As filed with the Securities and Exchange Commission on April 30, 1999
1933 Act Registration No. 333-72875
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
Registration Statement
on
FORM S-6
FOR REGISTRATION
Under the
SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
-------------
Lincoln Life Flexible Premium Variable Life Account S
(Exact Name of Registrant)
The Lincoln National Life Insurance Company
(Name of Depositor)
1300 South Clinton Street, Fort Wayne, Indiana 46802
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code
(219) 455-2000
-------------
<TABLE>
<S> <C>
Jack D. Hunter, Esquire Copy to:
The Lincoln National Life Insurance Company George Gingold, Esquire
200 East Berry Street 197 King Philip Drive
P.O. Box 1110 West Hartford, CT 06117-1409
Fort Wayne, Indiana 46802
(Name and Address of Agent for Service)
</TABLE>
-------------
Approximate date of proposed public offering:
As soon as practicable after the effective date of the registration statement.
Indefinite Number of Units of interest in Variable Life Insurance Contracts
(Title of Securities Being Registered)
-------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
================================================================================
<PAGE>
Cross Reference Sheet
(Reconciliation and Tie)
Required by Instruction 4 to Form S-6
<TABLE>
<CAPTION>
Item of Form N-8B-2 Location in Prospectus
- --------------------- -----------------------
<S> <C>
1 Cover Page; Highlights
2 Cover Page
3 *
4 Distribution of Policies
5 Lincoln Life, the Separate Account and the General Account
6(a) Lincoln Life, the Separate Account and the General Account
6(b) *
9 Legal Matters
10(a)-(c) Right to Examine the Policy; Surrenders; Accumulation Unit Value; Reports to
Policyowners
10(d) Policy Loans; Partial Surrenders; Allocation of Premiums
10(e) Reinstatement of a Lapsed Policy
10(f) Right to Instruct Voting of Fund Shares
10(g)-(h) *
10(i) Premium Payments; Allocations and Transfers; Death Benefit; Policy Values; Settlement Options
11 Separate Account--Funds
12 Separate Account--Funds
13 Charges and Fees
14 Policy Rights
15 Premium Payments; Allocations and Transfers
16 Separate Account--Funds
17 Partial Surrenders
18
19 Reports to Policyowners
20 *
21 Policy Loans
22 *
23 The Company
24 Age; Incontestability; Suicide;
25 The Company
26 Fund Participation Agreements
27 The Variable Account
28 Directors and Officers of Lincoln Life
29 The Company
30 *
31 *
32 *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item of Form N-8B-2 Location in Prospectus
- --------------------- ----------------------
<S> <C>
33 *
34 *
35 *
37 *
38 Distribution of Policies
39 Distribution of Policies
40 *
41(a) Distribution of Policies
42 *
43 *
44 Separate Account--The Funds; Premium Payments
45 *
46 Partial Surrenders
47 The Variable Account; Partial Surrenders, Allocations and Transfers
48 *
49 *
50 The Variable Account
51 Highlights; Premium Payments;
52 Lincoln Life, the Separate Account and the General Account
53 Tax Matters
54 *
55 *
</TABLE>
- ---------------
* Not Applicable
<PAGE>
The Lincoln National Life Insurance Company Lincoln Life Flexible Premium
Variable Life Account S--Preliminary Prospectus Dated April 30, 1999
Home Office Location: Administrative Office:
1300 South Clinton Street Lincoln Corporate Specialty Markets
P.O. Box 1110 350 Church Street--MSM 1
Fort Wayne, Indiana 46802 Hartford, CT 06103-1106
(800) 942-5500 (860) 466-1561
- --------------------------------------------------------------------------------
This Prospectus describes a flexible premium variable life insurance contract
(the "Policy") offered by The Lincoln National Life Insurance Company. The
Policies are available for purchase by corporations or other groups where the
individuals share a common employer or affiliation with the group or sponsoring
organization.
The Policy features:
o flexible Premium Payments
o a choice of life insurance qualification method
o a choice of one of three death benefit options
o 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 this Policy.
This Prospectus is intended to describe the variable options used to fund this
Policy through the Separate Account. The variable funding options (collectively,
the "Funds") currently available through the Separate Account are:
American Century Variable
Products Group, Inc.
o American Century VP Income &
Growth Fund
o American Century VP International Fund
Baron Capital Funds Trust
o Baron Capital Asset Fund
BT Insurance Funds Trust
o BT EAFE(R) Equity Index Fund
o BT Equity 500 Index Fund
o BT Small Cap Index Fund
Delaware Group Premium Fund, Inc.
o Delaware Group Delchester Series
o Delaware Group Devon Series
o Delaware Group International Series
o Delaware Group REIT Series
o Delaware Group Small Cap Value
Series
Fidelity Variable Insurance
Products Fund
o Fidelity VIP Growth Portfolio-Service
Class
Fidelity Variable Insurance
Products Fund II
o Fidelity VIP II Asset Manager
Portfolio-Service Class
o Fidelity VIP II Contrafund Portfolio-
Service Class
Janus Aspen Series
o Janus Aspen Series Aggressive Growth Portfolio
o Janus Aspen Series Balanced Portfolio
o Janus Aspen Series Worldwide Growth Portfolio
Lincoln National Funds
o LN Bond Fund, Inc.
o LN Capital Appreciation Fund, Inc.
(subadviser: Janus Capital Corp.)
o LN Equity-Income Fund, Inc.
(subadviser: Fidelity Management Trust Co.)
o LN Money Market Fund, Inc.
o LN Social Awareness Fund, Inc.
(subadviser: Vantage Global Advisors)
MFS Variable Insurance Trust
o MFS Research Series
o MFS Total Return Series
o MFS Utilities Series
o MFS Capital Opportunities Series
Neuberger Berman Advisers Management Trust
o NB AMT Mid-Cap Growth Portfolio
o NB AMT Partners Portfolio
OCC Accumulation Trust
o OCC Trust Managed Portfolio
OppenheimerFunds
o Oppenheimer Main Street Growth and Income
Fund/VA
Templeton Variable Products
Series Fund
o Templeton Asset Allocation Fund-Class 2
o Templeton International Fund-Class 2
o Templeton Stock Fund-Class 2
- --------------------------------------------------------------------------------
Read this prospectus and the prospectuses of the Funds available as investment
options through the separate account under the Policy offered by this prospectus
carefully. Keep them 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.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of any offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
HIGHLIGHTS ................................................. 3
A Flexible Premium Variable Life Insurance Policy ......... 3
Initial Choices to be Made ................................ 3
Amount of Premium Payment ................................. 3
Life Insurance Qualification Method ....................... 3
Death Benefit Options ..................................... 4
Selection of Funding Vehicles ............................. 4
Charges and Fees .......................................... 5
Policy Loans, Withdrawals and Surrenders .................. 6
Changes in Specified Amount ............................... 6
LINCOLN LIFE, THE SEPARATE ACCOUNT AND THE
GENERAL ACCOUNT ............................................ 6
BUYING VARIABLE LIFE INSURANCE ............................. 7
ALLOCATION OF PREMIUMS ..................................... 8
Fixed Account ............................................. 9
Separate Account -- Funds ................................. 9
Mixed and Shared Funding .................................. 14
Fund Participation Agreements ............................. 14
CHARGES & FEES ............................................. 15
Premium Load .............................................. 15
Premium Load Refund ....................................... 15
Premium Tax Charge ........................................ 15
Charges and Fees Assessed Against the Total
Account Value ............................................ 15
Charges and Fees Associated with the Variable
Funding Options .......................................... 16
Reduction of Charges ...................................... 18
POLICY CHOICES ............................................. 19
Premium Payments .......................................... 19
Life Insurance Qualification .............................. 20
Death Benefit Options ..................................... 21
Allocations and Transfers to Funding Options .............. 22
POLICY VALUES .............................................. 23
Total Account Value ....................................... 23
Accumulation Unit Value ................................... 23
Maturity Value ............................................ 24
Surrender Value ........................................... 24
POLICY RIGHTS .............................................. 24
Partial Surrenders ........................................ 24
Reinstatement of a Lapsed Policy .......................... 25
Policy Loans .............................................. 25
Policy Changes ............................................ 26
Right to Examine the Policy ............................... 27
</TABLE>
<TABLE>
<S> <C>
DEATH BENEFIT .............................................. 27
POLICY SETTLEMENT .......................................... 27
Settlement Options ........................................ 27
TERM INSURANCE RIDER ....................................... 29
THE COMPANY ................................................ 31
Directors and Officers of Lincoln Life .................... 31
ADDITIONAL INFORMATION ..................................... 32
Reports to Policyowners ................................... 32
Right to Instruct Voting of Fund Shares ................... 32
Disregard of Voting Instructions .......................... 33
State Regulation .......................................... 33
Legal Matters ............................................. 33
The Registration Statement ................................ 34
Distribution of the Policies .............................. 34
Records and Accounts ...................................... 34
Experts.................................................... 35
Advertising ............................................... 35
Preparing for Year 2000 ................................... 35
TAX MATTERS ................................................ 36
General ................................................... 36
Federal Tax Status of the Company ......................... 37
Life Insurance Qualification .............................. 37
General Rules ............................................. 38
Modified Endowment Contracts .............................. 38
Diversification Standards ................................. 39
Investor Control .......................................... 39
Other Tax Considerations .................................. 40
MISCELLANEOUS POLICY PROVISIONS ............................ 40
Payment of Benefits ....................................... 40
Age ....................................................... 41
Incontestability .......................................... 41
Suicide ................................................... 41
Coverage Beyond Maturity .................................. 41
Nonparticipation .......................................... 41
Appendix A --
Illustrations of Death Benefits, Total Account Values
and Surrender Values ...................................... 42
Appendix B --
Corridor Percentages ....................................... 56
Financial Statements of the Company ........................ S-1
</TABLE>
2
<PAGE>
HIGHLIGHTS
A Flexible Premium Variable Life Insurance Policy
This Prospectus describes a flexible premium variable life insurance contract
(the "Policy") offered by The Lincoln National Life Insurance Company ("Lincoln
Life", the "Company", "we", "us", "our") through Lincoln Life Flexible Premium
Variable Life Account S (the "Separate Account" or "Account S"). The Policy may
be useful in: funding non-qualified executive deferred compensation; funding
salary continuation programs; funding death benefit liabilities or cash flow
obligations for executive retirement plans.
The value of your Policy and, under one option, the death benefit amount depends
on the investment results of the funding options you select.
Initial Choices to be Made
The Policyowner (the "Owner" or "you") is the person named in the "Policy
Specifications" who has all of the Policy ownership rights. If no Owner is
named, the Insured (the person whose life is insured under the Policy) will be
the Owner of the Policy. You, as the Owner, have important choices to make when
the Policy is first purchased. You need to choose:
o the amount of premium you want to pay (see page 18);
o either of two life insurance qualification methods (see page 19);
o one of three death benefit options (see page 20);
o the amount of the Net Premium Payment to be placed in each of the funding
options selected. The Net Premium Payment is the balance of Premium Payment
that remains after certain charges are deducted from it.
Amount of Premium Payment
One of your initial decisions is how much premium to pay. Premium Payments may
be changed within the limits described on page 18. If the Policy lapses because
your monthly deduction is larger than the Net Accumulation Value, you may
reinstate the Policy. See page 24.
You may use the value of your Policy to pay the premiums due and continue the
Policy in force if sufficient values are available. 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 increase (see page 15) as the Insured
gets older.
When you first receive your Policy you will have 10 days to look it over (more
in some states). This is called the "right-to-examine" time period. Use this
time to review your Policy and make sure it meets your needs. During this time
period, your initial premium payment will be allocated to the funding options
you initially select unless your state requires a full refund of premiums. If
you then decide you do not want your Policy, you will receive a refund. See page
26.
Life Insurance Qualification Method
At the time of purchase you must choose which life insurance qualification
method best suits your needs--Cash Accumulation or Guideline Premium. Both
methods require a Policy to provide minimum ratios of life insurance coverage to
total account
3
<PAGE>
value. The Guideline Premium method may also restrict premiums payable under the
Policy. The Company reserves the right to return your premium payment if it
results in your Policy's failing to meet federal tax law requirements.
Death Benefit Options
The Death Benefit is the amount we pay the Beneficiary(ies) when the Insured
dies. Before we pay the Beneficiary(ies), any outstanding loan account balances
or outstanding amounts due are subtracted from the Death Benefit. We calculate
the Death Benefit payable as of the date the Insured died. We will pay the Death
Benefit in one lump sum or under one of the annuity settlement options.
The three death benefit options available usually provide a level, varying or
increasing death benefit, depending on the option selected. See page 21 for more
details on death benefit options.
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 favorable
federal tax treatment. The Company reserves the right to return your premium
payment if it results in your Policy's failing to meet federal tax law
requirements.
If you have surrendered a portion of your Policy, any surrendered amount will
reduce your initial death benefit. If you borrow against your Policy or
surrender a portion of your Policy, the Loan Account balance and any surrendered
amount will reduce your initial death benefit.
Selection of Funding Vehicles
This Prospectus focuses on the Separate Account investment information that
makes up the "variable" part of the contract. If you put money into the variable
funding options, you take all the investment risk on that money. This means that
if the mutual fund(s) you select go up in value, the value of your Policy, net
of charges and expenses, also goes up. If they lose value, so does your Policy.
Each Fund has its own investment objective. You should review each Fund's
prospectus before making your decision.
You must choose the Fund(s) (Sub-Account(s)) in which you want to place each Net
Premium Payment. These Sub-Accounts make up the Separate Account. Each Sub-
Account invests in shares of a certain Fund. A Separate Sub-Account is not
guaranteed and will increase or decrease in value according to the particular
Fund's investment performance. See page 9.
You may also choose to place the Net Premium Payment or part of it into the
Fixed Account. Net Premium Payments put into the Fixed Account:
o become part of the Company's General Account;
o do not share the investment experience of the Separate Account; and
o have a guaranteed minimum interest rate of 4.0% per year.
For additional information on the Fixed Account, see page 8.
4
<PAGE>
Charges and Fees
A premium load is deducted from all of your premium payments. (See page 14)
Currently, the premium load is:
<TABLE>
<CAPTION>
Policy Year(s)
<S> <C>
1 10.5%
2-5 7.5%
6-7 3.5%
8+ 1.5%
</TABLE>
If you fully surrender your Policy within 24 months after Date of Issue, you may
be entitled to receive partial credit for premium loads deducted from your
Policy. (See page 14).
For these purposes an increase in Specified Amount is treated as a newly issued
policy.
An explicit premium tax charge equal to the state and municipal taxes associated
with premiums received is also deducted from premium payments.
A monthly deduction is made from the total account value on the same day of each
month beginning with the date of issue. The monthly deduction includes the Cost
of Insurance and any charges for supplemental riders or benefits. Once a policy
is issued, monthly deductions will begin as of the date of issue, even if the
Policy's issuance was delayed due to underwriting requirements or other reasons.
The monthly deduction also includes a monthly administrative expense charge
during all policy years. The monthly Administrative Expense is currently $6, and
is guaranteed not to exceed $10. See page 15.
A daily deduction is made from the assets of Separate Account S for mortality
and expense risk, currently at an annual rate of:
<TABLE>
<CAPTION>
Policy Year(s)
<S> <C>
1-10 0.70%
11+ 0.35%
</TABLE>
The Company reserves the right to increase the mortality and expense risk charge
but it will never exceed 0.90% annually. (See page 15).
Each Fund has its own management fee charge also deducted daily. Investment
results for the Funds you choose will be affected by the fund management charges
and other fund expenses. The table on pages 16 - 17 shows you the current
charges and expenses.
Before the Maturity Date you may make transfers between funding options. The
Company allows twelve transfers each Policy Year; beyond twelve, a $25 charge
may apply. Within 45 days after each Policy Anniversary, you may also transfer
to the Separate Account 20% of the greatest amount held in the Fixed Account
Value during the prior 5 years, or $1000 if greater. See page 21.
There are no Surrender Charges for your Policy.
5
<PAGE>
Policy Loans, Withdrawals and Surrenders
You may borrow within described limits against the Policy. You may surrender
your Policy in full or withdraw part of its value. Upon the maturity of your
Policy, you may select one of the annuity settlement options or, prior to
maturity, you may apply the value of your Policy, minus surrender charges and
loan account amounts, to one of the annuity settlement options.
If you borrow against your Policy, interest will accrue at an annual rate which
will be the monthly average (Moody's Investors Service, Inc. Composite Yield on
Corporate Bonds) for the calendar month which ends two months prior to the
Policy Anniversary month, or 5.0% if greater.
Interest will be credited on the Loan Account Value at an annual rate that is
the interest charged on the loan minus a rate not to exceed 0.90%. The minimum
interest credited will be no less than 4.0% annually. See page 24.
Changes in Specified Amount
Within certain limits, you may increase or decrease the specified amount
beginning with the second policy year. Increases will require satisfactory
evidence of insurability. Decreases in the first five years are subject to
approval of the Company. Currently the minimum specified amount is $100,000.
Such changes will affect other aspects of your Policy. See page 24.
LINCOLN LIFE, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT
Lincoln Life, an Indiana life insurance company incorporated in 1905, is among
the nation's largest writers of annuities, individual life insurance and life
reinsurance. Wholly-owned by Lincoln National Corporation ("LNC"), a publicly
held Indiana insurance holding company incorporated in 1968, it is licensed in
all states (except New York), the District of Columbia, Guam, and the
Commonwealth of the Northern Mariana Islands. Its principal office is at 1300
South Clinton Street, Fort Wayne, IN 46802. Lincoln Life, LNC and their
affiliates comprise the "Lincoln Financial Group" which provides a variety of
wealth accumulation and protection products and services.
Account S is a "separate account" of the Company established on November 2,
1998. Account S was established for the purpose of segregating assets
attributable to the variable portion of life insurance contracts from other
assets of the Company. Under Indiana law, the assets of Account S attributable
to the Policies, through the property of Lincoln Life, are not chargeable with
liabilities of any other business of Lincoln Life and are available first to
satisfy Lincoln Life's obligations under the Policies. Account S income, gains,
and losses are credited to or charged against Account S without regard to other
income, gains, or losses of Lincoln Life. The values and investment performance
of Account S are not guaranteed. Account S is registered with the Securities
and Exchange Commission ("Commission") as a "unit investment trust" under the
Investment Company Act of 1940, as amended ("1940 Act") and meets the 1940
Act's definition of "separate account". The Commission does not supervise the
management, investment practices, or policies of Lincoln Life or Account S.
Lincoln Life has numerous other registered separate accounts which fund its
variable life insurance policies and variable annuity contracts.
Account S is divided into Sub-Accounts, each of which is invested solely in the
shares of one of the mutual funds available as funding vehicles under the
Policies.
6
<PAGE>
On each Valuation Day, Net Premium Payments allocated to Account S will be
invested in Fund shares at net asset value, and monies necessary to pay for
deductions, charges, transfers and surrenders from Account S are raised by
selling Fund shares at net asset value.
The Funds now available in Account S and their investment objectives are on
pages 9 - 13. More Fund information is in the Funds' prospectuses, which must
accompany or precede this prospectus and should be read carefully. The Funds
may or may not achieve their investment objectives.
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.
Lincoln Life reserves the right to add, withdraw or substitute Funds, subject
to the conditions of the Policy and to compliance with regulatory requirements,
if in its sole discretion, legal, regulatory, marketing, tax or investment
considerations so warrant or in the event a particular Fund is no longer
available to Lincoln Life 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 Lincoln Life 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 to decide what responsive action might be
appropriate. If a separate account were to withdraw its investment in a Fund
because of a conflict, a Fund might have to sell portfolio securities at
unfavorable prices.
A Policy may also be funded in whole or in part through the "Fixed Account",
part of Lincoln Life's General Account supporting its insurance and annuity
obligations. The General Account is the Company's general asset account, in
which assets attributable to the non-variable portion of the Policies are held.
Amounts held in the Fixed Account will be credited with interest at rates
Lincoln Life determines 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 Securities Act of 1933,
as amended ("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. Policy owners should be prepared to monitor
their investment choices on an ongoing basis.
The Policy is available for purchase by corporations or groups where
individuals share a common employer or affiliation with a group or sponsoring
organization. Each Policy covers a single insured. The Policy may be useful in:
funding non-qualified executive deferred compensation; funding salary
continuation programs; funding
7
<PAGE>
death benefit liabilities or cash flow obligations for executive retirement
plans. The Policy should not be considered for employer pension or profit
sharing programs. The Policy is not available in all states. State regulations
may vary your Policy's provisions.
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. 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.
Unless a policy has become a "modified endowment contract" (see page 36), 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.
Depending on the death benefit option chosen, accumulated Policy values may
also be part of the eventual death benefit payable. If a Policy is heavily
funded and investment performance is very favorable, the death benefit may
increase even further because of tax law requirements that the death benefit be
a certain multiple of Policy value, depending on the Insured's age (see page
54).
ALLOCATION OF PREMIUMS
You may allocate all or a part of your Net Premiums to the Fixed Account (part
of the Company's General Account) or to the Funds currently available through
the Separate Account in connection with the Policy. In addition, the Company
may add, withdraw or substitute Funds, subject to the conditions in the Policy
and to compliance with regulatory requirements. The investment results of the
Funds, whose objectives are described below, are likely to differ
significantly. Except where otherwise indicated, all of the Funds are
diversified, as defined in the 1940 Act.
Any monies received prior to policy issue will be credited with the return
attributable to the LN Money Market Fund from the date of receipt until the day
the Policy is issued.
In states which do not require a full refund of premiums during the Right to
Examine Period, the Policy value and future Net Premiums will be allocated as
of the date the Policy is issued in accordance with the Policy owner's selected
premium allocation percentages.
In states which require a full refund of premiums during the Right to Examine
Period, the first Net Premium will be allocated in its entirety as of the issue
date to the LN Money Market Fund, regardless of the Policy owner's premium
allocation percentages. Any other Net Premium received prior to the expiration
of the Right to Examine period will also be allocated to the LN Money Market
Fund. On the day following the expiration of the Right to Examine Period, the
policy value and future Net Premiums will be allocated in accordance with the
Policy owner's selected premium allocation percentages.
Fixed Account
The Fixed Account is the only investment option offered with a guaranteed
return. Amounts held in the Fixed Account will be credited with interest at
rates of not less than 4.0% per year. Additional excess interest of up to 0.5%
may be credited to the
8
<PAGE>
Fixed Account Value beginning in Policy Year 11. Credited interest rates
reflect the Company's return on Fixed Account invested assets and the
amortization of any realized gains and/or losses which the Company may incur on
these assets.
Separate Account
Funds
Each of the Separate Sub-Accounts 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
seventeen Massachusetts or Delaware business trusts or a Maryland corporation.
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 are diversified under the 1940 Act.
Listed below are the Fund groups, their investment advisors and distributors,
and the Funds within each that are available under the Policies.
American Century Variable Products Group, Inc., managed and distributed by
American Century Investments, 4500 Main Street, Kansas City, MO 64141-6200
American Century VP Income & Growth Fund
American Century VP International 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
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
BT EAFE[RegTM] Equity Index Fund
BT Equity 500 Index Fund
BT 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
Delaware Group Delchester Series
Delaware Group Devon Series
Delaware Group International Series
Delaware Group REIT Series
Delaware Group Small Cap Value Series
Fidelity Variable Insurance Products Fund, and Variable Insurance Products Fund
II, managed by Fidelity Management & Research Company and distributed by
Fidelity Distributors Corporation, 82 Devonshire Street, Boston, MA 02103
Fidelity VIP Growth Portfolio-Service Class
Fidelity VIP II Asset Manager Portfolio-Service Class
Fidelity VIP II Contrafund Portfolio-Service Class
9
<PAGE>
Janus Aspen Series, managed and distributed by Janus Capital, 100 Fillmore St.,
Denver, CO 80206-4928
Janus Aspen Series Aggressive Growth Portfolio
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 Money Market Fund, Inc.
LN Social Awareness Fund, Inc. (Sub-advised by Vantage Global Advisors)
MFS[RegTM] Variable Insurance Trust, managed by Massachusetts Financial
Services Company and distributed by MFS Fund Distributors, Inc., 500 Boylston
Street,
Boston, MA 02116
MFS Research Series
MFS Total Return Series
MFS Utilities Series
MFS Capital Opportunities 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
OCC Accumulation Trust, managed by OpCap Advisors and distributed by OCC
Distributors, One Financial Center, New York, NY 10281
OCC Trust Managed Portfolio
OppenheimerFunds, managed and distributed by OppenheimerFunds, Inc., Two World
Trade Center, New York, NY 10048
Oppenheimer Main Street Growth and Income Fund/VA
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 Asset Allocation Fund-Class 2
Templeton International Fund-Class 2
Templeton Stock Fund-Class 2
The investment advisory fees charged the Funds by their advisors are shown on
pages 17 - 18.
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.
o American Century VP Income & Growth Fund (Large Cap Stocks): Seeks dividend
growth, current income and capital appreciation by investing in a diversified
portfolio of U.S. stocks.
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<PAGE>
o American Century VP International Fund (International): Seeks capital
appreciation over time by investing in the common stocks of foreign companies
that exhibit accelerating growth.
o Baron Capital Asset Fund (Mid-Cap 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.
o BT EAFE[RegTM] Equity Index FUND (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 Index), a capitalization-weighted
index containing approximately 1,100 equity securities of companies located
outside the United States.
o BT Equity 500 Index Fund (Large Cap Stocks): Seeks to replicate as closely as
possible the performance of the Standard & Poor's 500 Composite Stock Price
Index, before the deduction of Fund expenses.
o BT Small Cap Index Fund (Small Cap 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.
o 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.
o Delaware Group Devon Series (Large Cap Stocks): Seeks current income and
capital appreciation by investing primarily in income-producing 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.
o Delaware Group International Series (International): Seeks long-term growth
without undue risk to principal by investing primarily in equity securities of
foreign issuers providing the potential for capital appreciation and income.
o 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.
o Delaware Group Small Cap Value Series (Small Cap Stocks): Seeks capital
appreciation by investing primarily in small to mid-cap common stocks whose
market value appears low relative to their underlying value or future earnings
and growth potential. Emphasis 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.
o Fidelity VIP Growth Portfolio--Service Class (Large Cap Stocks): Seeks
long-term capital appreciation. The portfolio normally purchases common
stocks.
o Fidelity VIP II Asset Manager Portfolio--Service Class (Large Cap Stocks):
Seeks high long-term return with reduced risk by using a broad diversified mix
of stocks, bonds and short-term money market investments.
11
<PAGE>
o Fidelity VIP II Contrafund Portfolio--Service Class (Large Cap Stocks): Seeks
long-term capital appreciation by investing primarily in a broad variety of
common stocks, using both growth-oriented and contrarian disciplines.
o Janus Aspen Series Aggressive Growth Portfolio (Mid-Cap Stocks): Seeks
long-term growth of capital by investing in medium sized companies whose
market capitalizations fall within the range of the MidCap 400 Index.
o Janus Aspen Series Balanced Portfolio (Large Cap Stocks): 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.
o Janus Aspen Series Worldwide Growth Portfolio (Large Cap Stocks): 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
issuers.
o Lincoln National Bond Fund, Inc. (Long Term Bonds): Seeks maximum current
income consistent with prudent investment strategy. The Fund invests primarily
in medium and long-term corporate and government bonds.
o Lincoln National Capital Appreciation Fund, Inc. (Large Cap 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.
o Lincoln National Equity-Income Fund, Inc. (Large Cap 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).
o Lincoln National Money Market Fund, Inc. (Money Market): Seeks maximum current
income consistent with the preservation of capital. The Fund allocates its
assets among several categories of equity and fixed-income securities, both of
U.S. and foreign insurers.
o Lincoln National Social Awareness Fund, Inc. (Mid-Large Cap Stocks): Seeks
long-term capital appreciation with income as a secondary objective by
investing in companies which meet the Fund's "Social Criteria".
o MFS Research Series (Large Cap Stocks): Seeks long-term growth of capital and
future income by investing in equity securities of companies believed to
possess better than average prospects for long-term growth.
o MFS Total Return Series (Balanced or Total Return): Seeks primarily to obtain
above-average income (compared to a portfolio entirely in equity securities)
consistent with the prudent employment of capital, and secondarily to provide
a reasonable opportunity for growth and income.
o MFS Utilities Series (Specialty): Seeks capital growth and current income
(income above that available from a portfolio invested entirely in equity
securities) by investing, under normal circumstances, at least 65% of its
assets in equity and debt securities of utility companies.
o MFS Capital Opportunities Series (Large Cap Stocks): Seeks capital
appreciation. Dividend income, if any, is a consideration incidental to the
Portfolio's objective of capital appreciation.
12
<PAGE>
o Neuberger Berman AMT Mid-Cap Growth Portfolio (Mid-Cap Stocks): Seeks growth
of capital through an investment approach that is designed to increase capital
with reasonable risk. It invests mainly in common stocks of mid-to-large
capitalization companies.
o Neuberger Berman AMT Partners Portfolio (Mid-Large Cap Stocks): Seeks growth
of capital and invests mainly in common stocks of mid-to-large capitalization
companies.
o OCC Trust Managed Portfolio (Balanced or Total Return): Seeks growth of
capital over time through investment in a portfolio of common stocks, bonds
and cash equivalents, the percentage of which will vary based on management's
assessments of relative investment values.
o Oppenheimer Main Street Growth and Income Fund/VA (Large Cap Stocks): Seeks a
high total return (which includes growth in the value of its shares as well as
current income) from equity and debt securities. From time to time the Fund
may focus on small to medium capitalization common stocks, bonds and
convertible securities.
o Templeton Asset Allocation Fund--Class 2 (Global Stocks): Seeks a high level
of total return. Invests in stocks of companies in any nation, debt securities
of companies and governments of any nation, and in money market instruments.
Assets are allocated among different investments depending upon worldwide
market and economic conditions.
o Templeton International Fund--Class 2 (International Stocks): Seeks long- term
capital growth. Invests primarily in stocks of companies outside the United
States, including emerging markets. Any income realized will be incidental.
o Templeton Stock Fund--Class 2 (Global Stocks): Seeks long-term capital growth.
Invests primarily in equity securities issued by companies, large and small,
in various nations throughout the world, including the United States and
emerging markets.
There is no assurance that the Funds will achieve their investment objectives.
Policy owners bear the full investment risk of investments in the Funds
selected.
Some of the above Funds may use instruments known as derivatives as part of
their investment strategies, as described in their respective prospectuses. The
use of certain derivatives such as inverse floaters and principal only debt
instruments may involve higher risk of volatility to a Fund. The use of
leverage in connection with derivatives can also increase risk of losses. See
the prospectuses for the Funds for a discussion of the risks associated with an
investment in those funds. You should refer to the accompanying prospectuses of
the Funds for more complete information about their investment policies and
restrictions.
Mixed and Shared Funding
Shares of the Funds are available to insurance company separate accounts which
fund variable annuity contracts and variable life insurance policies, including
the Policy described in this Prospectus. Because Fund shares are offered to
separate accounts of both affiliated and unaffiliated insurance companies, it
is conceivable that, in the future, it may not be advantageous for variable
life insurance separate accounts and variable annuity separate accounts to
invest in these Funds simultaneously, since the interests of such Policy owners
or contractholders may differ. Although neither the Company nor the Funds
currently foresees any such disadvantages either to variable life insurance or
to
13
<PAGE>
variable annuity policyholders, each Fund's Board of Trustees/Directors has
agreed to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response thereto. If such a conflict were to occur, one of the
separate accounts might withdraw its investment in a Fund. This might force
that Fund to sell portfolio securities at disadvantageous prices.
Fund Participation Agreements
Lincoln Life has entered into agreements with the various Funds and their
advisors or distributors under which Lincoln Life makes the Funds available
under the Policies and performs certain administrative services. In some cases,
the advisors or distributors may compensate Lincoln Life at annual rates of
between .11% and .25% of assets in a particular Fund attributable to the
Policies.
CHARGES & FEES
Premium Load
The premium load is deducted from your premium payments. This load represents
sales and administrative expenses associated with the startup and maintenance
of the policy.
1. Guaranteed Maximum Premium Load
The premium load is guaranteed to be no higher than the amounts shown in the
following table.
<TABLE>
<CAPTION>
For Premiums Paid up to For Premiums Paid greater than
Target Premium -- Target Premium --
load as a percentage of load as a percentage of
Policy Year(s) premium premium
- ---------------- ------------------------- -------------------------------
<S> <C> <C>
1 15% 6%
2-5 10% 6%
6 and after 6% 6%
</TABLE>
2. Current Premium Load
The premium load is currently as shown in the following table.
<TABLE>
<CAPTION>
For Premiums Paid up to For Premiums Paid greater than
Target Premium -- Target Premium --
load as a percentage of load as a percentage of
Policy Year(s) premium premium
- ---------------- ------------------------- -------------------------------
<S> <C> <C>
1 10.5% 2.5%
2-5 7.5% 1.5%
6-7 3.5% 1.5%
8 and after 1.5% 1.5%
</TABLE>
Premium Load Refund
Upon a full surrender of your Policy within the first 24 months if your Policy
is not in default you may be entitled to a credit for some or all of the
premium loads which have been deducted from your premium payments. To determine
the Surrender Value during the premium load refund period the Total Account
Value will be reduced by the amount of any Loan Account Value, including
accrued interest. That amount would be increased by the applicable credit for
the premium load. A decrease in the specified amount in Policy Years 1 or 2
will proportionately decrease the amount of any premium load refund.
14
<PAGE>
For Policies surrendered during the first twelve months after the Date of
Issue, the refund is 7% of premium paid in the first Policy Year up to the
Target Premium and 3% of premium paid in the first Policy Year above Target
Premium. For months 13 through 24, the refund is 75% of the first Policy Year
refund amount.
Premium Tax Charge
An amount equal to the state and municipal taxes associated with premiums
received is deducted from premium payments.
Charges and Fees Assessed Against the Total Account Value
A Monthly Deduction is made from the Total Account Value. The Monthly Deduction
is made as of the same day each month, beginning with the Date of Issue. The
Monthly Deduction includes the Cost of Insurance and any charges for
supplemental riders or benefits. The Cost of Insurance is the portion of the
monthly deduction attributable to the basic insurance coverage, not including
riders, supplemental benefits or monthly expense charges. The Cost of Insurance
depends on the Issue Age, risk class of the Insured and the number of Policy
Years elapsed and Specified Amount of the Policy.
Once a Policy is issued, Monthly Deductions, including Cost of Insurance
charges, will begin as of the Date of Issue, even if the Policy's issuance was
delayed due to underwriting requirements, and will be in amounts based on the
Specified Amount of the Policy issued, even if any temporary insurance coverage
provided during the underwriting period was for a lesser amount.
The Monthly Deduction also includes a monthly administrative expense charge of
$6 currently, guaranteed not to exceed $10 during all Policy Years.
The monthly administrative expense charge is for items such as premium billing
and collection, Policy value calculation, confirmations and periodic reports
and will not exceed our costs. The Monthly Deduction is deducted
proportionately from each funding option, if more than one is used. This is
accomplished by liquidating Accumulation Units and withdrawing the value of the
liquidated Accumulation Units from each funding option in the same proportion
as their respective values have to your Fixed Account and Separate Account
Values.
Charges and Fees Associated with the Variable Funding Options
Mortality and Expense Risk Charge
The Company deducts a daily charge from the assets of Account S for mortality
and expense risks assumed by it in connection with the Policy.
Currently, the amount of this charge, on an annualized basis, is the following
percentage of Policy value in the Separate Account:
<TABLE>
<S> <C>
Annualized Mortality and
Policy Years Expense Risk Charge
1-10 0.70%
11 and later 0.35%
</TABLE>
The mortality and expense risk charge is assessed to compensate the Company for
assuming certain mortality and expense risks under the Policies. The Company
reserves the right to increase the mortality and expense risk charge if it
believes that circumstances have changed so that current charges are no longer
adequate. In no event will the charge exceed 0.90% of average daily net assets
on an annualized basis.
15
<PAGE>
Charges Assessed against the Underlying Funds
The investment advisor for each of the Funds deducts
a daily charge as a percent of the net assets in each
fund as an asset management charge. The charge
reflects asset management fees of the investment
advisor (Management Fees), and other expenses
incurred by the funds (including 12b-1 fees for Class
2 shares and Other Expenses). The charge has the
effect of reducing the investment results credited to
the Sub-Accounts.
The following table illustrates the investment
advisory fees, other expenses and total expenses paid
by each of the Funds as a percentage of average net
assets based on figures for the year ended December
31, 1998 unless otherwise indicated.
<TABLE>
<CAPTION>
Total
Annual
Fund Total Fund
Operating Operating
Expenses Total Expenses
Without Waivers with
Management 12b-1 Other Waivers or and Waivers or
Fund Fees Fees Expenses Reductions Reductions Reductions
---- ------------ ---------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
American Century VP Income & Growth Fund 0.70% -- -- 0.70% -- 0.70%
American Century VP International Fund 1.48% -- -- 1.48% (0.01%) 1.47%
Baron Capital Asset Fund--Insurance Class (1) 1.00% 0.25% 6.37% 7.62% (6.17%) 1.45%
BT EAFE(R) Equity Index Fund (2) 0.45% -- 1.21% 1.66% (1.01%) 0.65%
BT Equity 500 Index Fund (3) 0.20% -- 0.99% 1.19% (0.89%) 0.30%
BT Small Cap Index Fund (4) 0.35% -- 1.23% 1.58% (1.13%) 0.45%
Delaware Group Delchester Series (5) 0.65% -- 0.10% 0.75% -- 0.75%
Delaware Group Devon Series (5) 0.65% -- 0.06% 0.71% -- 0.71%
Delaware International Equity Series (7) 0.82% -- 0.13% 0.95% -- 0.95%
Delaware Group REIT Series (8) 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%
Fidelity Asset Manager Portfolio--Service Class (9) 0.54% 0.10% 0.14% 0.78% -- 0.78%
Fidelity VIPII Contrafund Portfolio--Service Class (9) 0.59% 0.10% 0.11% 0.80% -- 0.80%
Fidelity VIP Growth Portfolio--Services Class (9) 0.59% 0.10% 0.11% 0.80% -- 0.80%
Janus Aspen Aggressive Growth (10) 0.72% -- 0.03% 0.75% -- 0.75%
Janus Aspen Balanced Portfolio (10) 0.72% -- 0.02% 0.74% -- 0.74%
Janus Aspen Worldwide Growth Portfolio (10) 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 Money Market Fund 0.48% -- 0.11% 0.59% -- 0.59%
LN Social Awareness Fund 0.34% -- 0.04% 0.38% -- 0.38%
MFS Capital Opportunities Series (11) 0.75% -- 0.36% 1.11% (0.09%) 1.02%
MFS Research Series (11) 0.75% -- 0.11% 0.86% -- 0.86%
MFS Total Return Series (11) 0.75% -- 0.16% 0.91% -- 0.91%
MFS Utilities Series (11) 0.75% -- 0.26% 1.01% -- 1.01%
NB AMT MidCap Growth Portfolio (12)(13) 0.85% -- 0.58% 1.43% (0.43%) 1.00%
NB AMT Partners Portfolio (12)(13) 0.78% -- 0.06% 0.84% -- 0.84%
OCC Trust Managed Fund (14)(15) 0.78% -- 0.04% 0.82% -- 0.82%
Oppenheimer Main Street Growth and Income Fund/VA (16) 0.74% -- 0.05% 0.79% -- 0.79%
Templeton Asset Allocation Fund--Class 2 (17) 0.60% 0.25% 0.18% 1.03% -- 1.03%
Templeton International Fund--Class 2 (17) 0.69% 0.25% 0.17% 1.11% -- 1.11%
Templeton Stock Fund--Class 2 (17) 0.70% 0.25% 0.19% 1.14% -- 1.14%
</TABLE>
(1.) BAMCO, Inc. will reduce its fee to the extent required to limit Baron
Capital Assets Fund's total operating expenses to 1.5% for the first $250
million in assets in the Fund, 1.35% for the Fund assets over $250 million
and up to $500 million, and 1.25% for Fund assets over $500 million.
Without the expense limitations, the Fund estimates that actual expenses
would be 1.6%.
(2.) Under the Advisory Agreement with Bankers Trust Company (the "Advisor"),
the Fund will pay an advisory fee at an annual percentage rate of 0.45% of
the average daily net assets of the Fund. These fees are accrued daily and
paid monthly. The Advisor has voluntarily undertaken to waive its fee and
to reimburse the Fund for certain expenses so the Fund's total operating
expenses will not exceed 0.65% of average daily net assets.
16
<PAGE>
(3.) Under the Advisory Agreement with Bankers Trust Company (the "Advisor"),
the Fund will pay an advisory fee at an annual percentage rate of 0.20% of
the average daily net assets of the Fund. These funds are accrued daily
and paid monthly. The Advisor has voluntarily undertaken to waive its fee
and to reimburse the Fund for certain expenses so the Fund's total
operating expenses will not exceed 0.30% of average daily net assets.
(4.) Under the Advisory Agreement with Bankers Trust Company (the "Advisor"),
the Fund will pay an advisory fee at an annual percentage rate of 0.35% of
the average daily net assets of the Funds. These fees are accrued daily
and paid monthly. The Advisory has voluntarily undertaken to waive its fee
and to reimburse the Fund for certain expenses so the Fund's total
operating expense will not exceed 0.45% of average daily net assets.
(5.) The investment advisory 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%; 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.
(6.) The investment advisor for the Small Cap Value Series is Delaware
Management Company, Inc. ("DMC"). Effective May 1, 1999 through October
31, 1999, DMC has voluntarily agreed to waive their management fees and
reimburse the Series for expenses to the extent that total expenses will
not exceed 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 a 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.) The investment advisor for the International Equity 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 0.95% for the International Equity Series.
Pursuant to a vote of the Fund's shareholders on March 17, 1999, a new
management fee structure based on average daily net asset was approved as
follows: 0.85% on the first $500 million, 0.80% on the next $500 million,
0.75% on the next $1,500 million, 0.70% on assets in excess of $2,500
million; all per year.
(8.) 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.
(9.) A portion of the brokerage commissions that certain funds pay was used to
reduce funds expenses. In addition, certain funds, or Fidelity Management
& Research on behalf of certain funds, have entered into arrangements with
their custodian whereby credits realized as a result of uninvested cash
balances were used to reduce custodian expenses. Including these
reductions, the total operating expenses presented in the table would have
been 0.77% for the VIP II Asset Manager Portfolio, 0.75% for the VIP
Growth Portfolio and for the VIP II ContraFund Portfolio.
(10.) The expenses are stated both with and without contractual waivers and fee
reductions by Janus Capital. Fee reductions for the Aggressive Growth,
Worldwide Growth and Balanced, Portfolio 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 next annual renewal of the advisory
agreement.
(11.) 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 expenses reductions, and are therefore higher than the
actual expenses of the series.
(12.) 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.
(13.) NBMI has undertaken to reimburse certain operating expenses, including the
compensation of NBMI (except with respect to Partners) and excluding
taxes, and interest, extraordinary expenses, brokerage commissions and
transaction costs, that exceed, in the aggregate, 1% of the Liquid Asset,
Mid-Cap Growth and Partners Portfolios' average daily net assets value.
These expense reimbursement agreements are subject to termination upon 60
days written notice with respect to the Mid-Cap Growth, and Partners
Portfolios.
(14.) Other Expenses are shown gross of expense offsets afforded the Portfolios
which effectively lowered overall custody expenses.
(15.) Total Portfolio Expenses for the Managed Portfolios are limited by OpCap
Advisors so that the respective annualized operating expenses (net of any
expense offsets) do not exceed 1.00% of average daily net assets.
(16.) The Fund's total returns should not be expected to be the same as the
returns of other funds, whether or not both funds have the same portfolio
managers and/or similar names.
(17.) Class Z of the Fund has a distribution plan or "Rule 12b-1 plan" which is
described in the Fund's prospectus.
17
<PAGE>
Reduction of Charges
The Policies are available for purchase by corporations or other groups where
the individuals share a common employer or affiliation with the group or
sponsoring organization. Each Policy covers a single insured. We reserve the
right to reduce premium loads or any other charges on certain multiple life
sales ("cases") where it is expected that the amount or nature of such cases
will result in savings of sales, underwriting, administrative or other costs.
Eligibility for these reductions and the amount of reductions will be
determined by a number of factors, including the number of lives to be insured,
the total premiums expected to be paid, total assets under management for the
policy owner, the nature of the relationship among the insured individuals, the
purpose for which the policies are being purchased, expected persistency of the
individual policies, and any other circumstances which we believe to be
relevant to the expected reduction of our expenses. Some of these reductions
may be guaranteed and others may be subject to withdrawal or modification by us
on a uniform case basis. Reductions in charges will not be unfairly
discriminatory to any policy owners.
POLICY CHOICES
When you buy a Policy, you make several important choices:
o The amount of premium you intend to pay;
o Which life insurance qualification method best suits your needs--Cash Value
Accumulation or Guideline Premium;
o Which one of the three Death Benefit Options you would like, and the Premium
Accumulation Rate you would like if you choose Death Benefit Option 3;
o The way your net premiums will be allocated to the Funds and/or the Fixed
Account.
Each of these choices is described in detail below:
Premium Payments
Planned Premiums are those premiums you choose to pay on a scheduled basis. We
will bill you annually, semiannually, or quarterly, or at any other agreed-upon
frequency. Additional Premiums are any premiums you pay in addition to Planned
Premiums.
Payment of Minimum Monthly Premiums, Planned Premiums, or Additional Premiums
in any amount will not guarantee that your Policy will remain in force.
Conversely, failure to pay Planned Premiums or Additional Premiums will not
necessarily cause your Policy to lapse. The Policy's surrender value must be
sufficient to cover the next Monthly Deduction.
At any time, you may increase your Planned Premium by written notice to us, or
pay Additional Premiums, except that:
o We may require evidence of insurability if the Additional Premium or the new
Planned Premium during the current Policy Year increases the difference
between the Death Benefit and the Total Account Value. If satisfactory
evidence of insurability is requested and not provided, we will refund the
increase in premium
18
<PAGE>
without interest and without investing such amounts in the underlying
funding options.
o If you have chosen the Guideline Premium method for life insurance
qualification, in no event may the total of all premiums paid exceed the
then-current maximum premium limitations established by federal income tax law
for a Policy to qualify as life insurance. (See "Tax Considerations for Policy
owners.")
o If, at any time, a premium is paid which would result in total premiums
exceeding such maximum premium limitations, we will only accept that portion
of the premium which will make total premiums equal to the maximum. Any part
of the premium in excess of that amount will be returned or applied as
otherwise agreed and no further premiums will be accepted until allowed by the
then-current maximum premium limitations prescribed by law.
o If you make a sufficient premium payment when you apply for a Policy, and have
answered favorably to certain questions relating to the Insured's health, a
"temporary insurance agreement" in the amount applied for (subject to stated
maximums) will be provided.
o After your first premium payment all premiums must be sent to our
Administrative Office. Your premium payments received will be allocated as you
have directed and amounts allocated to the Funds will be credited at the
Accumulation Unit value determined at the end of the business day after each
payment is received.
You may reallocate your future premium payments at any time free of charge. Any
reallocation will apply to premium payments made after you have received
written verification from us.
Under limited circumstances, we may backdate a Policy, upon request, by
assigning a Date of Issue earlier than the date the application is signed, but
no earlier than six months prior to state approval of the Policy. The Date of
Issue is the date from which policy years, policy anniversaries and Attained
Age are determined. The Date of Coverage is the date on or after the Date of
Issue that the initial premium has been paid (1) while the Insured is alive and
(2) prior to any change in health and insurability, as represented in the
application. Issue Age is the Insured's age on his/her birthday closest to the
Policy Date of Issue. Backdating may be desirable, for example, so that you can
purchase a particular Specified Amount for lower cost of insurance rates, based
on a younger insurance age. For a backdated Policy, you must pay the minimum
premium payable for the period between the Date of Issue and the date the
initial premium is invested in the Separate Account. Backdating of your Policy
will not affect the date on which your premium payments are credited to the
Separate Account and you are credited with Accumulation Units. You cannot be
credited with Accumulation Units until your Net Premium is actually deposited
in the Separate Account. (See "Policy Values.")
If we decline an application for a policy we will refund all premium payments
made.
Life Insurance Qualification
A Policy must satisfy either of two testing methods to qualify as a life
insurance contract for tax purposes under Section 7702 of the Internal Revenue
Code of 1986, as amended ("Code"). At the time of purchase, you may choose a
Policy which uses either the Guideline Premium test or the Cash Value
Accumulation test. Both methods require a life insurance policy to meet minimum
ratios of life insurance
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<PAGE>
coverage to Total Account Value. We refer to the ratios as Applicable
Percentages. We refer to required life insurance coverage in excess of the
Total Account Value as the Death Benefit corridor.
The Applicable Percentages for the Guideline Premium test are 250% through
Attained Age 40, decreasing over time to 100% at Attained Age 95 and above.
Attained Age is the Issue Age of the Insured increased by the number of Policy
Years elapsed. The Guideline Premium test also restricts the maximum premiums
that may be paid into a life insurance policy for a specified Death Benefit.
The Cash Value Accumulation test does not limit premiums which may be paid but
has higher required Applicable Percentages. For example, Applicable Percentages
for Non-Smokers range from 730% at Attained Age 20 to 380% at Attained Age 40
to 100% at Attained Age 100.
If your primary objective is to pay as much premium as possible into the Policy
to target a cash value funding objective, generally a Cash Value Accumulation
method policy will best meet your needs, since it generally permits higher
premium payments. The choice, however, might result in higher eventual Cost of
Insurance charges because of the higher Death Benefit corridor.
In addition, the payment of higher premiums which would be associated with
choosing the Cash Value Accumulation method increases the possibility that the
amount paid into the Policy will exceed the amount that would have been paid
had the Policy provided for seven level annual premiums (the "7-pay test"). If
premiums paid exceed such limit during any 7-pay testing period, any partial
surrender or Policy loan may be subject to federal income taxation. (See "Tax
Considerations for Policyowners".)
If your primary objective is to maximize the potential for growth in Total
Account Value, or to conserve Total Account Value, generally a Guideline
Premium Policy will best meet your needs. This is because the Applicable
Percentages are lower, resulting in lower Cost of Insurance charges for the
smaller required Death Benefit corridor coverage.
If your primary objective is to provide a specified Death Benefit at low cost,
then generally there is no difference between the testing methods because the
planned premium will be less than the maximum premium limit under the Guideline
Premium test and additional Death Benefit insurance coverage may not be
necessary under either testing method to comply with the Death Benefit corridor
requirements. The Policy's Death Benefit may also be referred to as the Target
Face Amount. If a Term Insurance Rider is attached to the Policy, the Target
Face Amount is the Term Insurance Rider's Benefit Amount plus the Policy's
Death Benefit which is dependent upon the Death Benefit Option in effect.
Death Benefit Options
At the time of purchase, you must choose from three available Death Benefit
Options. The amount payable under the option chosen will be determined as of
the date of the Insured's death. The Death Benefit may be affected by partial
surrenders. The Death Benefit for all three options will be reduced by the Loan
Account Value plus any accrued interest.
Under Option 1, the Death Benefit will be the greater of the Specified Amount
or Target Face Amount if a Term Insurance Rider is attached to the Policy (see
"Term
20
<PAGE>
Insurance Rider"), or the Applicable Percentage of the Total Account Value.
Option 1 generally provides a level Death Benefit.
Under Option 2, the Death Benefit will be the greater of the Specified Amount,
plus the Total Account Value or the Target Face Amount if a Term Insurance
Rider is attached to the Policy (see "Term Insurance Rider"), or the Applicable
Percentage of the Total Account Value. Option 2 provides a varying Death
Benefit which increases or decreases over time, depending on the amount of
premium paid and the investment performance of the underlying funding options
You choose.
Under Option 3, the Death Benefit will be the greater of the Specified Amount
plus the Accumulated Premium(s) accumulated at the Premium Accumulation Rate or
Target Face Amount if a Term Insurance Rider is attached to the Policy (see
"Term Insurance Rider"), or the Applicable Percentage of the Total Account
Value but will not exceed the total Death Benefit paid under Option 2. This
option may only be selected at issue.
The Accumulated Premium is the sum of all the premiums paid from the Date of
Issue accumulated or the Premium Accumulation Rate. You select the Premium
Accumulation Rate at issue. Any rate requested in excess of 10% may be subject
to additional underwriting.
The choice of Death Benefit Option should be based upon the pattern of Death
Benefits which best matches the intended use of the Policy. For example, an
Option 1 Policy should be chosen for a simple, fixed, level total Death Benefit
need. Option 2 would be chosen to provide a level death benefit in addition to
the Policy Total Account Value, and Option 3 would provide a level death
benefit for the Specified Amount plus a return of Accumulated Premiums.
Choosing the option which provides the lowest pattern of Death Benefits which
meets the desired need will be the most efficient for accumulating potential
cash value, since the lower Cost of Insurance charges will improve the growth
or preservation of the Total Account Value. Other than providing the
appropriate pattern of desired Death Benefits, there is no economic advantage
of one option over another, since the Cost of Insurance charges for all three
Options are based upon the amount at risk, the difference between the Death
Benefit and the Total Account Value each month.
The same is true for the choice of a Premium Accumulation Rate under Option 3.
Choice of a higher Premium Accumulation Rate will cause the death benefit to
increase more rapidly, but this will also generate higher Cost of Insurance
charges and lower the potential growth in Total Account Value.
Allocations and Transfers to Funding Options
At purchase, you must decide how to allocate your Net Premiums among the Funds
and/or the Fixed Account. Net Premiums must be allocated in whole percentages.
You should carefully consider current market conditions and each Fund's
investment policies and related risks before allocating money to or
transferring values among the Funds.
Before the Maturity Date, you may transfer Policy values from one Fund to
another at any time, or to the Fixed Account. The Company reserves the right to
charge $25 for
21
<PAGE>
each transfer after the twelfth transfer per year. Within 45 days after each
Policy anniversary, and before the Maturity Date, you may also transfer a
portion of the Fixed Account Value to one or more Funds. A transfer from the
Fixed Account is allowed only once in the 45-day period after the Policy
anniversary and will be effective as of the next Valuation Period after your
request is received by our Administrative Office. The amount of such transfer
cannot exceed the greater of 20% of the greatest amount held in the Fixed
Account Value during the prior 5 years or $1000.
Any transfer among the Funds or to the Fixed Account will result in the
crediting and cancellation of Accumulation Units based on the Accumulation Unit
values determined at the end of the Valuation Period after your request is
received by our Administrative Office. (See "Accumulation Unit Value.") The
Valuation Period is the period of time from when the Company determines the
Accumulation Unit Value and Settlement Option Unit Value of a variable
investment option until the next time it determines such unit value. Currently,
the calculation occurs after the close of business of the New York Stock
Exchange on any normal business day, Monday through Friday, that the New York
Stock Exchange is open.
POLICY VALUES
Total Account Value
The Total Account Value is the sum of the Fixed Account Value, the Separate
Account Value and the Loan Account Value.
We will allocate each Net Premium (the premium paid, less both the premium load
and the premium tax charge) to a funding option in the Separate Account and
credit it in the form of Accumulation Units. An Accumulation Unit is used to
measure the value of a Policyowner's interest in each applicable funding option
used to calculate the value of the variable portion of the Total Account Value
before election of a settlement option. We will credit each Net Premium we
receive after your policy is issued to your Policy at the Accumulation Unit
Value for a selected Fund at the end of the business day we receive it. The
number of Accumulation Units credited is the Net Premium divided by that
Accumulation Unit Value. Shares in each Fund you select will be purchased for
the Separate Account at the Fund's net asset value next computed after we
receive the Net Premium. Since each Fund has its own Accumulation Unit value if
you choose a combination of funding options, you will have Accumulation Units
credited for each funding option.
Separate Account Value is the sum of values in each Separate Account funding
option which is the total number of Accumulation Units times the current
Accumulation Unit Value. To that we add any Fixed Account values and any Loan
Account Values to arrive at the Policy's Total Account Value.
The number of Accumulation Units you have is not changed by any change in the
value of an Accumulation Unit. The number is increased by contributions or
transfers and decreased by charges and withdrawals.
There is no guarantee that the Separate Account Value will equal or exceed Net
Premiums placed in the Separate Account.
We will notify you annually as to the number of Accumulation Units credited to
your Policy for each Fund, the current Accumulation Unit values, the Separate
Account Value, the Fixed Account Value, and the Total Account Value.
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<PAGE>
Accumulation Unit Value
We convert any Net Premium payment allocated to, or Policy Value transferred to
a variable Sub-Account into Variable Accumulation Units. The Variable
Accumulation Unit Value for a Variable Sub-Account is determined by:
o multiplying the Fund shares owned by the Variable Sub-Account at the beginning
of the business day by Fund the net asset value per share at the end of the
business day and adding any dividend or other distribution during the business
day; minus
o the daily Variable Sub-Account charges which may include a tax charge or
credit; and
o dividing the result of the foregoing subtraction by the number of Variable
Accumulation Units for that Variable Sub-Account at the beginning of the
business day.
The Accumulation Unit Value may increase or decrease from business day to
business day.
Maturity Value
The Maturity Date is the Policy Anniversary nearest the Insured's 100th
birthday.
The Maturity Value of the Policy is the Total Account Value on the Maturity
Date, less the Loan Account Value and any unpaid accrued interest.
Surrender Value
The Surrender Value of your Policy is the amount you can receive in cash by
surrendering the Policy. This equals the Total Account Value minus the Loan
Account Value and any accrued interest, plus any credit for premium loads paid.
All or part of the Surrender Value may be applied to one or more of the
Settlement Options.
POLICY RIGHTS
Partial Surrenders
A partial surrender may be made at any time after the first Policy Year. If, at
the time of a partial surrender your Total Account Value is attributable to
more than one funding option, the transaction charge and the amount paid to you
upon the surrender will be taken proportionately from the Accumulation Unit
values in each funding option.
The amount of a partial surrender may not exceed the Surrender Value on the
date the request is received and may not be less than $500.
Partial surrenders may only be made prior to election of a Settlement Option.
For an Option 1 Death Benefit Policy (see "Death Benefit Options"):
A partial surrender will reduce the Total Account Value, Death Benefit, and
Specified Amount. The Specified Amount and Total Account Value will be reduced
by equal amounts and will reduce any past increases in the reverse order in
which they occurred.
For an Option 2 Death Benefit Policy (see "Death Benefit Options"):
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<PAGE>
A partial surrender will reduce the Total Account Value and the Death Benefit,
but it will not reduce the Specified Amount.
For an Option 3 Death Benefit Policy (see "Death Benefit Options"):
A partial surrender will reduce the Total Account Value, Death Benefit, and
Specified Amount. The Specified Amount and Total Account Value will be reduced
by equal amounts and will reduce any past increases in the reverse order in
which they occurred.
We will pay you on a full or partial surrender within seven calendar days after
we receive your written request at our Administrative Office in satisfactory
form. Payment may be postponed if the New York Stock Exchange has been closed
or trading has been restricted or an emergency exists. Your payment from the
Fixed Account Values may be deferred up to six months except when used to pay
premiums to the Company.
The Specified Amount remaining in force after a partial surrender may not be
less than $100,000. Any request for partial surrender that would reduce the
Specified Amount below this amount will not be granted. In addition, if,
following the 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 decrease may be limited to the extent
necessary to meet the federal tax law requirements.
Reinstatement of a Lapsed Policy
A lapse occurs if your Monthly Deduction is greater than the Policy's Surrender
Value and no payment to cover the deduction is made within 61 days of our
notifying you.
You can apply for reinstatement within five years after the date of lapse and
before the Maturity Date. To reinstate your Policy we will require satisfactory
evidence of insurability and an amount sufficient to pay for the current
Monthly Deductions, plus two additional Monthly Deductions. In the event of
reinstatement, the Policy will be reinstated on the monthly deduction day
following our approval. The Policy's total account value at reinstatement will
be the net premium paid less the monthly deduction due that day. Any loan
account value will not be reinstated.
Policy Loans
The maximum loan amount is 90% of Total Account Value unless individual state
laws require otherwise. The Loan Account Value, which is the loan amount plus
interest, reduces any proceeds payable.
Any loan made will be taken proportionally from the amount in each funding
option. Repayments on the loan will be allocated in proportion to current
premium allocations, and will reduce the Loan Account Value.
The annual rate we charge during any Policy Year will be:
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<PAGE>
o the monthly average (Moody's Investors Service, Inc. Composite Yield on
Corporate Bonds) for the calendar month which ends two months before the
month in which the Policy Anniversary occurs, or, if greater,
o 5%
This rate may increase only when it would be at least 0.5% higher than the prior
Policy Year's and decrease only when it would be at least 0.5% lower than the
prior Policy Year's.
When you take a loan, we will tell you the current policy loan interest rate. We
will tell you in advance of any interest rate change. You must pay interest on
the anniversary of the loan, or earlier upon surrender, payment of proceeds, or
maturity of a Policy. Any unpaid interest is added to the loan.
The Loan Account Value will earn interest at an annual rate equal to the greater
of:
o the policy loan interest rate less an annual rate not to exceed 0.90%; or
o 4.0%
The interest earned by the Loan Account Value will be added to the Fixed Account
Value and the Separate Account Value in the same proportion in which the loan
amount was originally deducted from these values.
Policy Changes
You may make changes to your Policy as described below by submitting a written
request to our Administrative Office in a form satisfactory to us.
Increases: You may increase the Specified Amount of your Policy at any time
subject to satisfactory evidence of insurability which may be required.
Decreases: Generally, you may decrease the Specified Amount of your Policy;
however, no decrease may reduce the Specified Amount below the minimum for the
type of Policy (see "Death Benefit Options"), and the availability of decreases
before the eighth Policy Year is subject to approval of this feature by state
regulatory agencies and to the Company's satisfaction that the decrease is
intended to meet a legitimate, non-insurance related business need of the
Policy owner.
The new Specified Amount will equal the Specified Amount less the Total Account
Value at the time of the change.
o Changes from Option 1 to Option 2 are allowed at any time. The new Specified
Amount will equal the Specified Amount less the Total Account Value at the
time of the change.
o Changes from Option 2 to Option 1 are allowed at any time. The new Specified
Amount will equal the Specified Amount plus the Total Account Value as of the
time of the change.
o Changes from Option 3 to Option 1 are allowed at any time. The Specified
Amount will be increased to equal the Specified Amount prior to the change
plus the
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<PAGE>
lesser of the Accumulated Premiums or the Total Account Value at the time of
the change.
o Changes from Option 3 to Option 2 are allowed at any time. The Specified
Amount will be reduced to equal the Specified Amount prior to the change
minus the difference between the Total Account Value and the sum of the
Accumulated Premiums at the time of the change.
o Changes from Options 1 or 2 to Option 3 are not allowed.
Right to Examine the Policy
The Policy has a "Right to Examine Period" during which you may examine the
Policy. If for any reason you are dissatisfied, it may be returned to our
Administrative Office for a refund. It must be returned within ten days after
you receive the Policy. Some states provide a longer period of time to exercise
these rights. Your Policy will indicate if you have more than 10 days to review
the Policy. If you return (cancel) the Policy, we will pay a refund of (1) the
difference between payments made and amounts allocated to the Separate Account,
plus (2) the value of the amount allocated to the Separate Account as of the
date the returned Policy is received by us, plus (3) any fees imposed on the
amounts allocated to the Separate Account. However, some state laws require
that the refund be equal to all premiums paid, without interest. Refunds will
usually occur within seven days of notice of cancellation, although a refund of
premiums you paid by check may be delayed until the check clears your bank.
DEATH BENEFIT
The Death Benefit under the Policy will be paid in a lump sum within seven days
after we receive due proof of the Insured's death (a certified copy of the death
certificate), unless you or the beneficiary have elected that it be paid under
one or more of the Settlement Options or such options as we may choose to make
available in the future. Payment of the Death Benefit may be delayed if the
Policy is being contested.
POLICY SETTLEMENT
Settlement Options
Proceeds in the form of Settlement Options are payable by the Company upon the
Insured's death, upon Maturity of the Policy, or upon election of one of the
Settlement Options.
Upon the death of the Insured the proceeds of the Policy will be paid to the
Beneficiary(ies) in the form of an annuity in Settlement Option 1, 2 or 3 if the
Beneficiary(ies) so elect. An annuity is a series of payments for a definite
period of time or for the life of an individual. For Settlement Option 4,
payments of requested amounts are made at the request of the Payee or payments
may be through one of the other available Settlement Options.
All or part of the Proceeds of this Policy may be applied, under one or more of
the options described below. An election shall be made by written request to
our Administrative Office. The Payee of Proceeds may make this election if no
prior election has been made.
26
<PAGE>
The Payee must designate whether the payments will be:
o on a fixed basis
o on a variable basis, or
o a combination of fixed and variable.
Variable Settlement Options will be supported by the then available Funds of
the Company's Variable Annuity Account N (Account N), a separate account very
similar to the Separate Account, except that Account N supports variable
annuity benefits rather than variable life insurance benefits. We will provide
an Account N prospectus in connection with selection of a Settlement Option.
That prospectus will describe the available Funds, the cost and expenses of
such Funds and the charges imposed on Account N. The available Funds may be and
the charges imposed on Account N are expected to be different from those that
relate to the Separate Account prior to commencement of a Settlement Option.
Accordingly, you should review the Account N prospectus, as well as
prospectuses for Account N's underlying Funds, prior to selecting any variable
payment Settlement Option. A minimum monthly payment of $50 from each funding
option will be required.
You make transfers among Funds while receiving payments on a variable basis
under our administrative procedures in effect at the time. Currently, we limit
the number of transfers to three per calendar year, but we can change this
limit in the future.
If no designation is made, the Separate Account Value shall be used to provide
a variable payment, and the Fixed Account Value shall be used to provide a
fixed payment.
If a fixed annuity is chosen, the annuity purchase rate for the option chosen
will reflect at least the minimum guaranteed interest rate of 3.0%.
Annuity Payment Options:
Option 1 -- Life Annuity/Life Annuity with Guaranteed Period -- Fixed and/or
variable annuity payments will be made for the lifetime of the Annuitant with
no certain period, or life and a 10 year certain period, or life and a 20 year
certain period.
Option 2 -- Unit Refund Life Annuity -- Variable annuity payments will be made
for the lifetime of the Annuitant with the guarantee that upon death, if (a)
the number of the Fund settlement option annuity units initially purchased
(determined by dividing the total dollar amount applied to purchase this
settlement option by the Fund settlement option annuity unit value on the
Annuity Commencement Date) is greater than (b) the number of Fund settlement
option annuity units paid as part of each variable annuity benefit payment
multiplied by the number of annuity benefit payments paid prior to death; then
a refund payment equal to the number of Fund settlement option annuity units
determined by (a) minus (b) will be made. The refund payment value will be
determined using the Fund settlement option annuity unit value on the Valuation
Date on which the death claim is approved by us for payment after we have
received (1) proof of death acceptable to us; (2) written authorization for
payment; and (3) all claim forms, fully completed.
Option 3 -- Cash Refund Life Annuity -- Fixed annuity payments will be made for
the lifetime of the Annuitant with the guarantee that upon death, if (a) the
total
27
<PAGE>
dollar amount applied to purchase this option is greater than (b) the fixed
annuity benefit payment multiplied by the number of annuity benefit payments
paid prior to death; then a refund payment equal to the dollar amount of (a)
minus (b) will be made. The refund payment will be made on the Valuation Date
on which the death claim is approved by us for payment after we are in receipt
of (1) proof of death acceptable to us; (2) written authorization for payment;
and (3) all claim forms, fully completed.
Option 4 -- Joint Life Annuity/Joint Life Annuity with Guaranteed Period --
Fixed and/or variable payments will be made during the joint life of the
Annuitant and a Joint Annuitant of the Owner's choice. Payments will be made
for life with no certain period, or life and a 10 year certain period, or life
and a 20 year certain period. Payments continue for the life of the survivor at
the death of the Annuitant or Joint Annuitant.
Other Options -- other options may be available as agreed upon in writing by
us.
TERM INSURANCE RIDER
The Policy can be issued with a Term Insurance Rider as a portion of the total
Death Benefit. The Rider provides term life insurance on the life of the
Insured, which is annually renewable to Attained Age 100. This rider will
continue in effect unless explicitly canceled by the Policy owner. The Rider
provides a vehicle for short-term insurance protection for Policy owners who
desire lower required premiums under the Policy, in anticipation of growth in
Total Account Value to fund life insurance coverage in later Policy Years. The
amount of coverage provided under the Rider's Benefit Amount varies from month
to month.
The Benefit Amount is the Target Face Amount minus the Specified Amount.
However, if the Death Benefit of the Policy is defined as a percentage of the
Total Account Value, the Benefit Amount is zero.
The cost of the Rider is added to the Monthly Deductions, and is based on the
Insured's premium class, Issue Age and the number of Policy Years elapsed. We
may adjust the monthly rider rate from time to time, but the rate will never
exceed the guaranteed cost of insurance rates for the Rider for that Policy
Year.
If the Policy's Death Benefit increases as a result of an increase in Total
Account Value (see "Life Insurance Qualification"), the Rider's Target Death
Benefit will be reduced by an equivalent amount to maintain the total desired
Death Benefit.
The Rider's Death Benefit is included in the total Death Benefit paid under the
Policy. (See "Death Benefit Options.")
THE COMPANY
The Company is registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers, Inc.
Directors and Officers of Lincoln Life
The following persons are Directors and Officers of Lincoln Life. Except as
indicated below, the address of each is 1300 South Clinton Street, Fort Wayne,
Indiana 46802, and each has been employed by Lincoln Life or its affiliates for
more than 5 years.
28
<TABLE>
<CAPTION>
Name, Address and
Position(s) with Registrant Principal Occupations Last Five Years
- ----------------------------- ------------------------------------------------------------
<S> <C>
Nancy J. Alford Vice President [4/96-present], (formerly Second Vice
Vice President President [1/90-4/96]), Lincoln National Life Insurance Co.
Roland C. Baker President [1/95-present], First Penn-Pacific Life Insurance
Vice President and Director Co. Formerly: Chairman and CFO [7/88-1/95], Baker,
1801 S. Meyers Road Ralish, Shipley and Politzer, Inc.
Oakbrook Terrace, Ill. 60181
Jon A. Boscia President, Chief Executive Officer and Director, Lincoln
Director National Corp. [1/98-present] (Formerly: President and
200 East Berry Street Chief Executive Officer [10/96-1/98] and Chief Operating
Fort Wayne, Ind. 46802 Officer [5/94-10/96]), Lincoln National Life Insurance Co.;
President [7/91-5/94] Lincoln Investment Management,
Inc.
John Gotta Vice President and General Manager [1/98-present]
Senior Vice President Lincoln National Life Insurance Co. Formerly: Senior Vice
and Assistant Secretary President, Connecticut General Life Insurance Company
350 Church Street [3/96-12/97]; Vice President, Connecticut Mutual Life
Hartford, CT 06103 Insurance Company [8/94-3/96]; Vice President, CIGNA
[3/93-8/94]
J. Michael Hemp President [11/96-Present], Lincoln Financial Advisors
Senior Vice President Corp.; Vice President [10/95-Present], Lincoln National
350 Church Street Life Insurance Co. Formerly: Regional Chief Executive
Hartford, CT 06103 Officer [11/79-10/95], Lincoln Dallas RMO.
Stephen H. Lewis Senior Vice President, [5/94-present] Lincoln National
Senior Vice President Life Insurance Co. Formerly: President [2/85-5/94], First
Penn-Pacific Life Insurance Co.
H. Thomas McMeekin President [5/94-present], Lincoln Investment
Director Management, Inc.; Executive Vice President [5/84-
200 East Berry Street Present], Lincoln National Corporation (formerly Senior
Fort Wayne, Ind. 46802 Vice President [11/92-5/94])
Arthur S. Ross Vice President, Lincoln National Life Insurance Co.
Vice President
Lawrence T. Rowland Executive Vice President [10/96-present] (formerly Senior
Executive Vice President Vice President [1/93-10/96]), Lincoln National Life
and Director Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
Keith J. Ryan Vice President and Controller [4/99-present] Formerly:
Vice President Senior Vice President [2/98-4/99]; Vice President, Chief
and Controller Financial Officer and Assistant Treasurer [1/96-present];
Controller [6/95-12/95], Business Controls Director
[11/90-6/95], Lincoln National Life Insurance Company.
Gabriel L. Shaheen President and Chief Executive Officer [1/98-present],
President, Chief Executive Lincoln National Life Insurance Co. Formerly: Chairman
Officer and Director and Managing Director, Lincoln National (UK) PLC [12/96-
1/98]; President, Lincoln National Reassurance Company
[7/95-12/96]; Senior Vice President, Lincoln National Life
Reinsurance Company [1/93-7/95]
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Name, Address and
Position(s) with Registrant Principal Occupations Last Five Years
- ----------------------------- -----------------------------------------------------------
<S> <C>
Todd R. Stephenson Senior Vice President, Chief Financial Officer and
Senior Vice President, Assistant Treasurer [4/99-present] Formerly: Vice
Chief Financial Officer and President and Assistant Secretary [1/98-4-99], Senior
Assistant Treasurer Vice President, Lincoln Financial Advisors Corporation
[1/98-4/99], Senior Vice President, Treasurer and Chief
Financial Officer, American States Insurance Company
[2/95-12/97], and Vice President-Corp. Acct., American
States Insurance Company [5/92-2/95]
Richard C. Vaughan Executive Vice President and Chief Financial Officer
Director [1/95-present] (formerly Senior Vice President
200 East Berry Street [4/92-1/95]), Lincoln National Corp.
Fort Wayne, Ind. 46802
Michael R. Walker Vice President [1/96-present], Lincoln National Life
Vice President Insurance Co. Formerly: Vice President [3/93-1/96],
Employers Health Insurance Co.
Roy V. Washington Vice President [7/96-present], Lincoln National Life
Vice President Insurance Co. (formerly, Associate Counsel [2/95-7/96]).
Formerly: Director of Compliance [8/94-2/95], Lincoln
Investment Management, Inc.; Compliance Consultant
[8/89-8/94], Lincoln National Corp.
Michael L. Wright Senior Vice President [3/95-present], Lincoln National
Senior Vice President Life Insurance Co. Formerly: Executive Vice President
and Chief Operating Officer [11/88-3/95], The
Associate Group.
</TABLE>
ADDITIONAL INFORMATION
Reports to Policyowners
Within 30 days after each Policy Anniversary and before proceeds are applied to
a Settlement Option, we will send you a report containing the following
information:
o a statement of changes in the Total Account Value and Surrender Value since
the prior report or since the Date of Issue, if there has been no prior
report. This includes a statement of Monthly Deductions and investment results
and any interest earnings for the report period;
o Surrender Value, Death Benefit, and any Loan Account Value as of the Policy
Anniversary;
o a projection of the Total Account Value, Loan Account Value and Surrender
Value as of the succeeding Policy Anniversary.
If you have Policy values funded in a Separate Account you will receive, in
addition, such periodic reports as may be required by the Commission.
Some state laws require additional reports; these requirements vary from state
to state.
Right to Instruct Voting of Fund Shares
In accordance with our view of present applicable law, we will vote the shares
of each of the Funds held in each Separate Account. The votes will be cast at
meetings of the shareholders of the Fund and will be based on instructions
received from
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Policy owners. However, if the 1940 Act or any regulations thereunder should be
amended or if the present interpretation thereof should change, and as a result
we determine that we are permitted to vote the shares of the Fund in our own
right, we may elect to do so.
The number of Fund shares which each Policy owner is entitled to direct a vote
is determined by dividing the portion of Total Account Value attributable to a
Fund, if any, by the net asset value of one share in the Fund. Where the value
of the Total Account Value or the Valuation Reserve relates to more than one
Fund, the calculation of votes will be performed separately for each Fund. The
number of shares which a person has a right to vote will be determined as of a
date to be chosen by us, but not more than 90 days before the meeting of the
Fund. Voting instructions will be solicited by written communication at least 14
days before such meeting. Fund shares for which no timely instructions are
received, and Fund shares which are not otherwise attributable to Policy owners,
will be voted by us in the same proportion as the voting instructions which are
received for all Policies participating in each Fund through the Separate
Account.
Policy owners having a voting interest will receive periodic reports relating to
the Fund, proxy material and a form for giving voting instructions.
Disregard of Voting Instructions
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the shares be voted so as
to cause a change in the sub-classification or investment objectives of a Fund
or to approve or disapprove an investment advisory contract for a Fund. In
addition, we may disregard voting instructions in favor of changes initiated by
a Policy owner in the investment policy or the investment adviser of a Fund if
we reasonably disapprove of such changes.
A change would be disapproved only if the proposed change is contrary to state
law or prohibited by state regulatory authorities, or we determined that the
change would have an adverse effect on the Separate Account in that the
proposed investment policy for a Fund may result in overly speculative or
unsound investments. In the event we do disregard voting instructions, a
summary of that action and the reasons for such action will be included in the
next annual report to Policy owners.
State Regulation
We are subject to regulation and supervision by the Insurance Department of the
state of Indiana, which periodically examines our affairs. We are also subject
to the insurance laws and regulations of all jurisdictions where we are
authorized to do business. The Policies have been approved by the Insurance
Department of the State of Indiana and in other jurisdictions where they are
offered.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
in which we do business, for the purposes of determining solvency and
compliance with local insurance laws and regulations.
Legal Matters
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of these proceedings are routine
and in the ordinary course of business. In some instances they include claims
for unspecified or
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substantial punitive damages and similar types of relief in addition to amounts
for equitable relief. After consultation with legal counsel and a review of
available facts, it is management's opinion that the ultimate liability, if any,
under these suits will not have a material adverse effect on the financial
position of Lincoln Life.
Lincoln Life is presently defending three lawsuits in which Plaintiffs seek to
represent national classes of policyholders in connection with alleged fraud,
breach of contract and other claims relating to the sale of interest-sensitive
universal and participating whole life insurance policies. As of the date of
this prospectus, the courts have not certified a class in any of the suits.
Plaintiffs seek unspecified damages and penalties for themselves and on behalf
of the putative class. Although the relief sought in these cases is substantial,
the cases are in the preliminary stages of litigation, and it is premature to
make assessments about potential loss, if any. Management is defending these
suits vigorously. The amount of liability, if any, which may ultimately arise as
a result of these suits cannot be reasonably determined at this time.
The Registration Statement
A Registration Statement under the 1933 Act has been filed with the Commission
relating to the offering described in this Prospectus. This Prospectus does not
include all the information set forth in the Registration Statement, certain
portions of which have been omitted pursuant to the rules and regulations of the
Commission. The omitted information may be obtained at the Commission's
principal office in Washington, DC, upon payment of the Commission's prescribed
fees.
Distribution of the Policies
The Policy will be sold by individuals and entities, who in addition to being
appointed as life insurance agents for Lincoln Life are also registered
representatives of Lincoln Financial Advisors, Inc. or of other registered
broker-dealers who maintain a selling relationship with Lincoln Life. Registered
broker-dealers and registered representatives of broker-dealers ordinarily
receive commission and service fees up to 35% of the first year premium as
defined and limited by Internal Revenue Code Section 7702, plus up to 10% of all
other premiums paid. A registered representative or registered broker-dealer may
be required to return all or part of any commission if the Policy is not
continued for a certain period. All compensation is paid from Lincoln Life
resources, which include sales charges made under this policy.
Records and Accounts
Andesa, TPA, Inc., Suite 502, 1621 N. Cedar Crest Boulevard, Allentown,
Pennsylvania, will act as a Transfer Agent on behalf of Lincoln Life as it
relates to the policies described in this Prospectus. In the role of a Transfer
Agent, Andesa will perform administrative functions, such as decreases,
increases, surrenders and partial surrenders, fund allocation changes and
transfers on behalf of the Company.
All records and accounts relating to the Separate Account and the Funds shares
held in the Separate Account will be maintained by the Company. All financial
transactions will be handled by the Company. All reports required to be made and
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information required to be given will be provided by Andesa on behalf of the
Company.
Experts
The statutory-basis financial statements of Lincoln Life appearing in this
prospectus and registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report which also appears elsewhere
in this document and in the registration statement. The financial statements
audited by Ernst & Young LLP have been included in this document in reliance on
their report given on their authority as experts in accounting and auditing.
Legal matters included in this prospectus have been examined by Robert A.
Picarello, Esq. as stated in the opinion filed as an exhibit to the
registration statement.
Actuarial matters included in this prospectus have been examined by Ronald D.
Franzluebbers, FSA as stated in the opinion filed as an exhibit to this
registration statement.
Advertising
Lincoln Life is also ranked and rated by independent financial rating services,
including Moody's, Standard & Poor's, Duff & Phelps and A.M. Best Company. The
purpose of these ratings is to reflect the financial strength or claims-paying
ability of Lincoln Life. The ratings are not intended to reflect the investment
experience or financial strength of the Separate Account. Lincoln Life may
advertise these ratings from time to time. In addition, Lincoln Life may
include in certain advertisements, endorsements in the form of a list of
organizations, individuals or other parties which recommend Lincoln Life or the
Policies. Furthermore, Lincoln Life may occasionally include in advertisements
comparisons of currently taxable and tax deferred investment programs, based on
selected tax brackets, or discussions of alternative investment vehicles and
general economic conditions.
We are a member of the Insurance Marketplace Standards Association ("IMSA") and
may include the IMSA logo and information about IMSA membership in our
advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services for individually
sold life insurance and annuities.
Preparing for Year 2000
Many existing computer programs use only two digits in the date field to
identify the year. If left uncorrected these programs, which were designed and
developed without considering the impact of the upcoming change in the century,
could fail to operate or could produce erroneous results when processing dates
after December 31, 1999. For example, a bond with a stated maturity date of
July 1, 2000, a computer program could read and store the maturity date as July
1, 1900. This program is known by many names, such as the "Year 2000 Problem",
"Y2K" and the "Millennium Bug".
The Year 2000 Problem affects virtually all computer programs worldwide. It can
cause a computer system to suddenly stop operating. It can also result in a
computer corrupting vital company records, and the program could go undetected
for a long time. For our products, if left unchecked it could cause such
problems as purchase
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payment, collection and deposit errors; claim payment difficulties; accounting
errors; erroneous unit values; and difficulties or delays in processing
transfers, surrenders and withdrawals. In a worst case scenario, this could
result in a material disruption to the operations both of Lincoln Life and of
Delaware Service Company Inc. (Delaware), the provider of the accounting and
valuation services for the Separate Account.
However, both companies are wholly owned by Lincoln National Corporation (LNC),
which has had Year 2000 processes in place since 1996. LNC projects aggregate
expenditures in excess of $92 million for its Y2K efforts through the year
2000. Both Lincoln Life and Delaware have dedicated Year 2000 teams and
steering committees that are answerable to their counterparts in LNC.
In light of the potential problems discussed above, Lincoln Life, as part of
its Year 2000 updating process, has assumed responsibility for correcting all
high-priority Information Technology (IT) systems which service the Separate
Account. Delaware is responsible for updating all its high-priority IT systems
to support these vital services. The Year 2000 effort, for both IT and non-IT
systems, is organized into four phases:
o awareness-raising and inventory of all assets (including third-party agent and
vendor relationships:
o assessment and high-level planning and strategy;
o remediation of affected systems and equipment; and
o testing to verify Year 2000 readiness.
Both companies are currently on schedule to have their high-priority IT systems
remediated and tested to demonstrate readiness by June 30, 1999. During the
third and fourth quarters of 1999 additional testing of the environment will
continue. Both companies are currently on schedule to have their high-priority
non-IT systems (elevators, heating and ventilation, security systems, etc.)
remediated and tested by October 31, 1999.
The work on Year 2000 issues has not suffered significant delays; however, some
uncertainty remains. Specific factors that give rise to this uncertainty
include (but are certainly not limited to) a possible loss of technical
resources to perform the work: failure to identify all susceptible systems; and
non-compliance by third parties whose systems and operations impact Lincoln
Life. In a report dated February 26, 1999, entitled Investigating the Impact of
the Year 2000 Technology Problem, S. Rpt. 106-10, the U.S. Senate Special
Committee on the Year 2000 Technology Problem expressed its concern that
"Financial services firms . . . are particularly vulnerable to . . . the risk
that a material customer or business partner will fail, as a result of the
computer problems, to meet its obligations."
One important source of uncertainty is the extent to which the key trading
partners of Lincoln Life and of Delaware will be successful in their own
remediation and testing efforts. Lincoln Life and Delaware have been monitoring
the progress of their trading partners; however, the efforts of these partners
are beyond our control.
Lincoln Life and Delaware expect to have completed their necessary remediation
and testing efforts prior to December 31, 1999. However, given the nature and
complexity of the problem, there can be no guarantee by either company that
there will not be significant computer problems after December 31, 1999.
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TAX MATTERS
General
The following is a discussion of the federal income tax considerations relating
to the Policy. This discussion is based on the Company's understanding of
federal income tax laws as they now exist and are currently interpreted by the
Internal Revenue Service ("IRS"). These laws are complex, and tax results may
vary among individuals. A person or persons contemplating the purchase of or
the exercise of elections under the Policy described in this Prospectus should
seek competent tax advice.
Federal Tax Status of the Company
The Company is taxed as a life insurance company in accordance with the Code.
For federal income tax purposes, the operations of each Separate Account form a
part of the Company's total operations and are not taxed separately, although
operations of each Separate Account are treated separately for accounting and
financial statement purposes.
Under existing federal income tax law, the Company believes that the Separate
Account investment income and realized net capital gains will not be taxed to
the extent that such income and gains are applied to increase the reserves
under the contracts. Accordingly, the Company does not anticipate that it will
incur any federal income tax liability attributable to the Separate Account.
Therefore, the Company does not intend to make provisions for any such taxes.
However, the Company reserves the right to make a deduction for such taxes
should they be imposed with respect to such items in the future.
Life Insurance Qualification
Section 7702 of the Code includes a definition of life insurance for tax
purposes. The Code and IRS rules generally place limits on the amount of
premiums payable under the contract and the level of cash surrender value. In
no event may the total of all premiums paid exceed the then-current maximum
premium limitations established by federal law for a Policy to qualify as life
insurance. If, at any time, a premium is paid which would result in total
premiums exceeding such maximum premium limitation, we will only accept that
portion of the premium which will make total premiums equal the maximum. Any
part of the premium in excess of that amount will be returned or applied as
otherwise agreed and no further premiums will be accepted until allowed by the
then-current maximum premium limitations prescribed by law. The Secretary of
the Treasury has been granted authority to prescribe regulations to carry out
the purposes of Section 7702, and proposed regulations governing mortality
charges were issued in 1991. The Company believes that the Policy meets the
statutory definition of life insurance. As such, and assuming the
diversification standards of Section 817(h) (discussed below) are satisfied,
then except in limited circumstances (a) death benefits paid under the Policy
should generally be excluded from the gross income of the beneficiary for
federal income tax purposes under Section 101(a)(1) of the Code, and (b) a
Policyowner should not generally be taxed on the cash value under a Policy,
including increments thereof, prior to actual receipt. The principal exceptions
to these rules are corporations that are subject to the alternative minimum
tax, and thus may be subject to tax on increments in the Policy's Total Account
Value, and Policyowners who acquire a Policy in a "transfer for value" and thus
can become subject to tax on the portion of the Death Benefit which exceeds the
total of their cost of acquisition and subsequent premium payments.
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The Company intends to comply with any future final regulations issued under
Sections 7702 and 817(h) of the Code, and therefore reserves the right to make
such changes as it deems necessary to ensure such compliance. Any such changes
will apply uniformly to affected Policyowners and will be made only after
advance written notice.
General Rules
Upon the surrender or cancellation of any Policy, whether or not it is a
Modified Endowment Contract, the Policyowner will be taxed on the Surrender
Value only to the extent that it exceeds the gross premiums paid less prior
untaxed withdrawals. The amount of any unpaid Policy Loans will, upon
surrender, be added to the Surrender Value and will be treated for this purpose
as if it had been received.
Assuming the Policy is not a Modified Endowment Contract, the proceeds of any
Partial Surrenders are generally not taxable unless the total amount received
due to such surrenders exceeds total premiums paid less prior untaxed Partial
Surrender amounts. However, Partial Surrenders made within the first 15 Policy
Years may be taxable in certain limited instances where the Surrender Value
plus any unpaid Policy debt exceeds the total premiums paid less the untaxed
portion of any prior Partial Surrenders. This result may occur even if the
total amount of any Partial Surrenders does not exceed total premiums paid to
that date.
Loans received under the Policy will ordinarily be considered indebtedness of
the Policy owner, and assuming the Policy is not considered a Modified
Endowment Contract, Policy Loans will not be treated as current distributions
subject to tax. Generally, amounts of loan interest paid by individuals will be
considered nondeductible "personal interest."
Modified Endowment Contracts
A class of contracts known as "Modified Endowment Contracts" has been created
under Section 7702A of the Code. The tax rules applicable to loan proceeds and
proceeds of a Partial Surrender of any Policy that is considered to be a
Modified Endowment Contract will differ from the general rules noted above.
A contract will be considered a Modified Endowment Contract if it fails the
"7-pay test." A Policy fails the 7-pay test if, at any time in the first seven
Policy Years, the amount paid into the Policy exceeds the amount that would
have been paid had the Policy provided for the payment of seven (7) level
annual premiums. In the event of a distribution under the Policy, the Company
will notify the Policyowner if the Policy is a Modified Endowment Contract.
In addition, each Policy is subject to the 7-pay test during the first seven
Policy Years following the time a material change takes effect. A material
change, for these purposes, includes the exchange of a life insurance policy
for another life insurance policy or the conversion of a term life insurance
policy into a whole life or universal life insurance policy. In addition, an
increase in the future benefits provided constitutes a material change unless
the increase is attributable to (1) the payment of premiums necessary to fund
the lowest Death Benefit payable in the first seven Policy Years or (2) the
crediting of interest or other earnings with respect to such premiums. A
reduction in death benefits during the first seven Policy Years may also cause
a Policy to be considered a Modified Endowment Contract.
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If the Policy is considered to be a Modified Endowment Contract, the proceeds
of any Partial Surrenders, any Policy Loans and most assignments will be
currently taxable to the extent that the Policy's Total Account Value
immediately before payment exceeds gross premiums paid (increased by the amount
of loans previously taxed and reduced by untaxed amounts previously received).
These rules may also apply to Policy Loans or Partial Surrender proceeds
received during the two-year period prior to the time that a Policy becomes a
Modified Endowment Contract. If the Policy becomes a Modified Endowment
Contract, it may be aggregated with other Modified Endowment Contracts
purchased by you from the Company (and its affiliates) during any one calendar
year for purposes of determining the taxable portion of withdrawals from the
Policy.
A penalty tax equal to 10% of the amount includable in income will apply to the
taxable portion of the proceeds of any Policy Surrender or Policy Loan received
by any Policyowner of a Modified Endowment Contract who is not an individual.
Taxable policy distributions made to an individual who has not reached the age
of 591/2 will also be subject to the penalty tax unless those distributions are
attributable to the individual becoming disabled, or are part of a series of
equal periodic payments made not less frequently than annually for the life or
life expectancy of such individual (i.e., an annuity).
Diversification Standards
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund, the shares of which are owned by separate
accounts of insurance companies) underlying the Policy must be "adequately
diversified" in accordance with Treasury regulations in order for the Policy to
qualify as life insurance. The Treasury Department has issued regulations
prescribing the diversification requirements in connection with variable
contracts. The Separate Account, through the Funds, intends to comply with
these requirements.
Investor Control
In certain circumstances, owners of variable contracts may be considered the
owners for federal income tax purposes of the assets of the separate account
used to support their contracts. In those circumstances, income and gains from
separate account assets would be includable in the variable contract owner's
gross income. In several rulings published prior to the enactment of Section
817(h), the IRS stated that a variable contract owner will be considered the
owner of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations under Section 817(h) concerning diversification,
that those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor (i.e., you), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which Policyowners may direct their investments to particular Funds
without being treated as owners of the underlying assets." As of the date of
this Prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in certain
respects from those described by the IRS in pre-Section 817(h) rulings in which
it was determined that Policy owners were not owners of separate account
assets. For
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example, a Policy owner has additional flexibility in allocating premium
payments and account values. While the Company does not believe that these
differences would result in a Policy owner being treated as the owner of a pro
rata portion of the assets of the Separate Account, there is no regulation or
ruling of the IRS that confirms this conclusion. In addition, the Company does
not know what standards will be set forth, if any, in the regulations or
rulings which the Treasury Department has stated it expects to issue. The
Company therefore reserves the right to modify the Policy as necessary or to
limit the number of variable options available to attempt to prevent a
Policyowner from being considered the owner of a pro rata share of the assets
of the Separate Account.
Other Tax Considerations
Business-owned life insurance may be subject to certain additional rules.
Section 264(a)(1) of the Code generally prohibits employers from deducting
premiums on policies covering officers, employees or other financially
interested parties where the employer is a beneficiary under the Policy.
Additions to the Policy's Total Account Value may also be subject to tax under
the corporation alternative minimum tax provisions. In addition, Section
264(a)(4) of the Code limits the Policy owner's deduction for interest on loans
taken against life insurance covering the lives of officers, employees, or
others financially interested in the Policy owner's trade or business. Under
current tax law, interest may generally be deducted on an aggregate total of
$50,000 of loans per covered life only with respect to life insurance policies
covering each officer, employee or others who may have a financial interest in
the Policy owner's trade or business and are considered key persons.
Generally, a key person means an officer or a 20 percent owner. However, the
number of key persons will be limited to the greater of (a) 5 individuals, or
(b) the lesser of 5 percent of the total officers and employees of the taxpayor
or 20 individuals. Deductible interest for these contracts will be capped based
on applicable Moody's Corporate Bond Rate. Section 264 (f) of the Code denies a
deduction for a portion of a Policyowner's otherwise deductible interest that
is allocable to nonborrowed policy cash values. The nondeductible interest
amount is the amount that bears the same ratio to such interest as the
company's average nonborrowed cash values of life insurance and annuity
policies issued after June 8, 1997 bears to the sum of the average nonborrowed
cash values of policies plus the average adjusted tax basis of other assets
owned by the company. This provision does not apply to policies in which the
insured is a 20 percent owner, officer, director or employee of the business,
including policies jointly covering such individual and his or her spouse. The
rule also will not apply where the Policyowner is a natural person, unless a
trade or business is directly or indirectly the beneficiary of the policy.
Depending on the circumstances, the exchange of a policy, a change in the
Policy's Death Benefit Option, a Policy Loan, a Full or Partial Surrender, a
change in Ownership or an assignment of the Policy may have federal income tax
consequences. In addition, federal, state and local transfer, estate,
inheritance and other tax consequences of policy ownership, premium payments
and receipt of policy proceeds depend on the circumstances of each Policy owner
or beneficiary. Any person concerned about these tax implications should
consult a competent tax advisor before initiating any transaction.
MISCELLANEOUS POLICY PROVISIONS
The Policy, including riders, which you receive and the application you make
when you purchase the Policy are the whole contract. A copy of the application
is attached to the Policy when it is issued to you. Any application for
changes, once approved by us, will become part of the Policy.
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Payment of Benefits
All benefits are payable by us. We may require submission of the Policy before
we grant loans, make changes or pay benefits.
Age
If age is misstated on the application, the amount payable on death will be
that which would have been purchased by the most recent monthly deduction at
the current age.
Incontestability
We will not contest coverage under the Policy after the Policy has been in
force during the lifetime of the insured for a period of two years from the
Policy's Date of Issue.
For coverage which takes effect on a later date (e.g., an increase in
coverage), we will not contest such coverage after it has been in force during
the lifetime of the Insured more than two years from its effective date.
Suicide
In most states, if the Insured commits suicide within two years from the Date
of Issue, the only benefit paid will be the sum of:
a) premiums paid less amounts allocated to the Separate Account; and
b) the Separate Account Value on the date of suicide, plus the portion of the
Monthly Deduction from the Separate Account Value, minus
c) the amount necessary to repay any loans in full and any interest earned on
the Loan Account Value transferred to the Separate Account Value, and any
surrenders from the Fixed Account.
If the Insured commits suicide within two years from the effective date of any
increase in coverage, we will pay as a benefit only the Monthly Deduction for
the increase, in lieu of the face amount of the increase.
All amounts described in (a) and (c) above will be calculated as of the date of
death.
Coverage Beyond Maturity
You may, by written request at any time before the Maturity Date of this
Policy, elect to continue coverage beyond the Maturity Date. At Age 100, the
Separate Account Value will be transferred to the Fixed Account. If coverage
beyond maturity is elected, we will continue to credit interest to the Total
Account Value of this Policy. Monthly Deductions will be calculated with a Cost
of Insurance rate equal to zero. (This provision is not available in certain
states.)
At this time, uncertainties exist regarding the tax treatment of the Policy
should it continue beyond the Maturity Date. You should therefore consult with
your tax advisor prior to making this election. (See "Tax Matters.")
Nonparticipation
The Policy is not entitled to share in the divisible surplus of the Company. No
dividends are payable.
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Appendix A
Illustrations of Death Benefit, Total Account Values and Surrender Values.
The following tables illustrate how the Death Benefit, Total Account Values and
Surrender Values of a Policy change with the investment experience of the
variable funding options. The tables show how the Death Benefit, Total Account
Values and Surrender Values of a Policy issued with an insured of a given age
and a given premium would vary over time if the investment return on the assets
held in each Fund were a uniform, gross after tax annual rate of 0%, 6%, and
12%, respectively.
Tables I, II, VII and VIII illustrate Policies issued on a unisex basis, age 45,
in the preferred nonsmoker rate class for fully underwriting issue. Tables III,
IV, IX and X illustrate Policies issued on a unisex basis, age 45 in the
nonsmoker rate class for guaranteed issue underwriting. Tables V, VI, XI and XII
illustrate Policies issued on a unisex basis, age 45 in the nonsmoker rate class
for simplified issue underwriting. Tables I through VI show values under the
Guideline Premium Test for the definition of life insurance, and Tables VII
through XII show values under the Cash Value Accumulation Test for the
definition of life insurance. The Death Benefit, Total Account Values, and
Surrender Values would be different from those shown if the gross annual
investment rates of return averaged 0%, 6%, and 12%, respectively, over a period
of years, but fluctuated above and below those averages for individual Policy
Years.
The second column of each table shows the accumulated values of the premiums
paid at an assumed rate of 5%. The third through fifth columns illustrate the
Death Benefit of a Policy over a designated period. The sixth through eighth
columns illustrate the Total Account Values, while the ninth through eleventh
columns illustrate the Surrender Values of each Policy over the designated
period. Tables I, III, V, VII, IX and XI assume the maximum Cost of Insurance
allowable under the Policy is charged in all Policy Years. These tables also
assume that the maximum allowable mortality and expense risk charge of 0.90% on
an annual basis, the maximum allowable premium load of 15% up to the first
year's Target Premium and 6% over the Target Premium, are assessed in the first
Policy Year; the maximum allowable premium load of 10% up to the second year's
Target Premium and 6% over the Target Premium, are assessed in the second
through fifth Policy Year and 6% on all premium in all Policy years thereafter.
Tables II, IV, VI, VIII, X and XII assume that the current scale of Cost of
Insurance rates applies during all policy years. These tables also assume the
current mortality and expense risk charge of 0.70% on an annual basis for the
first 10 policy years and 0.35% for policy years 11 and thereafter, the current
premium load of 10.5% up to the first year's target premium and 2.5% over the
target premium are assumed in the first policy year, the current premium load of
7.5% up to the second through the fifth years' target premiums and 1.5% over the
target premiums are assumed in the second through the fifth policy years, the
current premium load of 3.5% up to the sixth and the seventh years' target
premiums and 1.5% over the target premiums are assumed in the sixth and the
seventh policy years, 1.5% on all premium in all policy years thereafter.
The amounts shown for Death Benefit, Surrender Values, and Total Account Values
reflect the fact that the net investment return is lower than the gross return
on the assets held in each Fund as a result of expenses paid by each Fund and
Separate Account charges levied.
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The values shown take into account the daily investment advisory fee and other
Fund expenses paid by each Fund. See individual prospectuses for each Fund for
more information.
In addition, these values reflect the application of the mortality and expense
risk charge, premium load and an assumed premium tax charge of 2.05% on all
premium. After deduction of these amounts, the illustrated net annual return is
- -1.73%, 4.27% and 10.27% on a maximum charge basis for all years. The
illustrated net annual return on a current charge basis is -1.53%, 4.47% and
10.47% for Policy Years 1-10 and -1.18%, 4.82% and 10.82% for Policy Years 11
and thereafter.
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 0.83% of the daily net asset value of the Variable
Account. This rate reflects an arithmetic average of total Fund portfolio annual
expenses for the year ending December 31, 1998.
The hypothetical values shown in the tables do not reflect any Separate Account
charges for federal income taxes, since we are not currently making such
charges. However, such charges may be made in the future, and in that event, the
gross annual investment rate of return would have to exceed 0%, 6% or 12% by an
amount sufficient to cover the tax charges in order to produce the Death
Benefit, Total Account Values, and Surrender Values illustrated.
The tables illustrate the Policy Values that would result based upon the
hypothetical investment rates of return if premiums were paid as indicated, if
all Net Premiums were allocated to Account S, and if no Policy loans have been
made. The tables are based on the assumptions that the Policyowner has not
requested an increase or decrease in the Specified Amount of the Policy, and no
partial surrenders have been made.
Upon request, we will provide an illustration based upon the proposed Insured's
age and underwriting classification, the Specified Amount or premium requested,
the proposed frequency of premium payments and any available riders requested.
The hypothetical gross annual investment return assumed in such an illustration
will not exceed 12%.
41
<PAGE>
Table I
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 NONSMOKER RISK
SIMPLIFIED ISSUE
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM TEST
FACE AMOUNT $796,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 796,000 796,000 796,000 5,202 5,596 5,991 5,902 6,296 6,691
2 21,525 796,000 796,000 796,000 10,630 11,773 12,967 11,155 12,298 13,492
3 33,101 796,000 796,000 796,000 15,775 18,022 20,465 15,775 18,022 20,465
4 45,256 796,000 796,000 796,000 20,613 24,319 28,514 20,613 24,319 28,514
5 58,019 796,000 796,000 796,000 25,144 30,662 37,171 25,144 30,662 37,171
6 71,420 796,000 796,000 796,000 29,746 37,453 46,926 29,746 37,453 46,926
7 85,491 796,000 796,000 796,000 33,975 44,246 57,406 33,975 44,246 57,406
8 100,266 796,000 796,000 796,000 37,800 51,008 68,662 37,800 51,008 68,662
9 115,779 796,000 796,000 796,000 41,179 57,693 80,736 41,179 57,693 80,736
10 132,068 796,000 796,000 796,000 44,061 64,243 93,673 44,061 64,243 93,673
15 226,575 796,000 796,000 796,000 49,875 93,560 174,280 49,875 93,560 174,280
20 347,193 796,000 796,000 796,000 35,529 110,303 292,005 35,529 110,303 292,005
25 501,136 0 796,000 796,000 0 95,232 472,138 0 95,232 472,138
30 697,610 0 796,000 838,713 0 7,813 783,844 0 7,813 783,844
20 (Age 65) 347,193 796,000 796,000 796,000 35,529 110,303 292,005 35,529 110,303 292,005
</TABLE>
Guaranteed cost of insurance rates. Maximum mortality and expense risk charges.
Administrative charges and premium loads.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges, and
premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
42
<PAGE>
Table II
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 NONSMOKER RISK
SIMPLIFIED ISSUE
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM TEST
FACE AMOUNT $796,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 796,000 796,000 796,000 7,005 7,478 7,952 7,705 8,178 8,652
2 21,525 796,000 796,000 796,000 14,031 15,432 16,892 14,556 15,957 17,417
3 33,101 796,000 796,000 796,000 20,786 23,576 26,601 20,786 23,576 26,601
4 45,256 796,000 796,000 796,000 27,277 31,923 37,166 27,277 31,923 37,166
5 58,019 796,000 796,000 796,000 33,506 40,483 48,681 33,506 40,483 48,681
6 71,420 796,000 796,000 796,000 39,864 49,677 61,685 39,864 49,677 61,685
7 85,491 796,000 796,000 796,000 45,935 59,100 75,881 45,935 59,100 75,881
8 100,266 796,000 796,000 796,000 51,891 68,944 91,595 51,891 68,944 91,595
9 115,779 796,000 796,000 796,000 57,493 78,981 108,736 57,493 78,981 108,736
10 132,068 796,000 796,000 796,000 62,695 89,173 127,418 62,695 89,173 127,418
15 226,575 796,000 796,000 796,000 82,217 143,195 253,160 82,217 143,195 253,160
20 347,193 796,000 796,000 796,000 87,562 199,764 458,367 87,562 199,764 458,367
25 501,136 796,000 796,000 945,316 83,592 266,691 814,928 83,592 266,691 814,928
30 697,610 796,000 796,000 1,512,718 55,906 338,895 1,413,755 55,906 338,895 1,413,755
20 (Age 65) 347,193 796,000 796,000 796,000 87,562 199,764 458,367 87,562 199,764 458,367
</TABLE>
Current cost of insurance rates. Current mortality and expense risk charges,
administrative charges and premium load.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charges may be reduced from
0.70% to 0.35% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.18%, 4.82%, and 10.82%.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
43
<PAGE>
Table III
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 NONSMOKER RISK
GUARANTEED ISSUE
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM TEST
FACE AMOUNT $792,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 792,000 792,000 792,000 5,215 5,609 6,005 5,915 6,309 6,705
2 21,525 792,000 792,000 792,000 10,657 11,801 12,997 11,182 12,326 13,522
3 33,101 792,000 792,000 792,000 15,817 18,067 20,514 15,817 18,067 20,514
4 45,256 792,000 792,000 792,000 20,670 24,383 28,586 20,670 24,383 28,586
5 58,019 792,000 792,000 792,000 25,218 30,747 37,269 25,218 30,747 37,269
6 71,420 792,000 792,000 792,000 29,838 37,562 47,054 29,838 37,562 47,054
7 85,491 792,000 792,000 792,000 34,086 44,381 57,570 34,086 44,381 57,570
8 100,266 792,000 792,000 792,000 37,932 51,173 68,868 37,932 51,173 68,868
9 115,779 792,000 792,000 792,000 41,334 57,890 80,991 41,334 57,890 80,991
10 132,068 792,000 792,000 792,000 44,241 64,478 93,984 44,241 64,478 93,984
15 226,575 792,000 792,000 792,000 50,225 94,068 175,046 50,225 94,068 175,046
20 347,193 792,000 792,000 792,000 36,162 111,308 293,731 36,162 111,308 293,731
25 501,136 0 792,000 792,000 0 97,191 475,958 0 97,191 475,958
30 697,610 0 792,000 847,618 0 11,721 792,167 0 11,721 792,167
20 (Age 65) 347,193 792,000 792,000 792,000 36,162 111,308 293,731 36,162 111,308 293,731
</TABLE>
Guaranteed cost of insurance rates. Maximum mortality and expense risk charges.
Administrative charges and premium loads.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges, and
premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
44
<PAGE>
Table IV
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 NONSMOKER RISK
GUARANTEED ISSUE
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM TEST
FACE AMOUNT $792,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 792,000 792,000 792,000 6,723 7,187 7,651 7,423 7,887 8,351
2 21,525 792,000 792,000 792,000 13,474 14,840 16,264 13,999 15,365 16,789
3 33,101 792,000 792,000 792,000 19,964 22,675 25,617 19,964 22,675 25,617
4 45,256 792,000 792,000 792,000 26,202 30,709 35,799 26,202 30,709 35,799
5 58,019 792,000 792,000 792,000 32,196 38,956 46,906 32,196 38,956 46,906
6 71,420 792,000 792,000 792,000 38,342 47,844 59,482 38,342 47,844 59,482
7 85,491 792,000 792,000 792,000 44,231 56,975 73,233 44,231 56,975 73,233
8 100,266 792,000 792,000 792,000 50,040 66,548 88,490 50,040 66,548 88,490
9 115,779 792,000 792,000 792,000 55,541 76,345 105,169 55,541 76,345 105,169
10 132,068 792,000 792,000 792,000 60,693 86,336 123,392 60,693 86,336 123,392
15 226,575 792,000 792,000 792,000 81,004 140,243 246,949 81,004 140,243 246,949
20 347,193 792,000 792,000 792,000 88,279 197,841 449,235 88,279 197,841 449,235
25 501,136 792,000 792,000 927,446 84,965 264,797 799,522 84,965 264,797 799,522
30 697,610 792,000 792,000 1,485,434 57,685 336,671 1,388,256 57,685 336,671 1,388,256
20 (Age 65) 347,193 792,000 792,000 792,000 88,279 197,841 449,235 88,279 197,841 449,235
</TABLE>
Current cost of insurance rates. Current mortality and expense risk charges,
administrative charges and premium load.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charges may be reduced from
0.70% to 0.35% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.18%, 4.82%, and 10.82%.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
45
<PAGE>
Table V
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 PREFERRED NONSMOKER RISK
FULLY UNDERWRITTEN
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM TEST
FACE AMOUNT $840,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 840,000 840,000 840,000 5,060 5,449 5,840 5,760 6,149 6,540
2 21,525 840,000 840,000 840,000 10,338 11,462 12,637 10,863 11,987 13,162
3 33,101 840,000 840,000 840,000 15,322 17,527 19,925 15,322 17,527 19,925
4 45,256 840,000 840,000 840,000 19,988 23,617 27,727 19,988 23,617 27,727
5 58,019 840,000 840,000 840,000 24,335 29,728 36,094 24,335 29,728 36,094
6 71,420 840,000 840,000 840,000 28,740 36,261 45,512 28,740 36,261 45,512
7 85,491 840,000 840,000 840,000 32,755 42,763 55,599 32,755 42,763 55,599
8 100,266 840,000 840,000 840,000 36,349 49,199 66,396 36,349 49,199 66,396
9 115,779 840,000 840,000 840,000 39,475 55,516 77,935 39,475 55,516 77,935
10 132,068 840,000 840,000 840,000 42,078 61,651 90,246 42,078 61,651 90,246
15 226,575 840,000 840,000 840,000 46,024 87,971 165,847 46,024 87,971 165,847
20 347,193 840,000 840,000 840,000 28,571 99,249 273,023 28,571 99,249 273,023
25 501,136 0 840,000 840,000 0 73,677 430,104 0 73,677 430,104
30 697,610 0 0 840,000 0 0 688,585 0 0 688,585
20 (Age 65) 347,193 840,000 840,000 840,000 28,571 99,249 273,023 28,571 99,249 273,023
</TABLE>
Guaranteed cost of insurance rates. Maximum mortality and expense risk charges.
Administrative charges and premium loads.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges, and
premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
46
<PAGE>
Table VI
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 PREFERRED NONSMOKER RISK
FULLY UNDERWRITTEN
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM TEST
FACE AMOUNT $840,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 840,000 840,000 840,000 7,157 7,635 8,113 7,857 8,335 8,813
2 21,525 840,000 840,000 840,000 14,168 15,583 17,057 14,693 16,108 17,582
3 33,101 840,000 840,000 840,000 20,758 23,566 26,611 20,758 23,566 26,611
4 45,256 840,000 840,000 840,000 26,967 31,621 36,878 26,967 31,621 36,878
5 58,019 840,000 840,000 840,000 32,841 39,798 47,983 32,841 39,798 47,983
6 71,420 840,000 840,000 840,000 38,822 48,564 60,508 38,822 48,564 60,508
7 85,491 840,000 840,000 840,000 44,539 57,558 74,193 44,539 57,558 74,193
8 100,266 840,000 840,000 840,000 50,200 67,009 89,399 50,200 67,009 89,399
9 115,779 840,000 840,000 840,000 55,589 76,712 106,055 55,589 76,712 106,055
10 132,068 840,000 840,000 840,000 60,664 86,638 124,282 60,664 86,638 124,282
15 226,575 840,000 840,000 840,000 80,555 140,090 247,733 80,555 140,090 247,733
20 347,193 840,000 840,000 840,000 88,000 197,439 449,555 88,000 197,439 449,555
25 501,136 840,000 840,000 927,123 87,397 266,053 799,244 87,397 266,053 799,244
30 697,610 840,000 840,000 1,486,870 65,280 340,857 1,389,598 65,280 340,857 1,389,598
20 (Age 65) 347,193 840,000 840,000 840,000 88,000 197,439 449,555 88,000 197,439 449,555
</TABLE>
Current cost of insurance rates. Current mortality and expense risk charges,
administrative charges and premium load.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charges may be reduced from
0.70% to 0.35% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.18%, 4.82%, and 10.82%.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
47
<PAGE>
Table VII
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 NONSMOKER RISK
SIMPLIFIED ISSUE
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $656,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 656,000 656,000 656,000 17,484 18,615 19,747 19,234 20,365 21,497
2 53,813 656,000 656,000 656,000 35,802 39,239 42,815 37,114 40,552 44,128
3 82,754 656,000 656,000 656,000 53,705 60,655 68,174 53,705 60,655 68,174
4 113,142 656,000 656,000 656,000 71,187 82,888 96,058 71,187 82,888 96,058
5 145,049 656,000 656,000 656,000 88,258 105,986 126,753 88,258 105,986 126,753
6 178,551 656,000 656,000 656,000 105,906 131,035 161,672 105,906 131,035 161,672
7 213,729 656,000 656,000 656,000 123,110 157,064 200,156 123,110 157,064 200,156
8 224,415 656,000 656,000 656,000 117,877 160,786 217,928 117,877 160,786 217,928
9 235,636 656,000 656,000 656,000 112,417 164,417 237,393 112,417 164,417 237,393
10 247,418 656,000 656,000 656,000 106,683 167,916 258,723 106,683 167,916 258,723
15 315,775 656,000 656,000 835,540 72,655 182,354 398,386 72,655 182,354 398,386
20 403,017 656,000 656,000 1,110,981 23,809 186,573 607,011 23,809 186,573 607,011
25 514,362 0 656,000 1,475,196 0 166,233 910,501 0 166,233 910,501
30 656,471 0 656,000 1,953,907 0 90,599 1,342,006 0 90,599 1,342,006
20 (Age 65) 403,017 656,000 656,000 1,110,981 23,809 186,573 607,011 23,809 186,573 607,011
</TABLE>
Guaranteed cost of insurance rates. Maximum mortality and expense risk charges.
Administrative charges and premium loads.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges, and
premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
48
<PAGE>
Table VIII
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 NONSMOKER RISK
SIMPLIFIED ISSUE
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $656,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 656,000 656,000 656,000 20,220 21,491 22,762 21,970 23,241 24,512
2 53,813 656,000 656,000 656,000 40,768 44,624 48,635 42,080 45,937 49,948
3 82,754 656,000 656,000 656,000 60,908 68,705 77,138 60,908 68,705 77,138
4 113,142 656,000 656,000 656,000 80,657 93,789 108,566 80,657 93,789 108,566
5 145,049 656,000 656,000 656,000 100,024 119,934 143,247 100,024 119,934 143,247
6 178,551 656,000 656,000 656,000 120,005 148,243 182,650 120,005 148,243 182,650
7 213,729 656,000 656,000 656,000 139,599 177,773 226,185 139,599 177,773 226,185
8 224,415 656,000 656,000 656,000 135,460 183,816 248,126 135,460 183,816 248,126
9 235,636 656,000 656,000 681,506 131,168 189,967 272,274 131,168 189,967 272,274
10 247,418 656,000 656,000 725,315 126,680 196,198 298,733 126,680 196,198 298,733
15 315,775 656,000 656,000 1,005,272 101,583 231,554 479,314 101,583 231,554 479,314
20 403,017 656,000 656,000 1,395,789 66,066 268,571 762,623 66,066 268,571 762,623
25 514,362 656,000 656,000 1,972,293 22,723 312,362 1,217,313 22,723 312,362 1,217,313
30 656,471 0 656,000 2,816,393 0 359,592 1,934,389 0 359,592 1,934,389
20 (Age 65) 403,017 656,000 656,000 1,395,789 66,066 268,571 762,623 66,066 268,571 762,623
</TABLE>
Current cost of insurance rates. Current mortality and expense risk charges,
administrative charges and premium load.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charges may be reduced from
0.70% to 0.35% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.18%, 4.82%, and 10.82%.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
49
<PAGE>
Table IX
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 NONSMOKER RISK
GUARANTEED ISSUE
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $652,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 652,000 652,000 652,000 17,497 18,629 19,761 19,247 20,379 21,511
2 53,813 652,000 652,000 652,000 35,828 39,267 42,845 37,141 40,580 44,158
3 82,754 652,000 652,000 652,000 53,747 60,700 68,223 53,747 60,700 68,223
4 113,142 652,000 652,000 652,000 71,244 82,952 96,130 71,244 82,952 96,130
5 145,049 652,000 652,000 652,000 88,332 106,071 126,851 88,332 106,071 126,851
6 178,551 652,000 652,000 652,000 105,997 131,144 161,801 105,997 131,144 161,801
7 213,729 652,000 652,000 652,000 123,221 157,199 200,320 123,221 157,199 200,320
8 224,415 652,000 652,000 652,000 118,009 160,951 218,135 118,009 160,951 218,135
9 235,636 652,000 652,000 652,000 112,572 164,615 237,648 112,572 164,615 237,648
10 247,418 652,000 652,000 652,000 106,863 168,152 259,034 106,863 168,152 259,034
15 315,775 652,000 652,000 836,665 73,005 182,862 398,923 73,005 182,862 398,923
20 403,017 652,000 652,000 1,112,479 24,442 187,578 607,830 24,442 187,578 607,830
25 514,362 0 652,000 1,477,186 0 168,193 911,729 0 168,193 911,729
30 656,471 0 652,000 1,956,544 0 94,508 1,343,817 0 94,508 1,343,817
20 (Age 65) 403,017 652,000 652,000 1,112,479 24,442 187,578 607,830 24,442 187,578 607,830
</TABLE>
Guaranteed cost of insurance rates. Maximum mortality and expense risk charges.
Administrative charges and premium loads.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges, and
premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
50
<PAGE>
Table X
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 NONSMOKER RISK
GUARANTEED ISSUE
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $652,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 652,000 652,000 652,000 19,995 21,258 22,522 21,745 23,008 24,272
2 53,813 652,000 652,000 652,000 40,328 44,158 48,141 41,641 45,470 49,453
3 82,754 652,000 652,000 652,000 60,268 68,005 76,375 60,268 68,005 76,375
4 113,142 652,000 652,000 652,000 79,831 92,861 107,523 79,831 92,861 107,523
5 145,049 652,000 652,000 652,000 99,032 118,784 141,915 99,032 118,784 141,915
6 178,551 652,000 652,000 652,000 118,868 146,883 181,025 118,868 146,883 181,025
7 213,729 652,000 652,000 652,000 138,342 176,219 224,265 138,342 176,219 224,265
8 224,415 652,000 652,000 652,000 134,107 182,083 245,903 134,107 182,083 245,903
9 235,636 652,000 652,000 675,185 129,747 188,074 269,748 129,747 188,074 269,748
10 247,418 652,000 652,000 718,459 125,229 194,172 295,909 125,229 194,172 295,909
15 315,775 652,000 652,000 996,737 100,765 229,452 475,245 100,765 229,452 475,245
20 403,017 652,000 652,000 1,387,098 66,848 267,168 757,875 66,848 267,168 757,875
25 514,362 652,000 652,000 1,960,819 24,103 311,032 1,210,230 24,103 311,032 1,210,230
30 656,471 0 652,000 2,799,895 0 358,171 1,923,058 0 358,171 1,923,058
20 (Age 65) 403,017 652,000 652,000 1,387,098 66,848 267,168 757,875 66,848 267,168 757,875
</TABLE>
Current cost of insurance rates. Current mortality and expense risk charges,
administrative charges and premium load.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charges may be reduced from
0.70% to 0.35% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.18%, 4.82%, and 10.82%.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
51
<PAGE>
Table XI
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 PREFERRED NONSMOKER RISK
FULLY UNDERWRITTEN
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $684,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 684,000 684,000 684,000 17,394 18,522 19,651 19,144 20,272 21,401
2 53,813 684,000 684,000 684,000 35,616 39,041 42,605 36,928 40,354 43,918
3 82,754 684,000 684,000 684,000 53,417 60,340 67,830 53,417 60,340 67,830
4 113,142 684,000 684,000 684,000 70,790 82,441 95,557 70,790 82,441 95,557
5 145,049 684,000 684,000 684,000 87,743 105,392 126,068 87,743 105,392 126,068
6 178,551 684,000 684,000 684,000 105,265 130,276 160,773 105,265 130,276 160,773
7 213,729 684,000 684,000 684,000 122,334 156,121 199,006 122,334 156,121 199,006
8 224,415 684,000 684,000 684,000 116,954 159,635 216,486 116,954 159,635 216,486
9 235,636 684,000 684,000 684,000 111,333 163,032 235,610 111,333 163,032 235,610
10 247,418 684,000 684,000 684,000 105,421 166,267 256,542 105,421 166,267 256,542
15 315,775 684,000 684,000 827,253 70,205 178,797 394,435 70,205 178,797 394,435
20 403,017 684,000 684,000 1,099,949 19,381 179,539 600,984 19,381 179,539 600,984
25 514,362 0 684,000 1,460,536 0 152,517 901,452 0 152,517 901,452
30 656,471 0 684,000 1,934,478 0 63,245 1,328,661 0 63,245 1,328,661
20 (Age 65) 403,017 684,000 684,000 1,099,949 19,381 179,539 600,984 19,381 179,539 600,984
</TABLE>
Guaranteed cost of insurance rates. Maximum mortality and expense risk charges.
Administrative charges and premium loads.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges, and
premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
52
<PAGE>
Table XII
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45 PREFERRED NONSMOKER RISK
FULLY UNDERWRITTEN
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $684,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Gross Annual Investment Gross Annual Investment
at Return of Return of Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 684,000 684,000 684,000 20,355 21,629 22,905 22,105 23,379 24,655
2 53,813 684,000 684,000 684,000 40,904 44,773 48,797 42,217 46,086 50,110
3 82,754 684,000 684,000 684,000 60,932 68,747 77,200 60,932 68,747 77,200
4 113,142 684,000 684,000 684,000 80,483 93,632 108,429 80,483 93,632 108,429
5 145,049 684,000 684,000 684,000 99,605 119,518 142,842 99,605 119,518 142,842
6 178,551 684,000 684,000 684,000 119,329 147,544 181,940 119,329 147,544 181,940
7 213,729 684,000 684,000 684,000 138,688 176,798 225,160 138,688 176,798 225,160
8 224,415 684,000 684,000 684,000 134,353 182,589 246,789 134,353 182,589 246,789
9 235,636 684,000 684,000 684,000 129,921 188,526 270,655 129,921 188,526 270,655
10 247,418 684,000 684,000 720,992 125,357 194,589 296,953 125,357 194,589 296,953
15 315,775 684,000 684,000 1,002,040 100,700 229,616 477,774 100,700 229,616 477,774
20 403,017 684,000 684,000 1,398,847 67,246 267,220 764,294 67,246 267,220 764,294
25 514,362 684,000 684,000 1,988,123 27,413 312,227 1,227,083 27,413 312,227 1,227,083
30 656,471 0 684,000 2,857,516 0 361,351 1,962,633 0 361,351 1,962,633
20 (Age 65) 403,017 684,000 684,000 1,398,847 67,246 267,220 764,294 67,246 267,220 764,294
</TABLE>
Current cost of insurance rates. Current mortality and expense risk charges,
administrative charges and premium load.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charges may be reduced from
0.70% to 0.35% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.18%, 4.82%, and 10.82%.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
53
<PAGE>
Appendix B
Corridor Percentages
<TABLE>
<CAPTION>
Attained Age of
The Insured Corridor
(Nearest Birthday) Percentage
- -------------------- -----------
<S> <C>
0-40 250%
41 243%
42 236%
43 229%
44 222%
45 215%
46 209%
47 203%
48 197%
49 191%
50 185%
51 178%
52 171%
53 164%
54 157%
55 150%
56 146%
57 142%
58 138%
59 134%
60 130%
61 128%
62 126%
63 124%
64 122%
65 120%
66 119%
67 118%
68 117%
69 116%
70 115%
71 113%
72 111%
73 109%
74 107%
75-90 105%
91 104%
92 103%
93 102%
94 101%
95-99 100%
</TABLE>
54
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $23,830.9 $18,560.7
Preferred stocks 236.0 257.3
Unaffiliated common stocks 259.3 436.0
Affiliated common stocks 322.1 412.1
Mortgage loans on real estate 3,932.9 3,012.7
Real estate 473.8 584.4
Policy loans 1,606.0 660.5
Other investments 434.4 335.5
Cash and short-term investments 1,725.4 2,133.0
--------- ---------
Total cash and investments 32,820.8 26,392.2
Premiums and fees in course of collection 33.3 42.4
Accrued investment income 432.8 343.5
Reinsurance recoverable 171.6 71.1
Funds withheld by ceding companies 53.7 44.1
Federal income taxes recoverable from parent company 64.7 6.9
Goodwill 49.5 52.4
Other admitted assets 89.3 85.6
Separate account assets 36,907.0 31,330.9
--------- ---------
Total admitted assets $70,622.7 $58,369.1
========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,310.6 $ 5,872.9
Other policyholder funds 16,647.5 16,360.1
Amounts withheld or retained by Company as agent or trustee 897.6 878.2
Funds held under reinsurance treaties 795.8 720.4
Asset valuation reserve 484.5 450.0
Interest maintenance reserve 159.7 135.4
Other liabilities 504.5 294.7
Short-term loan payable to parent company 140.0 120.0
Net transfers due from separate accounts (789.0) (761.9)
Separate account liabilities 36,907.0 31,330.9
--------- ---------
Total liabilities 68,058.2 55,400.7
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
Corporation) 25.0 25.0
Surplus notes due to Lincoln National Corporation 1,250.0 --
Paid-in surplus 1,930.1 1,821.8
Unassigned surplus (deficit) (640.6) 1,121.6
--------- ---------
Total capital and surplus 2,564.5 2,968.4
--------- ---------
Total liabilities and capital and surplus $70,622.7 $58,369.1
========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $12,737.6 $ 5,589.0 $ 7,268.5
Net investment income 2,107.2 1,847.1 1,756.3
Amortization of interest maintenance reserve 26.4 41.5 27.2
Commissions and expense allowances on reinsurance ceded 179.9 99.7 90.9
Expense charges on deposit funds 134.6 119.3 100.7
Separate account investment management and administration service fees 396.3 325.5 244.6
Other income 31.3 21.3 16.8
--------- --------- ---------
Total revenues 15,613.3 8,043.4 9,505.0
BENEFITS AND EXPENSES:
Benefits and settlement expenses 13,964.1 4,522.1 5,989.9
Underwriting, acquisition, insurance and other expenses 2,919.4 3,053.9 3,123.1
--------- --------- ---------
Total benefits and expenses 16,883.5 7,576.0 9,113.0
--------- --------- ---------
Gain (loss) from operations before dividends to policyholders, income taxes
and net realized gain on investments (1,270.2) 467.4 392.0
Dividends to policyholders 67.9 27.5 27.3
--------- --------- ---------
Gain (loss) from operations before federal income taxes and net realized
gain on investments (1,338.1) 439.9 364.7
Federal income taxes (credit) (141.0) 78.3 83.6
--------- --------- ---------
Gain (loss) from operations before net realized gain on investments (1,197.1) 361.6 281.1
Net realized gain on investments, net of income tax expense and excluding
net transfers to the interest maintenance reserve 46.8 31.3 53.3
--------- --------- ---------
Net income (loss) $(1,150.3) $ 392.9 $ 334.4
========= ========= =========
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 2,968.4 $ 1,962.6 $ 1,732.9
Correction of prior year's asset valuation reserve -- (37.6) --
Correction of prior year's admitted assets -- (57.0) --
--------- --------- ---------
2,968.4 1,868.0 1,732.9
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) (1,150.3) 392.9 334.4
Difference in cost and admitted investment amounts (304.8) (36.2) 38.6
Nonadmitted assets (17.1) (0.4) (3.0)
Regulatory liability for reinsurance (35.2) (3.9) 0.6
Life policy reserve valuation basis (0.4) (0.9) (0.4)
Asset valuation reserve (34.5) (36.9) (105.5)
Proceeds from surplus notes from shareholder 1,250.0 -- --
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 108.4 938.4 100.0
Separate account receivable due to change in valuation -- (2.6) --
Dividends to shareholder (220.0) (150.0) (135.0)
--------- --------- ---------
Capital and surplus at end of year $ 2,564.5 $ 2,968.4 $ 1,962.6
========= ========= =========
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 13,495.2 $ 6,364.3 $ 8,059.4
Allowances and reserve adjustments paid on reinsurance ceded (632.4) (649.2) (767.5)
Investment income received 2,003.9 1,798.8 1,700.6
Separate account investment management and administration service fees 396.3 325.5 244.6
Benefits paid (7,395.8) (5,345.2) (4,050.4)
Insurance expenses paid (2,909.7) (3,193.0) (3,216.8)
Federal income taxes recovered (paid) 84.2 (87.0) (72.3)
Dividends to policyholders (12.9) (28.4) (27.7)
Other income received and expenses paid, net 207.0 (8.7) 117.0
---------- ---------- ----------
Net cash provided by (used in) operating activities 5,235.8 (822.9) 1,986.9
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 10,926.5 12,142.6 12,542.0
Purchase of investments (16,950.0) (10,345.0) (14,175.4)
Other sources (uses) including reinsured policy loans (778.3) 529.1 (377.2)
---------- ---------- ----------
Net cash provided by (used in) investing activities (6,801.8) 2,326.7 (2,010.6)
FINANCING ACTIVITIES
Surplus paid-in 108.4 -- 100.0
Proceeds from surplus notes from shareholder 1,250.0 -- --
Proceeds from borrowings from shareholder 140.0 120.0 100.0
Repayment of borrowings from shareholder (120.0) (100.0) (63.0)
Dividends paid to shareholder (220.0) (150.0) (135.0)
---------- ---------- ----------
Net cash provided by (used in) financing activities 1,158.4 (130.0) 2.0
---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (407.6) 1,373.8 (21.7)
Cash and short-term investments at beginning of year 2,133.0 759.2 780.9
---------- ---------- ----------
Cash and short-term investments at end of year $ 1,725.4 $ 2,133.0 $ 759.2
========== ========== ==========
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1998, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Insurance Department"), which practices differ from generally
accepted accounting principles ("GAAP"). The more significant variances from
GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. Changes between cost and admitted
asset investment amounts are credited or charged directly to unassigned
surplus rather than to a separate surplus account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period in which the asset giving rise to the gain or loss is sold and
valuation allowances are provided when there has been a decline in value
deemed other than temporary, in which case, the provision for such declines
are charged to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as would be
required by GAAP. Under statutory accounting principles, the Company's
subsidiaries are carried at their statutory-basis net equity and presented
in the balance sheet as affiliated common stocks.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
period of the related policies using assumptions consistent with those used
in computing policy benefit reserves. For universal life insurance, annuity
and other investment-type products, deferred policy acquisition costs, to
the extent recoverable from future gross profits, are amortized generally in
proportion to the present value of expected gross profits from surrender
charges and investment, mortality and expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to annuity and other investment-type
contracts are reported as premium revenues; whereas, under GAAP, such
premiums and deposits are treated as liabilities and policy charges
represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits would represent the excess of benefits paid over the policy account
value and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Insurance Department to assume such business. Changes to
those amounts are credited or charged directly to unassigned surplus. Under
GAAP, an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs. Business
assumed under 100% indemnity and assumption reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of
the transaction and the excess of the purchase price over the sum of the
amounts assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner whereas under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1998 1997 1998 1997 1996
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,564.5 $ 2,968.4 $(1,150.3) $ 392.9 $ 334.4
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
goodwill 3,085.2 958.3 48.5 (98.9) 66.7
Policy and contract reserves (2,299.9) (1,672.9) 1,743.4 (48.6) (57.1)
Interest maintenance reserve 159.7 135.4 24.4 58.7 (39.7)
Deferred income taxes 181.6 (13.0) (218.6) 70.3 1.8
Policyholders' share of earnings and
surplus on participating business (132.8) (79.8) 3.2 5.3 (.3)
Asset valuation reserve 484.5 450.0 -- -- --
Net realized gain (loss) on investments (174.1) (91.5) (116.7) (20.4) 78.7
Unrealized gain on investments 1,335.1 1,245.5 -- -- --
Nonadmitted assets, including nonadmitted
investments 119.1 61.0 -- -- --
Investments in subsidiary companies 490.4 188.8 41.3 (80.5) 29.9
Surplus notes and related interest (1,251.5) -- (1.5) -- --
Other, net (120.1) (162.5) 103.6 (35.0) (82.6)
--------- --------- --------- --------- ---------
Net increase (decrease) 1,877.2 1,019.3 1,627.6 (149.1) (2.6)
--------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 4,441.7 $ 3,987.7 $ 477.3 $ 243.8 $ 331.8
========= ========= ========= ========= =========
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between changes in the value of the derivatives and the
items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the repurchase price. It is the Company's
policy to take possession of securities with a market value at least equal
to the securities loaned. Securities loaned are recorded at amortized cost
as long as the value of the related collateral is sufficient. The Company's
agreements with third parties generally contain contractual provisions to
allow for additional collateral to be obtained when necessary. The Company
values collateral daily and obtains additional collateral when deemed
appropriate.
GOODWILL
Goodwill, which represents the excess, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
under an assumption reinsurance agreement, is amortized on a straight-line
basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Insurance Department. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenerios indicate the need for such
reserves. If net premiums exceed the gross premiums on any insurance
in-force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and
unreported claims incurred during the year. The Company does not discount
claims and claim adjustment expense reserves. The reserves for unpaid claims
and claim adjustment expenses are estimated using individual case-basis
valuations and statistical analyses. Those estimates are subject to the
effects of trends in claim severity and frequency. Although considerable
variability is inherent in such estimates, management believes that the
reserves for claims and claim adjustment expenses are adequate. The
estimates are continually reviewed and adjusted as necessary as experience
develops or new information becomes known; such adjustments are included in
current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums, benefits and claims and claim adjustment expenses are
accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts. Certain
business is transacted on a funds withheld basis and investment income on
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC and certain LNC subsidiaries.
Pursuant to an intercompany tax sharing agreement with LNC, the Company
provides for income taxes on a separate return filing basis. The tax sharing
agreement also provides that the Company will receive benefit for net
operating losses, capital losses and tax credits which are not usable on a
separate return basis to the extent such items may be utilized in the
consolidated income tax returns of LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
unassigned surplus or net income previously reported.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
ACCOUNTING PRACTICES AND PROCEDURES MANUAL and a variety of other NAIC
publications. "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements. Codification will require adoption by the various
states before it becomes the prescribed statutory-basis of accounting for
insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, the state of Indiana must
adopt Codification as the prescribed basis of accounting on which domestic
insurers must report their statutory-basis results to the Insurance
Department. At this time, it is anticipated that Indiana will adopt
Codification, however, based on current guidance, management believes that
the impact of Codification will not be material to the Company's
statutory-basis financial statements.
The Company has received written approval from the Insurance Department to
record surrender charges applicable to separate account liabilities for
variable life and annuity products as a liability in the separate account
financial statements payable to the Company's general account. In the
accompanying financial statements, a corresponding receivable is recorded
with the related income impact recorded in the accompanying Statement of
Operations as a change in reserves or change in premium and other deposit
funds.
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,714.3 $ 1,524.4 $ 1,442.2
Preferred stocks 19.7 23.5 9.6
Unaffiliated common stocks 10.6 8.3 6.5
Affiliated common stocks 5.2 15.0 9.5
Mortgage loans on real estate 323.6 257.2 269.3
Real estate 81.4 92.2 114.4
Policy loans 86.5 37.5 35.0
Other investments 26.5 28.2 22.4
Cash and short-term investments 104.7 70.3 48.9
--------- --------- ---------
Total investment income 2,372.5 2,056.6 1,957.8
Expenses:
Depreciation 19.3 21.0 25.0
Other 246.0 188.5 176.5
--------- --------- ---------
Total investment expenses 265.3 209.5 201.5
--------- --------- ---------
Net investment income $ 2,107.2 $ 1,847.1 $ 1,756.3
========= ========= =========
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
amounted to $2,600,000, consisting principally of interest
on bonds in default and mortgage loans. No accrued
investment income was nonadmitted at December 31, 1998.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Corporate $17,658.4 $ 1,159.8 $ 148.2 $18,670.0
U.S. government 900.7 88.8 3.4 986.1
Foreign government 947.8 59.9 61.2 946.5
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
State and municipal 11.9 .7 -- 12.6
--------- ----------- ----------- ---------
$23,830.9 $ 1,480.8 $ 246.2 $25,065.5
========= ========== ========= =========
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
U.S. government 436.3 67.9 -- 504.2
Foreign government 1,202.1 104.9 5.4 1,301.6
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
State and municipal 44.2 .3 -- 44.5
--------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
========= ==========- ========= =========
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1998 and 1997 reflects adjustments of
$11,800,000 and $5,500,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as low or lower quality.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1998, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1999 $ 705.6 $ 712.6
In 2000-2003 4,041.9 4,142.8
In 2004-2008 6,652.0 6,860.1
After 2008 8,119.3 8,899.7
Mortgage-backed securities 4,312.1 4,450.3
--------- ---------
Total $23,830.9 $25,065.5
========= =========
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The expected maturities may differ from the contractual maturities in the
foregoing table because certain borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Proceeds from sales of investments in bonds during 1998, 1997 and 1996 were
$9,395,000,000, $9,715,000,000 and $10,996,900,000, respectively. Gross
gains during 1998, 1997 and 1996 of $186,300,000, $218,100,000 and
$169,700,000, respectively, and gross losses of $138,000,000, $78,000,000
and $177,000,000, respectively, were realized on those sales.
At December 31, 1998 and 1997, investments in bonds, with an admitted asset
value of $97,800,000 and $76,200,000, respectively, were on deposit with
state insurance departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated common stocks
and preferred stocks are reported directly in unassigned surplus and do not
affect operations. The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in unaffiliated common stocks and
preferred stocks are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
Unaffiliated common stocks 223.3 62.0 26.0 259.3
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
Unaffiliated common stocks 357.0 98.5 19.5 436.0
</TABLE>
The carrying amount of preferred stocks in the balance sheets at December
31, 1998 and 1997 reflects adjustments of $5,800,000 and $4,000,000,
respectively, to decrease amortized cost as a result of the SVO designating
certain investments as low or lower quality.
During 1998, the minimum and maximum lending rates for mortgage loans were
6.41% and 8.08%, respectively. At the issuance of a loan, the percentage of
loan to value on any one loan does not exceed 75%. At December 31, 1998,
the Company did not hold any mortgages with interest overdue beyond one
year. All properties covered by mortgage loans have fire insurance at least
equal to the excess of the loan over the maximum loan that would be allowed
on the land without the building.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The components of the Company's real estate are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
Buildings 9.0 8.4
Less accumulated depreciation (1.7) (1.2)
Net real estate occupied by the Company 9.8 9.7
Other:
Land 93.2 124.1
Buildings 413.0 491.6
Other 7.9 8.1
Less accumulated depreciation (50.1) (49.1)
--------- ---------
Net other real estate 464.0 574.7
--------- ---------
Net real estate $ 473.8 $ 584.4
========= =========
</TABLE>
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 179.7 $ 209.3 $ 69.3
Less amount transferred to IMR (net of related taxes (credit) of $27.3,
$54.0 and $(6.7) in 1998, 1997 and 1996, respectively) 50.8 100.2 (12.4)
--------- --------- ---------
128.9 109.1 81.7
Less federal income taxes on realized gains 82.1 77.8 28.4
--------- --------- ---------
Net realized capital gains $ 46.8 $ 31.3 $ 53.3
========= ========= =========
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES
Statutory-basis financial information related to the Company's four wholly
owned insurance subsidiaries is summarized as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,221.1 $ 333.9 $ 403.6 $ 1,938.0
Other assets 40.3 31.3 490.0 270.2
--------- ----------- --------- ---------
Total admitted assets $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
========= ==========- ========= =========
Insurance reserves $ 1,149.8 $ 266.3 $ 281.8 $ 1,814.5
Other liabilities 42.0 24.0 553.7 45.1
Liabilities related to separate accounts -- -- -- 236.9
Capital and surplus 69.6 74.9 58.1 111.7
--------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
========= ==========- ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 310.4 $ 165.0 $ 150.3 $ 1,402.6
Expenses 310.6 164.4 139.5 1,656.1
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
--------- ---------- --------- ---------
Net income (loss) $ (0.5) $ 1.5 $ 10.7 $ (254.2)
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
Other assets 36.9 77.3 481.6 130.8
--------- --------- --------- ---------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
========= ========= ========= =========
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
Other liabilities 48.4 21.7 546.4 5.8
Liabilities related to separate accounts -- -- -- 164.7
Capital and surplus 70.7 73.7 54.9 212.9
--------- --------- --------- ---------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
========= ========= ========= =========
</TABLE>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
Expenses 262.6 244.2 114.6 224.4
Net realized gains (losses) .1 .6 (.1) (.1)
--------- --------- ----------- ----------
Net income (loss) $ 5.1 $ (108.2) $ 10.6 $ 5.5
========= ========= ========= =========
</TABLE>
The Company also owns three non-insurance subsidiaries, all of which were
formed or acquired in 1998. AnnuityNet, Inc. was formed for the
distribution of variable annuities over the internet and is valued on the
equity method with an admitted asset value of $1,500,000 at December 31,
1998. Lincoln National Insurance Associates was purchased for $600,000 and
is valued on the equity method with an admitted asset value of $600,000 at
December 31, 1998. Sagemark Consulting, Inc. ("Sagemark") was purchased in
1998 and is a broker dealer acquired in connection with a reinsurance
transaction completed in 1998. Sagemark is valued on the equity method with
an admitted asset value of $5,700,000 at December 31, 1998.
The carrying value of all affiliated common stocks, was $322,100,000 and
$412,100,000 at December 31, 1998 and 1997, respectively. The insurance
affiliates are carried at statutory-basis net equity while other affiliates
are recorded at GAAP basis net equity, adjusted for certain items which
would be non-admitted under statutory accounting principles. The cost basis
of investments in subsidiaries as of December 31, 1998 and 1997 was
$631,100,000 and $466,200,000, respectively.
During 1998, 1997 and 1996 the Company's insurance subsidiaries paid
dividends of $5,200,000, $15,000,000 and $10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying statements of
operations differs from the prevailing statutory tax rate principally due
to tax-exempt investment income, dividends received tax deductions and
differences between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract liabilities and
reinsurance ceding commissions.
In 1997 and 1996, federal income taxes incurred totaled $78,300,000 and
$83,600,000, respectively. In 1998, a federal income tax net operating loss
of $103,800,000 and tax credits of $19,300,000 were incurred and carried
back to recover taxes paid in prior years.
The Company paid $2,300,000, $164,500,000 and $100,400,000 to LNC in 1998,
1997 and 1996, respectively, for federal income taxes.
Under prior income tax law, one-half of the excess of a life insurance
company's income from operations over its taxable investment income was not
taxed, but was set aside in a special tax account designated as
"Policyholders' Surplus." The Company has approximately $187,000,000 of
untaxed "Policyholders' Surplus" on which no payment of federal income
taxes will be required unless it is distributed as a dividend, or under
other specified conditions. Barring the passage of unfavorable legislation,
the Company does not believe that any significant portion of the account
will be taxed in the foreseeable future and no related tax liability has
been recognized. If the entire balance of the account
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
became taxable under the current federal income tax rate, the tax would be
approximately $65,500,000.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other admitted assets", includes amounts
recoverable from other insurers for claims paid by the Company, and the
balance sheet caption, "Future policy benefits and claims," has been
reduced for insurance ceded as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 4,081.8 $ 1,431.0
Amounts recoverable from other insurers 79.9 35.9
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 9,018.9 $ 727.2 $ 241.3
Insurance ceded 877.1 302.9 193.3
-------- ------- -------
Net amount included in premiums $ 8,141.8 $ 424.3 $ 48.0
========= ======= =======
</TABLE>
The income statement caption, "Benefits and settlement expenses," is net of
reinsurance recoveries of $2,098,800,000, $1,240,500,000 and $787,900,000
for 1998, 1997 and 1996, respectively.
Details underlying the balance sheet caption "Other policyholder funds" are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Premium deposit funds $16,285.2 $16,201.8
Undistributed earnings on participating business 348.4 142.0
Other 13.9 16.3
--------- ---------
$16,647.5 $16,360.1
========= =========
</TABLE>
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity considerations
included in the balance sheet caption, "Premiums and fees in course of
collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
Ordinary renewal (13.7) 11.3 (25.0)
Group life 14.2 .2 14.0
------- ------ -------
$ 10.0 $ 14.9 $ (4.9)
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------
NET OF
GROSS LOADING LOADING
----------------------------------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $2.4 $ .8
Ordinary renewal 17.8 3.2 14.6
Group life 10.6 .2 10.4
----- --- -----
$31.6 $5.8 $ 25.8
===== ==== ======
</TABLE>
The Company has entered into non-exclusive managing general agent
agreements with International Benefit Services Corp., HRM Claim Management,
Inc. and Pediatrics Insurance Consultants, Inc. to write group life and
health business. Direct premiums written related to the agreements amounted
to $11,900,000 and $13,400,000 in 1998 and 1997, respectively. During 1996,
LNC Administrative Services Corporation, an affiliate, entered into a
similar agreement with the Company with direct premiums written amounting
to $7,000,000 and $7,200,000 in 1998 and 1997, respectively. Authority
granted by the managing general agents agreements include underwriting,
claims adjustment and claims payment services.
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES
At December 31, 1998, the Company's annuity reserves and deposit fund
liabilities, including separate accounts, that are subject to discretionary
withdrawal with adjustment, subject to discretionary withdrawal without
adjustment and not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,659.5 5%
At book value, less surrender charge 2,959.2 5
At market value 35,472.0 63
--------- ---
41,090.7 73
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 12,747.3 22
Not subject to discretionary withdrawal 2,625.1 5
--------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 56,463.1 100%
Less reinsurance 1,683.8 ===
---------
Net annuity reserves and deposit fund liabilities, including separate accounts $54,779.3
=========
</TABLE>
A reconciliation of the total net annuity reserves and
deposit fund liabilities to the amounts reported in the
Company's 1998 Annual Statement and the Company's Separate
Accounts Annual Statement is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
(IN MILLIONS)
-------------
<S> <C>
Per 1998 Annual Statement:
Exhibit 8, Section B -- Total (net) $ 2,554.6
Exhibit 8, Section C -- Total (net) 26.0
Exhibit 10, Column 1, Line 19 16,579.6
---------
19,160.2
---------
Per Separate Accounts Annual Statement
Exhibit 6, Column 2, Line 0299999 146.4
Page 3, Line 3 35,472.7
---------
35,619.1
---------
Total net annuity reserves and deposit fund liabilities $54,779.3
=========
</TABLE>
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA indemnity reinsurance transaction on January 5,
1998. This note calls for the Company to pay the principal amount of the
notes on or before March 31, 2028 and interest to be paid quarterly at an
annual rate of 6.56%. Subject to approval by the Indiana Insurance
Commissioner, LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the anniversary date of the
note, but not before January 5, 2003. Any payment of interest or
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS (CONTINUED)
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1998), and subject to approval by the Indiana Insurance
Commissioner. No interest payments were approved by the Indiana Insurance
Commissioner as of December 31, 1998 and, thus, no amounts were accrued at
that date.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna indemnity reinsurance transaction. This note calls
for the Company to pay the principal amount of the notes on or before
December 31, 2028 and interest to be paid quarterly at an annual rate of
6.03%. Subject to approval by the Indiana Insurance Commissioner, LNC also
has a right to redeem the note for immediate repayment in total or in part
once per year on the anniversary date of the note, but not before December
18, 2003. Any payment of interest or repayment of principal may be paid only
out of the Company's earnings, only if the Company's surplus exceeds
specified levels ($2,379,600,000 at December 31, 1998), and subject to
approval by the Indiana Insurance Commissioner. No interest payments were
approved by the Indiana Insurance Commissioner as of December 31, 1998 and,
thus, no amounts were accrued at that date.
A summary of the terms of these surplus notes follows:
<TABLE>
<CAPTION>
CURRENT YEAR
PRINCIPAL PRINCIPAL INTEREST
DATE ISSUED AMOUNT OF NOTE OUTSTANDING PAID
------------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
January 5, 1998 $500,000,000 $ 500,000,000 $ 32,300,000
December 18, 1998 750,000,000 750,000,000 --
</TABLE>
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1998, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in October
1998, the Company assumed a block of individual life insurance business from
Aetna (SEE NOTE 10). The statutory accounting regulations do not allow
goodwill to be recognized on indemnity reinsurance transactions and
therefore, the related ceding commission was expensed in the accompanying
Statement of Operations and resulted in the reduction of unassigned surplus.
As a result of these transactions, the Company's statutory-basis unassigned
surplus is negative as of December 31, 1998 and it will be necessary for the
Company to obtain prior approval of the Indiana Insurance Commissioner
before paying any dividends to LNC until such time as statutory-basis
unassigned surplus is positive. It is expected that statutory-basis
unassigned surplus will return to a positive position within two to three
years from the closing of the Aetna transaction assuming a level of
statutory-basis earnings coinciding with recent earnings patterns. If
statutory-basis earnings are less then recent patterns due to adverse
operating conditions or further indemnity reinsurance transactions of this
nature or other factors, or if dividends are approved and paid at amounts
higher than recent history, the statutory-basis unassigned surplus may not
return to a positive position as soon as expected. Although no assurance can
be given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1998, 885,252 and 504,369 shares of LNC common stock were
subject to options granted to Company employees and agents, respectively,
under the stock option incentive plans of which 430,053 and 87,160,
respectively, were exercisable on that date. The exercise prices of the
outstanding options range from $23.50 to $96.41. During 1998, 1997 and 1996,
136,469, 170,789 and 72,405 options were exercised, respectively, and
18,288, 1,846 and 10,950 options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1998 and 1997 is a net
liability of $670,100,000 and $516,900,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels and/or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves could be required in the future. Accordingly, this liability may
prove to be deficient or excessive. The Company reviews reserve levels on an
ongoing basis. However, it is management's opinion that such future
development will not materially affect the financial position of the
Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. As a result of this study, the reserve level
was deemed to be inadequate to meet future obligations if current incident
levels were to continue in the future. In order to address this situation,
the Company strengthened its disability income reserves by $80,000,000 in
1997.
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
development will not materially affect the financial position of the
Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1998, 1997 and 1996 was
$34,000,000, $29,300,000 and $26,400,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1999 $ 18.9
2000 18.4
2001 18.7
2002 18.7
2003 18.6
Thereafter 116.6
---------
$ 209.9
=========
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne operations.
Total costs incurred in 1998 were $54,800,000. Future minimum annual costs
range from $33,600,000 to $56,800,000, however future costs are dependent on
usage and could exceed these amounts.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Prior to December 31, 1997, the Company
limited its maximum coverage that it retained on an individual to
$3,000,000. Based on a review of the capital and business in-force effective
in January 1998, the Company changed the amount it will retain on an
individual to $10,000,000. Portions of the Company's deferred annuity
business have also been reinsured with other companies to limit its exposure
to interest rate risks. At December 31, 1998, the reserves associated with
these reinsurance arrangements totaled $1,608,500,000. To cover products
other than life insurance, the Company acquires other insurance coverages
with retentions and limits that management believes are appropriate for the
circumstances. The accompanying statutory-basis financial statements reflect
premiums, benefits and policy acquisition expenses net of reinsurance ceded.
The Company remains liable if its reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American Statements Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LLANY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA Corporation ("CIGNA"). The Company
paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$1,127,700,000 in 1998, which is included in the Statement of Operations
line item "Underwriting, acquisition, insurance and other expenses." At the
time of closing, this block of business had statutory liabilities of
$4,658,200,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities.
Pursuant to the terms of the reinsurance agreement, the Company, LLANY and
CIGNA are in the final stages of agreeing to the statutory-basis values of
these assets and liabilities. Any changes to these values that may occur in
future periods will not be material to the Company's financial position.
Subsequent to this transaction, the Company and LLANY announced that they
had reached an agreement to sell the administration rights to a variable
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
annuity portfolio that had been acquired as part of the block of business
assumed on January 2, 1998. This sale closed on October 12, 1998 with an
effective date of August 1, 1998.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
On October 1, 1998, the Company and LLANY entered into an indemnity
reinsurance transaction whereby the Company and LLANY reinsured 100% of a
block of individual life insurance business from Aetna, Inc. The Company
paid $856,300,000 to Aetna on October 1, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$815,300,000 in 1998, which is included in the Statement of Operations line
item "Underwriting, acquisition, insurance and other expenses." At the time
of closing, this block of business had statutory liabilities of
$2,813,300,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities. The Company financed this reinsurance transaction with proceeds
from short-term debt borrowings from LNC until the December 18, 1998 surplus
note was approved by the Insurance Department. Subsequent to the Aetna
transaction, the Company and LLANY announced that they had reached an
agreement to retrocede the sponsored life business assumed for $87,600,000.
The retrocession agreement closed on October 14, 1998 with an effective date
of October 1, 1998.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1998, the Company has provided $44,900,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company has retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. Generally, such
amounts are offset by corresponding receivables from the ceding company,
which are secured by future profits on the reinsured business. However, the
Company is subject to the risk that the ceding company may become insolvent
and the right of offset would not be permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $43,400,000 and $8,200,000 at December 31, 1998
and 1997, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1998, 25% of such mortgages ($980,500,000) involved properties
located in Texas and California. Such investments consist of first mortgage
liens on completed income-producing properties and the mortgage outstanding
on any individual property does not exceed $58,200,000.
At December 31, 1998, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage will depend on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will not have a material adverse affect on the financial position of the
Company.
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Four lawsuits involving alleged fraud in the sale of interest sensitive
universal life and whole life insurance have been filed as class actions
against the Company, although the court has not certified a class in any of
these cases. Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While the relief sought in
these cases is substantial, it is premature to make assessments about the
potential loss, if any, because the status of the cases ranges from the
early states of litigation to the dismissal and appeals stage. Management
intends to defend these suits vigorously. The amount of liability, if any,
which may arise as a result of these suits cannot be reasonably estimated at
this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks at December 31, 1998 relate to mortgage loan
pass-through certificates. The Company has sold commercial mortgage loans
through grantor trusts which issued pass-through certificates. The Company
has agreed to repurchase any mortgage loans which remain delinquent for 90
days at a repurchase price substantially equal to the outstanding principal
balance plus accrued interest thereon to the date of repurchase. The
outstanding guarantees as of December 31, 1998 and 1997 were $30,900,000 and
$41,600,000, respectively. It is management's opinion that the value of the
properties underlying these commitments is sufficient that in the event of
default the impact would not be material to the Company. Accordingly, both
the carrying value and fair value of these guarantees is zero at December
31, 1998 and 1997.
The Company's wholly owned subsidiary, LNH&C, accepts personal accident
reinsurance programs from other insurance companies. Most of these programs
are presented to LNH&C by independent brokers who represent the ceding
companies. Certain excess of loss personal accident reinsurance programs
created in the London market during 1993 through 1996 have produced and have
potential to produce significant losses. At December 31, 1998 and 1997,
liabilities of $177,400,000 and $186,300,000, respectively, have been
established for such programs. These reserves are based on various estimates
that are subject to considerable uncertainty. Accordingly, this reserve may
prove to be deficient or excessive. However, it is management's opinion that
such future development will not materially affect the financial position of
the Company.
The Company and LNH&C continue to investigate the personal accident
reinsurance programs to determine if there are additional programs including
certain workers compensation programs, which may produce losses. At this
time, the Company and LNH&C do not have sufficient information to determine
whether or not it is probable that additional losses have been incurred nor
can the Company and LNH&C accurately estimate the ultimate cost or timing of
the outcome on these programs.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
government obligations, commodity risk, credit risk, increased liabilities
associated with reinsurance agreements and foreign exchange risks. In
addition, the Company is subject to the risks associated with changes in the
value of its derivatives; however, such changes in value generally are
offset by changes in the value of the items
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
<TABLE>
<CAPTION>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1998 1998 1997 1997
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,108.8 $4,900.0 $ 9.3 $ .9 $13.9 $ .9
Swaptions 1,899.5 1,752.0 16.2 2.5 6.9 6.9
Interest rate swaps 258.3 10.0 -- 9.9 -- (1.8)
Put options 21.3 -- -- 2.2 -- --
-------- -------- -------- ----- -------- ------
6,287.9 6,662.0 25.5 15.5 20.8 6.0
Foreign currency derivatives:
Forward contracts 1.5 163.1 -- -- 5.4 5.4
Foreign currency swaps 47.2 15.0 -- .3 -- (2.1)
-------- -------- -------- ----- -------- ------
48.7 178.1 -- .3 5.4 3.3
Commodity derivatives:
Commodity swaps 8.1 -- -- 2.4 -- --
-------- -------- -------- ----- -------- ------
$6,344.7 $6,840.1 $25.5 $18.2 $26.2 $ 9.3
======== ======== ======== ===== ======== ======
</TABLE>
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
New contracts 708.8 -- -- 50.0 218.3 1,080.0
Terminations and maturities (1,500.0) (600.0) -- (50.0) (70.8) --
--------- --------- --- --------- --------- ---------
Balance at end of year $ 4,108.8 $ 4,900.0 $ -- $ -- $ 1,899.5 $ 1,752.0
========= ========= === ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES
CONTRACTS INTEREST RATE SWAPS
--------------------------------------------
1998 1997 1998 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $-- $ 147.7 $ 10.0 $ --
New contracts -- 88.3 2,226.6 10.0
Terminations and maturities -- (236.0) (1,978.3) --
--- ------- --------- -----
Balance at end of year $-- $ -- $ 258.3 $10.0
=== ======= ========= =====
</TABLE>
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
PUT OPTIONS COMMODITY SWAPS
------------------------------------------------
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ -- $ --
New contracts 21.3 -- 8.1 --
Terminations and maturities -- -- -- --
--------- --------- --------- ---------
Balance at end of year $ 21.3 $ -- $ 8.1 $ --
========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
------------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
New contracts 419.8 833.1 -- -- 39.2 --
Terminations and maturities (581.4) (921.6) -- (43.9) (7.0) --
--------- --------- --------- --------- --------- ---------
Balance at end of year $ 1.5 $ 163.0 $ -- $ -- $ 47.2 $ 15.0
========= ========= ========= ========= ========= =========
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 1999 through 2006, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($9,300,000 as of December 31, 1998) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 1999 through 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of rising
interest rates. The premium paid for the swaptions is included in other
assets ($16,200,000 as of December 31, 1998) and is being amortized over the
terms of the agreements. This amortization is included in net investment
income.
SPREAD LOCK AGREEMENTS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
government note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURE CONTRACTS
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
fixed maturity securities. Financial futures contracts obligate the Company
to buy or sell a financial instrument at a specified future date for a
specified price. They may be settled in cash or through delivery of the
financial instrument. Cash settlements on the change in market values of
financial futures contracts are made daily.
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the agreements the stream of variable coupon
payments generated from the bonds, and in turn, receives a fixed payment
from the counterparty at a predetermined interest rate. The net
receipts/payments from interest rate swaps are recorded in net investment
income.
The Company also uses interest rate swap agreements to hedge its exposure to
interest rate fluctuations related to the anticipated purchase of assets to
support newly acquired or assumed blocks of business. Once the assets are
purchased, the gains resulting from the termination of the swap agreements
are applied to the basis of the assets purchased. The gains are recognized
in earnings over the life of the assets.
PUT OPTION
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate a fixed income, fixed
maturity investment. The put options give the Company the right, but not the
obligation, to sell to the counterparty of the agreement the specified
securities on a specified date at a fixed price.
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
The Company uses a combination of foreign exchange forward contracts,
foreign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date.
COMMODITY SWAP
The Company uses a commodity swap to hedge its exposure to fluctuations in
the price of gold, which is the underlying variable in determining the
periodic interest payments associated with a fixed income security. A
commodity swap is a contractual agreement to exchange a certain amount of a
particular commodity for a fixed amount of cash. The Company owns a fixed
income security that meets its coupon payment obligations in gold bullion.
The Company is obligated to pay to the counterparty the gold bullion, and in
return, receives from the counterparty a stream of fixed income payments.
The fixed income payments are the product of the swap notional multiplied by
the fixed rate stated in the swap agreement. The net receipts/payments from
commodity swaps are recorded in net investment income.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$10,000,000, $7,000,000 and $6,900,000 in 1998, 1997 and 1996, respectively.
Deferred losses of $48,200,000 as of December 31, 1998, were the result of:
1) terminated and expired spread-lock agreements and; 2) terminated interest
rate swaps. These losses are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, financial futures, interest rate swaps, put options and foreign
currency derivatives. However, the Company does not anticipate
nonperformance
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
by any of the counterparties. The credit risk associated with such
agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount of
such exposure is essentially the net replacement cost or market value for
such agreements with each counterparty if the net market value is in the
Company's favor. At December 31, 1998, the exposure was $21,100,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market prices, where
available. For preferred stock not actively traded, fair values are based on
values of issues of comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income. The ratings for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future policy benefits and claims" and "Other
policyholder funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for
the deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted
cash flow calculations. These calculations are based on interest rates
currently offered on similar contracts with maturities that are consistent
with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future policy benefits and
claims" and "Other policyholder funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
companies in the insurance industry are monitoring the related actions of
the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM DEBT
For short-term debt, the carrying value approximates fair value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for
similar types of borrowing arrangements.
GUARANTEES
The Company's guarantees include guarantees related to mortgage loan
pass-through certificates. Based on historical performance where repurchases
have been negligible and the current status, which indicates none of the
loans are delinquent, the fair value liability for the guarantees related to
the mortgage loan pass-through certificates is zero.
DERIVATIVES
The Company employs several different methods for determining the fair value
of its derivative instruments. Fair values for these contracts are based on
current settlement values. These values are based on quoted market prices
for the foreign currency exchange contracts and financial future contracts
and; 2) industry standard models that are commercially available for
interest rate cap agreements, swaptions, spread lock agreements, interest
rate swaps, commodity swaps and put options.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the accompanying
statutory-basis balance sheets at fair value. The related liabilities are
also reported at fair value in amounts equal to the separate account assets.
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1998 1997
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
----------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 23,830.9 $ 25,065.5 $ 18,560.7 $ 19,798.6
Preferred stocks 236.0 242.5 257.3 268.7
Unaffiliated common stocks 259.3 259.3 436.0 436.0
Mortgage loans on real estate 3,932.9 4,100.1 3,012.7 3,179.2
Policy loans 1,606.0 1,685.9 660.5 648.3
Other investments 434.4 434.4 335.5 335.5
Cash and short-term investments 1,725.4 1,725.4 2,133.0 2,133.0
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,845.8) (17,486.4) (17,324.2) (16,887.6)
Remaining guaranteed interest and similar
contracts (714.4) (738.2) (1,267.0) (1,294.6)
Short-term debt (140.0) (140.0) (120.0) (120.0)
Surplus notes due to LNC (1,250.0) (1,335.1) -- --
Derivatives 25.5 18.2 26.2 9.3
Investment commitments -- (0.6) -- (0.5)
Separate account assets 36,907.0 36,907.0 31,330.9 31,330.9
Separate account liabilities (36,907.0) (36,907.0) (31,330.9) (31,330.9)
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation affiliates. The bulk of
the transaction was completed in the form of an assumption reinsurance
transaction, which resulted in a ceding commission of $71,800,000. The
ceding commission resulted in admissible goodwill of $62,300,000, which is
being amortized on a straight-line basis over 10 years. LLANY was required
by the New York Department of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals of the Company
and its wholly owned subsidiary increased by $3,200,000,000 as a result of
this transaction.
In 1997, LNC contributed 25,000,000 shares of common stock of American
States to the Company. American States is a property casualty insurance
holding company of which LNC owned 83.3%. The contributed common stock was
accounted for as a capital contribution equal to the fair value of the
common stock received by the Company. Subsequently, the American States
common stock owned by the Company, along with all other American States
common stock owned by LNC and its affiliates, was sold. The Company received
proceeds from the sale in the amount of $1,175,000,000. The Company
recognized no gain or loss on the sale of its portion of the common stock
due to the receipt of the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity Distributors,
Inc. ("LLAD"), has a nearly exclusive general agent's contract with the
Company under which it sells the Company's products and provides the service
that otherwise would be provided by a home office marketing department and
regional offices. For providing these selling and marketing services, the
Company paid LLAD override commissions of $76,700,000 in 1998 and override
commissions and operating expense allowances of $61,600,000 and $56,300,000
in 1997 and 1996, respectively. LLAD incurred expenses of $102,400,000,
$5,500,000 and $15,700,000 in 1998, 1997 and 1996, respectively, in excess
of the override commissions and operating expense allowances received from
the Company, which the Company is not required to reimburse. Effective in
January 1998, the Company and LLAD agreed to increase the override
commission expense and eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1998 and 1997 include the
Company's participation in a short-term investment pool with LNC of
$383,600,000 and $325,600,000, respectively. Related investment income
amounted to $16,800,000, $15,500,000 and $15,300,000 in 1998, 1997 and 1996,
respectively. Short-term loan payable to parent company at December 31, 1998
and 1997 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $92,100,000, $48,500,000 and
$34,100,000 in 1998, 1997 and 1996, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 13.7 $ 11.9 $ 17.9
Insurance ceded 290.1 100.3 302.8
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 197.3 $ 245.5
Future policy benefits
and claims ceded 1,125.0 997.2
Amounts recoverable on
paid and unpaid losses 84.2 30.4
Reinsurance payable on
paid losses 6.0 5.3
Funds held under
reinsurance treaties --
net liability 1,375.4 1,115.4
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $318,300,000 and $280,900,000 at December 31, 1998 and 1997,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1998 and 1997, LNC had guaranteed $237,000,000 and $229,100,000,
respectively, of these letters of credit. At December 31, 1998, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $122,400,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially all of the separate accounts do not
have any minimum guarantees and the investment risks associated with market
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$3,953,300,000, $4,821,800,000 and $4,148,700,000 in 1998, 1997
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
and 1996, respectively. Reserves for separate accounts with assets at fair
value were $36,145,900,000 and $30,560,700,000 at
December 31, 1998 and 1997, respectively. All reserves are subject to
discretionary withdrawal at market value.
A reconciliation of transfers to (from) separate accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 3,954.9 $ 4,824.0
Transfers from separate accounts (4,069.8) (2,943.8)
--------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (114.9) $ 1,880.2
========= =========
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois Insurance
Department in the calculation of the AVR as of December 31, 1996 and 1995.
The effects of the AVR errors also resulted in the need for revisions in
the calculation of certain investment limitation thresholds, the results of
which indicated that additional assets should have been nonadmitted as of
December 31, 1996. As discussed by the Company with the Indiana and
Illinois Insurance Departments, corrections were made to affected pages of
the Company's NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the corrections in
relation to the financial statements taken as a whole, the audited 1996 and
1995 statutory-basis financial statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with various state insurance
departments, also includes the corrected balances for 1996 and 1995. The
following is a reconciliation of total admitted assets, total liabilities and
capital and surplus as of December 31, 1996 as presented in the 1997 NAIC Annual
Statement (as corrected) to the accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $1,962.6
Effect of AVR errors -- 37.6 (37.6)
Effect of change in investment
limitations (57.0) -- (57.0)
--------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
========= =========== ========
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The Company has been
redirecting a large portion of internal Information Technology efforts and
contracting with outside consultants to update systems to address Year 2000
issues. Experts have been engaged to assist in developing work plans and
cost estimates and to complete remediation activities.
For the year ended December 31, 1998, the Company identified expenditures of
$26,300,000 to address this issue. This brings the expenditures for 1996
through 1998 to $34,200,000 million. The Company's financial plans for 1999
and 2000 include expected expenditures of an additional $38,300,000 bringing
estimated overall Year 2000 expenditures to $72,500,000. Because updating
systems and procedures is an integral part of the Company's on-going
operations, approximately 50% of expenditures shown above are expected to
continue after all Year 2000 issues have been resolved. Actual Year 2000
expenditures through December 31, 1998 and future Year 2000 expenditures are
expected to be funded from operating cash flows. The anticipated cost of
addressing Year 2000 issues is based on management's current best estimates
which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. Such costs will be closely monitored
by management. Nevertheless, there can be no guarantee that actual costs
will not be higher than these estimated costs. Specific factors that might
cause such differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer problems and other uncertainties. The total
expenditures identified represent only the Company's portion of LNC's larger
expenditures to address the Year 2000 issue.
The current scope of the overall Year 2000 program includes the following
four major project areas: 1) addressing the readiness of business
applications, operating systems and hardware on mainframe, personal computer
and Local Area Network platforms (IT); 2) addressing the readiness of non-IT
embedded software and equipment (non-IT); 3) addressing the readiness of key
business partners and 4) establishing Year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases.
Phase one involves raising awareness and creating an inventory of all IT and
non-IT assets. The second phase consists of assessing all items inventoried
to initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
The Company has completed those four phases for over two-thirds of its high
priority IT systems, including those provided by software vendors. While the
Company's year 2000 program for nearly all high priority IT systems is
expected to be completed in the first quarter 1999, phase four, for a small
but important subset of these systems, will continue through the end of the
second quarter 1999. As of December 31, 1998, the status of projects
addressing readiness of IT assets is: 100% of IT assets have been
inventoried (Phase 1) and assessed (Phase 2); 94% of IT projects have been
through the remediation phase (Phase 3) with the last project scheduled for
completion by the end of March 1999; and 69% of IT projects have completed
the testing phase (Phase 4) with the last project scheduled to finish
testing by the end of June 1999. A portion of the effort that extends into
1999 is dependent on outside third parties and is behind the original
schedule. The Company is working with these parties to modify the completion
schedule.
As of December 31, 1998, the status of projects that address readiness of
high priority non-IT assets is: 100% of non-IT assets have been inventoried
(Phase 1) and assessed (Phase 2); 79% of non-IT projects addressing
remediation (Phase 3) have been completed and 21% of non-IT projects have
completed the testing phase (Phase 4). The Company expects to have all
phases related to high priority non-IT completed by the end of October 1999.
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED) (CONTINUED)
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being
developed. The most significant categories of key business partners are
financial institutions, software vendors and utility providers (gas,
electric and telecommunications). Surveys have been mailed to these key
business partners. Based on responses received, current levels of readiness
are being assessed, follow-up contacts are underway, alternative strategies
are being developed and testing is being scheduled where feasible. This
effort is expected to continue well into 1999. As noted above, software
vendor assessments are considered part of the IT projects and, therefore,
would follow the schedule shown above for such projects.
While the Company is working to meet the schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact the Company and other similar uncertainties.
A worst case scenario might include the Company's inability to achieve Year
2000 readiness with respect to one or more of the Company's significant
policyholder systems resulting in a material disruption to the Company's
operations. Specifically, the Company could experience an interruption in
its ability to collect and process premiums or deposits, process claim
payments, accurately maintain policyholder information, accurately maintain
accounting records and/or perform adequate customer service. Should the
worst case scenario occur, it could, depending on its duration, have a
material impact on the Company's results of operations and financial
position. Simple failures can be repaired and returned to production within
a matter of hours with no material impact. Unanticipated failures with a
longer service disruption period would have a more serious impact. For this
reason, the Company is placing significant emphasis on risk management and
Year 2000 contingency planning. The Company is in the process of modifying
its contingency plans to address potential Year 2000 issues. Where these
efforts identify high risks due either to unacceptable work around
procedures or significant readiness risks, appropriate risk management
techniques are being developed. These techniques, such as resource shifting
or use of alternate providers, will be employed to provide stronger
assurances of readiness. The Company has gone through exercises to identify
worst case scenario failures. At this time, the Company believes its plans
are sufficient to mitigate identified worst case scenarios.
S-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of The Lincoln
National Life Insurance Company (a wholly owned subsidiary of Lincoln National
Corporation) as of December 31, 1998 and 1997, and the related statutory-basis
statements of operations, changes in capital and surplus and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance, which practices differ from
generally accepted accounting principles. The variances between such practices
and generally accepted accounting principles and the effects on the accompanying
financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of The Lincoln National Life Insurance Company at December 31, 1998 and 1997, or
the results of its operations or its cash flows for each of the three years in
the period ended December 31, 1998.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Lincoln National
Life Insurance Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
February 1, 1999
S-35
<PAGE>
Part II
FEES AND CHARGES REPRESENTATION
Lincoln Life represents that the fees and charges deducted under the
Policies, in the aggregate, are reasonable in relation to the services rendered,
the expenses expected to be incurred, and the risks assumed by Lincoln Life.
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
INDEMNIFICATION
(a) Brief description of indemnification provisions.
In general, Article VII of the By-Laws of The Lincoln National Life
Insurance Company (LNL) provides that LNL will indemnify certain
persons against expenses, judgments and certain other specified costs
incurred by any such person if he/she is made a party or is threatened
to be made a party to a suit or proceeding because he/she was a
director, officer, or employee of LNL, as long as he/she acted in good
faith and in a manner he/she reasonably believed to be in the best
interests of, or not opposed to the best interests of, LNL. Certain
additional conditions apply to indemnification in criminal proceedings.
In particular, separate conditions govern indemnification of directors,
officers, and employees of LNL in connection with suits by, or in the
right of, LNL.
Please refer to Article VII of the By-Laws of LNL (Exhibit No. 6(b)
hereto) for the full text of the indemnification provisions.
Indemnification is permitted by, and is subject to the requirements of
Indiana law.
(b) Undertaking pursuant to Rule 484 of Regulation C under the Securities
Act of 1933.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item
28(a) above or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any such action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet;
A cross-reference sheet (reconciliation and tie);
The prospectus, consisting of 89 pages;
The undertaking to file reports;
The signatures;
Written consents of the following persons:
1. Robert A. Picarello, Esq
2. Ronald D. Franzluebbers, FSA
3. Ernst & Young, LLP
<PAGE>
1. The following exhibits correspond to those required by paragraph A of the
instructions as to exhibits in Form N-8B-2:
(1) Resolution of the Board of Directors of The Lincoln National Life
Insurance Company and related documents authorizing establishment of the
Account (filed with original filing of this Registration Statement).
(2) Not applicable.
(3) (a) Form of Selling Group Agreement.*
(b) Commission Schedule for Variable Life Policies.*
(4) Not applicable.
(5) (a) Proposed Forms of Policy and Application (filed with original filing
of this Registration Statement).
(b) Riders (filed with original filing of this Registration Statement).
(6) (a) Articles of Incorporation of The Lincoln National Life Insurance
Company.(2)
(b) Bylaws of The Lincoln National Life Insurance Company.(2)
(7) Not applicable.
(8) Fund Participation Agreements.
Agreements between The Lincoln National Life Insurance Company and:
(a) American Century Variable Products Group, Inc.*
(b) [deleted]
(c) Baron Capital Funds Trust*
(d) BT Insurance Funds Trust(6)
(e) Delaware Group Premium Fund, Inc.(4)
(f) Fidelity Variable Insurance Products Fund(1)
(g) Fidelity Variable Insurance Products Fund II(1)
(h) Janus Aspen Series*
(i) Lincoln National Funds not applicable
(j) MFS[RegTM] Variable Insurance Trust(5)
(k) Neuberger & Berman Advisers Management Trust*
(l) OCC Accumulation Trust(6)
(m) OppenheimerFunds*
(n) Templeton Variable Products Series Fund*
(9) Services Agreement between The Lincoln National Life Insurance Co. and
Delaware Management Co.(3)
(10) See Exhibit 1(5).
See Exhibit 1(5).
Opinion and Consent of Robert A. Picarello, Esq.
Not applicable.
Not applicable.
Opinion and consent of Ronald D. Franzluebbers, FSA.
Consent of Ernst & Young, LLP, Auditors.
Not applicable.
*To be filed by amendment.
(1) Incorporated by reference to Registration Statement on Form N-4
(File No. 333-04999) filed on September 26, 1996.
(2) Incorporated by reference to Registration Statement on Form N-4
(File No. 33-27783) filed on December 5, 1996.
(3) Incorporated by reference to Registration Statement on Form S-6
(File No. 33-40745) filed on November 21, 1997.
(4) Incorporated by reference to Registration Statement on Form N-4
(File No. 33-25990) filed on April 28, 1998.
(5) Incorporated by reference to Registration Statement on Form S-6
(File No. 333-42479) filed on April 28, 1998.
(6) Incorporated by reference to Pre-Effective Amendment No. 1 to Registration
Statement on Form S-6 (File No. 333-42479) filed on May 12, 1998.
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta, Robert
A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all Registration Statements on
Form S-6 which may be filed with the Securities and Exchange Commission under
the Securities Act of 1933, on behalf of the Company in its own name or in the
name of one of its Separate Accounts, hereby ratifying and confirming our
signatures as they may be signed by any of our attorneys-in-fact to said
Registration Statement.
WITNESS our hands and common seal on this 18th day of December, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Gabriel L. Shaheen President, Chief Executive Officer and Director
- -------------------------- (Principal Executive Officer)
Gabriel L. Shaheen
/s/ Lawrence T. Rowland Executive Vice President and Director
- --------------------------
Lawrence T. Rowland
/s/ Keith J. Ryan Senior Vice President, Assistant Treasurer and
- -------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
/s/ H. Thomas McMeekin Director
- --------------------------
H. Thomas McMeekin
/s/ Richard C. Vaughan Director
- --------------------------
Richard C. Vaughan
/s/ Jon A. Boscia Director
- --------------------------
Jon A. Boscia
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta, Robert
A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all amendments to Registration
Statement No. 333-72875 filed with the Securities and Exchange Commission under
the Securities Act of 1933, on behalf of the Company in its own name or in the
name of one of its Separate Accounts, hereby ratifying and confirming our
signatures as they may be signed by any of our attorneys-in-fact to any such
amendment to said Registration Statement.
WITNESS our hands and common seal on this 28th day of April, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
- -------------------------- President, Chief Executive Officer and Director
Gabriel L. Shaheen (Principal Executive Officer)
- -------------------------- Executive Vice President and Director
Lawrence T. Rowland
/s/ Todd R. Stephenson
- -------------------------- Senior Vice President, Chief Financial Officer
Todd R. Stephenson and Assistant Treasurer
(Principal Financial Officer)
- -------------------------- Vice President and Controller
Keith J. Ryan (Principal Accounting Officer)
- -------------------------- Director
H. Thomas McMeekin
- -------------------------- Director
Richard C. Vaughan
- -------------------------- Director
Jon A. Boscia
</TABLE>
STATE OF INDIANA )
) SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
28th day of April, 1999.
/s/ Janet L. Lindenberg
----------------------------------------
Notary Public
Commission Expires: 7-10-2001
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta, Robert
A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all amendments to Registration
Statement No. 333-72875 filed with the Securities and Exchange Commission under
the Securities Act of 1933, on behalf of the Company in its own name or in the
name of one of its Separate Accounts, hereby ratifying and confirming our
signatures as they may be signed by any of our attorneys-in-fact to any such
amendment to said Registration Statement.
WITNESS our hands and common seal on this 29th day of April, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
- -------------------------- President, Chief Executive Officer and Director
Gabriel L. Shaheen (Principal Executive Officer)
- -------------------------- Executive Vice President and Director
Lawrence T. Rowland
- -------------------------- Senior Vice President, Chief Financial Officer
Todd R. Stephenson and Assistant Treasurer
(Principal Financial Officer)
/s/ Keith J. Ryan
- -------------------------- Vice President and Controller
Keith J. Ryan (Principal Accounting Officer)
- -------------------------- Director
H. Thomas McMeekin
- -------------------------- Director
Richard C. Vaughan
- -------------------------- Director
Jon A. Boscia
</TABLE>
STATE OF INDIANA )
) SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
29th day of April, 1999.
/s/ Janet L. Lindenberg
--------------------------------------
Notary Public
Commission Expires: 7-10-2001
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, the registrant has duly caused
this registration statement on Form S-6 to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Hartford and State of
Connecticut, on the 30th day of April, 1999.
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT S
(Name of Registrant)
By: /s/ John H. Gotta
-------------------------------------
John H. Gotta
Senior Vice President
The Lincoln National Life Insurance
Company
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Name of Depositor)
By: /s/ John H. Gotta
-------------------------------------
John H. Gotta
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on April 30, 1999 by the
following persons, as officers and directors of the Depositor, in the capacities
indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Gabriel L. Shaheen* President, Chief Executive Officer and
- -------------------------- Director (Principal Executive Officer)
Gabriel L. Shaheen
/s/ Jack D. Hunter* Executive Vice President, General Counsel
- -------------------------- and Director
Jack D. Hunter
/s/ Lawrence T. Rowland* Executive Vice President and Director
- --------------------------
Lawrence T. Rowland
/s/ Ian M. Rolland* Director
- --------------------------
Ian M. Rolland
/s/ H. Thomas McMeekin* Director
- --------------------------
H. Thomas McMeekin
/s/ Richard C. Vaughan* Director
- --------------------------
Richard C. Vaughan
/s/ Todd R. Stephenson* Senior Vice President, Chief Financial Officer
- -------------------------- and Assistant Treasurer
Todd R. Stephenson (Principal Financial Officer)
/s/ Keith J. Ryan* Vice President and Controller
- -------------------------- (Principal Accounting Officer)
Keith J. Ryan
*By /s/ John H. Gotta
- --------------------------
John H. Gotta
Attorney-in-Fact
</TABLE>
[logo] Lincoln
-------
Financial Group
Lincoln Life
Robert A. Picarello
Associate General Counsel
The Lincoln National Life Insurance Company
350 Church Street
Hartford, CT 06103-1106
Telephone: (860) 466-1603
Facsimile: (860) 466-1778
April 30, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Lincoln Life Flexible Premium Variable Life Account S (the "Account")
The Lincoln National Life Insurance Company
Pre-Effective Amendment Number 1, File No. 333-72875
Dear Sirs:
As Associate General Counsel of the The Lincoln National Life Insurance Company
(the "Company"), I am familiar with the actions of the Board of Directors of the
Company establishing the Account and its method of operation and authorizing the
filing of a Registration Statement under the Securities Act of 1933 (and
amendments thereto) for the securities to be issued by the Account and the
Investment Company Act of 1940 for the Account itself.
In the course of preparing this Opinion, I have reviewed the Certificate of
Incorporation and the By-Laws of the Company, the Board actions with respect to
the Account, and such other matters as I deemed necessary or appropriate. Based
on such review, I am of the opinion that the variable life insurance policies
(and interests therein) which are the subject of the Registration Statement
under the Securities Act of 1933, as amended, for the Account will, when issued,
be legally issued and will represent binding obligations of the Company, the
depositor for the Account.
I further consent to the use of this Opinion as an Exhibit to Pre-effective
Amendment No. 1 to said Registration Statement and to the reference to me under
the heading "Experts" in said Registration Statement, as amended.
Very truly yours,
/s/ Robert A. Picarello
Robert A. Picarello
Associate General Counsel
[logo] Lincoln
-------
Financial Group
Lincoln Life
[letterhead
Lincoln National Life Insurance Co.
350 Church Street
Hartford, CT 06103-1106]
April 30, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Lincoln Corporate Variable Universal Life
Lincoln Life Flexible Premium Variable Life Separate Account S
("Account")
Pre-Effective Amendment Number 1, File No. 333-72875
Dear Sir or Madam:
This opinion is furnished in connection with the filing of the Registration
Statement on Form S-6 by The Lincoln National Life Insurance Company under the
Securities Act of 1933. The Prospectus included in said Registration Statement
describes flexible premium variable universal life insurance policies (the
"Policies"). The forms of Policies were prepared under my direction.
In my opinion, the illustrations of benefits under the Policies included in the
section entitled "Illustrations of Death Benefit Total Account Values and
Surrender Values" in the Prospectus, based on assumptions stated in the
illustrations, are consistent with the provisions of the forms of the Policies.
The ages selected in the illustration are representative of the manner in which
the Policies operate.
I hereby consent to the use of this opinion as an Exhibit to the Registration
Statement.
Very truly yours,
/s/ Ronald D. Franzluebbers
Ronald D. Franzluebbers, FSA, MAAA
Assistant Vice President & Actuary
RDF:ao
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Pre-Effective Amendment No. 1 to the Registration Statement (Form S-6 No.
333-72875) pertaining to the Lincoln Life Flexible Premium Variable Life Account
S, and to the use therein of our report dated February 1, 1999, with respect to
the statutory-basis financial statements of The Lincoln National Life Insurance
Company.
/s/ Ernst & Young, LLP
Fort Wayne, Indiana
April 27, 1999
