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PROSPECTUS
This document is incorporated by reference to Post-Effective Amendment No. 11,
Registration Number 33-25990 filed on Form N-4 on April 30, 1995.
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STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
(REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(DEPOSITOR)
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln National Variable Annuity Account C dated April 29, 1995.
You may obtain a copy of the Account C Prospectus on request and without charge.
Please write Kim Oakman, The Lincoln National Life Insurance Company, P.O. Box
2340, Fort Wayne, Indiana 46801 or call 1-800-348-1212, Extension 4912.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
TABLE OF CONTENTS
ITEM Page
General Information and History of LNL B-2
Special Terms B-2
Services B-2
Purchase of Securities Being Offered B-2
Underwriters B-2
Calculation of Performance Data B-2
Annuity Payments B-5
Federal Tax Status B-5
Determination of Net Asset Value B-8
Advertising and Sales Literature/Graphics B-8
Financial Statements B-12
____________
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 29, 1995.
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STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
GENERAL INFORMATION AND HISTORY OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (LNL)
The Prior Depositor of the Account, Lincoln National Pension Insurance Company,
was merged into LNL, effective January 1, 1989. LNL, organized in 1905, is an
Indiana stock insurance corporation, engaged primarily in the direct issuance of
life insurance contracts and annuities, and is also a professional reinsurer.
LNL is wholly owned by Lincoln National Corporation, a publicly held insurance
holding company domiciled in Indiana.
SPECIAL TERMS
The Special terms used in this SAI are the ones defined in the Prospectus.
SERVICES
CUSTODIAN
The Custodian for the securities purchased by the Bond, Growth and Income,
Managed, Money Market, Social Awareness and Special Opportunities Funds is
Bankers Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005.
These six funds expect to change custodian to Chase Manhattan Bank, New York,
New York, in mid-1995. For the Aggressive Growth, Capital Appreciation, Equity-
Income, International and Global Asset Allocation Funds, the Custodian is State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
The Custodian, as authorized by each Fund, will hold, transfer, exchange,
deliver or loan the Fund's securities, and will maintain certain cash accounts
in support of those functions.
INDEPENDENT AUDITORS
The financial statements of the Variable Annuity Account and the consolidated
financial statements and schedules of LNL appearing in this Statement of
Additional Information and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, to the extent indicated in their reports
thereon also appearing elsewhere herein and in the Registration Statement. Such
financial statements and schedules have been included herein in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the Variable Annuity Account are maintained by LNL. No separate
charge against the assets of the Variable Annuity Account is made by LNL for
this service.
PRINCIPAL UNDERWRITER
LNL is the principal underwriter for the Variable Annuity Contracts.
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PURCHASE OF SECURITIES BEING OFFERED
The Variable Annuity Contracts are offered to the public through licensed
insurance agents who specialize in selling LNL products; through independent
insurance "brokers"; and through certain securities broker/dealers selected by
LNL whose personnel are legally authorized to sell annuity products. There are
no special purchase plans for any class of prospective buyers.
There are exchange privileges between sub-accounts, and between the Variable
Annuity Account and LNL's general account (See Transfers of Accumulation Units
Between Sub-Accounts, in the Prospectus.) No exchanges are permitted between
the Variable Annuity Account and other separate accounts.
UNDERWRITERS
LNL has contracted with some broker/dealers, and may contract with others, to
sell the Variable Contracts through certain legally authorized persons and
organizations. These dealers are compensated under a standard Compensation
Schedule.
LNL is the principal underwriter for the Variable Contracts. The offering of
the Contracts is continuous. LNL retains no underwriting commissions from the
sale of the variable contracts.
CALCULATION OF PERFORMANCE DATA
(a) MONEY MARKET FUNDED SUB-ACCOUNTS:
1) Seven-day yield: 5.16%
Length of Base Period used in computing the yield: 7 days
Last Day in the Base Period: December 31, 1994
2) The yield reported above and in the table of Condensed Financial
Information in the Prospectus is determined by calculating the change in
unit value for the base period (the 7-day period ended December 31,
1994); then dividing this figure by the account value at the beginning
of the period; then annualizing this result by the factor of 365/7.
This yield includes all deductions charged to the Contract Owner's
account, and excludes any realized gains and losses from the sale of
securities.
(b) OTHER SUB-ACCOUNTS:
1) TOTAL RETURN--the table below shows, for the various Sub-Accounts of
the Variable Annuity Account, an Average Annual Total Return as of
the stated periods, based upon a hypothetical initial purchase payment
of $1,000, calculated according to the formula set out after the table.
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<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1994
<S> <C> <C> <C> <C> <C> <C>
1-YEAR PERIOD 5-YEAR PERIOD 10-YEAR PERIOD
PERIODIC SINGLE & FLEXIBLE PERIODIC SINGLE & FLEXIBLE PERIODIC SINGLE & FLEXIBLE
CONTRACTS PREM. CONTRACTS PYMT. CONTRACTS PREM. CONTRACTS PYMT.CONTRACTS PREM. CONTRACTS
1
BA -12.83% -10.94% 5.75% 6.18% 8.71% 8.71%
1
GA -7.78 -5.77 7.02 7.47 12.43 12.43
2
IA -5.97 -3.92 N/A N/A N/A N/A
3
MA -10.68 -8.74 5.44 5.87 9.71 9.71
4
PMA -10.66 -8.72 5.96 6.40 6.22 6.81
5
SAA -8.82 -6.83 7.14 7.59 10.21 10.72
1
SOA -9.91 -7.96 8.71 9.15 11.85 11.85
6
AG -17.61 -16.71 N/A N/A N/A N/A
6
CA -6.50 -5.48 N/A N/A N/A N/A
6
EI -3.79 -2.75 N/A N/A N/A N/A
</TABLE>
KEY: BA=Bond Account; GA=Growth Account; IA=International Account; MA=Managed
Account; PMA=Putnam Master Account; SAA=Social Awareness Account;
SOA=Special Opportunities Account; AG=Aggressive Growth Account;
CA=Capital Appreciation Account; EI=Equity-Income Account
*The lifetime of this sub-account is less than the complete period indicated.
See the date the sub-account commenced activity under the notation "Footnotes".
Footnotes:
1
Sub-Account commenced activity on December 21, 1981
2
Sub-Account commenced activity on May 1, 1991
3
Sub-Account commenced activity on April 29, 1983
4
Sub-Account commenced activity on August 3, 1987
5
Sub-Account commenced activity on May 2, 1988
6
Sub-Account commenced activity on Jan. 3, 1994
N/A=not applicable.
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The length of the periods and the last day of each period used in
the above table are set out in the table heading and in the
footnotes above. The Average Annual Total Return for each period
was determined by finding the average annual compounded rate of
return over each period that would equate the initial amount
invested to the ending redeemable value for that period, according
to the following formula--
n
P(1+T) =ERV
Where: P= a hypothetical initial purchase payment of 1,000
T= average annual total return for the period in question
n= number of years
ERV= redeemable value (as of the end of the period in
question) of a hypothetical 1,000 purchase payment
made at the beginning of the 1-year, 5-year, or 10-
year period in question (or fractional portion thereof)
The formula assumes that: 1) all recurring fees have been charged
to Contract Owner accounts; 2) all applicable non-recurring
charges are deducted at the end of the period in question; and 3)
there will be a complete redemption at the end of the period in
question. The performance figures shown in the table above relate
to the contract form containing the highest level of charges.
(c) NON-STANDARDIZED PERFORMANCE DATA
The Variable Annuity Account advertises the performance of its
various Sub-Accounts by observing how they perform over various
time periods--monthly, year-to-date, yearly (fiscal year); and
over periods of two years and more. Monthly, year-to-date, and
yearly performance are computed on a "cumulative" basis;
performance for a two-year period and for greater periods is
computed both on a cumulative and on an "annualized" basis.
"Cumulative" quotations are arrived at by calculating the change
in the Accumulation Unit value between the first and last day of
the base period being measured, and expressing the difference as a
percentage of the Unit Value at the beginning of the base period.
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"Annualized" quotations are arrived at by applying a formula which
determines the level rate of return which, if earned over the
entire base period, would produce the cumulative return.
The table below sets out representative performance quotations,
according to the definitions above, for each of the Sub-Accounts,
for the following base periods: 1) monthly; 2) year-to-date; 3)
yearly; and 4) a two-year period. For all quotations except 2),
the end of the base period is December 31, 1994. For no. two, the
end of the base period is November 30, 1994. (The year-to-date
quotation would equal the yearly quotation if the end of the base
period selected for the former were December 31.) In addition,
the Account may advertise by quotations with base periods of more
than two years. These will be calculated in an identical manner
to the method used to calculate the quotation for the two-year
period; the only difference is that the base period utilized in
the formula will be longer.
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NON-STANDARDIZED PERFORMANCE DATA
SUB-ACCOUNTS OF ACCOUNT C*
<TABLE>
<CAPTION>
TYPE OF SUB-ACCOUNT
PERFORMANCE DATA LNBF LNGF LNIN LNMF LNMM LNPM LNSA LNSO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monthly (12/31/94) .63% 1.49% 0.32% 1.16% .36% .80% 1.06% 2.24%
Year-to-Date (11/30/94) -5.78 -1.16 1.92 -3.96 2.42 -3.60 -1.85 -4.15
Yearly (12/31/94) -5.18 .32 2.28 -2.85 2.78 -2.82 -0.81 -2.01
3-Year (Cum.) 12.70 13.42 28.45 10.25 7.08 19.13 14.54 22.28
3-Year (Ann.) 4.07 4.29 8.71 3.31 2.31 6.01 4.63 6.94
</TABLE>
<TABLE>
<CAPTION>
TYPE OF SUB-ACCOUNT
PERFORMANCE DATA AGG GROWTH CAP. APP. EQ. INC
<S> <C> <C> <C>
Monthly (12/31/94) 1.65% 0.69% 0.99%
Year-to-Date (11/30/94) -14.26 -0.88 0.86
Yearly (12/31/94) -12.85 -0.20 1.86
3-Year (Cum.) N/A N/A N/A
3-Year (Ann.) N/A N/A N/A
</TABLE>
*-Table excludes surrender charges.
Key: LNAG=Aggressive Growth Sub-Account
LNBF=Bond Sub-Account
LNCA=Capital Appreciation Sub-Account
LNEI=Equity-Income Sub-Account
LNGF=Growth and Income Sub-Account
LNIN=International Sub-Account
LNMF=Managed Sub-Account
LNMM=Money Market Sub-Account
LNPM=Global Asset Allocation Sub-Account
LNSA=Social Awareness Sub-Account
LNSO=Special Opportunities Sub-Account
Cum.=Cumulative return
Ann.=Annualized return
N/A =Not Applicable
All performance quotations may be advertised on a cumulative basis; performance
quotations with a base period of two years or longer may also be advertised on
an "annualized" basis.
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ANNUITY PAYMENTS
VARIABLE ANNUITY PAYMENTS
Variable annuity payments will be determined on the basis of: (1) the value of
the Contract prior to the Annuity Commencement Date; (2) the annuity tables
contained in the Contract; (3) the type of Annuity Option selected; and (4) the
investment performance of the Eligible Fund(s)selected. In order to determine
the amount of variable annuity payments, LNL makes the following calculation:
first, it determines the dollar amount of the first payment; second, it credits
the Annuitant with a fixed number of Annuity Units based on the amount of the
first payment; and third, it calculates the value of the Annuity Units each
period thereafter. These steps are explained below.
The dollar amount of the first variable annuity payment is determined by
applying the total value of the Accumulation Units credited under the Contract
valued as of the fourteenth day prior to the Annuity Commencement Date (less any
premium taxes) to the annuitbles contained in the Contract. Amounts shown in the
tables are based on the 1971 Individual Annuity Mortality Tables, modified with
an assumed investment return at the rate of 5% per annum. The first annuity
payment is determined by multiplying the benefit per 1,000 of value shown in the
Contract tables by the number of thousands of dollars of value accumulated under
the Contract. These
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annuity tables vary according to the form of annuity selected and the age of the
Annuitant at the Annuity Commencement Date. The 5% interest rate stated above
is the measuring point for subsequent annuity payments. If the actual Net
Investment Rate (annualized) exceeds 5%, the payment will increase at a rate
equal to the amount of such excess. Conversely, if the actual rate is less than
5%, annuity payments will decrease. If the assumed rate of interest were to be
increased, annuity payments would start at a higher level but would decrease
more rapidly or increase more slowly.
LNL may use sex distinct annuity tables in Contracts that are not associated
with employer sponsored plans where not prohibited by law.
At an Annuity Commencement Date, the Annuitant is credited with Annuity Units
for each sub-account on which variable annuity payments are based. The number of
Annuity Units to be credited is determined by dividing the amount of the first
payment by the value of an Annuity Unit in each sub-account selected. Although
the number of Annuity Units is fixed by this process, the value of such units
will vary with the value of the underlying Eligible Funds. The amount of the
second and subsequent annuity payments is determined by multiplying the Contract
Owner's fixed number of Annuity Units in each sub-account by the appropriate
Annuity Unit value for the Valuation Date ending 14 days prior to the date that
payment is due.
The value of each sub-account Annuity Unit was set initially at 1.00. The
Annuity Unit value for each sub-account at the end of any Valuation Date is
determined by multiplying the sub-account Annuity Unit value for the immediately
preceding Valuation Date by the product of:
(a) The net investment factor of the sub-account for the Valuation
Period for which the Annuity Unit value is being determined, and
(b) A factor to neutralize the assumed investment return in the
annuity table.
The value of the Annuity Units is determined as of a Valuation Date 14 days
prior to the payment date in order to permit calculation of amounts of annuity
payments and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
PROOF OF AGE, SEX AND SURVIVAL
LNL may require proof of age, sex, or survival of any payee upon whose age, sex,
or survival payments depend.
FEDERAL TAX STATUS
GENERAL
The operations of the Variable Annuity Account form a part of, and are taxed
with, the operations of LNL under the Internal Revenue Code of 1986, as amended
(the "Code"). Investment income and realized net capital gains on the assets of
the Variable Annuity Account are reinvested and taken into account in
determining the accumulation and annuity unit values. As a result, such
investment income and realized net capital gains are automatically retained as
part of the reserves under the Contract. Under existing federal income tax law,
LNL believes that Variable Annuity Account
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investment income and realized net capital gains are not taxed to the extent
they are retained as part of the reserves under the Contracts. Accordingly, LNL
does not anticipate that it will incur any federal income tax liability
attributable to the Variable Annuity Account, and therefore it does not intend
to make any provision for such taxes. However, if changes in the federal tax
laws or interpretations thereof result in LNL's being taxed on income or gains
attributable to the Variable Annuity Account, then LNL may impose a charge
against the Variable Annuity Account in order to make provision for payment of
such taxes.
TAX STATUS OF NON-QUALIFIED CONTRACTS
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund the shares of which are owned by separate accounts
of insurance companies) underlying the Contract be "adequately diversified" in
accordance with Treasury regulations in order for the Contract to qualify as an
annuity contract under section 72 of the Code. The Variable Account, through
each Fund, intends to comply with the diversification requirements prescribed in
the regulations, which affect how the assets in each Fund in which the Variable
Account invests may be invested. Although Lincoln National Investment
Management Company is an affiliate of LNL, LNL does not have control over the
Funds or their investments. However, LNL believes that each Fund in which the
Variable Account owns shares will meet the diversification requirements, and
therefore the Contracts will be treated as annuities under the Code.
The Treasury Department has indicated that guidelines may be forthcoming under
which a variable annuity contract will not be treated as an annuity contract for
tax purposes if the Contract Owner has excessive control over the investments
underlying the contract. The issuance of such guidelines may require the
Company to impose limitations on a Contract Owner's right to control the
investment. It is not known whether any such guidelines would have a
retroactive effect. For these reasons, LNL reserves the right to modify the
Contract as necessary to prevent the Contract Owner from being considered the
Owner of the assets for the Variable Account.
In addition to the requirements of section 817(h), the Code (section 72(s)
provides that Contracts issued after January 18, 1985, will not be treated as
annuity contracts for purposes of section 72 unless the Contract provides that
(A) if any Contract Owner dies on or after the annuity starting date but prior
to the time the entire interest in the Contract has been distributed, the
remaining portion of such interest must be distributed at least as rapidly as
under the method of distribution in effect at the time of the Contract Owner's
death; and (B) if any Contract Owner dies prior to the annuity starting date,
the entire interest must be distributed within five years after the death of the
Contract Owner. These requirements are considered satisfied if any portion of
the Contract Owner's interest that is payable to or for the benefit of a
"designated beneficiary" is distributed over that designated beneficiary's life,
or a period not extending beyond the designated beneficiary's life expectancy,
and if that distribution begins within one year of the Contract Owner's death.
The "designated beneficiary" must be a natural person. Contracts issued after
January 18, 1985 contain provisions intended to comply with these Code
requirements, although regulations interpreting these requirements have yet to
be issued. LNL intends to review such provisions and modify them if necessary
to assure that they comply with the requirements of section 72(s) when clarified
by regulation or otherwise.
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QUALIFIED CONTRACTS
The rules governing the tax treatment of contributions and distributions under
qualified plans, as set forth in the Code and applicable rulings and
regulations, are complex and subject to change. These rules also vary according
to the type of plan and the terms and conditions of the plan itself. Therefore,
no attempt is made herein to provide more than general information about the use
of Contracts with the various types of plans, based on LNL's understanding of
the current federal tax laws as interpreted by the Internal Revenue Service.
Purchasers of Contracts for use with such a plan and plan participants and
beneficiaries should consult counsel and other competent advisers as to the
suitability of the plan and the Contract to their specific needs, and as to
applicable Code limitations and tax consequences. Participants under such
plans, as well as Contract Owners, annuitants, and beneficiaries, should also be
aware that the rights of any person to any benefits under such plans may be
subject to the terms and conditions of the plans themselves regardless of the
terms and conditions of the Contract.
Following are brief descriptions of the various types of plans and of the use of
Contracts in connection therewith.
PUBLIC SCHOOL SYSTEMS AND SECTION 501(C)(3) ORGANIZATIONS
Payments made to purchase annuity contracts by public school systems or certain
Section 501(c)(3) organizations for their employees are excludable from the
gross income of the employee to the extent that aggregate payments for the
employee do not exceed the "exclusion allowance" provided by Section 403(b) of
the Code, the over-all limits for excludable contributions of Section 415 of the
Code or the limit on elective contributions. Furthermore, the investment
results of the Fund credited to the account are not taxable until benefits are
received either in the form of annuity payments or in a single sum.
If an employee's individual account is surrendered, usually the full amount
received would be includable in income for that year at ordinary rates.
QUALIFIED CORPORATE EMPLOYEE'S PENSION AND PROFIT-SHARING TRUSTS
AND QUALIFIED ANNUITY PLANS
Payments made by a corporate employer and the increments on all payments for
qualified corporate plans are not taxable as income to the employee until
distributed. However, the employee may be required to include these amounts in
gross income prior to distribution if the qualified plan or trust loses its
qualification. Corporate plans qualified under Sections 401(a) or 403(a) of the
Code are subject to extensive rules, including limitations on maximum
contributions or benefits.
Distributions of amounts in excess of nondeductible employee contributions
allocated to such distributions are generally taxable as ordinary income. If an
employee or beneficiary receives a "lump-sum distribution", that is, if the
employee or beneficiary receives in a single tax year the total amounts payable
with respect to that employee and the benefits are paid as a result of the
employee's death or separation from service or after the employee attains
59 1/2, taxable gain may be either eligible for special "lump sum averaging"
treatment or, if the recipient was age 50 before
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January 1, 1986, eligible for taxation at a 20% rate to the extent the
distribution reflects payments made prior to January 1, 1974. These special tax
rules are not available in all cases.
SELF-EMPLOYED INDIVIDUALS (H.R. 10 OR KEOGH)
Under Code provisions, self-employed individuals may establish plans commonly
known as "H.R. 10" or "Keogh plans" for themselves and their employees. The tax
consequences to participants under such plans depend upon the plan itself. Such
plans are subject to special rules in addition to those applicable to qualified
corporate plans, although certain of these rules have been repealed or modified
effective in 1984. Purchasers of the Contracts to use with H.R. 10 plans should
seek competent advice as to suitability of plan documents and the funding
contracts.
INDIVIDUAL RETIREMENT ANNUITIES (IRA)
Under Section 408 of the Code, individuals may participate in a retirement
program known as Individual Retirement Annuity (IRA). An individual may make an
annual IRA contribution of up to the lesser of $2,000 (or $2,250 if IRAs are
maintained for both the individual and his nonworking spouse) or 100% of
compensation. However, under rules effective for tax years beginning after
1986, IRA contributions may be nondeductible in whole or in part if (1) the
individual or his spouse is an active participant in certain other retirement
programs and (2) the income of the individual (or of the individual and his
spouse) exceeds a specified amount. Distributions from certain types of
retirement plans may be "rolled over" to an IRA on a tax-deferred basis if
certain requirements are met. Distributions from IRA's are subject to certain
restrictions. Deductible IRA contributions and all earnings will be taxed as
ordinary income when distributed. The failure to satisfy certain Code
requirements with respect to an IRA results in adverse tax consequences.
DEFERRED COMPENSATION PLANS (457 PLANS)
Under the Code provisions, employees and independent contractors (participants)
performing services for state and local governments and tax-exempt organizations
may establish deferred compensation plans. While participants in such plans may
be permitted to specify the form of investment in which their plan accounts will
participate, all such investments are owned by the sponsoring employer and are
subject to the claims of its creditors. The amounts deferred under a plan which
meet the requirements of Section 457 of the Code are not taxable as income to
the participant until paid or otherwise made available to the participant or
beneficiary. Deferrals are taxed as compensation from the employer when they
are actually or constructively received by the employee. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of $7,500 or
33 1/3% of the participant's includable compensation. However, in the limited
circumstances, up to $15,000 may be deferred in each of the last three years
before retirement.
SIMPLIFIED EMPLOYEE PENSION PLANS
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An employer may make contributions on behalf of employees to a simplified
employee pension plan as provided by Section 408(k) of the Code. The
contributions and distribution dates are limited by the Code provisions. All
distributions from the plan will be taxed as ordinary income. Any distribution
before the employee attains age 59 1/2 (except in the event of death or
disability) or the failure to satisfy certain other Code requirements may result
in adverse tax consequences.
TAX ON DISTRIBUTIONS FROM QUALIFIED CONTRACTS
The following rules generally apply to distributions from contracts purchased in
connection with the plans discussed above, other than deferred compensation
plans.
The portion, if any, of any contribution under a contract made by or on behalf
of an individual which is not excluded from the employee's gross income
(generally, the employee's own non-deductible contributions) constitutes his
"investment in the contract." If a distribution is made in the form of annuity
payments, the employee's "investment in the contract" (adjusted for certain
refund provisions) divided by his life expectancy (or other period for which
annuity payments are expected to be made) constitutes a tax-free return of
capital each year. The dollar amount of annuity payments received in any year
in excess of such return is taxable as ordinary income. However, for
employees whose annuity starting date is after December 31, 1986, all
distributions will be fully taxable once the employee is deemed to have
recovered the dollar amount of his investment in the contract.
If a surrender of or withdrawal from the contract is effected and distribution
is made from the plan in a single payment, the proceeds may qualify for special
"lump-sum distribution" treatment under certain qualified plans, as discussed
above. Otherwise, the amount by which the payment exceeds the "investment in
the contract" (adjusted for any prior withdrawal) allocated to that payment, if
any, will be taxed as ordinary income in the year of receipt. For amounts
distributed after 1986, rules generally provide that all distributions which are
not received as an annuity will be taxed as a pro rata distribution of taxable
and nontaxable amounts (rather than as a distribution first of nontaxable
amounts).
Distributions from qualified plans, Keoghs, simplified employee pension plans,
403(b) plans and IRAs will be subject to (1) a 10% penalty tax if made before
age 59 1/2 unless certain other exceptions apply, and (2) a 15% penalty tax on
combined annual distributions in excess of $150,000 subject to various special
rules. Effective for taxable years beginning after 1988, failure to meet
certain minimum distribution requirements for the above plans, as well as for
Section 457 plans, will result in a 50% excise tax. Various other adverse tax
consequences may also be potentially applicable in certain circumstances to
these types of plans.
Upon an employee's death, the taxation of benefits payable to his beneficiary
generally follows these same principles, subject to a variety
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of special rules. In particular, tax on death benefits paid as a lump-sum may
be deferred if, within 60 days after the lump-sum becomes payable, the
beneficiary instead elects to receive annuity payments.
OTHER CONSIDERATIONS
It should be understood that the foregoing comments about the federal tax
consequences under these Contracts are not exhaustive and that special rules are
provided with respect to other tax situations not discussed herein. Further,
the foregoing discussion does not address any applicable state, local, or
foreign tax laws. Finally, in recent years numerous changes have been made in
the federal income tax treatment of Contracts and retirement plans, which are
not fully discussed above. Before an investment is made in any of the
Contracts, a competent tax adviser should be consulted.
DETERMINATION OF NET ASSET VALUE
A description of the days on which Variable Account's net asset value per share
will be determined is given in the Prospectus. The New York Stock Exchange's
most recent announcement (which is subject to change) states that in 1995 it
will be closed on President's Day, February 20; Good Friday, April 14; Memorial
Day, May 29; Independence Day, July 4; Labor Day, September 4; Thanksgiving Day,
November 23; and Christmas Day, December 25. It may also be closed on other
days.
Since the portfolios of some of the Eligible Funds will consist of securities
primarily listed on foreign exchanges or otherwise traded outside the United
States, those securities may be traded (and the net asset value of those Funds
and of the Variable Account could therefore be significantly affected) on days
when the investor has no access to those Funds.
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ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, LNL may refer to the following organizations
(and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM evaluates the various factors affecting the overall
performance of an insurance company in order to provide an opinion as to an
insurance company's relative financial strength and ability to meet its
contractual obligations. The procedure includes both a quantitative and
qualitative review of each company.
DUFF & PHELPS insurance company claims paying ability (CPA) service provides
purchasers of insurance company policies and contracts with analytical and
statistical information on the solvency and liquidity of major U.S. licensed
insurance companies, both mutual and stock.
EAFE Index is prepared by Morgan Stanley Capital International (MSCI). It
measures performance of securities in Europe, Australia and the Far East. The
index reflects the movements of world stock markets by representing the
evolution of an unmanaged portfolio. The EAFE Index offers international
diversification with over 1000 companies across 18 different countries.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a publisher
of statistical data covering the investment company industry in the United
States and overseas. Lipper is recognized as the leading source of data on
open-end and closed-end funds. Lipper currently tracks the performance of over
5,000 investment companies and publishes numerous specialized reports, including
reports on performance and portfolio analysis, fee and expense analysis.
MOODY'S insurance claims-paying rating is a system of rating insurance company's
financial strength, market leadership, and ability to meet financial
obligations. The purpose of Moody's ratings is to provide investors with a
simple system of gradation by which the relative quality of insurance companies
may be noted.
MORNINGSTAR is an independent financial publisher offering comprehensive
statistical and analytical coverage of open-end and closed-end funds and
variable annuities.
STANDARD & POOR's insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. The likelihood of a timely flow
of funds from the insurer to the trustee for the bondholders is a key element in
the rating determination for such debt issues.
VARDS (Variable Annuity Research Data Service) provides a comprehensive guide to
variable annuity contract features and historical fund performance. The service
also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable contracts.
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STANDARD & POOR'S INDEX--broad-based measurement of changes in stock-market
conditions based on the average performance of 500 widely held common stocks;
commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks,
their relative weightings to reflect differences in the number of outstanding
shares, and publication of the index itself are services of Standard & Poor's
Corporation, a financial advisory, securities rating, and publishing firm. The
index tracks 400 industrial company stocks, 20 transportation stocks, 40
financial company stocks, and 40 public utilities.
NASDAQ-OTC Price Index--this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA)--price-weighted average of 30 actively
traded blue chip stocks, primarily industrials but including American Express
Company and American Telephone and Telegraph Company. Prepared and Published by
Dow Jones & Company, it is the oldest and most widely quoted of all the market
indicators. The average is quoted in points, not dollars.
BOSTON SAFE INDEX--The Boston SAFE (South Africa-Free Equity) Index is a
benchmark developed by The Boston Company, Inc. to measure the effects of
divestiture and the relative performance of South Africa-Free portfolios. The
Boston SAFE Index includes only those stocks within the S&P 500 Stock Index
which meet the following criteria: companies which are not conducting business
in South Africa and banks which are not making loans to South Africa. The
composition of the Boston SAFE Index is adjusted quarterly to reflect new
information. The Index is capitalization-weighted based on shares outstanding
and current stock prices.
In its advertisements and other sales literature for the Variable Account and
the Eligible Funds, LNL intends to illustrate the advantages of the Contracts in
a number of ways:
COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of the
variable annuity contract. For example, but not by way of limitation, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the Variable Account over the fixed account; and the
compounding effect when a client makes regular deposits to its Account.
DOLLAR-COST AVERAGING ILLUSTRATIONS. These illustrations will generally discuss
the price-leveling effect of making regular purchases in the same Sub-Accounts
over a period of time, to take advantage of the trends in market prices of the
portfolio securities purchased for those Sub-Accounts.
AUTOMATIC WITHDRAWAL SERVICE. A service provided by LNL, through which a
Contract Owner may take any distribution allowed by Code Section 401(a)(9)
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in the case of qualified contracts, or permitted under Code Section 72 in the
case of non-qualified contracts, by way of an automatically generated payment.
LNL'S CUSTOMERS. Sales literature for the Variable Account and the Eligible
Funds may refer to the number of employers and the number of individual annuity
clients which LNL serves. As of the date of this Statement of Additional
Information, LNL was serving over 9,500 organizations and had more than 750,000
annuity clients.
LNL'S ASSETS, SIZE. LNL may discuss its general financial condition (see, for
example, the reference to A.M. Best Company, above); it may refer to its assets;
it may also discuss its relative size and/or ranking among companies in the
industry or among any sub-classification of those companies, based upon
recognized evaluation criteria. For example, at year-end 1993 LNL was the
twelfth largest U.S. life insurance company based upon overall assets.
Sales literature may reference the Multi-Fund newsletter which is a newsletter
distributed quarterly to clients of the Multi-Fund.
The contents of the newsletter will be a commentary on general economic
conditions and, on some occasions, referencing matters in connection with the
Multi-Fund product.
Advertisements or sales literature may also describe an Earnings Sweep, which
allows a client to designate one of the variable Sub-Accounts or the Fixed
Account as a holding account, and to transfer earnings from that account to any
other variable Sub-Account. The Contract Owner chooses a specific fund as the
holding account. At specific intervals, account value in the holding account
fund that exceeds a certain designated baseline amount is automatically
transferred to another specified fund(s). The minimum account value required
for the Earnings Sweep feature is 10.000.
Sales literature and advertisements may reference these and other similar
reports from Best's or other similar publications which report on the insurance
and financial services industries.
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The Power of Tax-Deferred Growth
The graphs below compare accumulations attributable to contributions to
conventional savings vehicles such as savings accounts at a bank or credit
union, Non-Qualified contracts purchased with after tax contributions, and
qualified contracts purchased with pre-tax contributions under tax-favored
retirement programs.
<TABLE>
<CAPTION>
With Conventional After-Tax
Years Tax Deferral Savings Non-Qualified
- ----- ------------ ------------ -------------
<S> <C> <C> <C>
10 $25,017 $16,049 $18,013
15 46,890 28,143 33,761
20 79,028 44,145 56,900
With Tax
Deferral Conventional After Tax Non-
After All Savings With Qualified After
Years Penalties No Penalties All Penalties
- ----- --------- ------------ ---------------
10 $17,012 $16,049 $16,190
15 28,143 28,143 29,348
20 56,900 44,145 47,688
</TABLE>
The hypothetical chart above compares the results of contributing $1200 per year
($100 per month) during the time periods illustrated. Each graph assumes a 28%
tax rate and an *% fixed rate of return (before fees and charges). For tax
deferred annuities, the results are based on contributing $1,666.66 ($138.88 per
month) during the time periods illustrated. The contributing to the
conventional savings accounts or non-qualified contracts. In this example, it
has been invested by the contributors to the qualified contracts. The deduction
of fees and charges is also indicated in the graph. The dotted lines represent
the amount remaining after deducting any taxes due and all fees (including
surrender charges). Additionally, a 10% tax penalty (not included here) may
apply to withdrawals before age 59 1/2.
The contributions and interest earnings on conventional savings accounts are
usually taxed currently. For non-qualified contracts contributions are usually
taxed currently while earnings are not usually subject to income tax until
withdrawn. However, contributions to and earnings on qualified plans are
ordinarily not subject to income tax until withdrawn. Therefore, having greater
amounts re-invested in a qualified or non-qualified plan increases the
accumulation power of savings over time.
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As you can see, a tax-deferred plan can provide a much higher account value over
a long period of time. Therefore, it is an important savings plan for
retirement or for other long-term financial goals. (The above chart is for
illustrative purposes and should not be construed as representative of actual
results, which may be more or less.)
Tax Benefits Today
When you put a portion of your salary in a tax-deferred savings plan, your
savings dollars don't appear as taxable income on your W-2 form at the end of
the calendar year. So while you are saving money, you can reduce your taxes and
increase your take-home pay.
Here's an example: Let's assume you are single, your taxable income is $50,000,
and you are in the 28% tax bracket.
<TABLE>
<CAPTION>
Traditional Savings of
Savings Plan Pre-Tax Dollars
<S> <C> <C>
Your income $50,000 $50,000
Tax-deferred savings -0- $ 2,400
Taxable income $50,000 $47,500
*Estimated federal
income taxes $10,481 $ 9,809
Income after taxes $39,519 $37,791
After tax savings $ 2,400 -0-
Remaining income
after savings and
taxes $37,119 $37,791
</TABLE>
With a tax-deferred plan, you have $672 more spendable income each year because
you are paying less taxes.
*The above chart assumes a 28% marginal federal tax rate on conventional
contributions. TDA contributions are generally taxed as ordinary income when
withdrawn. Federal tax penalties generally apply to distributions prior to age
59 1/2. For illustrative purposes only.
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FINANCIAL STATEMENTS
The financial statements for Lincoln National Life Insurance Company and Lincoln
National Variable Annuity Account C are incorporated by reference to
Post-Effective Amendment No. 11, Registration Number 33-25990 filed on Form N-4
on April 30, 1995.
