PROSPECTUS 1
<PAGE>
The Lincoln National Life Insurance Company
Lincoln Life Flexible Premium Variable Life Account S
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 LCVUL, 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 from the
following trusts or corporations:
o American Century Variable Products Group, Inc.
o American Funds Insurance Series
(also known as American Variable Insurance Series)
o Baron Capital Funds Trust
o Delaware Group Premium Fund
o Deutsche Asset Management VIT Funds Trust
(formerly BT Insurance Funds Trust)
o Fidelity Variable Insurance Products Funds
o Franklin Templeton Variable Insurance Products Trust
o Janus Aspen Series
o Lincoln National Funds
o MFS Variable Insurance Trust
o Neuberger Berman Advisers Management Trust
o OCC Accumulation Trust
o OppenheimerFunds
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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.
Prospectus Dated May 1, 2000
<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
Underlying Funds Expenses ................................. 6
Policy Loans, Withdrawals and Surrenders .................. 10
Changes in Specified Amount ............................... 10
LINCOLN LIFE, THE SEPARATE ACCOUNT AND THE
GENERAL ACCOUNT ............................................ 10
BUYING VARIABLE LIFE INSURANCE ............................. 11
ALLOCATION OF PREMIUMS ..................................... 12
Fixed Account ............................................. 12
Separate Account -- Funds ................................. 13
Mixed and Shared Funding .................................. 19
Substitution of Securities ................................ 19
CHARGES & FEES ............................................. 19
Premium Load .............................................. 19
Premium Load Refund ....................................... 20
Premium Tax Charge ........................................ 20
Charges and Fees Assessed Against the Total
Account Value ............................................ 20
Mortality and Expense Risk Charge ......................... 21
Reduction of Charges ...................................... 21
POLICY CHOICES ............................................. 21
Premium Payments .......................................... 22
Life Insurance Qualification .............................. 23
Death Benefit Options ..................................... 24
Allocations and Transfers to Funding Options .............. 25
POLICY VALUES .............................................. 25
Total Account Value ....................................... 25
Accumulation Unit Value ................................... 26
Maturity Value ............................................ 26
Surrender Value ........................................... 27
POLICY RIGHTS .............................................. 27
Partial Surrenders ........................................ 27
Reinstatement of a Lapsed Policy .......................... 28
Policy Loans .............................................. 28
Policy Changes ............................................ 29
Right to Examine the Policy ............................... 29
</TABLE>
<TABLE>
<S> <C>
DEATH BENEFIT .............................................. 29
POLICY SETTLEMENT .......................................... 30
Settlement Options ........................................ 30
TERM INSURANCE RIDER ....................................... 31
THE COMPANY ................................................ 32
Directors and Officers of Lincoln Life .................... 32
ADDITIONAL INFORMATION ..................................... 33
Reports to Policyowners ................................... 33
Right to Instruct Voting of Fund Shares ................... 34
Disregard of Voting Instructions .......................... 34
State Regulation .......................................... 35
Legal Matters ............................................. 35
The Registration Statement ................................ 35
Distribution of the Policies .............................. 35
Records and Accounts ...................................... 36
Experts ................................................... 36
Advertising ............................................... 36
TAX ISSUES ................................................. 37
Taxation of Life Insurance Contracts in General ........... 37
Policies Which Are MECS ................................... 38
Policies Which Are Not MECS ............................... 39
Other Considerations ...................................... 39
Tax Status of Lincoln Life ................................ 40
MISCELLANEOUS POLICY PROVISIONS ............................ 40
Payment of Benefits ....................................... 40
Age ....................................................... 40
Incontestability .......................................... 41
Suicide ................................................... 41
Coverage Beyond Maturity .................................. 41
Nonparticipation .......................................... 41
Appendix A --
Illustrations of Death Benefit, Total Account Values
and Surrender Values ...................................... 42
Appendix B --
Applicable Percentages for Guideline Premium Test .......... 56
Financial Statements
Separate Account .......................................... I-1
Company ................................................... S-1
</TABLE>
2
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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 22);
o either of two life insurance qualification methods (see page 23);
o one of three death benefit options (see page 24);
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 22. If the Policy lapses because
your monthly deduction is larger than the Net Accumulation Value, you may
reinstate the Policy. See page 28.
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 20) 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
29.
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. See page
23.
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 24 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.
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 Sub-Account is not guaranteed and
will increase or decrease in value according to the particular Fund's investment
performance. See page 13.
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 12.
4
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Charges and Fees
A premium load is deducted from all of your premium payments. (See page 19).
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 20).
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 20.
A daily deduction is made from the assets of 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 21).
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 6-7 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 25.
There are no Surrender Charges for your Policy.
5
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Underlying Funds Expenses
The investment advisor for each of the Funds deducts a daily charge as a percent
of the net assets in each fund as an asset management charge. The charge
reflects asset management fees of the investment advisor (Management Fees), and
other expenses incurred by the funds (including 12b-1 fees for Class 2 shares
and Other Expenses). The charge has the effect of reducing the investment
results credited to the Sub-Accounts.
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, 1999 unless otherwise
indicated. Future fund expenses will vary.
<TABLE>
<CAPTION>
Total
Annual
Fund Total Fund
Operating Operating
Expenses Total Expenses
Without Waivers with
Management 12(b)1 Other Waivers or and Waivers and
Fund Fees(1) Fee Expenses Reductions Reductions Reductions
<S> <C> <C> <C> <C> <C> <C>
American Century VP
Income & Growth 0.70% N/A% 0.00% 0.70% N/A% 0.70%
American Century VP
International 1.34 N/A 0.00 1.34 N/A 1.34
AFIS Bond--Class 2 0.51 0.25 0.02 0.78 N/A 0.78
AFIS Global Growth--
Class 2 0.68 0.25 0.03 0.96 N/A 0.96
AFIS Growth--Class 2 0.38 0.25 0.01 0.64 N/A 0.64
AFIS Growth Income--
Class 2 0.34 0.25 0.01 0.60 N/A 0.60
AFIS High Yield Bond--
Class 2 0.50 0.25 0.01 0.76 N/A 0.76
AFIS U.S. Government/
AAA--Class 2 0.51 0.25 0.01 0.77 N/A 0.77
Baron Capital Asset(2) 1.00 0.25 0.63 1.88 (0.38) 1.50
Delaware Devon Standard
Class(3a) 0.65 N/A 0.10 0.75 N/A 0.75
Delaware High Yield
Standard Class(3b)
(formerly Delchester) 0.65 N/A 0.07 0.72 N/A 0.72
Delaware International
Equity
Standard Class(3c) 0.85 N/A 0.09 0.94 (0.02) 0.92
Delaware REIT Standard
Class(3d) 0.75 N/A 0.21 0.96 (0.11) 0.85
Delaware Small Value
Standard Class(3e) 0.75 N/A 0.10 0.85 N/A 0.85
Deutsche VIT EAFE
Index(4) 0.45 N/A 0.70 1.15 (0.50) 0.65
Deutsche VIT Equity 500
Index(4) 0.20 N/A 0.23 0.43 (0.13) 0.30
Deutsche VIT Small Cap
Index(4) 0.35 N/A 0.83 1.18 (0.73) 0.45
Fidelity VIP II Asset
Manager--Service
Class(5) 0.53 0.10 0.11 0.74 N/A 0.74
Fidelity VIP II
Contrafund--Service
Class(5) 0.58 0.10 0.10 0.78 N/A 0.78
</TABLE>
6
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<TABLE>
<CAPTION>
Total
Annual
Fund Total Fund
Operating Operating
Expenses Total Expenses
Without Waivers with
Management 12(b)1 Other Waivers or and Waivers and
Fund Fees(1) Fee Expenses Reductions Reductions Reductions
<S> <C> <C> <C> <C> <C> <C>
Fidelity VIP Growth--
Service Class(5) 0.58 0.10 0.09 0.77 N/A 0.77
Fidelity VIP High Income--
Service Class(5) 0.58 0.10 0.11 0.79 N/A 0.79
Fidelity VIP Overseas--
Service Class(5) 0.73 0.10 0.18 1.01 N/A 1.01
Franklin Small Cap--
Class 2(9a, b, d) 0.55 0.25 0.27 1.07 N/A 1.07
Janus Aspen Series
Aggressive Growth--
Institutional Shares(6) 0.65 N/A 0.02 0.67 N/A 0.67
Janus Aspen Series
Balanced--Institutional
Shares(6) 0.65 N/A 0.02 0.67 N/A 0.67
Janus Aspen Series
Flexible Income--
Institutional Shares(6) 0.65 N/A 0.07 0.72 N/A 0.72
Janus Aspen Series Global
Technology--
Service Shares(6) 0.65 0.25 0.13 1.03 N/A 1.03
Janus Aspen Series
Worldwide Growth--
Institutional Shares(6) 0.65 N/A 0.05 0.70 N/A 0.70
LN Bond 0.45 N/A 0.08 0.53 N/A 0.53
LN Capital Appreciation 0.72 N/A 0.06 0.78 N/A 0.78
LN Equity-Income 0.72 N/A 0.07 0.79 N/A 0.79
LN Money Market 0.48 N/A 0.11 0.59 N/A 0.59
LN Social Awareness 0.33 N/A 0.05 0.38 N/A 0.38
MFS Capital
Opportunities(7) 0.75 N/A 0.27(1) 1.02 (0.11)(2) 0.91
MFS Research(7) 0.75 N/A 0.11(1) 0.86 N/A 0.86
MFS Total Return(7) 0.75 N/A 0.15(1) 0.90 N/A 0.90
MFS Utilities(7) 0.75 N/A 0.16(1) 0.91 N/A 0.91
Neuberger Berman AMT
Mid-Cap Growth(8) 0.85 N/A 0.23 1.08 (0.08) 1.00
Neuberger Berman AMT
Partners(8) 0.80 N/A 0.07 0.87 N/A 0.87
OCC Accum Trust
Managed 0.77 N/A 0.06 0.83 N/A 0.83
Oppenheimer MainStreet
Growth & Income 0.73 N/A 0.05 0.78 N/A 0.78
Templeton Asset Strategy
(formerly Asset
Allocation) Class 2(9d, f) 0.60 0.25 0.18 1.03 N/A 1.03
Templeton Growth(9c, d, e)
Securities (formerly
Stock) Class 2 0.83 0.25 0.05 1.13 N/A 1.13
Templeton International
Securities (formerly
International)
Class 2(9d, g) 0.69 0.25 0.19 1.13 N/A 1.13
</TABLE>
(1) Certain of the fund advisers reimburse the company for administrative
costs incurred in connection with administering the funds as variable
funding options under the contract. These reimbursements are generally
paid out of the management fees and are not charged to investors.
7
<PAGE>
(2) The Adviser is contractually obligated to reduce its fee to the extent
required to limit Baron Capital Asset Fund's total operating expenses to
1.5% for the first $250 million of assets in the Fund, 1.35% for Fund
assets over $250 million and 1.25% for Fund assets over $500 million.
Without the expense limitations, total operating expenses for the Fund
for the period January 1, 1999 through December 31, 1999 would have been
1.88%.
(3)(a) The investment advisor for the Devon Series is Delaware Management
Company ("DMC"). Effective May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and reimburse each Series
for expenses to the extent that total expenses will not exceed 0.80%.
Under its Management Agreement, the Series pays a management fee based on
average daily net assets 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.
(b) The investment advisor for the High Yield Series is Delaware Management
Company ("DMC"). Effective May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and reimburse the Series
for expenses to the extent that total expenses will not exceed 0.80%.
Under its Management Agreement, the Series pays a management fee based on
average daily net assets 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.
(c) The investment advisor for the International Equity Series is Delaware
International Advisers Ltd. ("DIAL"). Effective May 1, 2000 through
October 31, 2000, DIAL has voluntarily agreed to waive its management fee
and reimburse the Series for expenses to the extent that total expenses
will not exceed 0.95%. Without such an arrangement, the total annual
operating expenses for the Series would have been 0.94%. Under its
Management Agreement, the Series pays a management fee based on average
daily net assets 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.
(d) The investment advisor for the REIT Series is Delaware Management Company
("DMC"). Effective May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and reimburse the Series
for expenses to the extent that total expenses will not exceed 0.85%.
Without such an arrangement, the total annual operating expenses for the
Series would have been 0.96%. Under its Management Agreement, the Series
pays a management fee based on average daily net assets 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.
(e) The investment advisor for the Small Cap Value Series is Delaware
Management Company ("DMC"). Effective May 1, 2000 through October 31,
2000, DMC has voluntarily agreed to waive its management fee and
reimburse the Series for expenses to the extent that total expenses will
not exceed 0.85%. Under its Management Agreement, the Series pays a
management fee based on average daily net assets 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.
(4) Under the Advisory Agreement with Bankers Trust Company (the "Advisor"),
the fund will pay an advisory fee at an annual percentage rate of 0.20%
of the average daily net assets of the Equity 500 Index Fund. These fees
are accrued daily and paid monthly. The Advisor has voluntarily
undertaken to waive its fee and to reimburse the fund for certain
expenses so that the fund's total operating expenses will not exceed
0.30% of average daily net assets. Under the Advisory Agreement with the
"Advisor", the Small Cap Index Fund will pay an advisory fee at an annual
percentage rate of 0.35% 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 that the fund's total operating expenses will not
exceed 0.45% of average daily net assets. Under the Advisory Agreement
the "Advisor", the EAFE Equity Index 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 that the fund's total operating expenses will not
exceed 0.65% of average daily net assets. Without the reimbursement to
the Funds for the year ended 12/31/99 total expenses would have been
0.43% for the Equity 500 Index Fund, 1.18% for the Small Cap Index Fund
and 1.15% for the EAFE Equity Index Fund.
(5) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain
funds', or FMR on behalf of certain funds' custodian, credits realized as
a result of uninvested cash balances were used to reduce a portion of
each applicable fund's expenses. The total operating expenses, after
reimbursement would have been:
8
<PAGE>
Growth 0.75% (service); Asset Manager 0.73% (service); Contrafund
0.75% (service);
(6) Expenses (except for Global Technology Portfolio) are based upon expenses
for the fiscal year ended December 31, 1999, restated to reflect a
reduction in the management fee for Growth, Aggressive Growth, Worldwide
Growth, and Balanced Portfolios. Expenses for Global Technology Portfolio
are based on the estimated expenses that the Portfolio expects to incur
in its initial fiscal year. All expenses are shown without the effect of
expense offset arrangements.'
(7) Each series has an expense offset arrangement which reduces the series'
custodian fee based on the amount of cash maintained by the series with
its custodian and dividend disbursing agent. Each series may enter into
other such arrangement and directed brokerage arrangements, which would
also have the effect of reducing the series' expenses. "Other Expenses"
do not take into account these expense reductions, and are therefore
higher than the actual expenses of the series. Had the fee reductions
been taken into account, "Net Expenses" would be lower for certain series
and would equal:
0.90% for Capital Opportunities Series
0.85% for Research Series
0.89% for Total Return Series
0.90% for Utilities Series
MFS has contractually agreed, subject to reimbursement, to bear expenses for the
Capital Opportunities Series such that such series' "Other Expenses" (after
taking into account the expense offset arrangement described above), do not
exceed the 0.15% of the average daily net assets of the series during the
current fiscal year. This contractual fee arrangement will continue until at
least May 1, 2001, unless changed with the consent of the board of trustees
which oversees the series.
(8) Expenses reflect expense reimbursement. Neuberger Berman Management Inc.
("NBMI") has undertaken through May 1, 2001 to reimburse certain
operating expenses, including the compensation of NBMI and excluding
taxes, interest, extraordinary expenses, brokerage commissions and
transaction costs, that exceed in the aggregate, 1.0% of the AMT Mid-Cap
Growth Portfolio's average daily net asset value. Absent such
reimbursement, Total Annual Expenses for the portfolio for the year ended
December 31, 1999 would have been 1.08%.
(9)(a) A merger and reorganization was approved that combined the fund with
a similar fund of Templeton Variable Products Series Fund.
(b) On 2/8/00, fund shareholders approved new management fees, effective
5/1/00. The table shows restated total expenses for the fund based on the
new fund fees and the combined assets of the two funds as of 12/31/99,
even though the merger and the new fees did not become effective until
5/1/00.
(c) The fund administration fee is paid indirectly through the management
fee.
(d) The fund's class 2 distribution plan or "rule 12b-1 plan" is described in
the fund's prospectus. While the maximum amount payable under the fund's
class 2 rule 12b-1 plan is 0.35% per year of the fund's average daily net
assets, the Board of Trustees of Franklin Templeton Variable Insurance
Products Trust has set the current rate at 0.25% per year.
(e) On 2/8/00, a merger and reorganization was approved that combined the
fund with a similar fund of the Templeton Variable Products Series Fund,
effective 5/1/00. The table shows total expenses based on the fund's
assets as of 12/31/99, and not the assets of the combined fund. However,
if the table reflected combined assets, the fund's expenses after 5/01/00
would be estimated as: Management Fees 0.80%, Distribution and Services
Fees 0.25%, Other Expenses 0.05%, and Total Fund Operating Expenses
1.10%.
(f) On 2/8/00, shareholders approved a merger and reorganization that
combined the fund with the Templeton Global Asset Allocation Fund,
effective 5/01/00. The shareholders of that fund had approved new
management fees, which apply to the combined fund effective 5/01/00. The
table shows restated total expenses based on the new fees and the assets
of the fund as of 12/31/99, and not the assets of the combined fund.
However, if the table reflected both the new fees and the the combined
assets, the fund's expenses after 5/1/00 would be estimated as:
Management Fees 0.60%, Distribution and Service Fees 0.25%, Other
Expenses 0.14%, and Total Fund Operating Expenses 0.99%.
(g) On 2/8/00, shareholders approved a merger and reorganization that
combined the fund with the Templeton International Equity Fund, effective
5/01/00. The shareholders of that fund had approved new management fees,
which apply to the combined fund effective 5/1/00. The table shows
restated total expenses based on the new fees and the assets of the fund
as of 12/31/99, and not the assets of the combined fund. However, if the
table reflected both the new fees and the combined assets, the fund's
expenses after 5/1/00 would be estimated as: Management Fees 0.65%,
Distribution and Service Fees 0.25%, Other Expenses 0.20%, and Total Fund
Operating Expenses 1.10%.
9
<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 28.
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 29.
LINCOLN LIFE, THE SEPARATE ACCOUNT AND THE GENERAL ACCOUNT
Lincoln Life, an Indiana life insurance company incorporated June 12, 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.
10
<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
described in "Separate Account--Funds". 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
11
<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 "Tax Issues"),
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 "Death Benefit
Options").
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 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 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 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
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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 Sub-Accounts of the Separate Account is invested solely in the
shares of one of the Funds available under the Policies. Each of the Funds, in
turn, is an investment portfolio of one of the trusts or corporations listed
below. A given fund may have a similar investment strategy to those of another
mutual fund managed by the same investment advisor or subadvisor. However,
because of timing of investments and other variables, we cannot guarantee that
there will be any correlation between the two investments. Even though the
management, strategy and the objectives of the funds are similar, the investment
results may vary.
The portfolios, their investment advisors and distributors, and the Funds within
each that are available under the Policies are:
American Century Variable Products Group, Inc., managed and distributed by
American Century Investment Management, Inc., P.O. Box 419835, Kansas City, MO
64141-6385
American Century VP Income & Growth Fund
American Century VP International Fund
American Funds Insurance Series (also known as American Variable Insurance
Series) managed by Capital Research and Management Company and distributed by
American Funds Distributors, Inc., 333 South Hope Street, Los Angeles, CA 90071
AFIS Bond Fund--Class 2
AFIS Global Growth Fund--Class 2
AFIS Growth Fund--Class 2
AFIS Growth-Income Fund--Class 2
AFIS High-Yield Bond Fund--Class 2
AFIS U.S. Government/AAA Rated Securities Fund--Class 2
Baron Capital Funds Trust, managed by BAMCO, Inc. and distributed by Baron
Capital Inc., 767 Fifth Avenue, New York, NY 10153
Baron Capital Asset Fund--Insurance Shares
Delaware Group Premium Fund, managed by Delaware Management Company, One
Commerce Square, Philadelphia, PA 19103 and for International, 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 Devon Series--Standard Class
Delaware Group High Yield Series (formerly Delchester Series)--Standard
Class
Delaware Group International Equity Series--Standard Class
Delaware Group REIT Series--Standard Class
Delaware Group Small Cap Value Series--Standard Class
Deutsche Asset Management VIT Funds Trust (formerly BT Insurance Funds Trust)
managed by Bankers Trust Company, 130 Liberty Street (One Bankers Trust Plaza),
New York, NY 10006 and distributed by Provident Distributors, Inc., Four Falls
Corporate Center, West Conshohocken, PA, 19428
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<PAGE>
Deutsche VIT EAFE[RegTM] Equity Index Fund
Deutsche VIT Equity 500 Index Fund
Deutsche VIT Small Cap Index Fund
Fidelity Variable Insurance Products Fund, and Fidelity Variable Insurance
Products Fund II, managed by Fidelity Management & Research Company and
distributed by Fidelity Distributors Corporation, Inc., 82 Devonshire Street,
Boston, MA 02103
Fidelity VIP Growth Portfolio-Service Class
Fidelity VIP High Income Portfolio--Service Class
Fidelity VIP Overseas Portfolio--Service Class
Fidelity VIP II Asset Manager Portfolio-Service Class
Fidelity VIP II Contrafund Portfolio-Service Class
Franklin Templeton Variable Insurance Products Trust, managed by Templeton
Investment Counsel, Inc., Broward Financial Centre, Suite 2100, Fort Lauderdale,
FL 33394, and its Templeton and Franklin affiliates and distributed by
Franklin/Templeton Distributors, Inc., 777 Mariners Island Blvd., San Mateo, CA
94403-7777.
Franklin Small Cap Fund-Class 2
Templeton Asset Strategy Fund-Class 2 (formerly Templeton Asset Allocation
Fund)
Templeton Growth Securities Fund-Class 2 (formerly Templeton Stock Fund)
Templeton International Securities Fund-Class 2 (formerly Templeton
International Fund)
Janus Aspen Series, managed by Janus Capital and distributed by Janus
Distributors, Inc., 100 Fillmore St., Denver, CO 80206-4928
Janus Aspen Series Aggressive Growth Portfolio--Institutional Shares
Janus Aspen Series Balanced Portfolio--Institutional Shares
Janus Aspen Series Flexible Income Portfolio--Institutional Shares
Janus Aspen Series Global Technology Portfolio--Service Shares
Janus Aspen Series Worldwide Growth Portfolio--Institutional Shares
Lincoln National Funds, managed by Lincoln Investment Management, Inc., 200
East Berry Street, Fort Wayne, IN 46802 and distributed by Lincoln Financial
Advisors, Corp., 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 Investment Advisors)
Lincoln Investment Management, Inc. (Lincoln Investment) has informed the funds
to which it provides advisory services that it intends to merge into a newly
created series of its affiliate, Delaware Management Business Trust, during the
second or third quarter of 2000. Lincoln Investment does not expect the merger
to result in any change in the level of advisory services that it currently
provides to these funds, although there may be some changes in, and additions
to, personnel. See the prospectuses for these funds for more information.
MFS[RegTM] Variable Insurance Trust, managed by Massachusetts Financial Services
Company and distributed by MFS Fund Distributors, Inc., 500 Boylston Street,
Boston, MA 02116
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<PAGE>
MFS Research Series
MFS Total Return Series
MFS Utilities Series
MFS Capital Opportunities Series
Neuberger Berman Advisers Management Trust, managed and distributed by
Neuberger Berman 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, 1345 Avenue of the Americas, New York, NY 10105
OCC Trust Managed Portfolio
OppenheimerFunds, managed by OppenheimerFunds, Inc., and distributed by
OppenheimerFunds Distributors, Inc., Two World Trade Center, New York, NY 10048
Oppenheimer Main Street Growth and Income Fund/VA
The investment advisory fees charged the Funds by their advisors are shown on
pages 6-8.
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: Seeks dividend growth, current
income and capital appreciation by investing in a diversified portfolio of
U.S. stocks.
o American Century VP International Fund: Seeks capital growth, by investing
primarily in an internationally diversified portfolio of common stocks that
are considered by management to have prospects for appreciation. The fund will
invest primarily in securities of issuers located in developed markets.
o AFIS Bond Fund--Class 2: The fund seeks to maximize your level of current
income and preserve your capital by investing primarily in bonds. The fund is
designed for investors seeking income and more price stability than stocks,
and capital preservation over the long-term.
o AFIS Global Growth Fund--Class 2: The fund seeks to make your investment grow
over time by investing primarily in common stocks of companies located around
the world. The fund is designed for investors seeking capital appreciation
through stocks. Investors in the fund should have a long-term perspective and
be able to tolerate potentially wide price fluctuations.
o AFIS Growth Fund--Class 2: The fund seeks to make your investment grow over
time by investing primarily in common stocks of companies that appear to offer
superior opportunities for growth of capital. The fund is designed for
investors seeking capital appreciation through stocks. Investors in the fund
should have a long-term perspective and be able to tolerate potentially wide
price fluctuations.
o AFIS Growth-Income Fund--Class 2: The fund seeks to make your investment
grow and provide you with income over time by investing primarily in common
stocks or other securities which demonstrate the potential for appreciation
and/or dividends. The fund is designed for investors seeking both capital
appreciation and income.
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<PAGE>
o AFIS High-Yield Bond Fund--Class 2: The fund seeks to provide you with a high
level of current income and secondarily capital appreciation by investing
primarily in lower quality debt securities (rated Ba or BB or lower by Moody's
Investors Services, Inc. or Standard & Poor's Corporation), including those of
non-U.S. issuers. The fund may also invest in equity securities that provide
an opportunity for capital appreciation.
o AFIS U.S. Government/AAA Rated Securities Fund--Class 2: The fund seeks to
provide you with a high level of current income, as well as preserve your
investment. The fund invests primarily in securities that are guaranteed by
the "full faith and credit" pledge of the U.S. Government and securities that
are rated AAA or Aaa by Moody's Investor's Services, Inc. or Standard & Poor's
Corporation or unrated but determined to be of equivalent quality.
o Baron Capital Asset Fund: The investment objective is to purchase stocks,
judged by the advisor, to have the potential of increasing their value at
least 50% over two subsequent years, although that goal may not be achieved.
o Delaware Group Devon Series --Standard Class: Seeks growth and income by
investing primarily in income-producing stocks that the manager believes have
the potential for above-average dividend increases over time. This fund blends
traditional growth and value investment styles.
o Delaware Group High Yield Series--Standard Class (formerly Delchester Series):
Seeks total return and, as a secondary objective, high current income. The
Series invests in rated and unrated corporate bonds (including high-risk,
high-yield bonds commonly known as junk bonds), foreign 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 International Equity Series--Standard Class: Seeks long-term
growth without undue risk to principal by investing primarily in
foreign-company stocks with the potential for capital appreciation and income.
o Delaware Group REIT Series--Standard Class: Seeks to achieve maximum long-term
total return by investing primarily in the securities of real estate
investment trusts and real estate operating companies.
o Delaware Group Small Cap Value Series--Standard Class: Seeks growth by
investing primarily in stocks of small cap companies whose market values
appear low relative to underlying value or future earnings and growth
potential.
o Deutsche VIT EAFE[RegTM] Equity Index Fund: 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 Deutsche VIT Equity 500 Index Fund: 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 Deutsche VIT Small Cap Index Fund: 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.
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<PAGE>
o Fidelity VIP Growth Portfolio--Service Class: Seeks long-term capital
appreciation. The portfolio normally purchases common stocks.
o Fidelity VIP High Income Portfolio--Service Class: Seeks high current income
by investing at least 65% of total assets in income-producing debt securities,
with an emphasis on lower quality securities.
o Fidelity VIP Overseas Portfolio--Service Class: Seeks long-term growth of
capital by investing mainly in foreign securities.
o Fidelity VIP II Asset Manager Portfolio--Service Class: Seeks high total
return with reduced risk over the long term by allocating its assets among
domestic and foreign stocks, bonds and money market instruments.
o Fidelity VIP II Contrafund Portfolio--Service Class: Seeks long-term capital
appreciation by investing primarily in securities of companies whose value the
adviser believes is not fully recognized by the public.
o Franklin Small Cap Fund--Class 2: Seeks long-term capital growth. It invests
primarily in equity securities of U.S. small cap growth companies. Small cap
companies are generally those with market cap values of less than $1.5 billion
at time of purchase. Franklin Advisers, Inc. serves as the Fund's investment
advisor.
o Janus Aspen Series Aggressive Growth Portfolio--Institutional Shares: Seeks
long-term growth of capital. Pursues objective in common stocks selected for
their growth potential and normally invests at least 50% of its equity assets
in medium-sized companies.
o Janus Aspen Series Balanced Portfolio--Institutional Shares: 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 Flexible Income Portfolio--Institutional Shares: To seek
maximum total return, consistent with preservation of capital. Pursues
objective primarily through investments in income-producing securities.
o Janus Aspen Series Global Technology Portfolio--Service Shares: To seek
long-term growth of capital. The Portfolio invests primarily in equity
securities of U.S. and foreign companies selected for their growth potential.
Normally, it invests at least 65% of its total assets in securities or
companies that the portfolio manager believes will benefit significantly from
advancements or improvements in technology.
o Janus Aspen Series Worldwide Growth Portfolio--Institutional Shares: Seeks
long-term growth of capital in a manner consistent with the preservation of
capital. Pursues objective by investing primarily in common stocks of
companies of any size throughout the world. The Portfolio normally invests in
issuers from at least 5 different countries, including the U.S. The Portfolio
may at times invest in fewer than five countries or even a single country.
o Lincoln National Bond Fund, Inc.: 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.: Seeks long-term growth of
capital in a manner consistent with preservation of capital. The fund
primarily buys stocks 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.
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o Lincoln National Equity-Income Fund, Inc.: Seeks reasonable income by
investing primarily in income-producing equity securities. The fund invests
mostly in high-income stocks with some high-yielding bonds (including junk
bonds).
o Lincoln National Money Market Fund, Inc.: Seeks maximum current income
consistent with the preservation of capital. The fund invests in short-term
obligations issued by U.S. corporations; the U.S. Government; and federally
chartered banks and U.S. branches of foreign banks.
o Lincoln National Social Awareness Fund, Inc.: Long-term capital appreciation.
The fund buys stocks of established companies which adhere to certain specific
social criteria.
o MFS Research Series: Seeks to provide long-term growth of capital and future
income.
o MFS Total Return Series: Seeks primarily to provide 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 of capital and income.
o MFS Utilities Series: Seeks capital growth and current income (income above
that available from a portfolio invested entirely in equity securities).
o MFS Capital Opportunities Series: Seeks capital appreciation.
o Neuberger Berman AMT Mid-Cap Growth Portfolio: Seeks capital appreciation by
investing primarily in common stocks of medium-capitalization companies, using
a growth-oriented investment approach.
o Neuberger Berman AMT Partners Portfolio: Seeks capital growth by investing
mainly in common stocks of mid- to large capitalization established companies
using the value-oriented investment approach. Neuberger Berman Management Inc.
serves as the Fund's investment adviser. Neuberger Berman, LLC serves as the
Fund's investment sub-adviser.
o OCC Accumulation Trust Managed Portfolio: Seeks to achieve 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 manager's assessments
of the relative outlook for such investments.
o Oppenheimer Main Street Growth and Income Fund/VA: 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 Strategy Fund--Class 2 (formerly Templeton Asset Allocation
Fund): Seeks a high level of total return. Invests in stocks of companies in
any nation, bonds of companies and governments of any nation and in money
market instruments, including emerging markets. Assets are allocated among
different investments depending upon worldwide market and economic conditions.
o Templeton Growth Securities Fund--Class 2 (formerly Templeton Stock Fund):
Seeks long-term capital growth. It invests primarily in stocks of companies
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in various nations throughout the world, including the U.S. and emerging
markets. Templeton Global Advisors Limited serves as the Fund's investment
advisor.
o Templeton International Securities Fund--Class 2 (formerly Templeton
International Fund): Seeks long-term capital growth. It invests primarily in
stocks of companies outside the United States, including emerging markets.
Templeton Investment Counsel, Inc. serves as the Fund's investment advisor.
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.
Lincoln Life has entered into agreements with the various trusts or corporations
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 .10% and .40% of assets in a particular Fund attributable to
the Policies.
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 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.
Substitution of Securities
If the shares of any Fund should no longer be available for investment by the
Separate Account or if, in our judgment, further investment in such shares
should cease to be appropriate in view of the purpose of the Separate Account or
in view of legal, regulatory or federal income tax restrictions, we may
substitute shares of another Fund. There will be no substitution of securities
in any Sub-Account without prior approval of the Commission. Substitute funds
may have higher charges than the funds being replaced.
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.
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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.
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
20
<PAGE>
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 per month 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.
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>
<CAPTION>
Annualized Mortality and
Policy Years Expense Risk Charge
- --------------------- -------------------------
<S> <C>
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.
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;
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<PAGE>
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 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.
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.
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<PAGE>
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 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 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
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<PAGE>
paid exceed such limit during any 7-pay testing period, any partial surrender or
Policy loan may be subject to federal income taxation.
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 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 at 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
24
<PAGE>
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 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.
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<PAGE>
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 Policy owner'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.
Accumulation Unit Value
We convert any Net Premium payment allocated to, or Policy Value transferred to
a Sub-Account into Accumulation Units. The Accumulation Unit Value for a Sub-
Account is determined by:
o multiplying the Fund shares owned by the Sub-Account at the beginning of the
business day by 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 Sub-Account charges which may include a tax charge or credit; and
o dividing the result of the foregoing subtraction by the number of Accumulation
Units for that 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.
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<PAGE>
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. If you make a full surrender, all coverage under the Policy
will automatically terminate and may not be reinstated.
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"):
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
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<PAGE>
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:
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.
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Policy Changes
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 fifth 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.
o Changes from Death Benefit Option 1 to Death Benefit 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 Death Benefit Option 2 to Death Benefit 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 Death Benefit Option 3 to Death Benefit Option 1 are allowed at
any time. The Specified Amount will be increased to equal the Specified Amount
prior to the change plus the lesser of the Accumulated Premiums or the Total
Account Value at the time of the change.
o Changes from Death Benefit Option 3 to Death Benefit 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 Death Benefit Options 1 or 2 to Death Benefit 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
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<PAGE>
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.
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 bases.
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%.
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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 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.
However, term coverage does not have an associated Account Value. 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.
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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.
<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], The Lincoln National Life Insurance
Company
Roland C. Baker Vice President [1/95-present] The Lincoln National Life
Vice President Insurance Co., President and Director, First Penn Pacific
1801 S. Meyers Rd. Life Insurance Company.
Oakbrook Terrace, IL 60181
Jon A. Boscia President, Chief Executive Officer and Director, Lincoln
President and Director National Corporation [1/98-present], Formerly: President,
1500 Market Street Chief Executive Officer and Director [10/96-1/98] and
Suite 3900 President and Chief Operating Officer [5/94-10/96], The
Philadelphia, PA 19102 Lincoln National Life Insurance Company.
Janet Chrzan Senior Vice President, Chief Financial Officer, and Director
Senior Vice President, [4/00-present] The Lincoln National Life Insurance Company.
Chief Financial Formerly: Vice President and Treasurer, Lincoln National
Officer and Director Corporation
1500 Market Street
Suite 3900
Philadelphia, PA 19102
John Gotta Chief Executive Officer of Life Insurance, Senior Vice
Chief Executive Officer of Life President and Assistant Secretary [12/99-present], The
Insurance, Senior Vice President Lincoln National Life Insurance Company. Formerly:
and Assistant Secretary Senior Vice President and Assistant Secretary
350 Church Street [4/98-12/99]; Senior Vice President [2/98-4/98]; Vice
Hartford, CT 06103 President and General Manager [1/98-2/98] The Lincoln
National Life Insurance Co. Formerly: Senior Vice
President, Connecticut General Life Insurance Company
[3/96-12/97]; Vice President, Connecticut (Massachusetts
Mutual) Mutual Life Insurance Company [8/94-3/96].
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Name, Address and
Position(s) with Registrant Principal Occupations Last Five Years
- --------------------------------- ----------------------------------------------------------
<S> <C>
J. Michael Hemp President and Director [7/97-present], Lincoln Financial
Senior Vice President Advisors Inc.; Senior Vice President [formerly Vice
350 Church Street President] [10/95-present], The Lincoln National Life
Hartford, CT 06103 Insurance Company.
Stephen H. Lewis Interim Chief Executive Officer of Annuities and Senior
Interim Chief Executive Officer Vice President, [12/99-present], Formerly: Senior Vice
of Annuities and Senior Vice President, [5/94-12/99] The Lincoln National Life
President Insurance Company.
H. Thomas McMeekin President and Director 5/94-present, Lincoln Investment
Director Management, Inc.
One Commerce Square
2005 Market Street
Philadelphia, PA 19013
Gary W. Parker Senior Vice President [4/00-present], Vice President,
Senior Vice President Product Management, [7/98-3/00] The Lincoln National
350 Church Street Life Insurance Company. Formerly: Senior Vice President,
Hartford, CT 06103 Life Products [10/97-6/98]; Vice President, Marketing
Services [9/89-10/97] Life of Virginia.
Lawrence T. Rowland Executive Vice President [10/96-present] Formerly: Senior
Executive Vice President and Vice President [1/93-10/96]), The Lincoln National Life
Director Insurance Company. Chairman, Chief Executive Officer,
One Reinsurance Place President and Director [10/96-present], Formerly: Senior
1700 Magnavox Way Vice President [10/95-10/96].
Fort Wayne, IN 46802
Keith J. Ryan Vice President, Controller and Chief Accounting Officer
Vice President, Controller and [1/96-present] The Lincoln National Life Insurance
Chief Accounting Officer Company.
Richard C. Vaughan Executive Vice President and Chief Financial Officer
Director [1/95-present] The Lincoln National Life Insurance
Centre Square Company.
West Tower
1500 Market Street
Suite 3900
Philadelphia, PA 19102
Michael R. Walker Senior Vice President [1/98-present], Vice President
Senior Vice President [1/96-1/98] The Lincoln National Life Insurance Co.
350 Church Street Formerly: Vice President [3/93-1/96], Employers Health
Hartford, CT 06103 Insurance Company.
Roy V. Washington Vice President [7/96-present] formerly, Associate Counsel
Vice President [2/95-7/96] The Lincoln National Life Insurance Company.
</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;
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<PAGE>
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. To determine how many votes
each policy owner is entitled to direct with respect to a Fund, first we will
calculate the dollar amount of your account value attributable to that Fund.
Second, we will divide that amount by $100.00. The result is the number of votes
you may direct. The votes will be cast at meetings of the shareholders of the
Fund and will be based on instructions received from 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
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<PAGE>
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 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 several 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 Corporation 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
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<PAGE>
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
information required to be given will be provided by Andesa on behalf of the
Company.
Experts
The financial statements of the Separate Account and the statutory-basis
financial statements of Lincoln Life appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports which also appear elsewhere in this
document and in the registration statement. The financial statements audited by
Ernst & Young LLP have been included in this document in reliance on their
reports given on their authority as experts in accounting and auditing.
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
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<PAGE>
standards covering the various aspects of sales and services for individually
sold life insurance and annuities.
TAX ISSUES
Introduction. The Federal income tax treatment of the policy is complex and
sometimes uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion does not include all the Federal income tax rules
that may affect you and your policy, and is not intended as tax advice. This
discussion also does not address other Federal tax consequences, or state or
local tax consequences, associated with the policy. As a result, you should
always consult a tax adviser about the application of tax rules to your
individual situation.
Taxation of Life Insurance Contracts In General
Tax Status of the Policy. Section 7702 of the Code establishes a statutory
definition of life insurance for Federal tax purposes. We believe that the
policy will meet the statutory definition of life insurance, which places
limitations on the amount of premium payments that may be made and the contract
values that can accumulate relative to the death benefit. As a result, the death
benefit payable under the policy will generally be excludable from the
beneficiary's gross income, and interest and other income credited under the
policy will not be taxable unless certain withdrawals are made (or are deemed to
be made) from the policy prior to the insured's death, as discussed below. This
tax treatment will only apply, however, if (1) the investments of the Separate
Account are "adequately diversified" in accordance with Treasury Department
regulations, and (2) we, rather than you, are considered the owner of the assets
of the Separate Account for Federal income tax purposes.
Investments in the Separate Account must be diversified. For a policy to be
treated as a life insurance contract for Federal income tax purposes, the
investments of the Separate Account must be "adequately diversified." IRS
regulations define standards for determining whether the investments of the
Separate Account are adequately diversified. If the Separate Account fails to
comply with these diversification standards, you could be required to pay tax
currently on the excess of the contract value over the contract premium
payments. Although we do not control the investments of the subaccounts, we
expect that the subaccounts will comply with the IRS regulations so that the
Separate Account will be considered "adequately diversified."
Restriction on investment options. Federal income tax law limits your right to
choose particular investments for the policy. Because the IRS has not issued
guidance specifying those limits, the limits are uncertain and your right to
allocate contract values among the subaccounts may exceed those limits. If so,
you would be treated as the owner of the assets of the Separate Account and thus
subject to current taxation on the income and gains from those assets. We do not
know what limits may be set by the IRS in any guidance that it may issue and
whether any such limits will apply to existing policies. We reserve the right to
modify the policy without your consent to try to prevent the tax law from
considering you as the owner of the assets of the Separate Account.
No guarantees regarding tax treatment. We make no guarantee regarding the tax
treatment of any policy or of any transaction involving a policy. However, the
remainder of this discussion assumes that your policy will be treated as a life
insurance contract for Federal income tax purposes and that the tax law will not
impose tax on any increase in your contract value until there is a distribution
from your policy.
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<PAGE>
Tax treatment of life insurance death benefit proceeds. In general, the amount
of the death benefit payable from a policy because of the death of the insured
is excludable from gross income. Certain transfers of the policy for valuable
consideration, however, may result in a portion of the death benefit being
taxable. If the death benefit is not received in a lump sum and is, instead,
applied under one of the settlement options, payments generally will be prorated
between amounts attributable to the death benefit which will be excludable from
the beneficiary's income and amounts attributable to interest (accruing after
the insured's death) which will be includible in the beneficiary's income.
Tax deferral during accumulation period. Under existing provisions of the Code,
except as described below, any increase in your contract value is generally not
taxable to you unless amounts are received (or are deemed to be received) from
the policy prior to the insured's death. If there is a total withdrawal from the
policy, the surrender value will be includible in your income to the extent the
amount received exceeds the "investment in the contract." (If there is any debt
at the time of a total withdrawal, such debt will be treated as an amount
received by the owner.) The "investment in the contract" generally is the
aggregate amount of premium payments and other consideration paid for the
policy, less the aggregate amount received under the policy previously to the
extent such amounts received were excludable from gross income. Whether partial
withdrawals (or other amounts deemed to be distributed) from the policy
constitute income to you depends, in part, upon whether the policy is considered
a "modified endowment contract" (a "MEC") for Federal income tax purposes.
Policies Which Are MECS
Characterization of a policy as a MEC. A policy will be classified as a MEC if
premiums are paid more rapidly than allowed by a "7-pay test" under the tax law
or if the policy is received in exchange for another policy that is a MEC. In
addition, even if the policy initially is not a MEC, it may in certain
circumstances become a MEC. These circumstances would include a later increase
in benefits, any other material change of the policy (within the meaning of the
tax law), and a withdrawal or reduction in the death benefit during the first
seven contract years.
Tax treatment of withdrawals, loans, assignments and pledges under MECs. If the
policy is a MEC, withdrawals from the policy will be treated first as
withdrawals of income and then as a recovery of premium payments. Thus,
withdrawals will be includible in income to the extent the contract value
exceeds the investment in the policy. The Code treats any amount received as a
loan under a policy, and any assignment or pledge (or agreement to assign or
pledge) any portion of your contract value, as a withdrawal of such amount or
portion. Your investment in the policy is increased by the amount includible in
income with respect to such assignment, pledge, or loan.
Penalty taxes payable on withdrawals. A 10% penalty tax may be imposed on any
withdrawal (or any deemed distribution) from your MEC which you must include in
your gross income. The 10% penalty tax does not apply if one of several
exceptions exists. These exceptions include withdrawals or surrenders that: you
receive on or after you reach age 59-1/2, you receive because you became
disabled (as defined in the tax law), or you receive as a series of
substantially equal periodic payments for your life (or life expectancy).
Special rules if you own more than one MEC. In certain circumstances, you must
combine some or all of the life insurance contracts which are MECs that you own
in
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<PAGE>
order to determine the amount of withdrawal (including a deemed withdrawal) that
you must include in income. For example, if you purchase two or more MECs from
the same life insurance company (or its affiliates) during any calendar year,
the Code treats all such policies as one contract. Treating two or more policies
as one contract could affect the amount of a withdrawal (or a deemed withdrawal)
that you must include in income and the amount that might be subject to the 10%
penalty tax described above.
Policies Which Are Not MECS
Tax treatment of withdrawals. If the policy is not a MEC, the amount of any
withdrawal from the policy will generally be treated first as a non-taxable
recovery of premium payments and then as income from the policy. Thus, a
withdrawal from a policy that is not a MEC will not be includible in income
except to the extent it exceeds the investment in the policy immediately before
the withdrawal.
Certain distributions required by the tax law in the first 15 policy years.
Section 7702 places limitations on the amount of premium payments that may be
made and the contract values that can accumulate relative to the death benefit.
Where cash distributions are required under Section 7702 in connection with a
reduction in benefits during the first 15 years after the policy is issued (or
if withdrawals are made in anticipation of a reduction in benefits, within the
meaning of the tax law, during this period), some or all of such amounts may be
includible in income. A reduction in benefits may occur when the face amount is
decreased, withdrawals are made, and in certain other instances.
Tax treatment of loans. If your policy is not a MEC, a loan you receive under
the policy is generally treated as your indebtedness. As a result, no part of
any loan under such a policy constitutes income to you so long as the policy
remains in force. Nevertheless, in those situations where the interest rate
credited to the loan account equals the interest rate charged to you for the
loan, it is possible that some or all of the loan proceeds may be includible in
your income. If a policy lapses (or if all contract value is withdrawn) when a
loan is outstanding, the amount of the loan outstanding will be treated as
withdrawal proceeds for purposes of determining whether any amounts are
includible in the your income.
Other Considerations
Insured lives past age 100. If the insured survives beyond the end of the
mortality table used to measure charges under the policy, which ends at age 100,
we believe the policy will continue to qualify as life insurance for Federal tax
purposes. However, there is some uncertainty regarding this treatment, and it is
possible that you would be viewed as constructively receiving the cash value in
the year the insured attains age 100.
Compliance with the tax law. We believe that the maximum amount of premium
payments we have determined for the policies will comply with the Federal tax
definition of life insurance. We will monitor the amount of premium payments,
and, if the premium payments during a contract year exceed those permitted by
the tax law, we will refund the excess premiums within 60 days of the end of the
policy year and will pay interest and other earnings (which will be includible
in income subject to tax) as required by law on the amount refunded. We also
reserve the right to increase the death benefit (which may result in larger
charges under a policy) or to take any other action deemed necessary to maintain
compliance of the policy with the Federal tax definition of life insurance.
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<PAGE>
Disallowance of interest deductions. If an entity (such as a corporation or a
trust, not an individual) purchases a policy or is the beneficiary of a policy
issued after June 8, 1997, a portion of the interest on indebtedness unrelated
to the policy may not be deductible by the entity. However, this rule does not
apply to a policy owned by an entity engaged in a trade or business which covers
the life of an individual who is a 20-percent owner of the entity, or an
officer, director, or employee of the trade or business, at the time first
covered by the policy. This rule also does not apply to a policy owned by an
entity engaged in a trade or business which covers the joint lives of the 20%
owner of the entity and the owner's spouse at the time first covered by the
policy.
Federal income tax withholding. We will withhold and remit to the IRS a part of
the taxable portion of each distribution made under a policy unless you notify
us in writing at or before the time of the distribution that tax is not to be
withheld. Regardless of whether you request that no taxes be withheld or whether
the Company withholds a sufficient amount of taxes, you will be responsible for
the payment of any taxes and early distribution penalties that may be due on the
amounts received. You may also be required to pay penalties under the estimated
tax rules, if your withholding and estimated tax payments are insufficient to
satisfy your total tax liability.
Changes In The Policy Or Changes In The Law. Changing the owner, exchanging the
contract, and other changes under the policy may have tax consequences (in
addition to those discussed herein) depending on the circumstances of such
change. The above discussion is based on the Code, IRS regulations, and
interpretations existing on the date of this Prospectus. However, Congress, the
IRS, and the courts may modify these authorities, sometimes retroactively.
Tax Status Of Lincoln Life
Under existing Federal income tax laws, Lincoln Life does not pay tax on
investment income and realized capital gains of the Separate Account. Lincoln
Life does not expect that it will incur any Federal income tax liability on the
income and gains earned by the Separate Account. We, therefore, do not impose a
charge for Federal income taxes. If Federal income tax law changes and we must
pay tax on some or all of the income and gains earned by the Separate Account,
we may impose a charge against the Separate Account to pay the taxes.
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.
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.
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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
We will continue coverage beyond the Maturity Date if: (1) your Cash Surrender
Value remains positive; and (2) you do not select a Settlement Option under the
policy. The Maturity Date for this Policy is the Policy Anniversary nearest the
Insured's 100th birthday.
Under Coverage Beyond Maturity, at the Maturity Date we will transfer the
Separate Account Value to the Fixed Account. We will then continue to pay
interest on the Total Account Value of the Policy as described in Policy Values
- -- Interest Credited.
Where permitted by law we will continue to charge you Monthly Deductions, except
that we will not charge you any Cost of Insurance. In addition, Loan Interest on
any loans outstanding on the Maturity Date will continue to accrue. Coverage
Beyond Maturity is not available if you select the Paid-Up Non-Forfeiture
Option. Also, the Paid-Up Non-Forfeiture Option will not be available once this
Coverage Beyond Maturity provision takes effect.
At this time, uncertainties exist about the tax treatment of the Policy if it
should continue beyond the Maturity Date. Therefore, you should consult your tax
advisor before the Policy becomes eligible for Coverage Beyond Maturity.
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 2.20% on all
premium. After deduction of these amounts, the illustrated net annual return is
- -1.71%, 4.29% and 10.29% on a maximum charge basis for all years. The
illustrated net annual return on a current charge basis is -1.16%, 4.84% and
10.84% for Policy Years 1-10 and -1.51%, 4.49% and 10.49% 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 0.81% of the daily net asset value of the Separate
Account. This rate reflects an arithmetic average of total Fund portfolio annual
expenses for the year ending December 31, 1999.
Certain fund groups waive a portion of fund expenses or reimburse the funds for
such expenses. Those waivers or reimbursements remain in effect for varying
periods of time, are usually reviewed at least yearly by each fund group, and
are within the fund group's control. The effect of discontinuing a waiver or
reimbursement arrangement could result in higher expense levels for the affected
fund, as shown in the portfolio expense table. Assuming those waivers and
reimbursements were discontinued, the Fund investment advisory fees and other
expenses arithmetic average would be equivalent to an annual effective rate of
0.86% of the daily net asset value of the Separate Account.
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%.
43
<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 $542,188
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 10,500 542,188 542,188 542,188 6,021 6,442 6,863 6,721 7,142 7,563
2 21,525 542,188 542,188 542,188 12,320 13,569 14,871 12,845 14,094 15,396
3 33,101 542,188 542,188 642,188 18,393 20,884 23,586 18,393 20,884 23,586
4 45,256 542,188 542,188 542,188 24,226 28,379 33,066 24,226 28,379 33,066
5 58,019 542,188 542,188 542,188 29,820 36,061 43,396 29,820 36,061 43,396
6 71,420 542,188 542,188 542,188 35,563 44,349 55,100 35,563 44,349 55,100
7 85,491 542,188 542,188 542,188 41,026 52,822 67,859 41,026 52,822 67,859
8 100,266 542,188 542,188 542,188 46,193 61,474 81,773 46,193 61,474 81,773
9 115,779 542,188 542,188 542,188 51,039 70,286 96,949 51,039 70,286 96,949
10 132,068 542,188 542,188 542,188 55,534 79,239 113,506 55,534 79,239 113,506
15 226,575 542,188 542,188 542,188 72,151 125,920 223,141 72,151 125,920 223,141
20 347,193 542,188 542,188 542,188 75,775 174,314 402,063 75,775 174,314 402,063
25 501,136 542,188 542,188 812,069 57,220 220,022 700,059 57,220 220,022 700,059
30 697,610 0 542,188 1,260,198 0 256,607 1,177,755 0 256,607 1,177,775
20 (Age 65) 347,193 542,188 542,188 542,188 75,775 174,314 402,063 75,775 174,314 402,063
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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 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 $542,188
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 10,500 542,188 542,188 542,188 7,486 7,974 8,463 8,186 8,674 9,163
2 21,525 542,188 542,188 542,188 15,046 16,509 18,032 15,571 17,034 18,557
3 33,101 542,188 542,188 542,188 22,368 25,323 28,502 22,368 25,323 28,502
4 45,256 542,188 542,188 542,188 29,518 34,434 39,974 29,518 34,434 39,974
5 58,019 542,188 542,188 542,188 36,439 43,857 52,558 36,439 43,857 52,558
6 71,420 542,188 542,188 542,188 43,546 54,023 66,818 43,546 54,023 66,818
7 85,491 542,188 542,188 542,188 50,429 64,541 82,483 50,429 64,541 82,483
8 100,266 542,188 542,188 542,188 57,272 75,621 99,918 57,272 75,621 99,918
9 115,779 542,188 542,188 542,188 63,853 87,059 119,077 63,853 87,059 119,077
10 132,068 542,188 542,188 542,188 70,143 98,847 140,131 70,143 98,847 140,131
15 226,575 542,188 542,188 542,188 97,751 165,382 286,104 97,751 165,382 286,104
20 347,193 542,188 542,188 650,611 116,327 244,836 533,287 116,327 244,836 533,287
25 501,136 542,188 542,188 1,098,261 129,347 347,159 946,777 129,347 347,159 946,777
30 697,610 542,188 542,188 1,746,798 129,098 481,005 1,632,522 129,098 481,005 1,632,522
20 (Age 65) 347,193 542,188 542,188 650,611 116,327 244,836 533,287 116,327 244,836 533,287
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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 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 $542,188
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 10,500 542,188 542,188 542,188 6,021 6,442 6,863 6,721 7,142 7,563
2 21,525 542,188 542,188 542,188 12,320 13,569 14,871 12,645 14,094 15,396
3 33,101 542,188 542,188 542,188 18,393 20,884 23,586 18,393 20,884 23,586
4 45,256 542,188 542,188 542,188 24,226 28,379 33,066 24,226 28,379 33,066
5 58,019 542,188 542,188 542,188 29,820 36,061 43,396 29,820 36,061 43,396
6 71,420 542,188 542,188 542,188 35,563 44,349 55,100 35,583 44,349 55,100
7 85,491 542,188 542,188 542,188 41,026 52,822 67,859 41,026 52,822 67,859
8 100,266 542,188 542,188 542,188 46,193 61,474 81,773 46,193 61,474 81,773
9 115,779 542,188 542,188 542,188 51,039 70,286 96,949 51,039 70,288 96,949
10 132,068 542,188 542,188 542,188 55,534 79,239 113,506 55,534 79,239 113,506
15 226,575 542,188 542,188 542,188 72,151 125,920 223,141 72,151 125,920 223,141
20 347,193 542,188 542,188 542,188 75,775 174,314 402,063 75,775 174,314 402,063
25 501,136 542,188 542,188 812,069 57,220 220,022 700,059 57,220 220,022 700,059
30 697,610 0 542,188 1,260,198 0 256,607 1,177,755 0 256,607 1,177,755
20 (Age 65) 347,193 542,188 542,188 542,188 75,775 174,314 402,063 75,775 174,314 402,063
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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 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 $542,188
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 10,500 542,188 542,188 542,188 7,288 7,770 6,252 7,988 8,470 8,852
2 21,525 542,188 542,188 542,188 14,657 16,095 17,594 15,182 16,620 18,119
3 33,101 542,188 542,188 542,188 21,813 24,694 27,815 21,813 24,694 27,815
4 45,256 542,188 542,188 542,188 28,767 33,587 39,021 28,767 33,587 39,021
5 58,019 542,188 542,188 542,188 35,524 42,792 51,322 35,524 42,792 51,322
6 71,420 542,188 542,188 542,188 42,483 52,746 65,285 42,483 52,746 65,285
7 85,491 542,188 542,188 542,188 49,238 63,060 80,642 49,238 63,060 80,642
8 100,266 542,188 542,188 542,188 55,976 73,949 97,759 55,976 73,949 97,759
9 115,779 542,188 542,188 542,188 62,480 85,215 116,595 62,480 85,215 116,595
10 132,068 542,188 542,188 542,188 68,727 96,855 137,323 68,727 96,855 137,323
15 226,575 542,188 542,188 542,188 96,752 163,136 281,547 96,752 163,136 281,547
20 347,193 542,188 542,188 641,709 116,384 242,805 525,991 116,384 242,805 525,991
25 501,136 542,188 542,188 1,084,379 129,635 344,602 934,809 129,635 344,602 934,809
30 697,610 542,188 542,188 1,725,588 129,368 477,418 1,612,699 129,368 477,418 1,612,699
20 (Age 65) 347,193 542,188 542,188 641,709 116,384 242,805 525,991 116,384 242,805 525,991
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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 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 $542,188
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 10,500 542,188 542,188 542,188 6,021 6,442 6,863 6,721 7,142 7,563
2 21,525 542,188 542,188 542,188 12,320 13,569 14,871 12,645 14,094 15,396
3 33,101 542,188 542,188 542,188 18,393 20,884 23,586 18,393 20,884 23,586
4 45,256 542,188 542,188 542,188 24,226 28,379 33,066 24,226 28,379 33,066
5 58,019 542,188 542,188 542,188 29,820 36,061 43,396 29,820 36,061 43,396
6 71,420 542,188 542,188 542,188 35,563 44,349 55,100 35,563 44,349 55,100
7 85,491 542,188 542,188 542,188 41,026 52,822 67,859 41,026 52,822 67,859
8 100,266 542,188 542,188 542,188 46,193 61,474 81,773 46,193 61,474 81,773
9 115,779 542,188 542,188 542,188 51,039 70,286 96,949 51,039 70,286 96,949
10 132,068 542,188 542,188 542,188 55,534 79,239 113,506 55,534 79,239 113,506
15 226,575 542,188 542,188 542,188 72,151 125,920 223,141 72,151 125,920 223,141
20 347,193 542,188 542,188 542,188 75,775 174,314 402,063 75,775 174,314 402,063
25 501,136 542,188 542,188 812,069 57,220 220,022 700,059 57,220 220,022 700,059
30 697,610 0 542,188 1,260,198 0 256,607 1,177,755 0 256,607 1,177,755
20 (Age 65) 347,193 542,188 542,188 542,188 75,775 174,314 402,063 75,775 174,314 402,063
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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 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 $542,188
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 10,500 542,188 542,188 542,188 7,638 8,131 8,625 8,338 8,831 9,325
2 21,525 542,188 542,188 542,188 15,250 16,729 18,269 15,775 17,254 18,794
3 33,101 542,188 542,188 542,188 22,553 25,516 28,726 22,553 25,516 28,726
4 45,256 542,188 542,188 542,188 29,576 34,529 40,111 29,576 34,529 40,111
5 58,019 542,188 542,188 542,188 36,351 43,808 52,560 36,351 43,808 52,560
6 71,420 542,188 542,188 542,188 43,305 53,816 66,662 43,305 53,816 66,662
7 85,491 542,188 542,188 542,188 50,058 64,189 82,177 50,058 64,189 82,177
8 100,266 542,188 542,188 542,188 56,815 75,162 99,490 56,815 75,162 99,490
9 115,779 542,188 542,188 542,188 63,369 86,546 118,572 63,369 86,546 118,572
10 132,068 542,188 542,188 542,188 69,698 98,341 139,601 69,698 98,341 139,601
15 226,575 542,188 542,188 542,188 98,353 165,761 286,127 98,353 165,761 286,127
20 347,193 542,188 542,188 652,107 119,434 247,573 534,514 119,434 247,573 534,514
25 501,136 542,188 542,188 1,102,193 135,912 353,185 950,166 135,912 353,185 950,166
30 697,610 542,188 542,188 1,755,071 141,099 491,179 1,640,253 141,099 491,179 1,640,253
20 (Age 65) 347,193 542,188 542,188 652,107 119,434 247,573 534,514 119,434 247,573 534,514
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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 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 $497,803
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 26,250 497,803 497,803 497,803 17,996 19,144 20,292 19,746 20,894 22,042
2 53,813 497,803 497,803 497,803 36,860 40,363 44,077 38,172 41,676 45,319
3 82,754 497,803 497,803 497,803 55,346 62,448 70,129 55,346 62,448 70,129
4 113,142 497,803 497,803 497,803 73,454 85,435 98,914 73,454 85,435 96,914
5 145,049 497,803 497,803 497,803 91,195 109,377 130,663 91,195 109,377 130,663
6 178,551 497,803 497,803 497,803 109,561 135,371 166,813 109,561 135,371 166,813
7 213,729 497,803 497,803 550,105 127,545 162,461 206,593 127,545 162,461 206,593
8 224,415 497,803 497,803 582,561 123,158 167,376 225,689 123,158 167,376 225,689
9 235,636 497,803 497,803 616,919 118,621 172,349 246,470 118,621 172,349 246,470
10 247,418 497,803 497,803 653,280 113,900 177,362 269,064 113,900 177,362 269,064
15 315,775 497,803 497,803 869,973 86,631 202,719 414,804 86,631 202,719 414,804
20 403,017 497,803 497,803 1,157,345 48,993 226,796 632,343 48,993 226,796 632,343
25 514,362 0 497,803 1,537,505 0 244,529 948,958 0 244,529 948,958
30 656,471 0 497,803 2,037,402 0 246,501 1,399,353 0 246,501 1,399,353
20 (Age 65) 403,017 497,803 497,803 1,157,345 48,993 226,796 632,343 48,993 226,796 632,343
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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 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 $497,803
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 26,250 497,803 497,803 497,803 20,494 21,772 23,051 22,244 23,522 24,801
2 53,813 497,803 497,803 497,803 41,350 45,240 49,286 42,662 46,553 50,598
3 82,754 497,803 497,803 497,803 61,834 69,712 78,230 61,834 69,712 78,230
4 113,142 497,803 497,803 497,803 81,960 95,246 110,190 81,960 95,246 110,190
5 145,049 497,803 497,803 497,803 101,741 121,904 145,503 101,741 121,904 145,503
6 178,551 497,803 497,803 510,081 122,172 150,794 185,650 122,172 150,794 185,650
7 213,729 497,803 497,803 611,796 142,257 180,982 229,762 142,257 180,982 229,762
8 224,415 497,803 497,803 651,155 138,693 187,810 252,262 138,693 187,810 252,262
9 235,636 497,803 497,803 693,070 135,030 194,849 276,894 135,030 194,849 276,894
10 247,418 497,803 497,803 737,693 131,239 202,090 303,831 131,239 202,090 303,831
15 315,775 497,803 514,362 1,022,904 111,264 245,248 487,722 111,264 245,248 487,722
20 403,017 497,803 540,532 1,420,926 84,054 295,333 776,357 84,054 295,333 776,357
25 514,362 497,803 578,084 2,008,729 51,342 356,797 1,239,801 51,342 356,797 1,239,801
30 656,471 497,803 624,815 2,869,726 2,869 429,143 1,971,019 2,869 429,143 1,971,019
20 (Age 65) 403,017 497,803 540,532 1,420,926 84,054 295,333 776,357 84,054 295,333 776,357
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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 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 $497,803
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 26,250 497,803 497,803 497,803 17,996 19,144 20,292 19,746 20,894 22,042
2 53,813 497,803 497,803 497,803 36,860 40,363 44,007 38,172 41,676 45,319
3 82,754 497,803 497,803 497,803 55,346 62,448 70,129 55,346 62,448 70,129
4 113,142 497,803 497,803 497,803 73,454 85,435 98,914 73,454 85,435 98,914
5 145,049 497,803 497,803 497,803 91,195 109,377 130,663 91,195 109,377 130,663
6 178,551 497,803 497,803 497,803 109,561 135,371 166,813 109,561 135,371 166,813
7 213,729 497,803 497,803 550,105 127,545 162,461 206,593 127,545 162,461 206,593
8 224,415 497,803 497,803 582,581 123,158 167,376 225,689 123,158 167,376 225,689
9 235,636 497,803 497,803 616,919 118,621 172,349 246,470 118,621 172,349 246,470
10 247,418 497,803 497,803 653,280 113,900 177,362 269,064 113,900 177,362 269,064
15 315,775 497,803 497,803 869,973 86,631 202,719 414,804 86,631 202,719 414,804
20 403,017 497,803 497,803 1,157,345 48,993 226,796 632,343 48,993 226,796 632,343
25 514,362 0 497,803 1,537,505 0 244,529 948,958 0 244,529 948,958
30 656,471 0 497,803 2,037,402 0 246,501 1,399,353 0 246,501 1,399,353
20 (Age 65) 403,017 497,803 497,803 1,157,345 48,983 226,796 632,343 48,993 226,796 632,343
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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 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 $497,803
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 26,250 497,803 497,803 497,803 20,318 21,590 22,863 22,068 23,340 24,613
2 53,813 497,803 497,803 497,803 41,008 44,877 48,901 42,320 46,190 50,214
3 82,754 497,803 497,803 497,803 61,337 69,169 77,639 61,337 69,169 77,639
4 113,142 497,803 497,803 497,803 81,321 94,528 109,385 81,321 94,528 109,385
5 145,049 497,803 497,803 497,803 100,974 121,017 144,480 100,974 121,017 144,480
6 178,551 497,803 497,803 506,670 121,294 149,749 184,408 121,294 149,749 184,408
7 213,729 497,803 497,803 607,873 141,288 179,791 228,288 141,288 179,791 228,288
8 224,415 497,803 497,803 646,727 137,647 186,482 250,547 137,647 186,482 250,547
9 235,636 497,803 497,803 688,158 133,928 193,395 274,932 133,928 193,395 274,932
10 247,418 497,803 497,803 732,335 130,104 200,527 301,624 130,104 200,527 301,624
15 315,775 497,803 510,678 1,016,463 110,483 243,492 484,651 110,483 243,492 484,651
20 403,017 497,803 537,882 1,415,204 84,254 293,885 773,231 84,254 293,885 773,231
25 514,362 497,803 575,484 2,001,464 51,775 355,193 1,235,317 51,775 355,193 1,235,317
30 656,471 497,803 621,979 2,859,235 3,285 427,195 1,963,813 3,285 427,195 1,963,813
20 (Age 65) 403,017 497,803 537,882 1,415,204 84,254 293,885 773,231 84,254 293,885 773,231
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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>
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 $497,803
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 26,250 497,803 497,803 497,803 17,996 19,144 20,292 19,746 20,894 22,042
2 53,813 497,803 497,803 497,803 36,860 40,363 44,074 38,172 41,676 45,319
3 82,754 497,803 497,803 497,803 55,346 62,448 70,129 55,346 62,448 70,129
4 113,142 497,803 497,803 497,803 73,454 85,435 98,914 73,454 85,435 98,914
5 145,049 497,803 497,803 497,803 91,195 109,377 130,863 91,195 109,377 130,663
6 178,551 497,803 497,803 497,803 109,561 135,371 166,813 109,561 135,371 166,813
7 213,729 497,803 497,803 550,105 127,545 162,461 206,593 127,545 162,461 206,593
8 224,415 497,803 497,803 582,561 123,158 167,376 225,689 123,158 167,376 225,689
9 235,636 497,803 497,803 616,919 118,621 172,349 246,470 118,621 172,349 246,470
10 247,418 497,803 497,803 653,280 113,900 177,362 269,064 113,900 177,362 269,064
15 315,775 497,803 497,803 869,973 86,631 202,719 414,804 86,631 202,719 414,804
20 403,017 497,803 497,803 1,157,345 48,993 226,796 632,343 48,993 226,796 632,343
25 514,362 0 497,803 1,537,505 0 244,529 948,958 0 244,529 948,958
30 656,471 0 497,803 2,037,402 0 246,501 1,399,353 0 246,501 1,399,353
20 (Age 65) 403,017 497,803 497,803 1,157,345 48,993 226,796 632,343 48,993 226,796 632,343
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
54
<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 $497,803
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 26,250 497,803 497,803 497,803 20,630 21,912 23,195 22,380 23,662 24,945
2 53,813 497,803 497,803 497,803 41,530 45,434 49,494 42,843 46,747 50,807
3 82,754 497,803 497,803 497,803 61,982 69,884 78,430 61,982 69,884 78,430
4 113,142 497,803 497,803 497,803 82,022 95,341 110,325 82,022 95,341 110,325
5 145,049 497,803 497,803 497,803 101,688 121,891 145,543 101,688 121,891 145,543
6 178,551 497,803 497,803 509,912 122,004 150,669 185,588 122,004 150,669 185,588
7 213,729 497,803 497,803 611,338 141,994 180,761 229,589 141,994 180,761 229,589
8 224,415 497,803 497,803 650,475 138,367 187,518 251,999 138,367 187,518 251,999
9 235,636 497,803 497,803 692,277 134,684 194,522 276,577 134,684 194,522 276,577
10 247,418 497,803 497,803 736,923 130,923 201,769 303,514 130,923 201,769 303,514
15 315,775 497,803 514,967 1,024,664 111,827 245,537 488,561 111,827 245,537 488,561
20 403,017 497,803 544,105 1,431,093 86,959 297,285 781,912 86,959 297,285 781,912
25 514,362 497,803 585,298 2,034,864 57,846 361,250 1,255,944 57,846 361,250 1,255,944
30 656,471 497,803 636,747 2,926,057 15,639 437,338 2,009,709 15,639 437,338 2,009,709
20 (Age 65) 403,017 497,803 544,105 1,431,093 86,959 297,285 761,912 86,959 297,285 781,912
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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.
55
<PAGE>
Appendix B
Applicable Percentages for Guideline Premium Test
<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>
56
<PAGE>
Lincoln Life Flexible Premium
Variable Life Account S
I-1
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
STATEMENT OF ASSETS AND LIABILITY
December 31, 1999
<TABLE>
<CAPTION>
American American
Century Century AVIS
VP Income VP Growth
& Growth International Class 2
Combined Subaccount Subaccount Subaccount
----------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $ 26,177,277 $ -- $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) 99,161,706 5,830,923 6,358,663 2,420
------------ ---------- ---------- -------
Total Investments 125,338,983 5,830,923 6,358,663 2,420
Dividends Receivable 8 -- -- --
------------ ---------- ---------- -------
Total Assets 125,338,991 5,830,923 6,358,663 2,420
Liability - Payable to The Lincoln National
Life Insurance Company 1,387 64 69 --
------------ ---------- ---------- -------
NET ASSETS $125,337,604 $5,830,859 $6,358,594 $ 2,420
============ ========== ========== =======
Percent of net assets 100.00% 4.65% 5.07% 0.00%
============ ========== ========== =======
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100
Unit value $ 11.416 $ 15.281 $12.088
---------- ---------- -------
1,142 1,528 1,209
LCVUL-LC Policies:
Units in accumulation period 541,065 456,990 100
Unit value $ 10.775 $ 13.911 $12.094
---------- ---------- -------
5,829,717 6,357,066 1,211
---------- ---------- -------
NET ASSETS $5,830,859 $6,358,594 $ 2,420
========== ========== =======
<CAPTION>
AVIS AVIS
Growth & High-Yield Baron BT EAFE BT BT
Income Bond Capital Equity 500 Equity 500 Small Cap
Class 2 Class 2 Asset Index Index Index
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $ -- $ -- $ -- $ -- $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) 2,077 2,079 2,866,572 2,341 9,396,642 472,093
------- ------- ---------- ------- ---------- --------
Total Investments 2,077 2,079 2,866,572 2,341 9,396,642 472,093
Dividends Receivable -- -- -- -- -- --
------- ------- ---------- ------- ---------- --------
Total Assets 2,077 2,079 2,866,572 2,341 9,396,642 472,093
Liability - Payable to The Lincoln National
Life Insurance Company -- -- 31 -- 102 5
------- ------- ---------- ------- ---------- --------
NET ASSETS $ 2,077 $ 2,079 $2,866,541 $ 2,341 $9,396,540 $472,088
======= ======= ========== ======= ========== ========
Percent of net assets 0.00% 0.00% 2.29% 0.00% 7.50% 0.38%
======= ======= ========== ======= ========== ========
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100 100 100
Unit value $10.371 $10.381 $ 11.552 $12.044 $ 11.369 $ 11.566
------- ------- ---------- ------- ---------- --------
1,037 1,038 1,155 1,205 1,137 1,157
LCVUL-LC Policies:
Units in accumulation period 100 100 244,282 100 870,538 40,034
Unit value $10.378 $10.389 $ 11.730 $11.335 $ 10.793 $ 11.763
------- ------- ---------- ------- ---------- --------
1,040 1,041 2,865,386 1,136 9,395,403 470,931
------- ------- ---------- ------- ---------- --------
NET ASSETS $ 2,077 $ 2,079 $2,866,541 $ 2,341 $9,396,540 $472,088
======= ======= ========== ======= ========== ========
</TABLE>
See accompanying notes.
I-2
<PAGE>
<TABLE>
<CAPTION>
Delaware
Delaware Delaware Premium Delaware
Premium Premium International Premium
Delchester Devon Equity REIT
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $ 3,479 $33,492 $ 2,153 $ 1,953
Investments at Market - Unaffiliated
(Cost $85,761,649) -- -- -- --
------- ------- ------- -------
Total Investments 3,479 33,492 2,153 1,953
Dividends Receivable 8 -- -- --
------- ------- ------- -------
Total Assets 3,487 33,492 2,153 1,953
Liability - Payable to The Lincoln National
Life Insurance Company -- -- -- --
------- ------- ------- -------
NET ASSETS $ 3,487 $33,492 $ 2,153 $ 1,953
======= ======= ======= =======
Percent of net assets 0.00% 0.03% 0.00% 0.00%
======= ======= ======= =======
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100
Unit value $ 9.650 $ 9.173 $10.569 $ 9.205
------- ------- ------- -------
965 917 1,057 921
LCVUL-LC Policies:
Units in accumulation period 245 3,266 100 100
Unit value $10.275 $ 9.971 $10.922 $10.291
------- ------- ------- -------
2,522 32,575 1,096 1,032
------- ------- ------- -------
NET ASSETS $ 3,487 $33,492 $ 2,153 $ 1,953
======= ======= ======= =======
<CAPTION>
Delaware Fidelity
Premium Fidelity VIP II Fidelity Janus
Small Cap VIP Asset VIP II Aggressive
Value Growth Manager Contrafund Growth
Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ---------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $ 1,966 $ -- $ -- $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) -- 23,647,410 469,765 5,934,256 6,651,724
------- ----------- -------- ---------- ----------
Total Investments 1,966 23,647,410 469,765 5,934,256 6,651,724
Dividends Receivable -- -- -- -- --
------- ----------- -------- ---------- ----------
Total Assets 1,966 23,647,410 469,765 5,934,256 6,651,724
Liability - Payable to The Lincoln National
Life Insurance Company -- 257 5 65 72
------- ----------- -------- ---------- ----------
NET ASSETS $ 1,966 $23,647,153 $469,760 $5,934,191 $6,651,652
======= =========== ======== ========== ==========
Percent of net assets 0.00% 18.89% 0.37% 4.73% 5.31%
======= =========== ======== ========== ==========
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100 100
Unit value $ 9.368 $ 12.677 $ 10.972 $ 11.612 $ 18.389
------- ----------- -------- ---------- ----------
937 1,268 1,097 1,161 1,839
LCVUL-LC Policies:
Units in accumulation period 100 2,028,481 44,399 524,537 482,589
Unit value $10.255 $ 11.657 $ 10.556 $ 11.311 $ 13.779
------- ----------- -------- ---------- ----------
1,029 23,645,885 468,663 5,933,030 6,649,813
------- ----------- -------- ---------- ----------
NET ASSETS $ 1,966 $23,647,153 $469,760 $5,934,191 $6,651,652
======= =========== ======== ========== ==========
</TABLE>
See accompanying notes.
I-3
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
STATEMENT OF ASSETS AND LIABILITY
Continued
December 31, 1999
<TABLE>
<CAPTION>
Janus LN
Janus Worldwide LN Capital
Balanced Growth Bond Appreciation
Subaccount Subaccount Subaccount Subaccount
---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $ -- $ -- $10,245,575 $1,487,267
Investments at Market - Unaffiliated
(Cost $85,761,649) 14,728,000 16,261,952 -- --
----------- ----------- ----------- ----------
Total Investments 14,728,000 16,261,952 10,245,575 1,487,267
Dividends Receivable -- -- -- --
----------- ----------- ----------- ----------
Total Assets 14,728,000 16,261,952 10,245,575 1,487,267
Liability - Payable to The Lincoln National
Life Insurance Company 160 177 113 16
----------- ----------- ----------- ----------
NET ASSETS $14,727,840 $16,261,775 $10,245,462 $1,487,251
=========== =========== =========== ==========
Percent of net assets 11.75% 12.97% 8.17% 1.19%
=========== =========== =========== ==========
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100
Unit value $ 11.783 $ 15.182 $ 10.046 $ 13.437
----------- ----------- ----------- ----------
1,178 1,518 1,005 1,344
LCVUL-LC Policies:
Units in accumulation period 1,339,392 1,231,477 1,032,174 128,416
Unit value $ 10.995 $ 13.204 $ 9.925 $ 11.571
----------- ----------- ----------- ----------
14,726,662 16,260,257 10,244,457 1,485,907
----------- ----------- ----------- ----------
NET ASSETS $14,727,840 $16,261,775 $10,245,462 $1,487,251
=========== =========== =========== ==========
<CAPTION>
LN LN LN MFS
Equity- Money Social Value MFS
Income Market Awareness Equity Research
Subaccount Subaccount Subaccount Subaccount Subaccount
--------------- --------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $5,429,453 $8,969,697 $ 2,242 $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) -- -- -- 96,620 142,536
---------- ---------- ------- ------- --------
Total Investments 5,429,453 8,969,697 2,242 96,620 142,536
Dividends Receivable -- -- -- -- --
---------- ---------- ------- ------- --------
Total Assets 5,429,453 8,969,697 2,242 96,620 142,536
Liability - Payable to The Lincoln National
Life Insurance Company 59 121 -- 1 2
---------- ---------- ------- ------- --------
NET ASSETS $5,429,394 $8,969,576 $ 2,242 $96,619 $142,534
========== ========== ======= ======= ========
Percent of net assets 4.33% 7.16% 0.00% 0.08% 0.11%
========== ========== ======= ======= ========
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 235,936 100 100 100
Unit value $ 9.897 $ 10.227 $11.507 $12.963 $ 12.110
---------- ---------- ------- ------- --------
990 2,412,996 1,151 1,296 1,211
LCVUL-LC Policies:
Units in accumulation period 519,156 650,491 100 7,846 12,262
Unit value $ 10.456 $ 10.079 $10.872 $12.148 $ 11.524
---------- ---------- ------- ------- --------
5,428,404 6,556,580 1,091 95,323 141,323
---------- ---------- ------- ------- --------
NET ASSETS $5,429,394 $8,969,576 $ 2,242 $96,619 $142,534
========== ========== ======= ======= ========
</TABLE>
See accompanying notes.
I-4
<PAGE>
<TABLE>
<CAPTION>
MFS AMT
Total MFS Mid-Cap AMT
Return Utilities Growth Partners
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Assets
Investments at Market--Affiliated
(Cost $25,938,475) $ -- $ -- $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) 1,996 35,869 5,982,397 2,017
------- ------- ---------- -------
Total Investments 1,996 35,869 5,982,397 2,017
Dividends Receivable -- -- -- --
------- ------- ---------- -------
Total Assets 1,996 35,869 5,982,397 2,017
Liability - Payable to The Lincoln National
Life Insurance Company -- -- 65 --
------- ------- ---------- -------
NET ASSETS $ 1,996 $35,869 $5,982,332 $ 2,017
======= ======= ========== =======
Percent of net assets 0.00% 0.03% 4.77% 0.00%
======= ======= ========== =======
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100
Unit value $ 9.922 $12.052 $ 15.660 $ 9.731
------- ------- ---------- -------
992 1,205 1,566 973
LCVUL-LC Policies:
Units in accumulation period 100 3,038 438,878 100
Unit value $10.005 $11.406 $ 13.627 $10.408
------- ------- ---------- -------
1,004 34,664 5,980,766 1,044
------- ------- ---------- -------
NET ASSETS $ 1,996 $35,869 $5,982,332 $ 2,017
======= ======= ========== =======
<CAPTION>
Oppenheimer
OCC Main Street Templeton
Accumulation Growth and Asset Templeton Templeton
Managed Income Allocation International Stock
Subaccount Subaccount Subaccount Subaccount Subaccount
-------------- ------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Assets
Investments at Market--Affiliated
(Cost $25,938,475) $ -- $ -- $ -- $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) 1,987 35,056 81,838 152,161 2,312
------ ------- ------- -------- -------
Total Investments 1,987 35,056 81,838 152,161 2,312
Dividends Receivable -- -- -- -- --
------ ------- ------- -------- -------
Total Assets 1,987 35,056 81,838 152,161 2,312
Liability - Payable to The Lincoln National
Life Insurance Company -- -- 1 2 --
------ ------- ------- -------- -------
NET ASSETS $1,987 $35,056 $81,837 $152,159 $ 2,312
====== ======= ======= ======== =======
Percent of net assets 0.00% 0.03% 0.07% 0.12% 0.00%
====== ======= ======= ======== =======
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100 100
Unit value $9.998 $11.217 $11.159 $ 11.287 $11.673
------ ------- ------- -------- -------
1,000 1,122 1,116 1,129 1,167
LCVUL-LC Policies:
Units in accumulation period 100 3,157 7,250 13,371 100
Unit value $9.831 $10.745 $11.133 $ 11.295 $11.415
------ ------- ------- -------- -------
987 33,934 80,721 151,030 1,145
------ ------- ------- -------- -------
NET ASSETS $1,987 $35,056 $81,837 $152,159 $ 2,312
====== ======= ======= ======== =======
</TABLE>
See accompanying notes.
I-5
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
STATEMENT OF OPERATIONS
Period from May 14, 1999 to December 31, 1999
<TABLE>
<CAPTION>
American American
Century Century AVIS
VP Income VP Growth
& Growth International Class 2
Combined Subaccount Subaccount Subaccount
-------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ 270,334 $ -- $ -- $ --
Dividends from net realized gains on
investments 42,228 -- -- 326
Mortality and expense guarantees:
LCVUL (505) (4) (4) (1)
LCVUL-LC (64,216) (3,315) (3,440) (1)
----------- -------- ---------- -----
NET INVESTMENT INCOME (LOSS) 247,841 (3,319) (3,444) 324
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments 384,544 15,823 29,044 --
Net change in unrealized appreciation or
depreciation on investments 13,638,859 374,877 1,695,003 94
----------- -------- ---------- ----
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 14,023,403 390,700 1,724,047 94
----------- -------- ---------- ----
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $14,271,244 $387,381 $1,720,603 $418
=========== ======== ========== ====
<CAPTION>
AVIS AVIS
Growth & High-Yield Baron BT EAFE BT BT
Income Bond Capital Equity 500 Equity 500 Small Cap
Class 2 Class 2 Asset Index Index Index
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ 8 $45 $ -- $37 $ 59,953 $ 4,634
Dividends from net realized gains on
investments 332 -- 12 69 28,193 13,267
Mortality and expense guarantees:
LCVUL (1) (1) (4) (4) (4) (4)
LCVUL-LC (1) (1) (1,399) (1) (5,239) (266)
------ --- -------- ---- -------- -------
NET INVESTMENT INCOME (LOSS) 338 43 (1,391) 101 82,903 17,631
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments -- -- 4 -- 20,633 1,715
Net change in unrealized appreciation or
depreciation on investments (264) 34 320,158 236 536,566 41,563
----- --- -------- ---- -------- -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (264) 34 320,162 236 557,199 43,278
----- --- -------- ---- -------- -------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 74 $77 $318,771 $337 $640,102 $60,909
===== === ======== ==== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Delaware
Delaware Delaware Premium Delaware
Premium Premium International Premium
Delchester Devon Equity REIT
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ 75 $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- -- --
Mortality and expense guarantees:
LCVUL (4) (4) (4) (4)
LCVUL-LC (1) (10) (1) (1)
---- ---- ----- ----
NET INVESTMENT INCOME (LOSS) 70 (14) (5) (5)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments -- -- -- --
Net change in unrealized appreciation or
depreciation on investments (76) 80 154 (46)
---- ---- ----- ----
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (76) 80 154 (46)
---- ---- ----- ----
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ (6) $ 66 $ 149 $(51)
==== ==== ===== ====
<CAPTION>
Delaware Fidelity
Premium Fidelity VIP II Fidelity Janus
Small Cap VIP Asset VIP II Aggressive
Value Growth Manager Contrafund Growth
Subaccount Subaccount Subaccount Subaccount Subaccount
------------ --------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ 15
Dividends from net realized gains on
investments -- -- -- -- 26
Mortality and expense guarantees:
LCVUL (4) (4) (4) (4) (4)
LCVUL-LC (1) (13,699) (115) (2,150) (3,015)
---- ---------- ------- -------- ----------
NET INVESTMENT INCOME (LOSS) (5) (13,703) (119) (2,154) (2,978)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments -- 230,871 439 12,269 1,929
Net change in unrealized appreciation or
depreciation on investments (33) 2,937,837 12,610 446,935 1,493,923
---- ---------- ------- -------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (33) 3,168,708 13,049 459,204 1,495,852
---- ---------- ------- -------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $(38) $3,155,005 $12,930 $457,050 $1,492,874
==== ========== ======= ======== ==========
</TABLE>
See accompanying notes.
I-6
<PAGE>
<TABLE>
<CAPTION>
Janus LN
Janus Worldwide LN Capital
Balanced Growth Bond Appreciation
Subaccount Subaccount Subaccount Subaccount
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ 156,039 $ 2 $ 119 $ --
Dividends from net realized gains on
investments -- -- -- --
Mortality and expense guarantees:
LCVUL (4) (4) (4) (4)
LCVUL-LC (7,462) (7,661) (6,314) (585)
---------- ---------- --------- --------
NET INVESTMENT INCOME (LOSS) 148,573 (7,663) (6,199) (589)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments 15,830 6,850 (503) 21,927
Net change in unrealized appreciation or
depreciation on investments 933,643 3,108,395 (104,238) 123,424
---------- ---------- --------- --------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 949,473 3,115,245 (104,741) 145,351
---------- ---------- --------- --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $1,098,046 $3,107,582 $(110,940) $144,762
========== ========== ========= ========
<CAPTION>
LN LN LN MFS
Equity- Money Social Value Equity MFS
Income Market Awareness Opportunities Research
Subaccount Subaccount Subaccount Subaccount Subaccount
------------- ------------ ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ 11 $49,384 $ 12 $ -- $ --
Dividends from net realized gains on
investments -- -- -- 3 --
Mortality and expense guarantees:
LCVUL (4) (374) (4) (4) (4)
LCVUL-LC (2,507) (3,621) (1) (5) (56)
-------- ------- ---- ------ ------
NET INVESTMENT INCOME (LOSS) (2,500) 45,389 7 (6) (60)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments 1,051 -- -- -- (2)
Net change in unrealized appreciation or
depreciation on investments 219,306 -- 231 3,316 9,775
-------- ------- ---- ------ ------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 220,357 -- 231 3,316 9,773
-------- ------- ---- ------ ------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $217,857 $45,389 $238 $3,310 $9,713
======== ======= ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
MFS AMT
Total MFS Mid-Cap AMT
Return Utilities Growth Partners
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $-- $ -- $ -- $--
Dividends from net realized gains on
investments -- -- -- --
Mortality and expense guarantees:
LCVUL (4) (4) (4) (4)
LCVUL-LC (1) (9) (3,212) (1)
--- ------ ---------- ---
NET INVESTMENT INCOME (LOSS) (5) (13) (3,216) (5)
Net Realized and Unrealized --
Gain (Loss) on Investments:
Net realized gain (loss) on investments -- -- 21,223 --
Net change in unrealized appreciation or
depreciation on investments (3) 2,390 1,465,860 18
--- ------ ---------- ---
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (3) 2,390 1,487,083 18
--- ------ ---------- ---
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $(8) $2,377 $1,483,867 $13
=== ====== ========== ===
<CAPTION>
Oppenheimer
OCC Main Street Templeton
Accumulation Growth and Asset Templeton Templeton
Managed Income Allocation International Stock
Subaccount Subaccount Subaccount Subaccount Subaccount
-------------- ------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- -- -- --
Mortality and expense guarantees:
LCVUL (4) (4) (4) (4) (4)
LCVUL-LC (1) (9) (26) (88) (1)
---- ------ ------ ------- ----
NET INVESTMENT INCOME (LOSS) (5) (13) (30) (92) (5)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments -- -- 507 4,934 --
Net change in unrealized appreciation or
depreciation on investments (13) 1,575 4,312 10,904 313
---- ------ ------ ------- ----
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (13) 1,575 4,819 15,838 313
---- ------ ------ ------- ----
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $(18) $1,562 $4,789 $15,746 $308
==== ====== ====== ======= ====
</TABLE>
See accompanying notes.
I-7
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
STATEMENT OF CHANGES IN NET ASSETS
Period from May 14, 1999 to December 31, 1999
<TABLE>
<CAPTION>
American American
Century Century AVIS
VP Income VP Growth
& Growth International Class 2
Combined Subaccount Subaccount Subaccount
--------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ 247,841 $ (3,319) $ (3,444) $ 324
Net realized gain (loss) on investments 384,544 15,823 29,044 --
Net change in unrealized appreciation or
depreciation on investments 13,638,859 374,877 1,695,003 94
------------ ---------- ---------- ------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 14,271,244 387,381 1,720,603 418
Change From Unit Transactions:
Participant purchases 115,618,710 5,887,784 4,811,758 2,002
Participant withdrawals (4,552,358) (444,306) (173,767) --
------------ ---------- ---------- ------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 111,066,352 5,443,478 4,637,991 2,002
------------ ---------- ---------- ------
TOTAL INCREASE IN NET ASSETS 125,337,604 5,830,859 6,358,594 2,420
------------ ---------- ---------- ------
NET ASSETS AT DECEMBER 31, 1999 $125,337,604 $5,830,859 $6,358,594 $2,420
============ ========== ========== ======
<CAPTION>
AVIS AVIS
Growth & High-Yield Baron BT EAFE BT BT
Income Bond Capital Equity 500 Equity 500 Small Cap
Class 2 Class 2 Asset Index Index Index
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ------------ ------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ 338 $ 43 $ (1,391) $ 101 $ 82,903 $ 17,631
Net realized gain (loss) on investments -- -- 4 -- 20,633 1,715
Net change in unrealized appreciation or
depreciation on investments (264) 34 320,158 236 536,566 41,563
------ ------ ---------- ------ ---------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 74 77 318,771 337 640,102 60,909
Change From Unit Transactions:
Participant purchases 2,003 2,002 2,556,620 2,004 9,121,906 451,732
Participant withdrawals -- -- (8,850) -- (365,468) (40,553)
------ ------ ---------- ------ ---------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 2,003 2,002 2,547,770 2,004 8,756,438 411,179
------ ------ ---------- ------ ---------- --------
TOTAL INCREASE IN NET ASSETS 2,077 2,079 2,866,541 2,341 9,396,540 472,088
------ ------ ---------- ------ ---------- --------
NET ASSETS AT DECEMBER 31, 1999 $2,077 $2,079 $2,866,541 $2,341 $9,396,540 $472,088
====== ====== ========== ====== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Delaware
Delaware Delaware Premium Delaware
Premium Premium International Premium
Delchester Devon Equity REIT
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ 70 $ (14) $ (5) $ (5)
Net realized gain (loss) on investments -- -- -- --
Net change in unrealized appreciation or
depreciation on investments (76) 80 154 (46)
----- ------- ------ ------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (6) 66 149 (51)
Change From Unit Transactions:
Participant purchases 3,606 33,494 2,004 2,004
Participant withdrawals (121) (68) -- --
------ ------- ------ ------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 3,485 33,426 2,004 2,004
------ ------- ------ ------
TOTAL INCREASE IN NET ASSETS 3,487 33,492 2,153 1,953
------ ------- ------ ------
NET ASSETS AT DECEMBER 31, 1999 $3,487 $33,492 $2,153 $1,953
====== ======= ====== ======
<CAPTION>
Delaware Fidelity
Premium Fidelity VIP II Fidelity Janus
Small Cap VIP Asset VIP II Aggressive
Value Growth Manager Contrafund Growth
Subaccount Subaccount Subaccount Subaccount Subaccount
------------ -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ (5) $ (13,703) $ (119) $ (2,154) $ (2,978)
Net realized gain (loss) on investments -- 230,871 439 12,269 1,929
Net change in unrealized appreciation or
depreciation on investments (33) 2,937,837 12,610 446,935 1,493,923
------ ----------- -------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (38) 3,155,005 12,930 457,050 1,492,874
Change From Unit Transactions:
Participant purchases 2,004 23,024,780 458,168 5,490,534 5,176,270
Participant withdrawals -- (2,532,632) (1,338) (13,393) (17,492)
------ ----------- -------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 2,004 20,492,148 456,830 5,477,141 5,158,778
------ ----------- -------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 1,966 23,647,153 469,760 5,934,191 6,651,652
------ ----------- -------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1999 $1,966 $23,647,153 $469,760 $5,934,191 $6,651,652
====== =========== ======== ========== ==========
</TABLE>
See accompanying notes.
I-8
<PAGE>
<TABLE>
<CAPTION>
Janus LN
Janus Worldwide LN Capital
Balanced Growth Bond Appreciation
Subaccount Subaccount Subaccount Subaccount
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ 148,573 $ (7,663) $ (6,199) $ (589)
Net realized gain (loss) on investments 15,830 6,850 (503) 21,927
Net change in unrealized appreciation or
depreciation on investments 933,643 3,108,395 (104,238) 123,424
----------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 1,098,046 3,107,582 (110,940) 144,762
Change From Unit Transactions:
Participant purchases 13,701,756 13,201,602 10,392,080 1,459,847
Participant withdrawals (71,962) (47,409) (35,678) (117,358)
----------- ----------- ----------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 13,629,794 13,154,193 10,356,402 1,342,489
----------- ----------- ----------- ----------
TOTAL INCREASE IN NET ASSETS 14,727,840 16,261,775 10,245,462 1,487,251
----------- ----------- ----------- ----------
NET ASSETS AT DECEMBER 31, 1999 $14,727,840 $16,261,775 $10,245,462 $1,487,251
=========== =========== =========== ==========
<CAPTION>
LN LN LN MFS
Equity- Money Social Value Equity MFS
Income Market Awareness Opportunities Research
Subaccount Subaccount Subaccount Subaccount Subaccount
------------- -------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ (2,500) $ 45,389 $ 7 $ (6) $ (60)
Net realized gain (loss) on investments 1,051 -- -- -- (2)
Net change in unrealized appreciation or
depreciation on investments 219,306 -- 231 3,316 9,775
---------- ---------- ------ ------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 217,857 45,389 238 3,310 9,713
Change From Unit Transactions:
Participant purchases 5,228,048 9,319,802 2,004 93,370 133,274
Participant withdrawals (16,511) (395,615) -- (61) (453)
---------- ---------- ------ ------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 5,211,537 8,924,187 2,004 93,309 132,821
---------- ---------- ------ ------- --------
TOTAL INCREASE IN NET ASSETS 5,429,394 8,969,576 2,242 96,619 142,534
---------- ---------- ------ ------- --------
NET ASSETS AT DECEMBER 31, 1999 $5,429,394 $8,969,576 $2,242 $96,619 $142,534
========== ========== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
MFS AMT
Total MFS Mid-Cap AMT
Return Utilities Growth Partners
Subaccount Subaccount Subaccount Subaccount
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ (5) $ (13) $ (3,216) $ (5)
Net realized gain (loss) on investments -- -- 21,223 --
Net change in unrealized appreciation or
depreciation on investments (3) 2,390 1,465,860 18
------ ------- ---------- ------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (8) 2,377 1,483,867 13
Change From Unit Transactions:
Participant purchases 2,004 33,492 4,628,766 2,004
Participant withdrawals -- -- (130,301) --
------ ------- ---------- ------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 2,004 33,492 4,498,465 2,004
------ ------- ---------- ------
TOTAL INCREASE IN NET ASSETS 1,996 35,869 5,982,332 2,017
------ ------- ---------- ------
NET ASSETS AT DECEMBER 31, 1999 $1,996 $35,869 $5,982,332 $2,017
====== ======= ========== ======
<CAPTION>
Oppenheimer
OCC Main Street Templeton
Accumulation Growth and Asset Templeton Templeton
Managed Income Allocation International Stock
Subaccount Subaccount Subaccount Subaccount Subaccount
-------------- ------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ (5) $ (13) $ (30) $ (92) $ (5)
Net realized gain (loss) on investments -- -- 507 4,934 --
Net change in unrealized appreciation or
depreciation on investments (13) 1,575 4,312 10,904 313
------ ------- -------- --------- ------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (18) 1,562 4,789 15,746 308
Change From Unit Transactions:
Participant purchases 2,005 33,494 106,879 245,604 2,004
Participant withdrawals -- -- (29,831) (109,191) --
------ ------- -------- --------- ------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 2,005 33,494 77,048 136,413 2,004
------ ------- -------- --------- ------
TOTAL INCREASE IN NET ASSETS 1,987 35,056 81,837 152,159 2,312
------ ------- -------- --------- ------
NET ASSETS AT DECEMBER 31, 1999 $1,987 $35,056 $ 81,837 $ 152,159 $2,312
====== ======= ======== ========= ======
</TABLE>
See accompanying notes.
I-9
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements
1. Accounting Policies and Variable Account Information
The Variable Account:
Lincoln Life Flexible Premium Variable Life Account S (the Variable
Account) is a segregated investment account of The Lincoln National Life
Insurance Company (Lincoln Life) and is registered as a unit investment
trust with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended. The operations of the Variable Account,
which commenced on May 14, 1999, are part of the operations of Lincoln
Life. The Variable Account consists of two products which are listed below:
--LCVUL
--LCVUL-LC
The assets of the Variable Account are owned by Lincoln Life. The portion
of the Variable Account's assets supporting the variable life policies may
not be used to satisfy liabilities arising from any other business of
Lincoln Life.
Basis of Presentation:
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for unit
investment trusts.
Investments:
The assets of the Variable Account are divided into variable subaccounts
each of which is invested in shares of one of thirty six portfolios of
fourteen diversified open-end management investment companies, each
portfolio with its own investment objective. The variable subaccounts are:
American Century Variable Products Group, Inc.:
VP Income & Growth Fund
VP International Fund
American Variable Insurance Series (AVIS):
AVIS Growth Fund-Class 2
AVIS Growth & Income Fund-Class 2
AVIS High-Yield Bond Fund-Class 2
Baron Capital Funds Trust:
Baron Capital Asset Fund
BT Insurance Funds Trust:
EAFE Equity 500 Index Fund
Equity 500 Index Fund
Small Cap Index Fund
Delaware Group Premium Fund , Inc.:
Delchester Series
Devon Series
International Equity Series
REIT Series
Small Cap Value Series
I-10
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements
1. Accounting Policies and Variable Account Information (Continued)
Fidelity Variable Insurance Fund Service Class:
Growth Portfolio
Fidelity Variable Insurance Products Fund II Service Class:
Asset Manager Portfolio
Contrafund Portfolio
Janus Aspen Series:
Aggressive Growth Portfolio
Balanced Portfolio
Worldwide Growth Portfolio
Lincoln National (LN) Funds:
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc.
LN Equity-Income Fund, Inc.
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc.
MFS Variable Insurance Trust:
MFS Capital Opportunities Series
MFS Research Series
MFS Total Return Series
MFS Utilities Series
Neuberger Berman Advisers Management Trust (AMT):
AMT Mid-Cap Growth Portfolio
AMT Partners Portfolio
OCC Accumulation Trust:
Managed Portfolio
Oppenheimer Funds:
Oppenheimer Main Street Growth and Income Fund/VA
Templeton Variable Products Series Fund:
Templeton Asset Allocation Class 2 Fund
Templeton International Class 2 Fund
Templeton Stock Class 2 Fund
Investments in the variable subaccounts are stated at the closing net asset
value per share on December 31, 1999, which approximates fair value. The
difference between cost and fair value is reflected as unrealized
appreciation and depreciation of investments.
Investment transactions are accounted for on a trade date basis. The cost
of investments sold is determined by the average cost method.
I-11
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements
1. Accounting Policies and Variable Account Information (Continued)
Dividends:
Dividends paid to the Variable Account are automatically reinvested in
shares of the variable subaccounts on the payable date. Dividend income is
recorded on the ex-dividend date.
Federal Income Taxes:
Operations of the Variable Account form a part of and are taxed with
operations of Lincoln Life, which is taxed as a "life insurance company"
under the Internal Revenue Code. The Variable Account will not be taxed as a
regulated investment company under Subchapter M of the Internal Revenue Code.
Using current federal income tax law, no federal income taxes are payable
with respect to the Variable Account's net investment income and the net
realized gain on investments.
2. Mortality and Expense Guarantees
& Other Transactions With Affiliate
Amounts are paid to Lincoln Life for mortality and expense guarantees at a
percentage of the current value of the Variable Account each day. The rates
are as follows.
--LCVUL is currently at an annual rate of .70% for policy years one through
ten and .35% thereafter.
--LCVUL-LC is currently at an annual rate of .40% for policy years one
through ten, .20% for policy years eleven through twenty and .10%
thereafter.
Prior to the allocation of premiums to the Variable Account, Lincoln Life
deducts a premium load for sales and administrative expenses associated
with the startup and maintenance of the policy. The premium loads for the
period ended December 31, 1999 amounted to $406,519. The premium loads are
as follows:
--LCVUL is currently 10.5% for policy year one, 7.5% for policy years two
through five, 3.5% for policy years six through seven and 1.5% thereafter.
--LCVUL-LC is currently 10.5% for policy year one, 7.5% for policy year
two, 3.5% for policy years three through five and 1.5% thereafter.
Lincoln Life charges a monthly administrative fee of $6 currently,
guaranteed not to exceed $10 per month during all policy years. This charge
is for items such as premium billing and collection, policy value
calculation, confirmations and periodic reports. There were no
administrative fees for the period ended December 31, 1999.
Lincoln Life assumes responsibility for providing the insurance benefit
included in the policy. Lincoln Life charges a monthly deduction of the
cost of insurance and any charges for supplemental riders. The cost of
insurance charge depends on the attained age, risk classification, gender
classification (in accordance with state law) and the current net amount at
risk. On a monthly basis, the administrative fee and the cost of insurance
charge are deducted proportionately for the value of each variable
subaccount and/or fixed account funding options. The fixed account is part
of the general account of Lincoln Life and is not included in these
financial statements. The cost of insurance charges for the period ended
December 31, 1999 amounted to $383,402.
Under certain circumstances, Lincoln Life reserves the right to charge a
transfer fee of $25 for each transfer after the twelfth transfer per year
between variable subaccounts. For the period ended December 31, 1999, no
transfer fees were deducted from the variable subaccounts.
I-12
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements (Continued)
3. Net Assets
The following is a summary of net assets owned at December 31, 1999.
<TABLE>
<CAPTION>
American American
Century Century AVIS
VP Income VP Growth
& Growth International Class 2
Combined Subaccount Subaccount Subaccount
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $111,066,352 $5,443,478 $4,637,991 $2,002
Accumulated net investment income (loss) 247,841 (3,319) (3,444) 324
Accumulated net realized gain (loss) on
investments 384,544 15,823 29,044 --
Net unrealized appreciation (depreciation) on
investments 13,638,859 374,877 1,695,003 94
------------ ---------- ---------- ------
$125,337,604 $5,830,859 $6,358,594 $2,420
============ ========== ========== ======
<CAPTION>
AVIS AVIS
Growth & High-Yield Baron BT EAFE BT BT
Income Bond Capital Equity 500 Equity 500 Small Cap
Class 2 Class 2 Asset Index Index Index
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ------------ -------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $2,003 $2,002 $2,547,770 $2,004 $8,756,438 $411,179
Accumulated net investment income (loss) 338 43 (1,391) 101 82,903 17,631
Accumulated net realized gain (loss) on
investments -- -- 4 -- 20,633 1,715
Net unrealized appreciation (depreciation) on
investments (264) 34 320,158 236 536,566 41,563
------ ------ ---------- ------ ---------- --------
$2,077 $2,079 $2,866,541 $2,341 $9,396,540 $472,088
====== ====== ========== ====== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Delaware
Delaware Delaware Premium Delaware
Premium Premium International Premium
Delchester Devon Equity REIT
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $3,485 $33,426 $2,004 $2,004
Accumulated net investment income (loss) 70 (14) (5) (5)
Accumulated net realized gain (loss) on
investments -- -- -- --
Net unrealized appreciation (depreciation) on
investments (76) 80 154 (46)
------ ------- ------ ------
$3,487 $33,492 $2,153 $1,953
====== ======= ====== ======
<CAPTION>
Delaware Fidelity
Premium Fidelity VIP II Fidelity Janus
Small Cap VIP Asset VIP II Aggressive
Value Growth Manager Contrafund Growth
Subaccount Subaccount Subaccount Subaccount Subaccount
------------ -------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $2,004 $20,492,148 $456,830 $5,477,141 $5,158,778
Accumulated net investment income (loss) (5) (13,703) (119) (2,154) (2,978)
Accumulated net realized gain (loss) on
investments -- 230,871 439 12,269 1,929
Net unrealized appreciation (depreciation) on
investments (33) 2,937,837 12,610 446,935 1,493,923
------ ----------- -------- ---------- ----------
$1,966 $23,647,153 $469,760 $5,934,191 $6,651,652
====== =========== ======== ========== ==========
</TABLE>
I-13
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements (Continued)
<TABLE>
<CAPTION>
Janus LN
Janus Worldwide LN Capital
Balanced Growth Bond Appreciation
Subaccount Subaccount Subaccount Subaccount
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $13,629,794 $13,154,193 $10,356,402 $1,342,489
Accumulated net investment income (loss) 148,573 (7,663) (6,199) (589)
Accumulated net realized gain (loss) on
investments 15,830 6,850 (503) 21,927
Net unrealized appreciation (depreciation) on
investments 933,643 3,108,395 (104,238) 123,424
----------- ----------- ----------- ----------
$14,727,840 $16,261,775 $10,245,462 $1,487,251
=========== =========== =========== ==========
<CAPTION>
LN LN LN MFS
Equity- Money Social Capital MFS
Income Market Awareness Opportunities Research
Subaccount Subaccount Subaccount Subaccount Subaccount
-------------- ------------ ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $5,211,537 $8,924,187 $2,004 $93,309 $132,821
Accumulated net investment income (loss) (2,500) 45,389 7 (6) (60)
Accumulated net realized gain (loss) on
investments 1,051 -- -- -- (2)
Net unrealized appreciation (depreciation) on
investments 219,306 -- 231 3,316 9,775
---------- ---------- ------ ------- --------
$5,429,394 $8,969,576 $2,242 $96,619 $142,534
========== ========== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
MFS AMT
Total MFS Mid-Cap AMT
Return Utilities Growth Partners
Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $2,004 $33,492 $4,498,465 $2,004
Accumulated net investment income (loss) (5) (13) (3,216) (5)
Accumulated net realized gain (loss) on
investments -- -- 21,223 --
Net unrealized appreciation (depreciation) on
investments (3) 2,390 1,465,860 18
------ ------- ---------- ------
$1,996 $35,869 $5,982,332 $2,017
====== ======= ========== ======
<CAPTION>
Oppenheimer
OCC Main Street Templeton
Accumulation Growth and Asset Templeton Templeton
Managed Income Allocation International Stock
Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $2,005 $33,494 $77,048 $136,413 $2,004
Accumulated net investment income (loss) (5) (13) (30) (92) (5)
Accumulated net realized gain (loss) on
investments -- -- 507 4,934 --
Net unrealized appreciation (depreciation) on
investments (13) 1,575 4,312 10,904 313
------ ------- ------- -------- ------
$1,987 $35,056 $81,837 $152,159 $2,312
====== ======= ======= ======== ======
</TABLE>
I-14
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements (Continued)
4. Purchases and Sales of Investments
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1999.
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
--------------- -------------
<S> <C> <C>
American Century VP Income & Growth Fund $ 5,864,035 $ 423,812
American Century VP International Fund 4,790,583 155,967
AVIS Growth Class 2 Fund 2,326 --
AVIS Growth & Income Class 2 Fund 2,341 --
AVIS High-Yield Bond Class 2 Fund 2,045 --
Baron Capital Asset Fund 2,551,656 5,246
BT EAFE Equity 500 Index Fund 2,107 2
BT Equity 500 Index Fund 9,332,369 492,926
BT Small Cap Index Fund 461,386 32,571
Delaware Premium Delchester Series 3,555 --
Delaware Premiun Devon Series 33,413 1
Delaware Premium International Equity Series 2,000 1
Delaware Premium REIT Series 2,000 1
Delaware Premium Small Cap Value Series 2,000 1
Fidelity VIP Growth Portfolio 23,031,832 2,553,130
Fidelity VIP II Asset Manager Portfolio 518,274 61,558
Fidelity VIP II Contrafund Portfolio 5,730,267 255,215
Janus Aggressive Growth Portfolio 5,168,908 13,036
Janus Balanced Portfolio 14,055,919 277,392
Janus Worldwide Growth Portfolio 13,205,529 58,822
LN Bond Fund 10,435,235 84,919
LN Capital Appreciation Fund 1,654,604 312,688
LN Equity-Income Fund 5,360,728 151,632
LN Money Market Fund 9,810,857 841,160
LN Social Awareness Fund 2,012 1
MFS Capital Opportunities Series 93,304 --
MFS Research Series 132,979 216
MFS Total Return Series 2,000 1
MFS Utilities Series 33,479 --
AMT Mid-Cap Growth Portfolio 4,620,250 124,936
AMT Partners Portfolio 2,000 1
OCC Accumulation Managed Portfolio 2,000 --
Oppenheimer Main Street Growth and Income Fund 33,481 --
Templeton Asset Allocation Fund 108,170 31,151
Templeton International Fund 245,019 108,696
Templeton Stock Fund 2,000 1
------------ ----------
$117,300,663 $5,985,083
============ ==========
</TABLE>
I-15
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements (Continued)
5. Investments
The following is a summary of investments owned at December 31, 1999.
<TABLE>
<CAPTION>
Net
Shares Asset Value of Cost of
Outstanding Value Shares Shares
------------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
American Century VP Income & Growth Fund 728,865 $ 8.00 $ 5,830,923 $ 5,456,046
American Century VP International Fund 508,693 12.50 6,358,663 4,663,660
AVIS Growth Class 2 Fund 34 70.57 2,420 2,326
AVIS Growth & Income Class 2 Fund 63 33.07 2,077 2,341
AVIS High-Yield Bond Class 2 Fund 163 12.75 2,079 2,045
Baron Capital Asset Fund 161,315 17.77 2,866,572 2,546,414
BT EAFE Equity 500 Index Fund 172 13.60 2,341 2,105
BT Equity 500 Index Fund 619,015 15.18 9,396,642 8,860,076
BT Small Cap Index Fund 40,664 11.61 472,093 430,530
Delaware Premium Delchester Series 469 7.42 3,479 3,555
Delaware Premiun Devon Series 2,459 13.62 33,492 33,412
Delaware Premium International Equity Series 116 18.63 2,153 1,999
Delaware Premium REIT Series 225 8.67 1,953 1,999
Delaware Premium Small Cap Value Series 128 15.36 1,966 1,999
Fidelity VIP Growth Portfolio 431,522 54.80 23,647,410 20,709,573
Fidelity VIP II Asset Manager Portfolio 25,271 18.59 469,765 457,155
Fidelity VIP II Contrafund Portfolio 203,926 29.10 5,934,256 5,487,321
Janus Aggressive Growth Portfolio 111,438 59.69 6,651,724 5,157,801
Janus Balanced Portfolio 527,507 27.92 14,728,000 13,794,357
Janus Worldwide Growth Portfolio 340,564 47.75 16,261,952 13,153,557
LN Bond Fund 895,937 11.44 10,245,575 10,349,813
LN Capital Appreciation Fund 47,266 31.47 1,487,267 1,363,843
LN Equity-Income Fund 246,273 22.05 5,429,453 5,210,147
LN Money Market Fund 896,970 10.00 8,969,697 8,969,697
LN Social Awareness Fund 51 44.29 2,242 2,011
MFS Capital Opportunities Series 4,446 21.73 96,620 93,304
MFS Research Series 6,107 23.34 142,536 132,761
MFS Total Return Series 112 17.75 1,996 1,999
MFS Utilities Series 1,485 24.16 35,869 33,479
AMT Mid-Cap Growth Portfolio 246,189 24.30 5,982,397 4,516,537
AMT Partners Portfolio 103 19.64 2,017 1,999
OCC Accumulation Managed Portfolio 46 43.65 1,987 2,000
Oppenheimer Main Street Growth and Income Fund 1,423 24.63 35,056 33,481
Templeton Asset Allocation Fund 3,517 23.27 81,838 77,526
Templeton International Fund 6,876 22.13 152,161 141,257
Templeton Stock Fund 95 24.29 2,312 1,999
------------ ------------
$125,338,983 $111,700,124
============ ============
</TABLE>
I-16
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements (Continued)
6. New Investment Funds
Effective October 29, 1999, the AVIS Growth Fund, AVIS Growth & Income Fund
and AVIS High-Yield Bond Fund became available as investment options for
the Variable Account policyholders.
I-17
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors of The Lincoln National Life Insurance Company
and
Contract Owners of Lincoln Life Flexible Premium Variable Life Account S
We have audited the accompanying statement of assets and liability of Lincoln
Life Flexible Premium Variable Life Account S ("Variable Account") (comprised
of the American Century VP Income & Growth, American Century VP International,
AVIS Growth Class 2, AVIS Growth & Income Class 2, AVIS High-Yield Bond Class
2, Baron Capital Asset, BT EAFE Equity 500 Index, BT Equity 500 Index, BT Small
Cap Index, Delaware Premium Delchester, Delaware Premium Devon, Delaware
Premium International Equity, Delaware Premium REIT, Delaware Premium Small Cap
Value, Fidelity VIP Growth, Fidelity VIP II Asset Manager, Fidelity VIP II
Contrafund, Janus Aggressive Growth, Janus Balanced, Janus Worldwide Growth,
Lincoln National Bond, Lincoln National Capital Appreciation, Lincoln National
Equity-Income, Lincoln National Money Market, Lincoln National Social
Awareness, MFS Value Equity, MFS Research, MFS Total Return, MFS Utilities,
Neuberger Berman Advisers Management Trust (AMT) Mid-Cap Growth, Neuberger
Berman Advisers Management Trust (AMT) Partners, OCC Accumulation Trust
Managed, Oppenheimer Main Street Growth and Income, Templeton Asset Allocation,
Templeton International and Templeton Stock subaccounts), as of December 31,
1999, and the related statements of operations and changes in net assets for
the period from May 14, 1999 to December 31, 1999. These financial statements
are the responsibility of the Variable Account's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of December 31,
1999, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting the Lincoln Life Flexible Premium Variable Life
Account S at December 31, 1999, and the results of their operations and the
changes in their net assets for the period from May 14, 1999 to December 31,
1999 in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 24, 2000
I-18
<PAGE>
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $22,985.0 $23,830.9
- ------------------------------------------------------------
Preferred stocks 253.8 236.0
- ------------------------------------------------------------
Unaffiliated common stocks 166.9 259.3
- ------------------------------------------------------------
Affiliated common stocks 604.7 322.1
- ------------------------------------------------------------
Mortgage loans on real estate 4,211.5 3,932.9
- ------------------------------------------------------------
Real estate 254.0 473.8
- ------------------------------------------------------------
Policy loans 1,652.9 1,606.0
- ------------------------------------------------------------
Other investments 426.6 434.4
- ------------------------------------------------------------
Cash and short-term investments 1,409.2 1,725.4
- ------------------------------------------------------------ --------- ---------
Total cash and investments 31,964.6 32,820.8
- ------------------------------------------------------------
Premiums and fees in course of collection 115.8 33.3
- ------------------------------------------------------------
Accrued investment income 435.3 432.8
- ------------------------------------------------------------
Reinsurance recoverable 199.0 171.6
- ------------------------------------------------------------
Funds withheld by ceding companies 73.5 53.7
- ------------------------------------------------------------
Federal income taxes recoverable from parent company 61.6 64.7
- ------------------------------------------------------------
Goodwill 43.1 49.5
- ------------------------------------------------------------
Other admitted assets 66.7 89.3
- ------------------------------------------------------------
Separate account assets 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total admitted assets $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,184.0 $12,310.6
- ------------------------------------------------------------
Other policyholder funds 16,589.5 16,647.5
- ------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 364.0 897.6
- ------------------------------------------------------------
Funds held under reinsurance treaties 796.9 795.8
- ------------------------------------------------------------
Asset valuation reserve 490.9 484.5
- ------------------------------------------------------------
Interest maintenance reserve 72.3 159.7
- ------------------------------------------------------------
Other liabilities 627.0 504.5
- ------------------------------------------------------------
Short-term loan payable to parent company 205.0 140.0
- ------------------------------------------------------------
Net transfers due from separate accounts (896.5) (789.0)
- ------------------------------------------------------------
Separate account liabilities 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total liabilities 76,538.2 68,058.2
- ------------------------------------------------------------
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 1,250.0
- ------------------------------------------------------------
Paid-in surplus 1,942.6 1,930.1
- ------------------------------------------------------------
Unassigned surplus -- deficit (691.1) (640.6)
- ------------------------------------------------------------ --------- ---------
Total capital and surplus 2,526.5 2,564.5
- ------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- --------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 7,273.6 $12,737.6 $5,589.0
- ------------------------------------------------------------
Net investment income 2,203.2 2,107.2 1,847.1
- ------------------------------------------------------------
Amortization of interest maintenance reserve 29.1 26.4 41.5
- ------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 472.3 179.9 99.7
- ------------------------------------------------------------
Expense charges on deposit funds 146.5 134.6 119.3
- ------------------------------------------------------------
Separate account investment management and administration
service fees 473.9 396.3 325.5
- ------------------------------------------------------------
Other income 88.8 31.3 21.3
- ------------------------------------------------------------ --------- --------- --------
Total revenues 10,687.4 15,613.3 8,043.4
- ------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 8,504.9 13,964.1 4,522.1
- ------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 1,618.3 2,919.4 3,053.9
- ------------------------------------------------------------ --------- --------- --------
Total benefits and expenses 10,123.2 16,883.5 7,576.0
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments 564.2 (1,270.2) 467.4
- ------------------------------------------------------------
Dividends to policyholders 80.3 67.9 27.5
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments 483.9 (1,338.1) 439.9
- ------------------------------------------------------------
Federal income taxes (credit) 85.4 (141.0) 78.3
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before net realized gain on
investments 398.5 (1,197.1) 361.6
- ------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 114.4 46.8 31.3
- ------------------------------------------------------------ --------- --------- --------
Net income (loss) $ 512.9 $(1,150.3) $ 392.9
- ------------------------------------------------------------ ========= ========= ========
</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
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,564.5 $2,968.4 $1,868.0
- ------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) 512.9 (1,150.3) 392.9
- ------------------------------------------------------------
Difference in cost and admitted investment amounts (101.9) (304.8) (36.2)
- ------------------------------------------------------------
Nonadmitted assets (22.9) (17.1) (0.4)
- ------------------------------------------------------------
Regulatory liability for reinsurance 26.0 (35.2) (3.9)
- ------------------------------------------------------------
Gain on reinsurance of disability income business 71.8 -- --
- ------------------------------------------------------------
Life policy reserve valuation basis -- (0.4) (0.9)
- ------------------------------------------------------------
Asset valuation reserve (6.4) (34.5) (36.9)
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 12.5 108.4 938.4
- ------------------------------------------------------------
Separate account receivable due to change in valuation -- -- (2.6)
- ------------------------------------------------------------
Dividends to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,526.5 $2,564.5 $2,968.4
- ------------------------------------------------------------ ======== ======== ========
</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
1999 1998 1997
--------- ---------- ---------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 7,671.1 $ 13,495.2 $ 6,364.3
- ------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (19.9) (632.4) (649.2)
- ------------------------------------------------------------
Investment income received 2,168.6 2,003.9 1,798.8
- ------------------------------------------------------------
Separate account investment management and administration
service fees 470.6 396.3 325.5
- ------------------------------------------------------------
Benefits paid (8,699.4) (7,395.8) (5,345.2)
- ------------------------------------------------------------
Insurance expenses paid (1,734.5) (2,909.7) (3,193.0)
- ------------------------------------------------------------
Proceeds related to sale of disability income business 71.8 -- --
- ------------------------------------------------------------
Federal income taxes recovered (paid) (81.2) 84.2 (87.0)
- ------------------------------------------------------------
Dividends to policyholders (82.8) (12.9) (28.4)
- ------------------------------------------------------------
Other income received and expenses paid, net 252.1 207.0 (8.7)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) operating activities 16.4 5,235.8 (822.9)
- ------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 6,557.7 10,926.5 12,142.6
- ------------------------------------------------------------
Purchase of investments (5,940.8) (16,950.0) (10,345.0)
- ------------------------------------------------------------
Other sources (uses) including reinsured policy loans (497.0) (778.3) 529.1
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) investing activities 119.9 (6,801.8) 2,326.7
- ------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 12.5 108.4 --
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Proceeds from borrowings from shareholder 205.0 140.0 120.0
- ------------------------------------------------------------
Repayment of borrowings from shareholder (140.0) (120.0) (100.0)
- ------------------------------------------------------------
Dividends paid to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) financing activities (452.5) 1,158.4 (130.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net increase (decrease) in cash and short-term investments (316.2) (407.6) 1,373.8
- ------------------------------------------------------------
Cash and short-term investments at beginning of year 1,725.4 2,133.0 759.2
- ------------------------------------------------------------ --------- ---------- ---------
Cash and short-term investments at end of year $ 1,409.2 $ 1,725.4 $ 2,133.0
- ------------------------------------------------------------ ========= ========== =========
</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 (the "Company") is a wholly
owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1999, the Company owned 100% of the outstanding
common stock of four insurance company subsidiaries and four non-insurance
subsidiaries. The Company also owned 85% of the common stock of an Internet
distributor of variable annuities.
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 accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
INVESTMENTS
Bonds and preferred stocks 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 and preferred stocks 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 a 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
writedowns 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
insurance subsidiaries are carried at their statutory-basis net equity and
the non-insurance subsidiaries are carried at their GAAP-basis net equity,
adjusted for certain items which would be non-admitted under statutory
accounting principles. Both insurance subsidiaries and non-insurance
subsidiaries are presented in the balance sheet as investments in affiliated
common stocks.
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred policy acquisition costs, to the extent recoverable from future
gross profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally 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 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 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 are accounted
for using deposit accounting under GAAP.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
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
1999 1998 1999 1998 1997
----------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,526.5 $ 2,564.5 $ 512.9 $(1,150.3) $392.9
-----------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
non-admitted goodwill 3,628.2 3,085.2 135.0 48.5 (98.9)
--------------------------------------
Policy and contract reserves (1,943.1) (2,299.9) (97.9) 1,743.4 (48.6)
--------------------------------------
Interest maintenance reserve 72.3 159.7 (86.6) 24.4 58.7
--------------------------------------
Deferred income taxes 244.5 181.6 (117.4) (218.6) 70.3
--------------------------------------
Policyholders' share of earnings and
surplus on participating business (122.7) (132.8) (1.8) 3.2 5.3
--------------------------------------
Asset valuation reserve 490.9 484.5 -- -- --
--------------------------------------
Net realized gain (loss) on investments (186.4) (174.1) (32.4) (116.7) (20.4)
--------------------------------------
Unrealized gain (loss) on investments (555.2) 1,335.1 -- -- --
--------------------------------------
Nonadmitted assets, including
nonadmitted investments 139.6 119.1 -- -- --
--------------------------------------
Investments in subsidiary companies 460.9 490.4 39.1 41.3 (80.5)
--------------------------------------
Surplus notes and related interest (1,250.0) (1,251.5) 1.5 (1.5) --
--------------------------------------
Other, net (61.0) (120.1) 129.8 103.6 (35.0)
-------------------------------------- --------- --------- --------- --------- ------
Net increase (decrease) 918.0 1,877.2 (30.7) 1,627.6 (149.1)
----------------------------------------- --------- --------- --------- --------- ------
Amounts on a GAAP basis $ 3,444.5 $ 4,441.7 $ 482.2 $ 477.3 $243.8
----------------------------------------- ========= ========= ========= ========= ======
</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 or deferred in IMR, where
applicable, and are amortized over the remaining lives of the hedged items
as adjustments to investment income. 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 amortized 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 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 are
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 cash collateral received which is
typically greater than the market value of the related securities loaned. In
other instances, the Company will hold as collateral securities with a
market value at least equal to the securities loaned. Securities held as
collateral are not recorded in the Company's balance sheet in accordance
with accounting guidance for secured borrowings and collateral. 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 reserves released and 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 the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LNC's common stock at the grant date, or other measurement date, over the
amount an employee or agent 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.
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") effective January 1, 2001. 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.
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
1999 1998 1997
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,840.6 $1,714.3 $1,524.4
------------------------------------------------------------
Preferred stocks 20.3 19.7 23.5
------------------------------------------------------------
Unaffiliated common stocks 6.3 10.6 8.3
------------------------------------------------------------
Affiliated common stocks 7.8 5.2 15.0
------------------------------------------------------------
Mortgage loans on real estate 321.0 323.6 257.2
------------------------------------------------------------
Real estate 57.8 81.4 92.2
------------------------------------------------------------
Policy loans 101.7 86.5 37.5
------------------------------------------------------------
Other investments 50.6 26.5 28.2
------------------------------------------------------------
Cash and short-term investments 95.9 104.7 70.3
------------------------------------------------------------ -------- -------- --------
Total investment income 2,502.0 2,372.5 2,056.6
------------------------------------------------------------
Expenses:
Depreciation 14.4 19.3 21.0
------------------------------------------------------------
Other 284.4 246.0 188.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 298.8 265.3 209.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,203.2 $2,107.2 $1,847.1
------------------------------------------------------------ ======== ======== ========
</TABLE>
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, 1999:
Corporate $17,758.4 $ 229.6 $763.0 $17,225.0
------------------------------------------------
U.S. government 316.8 29.6 21.5 324.9
------------------------------------------------
Foreign government 984.5 49.8 39.9 994.4
------------------------------------------------
Mortgage-backed 3,913.7 46.2 139.0 3,820.9
------------------------------------------------
State and municipal 11.6 -- .5 11.1
------------------------------------------------ --------- -------- ------ ---------
$22,985.0 $ 355.2 $963.9 $22,376.3
========= ======== ====== =========
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
========= ======== ====== =========
</TABLE>
The carrying amounts of bonds in the balance sheets at
December 31, 1999 and 1998 reflect adjustments of
$38,900,000 and $11,800,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as in or near default.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1999, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 2000 $ 598.0 $ 599.2
------------------------------------------------------------
In 2001-2004 4,359.8 4,313.4
------------------------------------------------------------
In 2005-2009 6,636.0 6,392.9
------------------------------------------------------------
After 2009 7,477.5 7,249.9
------------------------------------------------------------
Mortgage-backed securities 3,913.7 3,820.9
------------------------------------------------------------ --------- ---------
Total $22,985.0 $22,376.3
------------------------------------------------------------ ========= =========
</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 1999,
1998 and 1997 were $5,351,400,000, $9,395,000,000 and
$9,715,000,000, respectively. Gross gains during 1999, 1998
and 1997 of $95,400,000, $186,300,000 and $218,100,000,
respectively, and gross losses of $195,500,000, $138,000,000
and $78,000,000, respectively, were realized on those sales.
At December 31, 1999 and 1998, investments in bonds, with an
admitted asset value of $116,500,000 and $97,800,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks are reported directly in unassigned surplus
and are not reported in the statutory-basis Statements of
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, 1999:
Preferred stocks $253.8 $ 1.3 $31.5 $223.6
----------------------------------------
Unaffiliated common stocks 150.4 34.2 17.7 166.9
----------------------------------------
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
----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1999 and 1998 reflects adjustments of
$4,100,000 and $5,800,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1999, the minimum and maximum lending rates for
mortgage loans were 6.5% and 11.5%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. 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)
Components of the Company's investments in real estate are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 11.1 9.0
------------------------------------------------------------
Less accumulated depreciation (2.2) (1.7)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 11.4 9.8
------------------------------------------------------------
Other:
Land 46.2 93.2
------------------------------------------------------------
Buildings 226.8 413.0
------------------------------------------------------------
Other 4.7 7.9
------------------------------------------------------------
Less accumulated depreciation (35.1) (50.1)
------------------------------------------------------------ ------ ------
Net other real estate 242.6 464.0
------------------------------------------------------------ ------ ------
Net real estate $254.0 $473.8
------------------------------------------------------------ ====== ======
</TABLE>
Net realized capital gains are reported net of federal
income taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Net realized capital gains $ 20.8 $179.7 $209.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credits) of ($31.4), $27.3 and $54.0 in 1999, 1998 and
1997, respectively) (58.3) 50.8 100.2
------------------------------------------------------------ ------ ------ ------
79.1 128.9 109.1
Less federal income taxes (credits) on realized gains (35.3) 82.1 77.8
------------------------------------------------------------ ------ ------ ------
Net realized capital gains after transfer to IMR and taxes
(credits) $114.4 $ 46.8 $ 31.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
4. SUBSIDIARIES
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 ("LNY"). The Company also owns 100% of
the outstanding common stock of four non-insurance company
subsidiaries: Lincoln National Insurance Associates
("LNIA"), Sagemark Consulting, Inc. ("Sagemark"), Wakefield
Tower Alpha Limited ("Wakefield"), and Lincoln Realty
Capital
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
Corporation ("LRCC"). The Company also owns 85% of one
non-insurance company subsidiary, AnnuityNet, Inc.
(AnnuityNet). Statutory-basis financial information related
to the insurance subsidiaries is summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,318.7 $434.6 $443.6 $1,888.6
---------------------------------------------------------
Other assets 40.6 55.5 492.6 403.1
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,242.2 $394.4 $261.4 $1,802.4
---------------------------------------------------------
Other liabilities 44.3 27.9 614.4 25.6
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 328.8
---------------------------------------------------------
Capital and surplus 72.8 67.8 60.4 134.9
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $332.7 $263.3 $ 88.4 $ 313.3
-----------------------------------------------------------
Expenses 329.0 346.9 75.4 291.4
-----------------------------------------------------------
Net realized gains (losses) -- -- .2 (2.0)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ 3.7 $(83.6) $ 13.2 $ 19.9
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<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>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
FIRST
PENN LNH&C LNRAC LNY
---------------------------------
<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>
AnnuityNet was formed in 1998 for the distribution of
variable annuities over the Internet and is valued on the
equity method (at 85% of GAAP equity) with an admitted asset
value of $2,400,000 at December 31, 1999. LNIA was purchased
in 1998 for $600,000 and is valued on the equity method with
an admitted asset value of $800,000 at December 31, 1999.
Sagemark is a broker dealer and was acquired in connection
with a reinsurance transaction completed in 1998. Sagemark
is valued on the equity method with an admitted asset value
of $6,400,000 at December 31, 1999. Wakefield was formed in
1999 to engage in the ownership and management of
investments and is valued on the equity method with an
admitted asset value of $248,300,000. Wakefield's assets as
of December 31, 1999 consist entirely of investments in
bonds. LRCC was formed in 1999 to engage in the management
of certain real estate investments. It was capitalized with
cash and three real estate investments of $12,700,000 and is
valued on the equity method with an admitted asset value of
$10,900,000.
The carrying value of all affiliated common stocks, was
$604,700,000 and $322,100,000 at December 31, 1999 and 1998,
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, 1999 and 1998 was $970,700,000 and
$631,100,000, respectively.
During 1999, 1998 and 1997 the Company's insurance
subsidiaries paid dividends of $5,200,000, $5,200,000 and
$15,000,000, 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 1999, 1998 and 1997, federal income tax expense (benefit)
incurred totaled $85,400,000, ($141,000,000) and
$78,300,000, respectively. In 1999, capital losses of
$151,700,000 were incurred, and carried back to recover
taxes paid in prior years.
The Company paid $45,300,000, $2,300,000 and $164,500,000 to
LNC in 1999, 1998 and 1997, respectively, in 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
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
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
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 "Reinsurance recoverable" includes
amounts recoverable from other insurers for claims paid by
the Company. The balance sheet caption, "Future policy
benefits and claims," and the balance sheet caption "Other
policyholder funds" have been reduced for insurance ceded as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $5,340.0 $4,081.8
------------------------------------------------------------
Amounts recoverable from other insurers 81.2 79.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
Insurance assumed $2,606.5 $9,018.9 $727.2
------------------------------------------------------------
Insurance ceded 1,675.1 877.1 302.9
------------------------------------------------------------ -------- -------- ------
Net amount included in premiums $ 931.4 $8,141.8 $424.3
------------------------------------------------------------ ======== ======== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,609,000,000, $2,098,800,000 and $1,240,500,000 for 1999,
1998 and 1997, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,208.3 $16,285.2
------------------------------------------------------------
Undistributed earnings on participating business 346.9 348.4
------------------------------------------------------------
Other 34.3 13.9
------------------------------------------------------------ --------- ---------
$16,589.5 $16,647.5
========= =========
</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, 1999
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $10.8 $ 7.3 $ 3.5
------------------------------------------------------------
Ordinary renewal 54.2 6.8 47.4
------------------------------------------------------------
Group life 13.7 .1 13.6
------------------------------------------------------------ ----- ----- -----
$78.7 $14.2 $64.5
===== ===== =====
</TABLE>
<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>
7. ANNUITY RESERVES
At December 31, 1999, 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 $ 2,427.7 4%
------------------------------------------------------------
At book value, less surrender charge 2,237.3 3
------------------------------------------------------------
At market value 44,076.2 68
------------------------------------------------------------ --------- ---
48,741.2 75
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 13,486.5 21
------------------------------------------------------------
Not subject to discretionary withdrawal 2,622.4 4
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund 64,850.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,548.0
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $63,302.1
------------------------------------------------------------ =========
</TABLE>
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
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 Corporation ("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
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, 1999), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna, Inc. ("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, 1999), and subject
to approval by the Indiana Insurance Commissioner.
A summary of the terms of these surplus notes follows (in millions):
<TABLE>
<CAPTION>
PRINCIPAL INCEPTION ACCRUED
OUTSTANDING AT TO DATE INTEREST AT
PRINCIPAL DECEMBER 31, CURRENT YEAR INTEREST DECEMBER 31,
DATE ISSUED AMOUNT OF NOTE 1999 INTEREST PAID PAID 1999
----------- -------------- -------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
January 5, 1998 $ 500.0 $ 500.0 $ 32.8 $ 65.1 $ --
-------------------------------
December 18, 1998 750.0 750.0 46.7 46.7 --
-------------------------------
</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,
1999, 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, 1999 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. The time frame for
unassigned surplus to return to a positive position is dependent upon future
statutory earnings and dividends paid to LNC. 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-19
<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). Effective July 1, 1999, the
agents' postretirement plan was changed to require agents retiring on or
after that date to pay the full premium costs. This change to the plan
resulted in a one-time curtailment gain of $1,400,000 in 1999. 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 Operations 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. Options issued subsequent to 1991
are exercisable in 25% increments on the option issuance anniversary in the
four years following issuance.
As of December 31, 1999, there were 2,072,087 and 1,397,005 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 919,749 and
241,097, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $12.50 to $56.75. During 1999, 1998 and
1997, there were 318,421, 136,469 and 170,789 options exercised,
respectively, and 82,024, 18,288 and 1,846 options 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, 1999 and 1998 is
$221,600,000 and $670,100,000, 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.
PERSONAL ACCIDENT PROGRAMS
In the past, the Company and its wholly owned subsidiary, LNH&C, accepted
personal accident reinsurance programs from other insurance companies. Most
of these programs were presented by independent brokers who represented 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. The liabilities for these
programs, net of related assets recoverable from reinsurers, were
$174,700,000 and $177,400,000 at December 31, 1999 and 1998, respectively.
Settlement activities relating to the Company's participation in workers'
compensation carve-out (i.e., life and health risks associated with workers'
compensation coverage) programs managed by Unicover Managers, Inc. have
allowed the Company to evaluate the possibility of settlements and to
estimate its potential costs to settle Unicover-related exposures. As of
December 31, 1999, a liability of $62,200,000 has been established for the
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement of the Company's exposure to the Unicover programs.
These amounts are based on various estimates that are subject to
considerable uncertainty. Accordingly, the liabilities may prove to be
deficient or excessive. However, it is management's opinion that future
developments in these programs will not materially affect the financial
position of the Company.
HMO EXCESS-OF-LOSS REINSURANCE PROGRAMS
In light of the continued volatility in the HMO excess-of-loss line of
business, LNH&C discontinued writing new HMO excess-of-loss reinsurance
programs in the third quarter of 1999. The liability for HMO claims, net of
the related assets for amounts recoverable from reinsurers, was $101,900,000
and $55,900,000 at December 31, 1999 and 1998, respectively. LNH&C reviews
reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss
ratios fluctuate significantly from the assumptions underlying the reserves,
adjustments to reserves could be required in the future. Accordingly, the
liability may prove to be deficient or excessive. However, it is
management's opinion that such future developments will not materially
affect the financial position of the Company.
MARKETING AND COMPLIANCE MATTERS
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances, companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future development will not materially affect the financial position of the
Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1999, 1998 and 1997 was
$38,900,000, $34,000,000 and $29,300,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
2000 $ 28.7
--------------------------------
2001 28.8
--------------------------------
2002 27.5
--------------------------------
2003 26.2
--------------------------------
2004 26.5
--------------------------------
Thereafter 123.5
-------------------------------- ------
$261.2
======
</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
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
operations. Total costs incurred in 1999 and 1998 were $67,400,000 and
$54,800,000, respectively. 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. The Company limits its maximum coverage that
it retains on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been coinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1999, the
reserves associated with these reinsurance arrangements totaled
$1,422,800,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American States 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 LNY reinsured 100% of a block of individual life
insurance and annuity business from 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 $4,780,300,000 that became
the Company's obligation. The Company also received assets, measured on a
historical statutory-basis, equal to the liabilities.
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.
In 1999, the Company and CIGNA reached an agreement through arbitration on
the final statutory-basis values of the assets and liabilities reinsured. As
a result, the Company's ceding commission for this transaction was reduced
by $58.6 million.
Subsequent to this transaction, the Company and LNY announced that they had
reached an agreement to sell the administration rights to a variable annuity
portfolio that had been acquired as part of the block of business assumed on
January 2, 1998. This sale closed on October 12, 1998 with an effective date
of September 1, 1998.
On October 1, 1998, the Company and LNY entered into an indemnity
reinsurance transaction whereby the Company and LNY reinsured 100% of a
block of individual life insurance business from Aetna. 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 $2,813,800,000
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 LNY 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.
On November 1, 1999, the Company closed its previously announced agreement
to transfer a block of disability income business to MetLife. Under this
indemnity reinsurance agreement, the Company transferred $490,800,000 of
cash to MetLife representing the statutory reserves transferred on this
business less $17,800,000 of purchase price consideration. A gain on the
reinsurance transaction of $71,800,000 was recorded directly in unassigned
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
surplus and will be recognized in statutory earnings over the life of the
business.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1999, the Company provided $270,000,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company 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 $17,300,000 and $43,400,000 at December 31, 1999
and 1998, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999, 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, 1999, 29% of such mortgages ($1,212,700,000) 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 $70,000,000.
At December 31, 1999, 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 certain 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
proceedings will not have a material adverse affect on the financial
position of the Company.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, the Company now has
several such actions pending. While each of these lawsuits seeks class
action status, the court has not certified a class in any of them. In each
of these lawsuits, plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While relief sought in these
lawsuits is substantial, they are in the discovery stages of litigation, and
it is premature to make assessments about potential loss, if any. Management
intends to defend these lawsuits vigorously. The amount of liability, if
any, which may arise as a result of these lawsuits cannot be reasonably
estimated at this time. In another lawsuit, a settlement has been
preliminarily approved by the court, and a class has been conditionally
certified for settlement purposes. Two other similar lawsuits previously
have been resolved and dismissed.
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
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
credit exposure. Outstanding guarantees with off-balance-sheet risks at
December 31, 1999 relate to mortgage loan pass-through certificates. The
Company has sold commercial mortgage loans through grantor trusts that
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, 1999 and 1998 were $25,900,000 and $30,900,000, 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, 1999 and 1998.
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 and foreign exchange
risks. In addition, the Company is subject to the risks associated with
changes in the value of its derivatives; however, such changes in value
generally are offset by changes in the value of the items being hedged by
such contracts.
Outstanding derivatives with off-balance-sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values,
are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
---------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-----------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1999 1998 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ .9
---------------------------------
Swaptions 1,837.5 1,899.5 12.2 10.8 16.2 2.5
---------------------------------
Interest rate swaps 630.9 258.3 -- (19.5) -- 9.9
---------------------------------
Put options 21.3 21.3 -- 1.9 -- 2.2
--------------------------------- -------- -------- ----- ------ ----- -----
4,998.5 6,287.9 17.4 (3.6) 25.5 15.5
Foreign currency derivatives:
Forward contracts -- 1.5 -- -- -- --
---------------------------------
Foreign currency swaps 44.2 47.2 -- (.4) -- .3
--------------------------------- -------- -------- ----- ------ ----- -----
44.2 48.7 -- (.4) -- .3
Commodity derivatives:
Commodity swaps -- 8.1 -- -- -- 2.4
--------------------------------- -------- -------- ----- ------ ----- -----
$5,042.7 $6,344.7 $17.4 $ (4.0) $25.5 $18.2
======== ======== ===== ====== ===== =====
</TABLE>
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 SWAPTIONS
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,108.8 $4,900.0 $1,899.5 $1,752.0
-------------------------------------------------------
New contracts -- 708.8 -- 218.3
-------------------------------------------------------
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
------------------------------------------------------- -------- -------- -------- --------
Balance at end of year $2,508.8 $4,108.8 $1,837.5 $1,899.5
------------------------------------------------------- ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Balance at beginning of year $ 258.3 $ 10.0
------------------------------------------------------------
New contracts 482.4 2,226.6
------------------------------------------------------------
Terminations and maturities (109.8) (1,978.3)
------------------------------------------------------------ ------- ---------
Balance at end of year $ 630.9 $ 258.3
------------------------------------------------------------ ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
----------------------------------------
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $21.3 $ -- $ 8.1 $ --
------------------------------------------------------------
New contracts -- 21.3 -- 8.1
------------------------------------------------------------
Terminations and maturities -- -- (8.1) --
------------------------------------------------------------ ----- ----- ----- ----
Balance at end of year $21.3 $21.3 $ -- $8.1
------------------------------------------------------------ ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
(FOREIGN INVESTMENTS)
-------------------------------------------
FOREIGN CURRENCY
SWAPS
FOREIGN EXCHANGE
-------------------------------------------
FORWARD CONTRACTS
1999 1998 1999 1998
-------------------------------------------
(IN MILLIONS)
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1.5 $ 163.1 $47.2 $15.0
------------------------------------------------------------
New contracts 2.7 419.8 -- 39.2
------------------------------------------------------------
Terminations and maturities (4.2) (581.4) (3.0) (7.0)
------------------------------------------------------------ ----- ------- ----- -----
Balance at end of year $ -- $ 1.5 $44.2 $47.2
------------------------------------------------------------ ===== ======= ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 2000 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
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
premium paid for the interest rate caps is included in other investments
(amortized costs of $5.2 million as of December 31, 1999) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2000 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
investments (amortized cost of $12.2 million as of December 31, 1999) 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 security 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. While spreadlocks are
used periodically, there are no spreadlock agreements outstanding at
December 31, 1999.
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 agreement the stream of variable interest
payments based on the coupon payments hedged 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 blocks of business or to extend
the duration of certain portfolios of assets. Once the assets are purchased
the gains (losses) resulting from the termination of the swap agreements
will be applied to the basis of the assets. The gains (losses) will be
recognized in earnings over the life of the assets. The anticipated purchase
of assets related to extending the duration of certain portfolios of assets
is expected to be completed in 2000.
PUT OPTIONS
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed
maturity investments. The risk being hedged is a drop in bond prices due to
credit concerns with international bond issuers. The put options allow the
Company to put the bonds back to the counterparties at original par.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts and
foreign currency swaps, 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. A foreign currency swap is a contractual
agreement to exchange the currencies of two different countries at a fixed
rate of exchange in the future.
COMMODITY SWAPS
The Company used a commodity swap to hedge its exposure to fluctuations in
the price of gold. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a fixed amount of cash. The
Company owned a fixed income security that met its coupon
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 were the
product of the swap notional multiplied by the fixed rate stated in the swap
agreement. The net receipts or payments from commodity swaps were recorded
in net investment income. The fixed income security was called in the third
quarter of 1999 and the commodity swap expired.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,200,000, $10,000,000 and $7,000,000 in 1999, 1998 and 1997, respectively.
Deferred gains of $100,000 as of December 31, 1999, were the result of
terminated interest rate swaps. These gains are included with the related
fixed maturity securities to which the hedge applied or as deferred
liabilities 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 various derivative contracts. However, the Company does
not anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value less collateral held for such agreements with each
counterparty if the net market value is in the Company's favor. At
December 31, 1999, the exposure was $8,500,000.
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.,
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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
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-28
<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
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 22,985.0 $ 22,376.3 $ 23,830.9 $ 25,065.5
-----------------------------------------------
Preferred stocks 253.8 223.6 236.0 242.5
-----------------------------------------------
Unaffiliated common stocks 166.9 166.9 259.3 259.3
-----------------------------------------------
Mortgage loans on real estate 4,211.5 4,104.0 3,932.9 4,100.1
-----------------------------------------------
Policy loans 1,652.9 1,770.5 1,606.0 1,685.9
-----------------------------------------------
Other investments 426.6 426.6 434.4 434.4
-----------------------------------------------
Cash and short-term investments 1,409.2 1,409.2 1,725.4 1,725.4
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,730.4) (17,364.3) (17,845.8) (17,486.4)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (454.7) (465.1) (714.4) (738.2)
--------------------------------------------
Short-term debt (205.0) (205.0) (140.0) (140.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,022.1) (1,250.0) (1,335.1)
-----------------------------------------------
Derivatives 17.4 (4.0) 25.5 18.2
-----------------------------------------------
Investment commitments -- (0.8) -- (.6)
-----------------------------------------------
Separate account assets 46,105.1 46,105.1 36,907.0 36,907.0
-----------------------------------------------
Separate account liabilities (46,105.1) (46,105.1) (36,907.0) (36,907.0)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
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.
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 $60,400,000 and
$76,700,000 in 1999 and 1998, respectively, and override commissions and
operating expense allowances of $61,600,000 in 1997. LLAD incurred expenses
of $113,400,000, $102,400,000 and
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$5,500,000 in 1999, 1998 and 1997, 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, 1999 and 1998 include the
Company's participation in a short-term investment pool with LNC of
$390,300,000 and $383,600,000, respectively. Related investment income
amounted to $16,700,000, $16,800,000 and $15,500,000 in 1999, 1998 and 1997,
respectively. Short-term loan payable to parent company at December 31, 1999
and 1998 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $49,400,000, $92,100,000 and
$48,500,000 in 1999, 1998 and 1997, 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
1999 1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 19.7 $ 13.7 $ 11.9
----------------------
Insurance ceded 777.6 290.1 100.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 413.7 $ 197.3
------------------------
Future policy benefits
and claims ceded 1,680.4 1,125.0
------------------------
Amounts recoverable on
paid and unpaid losses 146.4 84.2
------------------------
Reinsurance payable on
paid losses 8.8 6.0
------------------------
Funds held under
reinsurance treaties --
net liability 2,106.4 1,375.4
------------------------
</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 $917,300,000 and $318,300,000 at December 31, 1999 and 1998,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1999 and 1998, LNC had guaranteed $818,900,000 and $237,000,000,
respectively, of these letters of credit. At December 31, 1999 and 1998, the
Company has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $118,800,000 and $122,400,000,
respectively, 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 none of the separate accounts have
any minimum guarantees and the investment risks associated with market
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$4,572,600,000, $3,953,300,000 and $4,821,800,000 in 1999, 1998 and 1997,
respectively. Reserves for separate accounts with assets at fair value were
$45,198,900,000 and $36,145,900,000 at December 31, 1999 and 1998,
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
1999 1998 1997
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 4,573.2 $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,933.8) (4,069.8) (2,943.8)
------------------------------------------------------------ --------- --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (360.6) $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= ========= =========
</TABLE>
15. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue was complex and affected many aspects of the Company's
business. The Company was particularly concerned with Year 2000 issues that
related to the Company's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners. From 1996
through 1999 the Company and its operating subsidiaries redirected a large
portion of internal Information Technology ("IT") efforts and contracted
with outside consultants to update systems to address Year 2000 issues.
Experts were engaged to assist in developing work plans and cost estimates
and to complete remediation activities.
For the year ended December 31, 1999, the Company identified expenditures of
$39,500,000 to address this issue. This brings the expenditures for 1996
through 1999 to $75,300,000. Because updating systems and procedures is an
integral part of the Company's on-going operations, most of the expenditures
shown above are expected to continue after all Year 2000 issues have been
resolved. All Year 2000 expenditures have been funded from operating cash
flows.
The scope of the overall Year 2000 program included 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 Company
completed these projects prior to year-end.
The Company's businesses have not identified any major problems in their
business processing. Minor problems have been resolved quickly. The
Company's businesses have not experienced any significant interruption in
service to clients or business partners or in reporting to regulators.
S-31
<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 (the "Company"),
a wholly owned subsidiary of Lincoln National Corporation, as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards
generally accepted in the United States. 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 accounting principles
generally accepted in the United States. The variances between
such practices and accounting principles generally accepted in
the United States 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 accounting
principles generally accepted in the United States, the
financial position of The Lincoln National Life Insurance
Company at December 31, 1999 and 1998, or the results of its
operations or its cash flows for each of the three years in the
period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
January 31, 2000
S-32
<PAGE>
PROSPECTUS 2
<PAGE>
The Lincoln National Life Insurance Company
Lincoln Life Flexible Premium Variable Life Account S
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 LCVUL Series III, a flexible premium variable
universal 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 universal 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 from the
following trusts or corporations:
o American Century Variable Products Group, Inc.
o American Funds Insurance Series
(also known as American Variable Insurance Series)
o Baron Capital Funds Trust
o Delaware Group Premium Fund
o Deutsche Asset Management VIT Funds Trust
(formerly BT Insurance Funds Trust)
o Fidelity Variable Insurance Products Funds
o Franklin Templeton Variable Insurance Products Trust
o Janus Aspen Series
o Lincoln National Funds
o MFS Variable Insurance Trust
o Neuberger Berman Advisers Management Trust
o OCC Accumulation Trust
o OppenheimerFunds
- --------------------------------------------------------------------------------
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.
Prospectus Dated May 1, 2000
<PAGE>
Table of Contents
<TABLE>
<S> <C>
HIGHLIGHTS ................................................. 3
A Flexible Premium Variable Universal 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 .......................................... 4
Charge Assessed Against the Underlying Funds .............. 6
Policy Loans, Withdrawals and Surrenders .................. 10
Changes in Specified Amount ............................... 11
LINCOLN LIFE, THE SEPARATE ACCOUNT AND THE
GENERAL ACCOUNT ............................................ 11
BUYING VARIABLE LIFE INSURANCE ............................. 12
ALLOCATION OF PREMIUMS ..................................... 13
Fixed Account ............................................. 13
Separate Account -- Funds ................................. 13
Mixed and Shared Funding .................................. 20
Substitution of Securities ................................ 20
CHARGES & FEES ............................................. 20
Premium Load .............................................. 20
Premium Load Refund ....................................... 21
Premium Tax Charge ........................................ 21
Charges and Fees Assessed Against the Total
Account Value ............................................ 21
Charges and Fees Associated with the Variable
Funding Options .......................................... 22
Reduction of Charges ...................................... 22
POLICY CHOICES ............................................. 23
Premium Payments .......................................... 23
Life Insurance Qualification .............................. 24
Death Benefit Options ..................................... 25
Allocations and Transfers to Funding Options .............. 26
POLICY VALUES .............................................. 27
Total Account Value ....................................... 27
Accumulation Unit Value ................................... 27
Maturity Value ............................................ 28
Surrender Value ........................................... 28
POLICY RIGHTS .............................................. 28
Partial Surrenders ........................................ 28
Reinstatement of a Lapsed Policy .......................... 29
Guaranteed Death Benefit .................................. 29
Policy Loans .............................................. 30
Policy Changes ............................................ 31
Right to Examine the Policy ............................... 31
DEATH BENEFIT .............................................. 32
POLICY SETTLEMENT .......................................... 32
Settlement Options ........................................ 32
TERM INSURANCE RIDER ....................................... 33
THE COMPANY ................................................ 34
Directors and Officers of Lincoln Life .................... 34
ADDITIONAL INFORMATION ..................................... 36
Reports to Policyowners ................................... 36
Right to Instruct Voting of Fund Shares ................... 36
Disregard of Voting Instructions .......................... 37
State Regulation .......................................... 37
Legal Matters ............................................. 37
The Registration Statement ................................ 38
Distribution of the Policies .............................. 38
Records and Accounts ...................................... 38
Experts ................................................... 38
Advertising ............................................... 39
TAX ISSUES ................................................. 39
Taxation of Life Insurance Contracts in General ........... 39
Policies Which Are MECS ................................... 40
Policies Which Are Not MECS ............................... 41
Other Considerations ...................................... 42
Tax Status of Lincoln Life ................................ 43
MISCELLANEOUS POLICY PROVISIONS ............................ 43
Payment of Benefits ....................................... 43
Age ....................................................... 43
Incontestability .......................................... 43
Suicide ................................................... 43
Coverage Beyond Maturity .................................. 44
Nonparticipation .......................................... 44
Appendix A --
Illustrations of Death Benefit, Total Account Values
and Surrender Values ...................................... 45
Appendix B --
Corridor Percentages ....................................... 59
Financial Statements
Separate Account ........................................ I-1
Company ................................................. S-1
</TABLE>
2
<PAGE>
HIGHLIGHTS
A Flexible Premium Variable Universal Life Insurance Policy
This Prospectus describes a flexible premium variable universal 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 23);
o either of two life insurance qualification methods (see page 24);
o one of three death benefit options (see page 25);
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 23. If the Policy lapses because
your monthly deduction is larger than the Net Accumulation Value, you may
reinstate the Policy. See page 29.
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 21) 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
31.
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 25 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 12.
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 13.
Charges and Fees
A premium load is deducted from all of your premium payments. The current
premium load for cases with average annual planned premiums of $100,000 or
greater but less than $1,000,000 is:
4
<PAGE>
<TABLE>
<CAPTION>
Portion Portion
of Premium Paid of Premium Paid
Policy Year(s) up to Target Above Target
- ------------------------ ----------------- ----------------
<S> <C> <C>
1 10.50% 2.5%
2-5 7.50% 1.5%
6-7 3.50% 1.5%
8 and thereafter 1.50% 1.5%
</TABLE>
The current premium load for cases with average annual planned premiums of
$1,000,000 or greater is:
<TABLE>
<CAPTION>
Portion Portion
of Premium Paid of Premium Paid
Policy Year(s) up to Target Above Target
- ------------------------ ----------------- ----------------
<S> <C> <C>
1 7.50% 1.00%
2 6.00% 1.00%
3-5 3.50% 1.00%
6 and thereafter 1.50% 1.00%
</TABLE>
For all cases, the premium load is guaranteed to be no higher than the amounts
shown in the following table:
<TABLE>
<CAPTION>
Portion of Portion of
Premium Paid up to Premium Paid greater
Target Premium-- than Target Premium--
load as a percentage load as a percentage
Policy Year(s) of that portion of that portion
- ----------------- ---------------------- ----------------------
<S> <C> <C>
1 12.0% 5.0%
2-5 9.0% 5.0%
6 and after 5.0% 5.0%
</TABLE>
Under certain circumstances, if you fully surrender your Policy within 60 months
after Date of Issue, you may be entitled to receive partial credit for premium
loads deducted from your Policy. (See page 21).
For the purpose of calculating current and maximum premium loads, 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. The tax ranges
from 2% to 5% depending upon the state involved.
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 21.
A daily deduction is made from the assets of Account S for mortality and expense
risk. Currently for cases with average annual planned premiums of $100,000 or
greater but less than $1,000,000, the mortality and expense risk charge on an
annualized basis equals the following percentage of policy value in the separate
account:
5
<PAGE>
<TABLE>
<S> <C>
Policy Years
1-10 0.70%
11 and thereafter 0.35%
</TABLE>
Currently, for cases with average annual planned premiums of $1,000,000 or
greater, the mortality and expense risk charge on an annualized basis equals the
following percentage of policy value in the separate account:
<TABLE>
<S> <C>
Policy Years
1-10 0.40%
11-20 0.20%
21 and thereafter 0.10%
</TABLE>
The Company reserves the right to increase the mortality and expense risk charge
but it will never exceed 0.80% annually. (See page 22).
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 26.
There are no Surrender Charges for your Policy.
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 below shows you the current charges and
expenses.
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, 1999 unless otherwise
indicated.
6
<PAGE>
Fund Expenses
<TABLE>
<CAPTION>
Total
Annual
Fund Total Fund
Operating Operating
Expenses Total Expenses
Without Waivers with
Management 12(b)1 Other Waivers or and Waivers and
Fund Fees(1) Fee Expenses Reductions Reductions Reductions
<S> <C> <C> <C> <C> <C> <C>
American Century VP
Income & Growth 0.70% N/A% 0.00% 0.70% N/A% 0.70%
American Century VP
International 1.34 N/A 0.00 1.34 N/A 1.34
AFIS Bond--Class 2 0.51 0.25 0.02 0.78 N/A 0.78
AFIS Global Growth--
Class 2 0.68 0.25 0.03 0.96 N/A 0.96
AFIS Growth--Class 2 0.38 0.25 0.01 0.64 N/A 0.64
AFIS Growth Income--
Class 2 0.34 0.25 0.01 0.60 N/A 0.60
AFIS High Yield Bond--
Class 2 0.50 0.25 0.01 0.76 N/A 0.76
AFIS U.S. Government/
AAA--Class 2 0.51 0.25 0.01 0.77 N/A 0.77
Baron Capital Asset(2) 1.00 0.25 0.63 1.88 (0.38) 1.50
Delaware Devon Standard
Class(3a) 0.65 N/A 0.10 0.75 N/A 0.75
Delaware High Yield
Standard Class(3b)
(formerly Delchester) 0.65 N/A 0.07 0.72 N/A 0.72
Delaware International
Equity
Standard Class(3c) 0.85 N/A 0.09 0.94 (0.02) 0.92
Delaware REIT Standard
Class(3d) 0.75 N/A 0.21 0.96 (0.11) 0.85
Delaware Small Value
Standard Class(3e) 0.75 N/A 0.10 0.85 N/A 0.85
Deutsche VIT EAFE
Index(4) 0.45 N/A 0.70 1.15 (0.50) 0.65
Deutsche VIT Equity 500
Index(4) 0.20 N/A 0.23 0.43 (0.13) 0.30
Deutsche VIT Small Cap
Index(4) 0.35 N/A 0.83 1.18 (0.73) 0.45
Fidelity VIP II Asset
Manager--Service
Class(5) 0.53 0.10 0.11 0.74 N/A 0.74
Fidelity VIP II
Contrafund--Service
Class(5) 0.58 0.10 0.10 0.78 N/A 0.78
Fidelity VIP Growth--
Service Class(5) 0.58 0.10 0.09 0.77 N/A 0.77
Fidelity VIP High
Income--Service
Class(5) 0.58 0.10 0.11 0.79 N/A 0.79
Fidelity VIP Overseas--
Service Class(5) 0.73 0.10 0.18 1.01 N/A 1.01
Franklin Small Cap--
Class 2(9a, b, d) 0.55 0.25 0.27 1.07 N/A 1.07
Janus Aspen Series
Aggressive Growth--
Institutional Shares(6) 0.65 N/A 0.02 0.67 N/A 0.67
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Total
Annual
Fund Total Fund
Operating Operating
Expenses Total Expenses
Without Waivers with
Management 12(b)1 Other Waivers or and Waivers and
Fund Fees(1) Fee Expenses Reductions Reductions Reductions
<S> <C> <C> <C> <C> <C> <C>
Janus Aspen Series
Balanced--Institutional
Shares(6) 0.65 N/A 0.02 0.67 N/A 0.67
Janus Aspen Series
Flexible Income--
Institutional Shares(6) 0.65 N/A 0.07 0.72 N/A 0.72
Janus Aspen Series Global
Technology--
Service Shares(6) 0.65 0.25 0.13 1.03 N/A 1.03
Janus Aspen Series
Worldwide Growth--
Institutional Shares(6) 0.65 N/A 0.05 0.70 N/A 0.70
LN Bond 0.45 N/A 0.08 0.53 N/A 0.53
LN Capital Appreciation 0.72 N/A 0.06 0.78 N/A 0.78
LN Equity-Income 0.72 N/A 0.07 0.79 N/A 0.79
LN Money Market 0.48 N/A 0.11 0.59 N/A 0.59
LN Social Awareness 0.33 N/A 0.05 0.38 N/A 0.38
MFS Capital
Opportunities(7) 0.75 N/A 0.27(1) 1.02 (0.11)(2) 0.91
MFS Research(7) 0.75 N/A 0.11(1) 0.86 N/A 0.86
MFS Total Return(7) 0.75 N/A 0.15(1) 0.90 N/A 0.90
MFS Utilities(7) 0.75 N/A 0.16(1) 0.91 N/A 0.91
Neuberger Berman AMT
Mid-Cap Growth(8) 0.85 N/A 0.23 1.08 (0.08) 1.00
Neuberger Berman AMT
Partners(8) 0.80 N/A 0.07 0.87 N/A 0.87
OCC Accum Trust
Managed 0.77 N/A 0.06 0.83 N/A 0.83
Oppenheimer MainStreet
Growth & Income 0.73 N/A 0.05 0.78 N/A 0.78
Templeton Asset Strategy
Class 2(9d, f) 0.60 0.25 0.18 1.03 N/A 1.03
Templeton Growth(9c, d, e)
Securities Class 2 0.83 0.25 0.05 1.13 N/A 1.13
Templeton International
Securities Class 2(9d, g) 0.69 0.25 0.19 1.13 N/A 1.13
</TABLE>
(1) Certain of the fund advisers reimburse the company for administrative costs
incurred in connection with administering the funds as variable funding
options under the contract. These reimbursements are generally paid out of
the management fees and are not charged to investors.
(2) The Adviser is contractually obligated to reduce its fee to the extent
required to limit Baron Capital Asset Fund's total operating expenses to
1.5% for the first $250 million of assets in the Fund, 1.35% for Fund
assets over $250 million and 1.25% for Fund assets over $500 million.
Without the expense limitations, total operating expenses for the Fund for
the period January 1, 1999 through December 31, 1999 would have been
1.88%.
(3) (a) The investment advisor for the Devon Series is Delaware Management
Company ("DMC"). Effective May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and reimburse each Series
for expenses to the extent that total expenses will not exceed 0.80%.
Under its Management Agreement, the Series pays a management fee based
on average daily net assets 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.
(b) The investment advisor for the High Yield Series is Delaware Management
Company ("DMC"). Effective May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and reimburse the Series
for expenses to the extent that total expenses will not
exceed 0.80%. Under its Management Agreement, the Series pays a
management fee based on average daily net assets 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.
8
<PAGE>
(c) The investment advisor for the International Equity Series is Delaware
International Advisers Ltd. ("DIAL"). Effective May 1, 2000 through
October 31, 2000, DIAL has voluntarily agreed to waive its management
fee and reimburse the Series for expenses to the extent that total
expenses will not exceed 0.95%. Without such an arrangement, the total
annual operating expenses for the Series would have been 0.94%. Under
its Management Agreement, the Series pays a management fee based on
average daily net assets 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.
(d) The investment advisor for the REIT Series is Delaware Management
Company ("DMC"). Effective May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and reimburse the Series
for expenses to the extent that total expenses will not exceed 0.85%.
Without such an arrangement, the total annual operating expenses for the
Series would have been 0.96%. Under its Management Agreement, the Series
pays a management fee based on average daily net assets 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.
(e) The investment advisor for the Small Cap Value Series is Delaware
Management Company ("DMC"). Effective May 1, 2000 through October 31,
2000, DMC has voluntarily agreed to waive its management fee and
reimburse the Series for expenses to the extent that total expenses will
not exceed 0.85%. Under its Management Agreement, the Series pays a
management fee based on average daily net assets 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.
(4) Under the Advisory Agreement with Bankers Trust Company (the "Advisor"),
the fund will pay an advisory fee at an annual percentage rate of 0.20% of
the average daily net assets of the Equity 500 Index Fund. These fees are
accrued daily and paid monthly. The Advisor has voluntarily undertaken to
waive its fee and to reimburse the fund for certain expenses so that the
fund's total operating expenses will not exceed 0.30% of average daily net
assets. Under the Advisory Agreement with the "Advisor", the Small Cap
Index Fund will pay an advisory fee at an annual percentage rate of 0.35%
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 that the fund's total
operating expenses will not exceed 0.45% of average daily net assets.
Under the Advisory Agreement the "Advisor", the EAFE Equity Index 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 that the fund's total
operating expenses will not exceed 0.65% of average daily net assets.
Without the reimbursement to the Funds for the year ended 12/31/99 total
expenses would have been 0.43% for the Equity 500 Index Fund, 1.18% for
the Small Cap Index Fund and 1.15% for the EAFE Equity Index Fund.
(5) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain
funds', or FMR on behalf of certain funds' custodian, credits realized as
a result of uninvested cash balances were used to reduce a portion of each
applicable fund's expenses. The total operating expenses, after
reimbursement would have been:
Growth 0.75% (service); Asset Manager 0.73% (service); Contrafund 0.75%
(service);
(6) Expenses (except for Global Technology Portfolio) are based upon expenses
for the fiscal year ended December 31, 1999, restated to reflect a
reduction in the management fee for Growth, Aggressive Growth, Worldwide
Growth, and Balanced Portfolios. Expenses for Global Technology Portfolio
are based on the estimated expenses that the Portfolio expects to incur in
its initial fiscal year. All expenses are shown without the effect of
expense offset arrangements.
(7) Each series has an expense offset arrangement which reduces the series'
custodian fee based on the amount of cash maintained by the series with
its custodian and dividend disbursing agent. Each series may enter into
other such arrangement and directed brokerage arrangements, which would
also have the effect of reducing the series' expenses. "Other Expenses" do
not take into account these expense reductions, and are therefore higher
than the actual expenses of the series. Had the fee reductions been taken
into account, "Net Expenses" would be lower for certain series and would
equal:
0.90% for Capital Opportunities Series
0.85% for Research Series
0.89% for Total Return Series
0.90% for Utilities Series
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MFS has contractually agreed, subject to reimbursement, to bear expenses for
the Capital Opportunities Series such that such series' "Other Expenses" (after
taking into account the expense offset arrangement described above), do not
exceed the 0.15% of the average daily net assets of the series during the
current fiscal year. This contractual fee arrangement will continue until at
least May 1, 2001, unless changed with the consent of the board of trustees
which oversees the series.
(8) Expenses reflect expense reimbursement. Neuberger Berman Management Inc.
("NBMI") has undertaken through May 1, 2001 to reimburse certain operating
expenses, including the compensation of NBMI and excluding taxes,
interest, extraordinary expenses, brokerage commissions and transaction
costs, that exceed in the aggregate, 1.0% of the AMT Mid-Cap Growth
Portfolio's average daily net asset value. Absent such reimbursement,
Total Annual Expenses for the portfolio for the year ended December 31,
1999 would have been 1.08%.
(9) (a) A merger and reorganization was approved that combined the fund with a
similar fund of Templeton Variable Products Series Fund.
(b) On 2/8/00, fund shareholders approved new management fees, effective
5/1/00. The table shows restated total expenses for the fund based on
the new fund fees and the combined assets of the two funds as of
12/31/99, even though the merger and the new fees did not become
effective until 5/1/00.
(c) The fund administration fee is paid indirectly through the management
fee.
(d) The fund's class 2 distribution plan or "rule 12b-1 plan" is described
in the fund's prospectus. While the maximum amount payable under the
fund's class 2 rule 12b-1 plan is 0.35% per year of the fund's average
daily net assets, the Board of Trustees of Franklin Templeton Variable
Insurance Products Trust has set the current rate at 0.25% per year.
(e) On 2/8/00, a merger and reorganization was approved that combined the
fund with a similar fund of the Templeton Variable Products Series Fund,
effective 5/1/00. The table shows total expenses based on the fund's
assets as of 12/31/99, and not the assets of the combined fund. However,
if the table reflected combined assets, the fund's expenses after
5/01/00 would be estimated as: Management Fees 0.80%, Distribution and
Service Fees 0.25%, Other Expenses 0.05% and Total Fund Operating
Expenses 1.10%.
(f) On 2/8/00, shareholders approved a merger and reorganization that
combined the fund with the Templeton Global Asset Allocation Fund,
effective 5/01/00. The shareholders of that fund had approved new
management fees, which apply to the combined fund effective 5/1/00. The
table shows restated total expenses based on the new fees and the assets
of the funds as of 12/31/99, and not the assets of the combined fund.
However, if the table reflected both the new fees and the combined
assets, the fund's expenses after 5/1/00 would be estimated as:
Management Fees 0.60%, Distribution and Service Fees 0.25%, Other
Expenses 0.14%, and Total Fund Operating Expenses 0.99%.
(g) On 2/8/00, shareholders approved a merger and reorganization that
combined the fund with the Templeton International Equity Fund,
effective 5/01/00. The shareholders of that fund had approved new
management fees, which apply to the combined fund effective 5/1/00. The
table shows restated total expenses based on the new fees and assets of
the fund as of 12/31/99, and not the shares of the combined fund.
However, if the table reflected both the new fees and the combined
assets, the fund's expenses after 5/1/00 would be estimated as:
Management Fees 0.65%, Distribution and Service Fees 0.25%, Other
Expenses 0.20%, and Total Fund Operating Expenses 1.10%.
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. Corporate Bond
Yield Average--Monthly Average Corporates) for the calendar month which ends two
months prior to the Policy Anniversary month, or 4.8% if greater.
The Loan Account Value will earn interest at an annual rate equal to the policy
loan interest rate less an annual rate, which we call a spread, not to exceed
0.80%. For the current spread see page 30.
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<PAGE>
Changes in Specified Amount
Within certain limits, you may increase or decrease the specified amount.
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 31.
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. 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
described in "Separate Account--Funds." 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.
11
<PAGE>
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 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 "Tax Issues"),
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
12
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further because of tax law requirements that the death benefit be a certain
multiple of Policy value, depending on the Insured's age (see "Death Benefit
Options").
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 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 Sub-Accounts of the Separate Account is invested solely in the
shares of one of the Funds available under the Policies. Each of the Funds, in
turn, is an investment portfolio of one of the trusts or corporations listed
below. A given fund may have a similar investment strategy to those of another
mutual fund managed by the same investment advisor or subadvisor. However,
because of timing of investments and other variables, we cannot guarantee that
there will be any correlation between the two investments. Even though the
management, strategy and the objectives of the funds are similar, the investment
results may vary.
The portfolios, their investment advisors and distributors, and the Funds within
each that are available under the Policies are:
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American Century Variable Products Group, Inc., managed and distributed by
American Century Investment Management, Inc., P.O. Box 419835, Kansas City, MO
64141-6385
American Century VP Income & Growth Fund
American Century VP International Fund
American Funds Insurance Series (also known as American Variable Insurance
Series) managed by Capital Research and Management Company and distributed by
American Funds Distributors, Inc., 333 South Hope Street, Los Angeles, CA 90071
AFIS Bond Fund--Class 2
AFIS Global Growth Fund--Class 2
AFIS Growth Fund--Class 2
AFIS Growth-Income Fund--Class 2
AFIS High-Yield Bond Fund--Class 2
AFIS U.S. Government/AAA Rated Securities Fund--Class 2
Baron Capital Funds Trust, managed by BAMCO, Inc. and distributed by Baron
Capital Inc., 767 Fifth Avenue, New York, NY 10153
Baron Capital Asset Fund--Insurance Shares
Delaware Group Premium Fund managed by Delaware Management Company, One Commerce
Square, Philadelphia, PA 19103 and for International, 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 Devon Series--Standard Class
Delaware Group High Yield Series (formerly Delchester Series)--Standard
Class
Delaware Group International Equity Series--Standard Class
Delaware Group REIT Series--Standard Class
Delaware Group Small Cap Value Series--Standard Class
Deutsche Asset Management VIT Funds Trust (formerly BT Insurance Funds Trust)
managed by Bankers Trust Company, 130 Liberty Street (One Bankers Trust Plaza),
New York, NY 10006 and distributed by Provident Distributors, Inc., Four Falls
Corporate Center, West Conshohocken, PA 19428
Deutsche VIT EAFE[RegTM] Equity Index Fund
Deutsche VIT Equity 500 Index Fund
Deutsche VIT Small Cap Index Fund
Fidelity Variable Insurance Products Fund, and Fidelity 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 High Income Portfolio--Service Class
Fidelity VIP Overseas Portfolio--Service Class
Fidelity VIP II Asset Manager Portfolio-Service Class
Fidelity VIP II Contrafund Portfolio-Service Class
Franklin Templeton Variable Insurance Products Trust, managed by Templeton
Investment Counsel, Inc., Broward Financial Centre, Suite 2100, Ft. Lauderdale,
FL 33394, and its Templeton and Franklin affiliates and distributed by
Franklin/Templeton Distributors, 777 Mariners Island Blvd., San Mateo, CA 94403.
Franklin Small Cap Fund-Class 2
Templeton Asset Strategy Fund-Class 2 (formerly Asset Allocation Fund)
Templeton Growth Securities Fund-Class 2 (formerly Stock Fund)
Templeton International Securities Fund-Class 2 (formerly International
Fund)
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Janus Aspen Series, managed by Janus Capital and distributed by Janus
Distributors, Inc., 100 Fillmore St., Denver, CO 80206-4928
Janus Aspen Series Aggressive Growth Portfolio--Institutional Shares
Janus Aspen Series Balanced Portfolio--Institutional Shares
Janus Aspen Series Flexible Income Portfolio--Institutional Shares
Janus Aspen Series Global Technology Portfolio--Service Shares
Janus Aspen Series Worldwide Growth Portfolio--Institutional Shares
Lincoln National Funds, managed by Lincoln Investment Management, Inc., 200
East Berry Street, Fort Wayne, IN 46802 and distributed by Lincoln Financial
Advisors, Corp., 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 Investment Advisors)
Lincoln Investment Management, Inc. (Lincoln Investment) has informed the funds
to which it provides advisory services that it intends to merge into a newly
created series of its affiliate, Delaware Management Business Trust, during the
second or third quarter of 2000. Lincoln Investment does not expect the merger
to result in any change in the level of advisory services that it currently
provides to these funds, although there may be some changes in, and additions
to, personnel. See the prospectuses for these funds for more information.
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
Neuberger Berman 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, 1345 Avenue of the Americas, New York, NY 10105
OCC Trust Managed Portfolio
OppenheimerFunds, managed by OppenheimerFunds, Inc., and distributed by
OppenheimerFunds, Distributors, Inc., Two World Trade Center, New York, NY 10048
Oppenheimer Main Street Growth and Income Fund/VA
The investment advisory fees charged the Funds by their advisors are shown on
pages 7 - 8.
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: Seeks dividend growth, current
income and capital appreciation by investing in a diversified portfolio of
U.S. stocks.
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o American Century VP International Fund: Seeks capital growth, by investing
primarily in an internationally diversified portfolio of common stocks that
are considered by management to have prospects for appreciation. The fund
will invest primarily in securities of issuers located in developed markets.
o AFIS Bond Fund--Class 2: The fund seeks to maximize your level of current
income and preserve your capital by investing primarily in bonds. The fund is
designed for investors seeking income and more price stability than stocks,
and capital preservation over the long-term.
o AFIS Global Growth Fund--Class 2: The fund seeks to make your investment grow
over time by investing primarily in common stocks of companies located around
the world. The fund is designed for investors seeking capital appreciation
through stocks. Investors in the fund should have a long-term perspective and
be able to tolerate potentially wide price fluctuations.
o AFIS Growth Fund--Class 2: The fund seeks to make your investment grow over
time by investing primarily in common stocks of companies that appear to
offer superior opportunities for growth of capital. The fund is designed for
investors seeking capital appreciation through stocks. Investors in the fund
should have a long-term perspective and be able to tolerate potentially wide
price fluctuations.
o AFIS Growth-Income Fund--Class 2: The fund seeks to make your investment
grow and provide you with income over time by investing primarily in common
stocks or other securities which demonstrate the potential for appreciation
and/or dividends. The fund is designed for investors seeking both capital
appreciation and income.
o AFIS High-Yield Bond Fund--Class 2: The fund seeks to provide you with a high
level of current income and secondarily capital appreciation by investing
primarily in lower quality debt securities (rated Ba or BB or lower by
Moody's Investors Services, Inc. or Standard & Poor's Corporation), including
those of non-U.S. issuers. The fund may also invest in equity securities that
provide an opportunity for capital appreciation.
o AFIS U.S. Government/AAA Rated Securities Fund--Class 2: The fund seeks to
provide you with a high level of current income, as well as preserve your
investment. The fund invests primarily in securities that are guaranteed by
the "full faith and credit" pledge of the U.S. Government and securities that
are rated AAA or Aaa by Moody's Investor's Services, Inc. or Standard &
Poor's Corporation or unrated but determined to be of equivalent quality.
o Baron Capital Asset Fund: The investment objective is to purchase stocks,
judged by the advisor, to have the potential of increasing their value at
least 50% over two subsequent years, although that goal may not be achieved.
o Delaware Group Devon Series --Standard Class: Seeks growth and income by
investing primarily in income-producing stocks that the manager believes have
the potential for above-average dividend increases over-time. This fund
blends traditional growth and value investment styles.
o Delaware Group High Yield Series--Standard Class (formerly Delchester
Series): Seeks total return and, as a secondary objective, high current
income. The Series invests in rated and unrated corporate bonds (including
high-risk, high-yield bonds commonly known as junk bonds), foreign bonds,
U.S. Government securities
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<PAGE>
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 International Equity Series--Standard Class: Seeks long-term
growth without undue risk to principal by investing primarily in foreign
company stocks with the potential for capital appreciation and income.
o Delaware Group REIT Series--Standard Class: Seeks to achieve maximum
long-term total return by investing primarily in the securities of real
estate investment trusts and real estate operating companies.
o Delaware Group Small Cap Value Series--Standard Class: Seeks growth by
investing primarily in stocks of small cap companies whose market values
appear low relative to underlying value or future earnings and growth
potential.
o Deutsche VIT EAFE[RegTM] Equity Index Fund: 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 Deutsche VIT Equity 500 Index Fund: 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 Deutsche VIT Small Cap Index Fund: 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 Fidelity VIP Growth Portfolio--Service Class: Seeks long-term capital
appreciation. The portfolio normally purchases common stocks.
o Fidelity VIP High Income Portfolio--Service Class: Seeks high current income
by investing at least 65% of total assets in income-producing debt
securities, with an emphasis on lower quality securities.
o Fidelity VIP Overseas Portfolio--Service Class: Seeks long term growth of
capital by investing mainly in foreign securities.
o Fidelity VIP II Asset Manager Portfolio--Service Class: Seeks high total
return with reduced risk over the long-term allocating its assets among
domestic and foreign stocks, bonds and money market instruments.
o Fidelity VIP II Contrafund Portfolio--Service Class: Seeks long-term capital
appreciation by investing primarily in securities of companies whose value
the adviser believes is not fully recognized by the public.
o Franklin Small Cap Fund--Class 2: Seeks long-term capital growth. It invests
primarily in equity securities of U.S. small cap growth companies. Small cap
companies are generally those with market cap values of less than $1.5
billion at time of purchase. Franklin Advisers, Inc. serves as the Fund's
investment advisor.
o Janus Aspen Series Aggressive Growth Portfolio--Institutional Shares: Seeks
long-term growth of capital. Pursues objective in common stocks selected for
their growth potential and normally invests at least 50% of its equity assets
in medium sized companies.
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o Janus Aspen Series Balanced Portfolio--Institutional Shares: 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 Flexible Income Portfolio--Institutional Shares: To seek
maximum total return, consistent with preservation of capital. Pursues
objective primarily through investments in income-producing securities.
o Janus Aspen Series Global Technology Portfolio--Service Shares: To seek
long-term growth of capital. The Portfolio invests primarily in equity
securities of U.S. and foreign companies selected for their growth potential.
Normally, it invests at least 65% of its total assets in securities or
companies that the portfolio manager believes will benefit significantly from
advancements or improvements in technology.
o Janus Aspen Series Worldwide Growth Portfolio--Institutional Shares: To seek
long-term growth of capital in a manner consistent with the preservation of
capital. Pursues objective by investing primarily in common stocks of
companies of any size throughout the world. The Portfolio normally invests in
issuers from at least 5 different countries, including the U.S. The Portfolio
may at times invest in fewer than five countries or even a single country.
o Lincoln National Bond Fund, Inc.: 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.: Seeks long-term growth of
capital in a manner consistent with preservation of capital. The fund
primarily buys stocks 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.: Seeks reasonable income by
investing primarily in income-producing equity securities. The fund invests
mostly in high-income stocks with some high-yielding bonds (including junk
bonds).
o Lincoln National Money Market Fund, Inc.: Seeks maximum current income
consistent with the preservation of capital. The fund invests in short-term
obligations issued by U.S. corporations; the U.S. Government; and federally
chartered banks and U.S. branches of foreign banks.
o Lincoln National Social Awareness Fund, Inc.: Long-term capital appreciation.
The fund buys stocks of established companies which adhere to certain
specified social criteria.
o MFS Research Series: Seeks to provide long-term growth of capital and future
income.
o MFS Total Return Series: Seeks primarily to provide 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 of capital and income.
o MFS Utilities Series: Seeks capital growth and current income (income above
that available from a portfolio invested entirely in equity securities).
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o MFS Capital Opportunities Series: Seeks capital appreciation.
o Neuberger Berman AMT Mid-Cap Growth Portfolio: Seeks capital appreciation by
investing primarily in common stocks of medium-capitalization companies,
using a growth-oriented investment approach.
o Neuberger Berman AMT Partners Portfolio: Seeks capital growth by investing
mainly in common stocks of mid- to large capitalization established companies
using the value-oriented investment approach. Neuberger Berman Management
Inc. serves as the Fund's investment adviser. Neuberger Berman, LLC serves as
the Fund's investment sub-adviser.
o OCC Accumulation Trust Managed Portfolio: Seeks to achieve 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 manager's assessments
of the relative outlook for such investments.
o Oppenheimer Main Street Growth and Income Fund/VA: 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 Strategy Fund--Class 2 (formerly Templeton Asset Allocation
Fund): Seeks a high level of total return. Invests in stocks of companies in
any nation, bonds of companies and governments of any nation and in money
market instruments, including emerging markets. Assets are allocated among
different investments depending upon worldwide market and economic
conditions.
o Templeton Growth Securities Fund--Class 2 (formerly Templeton Stock Fund):
Seeks long-term capital growth. It invests primarily in stocks of companies
in various nations throughout the world, including the U.S. and emerging
markets. Templeton Global Advisors Limited serves as the Fund's investment
advisor.
o Templeton International Securities Fund--Class 2 (formerly Templeton
International Fund): Seeks long-term capital growth. It invests primarily in
stocks of companies outside the United States, including emerging markets.
Templeton Investment Counsel, Inc. serves as the Fund's investment adviser.
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.
Lincoln Life has entered into agreements with the various trusts or corporations
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 .10% to .40% of assets in a particular Fund attributable to the
Policies.
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<PAGE>
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 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.
Substitution of Securities
If the shares of any Fund should no longer be available for investment by the
Separate Account or if, in our judgment, further investment in such shares
should cease to be appropriate in view of the purpose of the Separate Account or
in view of legal, regulatory or federal income tax restrictions, we may
substitute shares of another Fund. There will be no substitution of securities
in any Sub-Account without prior approval of the Commission. Substitute funds
may have higher charges than the funds being replaced.
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
For all cases, the premium load is guaranteed to be no higher than the amounts
shown in the following table:
<TABLE>
<CAPTION>
For the Portion of For the Portion of
Premiums Paid up to Premiums Paid greater than
Target Premium -- Target Premium --
load as a percentage load as a percentage
Policy Year(s) of that portion of that portion
- ---------------- ---------------------- ---------------------------
<S> <C> <C>
1 12.0% 5.0%
2-5 9.0% 5.0%
6 and after 5.0% 5.0%
</TABLE>
2. Current Premium Load
The current premium load for cases with average annual planned premiums of
$100,000 or greater but less than $1,000,000, is shown in the following table:
<TABLE>
<CAPTION>
For the Portion of For the Portion of
Premiums Paid up to Premiums Paid greater than
Target Premium -- Target Premium --
load as a percentage load as a percentage
Policy Year(s) of that portion of that portion
- ---------------- ---------------------- ---------------------------
<S> <C> <C>
1 10.50% 2.50%
2-5 7.50% 1.50%
6-7 3.50% 1.50%
8 and after 1.50% 1.50%
</TABLE>
20
<PAGE>
The current premium load for cases with average annual planned premiums of
$1,000,000 or greater, is shown in the following table:
<TABLE>
<CAPTION>
For the Portion of For the Portion of
Premiums Paid up to Premiums Paid greater than
Target Premium -- Target Premium --
load as a percentage load as a percentage
Policy Year(s) of that portion of that portion
- ---------------- ---------------------- ---------------------------
<S> <C> <C>
1 7.50% 1.00%
2 6.00% 1.00%
3-5 3.50% 1.00%
6 and after 1.50% 1.00%
</TABLE>
Premium Load Refund
In certain circumstances described below, if you surrender your policy within 60
months after Date of Issue, 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. This refund is
not guaranteed and is not available if your Policy is in default. There is no
refund after 60 months.
Currently, for cases with average annual planned premiums of $100,000 or greater
but less than $1,000,000, if a policy is 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 plus the Premium Tax Charge. For months 13 through 24,
the refund is 75% of the First Policy Year refund amount.
Currently, for cases with average annual planned premiums of $1,000,000 or
greater, if a policy is surrendered during the first twelve months after the
Date of Issue, the refund is 7.50% of premium paid in the first Policy Year up
to the Target Premium and 1% of premium paid in the first Policy Year above
Target Premium plus the premium tax charge. For months 13 through 60, the refund
is 100% 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
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<PAGE>
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, for cases with average annual planned premiums of $100,000 or greater
but less than $1,000,000, the mortality and expense risk charge on an annualized
basis equals the following percentage of policy value in the Separate Account:
<TABLE>
<CAPTION>
Annualized Mortality and
Policy Years Expense Risk Charge
- --------------------- -------------------------
<S> <C>
1-10 0.70%
11 and after 0.35%
</TABLE>
Currently, for cases with annual planned premiums of $1,000,000 or greater, the
mortality and expense risk charge on an annualized basis equals the following
percentage of policy value in the Separate Account:
<TABLE>
<CAPTION>
Annualized Mortality and
Policy Years Expense Risk Charge
- --------------------- -------------------------
<S> <C>
1-10 0.40%
11-20 0.20%
21 and after 0.10%
</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 0.80% of average daily net assets
on an annualized basis.
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
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<PAGE>
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 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.")
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<PAGE>
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 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
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<PAGE>
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 670% at Attained Age 20 to 350% 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 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
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<PAGE>
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 at 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 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
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<PAGE>
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.
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:
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<PAGE>
o multiplying the Fund shares owned by the Variable Sub-Account at the
beginning of the business day by 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. If you make a full surrender, all coverage under the Policy
will automatically terminate and may not be reinstated.
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"):
A partial surrender will reduce the Total Account Value and the Death Benefit,
but it will not reduce the Specified Amount.
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<PAGE>
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.
If the Specified Amount changes, the Premium required to maintain the Guaranteed
Death Benefit also changes. The new required Premium will be determined by the
new Specified Amount.
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, unless your Policy is continued under the Guaranteed Death
Benefit.
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.
Guaranteed Death Benefit
The Guaranteed Death Benefit assures that as long as the guaranteed death
benefit premium test, as described below, is met, the Policy will stay in force
even if the Surrender Value is insufficient to cover current monthly deductions.
The guaranteed death benefit premium is a specified amount of premium required
to keep the Policy in force to age 100 of the Insured.
We will test annually to determine if the sum of all premiums paid to date is
sufficient to support the guaranteed death benefit then in effect. In order for
the guaranteed death benefit to be in effect, the cumulative premiums paid less
partial surrenders must be greater than or equal to the required monthly
guaranteed death benefit premium times the number of months elapsed since the
Policy's date of issue.
If these premiums are deficient, the Policy owner will be notified and given 61
days to pay the amount deficient. If the amount deficient is not received within
the 61-day period, the guaranteed death benefit will terminate.
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<PAGE>
The guaranteed death benefit may not be available to all risk classes. If the
guaranteed death benefit is terminated it may not be reinstated.
Increases, decreases, partial surrenders, and death benefit options changes may
affect the guaranteed death benefit premium. These events and loans may also
affect the Policy's ability to remain in force even if the cumulative annual
guaranteed death benefit test has been met.
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:
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 4.8%
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 policy
loan interest rate less an annual rate, which we call a spread, not to exceed
0.80%. In other words:
Annual Loan Interest earned = policy loan interest rate - spread
Currently, the spread is the following:
o For cases with average annual planned premiums of $100,000 or greater but
less than $1,000,000:
<TABLE>
<S> <C>
Years 1-10 0.70%
Years 11 and thereafter 0.35%
</TABLE>
o For cases with average annual planned premiums of $1,000,000 or greater:
<TABLE>
<S> <C>
Years 1-10 0.40%
Years 11-20 0.20%
Years 20 and thereafter 0.10%
</TABLE>
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<PAGE>
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 with
our consent; 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 fifth Policy Year may be subject to
approval of this feature by state regulatory agencies and is subject to the
Company's satisfaction that the decrease is intended to meet a legitimate,
non-insurance related business need of the Policy owner.
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 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 greater of zero or 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.
Increases in the Specified Amount will increase the Guaranteed Death Benefit
Premium and decreases will decrease this premium. The premium required to
maintain the Guaranteed Death Benefit will be based on the new Specified Amount.
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,
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<PAGE>
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.
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.
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<PAGE>
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 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
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<PAGE>
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. However, term coverage does
not have an associated Account Value. 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.
<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]), The Lincoln National Life
Insurance Company.
Roland C. Baker Vice President [1/95-present], The Lincoln National Life
Vice President Insurance Co., President and Director, First Penn Pacific
1801 S. Meyers Road Life Insurance Company.
Oakbrook Terrace, IL 60181
Jon A. Boscia President, Chief Executive Officer and Director, Lincoln
President and Director National Corporation [1/98-present] Formerly: President,
1500 Market Street Chief Executive Officer and Director [10/96-1/98] and
Suite 3900 President and Chief Operating Officer [5/94-10/96]. The
Philadelphia, PA Lincoln National Life Insurance Company.
19102
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Name, Address and
Position(s) with Registrant Principal Occupations Last Five Years
- ----------------------------- ---------------------------------------------------------
<S> <C>
Janet Chrzan Senior Vice President, Chief Financial Officer and
Senior Vice President, Director (4/00-present) The Lincoln National Life
Chief Financial Insurance Company. Formerly: Vice President and
Officer and Director Treasurer, Lincoln National Corporation.
1500 Market Street
Suite 3900
Philadelphia, PA
19102
John H. Gotta Chief Executive Officer of Life Insurance, Senior Vice
Chief Executive President and Assistant Secretary [12/99-present] The
Officer of Life Lincoln National Life Insurance Company. Formerly:
Insurance, Senior Senior Vice President and Assistant Secretary
Vice President and [4/98-12/99]; Senior Vice President [2/98-4/98]; Vice
Assistant Secretary President and General Manager [1/98-2/98] The
350 Church Street Lincoln National Life Insurance Co. Formerly: Senior
Hartford, CT 06103 Vice President, Connecticut General Life Insurance
Company [3/96-12/97]; Vice President, Connecticut
(Massachusetts Mutual) Mutual Life Insurance
Company [8/94-3/96].
J. Michael Hemp President and Director [7/97-Present], Lincoln Financial
Senior Vice President Advisors Inc.; Senior Vice President [formerly Vice
350 Church Street President] [10/95-Present], The Lincoln National Life
Hartford, CT 06103 Insurance Company.
Stephen H. Lewis Interim Chief Executive Officer of Annuities and Senior
Interim Chief Vice President, [12/99-present], Formerly: Senior Vice
Executive Officer President, [5/94-12/99] The Lincoln National Life
and Senior Vice Insurance Company.
President of Annuities
H. Thomas McMeekin President and Director 5/94-present, Lincoln Investment
Director Management, Inc.
One Commerce Square
2005 Market Street
Philadelphia, PA 19013
Gary W. Parker Senior Vice President, [4/00-present], Vice President
Senior Vice President Product Management, [7/98-4/00] The Lincoln National
350 Church Street Life Insurance Company Formerly: Senior Vice
Hartford, CT 06103 President, Life Products [10/97-6/98]; Marketing
Services [9/89-10/97] Life of Virginia.
Lawrence T. Rowland Executive Vice President [10/96-present] Formerly:
Executive Vice Senior Vice President [1/93-10/96]), The Lincoln
President and National Life Insurance Co. Chairman, Chief Executive
Director Officer, President and Director [10/96-present],
One Reinsurance Place Formerly: Senior Vice President [10/95-10/96]
1700 Magnavox Way
Fort Wayne, IN 46802
Keith J. Ryan Vice President, Controller and Chief Accounting Officer
Vice President, [1/96-present] The Lincoln National Life Insurance
Controller and Company.
Chief Accounting
Officer
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Name, Address and
Position(s) with Registrant Principal Occupations Last Five Years
- ----------------------------- -----------------------------------------------------
<S> <C>
Richard C. Vaughan Executive Vice President and Chief Financial Officer
Director [1/95-present] The Lincoln National Life Insurance
Centre Square Company.
West Tower
1500 Market Street
Suite 3900
Philadelphia, PA 19102
Michael R. Walker Senior Vice President [1/98-present], Vice President
Senior Vice President [1/96-1/98] The Lincoln National Life Insurance
350 Church Street Company Formerly: Vice President [3/93-1/96],
Hartford, CT 06103 Employers Health Insurance Co.
Roy V. Washington Vice President [7/96-present], formerly, Associate
Vice President Counsel [2/95-7/96] The Lincoln National Life
Insurance Company.
</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. To determine how many votes
each policy owner is entitled to direct with respect to a Fund, first we will
calculate the dollar amount of your account value attributable to that Fund.
Second, we will divide that amount by $100.00. The result is the number of votes
you may direct. The votes will be cast at meetings of the shareholders of the
Fund and will be based on instructions received from 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
36
<PAGE>
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 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 several lawsuits in which Plaintiffs seek to
represent national classes of policyholders in connection with alleged fraud,
breach
37
<PAGE>
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 Corporation 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
information required to be given will be provided by Andesa on behalf of the
Company.
Experts
The financial statements of the Separate Account and the statutory-basis
financial statements of Lincoln Life appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports which also appear elsewhere in this
document and in the registration statement. The financial statements audited by
Ernst & Young LLP have been included in this document in reliance on their
reports given on their authority as experts in accounting and auditing.
38
<PAGE>
Actuarial matters included in this prospectus have been examined by Ronald D.
Franzluebbers, FSA as stated in the opinion filed as an exhibit to the
registration statement.
Legal matters in connection with the Policies described herein are being passed
upon by Robert A. Picarello, Esq., as stated in the opinion filed as an exhibit
to the registration statement.
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.
TAX ISSUES
Introduction. The Federal income tax treatment of the policy is complex and
sometimes uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion does not include all the Federal income tax rules
that may affect you and your policy, and is not intended as tax advice. This
discussion also does not address other Federal tax consequences, or state or
local tax consequences, associated with the policy. As a result, you should
always consult a tax adviser about the application of tax rules to your
individual situation.
Taxation Of Life Insurance Contracts In General
Tax Status of the Policy. Section 7702 of the Code establishes a statutory
definition of life insurance for Federal tax purposes. We believe that the
policy will meet the statutory definition of life insurance, which places
limitations on the amount of premium payments that may be made and the contract
values that can accumulate relative to the death benefit. As a result, the death
benefit payable under the policy will generally be excludable from the
beneficiary's gross income, and interest and other income credited under the
policy will not be taxable unless certain withdrawals are made (or are deemed to
be made) from the policy prior to the insured's death, as discussed below. This
tax treatment will only apply, however, if (1) the investments of the Separate
Account are "adequately diversified" in accordance with Treasury Department
regulations, and (2) we, rather than you, are considered the owner of the assets
of the Separate Account for Federal income tax purposes.
Investments in the Separate Account must be diversified. For a policy to be
treated as a life insurance contract for Federal income tax purposes, the
investments of
39
<PAGE>
the Separate Account must be "adequately diversified." IRS regulations define
standards for determining whether the investments of the Separate Account are
adequately diversified. If the Separate Account fails to comply with these
diversification standards, you could be required to pay tax currently on the
excess of the contract value over the contract premium payments. Although we do
not control the investments of the subaccounts, we expect that the subaccounts
will comply with the IRS regulations so that the Separate Account will be
considered "adequately diversified."
Restriction on investment options. Federal income tax law limits your right to
choose particular investments for the policy. Because the IRS has not issued
guidance specifying those limits, the limits are uncertain and your right to
allocate contract values among the subaccounts may exceed those limits. If so,
you would be treated as the owner of the assets of the Separate Account and thus
subject to current taxation on the income and gains from those assets. We do not
know what limits may be set by the IRS in any guidance that it may issue and
whether any such limits will apply to existing policies. We reserve the right to
modify the policy without your consent to try to prevent the tax law from
considering you as the owner of the assets of the Separate Account.
No guarantees regarding tax treatment. We make no guarantee regarding the tax
treatment of any policy or of any transaction involving a policy. However, the
remainder of this discussion assumes that your policy will be treated as a life
insurance contract for Federal income tax purposes and that the tax law will not
impose tax on any increase in your contract value until there is a distribution
from your policy.
Tax treatment of life insurance death benefit proceeds. In general, the amount
of the death benefit payable from a policy because of the death of the insured
is excludable from gross income. Certain transfers of the policy for valuable
consideration, however, may result in a portion of the death benefit being
taxable. If the death benefit is not received in a lump sum and is, instead,
applied under one of the settlement options, payments generally will be prorated
between amounts attributable to the death benefit which will be excludable from
the beneficiary's income and amounts attributable to interest (accruing after
the insured's death) which will be includible in the beneficiary's income.
Tax deferral during accumulation period. Under existing provisions of the Code,
except as described below, any increase in your contract value is generally not
taxable to you unless amounts are received (or are deemed to be received) from
the policy prior to the insured's death. If there is a total withdrawal from the
policy, the surrender value will be includible in your income to the extent the
amount received exceeds the "investment in the contract." (If there is any debt
at the time of a total withdrawal, such debt will be treated as an amount
received by the owner.) The "investment in the contract" generally is the
aggregate amount of premium payments and other consideration paid for the
policy, less the aggregate amount received under the policy previously to the
extent such amounts received were excludable from gross income. Whether partial
withdrawals (or other amounts deemed to be distributed) from the policy
constitute income to you depends, in part, upon whether the policy is considered
a "modified endowment contract" (a "MEC") for Federal income tax purposes.
Policies Which Are MECS
Characterization of a policy as a MEC. A policy will be classified as a MEC if
premiums are paid more rapidly than allowed by a "7-pay test" under the tax law
40
<PAGE>
or if the policy is received in exchange for another policy that is a MEC. In
addition, even if the policy initially is not a MEC, it may in certain
circumstances become a MEC. These circumstances would include a later increase
in benefits, any other material change of the policy (within the meaning of the
tax law), and a withdrawal or reduction in the death benefit during the first
seven contract years.
Tax treatment of withdrawals, loans, assignments and pledges under MECs. If the
policy is a MEC, withdrawals from the policy will be treated first as
withdrawals of income and then as a recovery of premium payments. Thus,
withdrawals will be includible in income to the extent the contract value
exceeds the investment in the policy. The Code treats any amount received as a
loan under a policy, and any assignment or pledge (or agreement to assign or
pledge) any portion of your contract value, as a withdrawal of such amount or
portion. Your investment in the policy is increased by the amount includible in
income with respect to such assignment, pledge, or loan.
Penalty taxes payable on withdrawals. A 10% penalty tax may be imposed on any
withdrawal (or any deemed distribution) from your MEC which you must include in
your gross income. The 10% penalty tax does not apply if one of several
exceptions exists. These exceptions include withdrawals or surrenders that: you
receive on or after you reach age 59 1/2, you receive because you became
disabled (as defined in the tax law), or you receive as a series of
substantially equal periodic payments for your life (or life expectancy).
Special rules if you own more than one MEC. In certain circumstances, you must
combine some or all of the life insurance contracts which are MECs that you own
in order to determine the amount of withdrawal (including a deemed withdrawal)
that you must include in income. For example, if you purchase two or more MECs
from the same life insurance company (or its affiliates) during any calendar
year, the Code treats all such policies as one contract. Treating two or more
policies as one contract could affect the amount of a withdrawal (or a deemed
withdrawal) that you must include in income and the amount that might be subject
to the 10% penalty tax described above.
Policies Which Are Not MECS
Tax treatment of withdrawals. If the policy is not a MEC, the amount of any
withdrawal from the policy will generally be treated first as a non-taxable
recovery of premium payments and then as income from the policy. Thus, a
withdrawal from a policy that is not a MEC will not be includible in income
except to the extent it exceeds the investment in the policy immediately before
the withdrawal.
Certain distributions required by the tax law in the first 15 policy years.
Section 7702 places limitations on the amount of premium payments that may be
made and the contract values that can accumulate relative to the death benefit.
Where cash distributions are required under Section 7702 in connection with a
reduction in benefits during the first 15 years after the policy is issued (or
if withdrawals are made in anticipation of a reduction in benefits, within the
meaning of the tax law, during this period), some or all of such amounts may be
includible in income. A reduction in benefits may occur when the face amount is
decreased, withdrawals are made, and in certain other instances.
Tax treatment of loans. If your policy is not a MEC, a loan you receive under
the policy is generally treated as your indebtedness. As a result, no part of
any loan
41
<PAGE>
under such a policy constitutes income to you so long as the policy remains in
force. Nevertheless, in those situations where the interest rate credited to the
loan account equals the interest rate charged to you for the loan, it is
possible that some or all of the loan proceeds may be includible in your income.
If a policy lapses (or if all contract value is withdrawn) when a loan is
outstanding, the amount of the loan outstanding will be treated as withdrawal
proceeds for purposes of determining whether any amounts are includible in the
your income.
Other Considerations
Insured lives past age 100. If the insured survives beyond the end of the
mortality table used to measure charges under the policy, which ends at age 100,
we believe the policy will continue to qualify as life insurance for Federal tax
purposes. However, there is some uncertainty regarding this treatment, and it is
possible that you would be viewed as constructively receiving the cash value in
the year the insured attains age 100.
Compliance with the tax law. We believe that the maximum amount of premium
payments we have determined for the policies will comply with the Federal tax
definition of life insurance. We will monitor the amount of premium payments,
and, if the premium payments during a contract year exceed those permitted by
the tax law, we will refund the excess premiums within 60 days of the end of the
policy year and will pay interest and other earnings (which will be includible
in income subject to tax) as required by law on the amount refunded. We also
reserve the right to increase the death benefit (which may result in larger
charges under a policy) or to take any other action deemed necessary to maintain
compliance of the policy with the Federal tax definition of life insurance.
Disallowance of interest deductions. If an entity (such as a corporation or a
trust, not an individual) purchases a policy or is the beneficiary of a policy
issued after June 8, 1997, a portion of the interest on indebtedness unrelated
to the policy may not be deductible by the entity. However, this rule does not
apply to a policy owned by an entity engaged in a trade or business which covers
the life of an individual who is a 20-percent owner of the entity, or an
officer, director, or employee of the trade or business, at the time first
covered by the policy. This rule also does not apply to a policy owned by an
entity engaged in a trade or business which covers the joint lives of the 20%
owner of the entity and the owner's spouse at the time first covered by the
policy.
Federal income tax withholding. We will withhold and remit to the IRS a part of
the taxable portion of each distribution made under a policy unless you notify
us in writing at or before the time of the distribution that tax is not to be
withheld. Regardless of whether you request that no taxes be withheld or whether
the Company withholds a sufficient amount of taxes, you will be responsible for
the payment of any taxes and early distribution penalties that may be due on the
amounts received. You may also be required to pay penalties under the estimated
tax rules, if your withholding and estimated tax payments are insufficient to
satisfy your total tax liability.
Changes In The Policy Or Changes In The Law. Changing the owner, exchanging the
contract, and other changes under the policy may have tax consequences (in
addition to those discussed herein) depending on the circumstances of such
change. The above discussion is based on the Code, IRS regulations, and
interpretations existing
42
<PAGE>
on the date of this Prospectus. However, Congress, the IRS, and the courts may
modify these authorities, sometimes retroactively.
Tax Status Of Lincoln Life
Under existing Federal income tax laws, Lincoln Life does not pay tax on
investment income and realized capital gains of the Separate Account. Lincoln
Life does not expect that it will incur any Federal income tax liability on the
income and gains earned by the Separate Account. We, therefore, do not impose a
charge for Federal income taxes. If Federal income tax law changes and we must
pay tax on some or all of the income and gains earned by the Separate Account,
we may impose a charge against the Separate Account to pay the taxes.
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.
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.
43
<PAGE>
Coverage Beyond Maturity
We will continue coverage beyond the Maturity Date if: (1) your Cash Surrender
Value remains positive; and (2) you do not select a Settlement Option under the
policy. The Maturity Date for this Policy is the Policy Anniversary nearest the
Insured's 100th birthday.
Under Coverage Beyond Maturity, at the Maturity Date we will transfer the
Separate Account Value to the Fixed Account. We will then continue to pay
interest on the Total Account Value of the Policy as described in Policy
Values--Interest Credited.
Where permitted by law we will continue to charge you Monthly Deductions, except
that we will not charge you any Cost of Insurance. In addition, Loan Interest on
any loans outstanding on the Maturity Date will continue to accrue. Coverage
Beyond Maturity is not available if you select the Paid-Up Non-Forfeiture
Option. Also, the Paid-Up Non-Forfeiture Option will not be available once this
Coverage Beyond Maturity provision takes effect.
At this time, uncertainties exist about the tax treatment of the Policy if it
should continue beyond the Maturity Date. Therefore, you should consult your tax
advisor before the Policy becomes eligible for Coverage Beyond Maturity.
Nonparticipation
The Policy is not entitled to share in the divisible surplus of the Company. No
dividends are payable.
44
<PAGE>
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 0.80% on
an annual basis, the maximum allowable premium load of 12% up to the first
year's Target Premium and 5% over the Target Premium, are assessed in the first
Policy Year; the maximum allowable premium load of 9% up to the second year's
Target Premium and 5% over the Target Premium, are assessed in the second
through fifth Policy Year and 5% 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 0.40% on an annual basis for the
first 10 policy years, 0.20% for policy years 11-20, and 0.10% for policy years
11 and thereafter, the current premium load of 7.50% up to the first policy
year's target premium and 1.0% over the target premium, the current premium load
of 6.0% up to the second policy year's target premium and 1.0% over the target
premium, the current premium load of 3.50% up to the third through the fifth
years' target premiums and 1.0% over the target premiums, the current premium
load of 1.50% up to the sixth and later years' target premiums and 1.0% over the
target premiums.
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.
45
<PAGE>
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 2.20% on all
premium. After deduction of these amounts, the illustrated net annual return is
- -1.61%, 4.39%, and 10.39% on a maximum charge basis for all years. The
illustrated net annual return on a current charge basis is -1.21%, 4.79% and
10.79% for Policy Years 1-10, -1.01%, 4.99% and 10.99% for Policy Years 11-20
and -0.91%, 5.09% and 11.09% for years 21+.
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 .81% of the daily net asset value of the Variable
Account. This rate reflects an arithmetic average of total Fund portfolio annual
expenses for the year ending December 31, 1999.
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%.
46
<PAGE>
Table I
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
UNISEX ISSUE AGE 45 NONSMOKER RISK
SIMPLIFIED ISSUE
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM TEST
FACE AMOUNT $502,000
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 10,500 502,000 502,000 502,000 6,196 6,639 7,082 7,166 7,609 8,052
2 21,525 502,000 502,000 502,000 12,446 13,738 15,087 13,416 14,708 16,057
3 33,101 502,000 502,000 502,000 18,446 21,002 23,777 19,416 21,972 24,747
4 45,256 502,000 502,000 502,000 24,200 28,438 33,231 25,170 29,408 34,201
5 58,019 502,000 502,000 502,000 29,687 36,034 43,509 30,657 37,004 44,479
6 71,420 502,000 502,000 502,000 35,296 44,208 55,143 35,296 44,208 55,143
7 85,491 502,000 502,000 502,000 40,603 52,547 67,818 40,603 52,547 67,818
8 100,266 502,000 502,000 502,000 45,590 61,041 81,637 45,590 61,041 81,637
9 115,779 502,000 502,000 502,000 50,226 69,668 96,708 50,226 69,668 96,708
10 132,068 502,000 502,000 502,000 54,484 78,413 113,161 54,484 78,413 113,161
15 226,575 502,000 502,000 502,000 69,640 123,906 222,858 69,640 123,906 222,858
20 347,193 502,000 502,000 502,000 71,733 171,647 405,754 71,733 171,647 405,754
25 501,136 502,000 502,000 823,774 51,931 218,672 710,150 51,931 218,672 710,150
30 697,610 0 502,000 1,283,237 0 261,858 1,199,287 0 261,858 1,199,287
20 (Age 65) 347,193 502,000 502,000 502,000 71,733 171,647 405,754 71,733 171,647 405,754
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
47
<PAGE>
Table II
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
UNISEX ISSUE AGE 45 NONSMOKER RISK
SIMPLIFIED ISSUE
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM TEST
FACE AMOUNT $502,000
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 10,500 502,000 502,000 502,000 7,818 8,325 8,832 8,788 9,295 9,802
2 21,525 502,000 502,000 502,000 15,590 17,104 18,680 16,560 18,074 19,650
3 33,101 502,000 502,000 502,000 23,385 26,435 29,738 24,355 27,405 30,708
4 45,256 502,000 502,000 502,000 30,930 36,059 41,836 31,900 37,029 42,806
5 58,019 502,000 502,000 502,000 38,257 46,022 55,127 39,277 46,992 56,097
6 71,420 502,000 502,000 502,000 45,595 56,583 69,997 45,595 56,583 69,997
7 85,491 502,000 502,000 502,000 52,764 67,583 86,425 52,764 67,583 86,425
8 100,266 502,000 502,000 502,000 59,781 79,063 104,605 59,781 79,063 104,605
9 115,779 502,000 502,000 502,000 66,640 91,041 124,733 66,640 91,041 124,733
10 132,068 502,000 502,000 502,000 73,291 103,498 146,988 73,291 103,498 146,988
15 226,575 502,000 502,000 502,000 103,194 174,473 301,900 103,194 174,473 301,900
20 347,193 502,000 502,000 690,365 125,690 262,046 565,873 125,690 262,046 565,873
25 501,136 502,000 502,000 1,173,701 143,419 378,108 1,011,812 143,419 378,108 1,011,812
30 697,610 502,000 570,623 1,882,793 149,768 533,293 1,759,619 149,768 533,293 1,759,619
20 (Age 65) 347,193 502,000 502,000 690,365 125,690 262,046 565,873 125,690 262,046 565,873
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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 III
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
UNISEX ISSUE AGE 45 NONSMOKER RISK
GUARANTEED ISSUE
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM TEST
FACE AMOUNT $502,000
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 10,500 502,000 502,000 502,000 6,196 6,639 7,082 7,166 7,609 8,052
2 21,525 502,000 502,000 502,000 12,446 13,738 15,087 13,416 14,708 16,057
3 33,101 502,000 502,000 502,000 18,446 21,002 23,777 19,416 21,972 24,747
4 45,256 502,000 502,000 502,000 24,200 28,438 33,231 25,170 29,408 34,201
5 58,019 502,000 502,000 502,000 29,687 36,034 43,509 30,657 37,004 44,479
6 71,420 502,000 502,000 502,000 35,296 44,208 55,143 35,296 44,208 55,143
7 85,491 502,000 502,000 502,000 40,603 52,547 67,818 40,603 52,547 67,818
8 100,266 502,000 502,000 502,000 45,590 61,041 81,637 45,590 61,041 81,637
9 115,779 502,000 502,000 502,000 50,226 69,688 96,708 50,226 69,668 96,708
10 132,068 502,000 502,000 502,000 54,484 78,413 113,161 54,484 78,413 113,161
15 226,575 502,000 502,000 502,000 69,640 123,906 222,858 69,640 123,906 222,858
20 347,193 502,000 502,000 502,000 71,733 171,647 405,754 71,733 171,647 405,754
25 501,136 502,000 502,000 823,774 51,931 218,672 710,150 51,931 218,672 710,150
30 697,610 0 502,000 1,283,237 0 261,858 1,199,267 0 261,858 1,199,287
20 (Age 65) 347,193 502,000 502,000 502,000 71,733 171,647 405,754 71,733 171,647 405,754
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
49
<PAGE>
Table IV
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
UNISEX ISSUE AGE 45 NONSMOKER RISK
GUARANTEED ISSUE
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM TEST
FACE AMOUNT $502,000
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 10,500 502,000 502,000 502,000 7,623 8,123 8,624 8,593 9,093 9,594
2 21,525 502,000 502,000 502,000 15,205 16,694 18,246 16,175 17,664 19,216
3 33,101 502,000 502,000 502,000 22,853 25,851 29,097 23,823 26,821 30,067
4 45,256 502,000 502,000 502,000 30,327 35,366 41,044 31,297 36,336 42,014
5 58,019 502,000 502,000 502,000 37,632 45,267 54,219 38,602 46,237 55,189
6 71,420 502,000 502,000 502,000 44,970 55,784 68,982 44,970 55,784 68,982
7 85,491 502,000 502,000 502,000 52,138 66,736 85,290 52,138 66,736 85,290
8 100,266 502,000 502,000 502,000 59,134 78,145 103,317 59,134 78,145 103,317
9 115,779 502,000 502,000 502,000 65,943 90,021 123,248 65,943 90,021 123,248
10 132,068 502,000 502,000 502,000 72,546 102,373 145,287 72,546 102,373 145,287
15 226,575 502,000 502,000 502,000 102,447 172,972 298,921 102,447 172,972 298,921
20 347,193 502,000 502,000 684,179 124,944 260,032 560,803 124,944 260,032 560,803
25 501,136 502,000 502,000 1,163,867 142,655 375,353 1,003,334 142,655 375,353 1,003,334
30 697,610 502,000 566,688 1,867,592 148,937 529,615 1,745,413 148,937 529,615 1,745,413
20 (Age 65) 347,193 502,000 502,000 684,179 124,944 260,032 560,803 124,944 260,032 560,803
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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 V
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
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 $502,000
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 10,500 502,000 502,000 502,000 6,196 6,639 7,082 7,166 7,609 8,052
2 21,525 502,000 502,000 502,000 12,446 13,738 15,087 13,416 14,708 16,057
3 33,101 502,000 502,000 502,000 18,446 21,002 23,777 19,416 21,972 24,747
4 45,256 502,000 502,000 502,000 24,200 28,438 33,231 25,170 29,408 34,201
5 58,019 502,000 502,000 502,000 29,687 36,034 43,509 30,657 37,004 44,479
6 71,420 502,000 502,000 502,000 35,296 44,208 55,143 35,296 44,208 55,143
7 85,491 502,000 502,000 502,000 40,603 52,547 67,818 40,603 52,547 67,818
8 100,266 502,000 502,000 502,000 45,590 61,041 81,637 45,590 61,041 81,637
9 115,779 502,000 502,000 502,000 50,226 69,668 96,708 50,226 69,668 96,708
10 132,068 502,000 502,000 502,000 54,484 78,413 113,161 54,484 78,413 113,161
15 226,575 502,000 502,000 502,000 69,640 123,906 222,858 69,640 123,906 222,858
20 347,193 502,000 502,000 502,000 71,733 171,647 405,754 71,733 171,647 405,754
25 501,136 502,000 502,000 823,774 51,931 218,672 710,150 51,931 218,672 710,150
30 697,610 0 502,000 1,283,237 0 261,858 1,199,287 0 261,858 1,199,287
20 (Age 65) 347,193 502,000 502,000 502,000 71,733 171,647 405,754 71,733 171,647 405,754
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
51
<PAGE>
Table VI
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
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 $502,000
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 10,500 502,000 502,000 502,000 7,969 8,480 8,992 8,939 9,450 9,962
2 21,525 502,000 502,000 502,000 15,792 17,321 18,914 16,762 18,291 19,884
3 33,101 502,000 502,000 502,000 23,585 26,664 29,998 24,555 27,634 30,968
4 45,256 502,000 502,000 502,000 31,128 36,299 42,125 32,098 37,269 43,095
5 58,019 502,000 502,000 502,000 38,454 46,275 55,448 39,424 47,245 56,418
6 71,420 502,000 502,000 502,000 45,789 56,849 70,354 45,789 56,849 70,354
7 85,491 502,000 502,000 502,000 52,957 67,863 86,822 52,957 67,863 86,822
8 100,266 502,000 502,000 502,000 59,972 79,357 105,046 59,972 79,357 105,046
9 115,779 502,000 502,000 502,000 66,830 91,351 125,224 66,830 91,351 125,224
10 132,068 502,000 502,000 502,000 73,510 103,854 147,562 73,510 103,854 147,562
15 226,575 502,000 502,000 502,000 103,986 175,525 303,423 103,986 175,525 303,423
20 347,193 502,000 502,000 694,187 127,785 264,523 569,006 127,785 264,523 569,006
25 501,136 502,000 502,000 1,181,355 148,376 383,073 1,018,409 148,376 383,073 1,018,409
30 697,610 502,000 578,572 1,897,066 159,465 540,721 1,772,959 159,465 540,721 1,772,959
20 (Age 65) 347,193 502,000 502,000 694,187 127,786 264,523 569,006 127,701 264,523 569,006
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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 VII
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
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 $467,500
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 26,250 467,500 467,500 467,500 19,061 20,284 21,508 21,486 22,709 23,933
2 53,813 467,500 467,500 467,500 38,489 42,183 46,028 40,914 44,608 48,453
3 82,754 467,500 467,500 467,500 57,542 64,997 73,066 59,967 67,422 75,491
4 113,142 467,500 467,500 467,500 76,235 88,783 102,914 78,660 91,208 105,339
5 145,049 467,500 467,500 467,500 94,564 113,588 135,884 96,989 116,013 138,309
6 178,551 467,500 467,500 467,500 113,528 140,523 173,452 113,528 140,523 173,452
7 213,729 467,500 467,500 541,243 132,127 168,651 214,682 132,127 168,651 214,682
8 224,415 467,500 467,500 573,638 127,368 173,648 234,291 127,368 173,648 234,291
9 235,636 467,500 467,500 607,949 122,416 178,698 255,594 122,416 178,698 255,594
10 247,418 467,500 467,500 644,300 117,239 183,786 278,718 117,239 183,786 278,718
15 315,775 467,500 467,500 861,663 87,081 209,669 427,263 87,081 209,669 427,263
20 403,017 467,500 467,500 1,151,583 45,615 235,253 648,333 45,615 235,253 648,333
25 514,362 0 467,500 1,537,673 0 257,013 970,242 0 257,013 970,242
30 656,471 0 467,500 2,049,550 0 269,137 1,431,178 0 269,137 1,431,178
20 (Age 65) 403,017 467,500 467,500 1,151,583 45,615 235,253 648,333 45,615 235,253 648,333
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
53
<PAGE>
Table VIII
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
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 $467,500
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 26,250 467,500 467,500 467,500 21,298 22,621 23,945 23,723 25,046 26,370
2 53,813 467,500 467,500 467,500 42,651 46,664 50,838 45,076 49,089 53,263
3 82,754 467,500 467,500 467,500 64,288 72,446 81,266 66,713 74,871 83,691
4 113,142 467,500 467,500 467,500 85,576 99,389 114,921 88,001 101,814 117,346
5 145,049 467,500 467,500 467,500 106,552 127,593 152,207 108,977 130,018 154,632
6 178,551 467,500 467,500 502,871 127,747 157,682 194,079 127,747 157,682 194,079
7 213,729 467,500 476,386 604,650 148,685 189,249 240,184 148,685 189,249 240,184
8 224,415 467,500 481,906 646,746 145,507 197,056 264,440 145,507 197,056 264,440
9 235,636 467,500 487,564 691,872 142,281 205,184 291,143 142,281 205,184 291,143
10 247,418 467,500 493,354 740,254 138,962 213,610 320,491 138,962 213,610 320,491
15 315,775 467,500 528,385 1,047,433 121,064 262,364 520,070 121,064 262,364 520,070
20 403,017 467,500 566,650 1,484,132 97,091 319,986 838,072 97,091 319,986 838,072
25 514,362 467,500 620,196 2,145,603 67,743 392,484 1,357,832 67,743 392,484 1,357,832
30 656,471 467,500 684,373 3,127,174 23,608 479,071 2,189,136 23,608 479,071 2,189,136
20 (Age 65) 403,017 467,500 566,650 1,484,132 97,091 319,986 838,072 97,091 319,986 838,072
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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.
54
<PAGE>
Table IX
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
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 $467,500
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 26,250 467,500 467,500 467,500 19,061 20,284 21,508 21,486 22,709 23,933
2 53,813 467,500 467,500 467,500 38,489 42,183 46,028 40,914 44,608 48,453
3 82,754 467,500 467,500 467,500 57,542 64,997 73,066 59,967 67,422 75,491
4 113,142 467,500 467,500 467,500 76,235 88,783 102,914 78,660 91,208 105,339
5 145,049 467,500 467,500 467,500 94,564 113,588 135,884 96,989 116,013 138,309
6 178,551 467,500 467,500 467,500 113,528 140,523 173,452 113,528 140,523 173,452
7 213,729 467,500 467,500 541,243 132,127 168,651 214,682 132,127 168,651 214,682
8 224,415 467,500 467,500 573,638 127,368 173,648 234,291 127,368 173,648 234,291
9 235,636 467,500 467,500 607,949 122,416 178,698 255,594 122,416 178,698 255,594
10 247,418 467,500 467,500 644,300 117,239 183,786 278,718 117,239 183,786 278,718
15 315,775 467,500 467,500 861,663 87,081 209,669 427,263 87,081 209,669 427,263
20 403,017 467,500 467,500 1,151,583 45,615 235,253 648,333 45,615 235,253 648,333
25 514,362 0 467,500 1,537,673 0 257,013 970,242 0 257,013 970,242
30 656,471 0 467,500 2,049,550 0 269,137 1,431,178 0 269,137 1,431,178
20 (Age 65) 403,017 467,500 467,500 1,151,583 45,615 235,253 648,333 45,615 235,253 648,333
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
55
<PAGE>
Table X
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
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 $467,500
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 26,250 467,500 467,500 467,500 21,122 22,439 23,758 23,547 24,864 26,183
2 53,813 467,500 467,500 467,500 42,309 46,302 50,454 44,734 48,727 52,879
3 82,754 467,500 467,500 467,500 63,823 71,936 80,708 66,248 74,361 83,133
4 113,142 467,500 467,500 467,500 85,053 98,791 114,240 87,478 101,216 11,665
5 145,049 467,500 467,500 467,500 106,013 126,943 151,430 108,436 129,368 153,855
6 178,551 467,500 467,500 501,760 127,209 156,996 193,218 127,209 156,996 193,218
7 213,729 467,500 475,299 603,132 148,147 188,526 239,230 148,147 188,526 239,230
8 224,415 467,500 480,580 644,826 144,954 196,283 263,367 144,954 196,283 263,367
9 235,636 467,500 486,044 689,571 141,691 204,343 289,910 141,691 204,343 289,910
10 247,418 467,500 491,689 737,605 138,336 212,700 319,081 138,336 212,700 319,081
15 315,775 467,500 526,824 1,044,156 120,437 261,231 517,755 120,437 261,231 517,755
20 403,017 467,500 565,908 1,481,970 96,464 318,602 834,339 96,464 318,602 834,339
25 514,362 467,500 619,329 2,142,343 67,102 390,784 1,351,777 67,102 390,784 1,351,777
30 656,471 467,500 683,065 3,120,902 22,901 476,977 2,179,292 22,901 476,977 2,179,292
20 (Age 65) 403,017 467,500 565,908 1,481,970 96,464 318,602 834,339 96,464 318,602 834,339
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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.
56
<PAGE>
Table XI
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
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 $467,500
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 26,250 467,500 467,500 467,500 19,061 20,284 21,508 21,486 22,709 23,933
2 53,813 467,500 467,500 467,500 38,489 42,183 46,028 40,914 44,608 48,453
3 82,754 467,500 467,500 467,500 57,542 64,997 73,066 59,967 67,422 75,491
4 113,142 467,500 467,500 467,500 76,235 88,783 102,914 78,660 91,208 105,339
5 145,049 467,500 467,500 467,500 94,564 113,588 135,884 96,989 116,013 138,309
6 178,551 467,500 467,500 467,500 113,528 140,523 173,452 113,528 140,523 173,452
7 213,729 467,500 467,500 541,243 132,127 168,651 214,682 132,127 168,651 214,682
8 224,415 467,500 467,500 573,638 127,368 173,648 234,291 127,368 173,648 234,291
9 235,636 457,500 467,500 607,949 122,416 178,698 255,594 122,416 178,698 255,594
10 247,418 467,500 467,500 644,300 117,239 183,786 278,718 117,239 183,786 278,718
15 315,775 467,500 467,500 861,663 87,081 209,669 427,263 87,081 209,669 427,263
20 403,017 467,500 467,500 1,151,583 45,615 235,253 648,333 45,615 235,253 648,333
25 514,362 0 467,500 1,537,673 0 257,013 970,242 0 257,013 970,242
30 656,471 0 467,500 2,049,550 0 269,137 1,431,178 0 269,137 1,431,178
20 (Age 65) 403,017 467,500 467,500 1,151,583 45,615 235,253 648,333 45,615 235,253 648,333
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
57
<PAGE>
Table XII
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY
SERIES III--LARGE CASE
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 $467,500
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 26,250 467,500 467,500 467,500 21,435 22,762 24,090 23,860 25,187 26,515
2 53,813 467,500 467,500 467,500 42,832 46,859 51,047 45,257 49,284 53,472
3 82,754 467,500 467,500 467,500 64,467 72,650 81,497 66,892 75,075 83,922
4 113,142 467,500 467,500 467,500 85,753 99,604 115,178 88,178 102,029 117,603
5 145,049 467,500 467,500 467,500 106,728 127,818 152,493 109,153 130,243 154,918
6 178,551 467,500 477,749 504,818 127,921 157,920 194,396 127,921 157,920 194,396
7 213,729 467,500 483,108 606,415 148,858 189,497 240,532 148,858 189,497 240,532
8 224,415 467,500 488,688 648,395 145,679 197,316 264,824 145,679 197,316 264,824
9 235,636 467,500 494,492 693,509 142,451 205,454 291,566 142,451 205,454 291,566
10 247,418 467,500 501,460 742,010 139,154 213,912 320,986 139,154 213,912 320,986
15 315,775 467,500 530,705 1,052,129 121,731 263,155 521,708 121,731 263,155 521,708
20 403,017 467,500 571,745 1,497,645 98,991 321,888 843,163 98,991 321,888 843,163
25 514,362 467,500 628,902 2,176,005 72,698 396,825 1,373,017 72,698 396,825 1,373,017
30 656,471 467,500 697,936 3,189,612 34,251 487,631 2,227,271 34,251 487,631 2,227,271
20 (Age 65) 403,017 467,500 571,745 1,497,645 98,991 321,888 843,163 98,991 321,888 843,163
</TABLE>
All amounts are in dollars.
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. Where a zero value is shown,
the Policy will lapse without payment of additional premium.
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.
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.
58
<PAGE>
Appendix B
Applicable Percentage for Guideline Premium Test
<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>
59
<PAGE>
Lincoln Life Flexible Premium
Variable Life Account S
I-1
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
STATEMENT OF ASSETS AND LIABILITY
December 31, 1999
<TABLE>
<CAPTION>
American American
Century Century AVIS
VP Income VP Growth
& Growth International Class 2
Combined Subaccount Subaccount Subaccount
----------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $ 26,177,277 $ -- $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) 99,161,706 5,830,923 6,358,663 2,420
------------ ---------- ---------- -------
Total Investments 125,338,983 5,830,923 6,358,663 2,420
Dividends Receivable 8 -- -- --
------------ ---------- ---------- -------
Total Assets 125,338,991 5,830,923 6,358,663 2,420
Liability - Payable to The Lincoln National
Life Insurance Company 1,387 64 69 --
------------ ---------- ---------- -------
NET ASSETS $125,337,604 $5,830,859 $6,358,594 $ 2,420
============ ========== ========== =======
Percent of net assets 100.00% 4.65% 5.07% 0.00%
============ ========== ========== =======
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100
Unit value $ 11.416 $ 15.281 $12.088
---------- ---------- -------
1,142 1,528 1,209
LCVUL-LC Policies:
Units in accumulation period 541,065 456,990 100
Unit value $ 10.775 $ 13.911 $12.094
---------- ---------- -------
5,829,717 6,357,066 1,211
---------- ---------- -------
NET ASSETS $5,830,859 $6,358,594 $ 2,420
========== ========== =======
<CAPTION>
AVIS AVIS
Growth & High-Yield Baron BT EAFE BT BT
Income Bond Capital Equity 500 Equity 500 Small Cap
Class 2 Class 2 Asset Index Index Index
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $ -- $ -- $ -- $ -- $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) 2,077 2,079 2,866,572 2,341 9,396,642 472,093
------- ------- ---------- ------- ---------- --------
Total Investments 2,077 2,079 2,866,572 2,341 9,396,642 472,093
Dividends Receivable -- -- -- -- -- --
------- ------- ---------- ------- ---------- --------
Total Assets 2,077 2,079 2,866,572 2,341 9,396,642 472,093
Liability - Payable to The Lincoln National
Life Insurance Company -- -- 31 -- 102 5
------- ------- ---------- ------- ---------- --------
NET ASSETS $ 2,077 $ 2,079 $2,866,541 $ 2,341 $9,396,540 $472,088
======= ======= ========== ======= ========== ========
Percent of net assets 0.00% 0.00% 2.29% 0.00% 7.50% 0.38%
======= ======= ========== ======= ========== ========
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100 100 100
Unit value $10.371 $10.381 $ 11.552 $12.044 $ 11.369 $ 11.566
------- ------- ---------- ------- ---------- --------
1,037 1,038 1,155 1,205 1,137 1,157
LCVUL-LC Policies:
Units in accumulation period 100 100 244,282 100 870,538 40,034
Unit value $10.378 $10.389 $ 11.730 $11.335 $ 10.793 $ 11.763
------- ------- ---------- ------- ---------- --------
1,040 1,041 2,865,386 1,136 9,395,403 470,931
------- ------- ---------- ------- ---------- --------
NET ASSETS $ 2,077 $ 2,079 $2,866,541 $ 2,341 $9,396,540 $472,088
======= ======= ========== ======= ========== ========
</TABLE>
See accompanying notes.
I-2
<PAGE>
<TABLE>
<CAPTION>
Delaware
Delaware Delaware Premium Delaware
Premium Premium International Premium
Delchester Devon Equity REIT
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $ 3,479 $33,492 $ 2,153 $ 1,953
Investments at Market - Unaffiliated
(Cost $85,761,649) -- -- -- --
------- ------- ------- -------
Total Investments 3,479 33,492 2,153 1,953
Dividends Receivable 8 -- -- --
------- ------- ------- -------
Total Assets 3,487 33,492 2,153 1,953
Liability - Payable to The Lincoln National
Life Insurance Company -- -- -- --
------- ------- ------- -------
NET ASSETS $ 3,487 $33,492 $ 2,153 $ 1,953
======= ======= ======= =======
Percent of net assets 0.00% 0.03% 0.00% 0.00%
======= ======= ======= =======
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100
Unit value $ 9.650 $ 9.173 $10.569 $ 9.205
------- ------- ------- -------
965 917 1,057 921
LCVUL-LC Policies:
Units in accumulation period 245 3,266 100 100
Unit value $10.275 $ 9.971 $10.922 $10.291
------- ------- ------- -------
2,522 32,575 1,096 1,032
------- ------- ------- -------
NET ASSETS $ 3,487 $33,492 $ 2,153 $ 1,953
======= ======= ======= =======
<CAPTION>
Delaware Fidelity
Premium Fidelity VIP II Fidelity Janus
Small Cap VIP Asset VIP II Aggressive
Value Growth Manager Contrafund Growth
Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ---------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $ 1,966 $ -- $ -- $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) -- 23,647,410 469,765 5,934,256 6,651,724
------- ----------- -------- ---------- ----------
Total Investments 1,966 23,647,410 469,765 5,934,256 6,651,724
Dividends Receivable -- -- -- -- --
------- ----------- -------- ---------- ----------
Total Assets 1,966 23,647,410 469,765 5,934,256 6,651,724
Liability - Payable to The Lincoln National
Life Insurance Company -- 257 5 65 72
------- ----------- -------- ---------- ----------
NET ASSETS $ 1,966 $23,647,153 $469,760 $5,934,191 $6,651,652
======= =========== ======== ========== ==========
Percent of net assets 0.00% 18.89% 0.37% 4.73% 5.31%
======= =========== ======== ========== ==========
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100 100
Unit value $ 9.368 $ 12.677 $ 10.972 $ 11.612 $ 18.389
------- ----------- -------- ---------- ----------
937 1,268 1,097 1,161 1,839
LCVUL-LC Policies:
Units in accumulation period 100 2,028,481 44,399 524,537 482,589
Unit value $10.255 $ 11.657 $ 10.556 $ 11.311 $ 13.779
------- ----------- -------- ---------- ----------
1,029 23,645,885 468,663 5,933,030 6,649,813
------- ----------- -------- ---------- ----------
NET ASSETS $ 1,966 $23,647,153 $469,760 $5,934,191 $6,651,652
======= =========== ======== ========== ==========
</TABLE>
See accompanying notes.
I-3
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
STATEMENT OF ASSETS AND LIABILITY
Continued
December 31, 1999
<TABLE>
<CAPTION>
Janus LN
Janus Worldwide LN Capital
Balanced Growth Bond Appreciation
Subaccount Subaccount Subaccount Subaccount
---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $ -- $ -- $10,245,575 $1,487,267
Investments at Market - Unaffiliated
(Cost $85,761,649) 14,728,000 16,261,952 -- --
----------- ----------- ----------- ----------
Total Investments 14,728,000 16,261,952 10,245,575 1,487,267
Dividends Receivable -- -- -- --
----------- ----------- ----------- ----------
Total Assets 14,728,000 16,261,952 10,245,575 1,487,267
Liability - Payable to The Lincoln National
Life Insurance Company 160 177 113 16
----------- ----------- ----------- ----------
NET ASSETS $14,727,840 $16,261,775 $10,245,462 $1,487,251
=========== =========== =========== ==========
Percent of net assets 11.75% 12.97% 8.17% 1.19%
=========== =========== =========== ==========
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100
Unit value $ 11.783 $ 15.182 $ 10.046 $ 13.437
----------- ----------- ----------- ----------
1,178 1,518 1,005 1,344
LCVUL-LC Policies:
Units in accumulation period 1,339,392 1,231,477 1,032,174 128,416
Unit value $ 10.995 $ 13.204 $ 9.925 $ 11.571
----------- ----------- ----------- ----------
14,726,662 16,260,257 10,244,457 1,485,907
----------- ----------- ----------- ----------
NET ASSETS $14,727,840 $16,261,775 $10,245,462 $1,487,251
=========== =========== =========== ==========
<CAPTION>
LN LN LN MFS
Equity- Money Social Value MFS
Income Market Awareness Equity Research
Subaccount Subaccount Subaccount Subaccount Subaccount
--------------- --------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Assets
Investments at Market - Affiliated
(Cost $25,938,475) $5,429,453 $8,969,697 $ 2,242 $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) -- -- -- 96,620 142,536
---------- ---------- ------- ------- --------
Total Investments 5,429,453 8,969,697 2,242 96,620 142,536
Dividends Receivable -- -- -- -- --
---------- ---------- ------- ------- --------
Total Assets 5,429,453 8,969,697 2,242 96,620 142,536
Liability - Payable to The Lincoln National
Life Insurance Company 59 121 -- 1 2
---------- ---------- ------- ------- --------
NET ASSETS $5,429,394 $8,969,576 $ 2,242 $96,619 $142,534
========== ========== ======= ======= ========
Percent of net assets 4.33% 7.16% 0.00% 0.08% 0.11%
========== ========== ======= ======= ========
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 235,936 100 100 100
Unit value $ 9.897 $ 10.227 $11.507 $12.963 $ 12.110
---------- ---------- ------- ------- --------
990 2,412,996 1,151 1,296 1,211
LCVUL-LC Policies:
Units in accumulation period 519,156 650,491 100 7,846 12,262
Unit value $ 10.456 $ 10.079 $10.872 $12.148 $ 11.524
---------- ---------- ------- ------- --------
5,428,404 6,556,580 1,091 95,323 141,323
---------- ---------- ------- ------- --------
NET ASSETS $5,429,394 $8,969,576 $ 2,242 $96,619 $142,534
========== ========== ======= ======= ========
</TABLE>
See accompanying notes.
I-4
<PAGE>
<TABLE>
<CAPTION>
MFS AMT
Total MFS Mid-Cap AMT
Return Utilities Growth Partners
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Assets
Investments at Market--Affiliated
(Cost $25,938,475) $ -- $ -- $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) 1,996 35,869 5,982,397 2,017
------- ------- ---------- -------
Total Investments 1,996 35,869 5,982,397 2,017
Dividends Receivable -- -- -- --
------- ------- ---------- -------
Total Assets 1,996 35,869 5,982,397 2,017
Liability - Payable to The Lincoln National
Life Insurance Company -- -- 65 --
------- ------- ---------- -------
NET ASSETS $ 1,996 $35,869 $5,982,332 $ 2,017
======= ======= ========== =======
Percent of net assets 0.00% 0.03% 4.77% 0.00%
======= ======= ========== =======
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100
Unit value $ 9.922 $12.052 $ 15.660 $ 9.731
------- ------- ---------- -------
992 1,205 1,566 973
LCVUL-LC Policies:
Units in accumulation period 100 3,038 438,878 100
Unit value $10.005 $11.406 $ 13.627 $10.408
------- ------- ---------- -------
1,004 34,664 5,980,766 1,044
------- ------- ---------- -------
NET ASSETS $ 1,996 $35,869 $5,982,332 $ 2,017
======= ======= ========== =======
<CAPTION>
Oppenheimer
OCC Main Street Templeton
Accumulation Growth and Asset Templeton Templeton
Managed Income Allocation International Stock
Subaccount Subaccount Subaccount Subaccount Subaccount
-------------- ------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Assets
Investments at Market--Affiliated
(Cost $25,938,475) $ -- $ -- $ -- $ -- $ --
Investments at Market - Unaffiliated
(Cost $85,761,649) 1,987 35,056 81,838 152,161 2,312
------ ------- ------- -------- -------
Total Investments 1,987 35,056 81,838 152,161 2,312
Dividends Receivable -- -- -- -- --
------ ------- ------- -------- -------
Total Assets 1,987 35,056 81,838 152,161 2,312
Liability - Payable to The Lincoln National
Life Insurance Company -- -- 1 2 --
------ ------- ------- -------- -------
NET ASSETS $1,987 $35,056 $81,837 $152,159 $ 2,312
====== ======= ======= ======== =======
Percent of net assets 0.00% 0.03% 0.07% 0.12% 0.00%
====== ======= ======= ======== =======
Net assets are represented by:
LCVUL Policies:
Units in accumulation period 100 100 100 100 100
Unit value $9.998 $11.217 $11.159 $ 11.287 $11.673
------ ------- ------- -------- -------
1,000 1,122 1,116 1,129 1,167
LCVUL-LC Policies:
Units in accumulation period 100 3,157 7,250 13,371 100
Unit value $9.831 $10.745 $11.133 $ 11.295 $11.415
------ ------- ------- -------- -------
987 33,934 80,721 151,030 1,145
------ ------- ------- -------- -------
NET ASSETS $1,987 $35,056 $81,837 $152,159 $ 2,312
====== ======= ======= ======== =======
</TABLE>
See accompanying notes.
I-5
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
STATEMENT OF OPERATIONS
Period from May 14, 1999 to December 31, 1999
<TABLE>
<CAPTION>
American American
Century Century AVIS
VP Income VP Growth
& Growth International Class 2
Combined Subaccount Subaccount Subaccount
-------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ 270,334 $ -- $ -- $ --
Dividends from net realized gains on
investments 42,228 -- -- 326
Mortality and expense guarantees:
LCVUL (505) (4) (4) (1)
LCVUL-LC (64,216) (3,315) (3,440) (1)
----------- -------- ---------- -----
NET INVESTMENT INCOME (LOSS) 247,841 (3,319) (3,444) 324
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments 384,544 15,823 29,044 --
Net change in unrealized appreciation or
depreciation on investments 13,638,859 374,877 1,695,003 94
----------- -------- ---------- ----
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 14,023,403 390,700 1,724,047 94
----------- -------- ---------- ----
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $14,271,244 $387,381 $1,720,603 $418
=========== ======== ========== ====
<CAPTION>
AVIS AVIS
Growth & High-Yield Baron BT EAFE BT BT
Income Bond Capital Equity 500 Equity 500 Small Cap
Class 2 Class 2 Asset Index Index Index
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ 8 $45 $ -- $37 $ 59,953 $ 4,634
Dividends from net realized gains on
investments 332 -- 12 69 28,193 13,267
Mortality and expense guarantees:
LCVUL (1) (1) (4) (4) (4) (4)
LCVUL-LC (1) (1) (1,399) (1) (5,239) (266)
------ --- -------- ---- -------- -------
NET INVESTMENT INCOME (LOSS) 338 43 (1,391) 101 82,903 17,631
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments -- -- 4 -- 20,633 1,715
Net change in unrealized appreciation or
depreciation on investments (264) 34 320,158 236 536,566 41,563
----- --- -------- ---- -------- -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (264) 34 320,162 236 557,199 43,278
----- --- -------- ---- -------- -------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 74 $77 $318,771 $337 $640,102 $60,909
===== === ======== ==== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Delaware
Delaware Delaware Premium Delaware
Premium Premium International Premium
Delchester Devon Equity REIT
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ 75 $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- -- --
Mortality and expense guarantees:
LCVUL (4) (4) (4) (4)
LCVUL-LC (1) (10) (1) (1)
---- ---- ----- ----
NET INVESTMENT INCOME (LOSS) 70 (14) (5) (5)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments -- -- -- --
Net change in unrealized appreciation or
depreciation on investments (76) 80 154 (46)
---- ---- ----- ----
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (76) 80 154 (46)
---- ---- ----- ----
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ (6) $ 66 $ 149 $(51)
==== ==== ===== ====
<CAPTION>
Delaware Fidelity
Premium Fidelity VIP II Fidelity Janus
Small Cap VIP Asset VIP II Aggressive
Value Growth Manager Contrafund Growth
Subaccount Subaccount Subaccount Subaccount Subaccount
------------ --------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ 15
Dividends from net realized gains on
investments -- -- -- -- 26
Mortality and expense guarantees:
LCVUL (4) (4) (4) (4) (4)
LCVUL-LC (1) (13,699) (115) (2,150) (3,015)
---- ---------- ------- -------- ----------
NET INVESTMENT INCOME (LOSS) (5) (13,703) (119) (2,154) (2,978)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments -- 230,871 439 12,269 1,929
Net change in unrealized appreciation or
depreciation on investments (33) 2,937,837 12,610 446,935 1,493,923
---- ---------- ------- -------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (33) 3,168,708 13,049 459,204 1,495,852
---- ---------- ------- -------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $(38) $3,155,005 $12,930 $457,050 $1,492,874
==== ========== ======= ======== ==========
</TABLE>
See accompanying notes.
I-6
<PAGE>
<TABLE>
<CAPTION>
Janus LN
Janus Worldwide LN Capital
Balanced Growth Bond Appreciation
Subaccount Subaccount Subaccount Subaccount
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ 156,039 $ 2 $ 119 $ --
Dividends from net realized gains on
investments -- -- -- --
Mortality and expense guarantees:
LCVUL (4) (4) (4) (4)
LCVUL-LC (7,462) (7,661) (6,314) (585)
---------- ---------- --------- --------
NET INVESTMENT INCOME (LOSS) 148,573 (7,663) (6,199) (589)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments 15,830 6,850 (503) 21,927
Net change in unrealized appreciation or
depreciation on investments 933,643 3,108,395 (104,238) 123,424
---------- ---------- --------- --------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 949,473 3,115,245 (104,741) 145,351
---------- ---------- --------- --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $1,098,046 $3,107,582 $(110,940) $144,762
========== ========== ========= ========
<CAPTION>
LN LN LN MFS
Equity- Money Social Value Equity MFS
Income Market Awareness Opportunities Research
Subaccount Subaccount Subaccount Subaccount Subaccount
------------- ------------ ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ 11 $49,384 $ 12 $ -- $ --
Dividends from net realized gains on
investments -- -- -- 3 --
Mortality and expense guarantees:
LCVUL (4) (374) (4) (4) (4)
LCVUL-LC (2,507) (3,621) (1) (5) (56)
-------- ------- ---- ------ ------
NET INVESTMENT INCOME (LOSS) (2,500) 45,389 7 (6) (60)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments 1,051 -- -- -- (2)
Net change in unrealized appreciation or
depreciation on investments 219,306 -- 231 3,316 9,775
-------- ------- ---- ------ ------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 220,357 -- 231 3,316 9,773
-------- ------- ---- ------ ------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $217,857 $45,389 $238 $3,310 $9,713
======== ======= ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
MFS AMT
Total MFS Mid-Cap AMT
Return Utilities Growth Partners
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $-- $ -- $ -- $--
Dividends from net realized gains on
investments -- -- -- --
Mortality and expense guarantees:
LCVUL (4) (4) (4) (4)
LCVUL-LC (1) (9) (3,212) (1)
--- ------ ---------- ---
NET INVESTMENT INCOME (LOSS) (5) (13) (3,216) (5)
Net Realized and Unrealized --
Gain (Loss) on Investments:
Net realized gain (loss) on investments -- -- 21,223 --
Net change in unrealized appreciation or
depreciation on investments (3) 2,390 1,465,860 18
--- ------ ---------- ---
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (3) 2,390 1,487,083 18
--- ------ ---------- ---
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $(8) $2,377 $1,483,867 $13
=== ====== ========== ===
<CAPTION>
Oppenheimer
OCC Main Street Templeton
Accumulation Growth and Asset Templeton Templeton
Managed Income Allocation International Stock
Subaccount Subaccount Subaccount Subaccount Subaccount
-------------- ------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- -- -- --
Mortality and expense guarantees:
LCVUL (4) (4) (4) (4) (4)
LCVUL-LC (1) (9) (26) (88) (1)
---- ------ ------ ------- ----
NET INVESTMENT INCOME (LOSS) (5) (13) (30) (92) (5)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on investments -- -- 507 4,934 --
Net change in unrealized appreciation or
depreciation on investments (13) 1,575 4,312 10,904 313
---- ------ ------ ------- ----
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (13) 1,575 4,819 15,838 313
---- ------ ------ ------- ----
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $(18) $1,562 $4,789 $15,746 $308
==== ====== ====== ======= ====
</TABLE>
See accompanying notes.
I-7
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
STATEMENT OF CHANGES IN NET ASSETS
Period from May 14, 1999 to December 31, 1999
<TABLE>
<CAPTION>
American American
Century Century AVIS
VP Income VP Growth
& Growth International Class 2
Combined Subaccount Subaccount Subaccount
--------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ 247,841 $ (3,319) $ (3,444) $ 324
Net realized gain (loss) on investments 384,544 15,823 29,044 --
Net change in unrealized appreciation or
depreciation on investments 13,638,859 374,877 1,695,003 94
------------ ---------- ---------- ------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 14,271,244 387,381 1,720,603 418
Change From Unit Transactions:
Participant purchases 115,618,710 5,887,784 4,811,758 2,002
Participant withdrawals (4,552,358) (444,306) (173,767) --
------------ ---------- ---------- ------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 111,066,352 5,443,478 4,637,991 2,002
------------ ---------- ---------- ------
TOTAL INCREASE IN NET ASSETS 125,337,604 5,830,859 6,358,594 2,420
------------ ---------- ---------- ------
NET ASSETS AT DECEMBER 31, 1999 $125,337,604 $5,830,859 $6,358,594 $2,420
============ ========== ========== ======
<CAPTION>
AVIS AVIS
Growth & High-Yield Baron BT EAFE BT BT
Income Bond Capital Equity 500 Equity 500 Small Cap
Class 2 Class 2 Asset Index Index Index
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ------------ ------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ 338 $ 43 $ (1,391) $ 101 $ 82,903 $ 17,631
Net realized gain (loss) on investments -- -- 4 -- 20,633 1,715
Net change in unrealized appreciation or
depreciation on investments (264) 34 320,158 236 536,566 41,563
------ ------ ---------- ------ ---------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 74 77 318,771 337 640,102 60,909
Change From Unit Transactions:
Participant purchases 2,003 2,002 2,556,620 2,004 9,121,906 451,732
Participant withdrawals -- -- (8,850) -- (365,468) (40,553)
------ ------ ---------- ------ ---------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 2,003 2,002 2,547,770 2,004 8,756,438 411,179
------ ------ ---------- ------ ---------- --------
TOTAL INCREASE IN NET ASSETS 2,077 2,079 2,866,541 2,341 9,396,540 472,088
------ ------ ---------- ------ ---------- --------
NET ASSETS AT DECEMBER 31, 1999 $2,077 $2,079 $2,866,541 $2,341 $9,396,540 $472,088
====== ====== ========== ====== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Delaware
Delaware Delaware Premium Delaware
Premium Premium International Premium
Delchester Devon Equity REIT
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ 70 $ (14) $ (5) $ (5)
Net realized gain (loss) on investments -- -- -- --
Net change in unrealized appreciation or
depreciation on investments (76) 80 154 (46)
----- ------- ------ ------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (6) 66 149 (51)
Change From Unit Transactions:
Participant purchases 3,606 33,494 2,004 2,004
Participant withdrawals (121) (68) -- --
------ ------- ------ ------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 3,485 33,426 2,004 2,004
------ ------- ------ ------
TOTAL INCREASE IN NET ASSETS 3,487 33,492 2,153 1,953
------ ------- ------ ------
NET ASSETS AT DECEMBER 31, 1999 $3,487 $33,492 $2,153 $1,953
====== ======= ====== ======
<CAPTION>
Delaware Fidelity
Premium Fidelity VIP II Fidelity Janus
Small Cap VIP Asset VIP II Aggressive
Value Growth Manager Contrafund Growth
Subaccount Subaccount Subaccount Subaccount Subaccount
------------ -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ (5) $ (13,703) $ (119) $ (2,154) $ (2,978)
Net realized gain (loss) on investments -- 230,871 439 12,269 1,929
Net change in unrealized appreciation or
depreciation on investments (33) 2,937,837 12,610 446,935 1,493,923
------ ----------- -------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (38) 3,155,005 12,930 457,050 1,492,874
Change From Unit Transactions:
Participant purchases 2,004 23,024,780 458,168 5,490,534 5,176,270
Participant withdrawals -- (2,532,632) (1,338) (13,393) (17,492)
------ ----------- -------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 2,004 20,492,148 456,830 5,477,141 5,158,778
------ ----------- -------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 1,966 23,647,153 469,760 5,934,191 6,651,652
------ ----------- -------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1999 $1,966 $23,647,153 $469,760 $5,934,191 $6,651,652
====== =========== ======== ========== ==========
</TABLE>
See accompanying notes.
I-8
<PAGE>
<TABLE>
<CAPTION>
Janus LN
Janus Worldwide LN Capital
Balanced Growth Bond Appreciation
Subaccount Subaccount Subaccount Subaccount
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ 148,573 $ (7,663) $ (6,199) $ (589)
Net realized gain (loss) on investments 15,830 6,850 (503) 21,927
Net change in unrealized appreciation or
depreciation on investments 933,643 3,108,395 (104,238) 123,424
----------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 1,098,046 3,107,582 (110,940) 144,762
Change From Unit Transactions:
Participant purchases 13,701,756 13,201,602 10,392,080 1,459,847
Participant withdrawals (71,962) (47,409) (35,678) (117,358)
----------- ----------- ----------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 13,629,794 13,154,193 10,356,402 1,342,489
----------- ----------- ----------- ----------
TOTAL INCREASE IN NET ASSETS 14,727,840 16,261,775 10,245,462 1,487,251
----------- ----------- ----------- ----------
NET ASSETS AT DECEMBER 31, 1999 $14,727,840 $16,261,775 $10,245,462 $1,487,251
=========== =========== =========== ==========
<CAPTION>
LN LN LN MFS
Equity- Money Social Value Equity MFS
Income Market Awareness Opportunities Research
Subaccount Subaccount Subaccount Subaccount Subaccount
------------- -------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ (2,500) $ 45,389 $ 7 $ (6) $ (60)
Net realized gain (loss) on investments 1,051 -- -- -- (2)
Net change in unrealized appreciation or
depreciation on investments 219,306 -- 231 3,316 9,775
---------- ---------- ------ ------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 217,857 45,389 238 3,310 9,713
Change From Unit Transactions:
Participant purchases 5,228,048 9,319,802 2,004 93,370 133,274
Participant withdrawals (16,511) (395,615) -- (61) (453)
---------- ---------- ------ ------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 5,211,537 8,924,187 2,004 93,309 132,821
---------- ---------- ------ ------- --------
TOTAL INCREASE IN NET ASSETS 5,429,394 8,969,576 2,242 96,619 142,534
---------- ---------- ------ ------- --------
NET ASSETS AT DECEMBER 31, 1999 $5,429,394 $8,969,576 $2,242 $96,619 $142,534
========== ========== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
MFS AMT
Total MFS Mid-Cap AMT
Return Utilities Growth Partners
Subaccount Subaccount Subaccount Subaccount
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ (5) $ (13) $ (3,216) $ (5)
Net realized gain (loss) on investments -- -- 21,223 --
Net change in unrealized appreciation or
depreciation on investments (3) 2,390 1,465,860 18
------ ------- ---------- ------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (8) 2,377 1,483,867 13
Change From Unit Transactions:
Participant purchases 2,004 33,492 4,628,766 2,004
Participant withdrawals -- -- (130,301) --
------ ------- ---------- ------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 2,004 33,492 4,498,465 2,004
------ ------- ---------- ------
TOTAL INCREASE IN NET ASSETS 1,996 35,869 5,982,332 2,017
------ ------- ---------- ------
NET ASSETS AT DECEMBER 31, 1999 $1,996 $35,869 $5,982,332 $2,017
====== ======= ========== ======
<CAPTION>
Oppenheimer
OCC Main Street Templeton
Accumulation Growth and Asset Templeton Templeton
Managed Income Allocation International Stock
Subaccount Subaccount Subaccount Subaccount Subaccount
-------------- ------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Changes From Operations:
Net investment income (loss) $ (5) $ (13) $ (30) $ (92) $ (5)
Net realized gain (loss) on investments -- -- 507 4,934 --
Net change in unrealized appreciation or
depreciation on investments (13) 1,575 4,312 10,904 313
------ ------- -------- --------- ------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (18) 1,562 4,789 15,746 308
Change From Unit Transactions:
Participant purchases 2,005 33,494 106,879 245,604 2,004
Participant withdrawals -- -- (29,831) (109,191) --
------ ------- -------- --------- ------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 2,005 33,494 77,048 136,413 2,004
------ ------- -------- --------- ------
TOTAL INCREASE IN NET ASSETS 1,987 35,056 81,837 152,159 2,312
------ ------- -------- --------- ------
NET ASSETS AT DECEMBER 31, 1999 $1,987 $35,056 $ 81,837 $ 152,159 $2,312
====== ======= ======== ========= ======
</TABLE>
See accompanying notes.
I-9
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements
1. Accounting Policies and Variable Account Information
The Variable Account:
Lincoln Life Flexible Premium Variable Life Account S (the Variable
Account) is a segregated investment account of The Lincoln National Life
Insurance Company (Lincoln Life) and is registered as a unit investment
trust with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended. The operations of the Variable Account,
which commenced on May 14, 1999, are part of the operations of Lincoln
Life. The Variable Account consists of two products which are listed below:
--LCVUL
--LCVUL-LC
The assets of the Variable Account are owned by Lincoln Life. The portion
of the Variable Account's assets supporting the variable life policies may
not be used to satisfy liabilities arising from any other business of
Lincoln Life.
Basis of Presentation:
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for unit
investment trusts.
Investments:
The assets of the Variable Account are divided into variable subaccounts
each of which is invested in shares of one of thirty six portfolios of
fourteen diversified open-end management investment companies, each
portfolio with its own investment objective. The variable subaccounts are:
American Century Variable Products Group, Inc.:
VP Income & Growth Fund
VP International Fund
American Variable Insurance Series (AVIS):
AVIS Growth Fund-Class 2
AVIS Growth & Income Fund-Class 2
AVIS High-Yield Bond Fund-Class 2
Baron Capital Funds Trust:
Baron Capital Asset Fund
BT Insurance Funds Trust:
EAFE Equity 500 Index Fund
Equity 500 Index Fund
Small Cap Index Fund
Delaware Group Premium Fund , Inc.:
Delchester Series
Devon Series
International Equity Series
REIT Series
Small Cap Value Series
I-10
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements
1. Accounting Policies and Variable Account Information (Continued)
Fidelity Variable Insurance Fund Service Class:
Growth Portfolio
Fidelity Variable Insurance Products Fund II Service Class:
Asset Manager Portfolio
Contrafund Portfolio
Janus Aspen Series:
Aggressive Growth Portfolio
Balanced Portfolio
Worldwide Growth Portfolio
Lincoln National (LN) Funds:
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc.
LN Equity-Income Fund, Inc.
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc.
MFS Variable Insurance Trust:
MFS Capital Opportunities Series
MFS Research Series
MFS Total Return Series
MFS Utilities Series
Neuberger Berman Advisers Management Trust (AMT):
AMT Mid-Cap Growth Portfolio
AMT Partners Portfolio
OCC Accumulation Trust:
Managed Portfolio
Oppenheimer Funds:
Oppenheimer Main Street Growth and Income Fund/VA
Templeton Variable Products Series Fund:
Templeton Asset Allocation Class 2 Fund
Templeton International Class 2 Fund
Templeton Stock Class 2 Fund
Investments in the variable subaccounts are stated at the closing net asset
value per share on December 31, 1999, which approximates fair value. The
difference between cost and fair value is reflected as unrealized
appreciation and depreciation of investments.
Investment transactions are accounted for on a trade date basis. The cost
of investments sold is determined by the average cost method.
Dividends:
Dividends paid to the Variable Account are automatically reinvested in
shares of the variable subaccounts on the payable date. Dividend income is
recorded on the ex-dividend date.
I-11
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements
1. Accounting Policies and Variable Account Information (Continued)
Federal Income Taxes:
Operations of the Variable Account form a part of and are taxed with
operations of Lincoln Life, which is taxed as a "life insurance company"
under the Internal Revenue Code. The Variable Account will not be taxed as a
regulated investment company under Subchapter M of the Internal Revenue Code.
Using current federal income tax law, no federal income taxes are payable
with respect to the Variable Account's net investment income and the net
realized gain on investments.
2. Mortality and Expense Guarantees
& Other Transactions With Affiliate
Amounts are paid to Lincoln Life for mortality and expense guarantees at a
percentage of the current value of the Variable Account each day. The rates
are as follows.
--LCVUL is currently at an annual rate of .70% for policy years one through
ten and .35% thereafter.
--LCVUL-LC is currently at an annual rate of .40% for policy years one
through ten, .20% for policy years eleven through twenty and .10%
thereafter.
Prior to the allocation of premiums to the Variable Account, Lincoln Life
deducts a premium load for sales and administrative expenses associated
with the startup and maintenance of the policy. The premium loads for the
period ended December 31, 1999 amounted to $406,519. The premium loads are
as follows:
--LCVUL is currently 10.5% for policy year one, 7.5% for policy years two
through five, 3.5% for policy years six through seven and 1.5% thereafter.
--LCVUL-LC is currently 10.5% for policy year one, 7.5% for policy year
two, 3.5% for policy years three through five and 1.5% thereafter.
Lincoln Life charges a monthly administrative fee of $6 currently,
guaranteed not to exceed $10 per month during all policy years. This charge
is for items such as premium billing and collection, policy value
calculation, confirmations and periodic reports. There were no
administrative fees for the period ended December 31, 1999.
Lincoln Life assumes responsibility for providing the insurance benefit
included in the policy. Lincoln Life charges a monthly deduction of the
cost of insurance and any charges for supplemental riders. The cost of
insurance charge depends on the attained age, risk classification, gender
classification (in accordance with state law) and the current net amount at
risk. On a monthly basis, the administrative fee and the cost of insurance
charge are deducted proportionately for the value of each variable
subaccount and/or fixed account funding options. The fixed account is part
of the general account of Lincoln Life and is not included in these
financial statements. The cost of insurance charges for the period ended
December 31, 1999 amounted to $383,402.
Under certain circumstances, Lincoln Life reserves the right to charge a
transfer fee of $25 for each transfer after the twelfth transfer per year
between variable subaccounts. For the period ended December 31, 1999, no
transfer fees were deducted from the variable subaccounts.
I-12
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements (Continued)
3. Net Assets
The following is a summary of net assets owned at December 31, 1999.
<TABLE>
<CAPTION>
American American
Century Century AVIS
VP Income VP Growth
& Growth International Class 2
Combined Subaccount Subaccount Subaccount
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $111,066,352 $5,443,478 $4,637,991 $2,002
Accumulated net investment income (loss) 247,841 (3,319) (3,444) 324
Accumulated net realized gain (loss) on
investments 384,544 15,823 29,044 --
Net unrealized appreciation (depreciation) on
investments 13,638,859 374,877 1,695,003 94
------------ ---------- ---------- ------
$125,337,604 $5,830,859 $6,358,594 $2,420
============ ========== ========== ======
<CAPTION>
AVIS AVIS
Growth & High-Yield Baron BT EAFE BT BT
Income Bond Capital Equity 500 Equity 500 Small Cap
Class 2 Class 2 Asset Index Index Index
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ------------ -------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $2,003 $2,002 $2,547,770 $2,004 $8,756,438 $411,179
Accumulated net investment income (loss) 338 43 (1,391) 101 82,903 17,631
Accumulated net realized gain (loss) on
investments -- -- 4 -- 20,633 1,715
Net unrealized appreciation (depreciation) on
investments (264) 34 320,158 236 536,566 41,563
------ ------ ---------- ------ ---------- --------
$2,077 $2,079 $2,866,541 $2,341 $9,396,540 $472,088
====== ====== ========== ====== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Delaware
Delaware Delaware Premium Delaware
Premium Premium International Premium
Delchester Devon Equity REIT
Subaccount Subaccount Subaccount Subaccount
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $3,485 $33,426 $2,004 $2,004
Accumulated net investment income (loss) 70 (14) (5) (5)
Accumulated net realized gain (loss) on
investments -- -- -- --
Net unrealized appreciation (depreciation) on
investments (76) 80 154 (46)
------ ------- ------ ------
$3,487 $33,492 $2,153 $1,953
====== ======= ====== ======
<CAPTION>
Delaware Fidelity
Premium Fidelity VIP II Fidelity Janus
Small Cap VIP Asset VIP II Aggressive
Value Growth Manager Contrafund Growth
Subaccount Subaccount Subaccount Subaccount Subaccount
------------ -------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $2,004 $20,492,148 $456,830 $5,477,141 $5,158,778
Accumulated net investment income (loss) (5) (13,703) (119) (2,154) (2,978)
Accumulated net realized gain (loss) on
investments -- 230,871 439 12,269 1,929
Net unrealized appreciation (depreciation) on
investments (33) 2,937,837 12,610 446,935 1,493,923
------ ----------- -------- ---------- ----------
$1,966 $23,647,153 $469,760 $5,934,191 $6,651,652
====== =========== ======== ========== ==========
</TABLE>
I-13
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements (Continued)
<TABLE>
<CAPTION>
Janus LN
Janus Worldwide LN Capital
Balanced Growth Bond Appreciation
Subaccount Subaccount Subaccount Subaccount
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $13,629,794 $13,154,193 $10,356,402 $1,342,489
Accumulated net investment income (loss) 148,573 (7,663) (6,199) (589)
Accumulated net realized gain (loss) on
investments 15,830 6,850 (503) 21,927
Net unrealized appreciation (depreciation) on
investments 933,643 3,108,395 (104,238) 123,424
----------- ----------- ----------- ----------
$14,727,840 $16,261,775 $10,245,462 $1,487,251
=========== =========== =========== ==========
<CAPTION>
LN LN LN MFS
Equity- Money Social Capital MFS
Income Market Awareness Opportunities Research
Subaccount Subaccount Subaccount Subaccount Subaccount
-------------- ------------ ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $5,211,537 $8,924,187 $2,004 $93,309 $132,821
Accumulated net investment income (loss) (2,500) 45,389 7 (6) (60)
Accumulated net realized gain (loss) on
investments 1,051 -- -- -- (2)
Net unrealized appreciation (depreciation) on
investments 219,306 -- 231 3,316 9,775
---------- ---------- ------ ------- --------
$5,429,394 $8,969,576 $2,242 $96,619 $142,534
========== ========== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
MFS AMT
Total MFS Mid-Cap AMT
Return Utilities Growth Partners
Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $2,004 $33,492 $4,498,465 $2,004
Accumulated net investment income (loss) (5) (13) (3,216) (5)
Accumulated net realized gain (loss) on
investments -- -- 21,223 --
Net unrealized appreciation (depreciation) on
investments (3) 2,390 1,465,860 18
------ ------- ---------- ------
$1,996 $35,869 $5,982,332 $2,017
====== ======= ========== ======
<CAPTION>
Oppenheimer
OCC Main Street Templeton
Accumulation Growth and Asset Templeton Templeton
Managed Income Allocation International Stock
Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $2,005 $33,494 $77,048 $136,413 $2,004
Accumulated net investment income (loss) (5) (13) (30) (92) (5)
Accumulated net realized gain (loss) on
investments -- -- 507 4,934 --
Net unrealized appreciation (depreciation) on
investments (13) 1,575 4,312 10,904 313
------ ------- ------- -------- ------
$1,987 $35,056 $81,837 $152,159 $2,312
====== ======= ======= ======== ======
</TABLE>
I-14
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements (Continued)
4. Purchases and Sales of Investments
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1999.
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
--------------- -------------
<S> <C> <C>
American Century VP Income & Growth Fund $ 5,864,035 $ 423,812
American Century VP International Fund 4,790,583 155,967
AVIS Growth Class 2 Fund 2,326 --
AVIS Growth & Income Class 2 Fund 2,341 --
AVIS High-Yield Bond Class 2 Fund 2,045 --
Baron Capital Asset Fund 2,551,656 5,246
BT EAFE Equity 500 Index Fund 2,107 2
BT Equity 500 Index Fund 9,332,369 492,926
BT Small Cap Index Fund 461,386 32,571
Delaware Premium Delchester Series 3,555 --
Delaware Premiun Devon Series 33,413 1
Delaware Premium International Equity Series 2,000 1
Delaware Premium REIT Series 2,000 1
Delaware Premium Small Cap Value Series 2,000 1
Fidelity VIP Growth Portfolio 23,031,832 2,553,130
Fidelity VIP II Asset Manager Portfolio 518,274 61,558
Fidelity VIP II Contrafund Portfolio 5,730,267 255,215
Janus Aggressive Growth Portfolio 5,168,908 13,036
Janus Balanced Portfolio 14,055,919 277,392
Janus Worldwide Growth Portfolio 13,205,529 58,822
LN Bond Fund 10,435,235 84,919
LN Capital Appreciation Fund 1,654,604 312,688
LN Equity-Income Fund 5,360,728 151,632
LN Money Market Fund 9,810,857 841,160
LN Social Awareness Fund 2,012 1
MFS Capital Opportunities Series 93,304 --
MFS Research Series 132,979 216
MFS Total Return Series 2,000 1
MFS Utilities Series 33,479 --
AMT Mid-Cap Growth Portfolio 4,620,250 124,936
AMT Partners Portfolio 2,000 1
OCC Accumulation Managed Portfolio 2,000 --
Oppenheimer Main Street Growth and Income Fund 33,481 --
Templeton Asset Allocation Fund 108,170 31,151
Templeton International Fund 245,019 108,696
Templeton Stock Fund 2,000 1
------------ ----------
$117,300,663 $5,985,083
============ ==========
</TABLE>
I-15
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements (Continued)
5. Investments
The following is a summary of investments owned at December 31, 1999.
<TABLE>
<CAPTION>
Net
Shares Asset Value of Cost of
Outstanding Value Shares Shares
------------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
American Century VP Income & Growth Fund 728,865 $ 8.00 $ 5,830,923 $ 5,456,046
American Century VP International Fund 508,693 12.50 6,358,663 4,663,660
AVIS Growth Class 2 Fund 34 70.57 2,420 2,326
AVIS Growth & Income Class 2 Fund 63 33.07 2,077 2,341
AVIS High-Yield Bond Class 2 Fund 163 12.75 2,079 2,045
Baron Capital Asset Fund 161,315 17.77 2,866,572 2,546,414
BT EAFE Equity 500 Index Fund 172 13.60 2,341 2,105
BT Equity 500 Index Fund 619,015 15.18 9,396,642 8,860,076
BT Small Cap Index Fund 40,664 11.61 472,093 430,530
Delaware Premium Delchester Series 469 7.42 3,479 3,555
Delaware Premiun Devon Series 2,459 13.62 33,492 33,412
Delaware Premium International Equity Series 116 18.63 2,153 1,999
Delaware Premium REIT Series 225 8.67 1,953 1,999
Delaware Premium Small Cap Value Series 128 15.36 1,966 1,999
Fidelity VIP Growth Portfolio 431,522 54.80 23,647,410 20,709,573
Fidelity VIP II Asset Manager Portfolio 25,271 18.59 469,765 457,155
Fidelity VIP II Contrafund Portfolio 203,926 29.10 5,934,256 5,487,321
Janus Aggressive Growth Portfolio 111,438 59.69 6,651,724 5,157,801
Janus Balanced Portfolio 527,507 27.92 14,728,000 13,794,357
Janus Worldwide Growth Portfolio 340,564 47.75 16,261,952 13,153,557
LN Bond Fund 895,937 11.44 10,245,575 10,349,813
LN Capital Appreciation Fund 47,266 31.47 1,487,267 1,363,843
LN Equity-Income Fund 246,273 22.05 5,429,453 5,210,147
LN Money Market Fund 896,970 10.00 8,969,697 8,969,697
LN Social Awareness Fund 51 44.29 2,242 2,011
MFS Capital Opportunities Series 4,446 21.73 96,620 93,304
MFS Research Series 6,107 23.34 142,536 132,761
MFS Total Return Series 112 17.75 1,996 1,999
MFS Utilities Series 1,485 24.16 35,869 33,479
AMT Mid-Cap Growth Portfolio 246,189 24.30 5,982,397 4,516,537
AMT Partners Portfolio 103 19.64 2,017 1,999
OCC Accumulation Managed Portfolio 46 43.65 1,987 2,000
Oppenheimer Main Street Growth and Income Fund 1,423 24.63 35,056 33,481
Templeton Asset Allocation Fund 3,517 23.27 81,838 77,526
Templeton International Fund 6,876 22.13 152,161 141,257
Templeton Stock Fund 95 24.29 2,312 1,999
------------ ------------
$125,338,983 $111,700,124
============ ============
</TABLE>
I-16
<PAGE>
Lincoln Life Flexible Premium Variable Life Account S
Notes to Financial Statements (Continued)
6. New Investment Funds
Effective October 29, 1999, the AVIS Growth Fund, AVIS Growth & Income Fund
and AVIS High-Yield Bond Fund became available as investment options for
the Variable Account policyholders.
I-17
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors of The Lincoln National Life Insurance Company
and
Contract Owners of Lincoln Life Flexible Premium Variable Life Account S
We have audited the accompanying statement of assets and liability of Lincoln
Life Flexible Premium Variable Life Account S ("Variable Account") (comprised
of the American Century VP Income & Growth, American Century VP International,
AVIS Growth Class 2, AVIS Growth & Income Class 2, AVIS High-Yield Bond Class
2, Baron Capital Asset, BT EAFE Equity 500 Index, BT Equity 500 Index, BT Small
Cap Index, Delaware Premium Delchester, Delaware Premium Devon, Delaware
Premium International Equity, Delaware Premium REIT, Delaware Premium Small Cap
Value, Fidelity VIP Growth, Fidelity VIP II Asset Manager, Fidelity VIP II
Contrafund, Janus Aggressive Growth, Janus Balanced, Janus Worldwide Growth,
Lincoln National Bond, Lincoln National Capital Appreciation, Lincoln National
Equity-Income, Lincoln National Money Market, Lincoln National Social
Awareness, MFS Value Equity, MFS Research, MFS Total Return, MFS Utilities,
Neuberger Berman Advisers Management Trust (AMT) Mid-Cap Growth, Neuberger
Berman Advisers Management Trust (AMT) Partners, OCC Accumulation Trust
Managed, Oppenheimer Main Street Growth and Income, Templeton Asset Allocation,
Templeton International and Templeton Stock subaccounts), as of December 31,
1999, and the related statements of operations and changes in net assets for
the period from May 14, 1999 to December 31, 1999. These financial statements
are the responsibility of the Variable Account's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of December 31,
1999, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting the Lincoln Life Flexible Premium Variable Life
Account S at December 31, 1999, and the results of their operations and the
changes in their net assets for the period from May 14, 1999 to December 31,
1999 in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 24, 2000
I-18
<PAGE>
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $22,985.0 $23,830.9
- ------------------------------------------------------------
Preferred stocks 253.8 236.0
- ------------------------------------------------------------
Unaffiliated common stocks 166.9 259.3
- ------------------------------------------------------------
Affiliated common stocks 604.7 322.1
- ------------------------------------------------------------
Mortgage loans on real estate 4,211.5 3,932.9
- ------------------------------------------------------------
Real estate 254.0 473.8
- ------------------------------------------------------------
Policy loans 1,652.9 1,606.0
- ------------------------------------------------------------
Other investments 426.6 434.4
- ------------------------------------------------------------
Cash and short-term investments 1,409.2 1,725.4
- ------------------------------------------------------------ --------- ---------
Total cash and investments 31,964.6 32,820.8
- ------------------------------------------------------------
Premiums and fees in course of collection 115.8 33.3
- ------------------------------------------------------------
Accrued investment income 435.3 432.8
- ------------------------------------------------------------
Reinsurance recoverable 199.0 171.6
- ------------------------------------------------------------
Funds withheld by ceding companies 73.5 53.7
- ------------------------------------------------------------
Federal income taxes recoverable from parent company 61.6 64.7
- ------------------------------------------------------------
Goodwill 43.1 49.5
- ------------------------------------------------------------
Other admitted assets 66.7 89.3
- ------------------------------------------------------------
Separate account assets 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total admitted assets $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,184.0 $12,310.6
- ------------------------------------------------------------
Other policyholder funds 16,589.5 16,647.5
- ------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 364.0 897.6
- ------------------------------------------------------------
Funds held under reinsurance treaties 796.9 795.8
- ------------------------------------------------------------
Asset valuation reserve 490.9 484.5
- ------------------------------------------------------------
Interest maintenance reserve 72.3 159.7
- ------------------------------------------------------------
Other liabilities 627.0 504.5
- ------------------------------------------------------------
Short-term loan payable to parent company 205.0 140.0
- ------------------------------------------------------------
Net transfers due from separate accounts (896.5) (789.0)
- ------------------------------------------------------------
Separate account liabilities 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total liabilities 76,538.2 68,058.2
- ------------------------------------------------------------
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 1,250.0
- ------------------------------------------------------------
Paid-in surplus 1,942.6 1,930.1
- ------------------------------------------------------------
Unassigned surplus -- deficit (691.1) (640.6)
- ------------------------------------------------------------ --------- ---------
Total capital and surplus 2,526.5 2,564.5
- ------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- --------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 7,273.6 $12,737.6 $5,589.0
- ------------------------------------------------------------
Net investment income 2,203.2 2,107.2 1,847.1
- ------------------------------------------------------------
Amortization of interest maintenance reserve 29.1 26.4 41.5
- ------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 472.3 179.9 99.7
- ------------------------------------------------------------
Expense charges on deposit funds 146.5 134.6 119.3
- ------------------------------------------------------------
Separate account investment management and administration
service fees 473.9 396.3 325.5
- ------------------------------------------------------------
Other income 88.8 31.3 21.3
- ------------------------------------------------------------ --------- --------- --------
Total revenues 10,687.4 15,613.3 8,043.4
- ------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 8,504.9 13,964.1 4,522.1
- ------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 1,618.3 2,919.4 3,053.9
- ------------------------------------------------------------ --------- --------- --------
Total benefits and expenses 10,123.2 16,883.5 7,576.0
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments 564.2 (1,270.2) 467.4
- ------------------------------------------------------------
Dividends to policyholders 80.3 67.9 27.5
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments 483.9 (1,338.1) 439.9
- ------------------------------------------------------------
Federal income taxes (credit) 85.4 (141.0) 78.3
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before net realized gain on
investments 398.5 (1,197.1) 361.6
- ------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 114.4 46.8 31.3
- ------------------------------------------------------------ --------- --------- --------
Net income (loss) $ 512.9 $(1,150.3) $ 392.9
- ------------------------------------------------------------ ========= ========= ========
</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
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,564.5 $2,968.4 $1,868.0
- ------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) 512.9 (1,150.3) 392.9
- ------------------------------------------------------------
Difference in cost and admitted investment amounts (101.9) (304.8) (36.2)
- ------------------------------------------------------------
Nonadmitted assets (22.9) (17.1) (0.4)
- ------------------------------------------------------------
Regulatory liability for reinsurance 26.0 (35.2) (3.9)
- ------------------------------------------------------------
Gain on reinsurance of disability income business 71.8 -- --
- ------------------------------------------------------------
Life policy reserve valuation basis -- (0.4) (0.9)
- ------------------------------------------------------------
Asset valuation reserve (6.4) (34.5) (36.9)
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 12.5 108.4 938.4
- ------------------------------------------------------------
Separate account receivable due to change in valuation -- -- (2.6)
- ------------------------------------------------------------
Dividends to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,526.5 $2,564.5 $2,968.4
- ------------------------------------------------------------ ======== ======== ========
</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
1999 1998 1997
--------- ---------- ---------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 7,671.1 $ 13,495.2 $ 6,364.3
- ------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (19.9) (632.4) (649.2)
- ------------------------------------------------------------
Investment income received 2,168.6 2,003.9 1,798.8
- ------------------------------------------------------------
Separate account investment management and administration
service fees 470.6 396.3 325.5
- ------------------------------------------------------------
Benefits paid (8,699.4) (7,395.8) (5,345.2)
- ------------------------------------------------------------
Insurance expenses paid (1,734.5) (2,909.7) (3,193.0)
- ------------------------------------------------------------
Proceeds related to sale of disability income business 71.8 -- --
- ------------------------------------------------------------
Federal income taxes recovered (paid) (81.2) 84.2 (87.0)
- ------------------------------------------------------------
Dividends to policyholders (82.8) (12.9) (28.4)
- ------------------------------------------------------------
Other income received and expenses paid, net 252.1 207.0 (8.7)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) operating activities 16.4 5,235.8 (822.9)
- ------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 6,557.7 10,926.5 12,142.6
- ------------------------------------------------------------
Purchase of investments (5,940.8) (16,950.0) (10,345.0)
- ------------------------------------------------------------
Other sources (uses) including reinsured policy loans (497.0) (778.3) 529.1
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) investing activities 119.9 (6,801.8) 2,326.7
- ------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 12.5 108.4 --
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Proceeds from borrowings from shareholder 205.0 140.0 120.0
- ------------------------------------------------------------
Repayment of borrowings from shareholder (140.0) (120.0) (100.0)
- ------------------------------------------------------------
Dividends paid to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) financing activities (452.5) 1,158.4 (130.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net increase (decrease) in cash and short-term investments (316.2) (407.6) 1,373.8
- ------------------------------------------------------------
Cash and short-term investments at beginning of year 1,725.4 2,133.0 759.2
- ------------------------------------------------------------ --------- ---------- ---------
Cash and short-term investments at end of year $ 1,409.2 $ 1,725.4 $ 2,133.0
- ------------------------------------------------------------ ========= ========== =========
</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 (the "Company") is a wholly
owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1999, the Company owned 100% of the outstanding
common stock of four insurance company subsidiaries and four non-insurance
subsidiaries. The Company also owned 85% of the common stock of an Internet
distributor of variable annuities.
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 accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
INVESTMENTS
Bonds and preferred stocks 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 and preferred stocks 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 a 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
writedowns 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
insurance subsidiaries are carried at their statutory-basis net equity and
the non-insurance subsidiaries are carried at their GAAP-basis net equity,
adjusted for certain items which would be non-admitted under statutory
accounting principles. Both insurance subsidiaries and non-insurance
subsidiaries are presented in the balance sheet as investments in affiliated
common stocks.
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred policy acquisition costs, to the extent recoverable from future
gross profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally 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 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 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 are accounted
for using deposit accounting under GAAP.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
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
1999 1998 1999 1998 1997
----------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,526.5 $ 2,564.5 $ 512.9 $(1,150.3) $392.9
-----------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
non-admitted goodwill 3,628.2 3,085.2 135.0 48.5 (98.9)
--------------------------------------
Policy and contract reserves (1,943.1) (2,299.9) (97.9) 1,743.4 (48.6)
--------------------------------------
Interest maintenance reserve 72.3 159.7 (86.6) 24.4 58.7
--------------------------------------
Deferred income taxes 244.5 181.6 (117.4) (218.6) 70.3
--------------------------------------
Policyholders' share of earnings and
surplus on participating business (122.7) (132.8) (1.8) 3.2 5.3
--------------------------------------
Asset valuation reserve 490.9 484.5 -- -- --
--------------------------------------
Net realized gain (loss) on investments (186.4) (174.1) (32.4) (116.7) (20.4)
--------------------------------------
Unrealized gain (loss) on investments (555.2) 1,335.1 -- -- --
--------------------------------------
Nonadmitted assets, including
nonadmitted investments 139.6 119.1 -- -- --
--------------------------------------
Investments in subsidiary companies 460.9 490.4 39.1 41.3 (80.5)
--------------------------------------
Surplus notes and related interest (1,250.0) (1,251.5) 1.5 (1.5) --
--------------------------------------
Other, net (61.0) (120.1) 129.8 103.6 (35.0)
-------------------------------------- --------- --------- --------- --------- ------
Net increase (decrease) 918.0 1,877.2 (30.7) 1,627.6 (149.1)
----------------------------------------- --------- --------- --------- --------- ------
Amounts on a GAAP basis $ 3,444.5 $ 4,441.7 $ 482.2 $ 477.3 $243.8
----------------------------------------- ========= ========= ========= ========= ======
</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 or deferred in IMR, where
applicable, and are amortized over the remaining lives of the hedged items
as adjustments to investment income. 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 amortized 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 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 are
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 cash collateral received which is
typically greater than the market value of the related securities loaned. In
other instances, the Company will hold as collateral securities with a
market value at least equal to the securities loaned. Securities held as
collateral are not recorded in the Company's balance sheet in accordance
with accounting guidance for secured borrowings and collateral. 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 reserves released and 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 the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LNC's common stock at the grant date, or other measurement date, over the
amount an employee or agent 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.
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") effective January 1, 2001. 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.
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
1999 1998 1997
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,840.6 $1,714.3 $1,524.4
------------------------------------------------------------
Preferred stocks 20.3 19.7 23.5
------------------------------------------------------------
Unaffiliated common stocks 6.3 10.6 8.3
------------------------------------------------------------
Affiliated common stocks 7.8 5.2 15.0
------------------------------------------------------------
Mortgage loans on real estate 321.0 323.6 257.2
------------------------------------------------------------
Real estate 57.8 81.4 92.2
------------------------------------------------------------
Policy loans 101.7 86.5 37.5
------------------------------------------------------------
Other investments 50.6 26.5 28.2
------------------------------------------------------------
Cash and short-term investments 95.9 104.7 70.3
------------------------------------------------------------ -------- -------- --------
Total investment income 2,502.0 2,372.5 2,056.6
------------------------------------------------------------
Expenses:
Depreciation 14.4 19.3 21.0
------------------------------------------------------------
Other 284.4 246.0 188.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 298.8 265.3 209.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,203.2 $2,107.2 $1,847.1
------------------------------------------------------------ ======== ======== ========
</TABLE>
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, 1999:
Corporate $17,758.4 $ 229.6 $763.0 $17,225.0
------------------------------------------------
U.S. government 316.8 29.6 21.5 324.9
------------------------------------------------
Foreign government 984.5 49.8 39.9 994.4
------------------------------------------------
Mortgage-backed 3,913.7 46.2 139.0 3,820.9
------------------------------------------------
State and municipal 11.6 -- .5 11.1
------------------------------------------------ --------- -------- ------ ---------
$22,985.0 $ 355.2 $963.9 $22,376.3
========= ======== ====== =========
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
========= ======== ====== =========
</TABLE>
The carrying amounts of bonds in the balance sheets at
December 31, 1999 and 1998 reflect adjustments of
$38,900,000 and $11,800,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as in or near default.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1999, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 2000 $ 598.0 $ 599.2
------------------------------------------------------------
In 2001-2004 4,359.8 4,313.4
------------------------------------------------------------
In 2005-2009 6,636.0 6,392.9
------------------------------------------------------------
After 2009 7,477.5 7,249.9
------------------------------------------------------------
Mortgage-backed securities 3,913.7 3,820.9
------------------------------------------------------------ --------- ---------
Total $22,985.0 $22,376.3
------------------------------------------------------------ ========= =========
</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 1999,
1998 and 1997 were $5,351,400,000, $9,395,000,000 and
$9,715,000,000, respectively. Gross gains during 1999, 1998
and 1997 of $95,400,000, $186,300,000 and $218,100,000,
respectively, and gross losses of $195,500,000, $138,000,000
and $78,000,000, respectively, were realized on those sales.
At December 31, 1999 and 1998, investments in bonds, with an
admitted asset value of $116,500,000 and $97,800,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks are reported directly in unassigned surplus
and are not reported in the statutory-basis Statements of
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, 1999:
Preferred stocks $253.8 $ 1.3 $31.5 $223.6
----------------------------------------
Unaffiliated common stocks 150.4 34.2 17.7 166.9
----------------------------------------
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
----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1999 and 1998 reflects adjustments of
$4,100,000 and $5,800,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1999, the minimum and maximum lending rates for
mortgage loans were 6.5% and 11.5%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. 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)
Components of the Company's investments in real estate are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 11.1 9.0
------------------------------------------------------------
Less accumulated depreciation (2.2) (1.7)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 11.4 9.8
------------------------------------------------------------
Other:
Land 46.2 93.2
------------------------------------------------------------
Buildings 226.8 413.0
------------------------------------------------------------
Other 4.7 7.9
------------------------------------------------------------
Less accumulated depreciation (35.1) (50.1)
------------------------------------------------------------ ------ ------
Net other real estate 242.6 464.0
------------------------------------------------------------ ------ ------
Net real estate $254.0 $473.8
------------------------------------------------------------ ====== ======
</TABLE>
Net realized capital gains are reported net of federal
income taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Net realized capital gains $ 20.8 $179.7 $209.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credits) of ($31.4), $27.3 and $54.0 in 1999, 1998 and
1997, respectively) (58.3) 50.8 100.2
------------------------------------------------------------ ------ ------ ------
79.1 128.9 109.1
Less federal income taxes (credits) on realized gains (35.3) 82.1 77.8
------------------------------------------------------------ ------ ------ ------
Net realized capital gains after transfer to IMR and taxes
(credits) $114.4 $ 46.8 $ 31.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
4. SUBSIDIARIES
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 ("LNY"). The Company also owns 100% of
the outstanding common stock of four non-insurance company
subsidiaries: Lincoln National Insurance Associates
("LNIA"), Sagemark Consulting, Inc. ("Sagemark"), Wakefield
Tower Alpha Limited ("Wakefield"), and Lincoln Realty
Capital
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
Corporation ("LRCC"). The Company also owns 85% of one
non-insurance company subsidiary, AnnuityNet, Inc.
(AnnuityNet). Statutory-basis financial information related
to the insurance subsidiaries is summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,318.7 $434.6 $443.6 $1,888.6
---------------------------------------------------------
Other assets 40.6 55.5 492.6 403.1
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,242.2 $394.4 $261.4 $1,802.4
---------------------------------------------------------
Other liabilities 44.3 27.9 614.4 25.6
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 328.8
---------------------------------------------------------
Capital and surplus 72.8 67.8 60.4 134.9
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $332.7 $263.3 $ 88.4 $ 313.3
-----------------------------------------------------------
Expenses 329.0 346.9 75.4 291.4
-----------------------------------------------------------
Net realized gains (losses) -- -- .2 (2.0)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ 3.7 $(83.6) $ 13.2 $ 19.9
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<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>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
FIRST
PENN LNH&C LNRAC LNY
---------------------------------
<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>
AnnuityNet was formed in 1998 for the distribution of
variable annuities over the Internet and is valued on the
equity method (at 85% of GAAP equity) with an admitted asset
value of $2,400,000 at December 31, 1999. LNIA was purchased
in 1998 for $600,000 and is valued on the equity method with
an admitted asset value of $800,000 at December 31, 1999.
Sagemark is a broker dealer and was acquired in connection
with a reinsurance transaction completed in 1998. Sagemark
is valued on the equity method with an admitted asset value
of $6,400,000 at December 31, 1999. Wakefield was formed in
1999 to engage in the ownership and management of
investments and is valued on the equity method with an
admitted asset value of $248,300,000. Wakefield's assets as
of December 31, 1999 consist entirely of investments in
bonds. LRCC was formed in 1999 to engage in the management
of certain real estate investments. It was capitalized with
cash and three real estate investments of $12,700,000 and is
valued on the equity method with an admitted asset value of
$10,900,000.
The carrying value of all affiliated common stocks, was
$604,700,000 and $322,100,000 at December 31, 1999 and 1998,
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, 1999 and 1998 was $970,700,000 and
$631,100,000, respectively.
During 1999, 1998 and 1997 the Company's insurance
subsidiaries paid dividends of $5,200,000, $5,200,000 and
$15,000,000, 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 1999, 1998 and 1997, federal income tax expense (benefit)
incurred totaled $85,400,000, ($141,000,000) and
$78,300,000, respectively. In 1999, capital losses of
$151,700,000 were incurred, and carried back to recover
taxes paid in prior years.
The Company paid $45,300,000, $2,300,000 and $164,500,000 to
LNC in 1999, 1998 and 1997, respectively, in 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
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
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
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 "Reinsurance recoverable" includes
amounts recoverable from other insurers for claims paid by
the Company. The balance sheet caption, "Future policy
benefits and claims," and the balance sheet caption "Other
policyholder funds" have been reduced for insurance ceded as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $5,340.0 $4,081.8
------------------------------------------------------------
Amounts recoverable from other insurers 81.2 79.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
Insurance assumed $2,606.5 $9,018.9 $727.2
------------------------------------------------------------
Insurance ceded 1,675.1 877.1 302.9
------------------------------------------------------------ -------- -------- ------
Net amount included in premiums $ 931.4 $8,141.8 $424.3
------------------------------------------------------------ ======== ======== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,609,000,000, $2,098,800,000 and $1,240,500,000 for 1999,
1998 and 1997, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,208.3 $16,285.2
------------------------------------------------------------
Undistributed earnings on participating business 346.9 348.4
------------------------------------------------------------
Other 34.3 13.9
------------------------------------------------------------ --------- ---------
$16,589.5 $16,647.5
========= =========
</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, 1999
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $10.8 $ 7.3 $ 3.5
------------------------------------------------------------
Ordinary renewal 54.2 6.8 47.4
------------------------------------------------------------
Group life 13.7 .1 13.6
------------------------------------------------------------ ----- ----- -----
$78.7 $14.2 $64.5
===== ===== =====
</TABLE>
<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>
7. ANNUITY RESERVES
At December 31, 1999, 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 $ 2,427.7 4%
------------------------------------------------------------
At book value, less surrender charge 2,237.3 3
------------------------------------------------------------
At market value 44,076.2 68
------------------------------------------------------------ --------- ---
48,741.2 75
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 13,486.5 21
------------------------------------------------------------
Not subject to discretionary withdrawal 2,622.4 4
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund 64,850.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,548.0
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $63,302.1
------------------------------------------------------------ =========
</TABLE>
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
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 Corporation ("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
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, 1999), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna, Inc. ("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, 1999), and subject
to approval by the Indiana Insurance Commissioner.
A summary of the terms of these surplus notes follows (in millions):
<TABLE>
<CAPTION>
PRINCIPAL INCEPTION ACCRUED
OUTSTANDING AT TO DATE INTEREST AT
PRINCIPAL DECEMBER 31, CURRENT YEAR INTEREST DECEMBER 31,
DATE ISSUED AMOUNT OF NOTE 1999 INTEREST PAID PAID 1999
----------- -------------- -------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
January 5, 1998 $ 500.0 $ 500.0 $ 32.8 $ 65.1 $ --
-------------------------------
December 18, 1998 750.0 750.0 46.7 46.7 --
-------------------------------
</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,
1999, 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, 1999 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. The time frame for
unassigned surplus to return to a positive position is dependent upon future
statutory earnings and dividends paid to LNC. 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-19
<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). Effective July 1, 1999, the
agents' postretirement plan was changed to require agents retiring on or
after that date to pay the full premium costs. This change to the plan
resulted in a one-time curtailment gain of $1,400,000 in 1999. 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 Operations 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. Options issued subsequent to 1991
are exercisable in 25% increments on the option issuance anniversary in the
four years following issuance.
As of December 31, 1999, there were 2,072,087 and 1,397,005 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 919,749 and
241,097, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $12.50 to $56.75. During 1999, 1998 and
1997, there were 318,421, 136,469 and 170,789 options exercised,
respectively, and 82,024, 18,288 and 1,846 options 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, 1999 and 1998 is
$221,600,000 and $670,100,000, 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.
PERSONAL ACCIDENT PROGRAMS
In the past, the Company and its wholly owned subsidiary, LNH&C, accepted
personal accident reinsurance programs from other insurance companies. Most
of these programs were presented by independent brokers who represented 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. The liabilities for these
programs, net of related assets recoverable from reinsurers, were
$174,700,000 and $177,400,000 at December 31, 1999 and 1998, respectively.
Settlement activities relating to the Company's participation in workers'
compensation carve-out (i.e., life and health risks associated with workers'
compensation coverage) programs managed by Unicover Managers, Inc. have
allowed the Company to evaluate the possibility of settlements and to
estimate its potential costs to settle Unicover-related exposures. As of
December 31, 1999, a liability of $62,200,000 has been established for the
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement of the Company's exposure to the Unicover programs.
These amounts are based on various estimates that are subject to
considerable uncertainty. Accordingly, the liabilities may prove to be
deficient or excessive. However, it is management's opinion that future
developments in these programs will not materially affect the financial
position of the Company.
HMO EXCESS-OF-LOSS REINSURANCE PROGRAMS
In light of the continued volatility in the HMO excess-of-loss line of
business, LNH&C discontinued writing new HMO excess-of-loss reinsurance
programs in the third quarter of 1999. The liability for HMO claims, net of
the related assets for amounts recoverable from reinsurers, was $101,900,000
and $55,900,000 at December 31, 1999 and 1998, respectively. LNH&C reviews
reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss
ratios fluctuate significantly from the assumptions underlying the reserves,
adjustments to reserves could be required in the future. Accordingly, the
liability may prove to be deficient or excessive. However, it is
management's opinion that such future developments will not materially
affect the financial position of the Company.
MARKETING AND COMPLIANCE MATTERS
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances, companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future development will not materially affect the financial position of the
Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1999, 1998 and 1997 was
$38,900,000, $34,000,000 and $29,300,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
2000 $ 28.7
--------------------------------
2001 28.8
--------------------------------
2002 27.5
--------------------------------
2003 26.2
--------------------------------
2004 26.5
--------------------------------
Thereafter 123.5
-------------------------------- ------
$261.2
======
</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
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
operations. Total costs incurred in 1999 and 1998 were $67,400,000 and
$54,800,000, respectively. 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. The Company limits its maximum coverage that
it retains on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been coinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1999, the
reserves associated with these reinsurance arrangements totaled
$1,422,800,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American States 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 LNY reinsured 100% of a block of individual life
insurance and annuity business from 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 $4,780,300,000 that became
the Company's obligation. The Company also received assets, measured on a
historical statutory-basis, equal to the liabilities.
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.
In 1999, the Company and CIGNA reached an agreement through arbitration on
the final statutory-basis values of the assets and liabilities reinsured. As
a result, the Company's ceding commission for this transaction was reduced
by $58.6 million.
Subsequent to this transaction, the Company and LNY announced that they had
reached an agreement to sell the administration rights to a variable annuity
portfolio that had been acquired as part of the block of business assumed on
January 2, 1998. This sale closed on October 12, 1998 with an effective date
of September 1, 1998.
On October 1, 1998, the Company and LNY entered into an indemnity
reinsurance transaction whereby the Company and LNY reinsured 100% of a
block of individual life insurance business from Aetna. 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 $2,813,800,000
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 LNY 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.
On November 1, 1999, the Company closed its previously announced agreement
to transfer a block of disability income business to MetLife. Under this
indemnity reinsurance agreement, the Company transferred $490,800,000 of
cash to MetLife representing the statutory reserves transferred on this
business less $17,800,000 of purchase price consideration. A gain on the
reinsurance transaction of $71,800,000 was recorded directly in unassigned
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
surplus and will be recognized in statutory earnings over the life of the
business.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1999, the Company provided $270,000,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company 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 $17,300,000 and $43,400,000 at December 31, 1999
and 1998, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999, 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, 1999, 29% of such mortgages ($1,212,700,000) 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 $70,000,000.
At December 31, 1999, 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 certain 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
proceedings will not have a material adverse affect on the financial
position of the Company.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, the Company now has
several such actions pending. While each of these lawsuits seeks class
action status, the court has not certified a class in any of them. In each
of these lawsuits, plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While relief sought in these
lawsuits is substantial, they are in the discovery stages of litigation, and
it is premature to make assessments about potential loss, if any. Management
intends to defend these lawsuits vigorously. The amount of liability, if
any, which may arise as a result of these lawsuits cannot be reasonably
estimated at this time. In another lawsuit, a settlement has been
preliminarily approved by the court, and a class has been conditionally
certified for settlement purposes. Two other similar lawsuits previously
have been resolved and dismissed.
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
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
credit exposure. Outstanding guarantees with off-balance-sheet risks at
December 31, 1999 relate to mortgage loan pass-through certificates. The
Company has sold commercial mortgage loans through grantor trusts that
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, 1999 and 1998 were $25,900,000 and $30,900,000, 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, 1999 and 1998.
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 and foreign exchange
risks. In addition, the Company is subject to the risks associated with
changes in the value of its derivatives; however, such changes in value
generally are offset by changes in the value of the items being hedged by
such contracts.
Outstanding derivatives with off-balance-sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values,
are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
---------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-----------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1999 1998 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ .9
---------------------------------
Swaptions 1,837.5 1,899.5 12.2 10.8 16.2 2.5
---------------------------------
Interest rate swaps 630.9 258.3 -- (19.5) -- 9.9
---------------------------------
Put options 21.3 21.3 -- 1.9 -- 2.2
--------------------------------- -------- -------- ----- ------ ----- -----
4,998.5 6,287.9 17.4 (3.6) 25.5 15.5
Foreign currency derivatives:
Forward contracts -- 1.5 -- -- -- --
---------------------------------
Foreign currency swaps 44.2 47.2 -- (.4) -- .3
--------------------------------- -------- -------- ----- ------ ----- -----
44.2 48.7 -- (.4) -- .3
Commodity derivatives:
Commodity swaps -- 8.1 -- -- -- 2.4
--------------------------------- -------- -------- ----- ------ ----- -----
$5,042.7 $6,344.7 $17.4 $ (4.0) $25.5 $18.2
======== ======== ===== ====== ===== =====
</TABLE>
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 SWAPTIONS
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,108.8 $4,900.0 $1,899.5 $1,752.0
-------------------------------------------------------
New contracts -- 708.8 -- 218.3
-------------------------------------------------------
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
------------------------------------------------------- -------- -------- -------- --------
Balance at end of year $2,508.8 $4,108.8 $1,837.5 $1,899.5
------------------------------------------------------- ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Balance at beginning of year $ 258.3 $ 10.0
------------------------------------------------------------
New contracts 482.4 2,226.6
------------------------------------------------------------
Terminations and maturities (109.8) (1,978.3)
------------------------------------------------------------ ------- ---------
Balance at end of year $ 630.9 $ 258.3
------------------------------------------------------------ ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
----------------------------------------
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $21.3 $ -- $ 8.1 $ --
------------------------------------------------------------
New contracts -- 21.3 -- 8.1
------------------------------------------------------------
Terminations and maturities -- -- (8.1) --
------------------------------------------------------------ ----- ----- ----- ----
Balance at end of year $21.3 $21.3 $ -- $8.1
------------------------------------------------------------ ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
(FOREIGN INVESTMENTS)
-------------------------------------------
FOREIGN CURRENCY
SWAPS
FOREIGN EXCHANGE
-------------------------------------------
FORWARD CONTRACTS
1999 1998 1999 1998
-------------------------------------------
(IN MILLIONS)
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1.5 $ 163.1 $47.2 $15.0
------------------------------------------------------------
New contracts 2.7 419.8 -- 39.2
------------------------------------------------------------
Terminations and maturities (4.2) (581.4) (3.0) (7.0)
------------------------------------------------------------ ----- ------- ----- -----
Balance at end of year $ -- $ 1.5 $44.2 $47.2
------------------------------------------------------------ ===== ======= ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 2000 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
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
premium paid for the interest rate caps is included in other investments
(amortized costs of $5.2 million as of December 31, 1999) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2000 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
investments (amortized cost of $12.2 million as of December 31, 1999) 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 security 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. While spreadlocks are
used periodically, there are no spreadlock agreements outstanding at
December 31, 1999.
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 agreement the stream of variable interest
payments based on the coupon payments hedged 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 blocks of business or to extend
the duration of certain portfolios of assets. Once the assets are purchased
the gains (losses) resulting from the termination of the swap agreements
will be applied to the basis of the assets. The gains (losses) will be
recognized in earnings over the life of the assets. The anticipated purchase
of assets related to extending the duration of certain portfolios of assets
is expected to be completed in 2000.
PUT OPTIONS
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed
maturity investments. The risk being hedged is a drop in bond prices due to
credit concerns with international bond issuers. The put options allow the
Company to put the bonds back to the counterparties at original par.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts and
foreign currency swaps, 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. A foreign currency swap is a contractual
agreement to exchange the currencies of two different countries at a fixed
rate of exchange in the future.
COMMODITY SWAPS
The Company used a commodity swap to hedge its exposure to fluctuations in
the price of gold. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a fixed amount of cash. The
Company owned a fixed income security that met its coupon
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 were the
product of the swap notional multiplied by the fixed rate stated in the swap
agreement. The net receipts or payments from commodity swaps were recorded
in net investment income. The fixed income security was called in the third
quarter of 1999 and the commodity swap expired.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,200,000, $10,000,000 and $7,000,000 in 1999, 1998 and 1997, respectively.
Deferred gains of $100,000 as of December 31, 1999, were the result of
terminated interest rate swaps. These gains are included with the related
fixed maturity securities to which the hedge applied or as deferred
liabilities 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 various derivative contracts. However, the Company does
not anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value less collateral held for such agreements with each
counterparty if the net market value is in the Company's favor. At
December 31, 1999, the exposure was $8,500,000.
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.,
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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
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-28
<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
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 22,985.0 $ 22,376.3 $ 23,830.9 $ 25,065.5
-----------------------------------------------
Preferred stocks 253.8 223.6 236.0 242.5
-----------------------------------------------
Unaffiliated common stocks 166.9 166.9 259.3 259.3
-----------------------------------------------
Mortgage loans on real estate 4,211.5 4,104.0 3,932.9 4,100.1
-----------------------------------------------
Policy loans 1,652.9 1,770.5 1,606.0 1,685.9
-----------------------------------------------
Other investments 426.6 426.6 434.4 434.4
-----------------------------------------------
Cash and short-term investments 1,409.2 1,409.2 1,725.4 1,725.4
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,730.4) (17,364.3) (17,845.8) (17,486.4)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (454.7) (465.1) (714.4) (738.2)
--------------------------------------------
Short-term debt (205.0) (205.0) (140.0) (140.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,022.1) (1,250.0) (1,335.1)
-----------------------------------------------
Derivatives 17.4 (4.0) 25.5 18.2
-----------------------------------------------
Investment commitments -- (0.8) -- (.6)
-----------------------------------------------
Separate account assets 46,105.1 46,105.1 36,907.0 36,907.0
-----------------------------------------------
Separate account liabilities (46,105.1) (46,105.1) (36,907.0) (36,907.0)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
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.
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 $60,400,000 and
$76,700,000 in 1999 and 1998, respectively, and override commissions and
operating expense allowances of $61,600,000 in 1997. LLAD incurred expenses
of $113,400,000, $102,400,000 and
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$5,500,000 in 1999, 1998 and 1997, 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, 1999 and 1998 include the
Company's participation in a short-term investment pool with LNC of
$390,300,000 and $383,600,000, respectively. Related investment income
amounted to $16,700,000, $16,800,000 and $15,500,000 in 1999, 1998 and 1997,
respectively. Short-term loan payable to parent company at December 31, 1999
and 1998 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $49,400,000, $92,100,000 and
$48,500,000 in 1999, 1998 and 1997, 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
1999 1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 19.7 $ 13.7 $ 11.9
----------------------
Insurance ceded 777.6 290.1 100.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 413.7 $ 197.3
------------------------
Future policy benefits
and claims ceded 1,680.4 1,125.0
------------------------
Amounts recoverable on
paid and unpaid losses 146.4 84.2
------------------------
Reinsurance payable on
paid losses 8.8 6.0
------------------------
Funds held under
reinsurance treaties --
net liability 2,106.4 1,375.4
------------------------
</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 $917,300,000 and $318,300,000 at December 31, 1999 and 1998,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1999 and 1998, LNC had guaranteed $818,900,000 and $237,000,000,
respectively, of these letters of credit. At December 31, 1999 and 1998, the
Company has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $118,800,000 and $122,400,000,
respectively, 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 none of the separate accounts have
any minimum guarantees and the investment risks associated with market
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$4,572,600,000, $3,953,300,000 and $4,821,800,000 in 1999, 1998 and 1997,
respectively. Reserves for separate accounts with assets at fair value were
$45,198,900,000 and $36,145,900,000 at December 31, 1999 and 1998,
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
1999 1998 1997
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 4,573.2 $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,933.8) (4,069.8) (2,943.8)
------------------------------------------------------------ --------- --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (360.6) $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= ========= =========
</TABLE>
15. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue was complex and affected many aspects of the Company's
business. The Company was particularly concerned with Year 2000 issues that
related to the Company's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners. From 1996
through 1999 the Company and its operating subsidiaries redirected a large
portion of internal Information Technology ("IT") efforts and contracted
with outside consultants to update systems to address Year 2000 issues.
Experts were engaged to assist in developing work plans and cost estimates
and to complete remediation activities.
For the year ended December 31, 1999, the Company identified expenditures of
$39,500,000 to address this issue. This brings the expenditures for 1996
through 1999 to $75,300,000. Because updating systems and procedures is an
integral part of the Company's on-going operations, most of the expenditures
shown above are expected to continue after all Year 2000 issues have been
resolved. All Year 2000 expenditures have been funded from operating cash
flows.
The scope of the overall Year 2000 program included 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 Company
completed these projects prior to year-end.
The Company's businesses have not identified any major problems in their
business processing. Minor problems have been resolved quickly. The
Company's businesses have not experienced any significant interruption in
service to clients or business partners or in reporting to regulators.
S-31
<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 (the "Company"),
a wholly owned subsidiary of Lincoln National Corporation, as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards
generally accepted in the United States. 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 accounting principles
generally accepted in the United States. The variances between
such practices and accounting principles generally accepted in
the United States 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 accounting
principles generally accepted in the United States, the
financial position of The Lincoln National Life Insurance
Company at December 31, 1999 and 1998, or the results of its
operations or its cash flows for each of the three years in the
period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
January 31, 2000
S-32
