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LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
LLANY SEPARATE ACCOUNT R FOR FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HOME OFFICE LOCATION:
120 MADISON STREET
SUITE 1700
SYRACUSE, NY 13202
(888) 223-1860
ADMINISTRATIVE OFFICE:
PERSONAL SERVICE CENTER MVLI
350 CHURCH STREET
HARTFORD, CT 06103-1106
(800) 552-9898 (5/99-7/99)
(800) 444-2363 (8/99 AND LATER)
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A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
BENEFITS PAYABLE ON DEATH OF SECOND OF TWO INSUREDS
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This Prospectus describes a flexible premium variable life insurance contract
(the "Policy"), offered by Lincoln Life & Annuity Company of New York ("LLANY"
"we", "our" or "us"). The Policy provides death benefits when the second of the
two named Insureds dies (a "Second Death Policy").
The Policy features:
- flexible premium payments;
- a choice of one of two death benefit options; and
- a choice of underlying investment options.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance contract with the Policy. This
Prospectus and the Prospectuses of the Funds furnished with this Prospectus
should be read carefully to understand the Policy being offered.
The Policy described in this Prospectus is available only in New York.
The mutual funds ("Funds") available through LLANY's Separate Account R
("Separate Account") are:
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
BARON CAPITAL FUNDS TRUST
Baron Capital Asset Fund -- Insurance Shares
BT INSURANCE FUNDS TRUST
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
DELAWARE GROUP PREMIUM FUND, INC.
Delchester Series
Devon Series
Emerging Markets Series
REIT Series
Small Cap Value Series
Trend Series
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Contrafund Portfolio -- Service Class
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III
Growth Opportunities Portfolio -- Service Class
JANUS ASPEN SERIES
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Worldwide Growth Portfolio
LINCOLN NATIONAL (LN)
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc.
LN Equity-Income Fund, Inc.
LN Global Asset Allocation Fund, Inc.
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc.
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
AMT Mid-Cap Growth Portfolio
AMT Partners Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton International Fund -- Class 2
Templeton Stock Fund -- Class 2
TO BE VALID, THIS PROSPECTUS MUST HAVE THE CURRENT MUTUAL FUNDS' PROSPECTUSES
WITH IT. KEEP ALL FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS A
CRIMINAL OFFENSE TO STATE OTHERWISE.
PROSPECTUS DATED: MAY 13, 1999
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TABLE OF CONTENTS
<TABLE>
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CONTENTS PAGE
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HIGHLIGHTS...................................... 3
Initial Choices To Be Made.................... 3
Level or Varying Death Benefit................ 3
Amount of Premium Payment..................... 4
Selection of Funding Vehicles................. 4
Charges and Fees.............................. 5
Changes in Specified Amount................... 5
LLANY, THE SEPARATE ACCOUNT AND THE GENERAL
ACCOUNT........................................ 6
BUYING VARIABLE LIFE INSURANCE.................. 7
Replacements.................................. 8
APPLICATION..................................... 8
OWNERSHIP....................................... 9
BENEFICIARY..................................... 9
INSUREDS........................................ 10
THE POLICY...................................... 10
Policy Specifications......................... 10
PREMIUM FEATURES................................ 10
Planned Premiums; Additional Premiums......... 10
Limits on Right to Make Payments of
Additional and Planned Premiums............ 11
Premium Load; Net Premium Payment........... 11
RIGHT-TO-EXAMINE PERIOD......................... 11
TRANSFERS AND ALLOCATION AMONG ACCOUNTS......... 11
Allocation of Net Premium Payments............ 11
Transfers..................................... 11
Optional Sub-Account Allocation Programs...... 12
Dollar Cost Averaging....................... 12
Automatic Rebalancing....................... 13
POLICY VALUES................................... 13
Accumulation Value............................ 13
Separate Account Value........................ 14
Accumulation Unit Value..................... 14
Accumulation Units.......................... 14
Fixed Account and Loan Account Value.......... 14
Net Accumulation Value........................ 15
FUNDS........................................... 15
Substitution of Securities.................... 19
Voting Rights................................. 19
Fund Participation Agreements................. 20
CHARGES AND FEES................................ 20
Deductions Made Monthly....................... 20
Monthly Deduction........................... 20
Cost of Insurance Charge.................... 21
Mortality and Expense Risk Charge............. 21
Fund Expenses................................. 22
Surrender Charges............................. 24
Transaction Fee for Excess Transfers.......... 24
DEATH BENEFITS.................................. 25
Death Benefit Options......................... 25
Changes in Death Benefit Options and Specified
Amount....................................... 25
Federal Income Tax Definition of Life
Insurance.................................... 26
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CONTENTS PAGE
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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
Reinstatement of a Lapsed Policy.............. 30
COMMUNICATIONS WITH LLANY....................... 30
Proper Written Form........................... 30
OTHER POLICY PROVISIONS......................... 31
Issuance...................................... 31
Date of Coverage.............................. 31
Right to Exchange the Policy.................. 31
Maturity of the Policy........................ 31
Incontestability.............................. 31
Misstatement of Age or Gender................. 32
Suicide....................................... 32
Nonparticipating Policies..................... 32
TAX ISSUES...................................... 32
Tax Treatment of Death Benefit................ 32
Federal Income Tax Considerations............. 32
Taxation of LLANY............................. 33
Other Considerations.......................... 34
FAIR VALUE OF THE POLICY........................ 34
DIRECTORS AND OFFICERS OF LLANY................. 34
DISTRIBUTION OF POLICIES........................ 36
CHANGES OF INVESTMENT POLICY.................... 36
OTHER CONTRACTS ISSUED BY LLANY................. 37
STATE REGULATION................................ 37
REPORTS TO OWNERS............................... 37
ADVERTISING..................................... 37
PREPARING FOR YEAR 2000......................... 38
LEGAL PROCEEDINGS............................... 39
EXPERTS......................................... 39
REGISTRATION STATEMENT.......................... 39
Appendix 1...................................... 40
Illustration of Accumulation Values, Surrender
Values, and Death Benefit Proceeds........... 40
Appendix 2...................................... 45
Corridor Percentages.......................... 45
Financial Statements............................
Lincoln Life & Annuity Company
of New York.................................. S-1
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HIGHLIGHTS
This section is an overview of key Policy features. Your
Policy is a flexible premium variable life insurance policy.
Your Policy insures two Insureds. If one of the Insureds
dies, the Policy pays no death benefit. Your Policy will pay
the death benefit only when the second Insured dies. A
"second-to-die" policy might be suitable when both of the
Insureds have income of their own and only want to provide
financial support for their dependents if both of them
should die, or to provide liquidity to heirs when the Second
Insured dies. If replacement income or immediate cash
liquidity is needed upon the death of one Insured, this type
of policy may not be suitable.
The Policy's value may change on a:
1) fixed basis;
2) variable basis; or a
3) combination of both fixed and variable bases.
Review your personal financial objectives and discuss them
with a qualified financial counselor before you buy a
"second-to-die" variable life insurance policy. As a death
benefit is only paid upon the second Insured's death, this
Policy may, or may not, be appropriate for your financial
goals. The value of the Policy and, under one option, the
death benefit amount, depends on the investment results of
the funding options you select.
At all times, your Policy must qualify as life insurance
under the Internal Revenue Code of 1986 (the "Code") to
receive favorable tax treatment under Federal law. If these
requirements are met, you may benefit from such tax
treatment. LLANY reserves the right to return your premium
payments if they result in your Policy failing to meet Code
requirements.
INITIAL CHOICES TO BE MADE
The Policy Owner (the "Owner" or "you") is the person named
in the "Policy Specifications" who has all of the Policy
ownership rights. You, as the Owner, have three important
choices to make when the Policy is first purchased. You need
to choose:
1) one of the two Death Benefit Options;
2) the amount of premium you want to pay; and
3) the amount of your Net Premium Payment to be placed in
each of the funding options you select. The Net Premium
Payment is the balance of your Premium Payment that
remains after certain charges are deducted from it.
LEVEL OR VARYING DEATH BENEFIT
The Death Benefit is the amount LLANY pays to the
Beneficiary(ies) when the second Insured dies. Before we pay
the Beneficiary(ies), any outstanding loan account balances
or outstanding amounts due are subtracted from the Death
Benefit. LLANY calculates the Death Benefit payable as of
the date of the second Insured's death.
When you purchase your Policy, you must choose one of two
Death Benefit Options:
1) a level death benefit; or
2) a varying death benefit.
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If you choose the level Death Benefit Option, the Death
Benefit will be the greater of:
1) the "Specified Amount," which is the amount of the death
benefit in effect for the Policy when the second Insured
died (The Specified Amount is on the Policy's Specification
Page); or
2) the "Corridor Death Benefit," which is the death benefit
calculated as a percentage of the Accumulation Value. The
Net Accumulation Value is the total of the balances in the
Fixed Account and the Separate Account minus any outstanding
Loan Account amounts.
If you choose the varying Death Benefit Option, the Death
Benefit will be the greater of:
1) the Specified Amount plus the Net Accumulation Value when
the second Insured died; or
2) the Corridor Death Benefit.
See page 25 for more details.
AMOUNT OF PREMIUM PAYMENT
When you apply for your Policy, you must decide how much
premium to pay. Premium payments may be changed within the
limits described on page 11.
You may use the value of the Policy to pay the premiums due
and continue the Policy in force if sufficient values are
available for premium payments. Be careful; if the
investment options you choose do not do as well as you
expect, there may not be enough value to continue the Policy
in force without more premium payments. Charges against
Policy values for the cost of insurance (see page 21)
increase as the Insureds get older.
If your Policy lapses because your Monthly Premium Deduction
is larger than the Net Accumulation Value, you may reinstate
your Policy. More information is on page 30.
When you first receive your Policy you will have 10 days to
look it over. This is called the "Right-to-Examine" time
period. Use this time to review your Policy and make sure
that it meets your needs. During this time period, your
Initial Premium Payment will be deposited in the Money
Market Sub-Account. If you then decide you do not want your
Policy, we will return all Premium Payments to you with no
interest paid. See page 11.
SELECTION OF FUNDING VEHICLES
This Prospectus focuses on the Separate Account investment
information that makes up the "variable" part of the Policy.
If you put money into the Funds, you take all the investment
risk on that money. This means that if the mutual funds(s)
you select go up in value, the value of your Policy, net of
charges and expenses, also goes up. If they lose value, so
does your Policy. Each fund has its own investment
objective. You should carefully read each fund's Prospectus
before making your decision.
You must choose the Fund(s) in which you want to place each
Net Premium Payment. These "Sub-Accounts" make up the
Separate Account. Each Sub-Account invests in shares of a
certain Fund. You may also place your Net Premium Payment or
part of it into the Fixed Account. A Sub-Account is not
guaranteed and will increase or decrease in value according
to the particular Fund's investment performance. See page
15.
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You may also use LLANY's Fixed Account to fund your Policy.
Net Premium Payments made into the Fixed Account:
- become part of LLANY's General Account;
- do not share the investment experience of the Separate
Account; and
- have a guaranteed minimum interest rate of 4% per year.
Interest beyond 4% is credited at LLANY's discretion. For
additional information, see page 7.
CHARGES AND FEES
We deduct a premium load of 8% from each Premium Payment. We
make monthly deductions for administrative expenses ($12.50
per month for the first Policy Year and $5 per month
afterwards), the Cost of Insurance and any riders that are
placed on your Policy. For Policy Years 1-20, a monthly
charge of $0.09 per $1,000 of Specified Amount is deducted.
We make daily charges against the Separate Account for
mortality and expense risk, currently at an annual rate of
.80%. See page 21.
Each Fund has its own management fee charge, also deducted
daily. Each Fund's expense levels will affect its investment
results. The table on page 22 shows you the current expense
levels for each Fund.
Each Policy Year you will be allowed to make 12 transfers
between funding options. Beyond 12, a $25 fee may apply. See
page 12.
You may surrender the Policy in full or withdraw part of its
value. A Surrender Charge is applied if the Policy is
surrendered totally and is the amount retained by us if the
Policy is surrendered. We charge you an administrative fee
of $25, but not more than 2% of the amount withdrawn, each
time you request a partial surrender of your Policy. If you
totally surrender your Policy within the first 15 years, a
surrender charge will be deducted in computing what will be
paid you. If you surrender your Policy within the first 15
years after an increase in the Specified Amount, a surrender
charge will also be imposed, in addition to any existing
surrender charge. See page 24.
You may borrow within described limits against the Policy.
If you borrow against your Policy, interest will be charged
to the Loan Account. Currently, the annual interest rate is
8%. For the first ten Policy Years interest will be credited
to the Loan Account Value at the annual rate of interest
charged for a loan minus 1%. For Policy Years eleven and
beyond, interest will be credited at an annual rate equal to
the current interest rate charged. See page 27.
LLANY may derive a profit from its charges and may use these
profits to finance distribution of the Policies.
CHANGES IN SPECIFIED AMOUNT
The Initial Specified Amount is the amount originally chosen
by the Policy Owner and is equal to the Death Benefit.
Within certain limits, you may decrease or, with
satisfactory evidence of insurability, increase the
Specified Amount. The minimum specified amount is currently
$250,000. Such changes will affect other aspects of your
Policy. See page 26.
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LLANY, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT
Lincoln Life & Annuity Company of New York is a life
insurance company chartered under New York law on June 6,
1996. Wholly-owned by The Lincoln National Life Insurance
Company ("Lincoln Life") and in turn by Lincoln National
Corporation ("LNC"), a publicly held Indiana insurance
holding company incorporated in 1968, it is licensed to sell
life insurance and annuity contracts in New York. Its
principal office is at 120 Madison Street, Suite 1700,
Syracuse, NY 13202. LLANY, Lincoln Life, LNC and their
affiliates comprise the "Lincoln Financial Group" which
provides a variety of wealth accumulation and protection
products and services.
LLANY Separate Account R for Flexible Premium Variable Life
Insurance ("Account R") is a "separate account" established
pursuant to a resolution of the Board of Directors of LLANY.
Under New York law, the assets of Account R attributable to
the Policies, though LLANY's property, are not chargeable
with liabilities of any other business of LLANY and are
available first to satisfy LLANY's obligations under the
Policies. Account R's income, gains, and losses are credited
to or charged against Account R without regard to other
income, gains, or losses of LLANY. Account R's values and
investment performance are not guaranteed. Account R is
registered with the Securities and Exchange Commission (the
"Commission") as a "unit investment trust" under the 1940
Act and meets the 1940 Act's definition of "separate
account". Such registration does not involve supervision by
the Commission of Account R's or LLANY's management,
investment practices, or policies. LLANY has other
registered separate accounts which fund its variable life
insurance policies and variable annuity contracts.
Account R is divided into Sub-Accounts, each of which is
invested solely in the shares of one of the mutual funds or
the Fixed Account available as funding vehicles under the
Policies. On each Valuation Day, Net Premium Payments
allocated to Account R will be invested in Fund shares at
net asset value, and monies necessary to pay for deductions,
charges, transfers and surrenders from Account R are raised
by selling Fund shares at net asset value.
The Funds and their investment objectives, which they may or
may not achieve, are on pages 15-19. More Fund information
is in the Funds' prospectuses, which must accompany or
precede this prospectus and should be read carefully. Some
Funds have investment objectives and policies similar to
those of other funds managed by the same investment adviser.
Their investment results may be higher or lower than those
of the other funds, and there can be no assurance, and no
representation is made, that a Fund's investment results
will be comparable to the investment results of any other
fund.
We reserve the right to add, withdraw or substitute Funds,
subject to the conditions of the Policy and to compliance
with regulatory requirements, if in our sole discretion
legal, regulatory, marketing, tax or investment
considerations so warrant or in the event a particular Fund
is no longer available for investment by the Sub-Accounts.
No substitution will take place without prior approval of
the Commission, to the extent required by law.
Shares of the Funds may be used by us and other insurance
companies to fund both variable annuity contracts and
variable life insurance policies. While this is not
perceived as problematic, the Funds' governing bodies
(Boards of Directors/Trustees) have agreed to monitor events
to identify any material irreconcilable conflicts which
might arise and
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to decide what responsive action might be appropriate. If a
Sub-Account were to withdraw its investment in a Fund
because of a conflict, a Fund might have to sell portfolio
securities at unfavorable prices.
A Policy may also be funded in whole or in part through the
"Fixed Account", part of LLANY's General Account supporting
its insurance and annuity obligations. We will credit
interest on amounts held in the Fixed Account as we
determine from time to time, but not less than 4% per year.
Interest, once credited, and Fixed Account principal are
guaranteed. Interests in the Fixed Account have not been
registered under the 1933 Act in reliance on exemptive
provisions. The Commission has not reviewed Fixed Account
disclosures, but they are subject to securities law
provisions relating to accuracy and completeness.
BUYING VARIABLE LIFE INSURANCE
The Policies this Prospectus offers are variable life
insurance policies which provide death benefit protection.
Investors not needing death benefit protection should
consider other forms of investment, as there are extra costs
and expenses of providing the insurance feature. Further,
life insurance purchasers who are risk-aversive or want more
predictable premium levels and benefits may be more
comfortable buying more traditional, non-variable life
insurance. However, variable life insurance is a flexible
tool for financial and investment planning for persons
needing death benefit protection and willing to assume
investment risk and to monitor investment choices they have
made.
Flexibility starts with the ability to make differing levels
of premium payments. A young family just starting out may
only be able to pay modest premiums initially but hope to
increase premium payments over time. At first, this family
would be paying primarily for the insurance feature (perhaps
at ages where the insurance cost is relatively low) and
later use a Policy more as a savings vehicle. A customer at
peak earning capacity may wish to pay substantial premiums
for a limited number of years prior to retirement, after
which Policy values may suffice, based on future expected
return results, though not guaranteed, to keep the Policy
inforce for the expected lifetime and to provide, through
loans, supplemental retirement income. A customer may be
able to pay a large single premium, using the Policy
primarily as a savings and investment vehicle for potential
tax advantages.
Sufficient premiums must always be paid to keep a policy
inforce, and there is a risk of lapse if premiums are too
low in relation to the insurance amount and if investment
results are less favorable than anticipated. The No Lapse
Provision, if elected, may help to assure a death benefit
even if investment results are unfavorable.
Flexibility also results from being able to select, monitor
and change investment choices within a Policy. With the wide
variety of fund options available, it is possible to
finetune an investment mix and change it to meet changing
personal objectives or investment conditions. Policy owners
should be prepared to monitor their investment choices on an
ongoing basis.
Variable life insurance has significant tax advantages under
current tax law. A transfer of values from one fund to
another within the Policy generates no taxable gain or loss.
And any investment income and realized capital gains within
a fund are automatically reinvested without being taxed to
the Policy owners. Policy values therefore accumulate on a
tax-deferred basis. These situations would normally result
in immediate tax liabilities in the case of direct
investment in mutual funds.
While these tax deferral features also apply to variable
annuities, liquidity (the ability of Policy owners to access
Policy values) is normally more easily achieved with
variable
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life insurance. Unless a policy has become a "modified
endowment contract" (see page 32), an Owner can borrow
Policy values tax-free, without surrender charges and at
very low net interest cost. Policy loans can be a source of
retirement income. Variable annuity withdrawals are
generally taxable to the extent of accumulated income, may
be subject to surrender charges, and will result in penalty
tax if made before age 59 1/2.
Depending on the death benefit option chosen, accumulated
Policy values may also be part of the eventual death benefit
payable. If a Policy is heavily funded and investment
performance is very favorable, the death benefit may
increase even further because of tax law requirements that
the death benefit be a certain multiple of Policy value,
depending on the Insured's ages (see page 25). The death
benefit is income-tax free and may, with proper estate
planning, be estate-tax free. A tax advisor should be
consulted.
There are costs and expenses of variable life insurance
ownership which are directly related to Policy values (i.e.
asset based costs) as is true with investment in mutual
funds or variable annuities. A significant additional cost
of variable life insurance is the "cost of insurance" charge
which is imposed on the "amount at risk" (the death benefit
less Policy value) and increases as the insured grows older.
This charge varies by age, underwriting classification,
smoking status and in most states by gender. The effect of
its increase can be seen in illustrations in this Prospectus
(see Appendix 1) or in personalized illustrations available
upon request. Surrender Charges, which decrease over time,
are another significant additional cost if the Policy is not
retained.
REPLACEMENTS
Before purchasing the Policy to replace, or to be funded
with proceeds borrowed or withdrawn from, an existing life
insurance policy, an applicant should consider a number of
matters. Will any commission will be paid to an agent or any
other person with respect to the replacement? Are 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 existing policy,
while the Policy could be contested. The Owner should
consider similar matters before deciding to replace the
Policy or withdraw funds from the Policy for the purchase of
funding a new policy of life insurance.
APPLICATION
Any person who wants to buy a Policy must first complete an
application on a form provided by 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. We
require medical history and examination of each of the
Insureds. 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, in most
states, gender of the Insureds.
The applicant will select the Beneficiary or Beneficiaries
who are to receive Death Benefit Proceeds payable on the
Second Death, the initial face amount (the Initial Specified
Amount) of the Death Benefit and which of two methods of
computing the Death Benefit is to be used. (See DEATH
BENEFITS, Death Benefit Options). The applicant
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will also indicate both the frequency and amount of Premium
Payments. (See PREMIUM FEATURES.) The applicant must also
determine how Policy values are initially to be allocated
among the available funding options following the expiration
of the Right-to-Examine Period. (See RIGHT-TO-EXAMINE
PERIOD).
OWNERSHIP
The Owner is the person or persons named as Owner in the
application, and on the Date of Issue will usually be
identified as Owner in the Policy Specifications. If no
person is identified as Owner in the Policy Specifications,
then the Insureds are the Owner. The person or persons
designated to be Owner of the Policy must have, or hold
legal title for the sole benefit of a person who has, an
"insurable interest" in the lives of each of the Insureds
under applicable state law. The Owner may be either or both
of the Insureds, or any other natural person or non-natural
entity. The Owner owns and exercises the rights under the
Policy prior to the Second Death.
The Owner is the person who is ordinarily entitled to
exercise the rights under the Policy so long as either of
the Insureds is living. These rights include the power to
select the Beneficiary and the Death Benefit Option. The
Owner generally also has the right to request policy loans,
make partial surrenders or surrender the Policy. The Owner
may also name a new owner, assign the Policy or agree not to
exercise all of the Owner's rights under the Policy.
If the Owner is a person other than the last surviving
Insured, and that Owner dies before the Second Death, the
Owner's rights in the Policy will belong to the Owner's
estate, unless otherwise specified to LLANY.
BENEFICIARY
The Beneficiary is designated by the Owner or the Applicant
and is the person who will receive the Death Benefit
proceeds payable under the Policy. The person or persons
named in the application as Beneficiary are the
Beneficiaries of the Death Benefit under the Policy.
Multiple Beneficiaries will be paid in equal shares, unless
otherwise specified to 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. Unless the Owner has reserved the
right to change the Beneficiary, such a request must be
signed by both the Owner and the Beneficiary. On
recordation, the change of Beneficiary will be effective as
of the date of signature or, if there is no such date, the
date recorded. No change of Beneficiary will affect, or
prejudice 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 assignee.
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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 POLICY
The Policy is the life insurance contract described in this
Prospectus. The Date of Issue is the date on which LLANY
begins life insurance coverage under a Policy. A Policy Year
is each twelve month period, beginning with the Date of
Issue, during which the Policy is in effect. The Policy
Anniversary is the day of the year the Policy was issued.
On issuance, a Policy will be delivered to the Owner. The
Policy sets forth the terms of the Policy, as applicable to
the Owner, and should be reviewed by the Owner on receipt to
confirm that it sets forth the features specified in the
application. The ownership and other options set forth in
the Policy are registered, and may be transferred, solely on
the books and records of 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.
PREMIUM FEATURES
The Policy permits flexible premium payments, meaning that
the Owner may select the frequency and the amount of Premium
Payments. After the Initial Premium Payment is paid there is
no minimum premium required. The initial Premium Payment is
due on the Effective Date (the date on which the initial
premium is applied to the Policy) and must be equal to or
exceed the amount necessary to provide for two Monthly
Deductions.
PLANNED PREMIUMS; ADDITIONAL PREMIUMS
"Planned Premiums" are 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.
Any subsequent Premium Payments (Additional Premiums) must
be sent directly to the Administrative Office. Additional
Premiums will be credited only when actually received by
LLANY. Planned Premiums may be billed with an annual,
semiannual, or quarterly frequency. Pre-authorized automatic
additional premium payments can also be arranged at any
time.
Unless specifically otherwise directed, any payment received
(other than any Premium Payment necessary to prevent, or
cure, Policy lapse) will be applied first to reduce Policy
indebtedness. There is no premium load on such payments to
the extent applied to reduce indebtedness.
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LIMITS ON RIGHT TO MAKE PAYMENTS OF ADDITIONAL AND PLANNED
PREMIUMS
The Owner may increase Planned Premiums, or pay Additional
Premiums, subject to the following limitations and 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) and notice of surrender rights to the
Owner, (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
Sub-Account, and will be allocated to the Sub-Accounts
designated by the Owner at the end of a Right-to-Examine
Period. If the Policy is returned for cancellation within
the Right-to-Examine Period, we will return any Premium
Payments within seven days, although any refund of a Premium
Payment made by check may be delayed until the check clears.
TRANSFERS AND ALLOCATION AMONG ACCOUNTS
ALLOCATION OF NET PREMIUM PAYMENTS
The allocation of Net Premium Payments among the Fixed
Account and the Sub-Accounts may be set forth in the
application. An Owner may change the allocation of future
Net Premium Payments at any time. In any allocation, the
amount allocated to any Sub-Account must be in whole
percentages. No allocation can be made which would result in
a Sub-Account Value of less than $50 or a Fixed Account
Value of less than $2,500. LLANY, at its sole discretion,
may waive minimum balance requirements on the Sub-Accounts.
TRANSFERS
The Owner may make transfers among the Sub-Accounts, on the
terms set forth below, at any time before the younger
Insured reaches or would have reached Age 100. The Owner
should carefully consider current market conditions and each
Sub-Account's investment policies and related risks before
allocating money to the Sub-Accounts.
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Transfer of amounts of at least $500 from one Sub-Account to
another or from the Sub-Accounts to the Fixed Account are
possible at any time. Within 30 days after each anniversary
of the Date of Issue, the Owner may transfer up to the
lesser of (a) 25% of the Fixed Account Value (as of the
preceding anniversary of the Date of Issue) or (b) $250,000
to one or more Sub-Accounts. Up to 12 transfer requests (a
request may involve more than a single transfer) may be made
in any Policy Year without charge, and any value remaining
in a Sub-Account after a transfer must be at least $500.
LLANY reserves the right to impose a charge for each
transfer request in excess of 12 requests in any Policy
Year. LLANY may further limit transfers from the Fixed
Account at any time.
Transfers must be made in proper written form, unless the
Owner has given written authorization to LLANY to accept
telephone transactions. Contact our Administrative Office
for authorization forms and information on permitted
telephone transactions. Written transfer requests or
adequately authenticated telephone transfer requests
received at the Administrative Office by the close of the
New York Stock Exchange (usually 4:00 PM ET) on a Valuation
Day will be effected as of that day. Otherwise, requests
will be effective as of the next Valuation Day.
Any transfer among the Sub-Accounts or to the Fixed Account
will result in the crediting and cancellation of
Accumulation Units based on the Accumulation Unit values
next determined after the Administrative Office receives a
request in proper written form or adequately authenticated
telephone transfer requests. Any transfer made which causes
the remaining value of Accumulation Units for a Sub-Account
or the Fixed Account to be less than $500 will result in
those remaining Accumulation Units being canceled and their
aggregate value reallocated proportionately among the other
Sub-Accounts and the Fixed Account to which Policy values
are then allocated.
OPTIONAL SUB-ACCOUNT ALLOCATION PROGRAMS
The Owner may elect to participate in programs providing for
Dollar Cost Averaging or Automatic Rebalancing, but may
participate in only one program at any time.
DOLLAR COST AVERAGING
Dollar Cost Averaging systematically transfers specified
dollar amounts from the Money Market Sub-Account. Transfer
allocations may be made to one or more of the Sub-Accounts
on a monthly or quarterly basis. These transfers do not
count against the free transfers available. By making
allocations on a regularly scheduled basis, instead of on a
lump sum basis, an Owner may reduce exposure to market
volatility. Dollar Cost Averaging will not assure a profit
or protect against a declining market.
If the Owner elects Dollar Cost Averaging, the value in the
Money Market Sub-Account must be at least $1,000 initially.
The minimum amount that may be allocated is $50 monthly.
An election for Dollar Cost Averaging is effective after the
Administrative Office receives a request from the Owner in
proper written form or by telephone, if adequately
authenticated. An election is effective within ten business
days, but only if there is sufficient value in the Money
Market Sub-Account. 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) within one week after the
Administrative Office receives a request for termination in
proper written form or by telephone, if adequately
authenticated; or (4) if the Policy is surrendered.
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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 Sub-Account (e.g. 20% Money Market, 50%
Growth, 30% Utilities). The Fixed Account is not subject to
rebalancing. The pre-determined level is the allocation
initially selected on the application, until changed by the
Owner. If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Sub-Accounts will be subject to
Automatic Rebalancing.
The Owner may select Automatic Rebalancing on a quarterly,
semi-annual or annual basis. Automatic Rebalancing may be
elected, terminated or the allocation may be changed at any
time, effective within ten business days upon receipt by the
Administrative Office of a request in proper written form or
by telephone, if adequately authenticated.
Currently, there is no current charge for Automatic
Rebalancing, but LLANY reserves the right to impose a
charge.
POLICY VALUES
The "Accumulation Value" is the sum of the Fixed Account
Value, Separate Account Value and the Loan Account Value.
The Accumulation Value of the Policy depends on the
performance of the underlying investments. Policy values are
used to fund Policy fees and expenses, including the Cost of
Insurance. Premium Payments to meet your objectives will
vary based on the investment performance of the underlying
investments. A market downturn, affecting the Sub-Accounts
upon which the Accumulation Value of a particular Policy
depends, may require additional premium payments beyond
those expected to maintain the level of coverage or to avoid
lapse of the Policy. We strongly suggest you review periodic
statements to see if additional premium payments must be
made to avoid lapse of the Policy.
We will tell you at least annually the Accumulation Value,
the number of Accumulation Units which remain credited to
the Policy, the current Accumulation Unit values, the
Sub-Account values, the Fixed Account Value and the Loan
Account Value.
ACCUMULATION VALUE
The portion of a Premium Payment, after deduction of 8.0%
for the premium load, is the Net Premium Payment. It is the
Net Premium Payment that is available for allocation to the
Fixed Account or the Sub-Accounts.
We credit a Net Premium Payment to the Policy as of the end
of the Valuation Period in which it is received at the
Administrative Office. The Valuation Period is the time
between Valuation Days, and a Valuation Day is every day on
which the New York Stock Exchange is open and trading
unrestricted. Accumulation Units are valued on every
Valuation Day.
The Accumulation Value of a Policy is determined by: (1)
multiplying the total number of Accumulation Units credited
to the Policy for each Sub-Account by its appropriate
current Accumulation Unit Value; (2) if a combination of
Sub-Accounts is elected, totaling the resulting values; and
(3) adding any values attributable to the Fixed Account and
the Loan Account. The Accumulation Value will be affected by
Monthly Deductions.
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SEPARATE ACCOUNT VALUE
The Separate Account Value is the portion of the
Accumulation Value attributable to the Separate Account.
ACCUMULATION UNIT VALUE
All or a part of a Net Premium Payment allocated to a
Sub-Account is converted into Accumulation Units by dividing
the amount allocated to the Sub-Account by the value of the
Accumulation Unit for the Sub-Account calculated at the end
of the Valuation Period in which it is received at the
Administrative Office. The Accumulation Unit value for each
Sub-Account was initially established at $10.00. It may
thereafter increase or decrease from one Valuation Period to
the next. Allocations to Sub-Accounts are made only as of
the end of a Valuation Day.
ACCUMULATION UNITS
An Accumulation Unit is a unit of measure used in the
calculation of the value of each Sub-Account. The
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 Accumulation Unit
value for a Sub-Account for any later Valuation Period is
determined as follows:
1.The total value of Fund shares held in the Sub-Account
is calculated by multiplying the number of Fund shares
owned by the Sub-Account at the beginning of the
Valuation Period by the net asset value per share of
the Fund at the end of the Valuation Period, and adding
any dividend or other distribution of the Fund if an
ex-dividend date occurs during the Valuation Period;
minus
2.The liabilities of the Sub-Account at the end of the
Valuation Period; such liabilities include daily
charges imposed on the Sub-Account, and may include a
charge or credit with respect to any taxes paid or
reserved for by LLANY that LLANY determines result from
the operations of the Separate Account; and
3.The result of (2) is divided by the number of
Accumulation Units outstanding at the beginning of the
Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation
Period are equal to the daily mortality and expense risk
charge multiplied by the number of calendar days in the
Valuation Period. The amount of Monthly Deduction allocated
to each Sub-Account will result in the cancellation of
Accumulation Units that have an aggregate value on the date
of such deduction equal to the total amount by which the
Sub-Account is reduced.
The number of Accumulation Units credited to a Policy will
not be changed by any subsequent change in the value of an
Accumulation Unit. Such value may vary from Valuation Period
to Valuation Period to reflect the investment experience of
the Fund used in a particular Sub-Account 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 Separate Account.
LLANY guarantees the Fixed Account Value.
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NET ACCUMULATION VALUE
The Net Accumulation Value is the Accumulation Value less
the Loan Account Value. The Net Accumulation Value
represents the net value of the Policy and is the basis for
calculating the Surrender Value.
FUNDS
Each of the Sub-Accounts of the Separate Account is invested
solely in the shares of one of the Funds available under the
Policies. Each of the Funds is a series of one of sixteen
Massachusetts or Delaware business trusts or Maryland
corporations, collectively referred to as the "Trusts". Each
such trust or corporation is registered as an open-end
management investment company under the 1940 Act. All of the
Funds except for the Delaware Group REIT Series and the
Delaware Group Emerging Market Series are diversified under
the 1940 Act.
Listed below are the Trusts, their investment advisers and
distributors, and the Funds within each that are available
under the Policies:
AIM VARIABLE INSURANCE FUNDS, INC., managed by A I M
Advisors, Inc., and distributed by A I M Distributors Inc.,
11 Greenway Plaza, Suite 100, Houston, TX 77046-1173
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
BARON CAPITAL FUNDS TRUST, managed by BAMCO, Inc. and
distributed by Baron Capital Inc., 767 Fifth Avenue, New
York, NY 10153
Baron Capital Asset Fund -- Insurance Shares
BT INSURANCE FUNDS TRUST, managed by Bankers Trust Company,
130 Liberty Street (One Bankers Trust Plaza), New York, NY
10006 and distributed by First Data Distributors, Inc., 4400
Computer Drive, Westborough, MA 01581
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
DELAWARE GROUP PREMIUM FUND, INC., managed by Delaware
Management Company, Inc., One Commerce Square, Philadelphia,
PA 19103 and for International and Emerging Markets,
Delaware International Advisors, Ltd., 80 Cheapside, London,
England ECV2 6EE, and distributed by Delaware Distributors,
L.P., 1818 Market Street, Philadelphia, PA 19103
Delchester Series
Devon Series
Emerging Markets Series
REIT Series
Small Cap Value Series
Trend Series
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II, AND VARIABLE
INSURANCE PRODUCTS FUND III, managed by Fidelity Management
& Research Company and distributed by Fidelity Distributors
Corporation, 82 Devonshire Street, Boston, MA 02109
Fidelity VIP II Contrafund Portfolio -- Service Class
Fidelity VIP III Growth Opportunities Portfolio --
Service Class
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JANUS ASPEN SERIES, managed by Janus Capital, 100 Fillmore
St. Denver, CO 80206-4928, and self-distributed.
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Worldwide Growth Portfolio
LINCOLN NATIONAL FUNDS, managed by Lincoln Investment
Management, Inc., 200 East Berry Street, Fort Wayne IN
46802, and distributed by Lincoln Financial Advisors, Inc.,
350 Church Street, Hartford, CT 06103. Sub-advisors are also
noted.
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc. (Sub-advised by Janus
Capital Corp.)
LN Equity-Income Fund, Inc. (Sub-advised by Fidelity
Management Trust Co.)
LN Global Asset Allocation Fund, Inc. (Sub-advised by
Putnam Investment Management, Inc.)
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc. (Sub-advised by Vantage
Investment Advisors Inc.)
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST, managed
by Massachusetts Financial Services Company and distributed
by MFS Fund Distributors, Inc., 500 Boylston Street, Boston,
MA 02116
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST, managed and
distributed by NB Management Incorporated, 605 Third Avenue,
2nd Floor, New York, NY 10158-0006
NB AMT Mid-Cap Growth Portfolio
NB AMT Partners Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND, managed by
Templeton Investment Counsel, Inc. and its Templeton and
Franklin affiliates and distributed by Franklin Templeton
Distributors, Inc., 100 Fountain Parkway, St. Petersburg, FL
33716-1205
Templeton International Fund -- Class 2
Templeton Stock Fund -- Class 2
The investment advisory fees charged the Funds by their
advisers are shown on page 22 of this Prospectus.
Below is a brief description of the investment objective and
program of each Fund. There can be no assurance that any of
the stated investment objectives will be achieved.
AIM V.I. GROWTH FUND (Large Cap Stocks): Seeks growth of
capital primarily by investing in seasoned and better
capitalized companies considered to have strong earnings
momentum. Current income will not be a criterion of
investment selection, and any such income should be
considered incidental.
AIM V.I. INTERNATIONAL EQUITY FUND (Large Cap Stocks --
International): Seeks to provide long-term growth of capital
by investing in a diversified portfolio of international
equity securities whose issuers are considered to have
strong earnings momentum. The fund seeks to meet this
objective by investing at least 70% of its total assets in
marketable equity securities of foreign companies that are
listed on a recognized foreign securities exchange or traded
in a foreign over-the-counter market.
AIM V.I. VALUE FUND (Large Cap Stocks): Seeks to achieve
long-term growth of capital by investing primarily in equity
securities judged by its investment advisor to be
undervalued relative to the investment advisor's appraisal
of current or projected
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earnings of the companies issuing the securities, or
relative to current market values of assets owned by the
companies issuing the securities or relative to the equity
markets generally. Income is a secondary objective and would
be satisfied principally from the interest (interest and
dividends) generated by the common stocks, convertible bonds
and convertible preferred stocks that make up the Fund's
portfolio.
BARON CAPITAL ASSET FUND -- INSURANCE SHARES (Small/Medium
Cap U.S. Stocks): Seeks capital appreciation through
investments in securities of small sized companies with
market capitalizations of approximately $100 million to $1.5
billion, and medium sized companies with market
capitalizations of $1.5 billion to $5 billion, with
undervalued assets or favorable growth prospects.
BT EAFE-REGISTERED TRADEMARK- FUND (Large Cap Stocks --
International): Seeks to replicate as closely as possible
(before the deduction of Expenses) the total return of the
Europe, Australia, Far East Index (the
EAFE-Registered Trademark- Index) , a
capitalization-weighted index containing approximately 1,100
equity securities of companies located outside the United
States.
BT EQUITY 500 INDEX FUND (Large Cap U.S. Stocks): Seeks to
replicate as closely as possible the performance of the
Standard & Poor's 500 Composite Stock Price Index, before
the deduction of Fund expenses.
BT SMALL CAP INDEX FUND (Small/Medium Cap U.S. Stocks):
Seeks to replicate as closely as possible (before the
deduction of Expenses) the total return of the Russell 2000
Small Stock Index (the "Russell 2000"), an index consisting
of approximately 2,000 small-capitalization common stocks.
DELAWARE GROUP DELCHESTER SERIES (High Yield Bonds): Seeks
as high a current income as possible by investing in rated
and unrated corporate bonds (including high yield bonds
commonly known as junk bonds), U. S. government securities
and commercial paper. An investment in this Series may
involve greater risks than an investment in a portfolio
comprised primarily of investment grade bonds.
DELAWARE GROUP DEVON SERIES (Large Cap U.S. Stocks): Seeks
current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on
common stocks that the investment manager believes have the
potential for above-average dividend increases over time.
Under normal circumstances, the Series will invest at least
65% of its total assets in dividend paying common stocks.
DELAWARE GROUP EMERGING MARKETS SERIES (Emerging Markets
Stocks): Seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located
or operating in emerging counties. The Series is an
international fund. As such, under normal market conditions,
at least 65% of the Series' assets will be invested in
equity securities of issuers organized or having a majority
of their assets or deriving a majority of their operating
income in at least three countries that are considered to be
emerging or developing.
DELAWARE GROUP REIT SERIES (Specialty): Seeks to achieve
maximum long-term total return. Capital appreciation is a
secondary objective. It seeks to achieve its objectives by
investing in securities of companies primarily engaged in
the real estate industry.
DELAWARE GROUP SMALL CAP VALUE SERIES (Small/Medium Cap U.S.
Stocks): Seeks capital appreciation by investing primarily
in small cap common stocks whose market value appears low
relative to their underlying value or future earnings and
growth potential. Emphasis will also be placed on securities
of companies that may be temporarily out of favor or whose
value is not yet recognized by the market.
DELAWARE GROUP TREND SERIES (Small/Medium Cap U.S. Stocks):
Seeks long-term capital appreciation by investing primarily
in small-cap common stocks and convertible
17
<PAGE>
securities of emerging and other growth-oriented companies.
These securities will have been judged to be responsive to
changes in the marketplace and to have fundamental
characteristics to support growth. Income is not an
objective.
FIDELITY VIP II CONTRAFUND PORTFOLIO -- SERVICE CLASS (Large
Cap U.S. Stocks): Seeks capital appreciation by investing
primarily in securities of companies whose value the advisor
believes is not fully recognized by the public.
FIDELITY VIP III GROWTH OPPORTUNITIES PORTFOLIO -- SERVICE
CLASS (Large Cap U.S. Stocks): Seeks capital growth by
investing primarily in common stocks.
JANUS ASPEN SERIES BALANCED PORTFOLIO (Balanced): Seeks long
term growth of capital, consistent with the preservation of
capital and balanced by current income. The Portfolio
normally invests 40-60% of its assets in securities selected
primarily for their growth potential and 40-60% of its
assets in securities selected primarily for their income
potential.
JANUS ASPEN SERIES WORLDWIDE GROWTH PORTFOLIO (Large Cap
Stocks -- Global): Seeks long-term growth of capital in a
manner consistent with the preservation of capital by
investing primarily in common stocks of foreign and domestic
insurers.
LINCOLN NATIONAL BOND FUND (Investment Grade Bonds): Seeks
maximum current income consistent with prudent investment
strategy. The fund invests primarily in medium-and long-term
corporate and government bonds.
LINCOLN NATIONAL CAPITAL APPRECIATION FUND (Large Cap U.S.
Stocks): Seeks long-term growth of capital in a manner
consistent with preservation of capital. The fund invests in
a large number of companies of all sizes if the companies
are competing well and if their products and services are in
high demand. It may also buy some money market securities
and bonds, including junk (high risk) bonds.
LINCOLN NATIONAL EQUITY-INCOME FUND (Large Cap U.S. Stocks):
Seeks to achieve reasonable income by investing primarily in
income-producing equity securities. The fund invests mostly
in high-yielding bonds (including junk bonds)
LINCOLN NATIONAL GLOBAL ASSET ALLOCATION FUND (Balanced --
International): Seeks long-term total return consistent with
preservation of capital. The fund allocates its assets among
several categories of equity and fixed-income securities,
both of U.S. and foreign insurers.
LINCOLN NATIONAL MONEY MARKET FUND (Money Market): Seeks
maximum current income consistent with the preservation of
capital. The fund invests in short term obligations issued
by U.S. corporations, the U.S. government, and
federally-chartered banks and U.S. branches of foreign
banks.
LINCOLN NATIONAL SOCIAL AWARENESS FUND (Large Cap
Stock/Specialty): Seeks to achieve long-term capital
appreciation, by investing in stocks of established
companies which adhere to certain specific social criteria.
MFS EMERGING GROWTH SERIES (Small/Medium Cap U.S. Stocks):
Seeks to provide long-term growth of capital.
MFS TOTAL RETURN SERIES (Balanced): Seeks primarily to
provide above-average income (compared to a portfolio
invested entirely in equity securities) consistent with the
prudent employment of capital, and secondarily to provide a
reasonable opportunity for growth of capital and income.
MFS UTILITIES SERIES (Small/Medium Cap U.S.
Stocks/Specialty): Seeks capital growth and current income
(income above that available from a portfolio invested
entirely in equity securities).
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NB AMT MID-CAP GROWTH PORTFOLIO (Small/Medium Cap U.S.
Stocks): Seeks growth of capital through an investment
approach that is designed to increase capital with
reasonable risk. It invests mainly in common stocks of
mid-capitalization companies.
NB AMT PARTNERS PORTFOLIO (Small/Medium Cap U.S. Stocks):
Seeks growth of capital and invests mainly in common stocks
of mid-to-large capitalization companies, using the
value-oriented investment approach.
TEMPLETON INTERNATIONAL FUND -- CLASS 2 (Large Cap Stocks --
International): Seeks long-term capital growth. It invests
primarily in stocks of companies outside the United States,
including emerging markets. Any income realized will be
incidental.
TEMPLETON STOCK FUND -- CLASS 2 (Large Cap Stocks --
Global): Seeks long-term capital growth. Invests primarily
in equity securities issued by companies, large and small,
in various nations throughout the world, including the
United States and emerging markets.
Several of the Funds may invest in non-investment grade,
high-yield, high-risk debt securities (commonly referred to
as "junk bonds"), as detailed in the individual Fund
Prospectuses.
There is no assurance that the investment objective of any
of the Funds will be met. You assume all of the investment
performance risk for the Sub-Accounts you select. There is
investment performance risk in each of the Sub-Accounts,
although the amount of such risk varies significantly among
the Sub-Accounts. Owners should read each Fund's prospectus
carefully and understand the risks before making or changing
investment choices. Additional Funds may, from time to time,
be made available as underlying investments, with prior
approval of the New York Insurance Department. The right to
select among Funds will be limited by the terms and
conditions imposed by LLANY (SEE ALLOCATION OF NET PREMIUM
PAYMENTS).
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Separate Account or if, in the judgment of
LLANY, further investment in such shares should cease to be
appropriate in view of the purpose of the Separate Account
or in view of legal, regulatory or federal income tax
restrictions, LLANY may substitute shares of another Fund.
There will be no substitution of securities in any
Sub-Account without prior approval of the Commission.
VOTING RIGHTS
LLANY will vote the shares of each Fund held in the Separate
Account at special meetings of the shareholders of the
particular Fund in accordance with instructions received by
the Administrative Office in proper written form from
persons having a voting interest in the Separate Account.
LLANY will vote shares for which it has not received
instructions in the same proportion as it votes shares in
the Separate Account for which it has received instructions.
The Funds do not hold regular meetings of shareholders.
The number of shares which a person has a right to vote will
be determined as of a date to be chosen by the appropriate
Trust not more than sixty (60) days prior to the meeting of
the particular Fund. Voting instructions will be solicited
by written communication at least fourteen (14) days prior
to the meeting.
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FUND PARTICIPATION AGREEMENTS
LLANY has entered into agreements with the various Trusts
and their advisers or distributors under which LLANY makes
the Funds available under the Policies and performs certain
administrative services. In some cases, the advisers or
distributors may compensate LLANY at annual rates of between
.10% and .25% of assets in a particular Fund attributable to
the Policies.
CHARGES AND FEES
LLANY deducts charges in connection with the Policy to
compensate it for providing the insurance benefit set forth
in the Policy, administering the Policy, assuming certain
risks in connection with the Policy and for incurring
expenses associated with the distribution of the Policy.
The nature and amount of these charges are as follows:
DEDUCTIONS MADE MONTHLY
We make various expense deductions monthly. The Monthly
Deduction, including the Cost of Insurance Charge and
charges for supplemental riders or benefits, if any, 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 Sub-Accounts, Accumulation Units are canceled
and the value of the canceled 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 the Net Accumulation Value is insufficient to cover the
current Monthly Deduction, you have a 61-day period (Grace
Period) to make a payment sufficient to cover that
deduction. (See LAPSE AND REINSTATEMENT. LAPSE OF A POLICY).
MONTHLY DEDUCTION
There is a flat dollar Monthly Deduction of $12.50 until the
first Policy Anniversary and $5 thereafter. 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.
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.
20
<PAGE>
COST OF INSURANCE CHARGE
The "Cost of Insurance" charge is the portion of the Monthly
Deduction designed to compensate LLANY for the anticipated
cost of paying Death Benefits in excess of the Accumulation
Value, not including riders, supplemental benefits or
monthly expense charges.
The Cost of Insurance charge depends on the Age (the age of
the subject person at his/ her nearest birthday),
underwriting category and gender (in accordance with state
law) of both Insureds and the current "Net Amount at Risk"
(Death Benefit minus the Accumulation Value). The rate on
which the Monthly Deduction for the Cost of Insurance is
based will generally increase as the 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.
MORTALITY AND EXPENSE RISK CHARGE
LLANY deducts a daily mortality and expense risk charge as a
percentage of the assets of the Separate Account. The
mortality risk assumed is that insureds may live for a
shorter period than estimated, and therefore, a greater
amount of death benefit will be payable. The expense risk
assumed is that expenses incurred is issuing and
administering the policies will be greater than estimated.
The mortality and expense risk charge is currently at an
annual rate of 0.80%, and is guaranteed not to exceed 0.90%
per year.
21
<PAGE>
FUND EXPENSES
The investment advisor for each of the Funds deducts a daily
charge as a percent of the net assets in each fund as an
asset management charge. The charge reflects asset
management fees of the investment advisor (Management Fees),
and other expenses incurred by the funds (including 12b-1
fees for a class of shares and Other Expenses). The charge
has the effect of reducing the investment results credited
to the Sub-Accounts. Future Fund expenses will vary.
<TABLE>
<CAPTION>
TOTAL
ANNUAL
FUND TOTAL FUND
OPERATING OPERATING
EXPENSES EXPENSES
WITHOUT TOTAL WITH
MANAGEMENT 12b-1 OTHER WAIVERS OR WAIVERS AND WAIVERS OR
FUND FEES FEES EXPENSES REDUCTIONS REDUCTIONS REDUCTIONS
- ------------------------------ --------------- ----- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
AIM V.I. Growth Fund.......... 0.64% -- 0.08% 0.72% -- 0.72%
AIM V.I. International Equity
Fund........................ 0.75% -- 0.16% 0.91% -- 0.91%
AIM V.I. Value Fund........... 0.61% -- 0.05% 0.66% -- 0.66%
Baron Capital Asset
Fund--Insurance Shares
(1)......................... 1.00% 0.25% 6.37% 7.62% (6.17%) 1.45%
BT EAFE Index Fund (2)........ 0.45% -- 1.21% 1.66% (1.01%) 0.65%
BT Equity 500 Index Fund
(2)......................... 0.20% -- 0.99% 1.19% (0.89%) 0.30%
BT Small Cap Index Fund (2)... 0.35% -- 1.23% 1.58% (1.13%) 0.45%
Delaware Group Delchester
Series (3).................. 0.65% -- 0.10% 0.75% -- 0.75%
Delaware Group Devon Series
(3)......................... 0.65% -- 0.06% 0.71% -- 0.71%
Delaware Group Emerging
Markets Series (4).......... 1.25% -- 0.42% 1.67% (0.17%) 1.50%
Delaware Group REIT Series
(5)......................... 0.75% -- 0.27% 1.02% (0.17%) 0.85%
Delaware Group Small Cap Value
Series (6).................. 0.75% -- 0.10% 0.85% -- 0.85%
Delaware Group Trend Series
(6)......................... 0.75% 0.10% 0.85% (0.04%) 0.81%
Fidelity VIPII Contrafund
Portfolio -- Service Class
(7)......................... 0.59% 0.10% 0.11% 0.80% -- 0.80%
Fidelity VIPIII Growth
Opportunities Portfolio --
Service Class (7)........... 0.59% 0.10% 0.11% 0.80% -- 0.80%
Janus Aspen Series Balanced
Portfolio (8)............... 0.72% -- 0.02% 0.74% -- 0.74%
Janus Aspen Series Worldwide
Growth Portfolio (8)........ 0.67% -- 0.07% 0.74% (0.02%) 0.72%
LN Bond Fund.................. 0.44% -- 0.13% 0.57% -- 0.57%
LN Capital Appreciation
Fund........................ 0.76% -- 0.07% 0.83% -- 0.83%
LN Equity Income Fund......... 0.72% -- 0.07% 0.79% 0.79%
LN Global Asset Allocation
Fund........................ 0.72% -- 0.19% 0.91% -- 0.91%
LN Money Market Fund.......... 0.48% -- 0.11% 0.59% -- 0.59%
LN Social Awareness Fund...... 0.34% -- 0.04% 0.38% -- 0.38%
MFS Emerging Growth Series
(9)......................... 0.75% -- 0.10% 0.85% -- 0.85%
MFS Total Return Series (9)... 0.75% -- 0.16% 0.91% -- 0.91%
MFS Utilities Series (9)...... 0.75% -- 0.26% 1.01% -- 1.01%
AMT MidCap Growth Portfolio
(10)(11).................... 0.85% -- 0.58% 1.43% (0.43%) 1.00%
AMT Partners Portfolio
(10)(11).................... 0.78% -- 0.06% 0.84% -- 0.84%
Templeton International Fund
-- Class 2 (12)............. 0.69% 0.25% 0.17% 1.11% -- 1.11%
Templeton Stock Fund -- Class
2 (12)...................... 0.70% 0.25% 0.19% 1.14% -- 1.14%
</TABLE>
---------------------------------------------------
(1) The Adviser is contractually obligated to reduce its
fee to the extent required to limit Baron Capital Asset
Fund's total operating expenses to 1.5% for the first
$250 million of assets in the Fund, 1.35% for Fund
22
<PAGE>
assets over $250 million, and 1.25% for Fund assets
over $500 million. Without the expense limitations,
total operating expenses for the Fund for the period
October 1, 1998 through December 31, 1998 would have
been 7.62%
(2) Under the Advisory Agreement with Bankers Trust Company
(the "Advisor"), the Funds will pay an advisory fee at
an annual percentage rate of 0.45%, 0.20% and 0.35% of
the average daily net assets of the Funds for the EAFE
Equity Index Fund, Equity 500 Index Fund and Small Cap
Index Fund, respectively. These fees are accrued daily
and paid monthly. The Advisor has voluntarily
undertaken to waive its fees and to reimburse the Funds
for certain expenses so that the Funds' total operating
expenses will not exceed 0.65%, 0.30% and 0.45% of
average daily net assets for the EAFE Equity Index
Fund, Equity 500 Index Fund and Small Cap Index Fund,
respectively.
(3) The investment advisor for the Devon Series and
Delchester Series is Delaware Management Company, Inc.
("DMC"). Effective May 1, 1999 through October 31,
1999, DMC has voluntarily agreed to waive its
management fees and reimburse each Series for expenses
to the extent that total expenses will not exceed 0.80%
for the Devon Series and 0.80% for the Delchester
Series. Pursuant to a vote of the Fund's shareholders
on March 17, 1999, a new management fee structure based
on average daily net assets was approved as follows:
0.65% on the first $500 million, 0.60% on the next $500
million, 0.55% on the next $1,500 million, 0.50% on
assets in excess of $2,500 million; all per year.
(4) The investment advisor for the Emerging Markets Series
is Delaware International Advisors, Limited ("DIAL").
Effective May 1, 1999 through October 31, 1999, DIAL
has voluntarily agreed to waive its management fees and
reimburse the Series for expenses to the extent that
total expenses will not exceed 1.50% for the Emerging
Market Series. Pursuant to a vote of the Fund's
shareholders on March 17, 1999, a new management fee
structure based on average daily net assets was
approved as follows: 1.25% on the first $500 million,
1.20% on the next $500 million, 1.15% on the next
$1,500 million, 1.10% on assets in excess of $2,500
million; all per year.
(5) The investment advisor for the REIT Series is Delaware
Management Company, Inc. ("DMC"). Effective May 1, 1999
through October 31, 1999, DMC has voluntarily agreed to
waive its management fees and reimburse the Series for
expenses to the extent that total expenses will not
exceed 0.85% for the REIT Series. There is no change to
the current management fee structure.
(6) The investment advisor for the Trend Series and Small
Cap Value Series is Delaware Management Company, Inc.
("DMC"). Effective May 1, 1999 through October 31,
1999, DMC has voluntarily agreed to waive its
management fee and reimburse each Series for expenses
to the extent that total expenses will not exceed 0.85%
for the Trend Series and 0.85% for the Small Cap Value
Series. Pursuant to a vote of the Fund's shareholders
on March 17, 1999, a new management fee structure based
on average daily net assets was approved as follows:
0.75% on the first $500 million, 0.70% on the next $500
million, 0.65% on the next $1,500 million, 0.60% on
assets in excess of $2,500 million; all per year.
(7) A portion of the brokerage commissions that certain
funds pay was used to reduce funds expenses. In
addition, certain funds, or Fidelity Management &
Research on behalf of certain funds, have entered into
arrangements with their custodian whereby realized as a
result of uninvested cash balances were used to reduce
custodian expenses. Including these reductions, the
total operating expenses presented in the table would
have been 0.75% for the VIP II Contrafund Portfolio and
0.79% for the VIP III Growth Opportunities Portfolio.
(8) All expenses are stated both with and without
contractual waivers and fee reductions by Janus
Capital. Fee reductions for the Worldwide Growth and
Balanced Portfolios reduce the Management Fee to the
level of the corresponding Janus retail fund. Other
waivers, if applicable, are first applied against the
Management Fee and then against Other Expenses. Janus
Capital has agreed to continue the waivers and fee
reductions until at least the annual renewal of the
advisory agreement.
(9) Each series has an expense offset arrangement which
reduces the series' custodian fee based upon the amount
of cash maintained by the series with its custodian and
disbursing agent. Each series may enter into other such
arrangements and directed brokerage arrangements, which
would also have the effect of reducing the series'
expenses. Expenses do not take into account these
expense reductions, and are therefore higher than the
actual expenses of the series.
(10) Neuberger Berman Advisers Management Trust is divided
into portfolios ("Portfolios"), each of which invests
all of its net investable assets in a corresponding
series ("Series") of Advisers Managers Trust. The
figures reported under "Investment Management and
Administration Fees" include the aggregate of the
administration fees paid by the Portfolio and the
management fees paid by its corresponding Series.
Similarly, "Other Expenses" includes all other
expenses of the Portfolio and its corresponding
Series.
(11) NBMI has undertaken to reimburse certain operating
expenses, including the compensation of NBMI (except
with respect to Partners Portfolio) and excluding
taxes, interest, extraordinary expenses, brokerage
commissions and transaction costs, that exceed, in the
aggregate, 1% of the Mid-Cap Growth
23
<PAGE>
and Partners Portfolios' average daily net asset
value. These expense reimbursement agreements are
subject to termination upon 60 days written notice
with respect to the Mid-Cap Growth and Partners
Portfolios, and there can be no assurance that these
policies will be continued thereafter.
(12) Class 2 of the Fund has a distribution plan or "Rule
12b-1 plan" which is described in the Fund's
prospectus.
SURRENDER CHARGES
A generally declining Surrender Charge will apply if the
Policy is totally surrendered or lapses during the first
fifteen years following the Date of Issue or the first
fifteen years following an increase in Specified Amount. The
Surrender Charge varies by Age of the Insureds, the number
of years since the Date of Issue, and Specified Amount. The
charge is in part a deferred sales charge and in part a
recovery of certain first year administrative costs. The
maximum Surrender Charge is included in each Policy and is
in compliance with each state's nonforfeiture law. Examples
of the Surrender Charge can be seen in Appendix 1 by
subtracting "Surrender Value" from "Total Accumulation
Value" on any chosen set of investment return assumptions.
The Surrender Charge under a Policy is proportional to the
face amount of the Policy. Expressed as a percentage of face
amount, it is higher for older than for younger issue ages.
For example, assuming issue ages 80 (the oldest possible
issue ages for a Policy), the first year Surrender Charge is
$37.40 per $1000 of face amount. At issue ages 65 it is
$25.10 per $1000 of face amount, at issue ages 55 it is
$13.68 per $1000 of face amount, and at issue ages 25 it is
$2.87 per $1000 of face amount. These calculations assume
both insureds are the same age. The Surrender Charge cannot
exceed Policy value but may equal Policy Value, especially
during the first two Policy Years. All Surrender Charges
decline to zero over the 15 years following issuance of the
Policy. See, for example, the illustrations in Appendix 1
for issue ages 55 and 65.
If the Specified Amount is increased, a new Surrender Charge
will be applicable, in addition to any existing Surrender
Charge. The Surrender Charge applicable to the increase
would be equal to the Surrender Charge on a new Policy whose
Specified Amount was equal to the amount of the increase.
Supplemental Policy Specifications will be sent to the Owner
upon an increase in Specified Amount reflecting the maximum
additional Surrender Charge in the Table of Surrender
Charges. The minimum allowable increase in Specified Amount
is $1,000. 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 (not to exceed 2% of the amount
surrendered) is imposed, allocated pro-rata among the
Sub-Accounts from which the partial surrender proceeds are
taken.
Any surrenders, full or partial, may result in tax
implications. (SEE TAX MATTERS)
Based on its actuarial determination, 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.
24
<PAGE>
DEATH BENEFITS
The Death Benefit Proceeds is the amount payable to the
Beneficiary upon the Second Death (the death of the second
of the two Insureds to die), in accordance with the Death
Benefit Option elected. Loans (if any) and overdue
deductions are deducted from the Death Benefit Proceeds
prior to payment.
The applicant must select the Specified Amount of the Death
Benefit, which may not be less than $250,000 and the Death
Benefit Option. The two Death Benefit Options are described
below. The applicant must consider a number of factors in
selecting the Specified Amount, including the amount of
proceeds required on the Second Death and the Owner's
ability to make Premium Payments. In evaluating this
decision, the applicant should consider that the greater the
Net Amount at Risk, the greater the monthly deductions for
the Cost of Insurance.
DEATH BENEFIT OPTIONS
Two different Death Benefit Options are available under the
Policy. The Death Benefit Proceeds payable under the Policy
is the greater of (a) the Corridor Death Benefit or (b) the
amount determined under the Death Benefit Option in effect
on the date of the Second Death, less (in each case) any
indebtedness under the Policy. In the case of Death Benefit
Option 1, the Specified Amount is reduced by the amount of
any partial surrender. The Corridor Death Benefit is the
applicable percentage (the Corridor Percentage) of the
Accumulation Value (rather than by reference to the
Specified Amount) required to maintain the Policy as a "life
insurance contract" for Federal income tax purposes. The
Corridor Percentage is 250% through the time the younger
Insured reaches or would have reached Age 40 and decreases
in accordance with the table in Appendix 2 of this
Prospectus to 100% when the younger Insured reaches or would
have reached Age 95.
Death Benefit Option 1 provides Death Benefit Proceeds equal
to the Specified Amount (a minimum of $250,000). If Option 1
is selected, the Policy pays level Death Benefit Proceeds
until the Minimum Death Benefit exceeds the Specified
Amount. (See DEATH BENEFITS, Federal Income Tax Definition
of Life Insurance).
Death Benefit Option 2 provides Death Benefit Proceeds equal
to the sum of the Specified Amount plus the Accumulation
Value as of the date of the Second Death. If Option 2 is
selected, the Death Benefit Proceeds increase or decrease
over time, depending on the amount of premium paid and the
investment performance of the
underlying Sub-Accounts.
If for any reason the applicant fails to affirmatively elect
a particular Death Benefit Option, Death Benefit Option 1
shall apply until changed as provided below. The ability of
the Owner to support the Policy is an important factor in
selecting between the Death Benefit Options, because the
greater the Net Amount at Risk at any time, the more that
will be deducted from the value of the Policy to pay the
Cost of Insurance.
Owners who prefer insurance coverage that generally does not
vary in amount and generally has lower Cost of Insurance
Charges should elect Option 1. Owners who prefer to have
favorable investment experience reflected in increased
insurance coverage should select Option 2. Under Option 1,
any Surrender Value at the time of the Second Death will
revert to 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
25
<PAGE>
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.
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. A table of
Corridor Percentages is in Appendix 2.
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. The amount of
the Death Benefit Proceeds under Option 2 will be determined
as of the date of the Second Death. Payment of the Death
Benefit Proceeds may be delayed if the Policy is contested
or if Separate Account values cannot be determined.
26
<PAGE>
SETTLEMENT OPTIONS
There are several ways to which the Beneficiary may receive
the Death Benefit Proceeds or the Owner may choose to
receive payments upon surrender of the Policy.
The Owner may elect a Settlement Option before the Second
Death; after the Second Death, if the Owner has not
irrevocably selected a Settlement Option, the Beneficiary
may elect one of the Settlement Options. If no Settlement
Option is selected, the Death Benefit Proceeds will be paid
in a lump sum.
If the Policy is assigned as collateral security, LLANY will
pay any amount due the assignee in one lump sum. Any
remaining Death Benefit Proceeds will be paid as elected.
A request to elect, change, or revoke a Settlement Option
must be received in proper written form by the
Administrative Office before payment of the lump sum or
under any Settlement Option. The first payment under the
Settlement Option selected will become payable on the date
proceeds are settled under the option. Payments after the
first payment will be made on the first day of each month.
Once payments have begun, the Policy cannot be surrendered
and neither the payee nor the Settlement Option may be
changed.
There are at least four Settlement Options:
The first Settlement Option is an annuity for the
lifetime of the payee.
The second Settlement Option is an annuity for the
lifetime of the payee, with monthly payments guaranteed
for 60, 120, 180, or 240 months.
Under the third Settlement Option, 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. The Loan Account is the account in
which Policy indebtedness (outstanding loans and interest)
accrues once it is transferred out of the Fixed Account or
the Sub-Accounts. 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 the Fixed Account and each Sub-Account, and
treated as an additional Policy Loan, and added to the Loan
Account Value.
During the first ten Policy Years, 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 (including for this purpose the
Fixed Account), transfers from each for loans and loan
interest will be made in proportion to the assets in each
such 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.
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. (SEE LAPSE AND
REINSTATEMENT, Lapse of a Policy)
If a Policy lapses while a loan is outstanding, adverse tax
consequences may result.
PARTIAL SURRENDER
You may make a partial surrender at any time before the
Second Death by request to the Administrative Office in
proper written form or by telephone, if you have authorized
telephone transactions. 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
You may surrender the Policy at any time. On surrender of
the Policy, LLANY will pay you or your assignee, the
Surrender Value next computed after receipt of the request
in proper written form at the Administrative Office. All
coverage under the Policy will automatically terminate if
the Owner makes a full surrender.
SURRENDER VALUE
The Surrender Value of a Policy is the amount the Owner can
receive in a lump sum by surrendering the Policy. The
Surrender Value is the Net Accumulation Value less the
Surrender Charge (SEE CHARGES AND FEES, Surrender Charge).
All or part of the Surrender Value may be applied to one or
more of the Settlement Options. Surrender Values are
illustrated in Appendix 1.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the Surrender Value from any
Sub-Accounts will be made within 7 days. Payment or transfer
from the Fixed Account may be deferred up to six months at
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, you may assign your rights
in the Policy, including the right to change the beneficiary
designation. The assignment must be in proper written form,
signed by you and recorded at the Administrative Office. No
assignment will affect, or prejudice 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, you 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, you may name a new
Owner by recording a change in ownership in proper written
form at the Administrative Office. On recordation, the
change will be effective as of the date of execution of the
document of transfer or, if there is no such date, the date
of recordation. No such change of ownership will affect, or
prejudice 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.
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<PAGE>
LAPSE AND REINSTATEMENT
LAPSE OF A POLICY
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 is 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.
REINSTATEMENT OF A LAPSED POLICY
After the Policy has lapsed due to the failure to make a
necessary payment before the end of an applicable Grace
Period, it may be reinstated provided (a) it has not been
surrendered, (b) there is an application for reinstatement
in proper written form, (c) evidence of insurability of both
insureds is furnished to 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 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 all Monthly Deductions due.
If the Surrender Value is not sufficient to cover the full
Surrender Charge at the time of lapse, the remaining portion
of the Surrender Charge will also be reinstated at the time
of Policy reinstatement.
COMMUNICATIONS WITH LLANY
PROPER WRITTEN FORM
When ever this Prospectus refers to a communication "in
proper written form," it means in writing, in form and
substance reasonably satisfactory to LLANY, received at the
Administrative Office.
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<PAGE>
OTHER POLICY PROVISIONS
ISSUANCE
A Policy may only be issued upon receipt of satisfactory
evidence of insurability, and generally only when both
Insureds are at least Age 18 but are less than Age 80.
DATE OF COVERAGE
The date of coverage will be the Date of Issue, provided
both Insureds are alive and prior to any change in the
health and insurability of the Insureds as represented in
the application.
RIGHT TO EXCHANGE THE POLICY
The Owner may, within the first two Policy Years, exchange
the Policy for a permanent life insurance policy then being
offered by LLANY. The benefits for the new policy will not
vary with the investment experience of the Separate Account.
The exchange must be elected within 24 months from the Date
of Issue. No evidence of insurability will be required.
The Owner, the Insureds and the Beneficiary under the new
policy will be the same as those under the exchanged Policy
on the date of the exchange. The Accumulation Value under
the new Policy will be equal to the Accumulation Value under
the old Policy on the date the exchange request is received.
The new policy will have a Death Benefit on the exchange
date not more than the Death Benefit of the original Policy
immediately prior to the exchange date. If the Accumulation
Value is insufficient to support the Death Benefit, the
Owner will be required to make additional Premium Payments
in order to effect the exchange. The new Policy will have a
Date of Issue and issue Ages as of the date of exchange. The
initial Specified Amount and any increases in Specified
Amount will have the same rate class as those of the
original Policy. Any indebtedness may be transferred to the
new policy.
The exchange may be subject to an equitable adjustment in
rates and values to reflect variances, if any, in the rates
and values between the two Policies. After adjustment, if
any excess is owed the Owner, LLANY will pay the excess to
the Owner in cash. The exchange may be subject to federal
income tax withholding.
If at any time while both Insureds are alive, a change in
the Internal Revenue Code would result in a less favorable
tax treatment of the Insurance provided under the policy or
if the Insureds are legally divorced while the policy is in
force, the Owner may exchange the policy for separate single
life policies on each of the Insureds subject to the
following conditions: (a) evidence of insurability
satisfactory to 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.
MATURITY OF THE POLICY
If either Insured is still living on the Monthly Anniversary
following the younger Insured's 100th birth date, at that
point the Policy will terminate and the Owner will receive
the Surrender Value.
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 both Insureds were alive during those two years. For any
increase in
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<PAGE>
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 both Insureds were alive
during those two years.
MISSTATEMENT OF AGE OR GENDER
If the Age or gender of either of the Insureds has been
misstated, the affected benefits will be adjusted. The
amount of the Death Benefit Proceeds will be 1. multiplied
by 2. and then the result added to 3. where:
1. is the Net Amount at Risk at the time of the Second
Death;
2. is the ratio of the monthly Cost of Insurance applied
in the Policy month of death to the monthly Cost of
Insurance that should have been applied at the true
Age and gender in the Policy month of death; and
3. is the Accumulation Value at the time of the Second
Death.
SUICIDE
If the Second Death is by suicide, while sane or insane,
within two years from the Date of Issue, 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.
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 59 1/2 years of Age or disabled.
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<PAGE>
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 Separate
Account be adequately diversified. Regulations issued by the
Secretary of the Treasury set the standards for measuring
the adequacy of this diversification. A variable life
insurance policy that is not adequately diversified under
these regulations would not be treated as life insurance
under Section 7702 of the Code. To be adequately
diversified, each Sub-Account must meet certain tests. LLANY
believes the Separate Account investments meet the
applicable diversification standards.
Should the Secretary of the Treasury issue additional rules
or regulations limiting the number of funds, transfers
between funds, exchanges of funds or changes in investment
objectives of funds such that the Policy would no longer
qualify as life insurance under Section 7702 of the Code,
LLANY reserves the right to steps required to remain in
compliance.
LLANY will monitor compliance with these regulations and, to
the extent necessary, will change the objectives or assets
of the Sub-Account investments to remain in compliance.
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 Separate 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 Accumulation Units.
LLANY does not initially expect to incur any Federal income
tax liability that would be chargeable to the Separate
Account. Based upon these expectations, no charge is
currently being made against the Separate Account for
federal income taxes. If, however, 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 Separate Account.
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<PAGE>
LLANY may also incur state and local taxes in addition to
premium taxes. 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 sometimes necessary for tax and other reasons to
determine the "fair value" of the Policy. The fair value of
the Policy is measured differently for different purposes.
It is not necessarily the same as the Accumulation Value or
the Net Accumulation Value, although the amount of the Net
Accumulation Value will typically be important in valuing
the Policy for this purpose. For some but not all purposes,
the fair value of the Policy may be the Surrender Value of
the Policy. The fair value of the Policy may be impacted by
developments other than the performance of the underlying
investments. For example, without regard to any other
factor, it increases as the Insureds grow older. Moreover,
on the death of the first of the Insureds to die, it tends
to increase significantly. The Owner should consult with his
or her advisors for guidance as to the appropriate
methodology for determining the fair value of the Policy for
a particular purpose.
DIRECTORS AND OFFICERS OF 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 Penn-Pacific Life
DIRECTOR Insurance Co. Formerly: Chairman and CEO
1801 S. Meyers Road [7/88-1/95], Baker, Rakish, Shipley & Politzer, Inc.
Oakbrook Terrace, IL 60181
J. PATRICK BARRETT Chairman and Chief Executive Officer, CARPAT
DIRECTOR Investments
4605 Watergap
Manlius, NY 13104
DAVID N. BECKER Vice President and Chief Actuarial Officer, The
SECOND VICE PRESIDENT AND Lincoln National Life Insurance Company
APPOINTED ACTUARY
1300 South Clinton Street
Fort Wayne, IN 46802
THOMAS D. BELL, JR. President and Chief Executive Officer
DIRECTOR [4/95-present], Burson-Marstellar. Formerly: Vice
230 Park Avenue, South Chairman [3/94-5/95], Gulfstream Aerospace Corp.
New York, NY 10003
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- ---------------------------------- ----------------------------------------------------
<S> <C>
JON A. BOSCIA President, Chief Executive Officer and Director,
DIRECTOR Lincoln National Corp. [1/98-present], Formerly:
Centre Square, West Tower President and Chief Executive Officer [10/96-1/98],
1500 Market Street, Suite 3900 and Chief Operating Officer [5/94-10/96], The
Philadelphia, PA 19102 Lincoln National Life Insurance Co.
JOANNE B. COLLINS President and Treasurer, Lincoln Life & Annuity
PRESIDENT AND DIRECTOR Company of New York [9/99 -- Present]. Formerly:
Second Vice President, Lincoln National Corporation
[4/96-8/99] and Second Vice President, Lincoln
National Health & Casualty Company [11/94-3/96]
JOHN H. GOTTA Senior Vice President and General Manager (formerly
SECOND VICE PRESIDENT AND DIRECTOR Vice President) [1/98-present], The Lincoln National
350 Church Street Life Insurance Co. Formerly: Senior Vice President,
Hartford, CT 06103 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]
BARBARA S. KOWALCZYK Senior Vice President, Corporation Planning
DIRECTOR [5/94-present], Lincoln National Corp.
200 East Berry Street
Fort Wayne, IN 46802
MARGEURITE L. LACHMAN Managing Director, Schroder Real Estate Associates
DIRECTOR
437 Madison Avenue, 18th Floor
New York, NY 10022
LOUIS G. MARCOCCIA Senior Vice President, Business, Finance and
DIRECTOR Administrative Services, Syracuse University
Skytop Office Building
Skytop Road
Syracuse, NY 13244-5300
TROY D. PANNING Second Vice President and Chief Financial Officer
SECOND VICE PRESIDENT AND [11/96-present], Lincoln Life & Annuity Company of
CHIEF FINANCIAL OFFICER New York; Formerly: Accountant [9/90-11/96], Ernst &
Young LLP
JOHN M. PIETRUSKI Chairman of Board, Texas Biotechnology Corp.
DIRECTOR
One Penn Plaza
Suite 3408
New York, NY 10119
LAWRENCE T. ROWLAND President [97-present] Lincoln Reinsurance,
DIRECTOR Formerly: Senior Vice President (96), Vice President
One Reinsurance Place [94-95] Lincoln Reinsurance.
1700 Magnavox Way
Fort Wayne, IN 46804
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- ---------------------------------- ----------------------------------------------------
<S> <C>
GABRIEL L. SHAHEEN President, Chief Executive Officer and Director
DIRECTOR [1/98-present], The Lincoln National Life Insurance
1300 South Clinton Street Co. Formerly: Managing Director, Lincoln National
Fort Wayne, IN 46802 (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 & Annuity
ASSISTANT VICE PRESIDENT 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 Financial Officer
DIRECTOR [1/95-present] Formerly: Senior Vice President
200 East Berry Street [5/92-1/95], Lincoln National Corp.
Fort Wayne, IN 46802
C. SUZANNE WOMACK Secretary, Lincoln Life & Annuity Company of New
SECRETARY York [7/96-present]; Second Vice President and
200 East Berry Street Secretary, Lincoln National Corporation
Fort Wayne, IN 46802 [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 Policy 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"). The
principal business address of LFA is 350 Church Street,
Hartford, CT 06103.
The Policy will be sold by individuals, who in addition to
being appointed as life insurance agents for LLANY, are also
registered representatives of LFA or other broker-dealers.
These representatives ordinarily receive commission and
service fees up to 98% of the first year premium, plus up to
10% of all other premiums paid. In lieu of premium-based
commission, LLANY may pay equivalent amounts based on
Accumulation Value. The selling office receives additional
compensation on the first year premium and all additional
premiums. In some situations, the selling office may elect
to share its commission with the registered representative.
Selling representatives are also eligible for bonuses and
non-cash compensation if certain production levels are
reached. All compensation is paid from LLANY's resources,
which include sales charges made under this Policy.
CHANGES OF INVESTMENT POLICY
LLANY may materially change the investment policy of the
Separate Account. LLANY must inform the Owners and obtain
all necessary regulatory approvals. Any change must be
submitted to the various state insurance departments which
shall disapprove it if deemed detrimental to the interests
of the Owners or if it renders 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 offered by LLANY on the life
36
<PAGE>
of the Insureds. 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.
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 New York 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.
Owners will also be sent annual reports containing financial
statements for the Separate Account and annual and
semi-annual reports of the Funds as required by the 1940
Act.
In addition, Owners will receive statements of significant
transactions, such as changes in Specified Amount, changes
in Death Benefit Option, transfers among Sub-Accounts,
Premium Payments, loans, loan repayments, reinstatement and
termination.
ADVERTISING
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.
We are a member of the Insurance Marketplace Standards
Association ("IMSA") and may include the IMSA logo and
information about IMSA membership in our
37
<PAGE>
advertisements. Companies that belong to IMSA subscribe to a
set of ethical standards covering the various aspects of
sales and services for individually sold life insurance and
annuities.
PREPARING FOR YEAR 2000
Many existing computer programs use only two digits in the
date field to identify the year. If left uncorrected these
programs, which were designed and developed without
considering the impact of the upcoming change in the
century, could fail to operate or could produce erroneous
results when processing dates after December 31, 1999. For
example, for a bond with a stated maturity date of July 1,
2000, a computer program could read and interpret the
maturity date as July 1, 1900. This problem is known by many
names, such as the "Year 2000 Problem", "Y2K", and the
"Millenium Bug".
The Year 2000 Problem affects virtually all computer
programs worldwide. It can cause a computer system to
suddenly stop operating. It can also result in a computer
corrupting vital company records, and the problem could go
undetected for a long time. For our products, if left
unchecked it could cause such problems as purchase payment
collection and deposit errors; claim payment difficulties;
accounting errors; erroneous unit values; and difficulties
or delays in processing transfers, surrenders and
withdrawals. In a worst case scenario, this could result in
a material disruption to the operations of LLANY and of
Lincoln Life and Delaware Service Company Inc. (Delaware),
affiliates of LLANY and providers of the accounting and
valuation services for the Separate Account.
However, both provider companies (Lincoln Life and Delaware)
are wholly owned by Lincoln National Corporation (LNC),
which has had Year 2000 processes in place since 1996. LNC
projects aggregate expenditures in excess of $92 million for
its Y2K efforts through the year 2000. Both Lincoln Life and
Delaware have dedicated Year 2000 teams and steering
committees that are answerable to their counterparts in LNC.
LLANY also has a dedicated Year 2000 team and is
coordinating its activities with those of Lincoln Life,
Delaware and LNC.
In light of the potential problems discussed above, LLANY,
as part of its Year 2000 updating process, has assumed
responsibility for correcting all Information Technology
(IT) systems which service the Separate Account. Delaware is
responsible for updating all its IT systems to support these
vital services. The Year 2000 efforts for both IT and non-IT
systems, is organized into four phases:
- awareness-raising and inventory of all assets (including
third-party agent and vendor relationships)
- assessment and high-level planning and strategy
- remediation of affected systems and equipment; and
- testing to verify Year 2000 readiness.
The high-priority IT processes and systems -- those Lincoln
Life uses to maintain its customers' records and accounts --
have been assessed and repaired, and testing of those
processes and systems is more than 99% complete. Our efforts
will continue through the end of 1999 to ensure they remain
Y2K-ready. And, we continue to work closely with our key
business partners and suppliers so they can provide the
information and service we need from them. All three
companies are currently on schedule to have their
high-priority non-IT systems (elevators, heating and
ventilation, security systems, etc.) remediated and tested
by October 31, 1999.
The work on Year 2000 issues has not suffered significant
delays; however, some uncertainty remains. Specific factors
that give rise to this uncertainty include (but are
38
<PAGE>
certainly not limited to) a possible loss of technical
resources to perform the work; failure to identify all
susceptible systems; and non-compliance by third parties
whose systems and operations impact LLANY. In a report dated
February 26, 1999, entitled INVESTIGATING THE IMPACT OF THE
YEAR 2000 TECHNOLOGY PROBLEM, S. Rpt. 106-10, the U.S.
Senate Special Committee on the Year 2000 Technology Problem
expressed its concern that "Financial services firms...are
particularly vulnerable to...the risk that a material
customer or business partner will fail, as a result of the
computer problems, to meet its obligations".
One important source of uncertainty is the extent to which
the key trading partners of LLANY, Lincoln Life and of
Delaware will be successful in their own remediation and
testing efforts. LLANY, Lincoln Life and Delaware have been
monitoring the progress of their trading partners; however,
the efforts of these partners are beyond our control.
LLANY, Lincoln Life and Delaware expect to have completed
their necessary remediation and testing efforts prior to
December 31, 1999. However, given the nature and complexity
of the problem, there can be no guarantee by any of the
three companies that there will not be significant computer
problems after December 31, 1999.
LEGAL PROCEEDINGS
LLANY may be involved in various pending or threatened legal
proceedings arising from the conduct of its business. Most
of these proceedings are routine and in the ordinary course
of business.
EXPERTS
The statutory-basis financial statements of LLANY appearing
in this prospectus and registration statement have been
audited by Ernst & Young, LLP, independent auditors, as set
forth in their report which appears elsewhere in this
document and in the registration statement. The financial
statements audited by Ernst & Young, LLP, have been included
in this document in reliance on their report given on their
authority as experts in accounting and auditing.
Actuarial matters included in this prospectus have been
examined by Vaughn W. Robbins, FSA as stated in the Opinion
filed as an Exhibit to the Registration Statement.
Legal matters in connection with the Policies described
herein are being passed upon by Robert O. Sheppard, Esq., as
stated in the Opinion filed as an Exhibit to the
Registration Statement.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities
and Exchange Commission under the Securities Act of 1933, as
amended, with respect to the Policies offered hereby. This
Prospectus does not contain all the information set forth in
the Registration Statement and amendments thereto and
exhibits filed as a part thereof, to all of which reference
is hereby made for further information concerning the
Separate Account, 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.
39
<PAGE>
APPENDIX 1
ILLUSTRATIONS OF ACCUMULATION VALUES, SURRENDER VALUES, AND
DEATH BENEFIT PROCEEDS
The illustrations in this Prospectus have been prepared to
help show how values under the Policies change with
investment performance. The illustrations illustrate how
Accumulation Values, Surrender Values and Death Benefit
Proceeds under a Policy would vary over time if the
hypothetical gross investment rates of return were a uniform
annual effective rate of either 0%, 6% or 12%. If the
hypothetical gross investment rate of return averages 0%,
6%, or 12% over a period of years, but fluctuates above or
below those averages for individual years, the Accumulation
Values, Surrender Values and Death Benefit Proceeds may be
different. The illustrations also assume there are no Policy
Loans or Partial Surrenders, no additional Premium Payments
are made other than shown, no Accumulation Values are
allocated to the Fixed Account, and there are no changes in
the Specified Amount or Death Benefit Option, and that the
No-Lapse Provision is not selected.
The amounts shown for the Accumulation Value, Surrender
Value and Death Benefit Proceeds as of each Policy
Anniversary reflect the fact that charges are made and
expenses applied which lower investment return on the assets
held in the Sub-Accounts. Daily charges are made against the
assets of the Sub-Accounts for assuming mortality and
expense risks. The current mortality and expense risk
charges are equivalent to an annual effective rate of 0.80%
of the daily net asset value of the Separate Account. The
mortality and expense risk charge is guaranteed never to
exceed an annual effective rate of 0.90% of the daily net
asset value of the Separate Account. In addition, the
amounts shown also reflect the deduction of Fund investment
advisory fees and other expenses which will vary depending
on which funding vehicle is chosen but which are assumed for
purposes of these illustrations to be equivalent to an
annual effective rate of 0.82% of the daily net asset value
of the Separate Account. This rate reflects an arithmetic
average of total Fund portfolio annual expenses for the year
ending December 31, 1998.
Considering charges for mortality and expense risks and the
assumed Fund expenses, gross annual rates of 0%, 6% and 12%
correspond to net investment experience at annual rates of
-1.62%, 4.38% and 10.38% on a current basis, -1.72%, 4.28%
and 10.28% on a guaranteed basis.
The illustrations also reflect the fact that 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.
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.
40
<PAGE>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,782 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ ----------- ---------- ---------- ---------- -------- -------- ---------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 14,471 1,000,000 1,000,000 1,000,000 11,172 11,884 12,597 0 0 0 13,676
2 29,666 1,000,000 1,000,000 1,000,000 22,020 24,135 26,337 8,754 10,869 13,071 13,266
3 45,620 1,000,000 1,000,000 1,000,000 32,492 36,709 41,274 19,739 23,956 28,521 12,753
4 62,372 1,000,000 1,000,000 1,000,000 42,564 49,591 57,504 30,358 37,385 45,298 12,206
5 79,962 1,000,000 1,000,000 1,000,000 52,211 62,762 75,128 40,484 51,034 63,400 11,728
6 98,431 1,000,000 1,000,000 1,000,000 61,399 76,196 94,253 50,287 65,084 83,141 11,112
7 117,824 1,000,000 1,000,000 1,000,000 70,084 89,854 114,987 60,206 79,976 105,110 9,877
8 138,186 1,000,000 1,000,000 1,000,000 78,202 103,680 137,439 69,560 95,038 128,796 8,643
9 159,567 1,000,000 1,000,000 1,000,000 85,672 117,596 161,711 78,264 110,188 154,303 7,408
10 182,016 1,000,000 1,000,000 1,000,000 92,398 131,511 187,916 86,224 125,338 181,742 6,173
11 205,588 1,000,000 1,000,000 1,000,000 98,278 145,325 216,182 93,339 140,386 211,244 4,939
12 230,338 1,000,000 1,000,000 1,000,000 103,208 158,936 246,668 99,504 155,232 242,964 3,704
13 256,326 1,000,000 1,000,000 1,000,000 107,083 172,240 279,565 104,613 169,771 277,095 2,469
14 283,614 1,000,000 1,000,000 1,000,000 109,798 185,135 315,110 108,563 183,900 313,875 1,235
15 312,266 1,000,000 1,000,000 1,000,000 111,212 197,484 353,564 111,212 197,484 353,564 0
20 478,501 1,000,000 1,000,000 1,000,000 88,571 241,528 600,910 88,571 241,528 600,910 0
25 690,664 0 1,000,000 1,065,112 0 215,810 1,014,392 0 215,810 1,014,392 0
30 961,443 0 0 1,787,824 0 0 1,702,690 0 0 1,702,690 0
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Guaranteed cost of insurance
rates assumed. Guaranteed mortality and
expense risk charges, administrative fees and
premium load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of guaranteed
mortality and expense risk charges and (2)
assumed Fund total expenses of 0.82% per year.
See "Fund Expenses" at page 22 of this
Prospectus.
41
<PAGE>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,782 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ ----------- ---------- ---------- ---------- -------- -------- ---------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 14,471 1,000,000 1,000,000 1,000,000 11,246 11,961 12,676 0 0 0 13,676
2 29,666 1,000,000 1,000,000 1,000,000 22,377 24,509 26,728 9,110 11,243 13,462 13,266
3 45,620 1,000,000 1,000,000 1,000,000 33,302 37,576 42,199 20,549 24,822 29,446 12,753
4 62,372 1,000,000 1,000,000 1,000,000 44,022 51,180 59,232 31,816 38,973 47,026 12,206
5 79,962 1,000,000 1,000,000 1,000,000 54,536 65,340 77,985 42,809 53,613 66,258 11,728
6 98,431 1,000,000 1,000,000 1,000,000 64,844 80,079 98,632 53,732 68,967 87,519 11,112
7 117,824 1,000,000 1,000,000 1,000,000 74,942 95,415 121,362 65,065 85,537 111,485 9,877
8 138,186 1,000,000 1,000,000 1,000,000 84,831 111,371 146,390 76,189 102,728 137,747 8,643
9 159,567 1,000,000 1,000,000 1,000,000 94,508 127,969 173,947 87,100 120,561 166,539 7,408
10 182,016 1,000,000 1,000,000 1,000,000 103,969 145,232 204,293 97,796 139,059 198,119 6,173
11 205,588 1,000,000 1,000,000 1,000,000 113,213 163,184 237,712 108,274 158,246 232,773 4,939
12 230,338 1,000,000 1,000,000 1,000,000 122,161 181,779 274,455 118,457 178,075 270,751 3,704
13 256,326 1,000,000 1,000,000 1,000,000 130,779 201,012 314,844 128,310 198,543 312,375 2,469
14 283,614 1,000,000 1,000,000 1,000,000 138,998 220,846 359,213 137,763 219,611 357,978 1,235
15 312,266 1,000,000 1,000,000 1,000,000 146,785 241,280 407,974 146,785 241,280 407,974 0
20 478,501 1,000,000 1,000,000 1,000,000 175,594 350,409 735,049 175,594 350,409 735,049 0
25 690,664 1,000,000 1,000,000 1,343,332 180,770 472,005 1,279,364 180,770 472,005 1,279,364 0
30 961,443 1,000,000 1,000,000 2,269,016 121,765 590,664 2,160,968 121,765 590,664 2,160,968 0
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.82% per year. See "Fund
Expenses" at page 22 of this Prospectus.
42
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,713 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
AT
END OF 5% DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ ---------- ---------- ---------- ----------- --------- -------- ---------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 22,799 1,000,000 1,000,000 1,000,000 18,058 19,195 20,332 0 0 0 25,098
2 46,737 1,000,000 1,000,000 1,000,000 35,031 38,404 41,915 10,971 14,344 17,855 24,060
3 71,873 1,000,000 1,000,000 1,000,000 50,771 57,463 64,711 27,781 34,473 41,721 22,991
4 98,265 1,000,000 1,000,000 1,000,000 65,166 76,238 88,726 43,213 54,285 66,773 21,953
5 125,977 1,000,000 1,000,000 1,000,000 78,084 94,575 113,961 57,201 73,692 93,077 20,883
6 155,074 1,000,000 1,000,000 1,000,000 89,357 112,281 140,394 69,511 92,435 120,549 19,845
7 185,627 1,000,000 1,000,000 1,000,000 98,752 129,097 167,964 81,111 111,457 150,324 17,640
8 217,707 1,000,000 1,000,000 1,000,000 105,947 144,674 196,550 90,512 129,239 181,115 15,435
9 251,391 1,000,000 1,000,000 1,000,000 110,521 158,561 225,970 97,290 145,331 212,739 13,230
10 286,759 1,000,000 1,000,000 1,000,000 111,977 170,228 256,022 100,951 159,203 244,996 11,025
11 323,896 1,000,000 1,000,000 1,000,000 109,766 179,093 286,522 100,945 170,273 277,702 8,820
12 362,889 1,000,000 1,000,000 1,000,000 103,287 184,514 317,331 96,672 177,899 310,716 6,615
13 403,832 1,000,000 1,000,000 1,000,000 91,890 185,792 348,374 87,480 181,382 343,964 4,410
14 446,822 1,000,000 1,000,000 1,000,000 74,832 182,126 379,645 72,626 179,921 377,440 2,205
15 491,962 1,000,000 1,000,000 1,000,000 51,143 172,481 411,144 51,143 172,481 411,144 0
20 753,859 0 0 1,000,000 0 0 570,383 0 0 570,383 0
25 1,088,113 0 0 1,000,000 0 0 771,432 0 0 771,432 0
30 1,514,716 0 0 1,289,785 0 0 1,277,015 0 0 1,277,015 0
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Guaranteed cost of insurance
rates assumed. Guaranteed mortality and
expense risk charges, administrative fees and
premium load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of guaranteed
mortality and expense risk charges and (2)
assumed Fund total expenses of 0.82% per year.
See "Fund Expenses" at page 22 of this
Prospectus.
43
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,713 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
AT
END OF 5% DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ ---------- ---------- ---------- ----------- --------- -------- ---------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 22,799 1,000,000 1,000,000 1,000,000 18,364 19,511 20,660 0 0 0 25,098
2 46,737 1,000,000 1,000,000 1,000,000 36,370 39,806 43,381 12,311 15,747 19,321 24,060
3 71,873 1,000,000 1,000,000 1,000,000 53,947 60,840 68,295 30,956 37,849 45,305 22,991
4 98,265 1,000,000 1,000,000 1,000,000 71,077 82,621 95,608 49,124 60,669 73,656 21,953
5 125,977 1,000,000 1,000,000 1,000,000 87,754 105,172 125,559 66,870 84,288 104,675 20,883
6 155,074 1,000,000 1,000,000 1,000,000 103,967 128,510 158,409 84,122 108,665 138,563 19,845
7 185,627 1,000,000 1,000,000 1,000,000 119,708 152,660 194,453 102,068 135,020 176,813 17,640
8 217,707 1,000,000 1,000,000 1,000,000 134,966 177,644 234,021 119,530 162,209 218,586 15,435
9 251,391 1,000,000 1,000,000 1,000,000 149,728 203,489 277,480 136,498 190,259 264,249 13,230
10 286,759 1,000,000 1,000,000 1,000,000 163,982 230,222 325,242 152,957 219,197 314,216 11,025
11 323,896 1,000,000 1,000,000 1,000,000 177,714 257,874 377,771 168,894 249,054 368,951 8,820
12 362,889 1,000,000 1,000,000 1,000,000 190,447 286,055 435,236 183,832 279,440 428,621 6,615
13 403,832 1,000,000 1,000,000 1,000,000 202,060 314,707 498,176 197,650 310,297 493,766 4,410
14 446,822 1,000,000 1,000,000 1,000,000 212,192 343,573 567,096 209,987 341,368 564,891 2,205
15 491,962 1,000,000 1,000,000 1,000,000 220,393 372,347 642,645 220,393 372,347 642,645 0
20 753,859 1,000,000 1,000,000 1,217,751 215,894 506,279 1,159,763 215,894 506,279 1,159,763 0
25 1,088,113 1,000,000 1,000,000 2,107,579 115,282 636,208 2,007,219 115,282 636,208 2,007,219 0
30 1,514,716 0 1,000,000 3,411,907 0 772,921 3,378,126 0 772,921 3,378,126 0
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.82% per year. See "Fund
Expenses" at page 22 of this Prospectus.
44
<PAGE>
APPENDIX 2
CORRIDOR PERCENTAGES
<TABLE>
<CAPTION>
ATTAINED AGE OF THE YOUNGER
INSURED (NEAREST BIRTHDAY) CORRIDOR PERCENTAGE
- ---------------------------- -------------------
<S> <C>
0-40 250%
41 243
42 236
43 229
44 222
45 215
46 209
47 203
48 197
49 191
50 185
51 178
52 171
53 164
54 157
55 150
56 146
57 142
58 138
59 134
60 130
61 128
62 126
63 124
64 122
65 120
66 119
67 118
68 117
69 116
70 115
71 113
72 111
73 109
74 107
75-90 105
91 104
92 103
93 102
94 101
95-99 100
</TABLE>
45
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------- ------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTED ASSETS:
Bonds $1,435,882,019 $593,431,718
- ----------------------------------------------------------------------------
Common stocks 155,039 --
- ----------------------------------------------------------------------------
Mortgage loans on real estate 184,503,805 --
- ----------------------------------------------------------------------------
Policy loans 170,372,567 39,054,927
- ----------------------------------------------------------------------------
Cash and short-term investments 143,546,873 163,773,594
- ----------------------------------------------------------------------------
Other invested assets 60,000 --
- ----------------------------------------------------------------------------
Receivable for securities 3,477,120 34,804
- ---------------------------------------------------------------------------- -------------- ------------
Total cash and invested assets 1,937,997,423 796,295,043
- ----------------------------------------------------------------------------
Premiums and fees in course of collection 6,959,116 --
- ----------------------------------------------------------------------------
Accrued investment income 25,925,055 10,706,003
- ----------------------------------------------------------------------------
Other admitted assets 438,335 335,728
- ----------------------------------------------------------------------------
Separate account assets 236,861,781 164,721,012
- ---------------------------------------------------------------------------- -------------- ------------
Total admitted assets $2,208,181,710 $972,057,786
- ---------------------------------------------------------------------------- -------------- ------------
-------------- ------------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 851,746,596 $ 1,214,524
- ----------------------------------------------------------------------------
Other policyholder funds 962,725,311 587,465,491
- ----------------------------------------------------------------------------
Other liabilities 44,824,520 6,784,652
- ----------------------------------------------------------------------------
Federal income taxes recoverable (3,206,611) (342,378)
- ----------------------------------------------------------------------------
Asset valuation reserve 5,374,594 2,350,411
- ----------------------------------------------------------------------------
Interest maintenance reserve 5,051,304 2,594,552
- ----------------------------------------------------------------------------
Net transfers due from separate accounts (6,915,063) (5,582,705)
- ----------------------------------------------------------------------------
Separate account liabilities 236,861,781 164,721,012
- ---------------------------------------------------------------------------- -------------- ------------
Total liabilities 2,096,462,432 759,205,559
- ----------------------------------------------------------------------------
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 384,128,481 227,407,481
- ----------------------------------------------------------------------------
Unassigned surplus -- deficit (274,409,203) (16,555,254)
- ---------------------------------------------------------------------------- -------------- ------------
Total capital and surplus 111,719,278 212,852,227
- ---------------------------------------------------------------------------- -------------- ------------
Total liabilities and capital and surplus $2,208,181,710 $972,057,786
- ---------------------------------------------------------------------------- -------------- ------------
-------------- ------------
</TABLE>
See accompanying notes. S-1
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1996 TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1998 1997 1996
-------------- ------------ ---------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $1,291,566,984 $184,112,330 $ 631,355,849
- -----------------------------------------------------------
Net investment income 105,083,579 43,953,796 10,769,172
- -----------------------------------------------------------
Surrender and administrative charges 2,834,073 1,334,705 310,991
- -----------------------------------------------------------
Mortality and expense charges on deposit funds 1,980,728 1,548,722 --
- -----------------------------------------------------------
Amortization of the interest maintenance reserve 579,137 370,129 205,255
- -----------------------------------------------------------
Other revenues 536,698 183,048 18,347
- ----------------------------------------------------------- -------------- ------------ ---------------
Total revenues 1,402,581,199 231,502,730 642,659,614
- -----------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 1,320,787,190 72,475,389 640,912,693
- -----------------------------------------------------------
Commissions 274,529,390 2,459,308 18,931,151
- -----------------------------------------------------------
Underwriting, insurance and other expenses 28,064,172 8,012,925 1,801,204
- -----------------------------------------------------------
Net transfers to separate accounts 33,875,951 141,027,195 --
- ----------------------------------------------------------- -------------- ------------ ---------------
Total benefits and expenses 1,657,256,703 223,974,817 661,645,048
- ----------------------------------------------------------- -------------- ------------ ---------------
Gain (loss) from operations before dividends to
policyholders, federal income taxes (benefit) and net
realized loss on investments (254,675,504) 7,527,913 (18,985,434)
- -----------------------------------------------------------
Dividends to policyholders 3,375,629 -- --
- ----------------------------------------------------------- -------------- ------------ ---------------
Gain (loss) from operations before federal income taxes
(benefit) and net realized loss on investments (258,051,133) 7,527,913 (18,985,434)
- -----------------------------------------------------------
Federal income taxes (benefit) (4,561,826) 1,942,625 (391,144)
- ----------------------------------------------------------- -------------- ------------ ---------------
Gain (loss) from operations before net realized loss on
investments (253,489,307) 5,585,288 (18,594,290)
- -----------------------------------------------------------
Net realized loss on investments (721,449) (73,398) (855)
- ----------------------------------------------------------- -------------- ------------ ---------------
Net income (loss) $ (254,210,756) $ 5,511,890 $ (18,595,145)
- ----------------------------------------------------------- -------------- ------------ ---------------
-------------- ------------ ---------------
</TABLE>
See accompanying notes.
S-2
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS -- CAPITAL AND
STOCK SURPLUS DEFICIT 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
Add (deduct):
Surplus paid-in -- 156,721,000 -- 156,721,000
- -------------------------------------------------
Net loss -- -- (254,210,756) (254,210,756)
- -------------------------------------------------
Increase in unrealized capital losses -- -- (178,648) (178,648)
- -------------------------------------------------
Decrease in nonadmitted assets -- -- 241,698 241,698
- -------------------------------------------------
Increase in asset valuation reserve -- -- (3,024,183) (3,024,183)
- -------------------------------------------------
Increase in liability for reinsurance in
unauthorized companies -- -- (682,060) (682,060)
- ------------------------------------------------- ---------- ------------- ------------- -------------
Balances at December 31, 1998 $2,000,000 $ 384,128,481 $(274,409,203) $ 111,719,278
- ------------------------------------------------- ---------- ------------- ------------- -------------
---------- ------------- ------------- -------------
</TABLE>
See accompanying notes. S-3
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1996 TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1998 1997 1996
--------------- ------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds, and other considerations received $ 1,284,669,810 $ 184,112,330 $ 631,355,849
- ------------------------------------------------------------
Investment income received 96,331,551 43,781,378 1,837,439
- ------------------------------------------------------------
Benefits paid (83,399,329) (85,008,691) (23,169,165)
- ------------------------------------------------------------
Insurance expenses paid (351,272,500) (154,355,904) (20,919,059)
- ------------------------------------------------------------
Federal income taxes received (paid) 1,703,193 (1,893,859) --
- ------------------------------------------------------------
Dividends to policyholders 2,651,237 -- --
- ------------------------------------------------------------
Other income received and expenses paid, net 39,064,672 1,613,631 329,338
- ------------------------------------------------------------ --------------- ------------- -----------------
Net cash provided by (used in) operating activities 989,748,634 (11,751,115) 589,434,402
- ------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 249,409,117 272,961,178 366,021,652
- ------------------------------------------------------------
Purchase of investments (1,280,892,696) (265,700,363) (965,220,343)
- ------------------------------------------------------------
Net decrease (increase) in policy loans (131,317,640) 1,554,149 (40,609,076)
- ------------------------------------------------------------ --------------- ------------- -----------------
Net cash provided by (used in) investing activities (1,162,801,219) 8,814,964 (639,807,767)
- ------------------------------------------------------------
FINANCING AND MISCELLANEOUS ACTIVITIES
Capital and surplus paid-in 156,721,000 158,407,481 71,000,000
- ------------------------------------------------------------
Other (3,895,136) (11,032,743) (1,291,628)
- ------------------------------------------------------------ --------------- ------------- -----------------
Net cash provided by financing activities 152,825,864 147,374,738 69,708,372
- ------------------------------------------------------------ --------------- ------------- -----------------
Increase (decrease) in cash and short-term investments (20,226,721) 144,438,587 19,335,007
- ------------------------------------------------------------
Total cash and short-term investments at beginning of year 163,773,594 19,335,007 --
- ------------------------------------------------------------ --------------- ------------- -----------------
Total cash and short-term investments at end of year $ 143,546,873 $ 163,773,594 $ 19,335,007
- ------------------------------------------------------------ --------------- ------------- -----------------
--------------- ------------- -----------------
</TABLE>
See accompanying notes.
S-4
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
1. ORGANIZATION AND OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND OPERATIONS
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 principal business consists of underwriting annuities,
deposit-type contracts and life and health insurance sold through multiple
distribution channels. The Company is licensed to do business in New York
State.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect amounts reported in
the statutory basis 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. In 1998, the NAIC adopted codified statutory
accounting principles ("Codification"). Codification will likely change, to
some extent, prescribed statutory accounting practices and may result in
changes to the accounting practices that the Company uses to prepare its
statutory basis financial statements. Codification will require adoption by
the various states before it becomes the prescribed statutory basis of
accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the
Department must adopt Codification as the prescribed basis of accounting on
which domestic insurers must report their statutory basis results. At this
time, it is unclear whether the Department will adopt Codification.
Management has not yet determined the impact of Codification 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 cost or amortized cost or fair 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 related amortization of deferred acquisition costs,
additional policyholder commitment and deferred income taxes.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of bonds and mortgage loans
attributable to changes in the general level of interest rates and amortizes
those deferrals over the remaining period to maturity of the individual
security sold. The net deferral is reported as the interest maintenance
reserve ("IMR") in the accompanying balance sheets. Realized capital gains
and losses are reported in income net of federal income tax and transfers to
IMR. The asset valuation reserve ("AVR") is determined by an NAIC prescribed
formula and is reported as a liability rather than a reduction to unassigned
surplus. Under GAAP, realized capital gains and losses are reported in the
income statement on a pretax
S-5
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
1. ORGANIZATION AND OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred policy acquisition costs, to the extent recoverable from future
gross profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally start-up and
organizational costs and furniture and equipment, are excluded from the
accompanying balance sheets and are charged directly to unassigned surplus.
PREMIUMS AND DEPOSITS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
BENEFITS AND SETTLEMENT EXPENSES
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 operations; 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
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs. Business
assumed under 100% indemnity and assumption reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of
the transaction and the excess of the purchase price over the sum of the
amounts assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory basis of accounting, the ceding commission is
expensed when paid.
Premiums, benefits and settlement expenses and policy benefits and contract
liabilities are reported in the accompanying financial statements net of
reinsurance amounts. Under GAAP, such amounts are reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Department to assume such business. Changes to those
amounts are credited or charged directly to unassigned surplus. Under GAAP,
an allowance for amounts deemed uncollectible is established through a
charge to income.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
S-6
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
1. ORGANIZATION AND OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less
from the date of acquisition. Under GAAP, the corresponding captions of cash
and cash equivalents include cash balances and investments with initial
maturities of three months or less from the date of acquisition.
A reconciliation of the Company's capital and surplus and net income (loss)
determined on a statutory accounting basis with amounts determined in
accordance with GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
----------------------------------------------------------------------
PERIOD FROM
JUNE 6, 1996 TO
DECEMBER 31 YEAR ENDED DECEMBER 31 DECEMBER 31,
1998 1997 1998 1997 1996
----------------------------------------------------------------------
(IN THOUSANDS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts as reported on a statutory basis $111,719 $212,852 $(254,211) $ 5,512 $(18,595)
- ---------------------------------------------
GAAP adjustments:
Net unrealized gain on investments 27,851 14,327 -- -- --
- ---------------------------------------------
Interest maintenance reserve 5,051 2,595 (579) (370) 3,204
- ---------------------------------------------
Net realized gain (loss) on investments (990) -- 3,050 (240) --
- ---------------------------------------------
Asset valuation reserve 5,375 2,350 -- -- --
- ---------------------------------------------
Policy and contract reserves (85,875) (19,204) 271,293 (3,667) (15,537)
- ---------------------------------------------
Present value of future profits, deferred
policy acquisition costs and goodwill 336,568 37,605 6,091 524 37,081
- ---------------------------------------------
Policyholders' share of earnings and
surplus on participating business (9,904) -- (100) -- --
- ---------------------------------------------
Deferred income taxes 35,280 (5,558) (12,696) 671 (1,215)
- ---------------------------------------------
Nonadmitted assets 880 1,122 -- -- --
- ---------------------------------------------
Other, net (1,705) -- (82) -- --
- --------------------------------------------- -------- -------- --------- ------ --------
Net increase (decrease) 312,531 33,237 266,977 (3,082) 23,533
- --------------------------------------------- -------- -------- --------- ------ --------
Amounts on a GAAP basis $424,250 $246,089 $ 12,766 $ 2,430 $ 4,938
- --------------------------------------------- -------- -------- --------- ------ --------
-------- -------- --------- ------ --------
</TABLE>
S-7
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
1. ORGANIZATION AND OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
Policy loans are reported at unpaid balances.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds and mortgage loans are credited or charged directly in
unassigned surplus.
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 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.
PREMIUMS
Premiums for group tax-qualified annuity business are recognized as revenue
when deposited. 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.
BENEFIT RESERVES
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.
The tabular interest, tabular less actual reserves 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.
S-8
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
1. ORGANIZATION AND OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums, benefits and settlement expenses are accounted for on
bases consistent with those used in accounting for the original policies
issued and the terms of the reinsurance contracts.
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 unit investments in mutual funds. The detailed operations of
the separate accounts are not included in the accompanying financial
statements. 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.
RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
unassigned surplus-deficit or net income (loss) previously reported.
2. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1996 TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1998 1997 1996
----------------------------------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 78,205,686 $42,237,959 $ 9,427,203
- ----------------------------------------
Mortgage loans on real estate 14,304,385 -- --
- ----------------------------------------
Policy loans 7,981,377 1,990,613 439,305
- ----------------------------------------
Cash and short-term investments 5,893,453 315,328 1,024,525
- ---------------------------------------- -------------- ------------- ------------
Total investment income 106,384,901 44,543,900 10,891,033
- ----------------------------------------
Investment expenses 1,301,322 590,104 121,861
- ---------------------------------------- -------------- ------------- ------------
Net investment income $105,083,579 $43,953,796 $10,769,172
- ---------------------------------------- -------------- ------------- ------------
-------------- ------------- ------------
</TABLE>
S-9
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Corporate $1,148,083,966 $27,649,036 $(7,489,560) $1,168,243,442
---------------------------------
U.S. government 39,617,653 564,146 (119,394) 40,062,405
---------------------------------
Foreign government 19,532,744 994,331 (720,250) 19,806,825
---------------------------------
Mortgage-backed 225,005,162 6,239,684 (421,281) 230,823,565
---------------------------------
State and municipal 3,642,494 164,552 -- 3,807,046
--------------------------------- -------------- ----------- ----------- --------------
$1,435,882,019 $35,611,749 $(8,750,485) $1,462,743,283
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
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>
The carrying amount of investments in bonds in the balance
sheet at December 31, 1998 reflects adjustments of $178,648
to decrease amortized cost as a result of the Securities
Valuation Office ("SVO") of the NAIC designating certain
investments as low or lower quality.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1998, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
------------------------------
<S> <C> <C>
Maturity:
In 1999 $ 29,182,134 $ 29,230,713
----------------------------------------------------------------
In 2000-2003 358,100,253 362,502,042
----------------------------------------------------------------
In 2004-2008 525,815,980 536,016,775
----------------------------------------------------------------
After 2008 297,778,590 304,170,188
----------------------------------------------------------------
Mortgage-backed securities 225,005,062 230,823,565
---------------------------------------------------------------- -------------- --------------
Total $1,435,882,019 $1,462,743,283
- ------------------------------------------------------------------- -------------- --------------
-------------- --------------
</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.
S-10
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
2. INVESTMENTS (CONTINUED)
Proceeds from sales of investments in bonds were $203,748,028, $274,742,319
and $365,646,000 in 1998, 1997 and 1996, respectively. Gross gains of
$3,612,434, $1,533,793 and $4,871,624, and gross losses of $1,529,149,
$1,922,165 and $2,433 during 1998, 1997 and 1996, respectively, were
realized on those sales. Net gains (losses) of $17,705, $(26) and $376,041
were realized on sales of short-term investments in 1998, 1997 and 1996,
respectively.
At December 31, 1998 and 1997, investments in bonds with an admitted asset
value of $500,129 and $500,177, respectively, were on deposit with the
Department to satisfy regulatory requirements.
During 1998, the minimum and maximum lending rates for mortgage loans were
6.62% 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 December 31, 1998, the
Company did not hold any mortgages with interest overdue beyond one year.
All properties covered by mortgage loans have fire insurance at least equal
to the excess of the loan over the maximum loan that would be allowed on the
land without the building.
Realized capital gains and losses are reported net of federal income taxes
of $1,223,897, $55,541 and $1,836,682 in 1998, 1997 and 1996, respectively,
and amounts transferred to the interest maintenance reserve of $3,035,887,
$239,459 and $3,409,395 in 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic location.
3. FEDERAL INCOME TAXES
The Company's federal income tax return is not consolidated with any other
entities. The effective federal income tax rate for financial reporting
purposes differs from the prevailing statutory tax rate principally due to
tax-exempt investment income, other pass through tax attributes from
investments, differences in ceding commissions, policy acquisition costs,
and policy and contract liabilities in the tax return versus the financial
statements.
In 1998, a federal income tax net operating loss of $76,192,977 was
incurred. The Company plans to utilize $9,161,743 of the net operating loss
to recover taxes paid in prior years. The remaining portion of the net
operating loss of $67,031,234 will be available for use to offset taxable
income in future years. The net operating loss carryforward of $67,031,234
will expire in 2018.
The Company paid $3,675,000 in 1997 for federal income taxes. No federal
income tax payments were made in 1998 or 1996.
4. REINSURANCE
The Company cedes insurance to other companies, including affiliated
companies. The portion of risks exceeding the Company's retention limit is
reinsured with Lincoln Life. The Company limits its maximum risk that it
retains on an individual to $500,000. The Company remains obligated for
amounts ceded in the event that the reinsurers do not meet their
obligations. The Company did not cede or assume any business prior to
January 1, 1998. On January 2, 1998, the Company and Lincoln Life 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 and recognized
a ceding commission expense of $149,714,239 in 1998, which is included in
the statements of operations line item "Commissions." At the time of
closing, this block of business had statutory liabilities of $779,551,235
which became the Company's obligation. The Company also received assets,
measured on a historical statutory basis, equal to the liabilities. Pursuant
to the terms of the reinsurance agreement, the Company, Lincoln Life and
CIGNA are in the final stages of agreeing to the statutory basis values of
these assets and liabilities. Any changes to these values which may occur in
future periods will not be material to the Company's financial position.
Subsequent to the CIGNA transaction, the Company and Lincoln Life announced
that they had reached an agreement to sell the administration rights to a
variable annuity portfolio that had been acquired as part of the block of
business assumed
S-11
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
4. REINSURANCE (CONTINUED)
on January 2, 1998. This sale closed on October 12, 1998 with an effective
date of September 1, 1998.
On October 1, 1998, the Company entered into an indemnity reinsurance
transaction whereby the Company and Lincoln Life reinsured 100% of a block
of individual life insurance business from Aetna, Inc. The Company paid
$143,721,000 to Aetna on October 1, 1998 under the terms of the reinsurance
agreement and recognized a ceding commission expense of $135,374,141 in
1998, which is included in the statements of operations line item
"Commissions." At the time of closing, this block of business had statutory
liabilities of $463,007,132 which became the Company's obligation. The
Company also received assets, measured on a historical statutory basis,
equal to the liabilities. Subsequent to the Aetna transaction, the Company
and Lincoln Life announced that they had reached an agreement to retrocede
the sponsored life business assumed for $87,600,000, of which $11,900,000
was received by the Company. The retrocession agreement was executed on
October 14, 1998 with an effective date of October 1, 1998.
In October 1996, the Company and Lincoln Life purchased a block of group
tax-qualified annuity business from UNUM Corporation's affiliates. The
transaction was completed in the form of an assumptive reinsurance
transaction, which resulted in the Company paying a ceding commission of
$15,675,206. Policy liabilities and related accruals of the Company
increased by $714,282,427 as a result of this transaction.
The balance sheet captions, "Future policy benefits and claims" and "Other
policyholder funds," have been reduced for insurance ceded by $54,411,763
and $2,722,404, respectively, at December 31, 1998.
The caption "Premiums and deposits" in the statements of operations includes
$1,276,884,778 of insurance assumed and $52,443,264 of insurance ceded in
1998.
The caption "Benefits and settlement expenses" in the statements of
operations is net of reinsurance recoveries of $47,526,681 for 1998.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $682,060 at December 31, 1998. Amounts payable
or recoverable for reinsurance on policy and contract liabilities are not
subject to periodic or maximum limits. At December 31, 1998, the Company's
reinsurance recoverables are not material and no individual reinsurer owed
the Company an amount that was equal to or greater than 3% of the Company's
surplus.
5. LIFE AND ANNUITY RESERVES AND DEPOSIT FUND LIABILITIES
At December 31, 1998, the Company had $1,092,753,902 of insurance in force
for which the gross premiums are less than the net premiums according to the
standard of valuation set by the State of New York. Reserves to cover the
above insurance totaled $6,937,379 at December 31, 1998.
At December 31, 1998, the Company's annuity reserves and deposit fund
liabilities, including separate accounts, that are subject to discretionary
withdrawal with adjustment, subject to discretionary withdrawal without
adjustment and not subject to discretionary withdrawal provisions are
summarized as follows:
S-12
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
5. LIFE AND ANNUITY RESERVES AND DEPOSIT FUND LIABILITIES (CONTINUED)
<TABLE>
<CAPTION>
AMOUNT PERCENT
-------------- ---------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value of investment $ 343,050,030 28.5%
- -----------------------------------------------------------------------------
At book value, less surrender charge 153,828,072 12.8
- -----------------------------------------------------------------------------
At market value 229,940,273 19.1
- ----------------------------------------------------------------------------- -------------- ---------
726,818,375 60.4
Subject to discretionary withdrawal without adjustment:
At book value with minimal or no charge or adjustment 461,855,066 38.4
- -----------------------------------------------------------------------------
Not subject to discretionary withdrawal 13,848,286 1.2
- ----------------------------------------------------------------------------- -------------- ---------
Total annuity reserves and deposit fund liabilities, before reinsurance 1,202,521,727 100.0%
---------
---------
Less reinsurance 2,991,673
- ----------------------------------------------------------------------------- --------------
Net annuity reserves and deposit fund liabilities, including separate
accounts $1,199,530,054
- ----------------------------------------------------------------------------- --------------
--------------
</TABLE>
A reconciliation of the total net annuity reserves and deposit fund
liabilities to the amounts reported in the Company's 1998 Annual Statement
and the Company's Separate Accounts Annual Statement is as follows:
<TABLE>
<S> <C>
DECEMBER 31,
1998
--------------
Per 1998 Annual Statement:
Exhibit 8, Section B -- Total (net) $ 9,955,624
- --------------------------------------------------------------------------------------
Exhibit 8, Section C -- Total (net) 1,241,407
- --------------------------------------------------------------------------------------
Exhibit 10, Column 1, Line 19 958,392,750
- -------------------------------------------------------------------------------------- --------------
969,589,781
- --------------------------------------------------------------------------------------
Per Separate Accounts Annual Statement:
- --------------------------------------------------------------------------------------
Exhibit 6, Column 2, Line 0299999 --
- --------------------------------------------------------------------------------------
Page 3, Line 3 229,940,273
- -------------------------------------------------------------------------------------- --------------
229,940,273
--------------
Total net annuity reserves and deposit fund liabilities $1,199,530,054
- -------------------------------------------------------------------------------------- --------------
--------------
</TABLE>
Details underlying the balance sheet caption "Other policyholder funds" are
as follows:
<TABLE>
<S> <C> <C>
DECEMBER 31
1998 1997
------------- ------------
Premium deposit funds $ 931,230,214 $587,465,491
- -------------------------------------------------------------------------
Undistributed earnings on participating business 30,772,519 --
- -------------------------------------------------------------------------
Other 722,578 --
- ------------------------------------------------------------------------- ------------- ------------
$ 962,725,311 $587,465,491
------------- ------------
------------- ------------
</TABLE>
S-13
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
6. 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 $69,000,000, $158,407,481 and $156,721,000
was received in September 1996, December 1997 and October 1998,
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 related to it. At December 31,
1998, the Company exceeds the RBC requirements.
The payment of dividends by the Company requires 30 day advance notice to
the Department.
7. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory basis statements of operations or
balance sheets for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Options issued subsequent to 1991
are exercisable in equal increments on the option issuance anniversary in
three to four years following issuance.
As of December 31, 1998, 16,600 shares of LNC common stock were subject to
options granted to Company employees under the stock option incentive plans
of which 2,399 were exercisable on that date. The exercise prices of the
outstanding options range from $58.94 to $89.85. During 1998, 137 options
were exercised. There were no options exercised during 1997.
8. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and equipment under lease agreements that
expire at various intervals over the next five years and are subject to
renewal options at market rates prevailing at the time of renewal. Rental
expense for all operating leases was $281,947, $155,664 and $32,252 for
1998, 1997 and 1996, respectively. Future minimum rental commitments are as
follows:
<TABLE>
<S> <C>
1999 $ 225,596
- ------------------------------------
2000 162,908
- ------------------------------------
2001 161,564
- ------------------------------------
2002 161,564
- ------------------------------------
2003 148,100
- ------------------------------------ ---------
$ 859,732
---------
---------
</TABLE>
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1998, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
CONTINGENCY MATTERS
The Company is occasionally involved in various pending or threatened legal
proceedings arising from the conduct of business. These proceedings are
routine in the ordinary course of business. In
S-14
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
8. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
some instances, these proceedings include claims for compensatory and
punitive damages and similar types of relief in addition to amounts for
alleged contractual liability or requests for equitable relief. After
consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these
proceedings will not have a material adverse affect on the financial
position of the Company.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of the Company's
financial instruments.
BONDS AND COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of common stocks are based on
quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair values of mortgage loans on real estate are established
using a discounted cash flow method based on credit rating, maturity and
future income. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using U.S. 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 their
fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future policy benefits and claims" and "Other
policyholder funds," include investment type insurance contracts (i.e.,
deposit contracts). The fair values for the deposit contracts are based on
their approximate surrender values.
The remainder of the balance sheet captions "Future policy benefits and
claims" and "Other policyholder funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other companies in the insurance industry are monitoring the related actions
of the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
S-15
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the accompanying statutory
basis balance sheets at fair value. The related liabilities are also
reported at fair value in amounts equal to the separate account assets.
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
-------------------------------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
-------------------------------------------------
DECEMBER 31
1998 1997
-------------------------------------------------
(IN THOUSANDS)
-------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 1,435,882 $1,462,743 $ 593,432 $ 607,259
- ----------------------------------------
Unaffiliated common stock 155 155 -- --
- ----------------------------------------
Mortgage loans on real estate 184,504 185,694 -- --
- ----------------------------------------
Policy loans 170,373 183,408 39,055 39,055
- ----------------------------------------
Cash and short-term investments 143,547 143,547 163,774 163,774
- ----------------------------------------
Other invested assets 60 60 -- --
- ----------------------------------------
Investment-type insurance contracts (962,725) (938,191) (587,465) (587,465)
- ----------------------------------------
Separate account assets 236,862 236,862 164,721 164,721
- ----------------------------------------
Separate account liabilities (236,862) (236,862) (164,721) (164,721)
- ----------------------------------------
</TABLE>
10. 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 $18,504,450, $3,454,014 and $931,000 in 1998, 1997 and 1996,
respectively. The Company has also entered into an agreement with Lincoln
Life to provide certain processing services. Fees received from Lincoln Life
for such services were $273,952, $578,003 and $229,000 in 1998, 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 $1,501,592,
$558,011 and $122,000 in 1998, 1997 and 1996, respectively.
The Company cedes business to two affiliated companies, Lincoln Life and
Lincoln National Reassurance Company. The caption "Premiums and deposits" in
the accompanying statements of operations has been reduced by the $2,095,019
of premiums paid on these contracts in 1998. The caption "Future policy
benefits and claims" has been reduced by $2,583,702 related to reserve
credits taken on these contracts as of December 31, 1998.
11. SEPARATE ACCOUNTS
Separate account premiums, deposits and other considerations amounted to
$73,993,993 and $167,895,749 in 1998 and 1997, respectively. Reserves for
separate accounts with assets at fair value were $229,940,273 and
$159,132,918 at December 31, 1998 and 1997, respectively. All reserves are
subject to discretionary withdrawal at market value. All of the Company's
separate accounts are nonguaranteed. The investment risks associated with
market value changes are borne entirely by the policyholder.
S-16
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
11. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
-------------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of various Separate Accounts:
Transfers to separate accounts $ 73,993,993 $167,895,749
- ------------------------------------------------------------------------------------------ -------------- --------------
Transfers from separate accounts (40,118,042) (26,868,553)
- ------------------------------------------------------------------------------------------ -------------- --------------
Net transfer to separate accounts as reported in the Company's NAIC Annual Statement --
Summary of Operations $ 33,875,951 $141,027,195
- ------------------------------------------------------------------------------------------ -------------- --------------
-------------- --------------
</TABLE>
12. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The Company has been
redirecting a large portion of internal Information Technology efforts and
contracting with affiliate service providers, who have contracted with
outside consultants, to update systems to address Year 2000 issues. Experts
have been engaged to assist in developing work plans and cost estimates and
to complete remediation activities.
For the year ended December 31, 1998, the Company identified expenditures of
$235,809 to address this issue which represent all expenditures to date. The
Company's financial plans for 1999 and 2000 include expected expenditures of
an additional $410,000. Actual Year 2000 expenditures through December 31,
1998 and future Year 2000 expenditures are expected to be funded from
operating cash flows. The anticipated cost of addressing Year 2000 issues is
based on management's current best estimates which were derived utilizing
numerous assumptions of future events, including the continued availability
of certain resources, third party modification plans and other factors. Such
costs will be closely monitored by management. Nevertheless, there can be no
guarantee that actual costs will not be higher than these estimated costs.
Specific factors that might cause such differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer problems and other
uncertainties. The total expenditures identified represent only the
Company's portion of Lincoln Life's and LNC's larger expenditures to address
the Year 2000 issue.
The current scope of the Company's and its affiliates overall Year 2000
program includes the following four major project areas: 1) addressing the
readiness of business applications, operating systems and hardware on
mainframe, personal computer and Local Area Network platforms (IT); 2)
addressing the readiness of non-IT embedded software and equipment (non-IT);
3) addressing the readiness of key business partners; and 4) establishing
Year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases.
Phase one involves raising awareness and creating an inventory of all IT and
non-IT assets. The second phase consists of assessing all items inventoried
to initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
The Company and its affiliates have completed those four phases for over
two-thirds of its high priority IT systems respectively, including those
provided by software vendors. While the Company's year 2000 program for
nearly all high priority IT systems is expected to be completed in the first
quarter 1999, phase four, for a small but important subset of these systems,
will continue through the end of the second quarter 1999. As of
S-17
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS (CONTINUED)
12. CENTURY COMPLIANCE (UNAUDITED) (CONTINUED)
December 31, 1998, the status of projects addressing readiness of IT assets
is: 100% of IT assets have been inventoried (Phase 1) and assessed (Phase
2); 94% of IT projects have been through the remediation phase (Phase 3)
with the last project scheduled for completion by the end of March 1999; and
69% of IT projects have completed the testing phase (Phase 4) with the last
project scheduled to finish testing by the end of June 1999. A portion of
the effort that extends into 1999 is dependent on outside third parties and
is behind the original schedule. The Company is working with these parties
to modify the completion schedule.
As of December 31, 1998, the status of projects that address readiness of
high priority non-IT assets is: 100% of non-IT assets have been inventoried
(Phase 1) and assessed (Phase 2); 79% of non-IT projects addressing
remediation (Phase 3) have been completed and 21% of non-IT projects have
completed the testing phase (Phase 4). The Company expects to have all
phases related to high priority non-IT completed by the end of October 1999.
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being
developed. The most significant categories of key business partners are
financial institutions, software vendors and utility providers (gas,
electric and telecommunications). Surveys have been mailed to these key
business partners. Based on responses received, current levels of readiness
are being assessed, follow-up contacts are underway, alternative strategies
are being developed and testing is being scheduled where feasible. This
effort is expected to continue well into 1999. As noted above, software
vendor assessments are considered part of the IT projects and, therefore,
would follow the schedule shown above for such projects.
While the Company is working to meet the schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact the Company and other similar uncertainties.
A worst case scenario might include the Company's inability to achieve Year
2000 readiness with respect to one or more of the Company's significant
policyholder systems resulting in a material disruption to the Company's
operations. Specifically, the Company could experience an interruption in
its ability to collect and process premiums or deposits, process claim
payments, accurately maintain policyholder information, accurately maintain
accounting records and/or perform adequate customer service. Should the
worst case scenario occur, it could, depending on its duration, have a
material impact on the Company's results of operations and financial
position. Simple failures can be repaired and returned to production within
a matter of hours with no material impact. Unanticipated failures with a
longer service disruption period would have a more serious impact. For this
reason, the Company is placing significant emphasis on risk management and
Year 2000 contingency planning. The Company is in the process of modifying
its contingency plans to address potential Year 2000 issues. Where these
efforts identify high risks due either to unacceptable work around
procedures or significant readiness risks, appropriate risk management
techniques are being developed. These techniques, such as resource shifting
or use of alternate providers, will be employed to provide stronger
assurances of readiness. The Company has gone through exercises to identify
worst case scenario failures. At this time, the Company believes its plans
are sufficient to mitigate identified worst case scenarios.
S-18
<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 (a wholly owned
subsidiary of The Lincoln National Life Insurance Company) as of
December 31, 1998 and 1997, and the related statutory-basis
statements of operations, changes in capital and surplus, and
cash flows for the years then ended and 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, 1998
and 1997, or the results of its operations or its cash flows for
the years then ended and 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, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended and 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.
/s/ Ernst & Young LLP
March 18, 1999
S-19
