutory-basis
financial statements and schedules of LLANY as of and for
the periods ended December 31, 1997 and 1996. Also, the
unaudited statutory-basis financial statements of LLANY as
of and for the three months ended March 31, 1998 are
included.
40
<PAGE>
Financial Statements -- Statutory Basis
and Other Financial Information
LINCOLN LIFE & ANNUITY
COMPANY OF NEW YORK
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM JUNE 6,
1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1996
WITH REPORT OF INDEPENDENT AUDITORS
41
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
FINANCIAL STATEMENTS -- STATUTORY BASIS
AND OTHER FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM JUNE 6, 1996
(DATE OF INCORPORATION) TO DECEMBER 31, 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................................ 43
AUDITED FINANCIAL STATEMENTS
Balance Sheets -- Statutory Basis..................................................................... 44
Statements of Operations -- Statutory Basis........................................................... 45
Statements of Changes in Capital and Surplus -- Statutory Basis....................................... 46
Statements of Cash Flows -- Statutory Basis........................................................... 47
Notes to Financial Statements -- Statutory Basis...................................................... 48
OTHER FINANCIAL INFORMATION
Report of Independent Auditors on Other Financial Information......................................... 58
Supplemental Schedule of Selected Financial Data -- Statutory Basis................................... 59
Note to Supplemental Schedule of Selected Financial Data -- Statutory Basis........................... 60
</TABLE>
42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Lincoln Life & Annuity Company of New York
We have audited the accompanying statutory-basis balance sheets
of Lincoln Life & Annuity Company of New York (an indirect
wholly owned subsidiary of Lincoln National Corporation) as of
December 31, 1997 and 1996, and the related statutory-basis
statements of operations, changes in capital and surplus, and
cash flows for the year ended December 31, 1997 and for the
period from June 6, 1996 (date of incorporation) to December 31,
1996. 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 New York Insurance
Department, 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 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
Lincoln Life & Annuity Company of New York at December 31, 1997
and 1996, or the results of its operations or its cash flows for
the year ended December 31, 1997 and for the period from June 6,
1996 (date of incorporation) to December 31, 1996.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of Lincoln Life & Annuity Company of New York at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for the year ended December 31, 1997 and for
the period from June 6, 1996 (date of incorporation) to December
31, 1996, in conformity with accounting practices prescribed or
permitted by the New York Insurance Department.
[SIGNATURE]
March 12, 1998
43
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------- ------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTED ASSETS:
Bonds $ 593,431,718 $604,353,271
- ------------------------------------------------------------------------------
Policy loans 39,054,927 40,609,076
- ------------------------------------------------------------------------------
Cash and short-term investments 163,773,594 19,335,007
- ------------------------------------------------------------------------------
Receivable for securities 34,804 --
- ------------------------------------------------------------------------------ ------------- ------------
Total cash and invested assets 796,295,043 664,297,354
- ------------------------------------------------------------------------------
Accrued investment income 10,706,003 9,022,375
- ------------------------------------------------------------------------------
Data processing equipment 248,782 103,557
- ------------------------------------------------------------------------------
Other admitted assets 86,946 --
- ------------------------------------------------------------------------------
Separate account assets 164,721,012 --
- ------------------------------------------------------------------------------ ------------- ------------
Total admitted assets $ 972,057,786 $673,423,286
- ------------------------------------------------------------------------------ ------------- ------------
------------- ------------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Policyholders' funds $ 587,465,491 $601,117,439
- ------------------------------------------------------------------------------
Future policy benefits and claims 1,214,524 --
- ------------------------------------------------------------------------------
Other liabilities 6,784,652 16,351,624
- ------------------------------------------------------------------------------
Federal income taxes (recoverable) (342,378) 1,445,538
- ------------------------------------------------------------------------------
Asset valuation reserve 2,350,411 1,128,548
- ------------------------------------------------------------------------------
Interest maintenance reserve 2,594,552 3,204,140
- ------------------------------------------------------------------------------
Net transfers due from separate accounts (5,582,705) --
- ------------------------------------------------------------------------------
Separate account liabilities 164,721,012 --
- ------------------------------------------------------------------------------ ------------- ------------
Total liabilities 759,205,559 623,247,289
- ------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $100 par value:
Authorized, issued and outstanding -- 20,000 shares (owned by The Lincoln
National Life Insurance Company) 2,000,000 2,000,000
- ------------------------------------------------------------------------------
Paid-in surplus 227,407,481 69,000,000
- ------------------------------------------------------------------------------
Unassigned surplus -- deficit (16,555,254) (20,824,003)
- ------------------------------------------------------------------------------ ------------- ------------
Total capital and surplus 212,852,227 50,175,997
- ------------------------------------------------------------------------------ ------------- ------------
Total liabilities and capital and surplus $ 972,057,786 $673,423,286
- ------------------------------------------------------------------------------ ------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
44
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1996
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
REVENUES:
Premiums and deposits $184,112,330 $631,355,849
- -----------------------------------------------------------------------------
Net investment income 43,953,796 10,769,172
- -----------------------------------------------------------------------------
Surrender charges 1,334,705 310,991
- -----------------------------------------------------------------------------
Amortization of the interest maintenance reserve 370,129 205,255
- -----------------------------------------------------------------------------
Other revenues 183,048 18,347
- ----------------------------------------------------------------------------- ------------- ------------
Total revenues 229,954,008 642,659,614
- -----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits paid or provided to policyholders 72,475,389 640,912,693
- -----------------------------------------------------------------------------
Commissions 2,459,308 18,931,151
- -----------------------------------------------------------------------------
General expenses 7,272,936 1,754,158
- -----------------------------------------------------------------------------
Insurance taxes, licenses and fees 739,989 47,046
- -----------------------------------------------------------------------------
Net transfers to separate accounts 139,478,473 --
- ----------------------------------------------------------------------------- ------------- ------------
Total benefits and expenses 222,426,095 661,645,048
- ----------------------------------------------------------------------------- ------------- ------------
Gain (loss) from operations before federal income taxes and net realized
capital losses 7,527,913 (18,985,434)
- -----------------------------------------------------------------------------
Federal income taxes (benefit) 1,942,625 (391,144)
- ----------------------------------------------------------------------------- ------------- ------------
Gain (loss) from operations before net realized capital losses 5,585,288 (18,594,290)
- -----------------------------------------------------------------------------
Net realized capital losses (73,398) (855)
- ----------------------------------------------------------------------------- ------------- ------------
Net income (loss) $ 5,511,890 $(18,595,145)
- ----------------------------------------------------------------------------- ------------- ------------
------------- ------------
</TABLE>
See accompanying notes. 45
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
UNASSIGNED
COMMON PAID-IN SURPLUS -- TOTAL CAPITAL
STOCK SURPLUS DEFICIT AND SURPLUS
---------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balances at June 6, 1996 $ -- $ -- $ -- $ --
- ---------------------------------------------------
ADD (DEDUCT):
Capital paid-in 2,000,000 -- -- 2,000,000
- ---------------------------------------------------
Surplus paid-in -- 69,000,000 -- 69,000,000
- ---------------------------------------------------
Net loss -- -- (18,595,145) (18,595,145)
- ---------------------------------------------------
Increase in nonadmitted assets -- -- (1,100,310) (1,100,310)
- ---------------------------------------------------
Increase in asset valuation reserve -- -- (1,128,548) (1,128,548)
- --------------------------------------------------- ---------- ------------- ------------ -------------
Balances at December 31, 1996 2,000,000 69,000,000 (20,824,003) 50,175,997
- ---------------------------------------------------
ADD (DEDUCT):
Surplus paid-in -- 158,407,481 -- 158,407,481
- ---------------------------------------------------
Net income -- -- 5,511,890 5,511,890
- ---------------------------------------------------
Increase in nonadmitted assets -- -- (21,278) (21,278)
- ---------------------------------------------------
Increase in asset valuation reserve -- -- (1,221,863) (1,221,863)
- --------------------------------------------------- ---------- ------------- ------------ -------------
Balances at December 31, 1997 $2,000,000 $ 227,407,481 $(16,555,254) $ 212,852,227
- --------------------------------------------------- ---------- ------------- ------------ -------------
---------- ------------- ------------ -------------
</TABLE>
See accompanying notes.
46
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1996
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 184,112,330 $631,355,849
- ----------------------------------------------------------------------------
Investment income received 43,781,378 1,837,439
- ----------------------------------------------------------------------------
Benefits paid (85,008,691) (23,169,165)
- ----------------------------------------------------------------------------
Insurance expenses paid (154,355,904) (20,919,059)
- ----------------------------------------------------------------------------
Federal income taxes paid (1,893,859) --
- ----------------------------------------------------------------------------
Other income received and expenses paid, net 1,613,631 329,338
- ---------------------------------------------------------------------------- ------------- -------------
Net cash provided by (used in) operating activities (11,751,115) 589,434,402
- ----------------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 272,961,178 366,021,652
- ----------------------------------------------------------------------------
Purchase of investments (265,700,363) (965,220,343)
- ----------------------------------------------------------------------------
Net decrease (increase) in policy loans 1,554,149 (40,609,076)
- ---------------------------------------------------------------------------- ------------- -------------
Net cash provided by (used in) investing activities 8,814,964 (639,807,767)
- ----------------------------------------------------------------------------
FINANCING AND MISCELLANEOUS ACTIVITIES
Capital and surplus paid-in 158,407,481 71,000,000
- ----------------------------------------------------------------------------
Other (11,032,743) (1,291,628)
- ---------------------------------------------------------------------------- ------------- -------------
Net cash provided by financing activities 147,374,738 69,708,372
- ---------------------------------------------------------------------------- ------------- -------------
Increase in cash and short-term investments 144,438,587 19,335,007
- ----------------------------------------------------------------------------
Total cash and short-term investments at beginning of year 19,335,007 --
- ---------------------------------------------------------------------------- ------------- -------------
Total cash and short-term investments at end of year $ 163,773,594 $19,335,007
- ---------------------------------------------------------------------------- ------------- -------------
------------- -------------
</TABLE>
See accompanying notes. 47
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Lincoln Life & Annuity Company of New York (the "Company") is a wholly owned
subsidiary of The Lincoln National Life Insurance Company ("Lincoln Life"),
which is a wholly owned subsidiary of Lincoln National Corporation ("LNC").
The Company was organized under the laws of the state of New York on June 6,
1996 as a life insurance company.
The Company received approval from the New York Insurance Department (the
"Department") to operate as a licensed insurance company in the state of New
York on September 27, 1996. The Company's operations consist of group 403(b)
tax-qualified annuity business acquired from UNUM Corporation affiliates on
October 1, 1996. The purchase was completed in the form of an indemnity
reinsurance transaction with an initial ceding commission of $15,600,000
which the Department required the Company to record as an expense in the
1996 statement of operations. Upon novation, the indemnity reinsurance
agreements for general accounts were replaced with assumption reinsurance
agreements and the acquired separate accounts were recorded via assumption
reinsurance agreements. The group tax-qualified annuities are sold to
not-for-profit organizations throughout the State of New York by independent
brokers. The Company also sells single premium immediate annuity contracts
to 403(b) contractholders who desire annuitization.
USE OF ESTIMATES
Preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
BASIS OF PRESENTATION
The accompanying statutory-basis financial statements have been prepared in
conformity with accounting practices prescribed or permitted by the
Department. "Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners
("NAIC"). "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future. The NAIC currently is in the process of codifying
statutory accounting practices, the result of which is expected to
constitute the only source of "prescribed" statutory accounting practices.
Codification will likely change, to some extent, prescribed statutory
accounting practices and may result in changes to the accounting practices
that the Company uses to prepare its statutory-basis financial statements.
Codification, which is expected to be approved by the NAIC in 1998, will
require adoption by the various states before it becomes the prescribed
statutory basis of accounting for insurance companies domesticated within
those states. Accordingly, before Codification becomes effective for the
Company, the State of New York must adopt Codification as the prescribed
basis of accounting on which domestic insurers must report their
statutory-basis results to the Department. At this time, it is unclear
whether the State of New York will adopt Codification. However, based on the
current draft of the proposed accounting practices, management believes that
the impact of codification will not be material to the Company's
statutory-basis financial statements.
Existing statutory accounting practices differ from generally accepted
accounting principles ("GAAP"). The more significant variances from GAAP are
as follows:
INVESTMENTS
Bonds are reported at amortized cost or market value based on their 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 deferred
income taxes.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of bonds 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" in the
accompanying balance sheets. Realized capital gains and losses are reported
in income
48
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
net of federal income tax and transfers to the interest maintenance reserve.
The "asset valuation reserve" 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
pretax basis in the period that the asset giving rise to the gain or loss is
sold and valuation allowances are provided when there has been a decline in
value deemed other than temporary, in which case, the provision for such
declines are charged to income.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally start-up and
organizational costs and furniture and equipment, are excluded from the
accompanying balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits are reported as premiums and deposits revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
REINSURANCE
Commissions on business assumed are reported as an expense; whereas, under
GAAP the reinsurance transaction would be treated as a purchase of a
business and the ceding commission would represent the purchase price which
would be allocated to the assets and liabilities acquired at their
respective fair values. The excess of liabilities over assets acquired would
be treated as goodwill.
POSTRETIREMENT BENEFITS
For purposes of calculating the Company's postretirement benefit obligation,
only vested employees and current retirees are included in the actuarial
benefit valuation. Under GAAP, active employees not currently eligible would
also be included.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
A reconciliation of the Company's capital and surplus and net income (loss)
determined in accordance with statutory accounting practices with amounts
determined in accordance with GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
--------------------------------------------------------
PERIOD FROM
JUNE 6, 1996
YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
Amounts as reported on a statutory basis $ 212,852,227 $ 50,175,997 $ 5,511,890 $(18,595,145)
- --------------------------------------------
Add (deduct):
Net unrealized gain on bonds 14,327,159 215,899 -- --
-----------------------------------------
Interest maintenance reserve 2,594,552 3,204,140 (370,129) 3,204,140
-----------------------------------------
Net realized loss on investments -- -- (239,459) --
-----------------------------------------
Asset valuation reserve 2,350,411 1,128,548 -- --
-----------------------------------------
Difference between GAAP and
statutory-basis policyholders' funds (19,203,409) (15,536,418) (3,666,991) (15,536,418)
-----------------------------------------
Present value of future profits and
deferred acquisition costs 37,605,108 37,081,156 523,952 37,081,156
-----------------------------------------
Deferred federal income taxes (5,558,937) (1,290,978) 670,981 (1,215,413)
-----------------------------------------
Nonadmitted assets 1,121,588 1,100,310 -- --
- -------------------------------------------- ------------- ------------ ------------ -------------
Amounts on a GAAP basis $ 246,088,699 $ 76,078,654 $ 2,430,244 $ 4,938,320
- -------------------------------------------- ------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
49
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method. For
mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values. Policy loans are reported at unpaid balances.
Realized capital gains and losses on investments sold are determined using
the specific identification method. Changes in admitted asset carrying
amounts of bonds are credited or charged directly in unassigned surplus.
DATA PROCESSING EQUIPMENT
Data processing equipment is reported at cost, less accumulated
depreciation. Data processing equipment is depreciated on a straight-line
basis over the useful life of the asset.
PREMIUMS
Premiums for group tax-qualified annuity business are recognized as revenue
when deposited. Individual annuity premiums are recognized as revenue when
due.
BENEFITS
Annuity benefit reserves are developed by actuarial methods and are
determined based on published tables using statutorily specified interest
rates and valuation methods that will provide, in the aggregate, reserves
that are greater than or equal to the minimum or guaranteed policy cash
values or the amounts required by the Department.
The 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 policyholders' funds left on deposit with the Company
generally are equal to fund balances less applicable surrender charges, and
do not differ materially from reserve practices prescribed by the
Department.
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.
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 the exclusive
benefit of variable annuity contractholders and for which the
contractholders, and not the Company, bears the investment risk. Separate
account contractholders have no claim against the assets of the general
account of the Company. Separate account assets are reported at fair value
and consist of mutual funds. The fees received by the Company for
administrative and contractholder maintenance services performed for these
separate accounts are included in the Company's statements of operations.
VULNERABILITY FROM CONCENTRATIONS
The Company is licensed to conduct life insurance business in the state of
New York. Currently, its products are sold through independent brokers in
the group 403(b) marketplace, primarily to higher-education institutions and
non-profit healthcare organizations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
50
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
2. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JUNE 6, 1996
DECEMBER TO DECEMBER
31, 1997 31, 1996
--------------------------
<S> <C> <C>
Income:
Bonds $42,237,959 $ 9,427,203
--------------------------------------------------------------------
Policy loans 1,990,613 439,305
--------------------------------------------------------------------
Cash and short-term investments 315,328 1,024,525
-------------------------------------------------------------------- ----------- -------------
Total investment income 44,543,900 10,891,033
- -----------------------------------------------------------------------
Investment expenses 590,104 121,861
-------------------------------------------------------------------- ----------- -------------
Net investment income $43,953,796 $10,769,172
-------------------------------------------------------------------- ----------- -------------
----------- -------------
</TABLE>
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
------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Corporate $ 445,296,161 $12,163,765 $(1,677,849) $ 455,782,077
------------------------------------
U.S. government 12,326,095 191,925 -- 12,518,020
------------------------------------
Foreign government 17,131,754 636,803 (426,360) 17,342,197
------------------------------------
Mortgage-backed 115,611,907 3,369,970 (3,564) 118,978,313
------------------------------------
State and municipal 3,065,801 72,469 -- 3,138,270
------------------------------------ ------------- ----------- ----------- -------------
$ 593,431,718 $16,434,932 $(2,107,773) $ 607,758,877
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1996:
Corporate $374,672,586 $ 1,065,584 $(2,174,439) $373,563,731
--------------------------------------
U.S. government 66,997,162 582,337 -- 67,579,499
--------------------------------------
Foreign government 4,992,530 56,125 -- 5,048,655
--------------------------------------
Mortgage-backed 157,690,993 762,919 (76,627) 158,377,285
-------------------------------------- ------------ ----------- ----------- ------------
$604,353,271 $ 2,466,965 $(2,251,066) $604,569,170
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
Fair value for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are
estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit
quality and maturity of the investments.
51
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
2. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1997, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
----------------------------
<S> <C> <C>
Maturity:
In 1999-2002 $ 159,878,049 $ 161,394,220
-------------------------------------------------------------------
In 2003-2007 224,195,608 229,089,814
-------------------------------------------------------------------
After 2007 93,746,154 98,296,530
-------------------------------------------------------------------
Mortgage-backed securities 115,611,907 118,978,313
------------------------------------------------------------------- ------------- -------------
Total $ 593,431,718 $ 607,758,877
- ---------------------------------------------------------------------- ------------- -------------
------------- -------------
</TABLE>
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investments in bonds were
$274,742,319 and $365,646,000 in 1997 and 1996,
respectively. Gross gains of $1,533,793 and $4,871,624 and
gross losses of $1,922,165 and $2,443 during 1997 and 1996,
respectively, were realized on those sales. Net gains
(losses) of $(26) and $376,041 were realized on sales of
short-term investments in 1997 and 1996, respectively.
Realized capital gains and losses are reported net of
federal income taxes of $55,541 and $1,836,682 in 1997 and
1996, respectively, and amounts transferred to the interest
maintenance reserve of $239,459 and $3,409,395 in 1997 and
1996, respectively.
At December 31, 1997, investments in bonds with an admitted
asset value of $500,177 were on deposit with the Department
to satisfy regulatory requirements.
At December 31, 1997, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
3. FEDERAL INCOME TAXES
The effective federal income tax rate for financial
reporting purposes differs from the prevailing statutory tax
rate principally due to differences in ceding commissions
for tax return and financial statement purposes.
4. ANNUITY RESERVES
At December 31, 1997, the Company's future policy benefits
and claims and policyholders' funds, including separate
accounts, that are subject to discretionary withdrawal with
52
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
4. ANNUITY RESERVES (CONTINUED)
adjustment, subject to discretionary withdrawal without
adjustment and not subject to discretionary withdrawal
provisions are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
--------------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
At book value, less surrender charge $ 263,779,308 35.2%
-------------------------------------------------------------------------
At market value 159,132,918 21.3
------------------------------------------------------------------------- ------------- -----
422,912,226 56.5
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 323,686,183 43.3
- ----------------------------------------------------------------------------
Not subject to discretionary withdrawal 1,214,524 0.2
- ---------------------------------------------------------------------------- ------------- -----
Total future policy benefits and claims and policyholders' funds $ 747,812,933 100.0%
- ---------------------------------------------------------------------------- ------------- -----
------------- -----
</TABLE>
5. CAPITAL AND SURPLUS
The Company was initially capitalized on August 12, 1996 with a capital
contribution from Lincoln Life in the amount of $2,000,000. Additional
paid-in surplus from Lincoln Life of $169,000,000 and $158,407,481 was
received in September 1996 and December 1997, respectively.
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. At December 31, 1997, the
Company exceeds the RBC requirements.
The payment of dividends by the Company requires 30 day advance notice to
the Department.
6. EMPLOYEE BENEFIT PLANS
The Company participates in various employee benefit plans sponsored by LNC.
PENSION PLANS
LNC maintains funded defined benefit pension plans for most of its
employees. The benefits for employees are based on total years of service
and the highest 60 months of compensation during the last 10 years of
employment. The plans are funded by contributions to tax-exempt trusts. The
Company's funding policy is consistent with the funding requirements of
Federal laws and regulations. Contributions are intended to provide not only
the benefits attributed to service to date, but also those expected to be
earned in the future. Plan assets consist principally of listed equity
securities, corporate obligations and government bonds.
LNC also administers an unfunded, non-qualified, defined benefit salary
continuation plan that provides certain officers of the Company defined
pension benefits based on years of service and final monthly salary upon
death or retirement.
401(k) PLAN
LNC and the Company sponsor contributory defined contribution plans for
eligible employees and agents. The Company's contributions to the plans are
equal to each participant's pretax contribution, not to exceed 6% of base
pay, multiplied by a percentage ranging from 25% to 150%, which varies
according to certain incentive criteria as determined by LNC's Board of
Directors.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLANS
LNC sponsors unfunded defined benefit plans that provide postretirement
medical and life insurance benefits to full-time employees and agents who,
depending on the plan, have worked for the Company 10 to 15 years and
attained age 55 to 60. Medical benefits are also available to spouses and
other dependents of employees and agents. For medical benefits, limited
contributions are required from individuals retired prior to November 1,
1988; contributions for later retirees, which can be adjusted annually, are
based on such items as years of service at retirement and age at retirement.
The life insurance benefits are noncontributory, although participants can
elect supplemental contributory benefits.
53
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and equipment under lease agreements that
expire at various intervals over the next six years and are subject to
renewal options at market rates prevailing at the time of renewal. Rental
expense for all operating leases was $155,664 and $32,252 for 1997 and 1996,
respectively. Future minimum rental commitments are as follows:
<TABLE>
<S> <C>
1998 $ 190,224
- ----------------------------------
1999 195,081
- ----------------------------------
2000 195,081
- ----------------------------------
2001 189,494
- ----------------------------------
2002 161,563
- ----------------------------------
Thereafter 134,637
- ---------------------------------- ----------
$1,066,080
----------
----------
</TABLE>
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. In some instances, these proceedings
include claims for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for alleged contractual liability or
requests for equitable relief. After consultation with legal counsel and a
review of available facts, it is management's opinion that these proceedings
ultimately will be resolved without materially affecting the financial
position or results of operations of the Company.
8. 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 and,
accordingly, the estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of the
Company's financial instruments.
BONDS
Fair values of bonds are based on quoted market prices, where available. For
securities not actively traded, fair values are estimated using values
obtained from independent pricing services or, in the case of private
placements, are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments.
POLICY LOANS
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations were based
on historical experience.
CASH AND SHORT-TERM INVESTMENTS
The carrying value of cash and short-term investments approximates fair
value.
POLICYHOLDER FUNDS
The fair values of policyholder funds are based on their approximate
surrender values.
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
ASSETS CARRYING
(LIABILITIES) VALUE FAIR VALUE
- -------------------------------------------
<S> <C> <C>
Bonds $ 593,431,718 $ 607,258,877
- -------------
Policy loans 39,054,927 39,054,927
- -------------
Cash and
short-term
investments 163,773,594 163,773,594
- -------------
Policyholders'
funds (587,465,491) (587,465,491)
- -------------
</TABLE>
9. TRANSACTIONS WITH AFFILIATES
The Company has entered into agreements with Lincoln Life to receive
processing and other corporate services. Fees paid to Lincoln Life for such
services were $3,454,014 and $931,000 for 1997 and 1996, respectively. The
Company has also entered into an agreement with Lincoln Life to provide
403(b) processing services primarily related to banking and cash management.
Fees received from Lincoln Life for such services were $578,003 and $229,000
for 1997 and 1996, respectively.
The Company has an investment management agreement with an affiliate,
Lincoln Investment Management, Inc., for investment advisory and asset
management services. Fees paid for such investment services were $558,011
and $122,000 for 1997 and 1996, respectively.
54
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
9. TRANSACTIONS WITH AFFILIATES (CONTINUED)
10. SEPARATE ACCOUNTS
Separate account premiums, deposits and other considerations
amounted to $167,895,749 in 1997. Reserves for separate
accounts with assets at fair value were $159,132,918 at
December 31, 1997. All reserves are subject to discretionary
withdrawal at market value. All of the Company's separate
accounts are nonguaranteed.
A reconciliation of transfers to (from) separate accounts
for the year ended December 31, 1997 is as follows:
<TABLE>
<S> <C>
Transfers as reported in the Summary of Operations of various Separate Accounts:
------------------------------------------------------------------------------------
Transfers to separate accounts $ 167,895,749
------------------------------------------------------------------------------------
Transfers from separate accounts (28,417,276)
------------------------------------------------------------------------------------ -------------
Net transfer to separate accounts as reported in the Company's NAIC Annual Statement $ 139,478,473
- --------------------------------------------------------------------------------------- -------------
-------------
</TABLE>
11. SUBSEQUENT EVENT
Additional surplus contributed by Lincoln Life on December 29, 1997 was used
to finance an indemnity reinsurance transaction whereby the Company and
Lincoln Life reinsured 100% of a block of individual life insurance and
annuity business of CIGNA Corporation. The Company paid $149,621,452 to
CIGNA on January 2, 1998 under the terms of the reinsurance agreement.
Operating results generated by this block of business after the closing date
will be included in the Company's financial statements from the closing
date. At the time of closing, this block of business had statutory
liabilities of $779,551,235 that became the Company's obligation. The
Company also received assets, measured on a historical statutory basis,
equal to the liabilities. During 1997, this block produced premiums, fees
and deposits of $157,650,000 and earnings of $9,285,600 on a statutory basis
of accounting. The Company expects to pay $1,000,000 to cover expenses
associated with the reinsurance agreement.
12. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The inability to properly
recognize date sensitive electronic information and transfer data between
systems could cause errors or even a complete systems failure which would
result in a temporary inability to process transactions correctly and engage
in normal business activities. The Company shares information systems with
Lincoln Life, and Lincoln Life is redirecting a large portion of its
internal information technology efforts and contracting with outside
consultants to update its systems to accommodate the year 2000. Also,
Lincoln Life and the Company have initiated formal communications with
critical parties that interface with the Company's systems to gain an
understanding of their progress in addressing Year 2000 Issues. While the
Company is making every effort to address its own systems and the systems
with which it interfaces, it is not possible to provide assurance that
operational problems will not occur. The Company presently believes that
with the modification of existing computer systems, updates by vendors and
conversion to new software and hardware, the Year 2000 Issue will not pose
significant operational problems for its computer systems. In addition, the
Company is developing contingency plans in the event that, despite its best
efforts, there are unresolved year 2000 problems. If the remediation efforts
noted above are not completed timely or properly, the Year 2000 Issue could
have a material adverse impact on the operation of the Company's business.
55
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
12. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
During 1997 and 1996, expenditures to address this issue were not material
to the Company's financial statements. In addition, the Company's financial
plans for 1998 through 2000 include immaterial amounts relative to this
issue. The cost of addressing Year 2000 Issues and the timeliness of
completion will be closely monitored by management and are 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.
Nevertheless, there can be no guarantee that these estimated costs will be
achieved and actual results could differ significantly from those
anticipated. Specific factors that might cause such differences include, but
are not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer problems and
other uncertainties.
56
<PAGE>
OTHER FINANCIAL INFORMATION
57
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
Lincoln Life & Annuity Company of New York
Our audit was conducted for the purpose of forming an opinion on
the statutory-basis financial statements taken as a whole. The
accompanying supplemental schedule of selected statutory basis
financial data is presented to comply with the National
Association of Insurance Commissioners' Annual Statement
Instructions and is not a required part of the statutory-basis
financial statements. Such information has been subjected to the
auditing procedures applied in our audit of the statutory-basis
financial statements and, in our opinion, is fairly stated in
all material respects in relation to the statutory-basis
financial statements taken as a whole.
[SIGNATURE]
March 12, 1998
58
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
SUPPLEMENTAL SCHEDULE OF SELECTED
FINANCIAL DATA -- STATUTORY BASIS
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Investment income earned:
Government bonds $ 10,210,129
------------------------------------------------------------
Other bonds (unaffiliated) 32,025,370
------------------------------------------------------------
Policy loans 1,990,613
------------------------------------------------------------
Cash on hand and on deposit 15,706
------------------------------------------------------------
Short-term investments 299,622
------------------------------------------------------------
Aggregate write-ins for investment income 2,460
------------------------------------------------------------ ------------
</TABLE>
<TABLE>
<S> <C> <C>
Gross investment income $ 44,543,900
- ---------------------------------------------------------------------- ------------
------------
</TABLE>
<TABLE>
<S> <C>
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $157,373,927
- ----------------------------------------------------------------------
Over 1 year through 5 years 206,718,997
- ----------------------------------------------------------------------
Over 5 years through 10 years 252,342,252
- ----------------------------------------------------------------------
Over 10 years through 20 years 69,249,669
- ----------------------------------------------------------------------
Over 20 years 53,525,556
- ---------------------------------------------------------------------- ------------
Total by maturity $739,210,401
- ---------------------------------------------------------------------- ------------
------------
Bonds by class (statement value):
Class 1 $493,275,662
- ----------------------------------------------------------------------
Class 2 218,168,700
- ----------------------------------------------------------------------
Class 3 18,838,715
- ----------------------------------------------------------------------
Class 4 8,927,324
- ---------------------------------------------------------------------- ------------
Total by class $739,210,401
- ---------------------------------------------------------------------- ------------
------------
Total bonds publicly traded $693,512,440
- ---------------------------------------------------------------------- ------------
------------
Total bonds privately placed $ 45,697,961
- ---------------------------------------------------------------------- ------------
------------
Short-term investments (cost or amortized cost) $145,778,683
- ---------------------------------------------------------------------- ------------
------------
Cash on deposit $ 17,994,911
- ---------------------------------------------------------------------- ------------
------------
</TABLE>
<TABLE>
<S> <C>
Annuities:
Ordinary:
Immediate amount of income payable $ 140,946
- ----------------------------------------------------------------------
--------------
--------------
Deposit funds and dividend accumulations:
Deposit funds account balance $ 587,465,491
- ----------------------------------------------------------------------
--------------
--------------
</TABLE>
59
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED
FINANCIAL DATA -- STATUTORY BASIS
NOTE -- BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis
financial data as of December 31, 1997 for purposes of complying
with paragraph 9 of the Annual Audited Financial Reports in the
General section of the National Association of Insurance
Commissioners' Annual Statement Instructions and agrees to or is
included in the amounts reported in Lincoln Life & Annuity
Company of New York's 1997 Statutory Annual Statement as filed
with the New York Insurance Department.
60
<PAGE>
Financial Statements -- Statutory Basis (Unaudited)
LINCOLN LIFE & ANNUITY
COMPANY OF NEW YORK
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
61
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
FINANCIAL STATEMENTS -- STATUTORY BASIS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
CONTENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENTS
Balance Sheet -- Statutory Basis (Unaudited).......................................................... 63
Statements of Operations -- Statutory Basis (Unaudited)............................................... 64
Statements of Changes in Capital and Surplus -- Statutory Basis (Unaudited)........................... 65
Statements of Cash Flows -- Statutory Basis (Unaudited)............................................... 66
Notes to Financial Statements -- Statutory Basis (Unaudited).......................................... 67
</TABLE>
62
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
BALANCE SHEET -- STATUTORY BASIS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1998
<S> <C>
ADMITTED ASSETS
CASH AND INVESTED ASSETS:
Bonds $1,081,072,420
- ------------------------------------------------------------
Mortgage loans on real estate 200,891,350
- ------------------------------------------------------------
Policy loans 40,975,893
- ------------------------------------------------------------
Cash and short-term investments 59,713,851
- ------------------------------------------------------------
Receivable for securities 929,557
- ------------------------------------------------------------ --------------
Total cash and invested assets 1,383,583,071
- ------------------------------------------------------------
Premiums and fees in course of collection 10,666,544
- ------------------------------------------------------------
Accrued investment income 21,745,014
- ------------------------------------------------------------
Data processing equipment 261,287
- ------------------------------------------------------------
Other admitted assets 63,138,570
- ------------------------------------------------------------
Separate account assets 192,088,461
- ------------------------------------------------------------ --------------
Total admitted assets $1,671,482,947
- ------------------------------------------------------------ --------------
--------------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Policyholders' funds $ 751,558,672
- ------------------------------------------------------------
Future policy benefits and claims 623,642,101
- ------------------------------------------------------------
Other liabilities 17,666,745
- ------------------------------------------------------------
Federal income taxes 2,996,008
- ------------------------------------------------------------
Asset valuation reserve 4,642,461
- ------------------------------------------------------------
Interest maintenance reserve 2,449,766
- ------------------------------------------------------------
Net transfers due from separate accounts (6,172,605)
- ------------------------------------------------------------
Separate account liabilities 192,088,461
- ------------------------------------------------------------ --------------
Total liabilities 1,588,871,609
- ------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $100 par value:
Authorized, issued and outstanding -- 20,000 shares (owned
by The Lincoln National Life Insurance Company) 2,000,000
- ------------------------------------------------------------
Paid-in surplus 227,407,481
- ------------------------------------------------------------
Unassigned surplus -- deficit (146,796,143)
- ------------------------------------------------------------ --------------
Total capital and surplus 82,611,338
- ------------------------------------------------------------ --------------
Total liabilities and capital and surplus $1,671,482,947
- ------------------------------------------------------------ --------------
--------------
</TABLE>
See accompanying notes.
63
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
-------------- ------------
<S> <C> <C>
REVENUES:
Premiums and deposits $ 816,637,545 $130,589,000
- -----------------------------------------------------------------
Net investment income 25,053,059 11,140,862
- -----------------------------------------------------------------
Surrender charges 538,380 339,892
- -----------------------------------------------------------------
Amortization of the interest maintenance reserve (274,446) 127,725
- -----------------------------------------------------------------
Other revenues 3,714 31,519
- ----------------------------------------------------------------- -------------- ------------
Total revenues 841,958,252 142,228,998
- -----------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits paid or provided to policyholders 824,140,895 21,093,787
- -----------------------------------------------------------------
Commissions 127,060,808 675,655
- -----------------------------------------------------------------
General expenses 6,178,564 1,255,672
- -----------------------------------------------------------------
Insurance taxes, licenses and fees 1,331,384 60,898
- -----------------------------------------------------------------
Net transfers to separate accounts 8,144,219 117,699,461
- ----------------------------------------------------------------- -------------- ------------
Total benefits and expenses 966,855,870 140,785,473
- ----------------------------------------------------------------- -------------- ------------
Gain (loss) from operations before dividends to policyholders,
federal income taxes and net realized capital gains (124,897,618) 1,443,525
- -----------------------------------------------------------------
Dividends to policyholders 323,154 --
- ----------------------------------------------------------------- -------------- ------------
Gain (loss) from operations before federal income taxes and net
realized capital gains (125,220,772) 1,443,525
- -----------------------------------------------------------------
Federal income taxes 3,297,183 341,399
- ----------------------------------------------------------------- -------------- ------------
Gain (loss) from operations before net realized capital gains (128,517,955) 1,102,126
- -----------------------------------------------------------------
Net realized capital gains 387,449 2
- ----------------------------------------------------------------- -------------- ------------
Net income (loss) $ (128,130,506) $ 1,102,128
- ----------------------------------------------------------------- -------------- ------------
-------------- ------------
</TABLE>
See accompanying notes.
64
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS (UNAUDITED)
<TABLE>
<CAPTION>
UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS-- CAPITAL AND
STOCK SURPLUS DEFICIT SURPLUS
---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances at January 1, 1998 $2,000,000 $ 227,407,481 $ (16,555,254) $ 212,852,227
- -------------------------------------------------
ADD (DEDUCT):
Net loss -- -- (128,130,506) (128,130,506)
- -------------------------------------------------
Decrease in nonadmitted assets -- -- 181,667 181,667
- -------------------------------------------------
Increase in asset valuation reserve -- -- (2,292,050) (2,292,050)
- ------------------------------------------------- ---------- ------------- ------------- -------------
Balances at March 31, 1998 $2,000,000 $ 227,407,481 $(146,796,143) $ 82,611,338
- ------------------------------------------------- ---------- ------------- ------------- -------------
---------- ------------- ------------- -------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Balances at January 1, 1997 $2,000,000 $ 69,000,000 $ (20,824,003) $ 50,175,997
- ---------------------------------------------------
ADD (DEDUCT):
Net income -- -- 1,102,128 1,102,128
- ---------------------------------------------------
Increase in nonadmitted assets -- -- (93,385) (93,385)
- ---------------------------------------------------
Increase in asset valuation reserve -- -- (215,893) (215,893)
- --------------------------------------------------- ---------- ------------ ------------- -------------
Balances at March 31, 1997 $2,000,000 $ 69,000,000 $ (20,031,153) $ 50,968,847
- --------------------------------------------------- ---------- ------------ ------------- -------------
---------- ------------ ------------- -------------
</TABLE>
See accompanying notes.
65
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 812,264,625 $ 130,589,000
- ----------------------------------------------------------------------------
Investment income received 14,181,918 11,095,864
- ----------------------------------------------------------------------------
Benefits paid (39,023,842) (28,529,868)
- ----------------------------------------------------------------------------
Insurance expenses paid (143,976,536) (122,071,655)
- ----------------------------------------------------------------------------
Federal income taxes paid -- (72,551)
- ----------------------------------------------------------------------------
Dividends to policyholders (320,853) --
- ----------------------------------------------------------------------------
Other income received and expenses paid, net 974,119 371,411
- ---------------------------------------------------------------------------- ------------- -------------
Net cash provided by (used in) operating activities 644,099,431 (8,617,799)
- ----------------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 63,304,006 142,472,088
- ----------------------------------------------------------------------------
Purchase of investments (751,836,058) (131,720,366)
- ----------------------------------------------------------------------------
Net increase in policy loans (1,920,966) (403,647)
- ---------------------------------------------------------------------------- ------------- -------------
Net cash provided by (used in) investing activities (690,453,018) 10,348,075
- ----------------------------------------------------------------------------
FINANCING AND MISCELLANEOUS ACTIVITIES
Other (57,706,156) (17,727,274)
- ---------------------------------------------------------------------------- ------------- -------------
Net cash used in financing activities (57,706,156) (17,727,274)
- ---------------------------------------------------------------------------- ------------- -------------
Decrease in cash and short-term investments (104,059,743) (15,996,998)
- ----------------------------------------------------------------------------
Total cash and short-term investments at beginning of period 163,773,594 19,335,007
- ---------------------------------------------------------------------------- ------------- -------------
Total cash and short-term investments at end of period $ 59,713,851 $ 3,338,009
- ---------------------------------------------------------------------------- ------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
66
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying statutory-basis financial statements of Lincoln Life &
Annuity of New York (the "Company") have been prepared in accordance with
accounting practices prescribed or permitted by the New York Insurance
Department (the "Department"), except that they do not contain complete
notes. "Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners
("NAIC"). "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future. These financial statements are unaudited and include
all adjustments (consisting of normal recurring accruals) necessary for a
fair presentation of the results, in accordance with the accounting basis
described above. For further information, refer to the statutory-basis
financial statements and notes as of December 31, 1997 and 1996 and for the
year ended December 31, 1997 and the period from June 6, 1996 to December
31, 1996, included in this registration statement.
Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the entire
year ending December 31, 1998.
The following footnotes are included due to significant changes in
circumstances since December 31, 1997. The majority of these changes are
caused by the acquisition of certain individual life and annuity business
from CIGNA Corporation.
2. ACQUISITIONS
On January 2, 1998, the Company and The Lincoln National Life Insurance
Company ("Lincoln Life" -- an affiliate) entered into an indemnity
reinsurance transaction whereby the Company and Lincoln Life reinsured 100%
of a block of individual life insurance and annuity business of CIGNA
Corporation. The Company paid $149,621,452 to CIGNA on January 2, 1998 under
the terms of the reinsurance agreement. Operating results generated by this
block of business for the three month period ended March 31, 1998 have been
included in the Company's financial statements as of and for the three month
period ended March 31, 1998. At the time of closing, this block of business
had statutory liabilities of $779,551,235 that became the Company's
obligation. The Company also received assets, measured on a historical
statutory basis, equal to the liabilities. During 1997, this block produced
premiums, fees and deposits of $157,650,000 and earnings of $9,285,600 on a
statutory basis of accounting. The Company expects to pay $1,000,000 to
cover expenses associated with the reinsurance agreement.
On May 21, 1998, the Company and Lincoln Life announced their intentions to
acquire certain domestic individual life insurance business from Aetna, Inc.
via a 100% indemnity reinsurance transaction. The transaction is expected to
close in the fall of 1998. Under the terms of the agreement, the Company
will pay approximately $125 million to acquire the business and assume
liabilities of approximately $426.9 million. Cash equal to such liabilities
will also be received by the Company.
3. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Existing statutory accounting practices differ from generally accepted
accounting principles ("GAAP"). The more significant variances from GAAP are
as follows:
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred policy acquisition costs, to the extent recoverable from future
gross profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type
67
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (UNAUDITED) (CONTINUED)
3. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contracts are reported as premiums and deposits 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.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
A reconciliation of the Company's capital and surplus and net income (loss)
determined in accordance with statutory accounting practices with amounts
determined in accordance with GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND
SURPLUS NET INCOME (LOSS)
------------- ------------------------------
MARCH 31, THREE MONTHS ENDED MARCH 31,
------------- ------------------------------
1998 1998 1997
------------- ------------------------------
<S> <C> <C> <C>
Amounts as reported on a statuary basis $ 82,611,338 $ (128,130,506) $ 1,102,128
- --------------------------------------------------
Add (deduct):
Net unrealized gain on bonds 17,057,577 -- --
- --------------------------------------------------
Interest maintenance reserve 2,449,766 274,446 (127,725)
- --------------------------------------------------
Net realized loss on investments -- (419,232) (574,288)
- --------------------------------------------------
Asset valuation reserve 4,642,461 -- --
- --------------------------------------------------
Difference between GAAP and statutory-basis
policyholders' funds (80,062,385) 7,589,009 40,354
- --------------------------------------------------
Present value of future profits and deferred
acquisition costs 136,751,975 122,359,145 113,780
- --------------------------------------------------
Deferred federal income taxes 17,159,157 1,539,085 (174,046)
- --------------------------------------------------
Goodwill 69,567,274 -- --
- --------------------------------------------------
Nonadmitted assets 1,000,153 -- --
- -------------------------------------------------- ------------- -------------- -----------
Amounts on a GAAP basis $ 251,177,316 $ 3,211,947 $ 380,203
- -------------------------------------------------- ------------- -------------- -----------
------------- -------------- -----------
</TABLE>
68
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (UNAUDITED) (CONTINUED)
3. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments.
PREMIUMS
Life insurance and individual annuity premiums are recognized as revenue
when due. Accident and health premiums are earned pro rata over the contract
term of the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Department. The Company waives deduction of deferred fractional premiums on
the death of life and annuity policy insureds and returns any premium beyond
the date of death, except for policies issued prior to March 1977. Surrender
values on policies do not exceed the corresponding benefit reserves.
Additional reserves are established when the results of cash flow testing
under various interest rate scenarios 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.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations and
statistical analyses. Those estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is
inherent in such estimates, management believes that the reserves for claims
and claim adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
69
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (UNAUDITED) (CONTINUED)
4. INVESTMENTS
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds as of
March 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate $ 859,049,567 $13,936,716 $(2,055,297) $ 870,930,986
- -----------------------
U.S. government 24,961,394 194,735 (29) 25,156,100
- -----------------------
Foreign government 16,144,312 814,184 (120,261) 16,838,235
- -----------------------
Mortgage-backed 173,970,322 4,134,353 (65,469) 178,039,206
- -----------------------
State and municipal 6,946,825 218,645 -- 7,165,470
- ----------------------- -------------- ----------- ----------- --------------
$1,081,072,420 $19,298,633 $(2,241,056) $1,098,129,997
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
</TABLE>
During 1998, the minimum and maximum lending rates for
mortgage loans were 6.75% and 10.29%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At March 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.
5. FEDERAL INCOME TAXES
The effective income tax rate for financial reporting
purposes differs from the prevailing statutory tax rate
principally due to tax-exempt investment income,
dividends-received tax deductions and differences in ceding
commissions and policy acquisition costs for tax return and
financial statement purposes.
70
<PAGE>
APPENDIX 1
ILLUSTRATIONS OF ACCUMULATION VALUES, SURRENDER VALUES, AND
DEATH BENEFIT PROCEEDS
The illustrations in this Prospectus have been prepared to
help show how values under the Policies change with
investment performance. The illustrations 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 made against the
assets of the Sub-Accounts for assuming mortality and
expense risks. The current mortality and expense risk
charges are equivalent to an annual effective rate of 0.80%
of the daily net asset value of the Variable Account. The
mortality and expense risk charge is guaranteed never to
exceed an annual effective rate of 0.90% of the daily net
asset value of the Variable Account. In addition, the net
investment returns also reflect the deduction of Fund
investment advisory fees and other expenses which will vary
depending on which funding vehicle is chosen but which are
assumed for purposes of these illustrations to be equivalent
to an annual effective rate of 0.81% of the daily net asset
value of the Variable Account. This rate reflects an
arithmetic average of total Fund portfolio annual expenses
for the year ending December 31, 1997.
Considering current charges for mortality and expense risks
and the assumed Fund expenses, gross annual rates of return
of 0%, 6%, and 12% correspond to net investment experience
at constant annual rates of -1.61%, 4.39% and 10.39%.
Considering guaranteed charges for mortality and expense
risks and the assumed Fund expenses, gross annual rates of
0%, 6% and 12% correspond to net investment experience at
constant annual rates of -1.71%, 4.29% and 10.29%.
The illustrations also reflect the fact that LLANY 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 LLANY deducts a
premium load of 8.0% from each Premium Payment.
71
<PAGE>
The Surrender Values shown in the illustrations reflect the
fact that LLANY 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 LLANY
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, LLANY will furnish a comparable illustration
based on the proposed insureds' ages, gender classification,
smoking classification, risk classification and premium
payment requested.
72
<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
END OF ACCUMULATED AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ -------------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 14,420 1,000,000 1,000,000 1,000,000 11,129 11,839 12,549
2 29,560 1,000,000 1,000,000 1,000,000 21,936 24,043 26,236
3 45,458 1,000,000 1,000,000 1,000,000 32,368 36,569 41,117
4 62,150 1,000,000 1,000,000 1,000,000 42,402 49,403 57,287
5 79,678 1,000,000 1,000,000 1,000,000 52,013 62,525 74,845
6 98,081 1,000,000 1,000,000 1,000,000 61,166 75,908 93,900
7 117,405 1,000,000 1,000,000 1,000,000 69,817 89,515 114,558
8 137,695 1,000,000 1,000,000 1,000,000 77,903 103,290 136,928
9 158,999 1,000,000 1,000,000 1,000,000 85,341 117,152 161,111
10 181,369 1,000,000 1,000,000 1,000,000 92,037 131,012 187,219
11 204,857 1,000,000 1,000,000 1,000,000 97,887 144,769 215,382
12 229,519 1,000,000 1,000,000 1,000,000 102,788 158,321 245,753
13 255,415 1,000,000 1,000,000 1,000,000 106,633 171,565 278,526
14 282,605 1,000,000 1,000,000 1,000,000 109,320 184,396 313,934
15 311,155 1,000,000 1,000,000 1,000,000 110,704 196,679 352,239
20 476,799 1,000,000 1,000,000 1,000,000 87,896 240,309 598,538
25 688,208 0 1,000,000 1,060,544 0 213,860 1,010,042
30 958,025 0 0 1,781,005 0 0 1,696,195
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1 0 0 0 13,676
2 8,670 10,777 12,970 13,266
3 19,615 23,816 28,364 12,753
4 30,196 37,197 45,080 12,206
5 40,285 50,797 63,118 11,728
6 50,054 64,796 82,788 11,112
7 59,939 79,638 104,681 9,877
8 69,260 94,647 128,285 8,643
9 77,933 109,744 153,703 7,408
10 85,863 124,838 181,046 6,173
11 92,948 139,830 210,443 4,939
12 99,084 154,617 242,049 3,704
13 104,164 169,095 276,056 2,469
14 108,085 183,162 312,700 1,235
15 110,704 196,679 352,239 0
20 87,896 240,309 598,538 0
25 0 213,860 1,010,042 0
30 0 0 1,696,195 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 0.81% per year. See "Expense
Data" at pages 22-23 of this Prospectus.
73
<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
END OF ACCUMULATED AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ -------------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 14,420 1,000,000 1,000,000 1,000,000 11,203 11,915 12,628
2 29,560 1,000,000 1,000,000 1,000,000 22,292 24,417 26,627
3 45,458 1,000,000 1,000,000 1,000,000 33,178 37,436 42,042
4 62,150 1,000,000 1,000,000 1,000,000 43,860 50,991 59,015
5 79,678 1,000,000 1,000,000 1,000,000 54,338 65,103 77,703
6 98,081 1,000,000 1,000,000 1,000,000 64,611 79,792 98,279
7 117,405 1,000,000 1,000,000 1,000,000 74,676 95,077 120,934
8 137,695 1,000,000 1,000,000 1,000,000 84,534 110,982 145,881
9 158,999 1,000,000 1,000,000 1,000,000 94,180 127,528 173,352
10 181,369 1,000,000 1,000,000 1,000,000 103,613 144,739 203,604
11 204,857 1,000,000 1,000,000 1,000,000 112,829 162,638 236,924
12 229,519 1,000,000 1,000,000 1,000,000 121,751 181,179 273,560
13 255,415 1,000,000 1,000,000 1,000,000 130,344 200,357 313,835
14 282,605 1,000,000 1,000,000 1,000,000 138,539 220,135 358,081
15 311,155 1,000,000 1,000,000 1,000,000 146,304 240,514 406,710
20 476,799 1,000,000 1,000,000 1,000,000 175,007 349,344 732,960
25 688,208 1,000,000 1,000,000 1,339,962 180,070 470,575 1,276,155
30 958,025 1,000,000 1,000,000 2,264,233 120,880 588,673 2,156,413
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1 0 0 0 13,676
2 9,026 11,150 13,361 13,266
3 20,425 24,682 29,289 12,753
4 31,654 38,785 46,809 12,206
5 42,611 53,376 65,975 11,728
6 53,499 68,680 87,167 11,112
7 64,799 85,200 111,057 9,877
8 75,891 102,340 137,238 8,643
9 86,772 120,120 165,944 7,408
10 97,440 138,566 197,431 6,173
11 107,890 157,699 231,985 4,939
12 118,047 177,475 269,856 3,704
13 127,875 197,888 311,365 2,469
14 137,304 218,901 356,846 1,235
15 146,304 240,514 406,710 0
20 175,007 349,344 732,960 0
25 180,070 470,575 1,276,155 0
30 120,880 588,673 2,156,413 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 0.81% per year. See "Expense
Data" at pages 22-23 of this Prospectus.
74
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,685 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
END OF ACCUMULATED AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ -------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 22,738 1,000,000 1,000,000 1,000,000 18,007 19,141 20,275
2 46,612 1,000,000 1,000,000 1,000,000 34,932 38,296 41,797
3 71,681 1,000,000 1,000,000 1,000,000 50,627 57,300 64,528
4 98,003 1,000,000 1,000,000 1,000,000 64,977 76,019 88,473
5 125,640 1,000,000 1,000,000 1,000,000 77,853 94,299 113,632
6 154,660 1,000,000 1,000,000 1,000,000 89,085 111,946 139,983
7 185,131 1,000,000 1,000,000 1,000,000 98,440 128,702 167,464
8 217,125 1,000,000 1,000,000 1,000,000 105,595 144,216 195,951
9 250,719 1,000,000 1,000,000 1,000,000 110,129 158,036 225,262
10 285,993 1,000,000 1,000,000 1,000,000 111,543 169,632 255,192
11 323,030 1,000,000 1,000,000 1,000,000 109,289 178,418 285,554
12 361,920 1,000,000 1,000,000 1,000,000 102,764 183,753 316,205
13 402,753 1,000,000 1,000,000 1,000,000 91,315 184,935 347,065
14 445,629 1,000,000 1,000,000 1,000,000 74,200 181,160 378,121
15 490,648 1,000,000 1,000,000 1,000,000 50,446 171,388 409,366
20 751,845 0 0 1,000,000 0 0 566,122
25 1,085,207 0 0 1,000,000 0 0 757,444
30 1,510,670 0 0 1,250,223 0 0 1,237,844
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1 0 0 0 25,098
2 10,872 14,236 17,737 24,060
3 27,636 34,310 41,538 22,991
4 43,025 54,066 66,520 21,953
5 56,970 73,416 92,748 20,883
6 69,239 92,101 120,137 19,845
7 80,799 111,062 149,823 17,640
8 90,160 128,781 180,515 15,435
9 96,898 144,805 212,031 13,230
10 100,518 158,606 244,166 11,025
11 100,469 169,598 276,734 8,820
12 96,149 177,138 309,590 6,615
13 86,905 180,525 342,654 4,410
14 71,995 178,955 375,916 2,205
15 50,446 171,388 409,366 0
20 0 0 566,122 0
25 0 0 757,444 0
30 0 0 1,237,844 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 0.81% per year. See "Expense
Data" at pages 22-23 of this Prospectus.
75
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,685 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
END OF ACCUMULATED AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ -------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 22,738 1,000,000 1,000,000 1,000,000 18,314 19,458 20,603
2 46,612 1,000,000 1,000,000 1,000,000 36,272 39,699 43,263
3 71,681 1,000,000 1,000,000 1,000,000 53,803 60,677 68,113
4 98,003 1,000,000 1,000,000 1,000,000 70,890 82,404 95,357
5 125,640 1,000,000 1,000,000 1,000,000 87,526 104,899 125,233
6 154,660 1,000,000 1,000,000 1,000,000 103,701 128,182 158,005
7 185,131 1,000,000 1,000,000 1,000,000 119,405 152,276 193,966
8 217,125 1,000,000 1,000,000 1,000,000 134,628 177,204 233,445
9 250,719 1,000,000 1,000,000 1,000,000 149,358 202,992 276,809
10 285,993 1,000,000 1,000,000 1,000,000 163,582 229,669 324,470
11 323,030 1,000,000 1,000,000 1,000,000 177,284 257,264 376,893
12 361,920 1,000,000 1,000,000 1,000,000 189,989 285,388 434,244
13 402,753 1,000,000 1,000,000 1,000,000 201,575 313,981 497,063
14 445,629 1,000,000 1,000,000 1,000,000 211,680 342,787 565,852
15 490,648 1,000,000 1,000,000 1,000,000 219,854 371,499 641,258
20 751,845 1,000,000 1,000,000 1,215,397 215,190 505,040 1,157,521
25 1,085,207 1,000,000 1,000,000 2,104,325 114,273 634,276 2,004,119
30 1,510,670 0 1,000,000 3,407,995 0 769,393 3,374,252
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1 0 0 0 25,098
2 12,212 15,639 19,203 24,060
3 30,812 37,687 45,122 22,991
4 48,937 60,451 73,404 21,953
5 66,642 84,015 104,350 20,883
6 83,855 108,336 138,159 19,845
7 101,765 134,635 176,325 17,640
8 119,193 161,769 218,009 15,435
9 136,128 189,762 263,578 13,230
10 152,556 218,643 313,445 11,025
11 168,464 248,444 368,073 8,820
12 183,374 278,773 427,629 6,615
13 197,165 309,571 492,653 4,410
14 209,475 340,582 563,647 2,205
15 219,854 371,499 641,258 0
20 215,190 505,040 1,157,521 0
25 114,273 634,276 2,004,119 0
30 0 769,393 3,374,252 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 0.81% per year. See "Expense
Data" at pages 22-23 of this Prospectus.
76
<PAGE>
PART II
FEES AND CHARGES REPRESENTATION
Lincoln Life & Annuity Company of New York represents that the fees and
charges deducted under the Contracts, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by Lincoln Life & Annuity Company of New York.
UNDERTAKING
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
INDEMNIFICATION
(a) Brief description of indemnification provisions.
In general, Article VII of the By-Laws of Lincoln Life & Annuity
Company of New York (LLANY) provides that LLANY will indemnify
certain persons against expenses, judgments and certain other
specified costs incurred by any such person if he/she is made a party
or is threatened to be made a party to a suit or proceeding because
he/she was a director, officer, or employee of LLANY, as long as
he/she acted in good faith and in a manner he/she reasonably believed
to be in the best interests of, or not opposed to the best interests
of, LLANY. Certain additional conditions apply to indemnification in
criminal proceedings.
In particular, separate conditions govern indemnification of
directors, officers, and employees of LLANY in connection with suits
by, or in the right of, LLANY.
Please refer to Article VII of the By-Laws of LLANY (Exhibit No. 6(b)
hereto) for the full text of the indemnification provisions.
Indemnification is permitted by, and is subject to the requirements
of, New York law.
(b) Undertaking pursuant to Rule 484 of Regulation C under the Securities
Act of 1933.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions
described in Item 28(a) above or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of
any such action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet;
A cross-reference sheet (reconciliation and tie);
The prospectus, consisting of 76 pages;
The undertaking to file reports;
The fees and charges representation;
Statements regarding indemnification;
The signatures.
1. The following exhibits correspond to those required by paragraph A of
the instructions as to exhibits in Form N-8B-2:
(1) Resolution of the Board of Directors of Lincoln Life & Annuity
Company of New York and related documents authorizing establishment
of the Account.
(2) Not applicable.
(3) (a) Underwriting Agreement between Lincoln Financial Advisors
Corporation and Lincoln Life & Annuity Company of New York*
(b) Form of Selling Group Agreement.*
(c) Commission Schedule for Variable Life Policies.*
(4) Not applicable.
(5) (a) Proposed Form of Policy and Application.
(b) Riders.
(6) (a) Articles of Incorporation of Lincoln Life & Annuity Company of
New York are incorporated herein by reference to Registration
Statement on Form N-4 (File No. 333-38007) filed on October 16,
1997.
<PAGE>
(b) Bylaws of Lincoln Life & Annuity Company of New York are
incorporated herein by reference to Registration Statement on
Form N-4 (File No. 333-38007) filed on October 16, 1997.
(7) Not applicable.
(8) Fund Participation Agreements.*
Agreements between Lincoln Life & Annuity Company of New York and:
(a) AIM Variable Insurance Funds, Inc.*
(b) BT Insurance Funds Trust*
(c) Delaware Group Premium Fund, Inc.*
(d) Fidelity Variable Insurance Products Fund.*
(e) Fidelity Variable Insurance Products Fund II.*
(f) Lincoln National Money Market Fund, Inc.*
(g) MFS-Registered Trademark- Variable Insurance Trust.*
(h) Templeton Variable Products Series Fund.*
(i) OCC Accumulation Trust.*
(9) (a) Not applicable.
(b) *
(10) See Exhibit 1(5).
2. See Exhibit 1(5).
3. Opinion and Consent of Robert O. Sheppard, Esq.
4. Not applicable.
5. Not applicable.
6. Opinion and Consent of Michael J. Roscoe, F.S.A.
7. Consent of Ernst & Young LLP, Independent Auditors.
8. Not applicable.
* To be filed by amendment
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, the registrant has duly caused
this Pre-Effective Amendment No. 1 to its Registration Statement on Form S-6 to
be signed on its behalf by the undersigned thereunto duly authorized, in the
City of Syracuse and State of New York, on the 1st day of July, 1998.
LLANY SEPARATE ACCOUNT R FOR FLEXIBLE
PREMIUM VARIABLE LIFE INSURANCE
(Name of Registrant)
By: /s/ PHILIP L. HOLSTEIN
-----------------------------------
Philip L. Holstein
PRESIDENT AND DIRECTOR
LINCOLN LIFE & ANNUITY COMPANY OF
NEW YORK
LINCOLN LIFE & ANNUITY COMPANY OF NEW
YORK
(Name of Depositor)
By: /s/ PHILIP L. HOLSTEIN
-----------------------------------
Philip L. Holstein
PRESIDENT AND DIRECTOR
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on July 1, 1998 by the following
persons, as officers and directors of the Depositor, in the capacities
indicated:
SIGNATURE TITLE
- -------------------------------------------------- -------------------------
/s/ PHILIP L. HOLSTEIN President, Treasurer and
------------------------------------------- Director (Principal
Philip L. Holstein Executive Officer)
/s/ JON A. BOSCIA
------------------------------------------- Director
Jon A. Boscia
/s/ RICHARD C. VAUGHAN
------------------------------------------- Director
Richard C. Vaughan
Second Vice President and
/s/ TROY D. PANNING Chief Financial Officer
------------------------------------------- (Principal Financial
Troy D. Panning Officer and Principal
Accounting Officer)
/S/ THOMAS D. BELL, JR.
------------------------------------------- Director
Thomas D. Bell, Jr.
/s/ ROLAND C. BAKER
------------------------------------------- Director
Roland C. Baker
/s/ HARRY L. KAVETAS
------------------------------------------- Director
Harry L. Kavetas
/s/ BARBARA STEURY KOWALCZYK
------------------------------------------- Director
Barbara Steury Kowalczyk
/s/ MARGUERITE LEANNE LACHMAN
------------------------------------------- Director
Marguerite Leanne Lachman
/s/ JOHN M. PIETRUSKI
------------------------------------------- Director
John M. Pietruski
/s/ LAWRENCE T. ROLAND
------------------------------------------- Director
Lawrence T. Roland
<PAGE>
SIGNATURE TITLE
- -------------------------------------------------- -------------------------
------------------------------------------- Director
J. Patrick Barrett
/s/ LOUIS G. MARCOCCIA
------------------------------------------- Director
Louis G. Marcoccia
/s/ GABRIEL L. SHAHEEN
------------------------------------------- Director
Gabriel L. Shaheen
(A majority of the Directors)
<PAGE>
LINCOLN
- ---------------
Financial Group
Lincoln Life & Annuity
Company of New York
ROBERT O. SHEPPARD
Corporate Counsel
Lincoln Life & Annuity
Company of New York
120 Madison St., Suite 1700
June 29, 1998 Syracuse, NY 13202-2802
phone 315 428-8420
toll free 888 ABE-1860
Securities and Exchange Commission fax 315 428-8419
450 Fifth Street, N.W. [email protected]
Washington, D.C. 20549
Re: LLANY's Separate Account R ("Account")
for Flexible Premium Variable
Pre-Effective Amendment Number 1
(File No. 333-46113)
Dear Sirs:
As Corporate Counsel of Lincoln Life & Annuity Company of New York
("LLANY"), I am familiar with the actions of the Board of Directors of LLANY,
establishing the Account and its method of operation and authorizing the
filing of a Registration Statement under the Securities Act of 1933, (and
amendments thereto) for the securities to be issued by the Account and the
Investment Company Act of 1940 for the Account itself.
In the course of preparing the opinion, I have reviewed the Charter
and the By-Laws of the Company, the Board actions with respect to the
Account, and such other matters as I deemed necessary or appropriate. Based
on such review, I am of the opinion that the variable life insurance policies
(and interests therein) which are the subject of the Registration Statement
under the Securities Act of 1933, as amended, for the Account will, when
issued, be legally issued and will represent binding obligations of the
Company, the depositor of the Account.
I further consent to the use of this opinion as an Exhibit to
Pre-Effective Amendment No. 1 to said Registration Statement and to the
reference to me under the heading "Experts" in said Registration Statement,
as amended.
Very truly yours,
Robert O. Sheppard
-------------------
Robert O. Sheppard
ROS/jlk
<PAGE>
LINCOLN LIFE
- ----------------------
900 Cottage Grove Road
Hartford, CT 06152
July 2, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: LLANY Separate Account R ("Account")
For Flexible Premium Variable Life Insurance
Pre-Effective Amendment Number 1, File No. 333-46113
----------------------------------------------------
Commissioners:
This opinion is furnished in connection with Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-6 filed by Lincoln Life & Annuity
Company of New York under the Securities Act of 1993 recorded as
File No. 333-46113. The prospectus included in said Pre-Effective Amendment
describes second-to-die flexible premium variable universal life insurance
policies (the "Policies"). The forms of Policies were prepared under my
direction.
In my opinion, the illustrations of benefits under the Policies included in
the Section entitled "Illustrations" in the prospectus, based on assumptions
stated in the illustrations, are consistent with the provisions of the forms
of the Policies. The ages selected in the illustrations are representative of
the manner in which the Policies operate.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to me under the heading "Experts" in the
prospectus.
Very truly yours,
/s/ Michael J. Roscoe
- ----------------------------
Michael J. Roscoe, FSA, MAAA
<PAGE>
Exhibit 7
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the Pre
Effective Amendment No. 1 to the Registration Statement (Form S-6 No. 333-46113)
pertaining to the LLANY Separate Account R for Flexible Premium Variable Life
Insurance, and to the use therein of our report dated March 12, 1998, with
respect to the statutory-basis financial statements of Lincoln Life & Annuity
Company of New York.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
June 29, 1998
