<PAGE>
As filed with the Securities and Exchange Commission on April 24, 1997
Registration No. 33-25990
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 14
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26
(Check appropriate box or boxes.)
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
-------------------------------------------
(Exact Name of Registrant)
LINCOLN NATIONAL LIFE INSURANCE COMPANY
-------------------------------------------
(Name of Depositor)
1300 South Clinton Street
Fort Wayne, Indiana 46802
-------------------------------------------
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code: (219)455-2000
Jack D. Hunter, Esq.
200 East Berry Street
Fort Wayne, Indiana 46802
Telephone No. (219)455-2000
-------------------------------------------
(Name and Address of Agent for Service)
Copies of all communications to Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W., Suite 825
Washington, D.C.
Attention: Gary O. Cohen, Esq.
The Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 of the Investment Company Act of
1940. Pursuant to Rule 24f-2(b)(1), the Registrant filed a Rule 24f-2 Notice for
the last fiscal year (1996) on February 28, 1997.
It is proposed that this filing will become effective:
----- immediately upon filing pursuant to paragraph (b) of Rule 485
X on 5/1/97 pursuant to paragraph (b) of Rule 485
-----
----- 60 days after filing pursuant to paragraph (a)(1) of Rule 485
on (date) pursuant to paragraph (a)(1) of Rule 485
-----
<PAGE>
ACCOUNT C
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
<TABLE>
<CAPTION>
N-4 ITEM CAPTION IN PROSPECTUS (PART A)
- -------- ------------------------------
<C> <S>
1. Cover Page
2. Special Terms
3.(a) Expense Table
(b) Not Applicable
(c) Not Applicable
(d) For Your Information
4.(a) Condensed Financial Information
(b) Condensed Financial Information
(c) Financial Statements
5.(a) Cover Page; Lincoln National Life
Insurance Company
(b) Cover Page; Variable Annuity Account;
Investments of the Variable Annuity
Account
(c) Investments of the Variable Account
(d) Cover Page
(e) Voting Rights
(f) Not Applicable
6.(a) For Your Information; Charges and
Other Deductions
(b) Charges and Other Deductions
(c) Charges and Other Deductions
(d) Charges and Other Deductions
(e) Charges and Other Deductions
(f) Charges and Other Deductions
7.(a) The Contracts; Investments of the Variable
Account; Annuity Payments; Voting Rights;
Return Privilege
(b) Investments of the Variable Account;
The Contracts; Cover Page
(c) The Contracts
(d) The Contracts
</TABLE>
<PAGE>
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
<TABLE>
<CAPTION>
N-4 ITEM CAPTION IN PROSPECTUS (PART A)
- -------- ------------------------------
<C> <S>
1. Cover Page
8. (a) Annuity Payments
(b) Annuity Payments
(c) Annuity Payments
(d) Annuity Payments
(e) Cover Page; Annuity Payments
(f) The Contracts; Annuity Payments
9. (a) The Contracts; Annuity Payments
(b) The Contracts; Annuity Payments
10.(a) The Contracts; Cover Page; Charges
and Other Deductions
(b) The Contracts; Investments of the
Variable Account
(c) The Contracts
(d) Distribution of the Contracts
11.(a) The Contracts
(b) Restrictions Under the Texas
Optional Retirement Program
(c) The Contracts
(d) The Contracts
(e) Return Privilege
12.(a) Federal Tax Status
(b) Cover Page; Federal Tax Status
(c) Federal Tax Status
13.
14. Table of Contents to the Statement
of Additional Information (SAI)
for Lincoln National Variable
Annuity Account C
</TABLE>
<PAGE>
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
<TABLE>
<CAPTION>
CAPTION IN STATEMENT OF ADDITIONAL
----------------------------------
N-4 ITEM INFORMATION (PART B)
- -------- --------------------
<C> <S>
15. Cover Page for Part B
16. Cover Page for Part B
17.(a) Not Applicable
(b) Not Applicable
(c) General Information and History
of Lincoln National Life
Insurance Co. (Lincoln Life)
18.(a) Not Applicable
(b) Not Applicable
(c) Services
(d) Not Applicable
(e) Not Applicable
(f) Services
19.(a) Purchase of Securities Being
Offered
(b) Not Applicable
20.(a) Underwriters
(b) Underwriters
(c) Underwriters
(d) Underwriters
21. Calculation of Performance Data
22. 22. Annuity Payouts
23.(a) Financial Statements -- Lincoln
National Variable Annuity
Account C
(b) Consolidated Financial Statements --
Lincoln National Life
Insurance Co. (Lincoln Life)
</TABLE>
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
issued by:
Lincoln National Life Insurance Co.
1300 South Clinton Street
Fort Wayne, Indiana 46802
Account C
This Prospectus describes individual variable annuity contracts issued by
Lincoln National Life Insurance Co. (Lincoln Life). They are for use with the
following retirement plans qualified for special tax treatment (qualified
contracts) under the Internal Revenue Code of 1986, as amended (the code):
1. Public school systems and 501(c)(3) tax-exempt organizations (403(b));
2. Qualified corporate employee pension and profit-sharing trusts and qualified
annuity plans;
3. Corresponding plans of self-employed individuals (H.R. 10 or Keogh);
4. Individual retirement annuities (IRA);
5. Government deferred compensation plans (457); and
6. Simplified employee pension plans (SEP).
7. SIMPLE IRA (consult your representative as to the availability of this
contract for SIMPLE IRAs).
The contracts described in this Prospectus are also offered to plans
established by persons who are not entitled to participate in one of the
previously mentioned plans (nonqualified contracts).
This Prospectus offers you, as contractowner, contracts of the following types:
1. Single premium deferred annuity;
2. Flexible premium deferred annuity (Multi Fund 2, 3 and 4); and
3. Periodic premium deferred annuity (Multi Fund 1).
The contracts offer you the accumulation of contract value and payment of
periodic annuity benefits. These benefits may be paid on a variable or fixed
basis or a combination of both. Benefits start at an annuity commencement date
which you select. If the annuitant dies before the annuity commencement date, a
death benefit will be paid to the beneficiary.
The minimum initial purchase payment for each of the three types of contract
is:
1. Single premium deferred contract: $1,000 for IRAs and SEPs; $3,000 for all
others;
2. Flexible premium deferred contract: $1,000 for IRAs and SEPs; $3,000 for all
others (subsequent purchase payments: $100); and
3. Periodic premium deferred contract: $600 per contract year (minimum $25 per
purchase payment).
All investments (purchase payments) for benefits on a variable basis will be
placed in Lincoln National Variable Annuity Account C (variable annuity account
[VAA]). The VAA is a segregated investment account of Lincoln Life, which is
the Depositor. Based upon your instructions, the VAA invests purchase payments
(at net asset value) in specified mutual funds (the fund or funds and series).
Both the value of a contract before the annuity commencement date and the
amount of payouts afterward will depend upon the investment performance of the
fund(s) or series selected. Investments in these funds and series are neither
insured nor guaranteed by the U.S. Government or by any other person or entity.
Purchase payments for benefits on a fixed basis will be placed in the fixed
side of the contract, which is part of our general account. However, this
Prospectus deals only with those elements of the contracts relating to the VAA,
except where reference to the fixed side is made.
We may not offer a contract continuously or in every state. THE MULTI FUND 4
CONTRACT AND THE ENHANCED GUARANTEED MINIMUM DEATH BENEFIT ARE EXPECTED TO BE
AVAILABLE AFTER JUNE 1997. PLEASE CONSULT YOUR REPRESENTATIVE AS TO THE
AVAILABILITY IN YOUR STATE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus details the information regarding the VAA that you should know
before investing. This Prospectus is printed in a booklet that also includes a
current Prospectus for each of the following funds: Lincoln National Aggressive
Growth Fund, Inc., Lincoln National Bond Fund, Inc., Lincoln National Capital
Appreciation Fund, Inc., Lincoln National Equity-Income Fund, Inc., Lincoln
National Global Asset Allocation Fund, Inc., Lincoln National Growth and Income
Fund, Inc., Lincoln National International Fund, Inc., Lincoln National Managed
Fund, Inc., Lincoln National Money Market Fund, Inc., Lincoln National Social
Awareness Fund, Inc., and Lincoln National Special Opportunities Fund, Inc. and
a current Prospectus for the Delaware Group Premium Fund, Inc., which contains
information regarding the Equity/Income Series, Global Bond Series and the
Emerging Growth Series. All Prospectuses should be read carefully and kept for
future reference.
A statement of additional information (SAI), dated May 1, 1997, concerning the
VAA has been filed with the SEC and is incorporated by this reference into this
Prospectus. If you would like a free copy, write, Lincoln National Life
Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801, or call 1-800-4LINCOLN
(454-6265). A table of contents for the SAI appears on the last page of this
Prospectus.
This Prospectus is dated May 1, 1997.
1
<PAGE>
Account C
FOR YOUR INFORMATION:
IF YOU SURRENDER YOUR CONTRACT OR WITHDRAW CONTRACT VALUE, A SURRENDER CHARGE
OF UP TO 8% MAY BE DEDUCTED. THE AMOUNT OF THE SURRENDER CHARGE DEPENDS ON THE
TYPE OF CONTRACT AND ITS DURATION. HOWEVER, NO SURRENDER CHARGE IS ASSESSED
WHEN ANNUITY PAYOUTS BEGIN OR AT THE ANNUITANT'S DEATH. SEE CHARGES AND OTHER
DEDUCTIONS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ----------------------------------------------------------------------
<S> <C>
Special terms 3
- ----------------------------------------------------------------------
Expense tables 4
- ----------------------------------------------------------------------
Condensed financial information for the variable annuity account 7
- ----------------------------------------------------------------------
Financial statements 9
- ----------------------------------------------------------------------
Lincoln National Life Insurance Co. 9
- ----------------------------------------------------------------------
Variable annuity account (VAA) 9
- ----------------------------------------------------------------------
Investments of the variable annuity account 9
- ----------------------------------------------------------------------
Charges and other deductions 12
- ----------------------------------------------------------------------
The contracts 14
- ----------------------------------------------------------------------
Annuity payouts 18
- ----------------------------------------------------------------------
</TABLE>
ALSO, YOU MAY BE SUBJECT TO A PENALTY TAX UNDER SECTION 72 (Q) OF THE CODE (SEE
FEDERAL TAX STATUS) SHOULD YOU WITHDRAW CONTRACT VALUE OR SURRENDER THE
CONTRACT BEFORE THE ANNUITY COMMENCEMENT DATE.
THESE CONTRACTS CONTAIN A FREE-LOOK PROVISION. SEE RETURN PRIVILEGE.
<TABLE>
<CAPTION>
Page
- --------------------------------------------------------------
<S> <C>
Federal tax status 19
- --------------------------------------------------------------
Voting rights 20
- --------------------------------------------------------------
Distribution of the contracts 21
- --------------------------------------------------------------
Return privilege 21
- --------------------------------------------------------------
State regulation 21
- --------------------------------------------------------------
Restrictions under the Texas Optional Retirement Program 21
- --------------------------------------------------------------
Records and reports 21
- --------------------------------------------------------------
Other information 22
- --------------------------------------------------------------
Statement of additional information
table of contents for VAA 22
- --------------------------------------------------------------
</TABLE>
2
<PAGE>
Account C
SPECIAL TERMS
(Throughout this Prospectus, in order to make the following documents more
understandable to you, we have italicized the special terms.)
Account or variable annuity account (VAA) -- The segregated investment account,
Account C, into which Lincoln Life sets aside and invests the assets for the
variable annuity contracts offered in this Prospectus.
Accumulation unit -- A measure used to calculate contract value for the
variable side of the contract before the annuity commencement date. See The
contracts.
Advisor or investment advisor -- Lincoln Investment Management, Inc. (Lincoln
Investment), which provides investment management services to each of the
funds. See Investment advisor.
Annuitant -- The person upon whose life the annuity benefit payments made after
the annuity commencement date will be based.
Annuity commencement date -- The valuation date when the funds or series are
withdrawn or converted into annuity units or fixed dollar payout for payment of
annuity benefits under the annuity payout option selected. For purposes of
determining whether an event occurs before or after the annuity commencement
date, the annuity commencement date is deemed to begin at the valuation period.
Annuity option -- One of the optional forms of payout of the annuity available
within the contract. See Annuity payouts.
Annuity payout -- An amount paid after the annuity commencement date at regular
intervals under one of several options available to the annuitant and/or any
other payee. This amount may be paid on a variable or fixed basis, or a
combination of both.
Annuity unit -- A measure used to calculate the amount of annuity payouts after
the annuity commencement date. See Annuity payouts.
Beneficiary -- The person whom you designate to receive the death benefit, if
any, in case of the annuitant's death.
Cash surrender value -- Upon surrender, the contract value less any applicable
charges, fees, and taxes.
Code -- The Internal Revenue Code of 1986, as amended.
Contract (variable annuity contract) -- The agreement between you and us
providing a variable annuity.
Contractowner (you, your owner) -- The person who has the ability to exercise
the rights within the contract (decides on investment allocations, transfers,
payout options; designates the beneficiary, etc.). Usually, but not always, the
owner is also the annuitant.
Contract value -- At a given time, the total value of all accumulation units
for a contract plus the value of the fixed side of the contract.
Contract year -- Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
Death benefit -- The amount payable to your designated beneficiary if the
annuitant dies before the annuity commencement date. See The contracts.
Enhanced Guaranteed Minimum Death Benefit (EGMDB)--The EGMDB is the greater of:
(1) the contract value at the end of the valuation period when the death claim
is approved for payment by Lincoln Life or (2) the higher of:
a. the contract value at the end of the valuation period when the EGMDB becomes
effective and;
b. the highest contract value at the end of the valuation period that includes
any contract anniversary date up to and including age 75 following election
of the EGMDB;
increased by purchase payments and decreased by any withdrawals,
annuitizations, and premium taxes incurred after the contract anniversary or
EGMDB effective date the highest contract value occurred. See The contracts.
Delaware Management -- Delaware Management Company, Inc.
Flexible premium deferred contract (Multi Fund 2, 3, and 4) -- An annuity
contract with an initial purchase payment, allowing additional purchase
payments to be made, and with annuity payouts beginning at a future date.
Fund -- Any of the eleven individual Lincoln National underlying investment
options in which your purchase payments are invested.
Home office -- The headquarters of Lincoln National Life Insurance Co., located
at 1300 South Clinton Street, Fort Wayne, Indiana 46802.
Lincoln Investment -- Lincoln Investment Management, Inc.
Lincoln Life (we, us, our) -- Lincoln National Life Insurance Co.
Lump sum -- A one-time purchase payment of $5,000 or more ($1,000 for IRAs and
SEPs) made to a periodic premium deferred contract.
Periodic premium deferred contract (Multi Fund 1) -- An annuity contract with
purchase payments due periodically and with annuity payouts beginning at a
future date.
Purchase payments -- Amounts paid into the contract to purchase an annuity.
Qualified plan -- A retirement plan qualified for special tax treatment under
the Code, as amended, including Sections 401, 403, 408 and 457.
Series -- Any of the three underlying portfolios of the Delaware Group Premium
Fund, Inc., in which your purchase payments are invested.
Single premium deferred contract -- An annuity contract with a single purchase
payment and with annuity payouts beginning at a future date.
Statement of additional information (SAI) -- A document required by the SEC to
be provided upon request to a prospective purchaser of a contract, you. This
free document gives more information about Lincoln Life, the VAA, and the
variable annuity contract.
Subaccount -- That portion of the VAA that reflects investments in accumulation
and annuity units of a particular fund and series. There is a separate
subaccount which corresponds to each fund.
Surrender -- A contract right that allows you to terminate your contract and
receive your cash surrender value. See The contracts.
Surrender charge -- The term that refers to what is known in the industry as a
contingent deferred sales charge. See Charges and other deductions.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period -- The period starting at the close of trading (currently 4:00
p.m. New York time) on each day that the NYSE is open for trading and ending at
the close of such trading on the next valuation date.
Withdrawal -- A contract right that allows you to obtain a portion of your cash
surrender value.
3
<PAGE>
Account C
EXPENSE TABLES
CONTRACTOWNER TRANSACTION EXPENSES-SINGLE PREMIUM AND PERIODIC PREMIUM DEFERRED
CONTRACTS:
Surrender charge (as a percentage of contract value surrendered/withdrawn):7%
(single premium)
8% (periodic premium)
(Note: Upon the first withdrawal of contract value in any contract year, up to
15% of contract value may be withdrawn free of this charge.)
REDUCED SURRENDER CHARGES OVER TIME:
The surrender charge percentages listed above are the maximum percentages
charged as a percentage of contract value withdrawn. The later a
surrender/withdrawal occurs, the lower the surrender charge percentage applied,
according to the following table:
<TABLE>
<CAPTION>
Contract type Contract year
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 7 8 9 10 11+
Single premium 7% 6 5 4 3 2 1 0 0 0 0
Periodic premium 8% 8 8 8 8 4 4 4 4 4 0
</TABLE>
- --------------------------------------------------------------------------------
CONTRACTOWNER TRANSACTION EXPENSES-FLEXIBLE PREMIUM DEFERRED CONTRACT:
Surrender charge (as a percentage of purchase payments
surrendered/withdrawn) 7% (flexible premium)
(Note: Upon the first withdrawal of purchase payments in any contract year, up
to 15% of those purchase payments may be withdrawn free of this charge.)
REDUCED SURRENDER CHARGE OVER TIME:
The surrender charge percentage listed above is the maximum percentage charged
as a percentage of purchase payments withdrawn. This charge is calculated
separately for each contract year's purchase payments. The later a
surrender/withdrawal occurs, the lower the surrender charge percentage applied,
according to the following table:
<TABLE>
<CAPTION>
Completed contract years between
date of
purchase payments and date of
Contract type surrender/withdrawal
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 1 2 3 4 5 6 7+
Flexible premium 7% 6 5 4 3 2 1 0
</TABLE>
ANNUAL CONTRACT FEE:
$-0-(single premium and flexible premium Multi Fund 3 and 4)
$25 (periodic and flexible premium Multi Fund 2) This fee is a single charge
assessed against contract value on the last valuation date of each contract
year and upon full surrender; it is NOT a separate charge for each subaccount.
VAA ANNUAL EXPENSES
(as a percentage of average account value for each subaccount)*:
<TABLE>
<CAPTION>
Contracts with EGMDB Contracts without EGMDB
<S> <C> <C>
Mortality and expense risk fees 1.00% 1.00%
EGMDB charge .30 --
---- ----
Total Account C annual expenses 1.30% 1.00%
</TABLE>
*The VAA is divided into 14 separately-named subaccounts, each of which, in
turn, invests purchase payments in its respective fund or series.
4
<PAGE>
Account C
ANNUAL EXPENSES OF THE FUNDS AND SERIES FOR THE YEAR ENDED 1996
(as a percentage of each fund's and series' average net assets):
<TABLE>
<CAPTION>
Management Other Total
fees + expenses = expenses
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Aggressive Growth (AG) .75% .07% .82%
- -----------------------------------------------------------------------------
2. Bond (B) .46 .05 .51
- -----------------------------------------------------------------------------
3. Capital Appreciation (CA) .80 .13 .93
- -----------------------------------------------------------------------------
4. Equity-Income (EI) .95 .13 1.08
- -----------------------------------------------------------------------------
5. Global Asset Allocation (GAA) .73 .27 1.00
- -----------------------------------------------------------------------------
6. Growth and Income (GI) .33 .03 .36
- -----------------------------------------------------------------------------
7. International (I) .82 .37 1.19
- -----------------------------------------------------------------------------
8. Managed (M) .39 .04 .43
- -----------------------------------------------------------------------------
9. Money Market (MM) .48 .09 .57
- -----------------------------------------------------------------------------
10. Social Awareness (SA) .42 .04 .46
- -----------------------------------------------------------------------------
11. Special Opportunities (SO) .40 .04 .44
- -----------------------------------------------------------------------------
12. Delaware Emerging Growth (DEG)* .70* .10 .80
- -----------------------------------------------------------------------------
13. Delaware Equity/Income (DE/I)* .54* .13 .67
- -----------------------------------------------------------------------------
14. Delaware Global Bond (DGB)* .36* .44 .80
</TABLE>
- --------------------------------------------------------------------------------
*The investment advisors for these series currently voluntarily waive
management fees to the extent necessary to maintain the series total expense
ratio at a maximum of .80%. The management fees and total expenses, absent the
waiver, would have been .75% and .85% for DEG, .60% and .73% for DE/I and .75%
and 1.19% for DGB. Should they cease to waive those amounts in the future,
these management fee percentages and total expenses may be higher in future
years.
EXAMPLES
(reflecting expenses of the VAA, the funds and series):
If you surrender your contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming a 5% annual
return:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
Flexible Flexible Flexible
Flexible Multi- Flexible Multi- Flexible Multi-
Multi- Fund Multi- Fund Multi- Fund
Single Fund 2 3 & 4 Periodic Single Fund 2 3 & 4 Periodic Single Fund 2 3 & 4 Periodic Single
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. AG $91 $89 $89 $101 $112 $101 $107 $145 $134 $128 $129 $192 $214
- --------------------------------------------------------------------------------------------------------------------------
2. B 88 85 85 98 103 98 98 136 118 112 112 177 180
- --------------------------------------------------------------------------------------------------------------------------
3. CA 92 90 90 102 115 111 111 148 139 134 134 197 226
- --------------------------------------------------------------------------------------------------------------------------
4. EI 93 91 91 103 120 115 115 152 147 142 142 204 241
- --------------------------------------------------------------------------------------------------------------------------
5. GAA 92 90 90 103 117 113 113 150 143 138 138 200 233
- --------------------------------------------------------------------------------------------------------------------------
6. GI 86 84 84 97 99 93 93 132 110 104 105 170 164
- --------------------------------------------------------------------------------------------------------------------------
7. I 94 92 92 104 123 119 119 155 152 147 148 209 253
- --------------------------------------------------------------------------------------------------------------------------
8. M 87 85 85 97 101 95 95 134 114 108 108 173 172
- --------------------------------------------------------------------------------------------------------------------------
9. MM 88 86 86 99 105 100 100 138 121 116 116 180 187
- --------------------------------------------------------------------------------------------------------------------------
10. SA 87 85 85 98 102 96 96 135 116 110 110 175 175
- --------------------------------------------------------------------------------------------------------------------------
11. SO 87 85 85 98 101 96 96 134 115 109 109 174 173
- --------------------------------------------------------------------------------------------------------------------------
12. DEG 91 88 88 101 112 107 107 144 133 127 128 191 212
- --------------------------------------------------------------------------------------------------------------------------
13. DE/I 89 87 87 100 108 103 103 141 126 121 121 185 198
- --------------------------------------------------------------------------------------------------------------------------
14. DGB 91 88 88 101 112 107 107 144 133 127 128 191 212
<CAPTION>
Flexible
Flexible Multi-
Multi- Fund
Fund 2 3 & 4 Periodic
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. AG $213 $214 $268
- --------------------------------------------------------------------------------------------------------------------------
2. B 180 180 236
- --------------------------------------------------------------------------------------------------------------------------
3. CA 225 226 225
- --------------------------------------------------------------------------------------------------------------------------
4. EI 241 241 294
- --------------------------------------------------------------------------------------------------------------------------
5. GAA 232 233 286
- --------------------------------------------------------------------------------------------------------------------------
6. GI 163 164 220
- --------------------------------------------------------------------------------------------------------------------------
7. I 252 253 304
- --------------------------------------------------------------------------------------------------------------------------
8. M 171 172 228
- --------------------------------------------------------------------------------------------------------------------------
9. MM 186 187 242
- --------------------------------------------------------------------------------------------------------------------------
10. SA 174 175 231
- --------------------------------------------------------------------------------------------------------------------------
11. SO 172 173 229
- --------------------------------------------------------------------------------------------------------------------------
12. DEG 211 212 266
- --------------------------------------------------------------------------------------------------------------------------
13. DE/I 197 198 252
- --------------------------------------------------------------------------------------------------------------------------
14. DGB 211 212 266
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
Account C
If you do not surrender your contract, (whether single, flexible or periodic),
or if you annuitize, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
5 years 10 years
Single, Single,
Flexible Periodic, Flexible Periodic,
Multi Flexible Multi Flexible
Fund 3 Multi Fund 3 Multi
1 year 3 years and 4 Fund 2 and 4 Fund 2
- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. AG $19 $57 $ 99 $ 98 $214 $213
- --------------------------------------------------------------
2. B 15 48 82 82 180 180
- --------------------------------------------------------------
3. CA 20 61 104 104 226 225
- --------------------------------------------------------------
4. EI 21 65 112 112 241 241
- --------------------------------------------------------------
5. GAA 20 63 108 108 233 232
- --------------------------------------------------------------
6. GI 14 43 75 74 164 163
- --------------------------------------------------------------
7. I 22 69 118 117 253 252
- --------------------------------------------------------------
8. M 15 45 78 78 172 171
- --------------------------------------------------------------
9. MM 16 50 86 86 187 186
- --------------------------------------------------------------
10. SA 15 46 80 80 175 174
- --------------------------------------------------------------
11. SO 15 46 79 79 173 172
- --------------------------------------------------------------
12. DEG 18 57 98 97 212 211
- --------------------------------------------------------------
13. DE/I 17 53 91 91 198 197
- --------------------------------------------------------------
14. DGB 18 57 98 97 212 211
</TABLE>
- --------------------------------------------------------------------------------
This table is provided to assist you in understanding the various costs and
expenses that you will bear directly or indirectly. The table reflects expenses
of the VAA, the 11 funds and the three series for the year ended December 31,
1996. For more complete descriptions of the various costs and expenses
involved, see Charges and other deductions in this Prospectus, and Management
of the funds in the Appendix to the funds' Prospectuses and the Prospectus for
Delaware Group Premium Fund, Inc. Premium taxes may also be applicable,
although they do not appear in the table. In addition, we reserve the right to
impose a charge on transfers between subaccounts as well as to and from the
fixed account, although we do not currently do so. THE EXAMPLES SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
MORE OR LESS THAN THOSE SHOWN. This table is unaudited.
These examples reflect expenses assuming that the EGMDB is NOT in effect. If
the EGMDB is in effect, these examples will be higher.
6
<PAGE>
CONDENSED FINANCIAL INFORMATION FOR THE VAA
Account C
ACCUMULATION UNIT VALUES
The following information relating to accumulation unit values and number of
accumulation units for each of the 10 years in the period ended December 31,
1996 comes from the VAA's financial statements. It should be read in
conjunction with the VAA's financial statements and notes which are all
included in the SAI.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth
subaccount
Accumulation unit value
. Beginning of period $ 1.196 .896 1.000 1.000*
. End of period $ 1.384 1.196 .896 1.000* trading began in 1994.
Number of accumulation
units
. End of period (000's
omitted) 172,630 114,518 67,547 110
- ------------------------------------------------------------------------------------------------------------
Bond subaccount
Accumulation unit value
. Beginning of period $ 4.228 3.585 3.780 3.398 3.181 2.737 2.591 2.312 2.162 2.156
. End of period $ 4.283 4.228 3.585 3.780 3.398 3.181 2.737 2.591 2.312 2.162
Number of accumulation
units
. End of period (000's
omitted) 62,709 62,644 57,900 62,765 52,842 46,830 40,983 37,671 28,146 25,879
- ------------------------------------------------------------------------------------------------------------
Capital Appreciation
subaccount
Accumulation unit value
. Beginning of period $ 1.294 1.017 1.000 1.000*
. End of period $ 1.520 1.294 1.017 1.000* trading began in 1994.
Number of accumulation
units
. End of period (000's
omitted) 174,073 98,067 52,125 110
- ------------------------------------------------------------------------------------------------------------
Equity-Income subaccount
Accumulation unit value
. Beginning of period $ 1.391 1.046 1.000 1.000*
. End of period $ 1.663 1.391 1.046 1.000* trading began in 1994.
Number of accumulation
units
. End of period (000's
omitted) 275,632 171,817 75,383 110
- ------------------------------------------------------------------------------------------------------------
Global Asset Allocation
subaccount
Accumulation unit value
. Beginning of period $ 2.013 1.642 1.689 1.453 1.378 1.174 1.175 1.005 .914 1.000*
. End of period $ 2.302 2.013 1.642 1.689 1.453 1.378 1.174 1.175 1.005 .914*
trading
Number of accumulation began
units in 1987.
. End of period (000's
omitted) 140,242 126,558 122,061 92,778 67,873 57,199 50,149 39,835 27,750 23,120
- ------------------------------------------------------------------------------------------------------------
Growth and Income
subaccount
Accumulation unit value
. Beginning of period $ 6.292 4.593 4.579 4.084 4.050 3.125 3.126 2.611 2.436 2.130
. End of period $ 7.453 6.292 4.593 4.579 4.084 4.050 3.125 3.126 2.611 2.436
Number of accumulation
units
. End of period (000's
omitted) 332,885 291,063 253,621 226,072 188,659 144,515 114,974 96,161 81,066 73,488
- ------------------------------------------------------------------------------------------------------------
International subaccount
Accumulation unit value
. Beginning of period $ 1.368 1.271 1.243 .901 .990 1.000*
. End of period $ 1.488 1.368 1.271 1.243 .901 .990* trading began in 1991.
Number of accumulation
units
. End of period (000's
omitted) 294,570 261,509 248,639 129,551 50,718 21,088
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* These values do not reflect a full year's experience because they are
calculated for the period from the beginning of investment activity of the
subaccounts, through December 31.
7
<PAGE>
Account C
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Managed subaccount
Accumulation unit value
. Beginning of period $ 3.515 2.747 2.827 2.558 2.492 2.065 2.015 1.737 1.609 1.495
. End of period $ 3.913 3.515 2.747 2.827 2.558 2.492 2.065 2.015 1.737 1.609
Number of accumulation units
. End of period (000's omitted) 178,496 172,789 167,184 162,485 139,606 115,929 104,011 95,285 84,586 78,432
- ----------------------------------------------------------------------------------------------------------------
Money Market subaccount
Accumulation unit value
. Beginning of period $ 2.235 2.137 2.079 2.044 1.996 1.907 1.783 1.651 1.553 1.472
. End of period $ 2.324 2.235 2.137 2.079 2.044 1.996 1.907 1.783 1.651 1.553
Number of accumulation units
. End of Period (000's omitted) 40,057 35,136 37,106 39,763 46,993 77,812 57,377 53,287 37,890 37,132
- ----------------------------------------------------------------------------------------------------------------
Social Awareness subaccount
Accumulation unit value
. Beginning of period $ 2.843 2.005 2.021 1.796 1.750 1.285 1.357 1.042 1.000*
. End of period $ 3.638 2.843 2.005 2.021 1.796 1.750 1.285 1.357 1.042* trading
began
in 1988
Number of accumulation units
. End of period (000's omitted) 175,970 106,204 83,069 69,006 50,838 30,735 19,486 7,127 1,984
- ----------------------------------------------------------------------------------------------------------------
Special Opportunities subaccount
Accumulation unit value
. Beginning of period $ 5.618 4.303 4.392 3.740 3.519 2.481 2.710 2.054 1.997 1.867
. End of period $ 6.505 5.618 4.303 4.392 3.740 3.519 2.481 2.710 2.054 1.997
Number of accumulation units
. End of period (000's omitted) 97,744 88,993 73,673 62,314 51,056 37,798 33,837 27,789 31,068 29,240
- ----------------------------------------------------------------------------------------------------------------
DE Emerging Growth subaccount
Accumulation unit value
. Beginning of period $ 1.000*
. End of period $ 0.991* trading began in 1996
Number of accumulation units
. End of period (000's omitted) 23,508
- ----------------------------------------------------------------------------------------------------------------
DE Equity/Income subaccount
Accumulation unit value
. Beginning of period $ 1.000*
. End of period $ 1.126* trading began in 1996
Number of accumulation units
. End of period (000's omitted) 12,220
- ----------------------------------------------------------------------------------------------------------------
DE Global Bond subaccount
Accumulation unit value
. Beginning of period $ 1.000*
. End of period $ 1.111* trading began in 1996
Number of accumulation units
. End of period (000's omitted) 7,613
</TABLE>
- --------------------------------------------------------------------------------
*These values do not reflect a full year's experience because they are
calculated for the period from the beginning of investment activity of
the subaccounts, through December 31.
ADDITIONAL INFORMATION FOR THE MONEY MARKET SUBACCOUNT:
Seven-day yield: 3.71%; Length of base period-7 days; Date of last day of base
period: December 31, 1996.
8
<PAGE>
Account C
PERFORMANCE DATA:
At times the VAA may advertise the Money Market subaccount's yield. The yield
refers to the income generated by an investment in the subaccount over a seven-
day period. This income is then annualized. The process of annualizing results
when the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. THE YIELD FIGURE IS BASED ON HISTORICAL EARNINGS
AND IS NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
The VAA advertises the annual performance of the subaccounts for the funds and
series on both a standardized and nonstandardized basis.
The standardized calculation measures average annual total return. This is
based on a hypothetical $1,000 payment made at the beginning of a one-year, a
five-year, and a 10-year period. This calculation reflects all fees and charges
that are or could be imposed on all contractowner accounts.
The nonstandardized calculation compares changes in accumulation unit values
from the beginning of the most recently completed calendar year to the end of
that year. It may also compare changes in accumulation unit values over shorter
or longer time periods. This calculation reflects mortality and expense risk
fees. It also reflects management fees and other expenses of the fund. It does
not include surrender charges or the account charge; if included, they would
decrease the performance.
For additional information about performance calculations, please refer to the
SAI.
FINANCIAL STATEMENTS
The financial statements for the VAA and Lincoln Life are located in the SAI.
You may obtain a free copy by writing Lincoln National Life Insurance Co., P.O.
Box 2340, Fort Wayne, Indiana 46801 or calling
1-800-4LINCOLN (454-6265).
LINCOLN NATIONAL LIFE INSURANCE CO.
Lincoln Life was founded in 1905 and is organized under Indiana law. We are one
of the largest stock life insurance companies in the United States. We serve as
the principal underwriter for the contracts. We are owned by Lincoln National
Corp. (LNC) which is also organized under Indiana law. LNC's primary businesses
are insurance and financial services.
VARIABLE ANNUITY ACCOUNT (VAA)
On June 3, 1981, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the Investment Company Act of 1940 (1940 Act).
The SEC does not supervise the VAA or Lincoln Life. The VAA is a segregated
investment account, meaning that its assets may not be charged with liabilities
resulting from any other business that we may conduct. Income, gains and
losses, whether realized or not, from assets allocated to the VAA are, in
accordance with the applicable annuity contracts, credited to or charged
against the VAA. They are credited or charged without regard to any other
income, gains or losses of Lincoln Life. The VAA satisfies the definition of
separate account under the federal securities laws. We do not guarantee the
investment performance of the VAA. Any investment gain or loss depends on the
investment performance of the funds and series. YOU ASSUME THE FULL INVESTMENT
RISK FOR ALL AMOUNTS PLACED IN THE VAA.
INVESTMENTS OF THE VARIABLE ANNUITY ACCOUNT
You decide the subaccount(s) to which you allocate purchase payments. There is
a separate subaccount which corresponds to each fund and series. You may change
your allocations without penalty or charges. Shares of the funds and series
will be sold at net asset value (See the Appendix to the funds' Prospectuses
for an explanation of net asset value) to the VAA in order to fund the
contracts. The funds and series are required to redeem their shares at net
asset value upon our request. We reserve the right to add, delete or substitute
funds and series.
INVESTMENT ADVISOR
Lincoln Investment (owned by LNC) is the advisor for each of the funds and is
primarily responsible for the investment decisions affecting the funds. The
services it provides are explained in the Prospectuses of the funds. Under an
advisory agreement with each fund, Lincoln Investment provides portfolio
management and investment advice to that fund, subject to the supervision of
the fund's Board of Directors.
Additionally, Lincoln Investment currently has six sub-advisory agreements in
which the sub-advisor may perform some or substantially all of the investment
advisory services required by those respective funds.
No additional compensation from the assets of those funds will be assessed as a
result of the sub-advisory agreements.
9
<PAGE>
Account C
Following is a chart that shows the fund names and the six sub-advisors under
Lincoln Investment (the advisor):
<TABLE>
<CAPTION>
Sub-advisor Fund
- ------------------------------------------------------------------------------
<S> <C>
Clay Finlay Inc. International
- ------------------------------------------------------------------------------
Fidelity Management Trust Co. Equity-Income
- ------------------------------------------------------------------------------
Janus Capital Corp. Capital Appreciation
- ------------------------------------------------------------------------------
Lynch & Mayer, Inc. Aggressive Growth
- ------------------------------------------------------------------------------
Putnam Investment
Management, Inc. Global Asset Allocation
- ------------------------------------------------------------------------------
Vantage Global Growth and Income; Managed
Advisors, Inc. (for stock portfolio);
Social Awareness; and
Special Opportunities
- ------------------------------------------------------------------------------
</TABLE>
The Bond and Money Market Funds do not have sub-advisors.
Delaware Management, an indirect subsidiary of LNC, is the advisor for the
series and is primarily responsible for the investment decisions affecting the
series. Delaware International Advisers Limited (Delaware International), an
affiliate of Delaware Management, furnishes investment management services to
the Global Bond series.
Additional information about Delaware Management and Delaware International may
be found in the Delaware Group Premium Fund, Inc. Prospectus enclosed in this
booklet under Management of the Fund.
FUNDS/SERIES
Following are brief summaries of the investment objectives and policies of the
funds. The year in which each fund started trading is in parentheses. There is
more detailed information in the current Prospectuses for the funds, which are
included in this booklet.
All of the funds with the exception of the Special Opportunities Fund are
diversified, open-end management investment companies. Diversified means not
owning too great a percentage of the securities of any one company. An open-end
company is one which, in this case, permits Lincoln Life to sell its shares
back to the fund or series when you make a withdrawal, surrender the contract
or transfer from one fund to another. Management investment company is the
legal term for a mutual fund. The Special Opportunities Fund is open-end, but
is non-diversified. Non-diversified means the fund may own a larger percentage
of the securities of particular companies than will a diversified company.
These definitions are very general. The precise legal definitions for these
terms are contained in the 1940 Act. PLEASE BE ADVISED THAT THERE IS NO
ASSURANCE THAT ANY OF THE FUNDS OR SERIES WILL ACHIEVE ITS STATED OBJECTIVES.
FUNDS
1. AGGRESSIVE GROWTH FUND (1994) -- The investment objective is to maximize
capital appreciation. The fund invests in stocks of smaller, lesser-known
companies which have a chance to grow significantly in a short time.
2. BOND FUND (1981) -- The investment objective is maximum current income
consistent with prudent investment strategy. The fund invests primarily in
medium-and long-term corporate and government bonds.
3. CAPITAL APPRECIATION FUND (1994) -- The investment objective is 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 or services are in
high demand. It may also buy some money market securities and bonds,
including junk (high-risk) bonds.
4. EQUITY-INCOME FUND (1994) -- The investment objective is to achieve
reasonable income by investing primarily in income-producing equity
securities. The fund invests mostly in high-income stocks and some high-
yielding bonds (including junk bonds).
5. GLOBAL ASSET ALLOCATION FUND (1987) -- The investment objective is long-
term total return consistent with preservation of capital. The fund
allocates its assets among several categories of equity and fixed-income
securities, both of U.S. and foreign issuers.
6. GROWTH AND INCOME FUND (1981) -- The investment objective is long-term
capital appreciation. The fund buys stocks of established companies.
7. INTERNATIONAL FUND (1991) -- The investment objective is long-term capital
appreciation. The fund trades in securities issued outside the United
States--mostly stocks, with an occasional bond or money market security.
8. MANAGED FUND (1983) -- The investment objective is maximum long-term total
return (capital gains plus income) consistent with prudent investment
strategy. The fund invests in a mix of stocks, bonds, and money market
securities, as determined by an investment committee.
10
<PAGE>
Account C
9. MONEY MARKET FUND (1981) -- The investment objective is 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.
10. SOCIAL AWARENESS FUND (1988) -- The investment objective is long-term
capital appreciation. The fund buys stocks of established companies which
adhere to certain specific social criteria.
11. SPECIAL OPPORTUNITIES FUND (1981) -- The investment objective is maximum
capital appreciation. The fund primarily invests in mid-size companies
whose stocks have significant growth potential. Current income is a
secondary consideration.
SERIES
Following are brief summaries of the investment objectives and policies of the
three series being offered by Delaware Group Premium Fund, Inc. More detailed
information may be obtained from the current prospectus for those series,
which is included in this booklet. PLEASE BE ADVISED THAT THERE IS NO
ASSURANCE THAT ANY OF THE SERIES WILL ACHIEVE ITS STATED OBJECTIVES.
1. EQUITY/INCOME -- seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. This series has the same
objective and investment disciplines as the Decatur Total Return Fund of
Delaware Group Decatur Fund, Inc., a separate Delaware Group fund, in that
it invests generally, but not exclusively, in common stocks and income-
producing securities convertible into common stocks, consistent with the
series' objective.
2. EMERGING GROWTH -- seeks long-term capital appreciation by investing
primarily in small-cap common stocks and convertible securities of emerging
and other growth-oriented companies. These securities will have been judged
to be responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. This series
has the same objective and investment disciplines as Delaware Group Trend
fund, Inc., a separate Delaware Group fund.
3. GLOBAL BOND -- seeks current income consistent with preservation of
principal by investing primarily in fixed income securities that may also
provide the potential for capital appreciation. This series is a global
fund. As such, at least 65% of the series' assets will be invested in fixed
income securities of issuers organized or having a majority of their assets
in or deriving a majority of their operating income in at least three
different countries, one of which may be the United States. This series has
the same objective and investment disciplines as the Global Bond Series of
Delaware Group Global & International Funds, Inc., a separate Delaware
Group fund.
Shares of the funds and series are sold to Lincoln Life for investment of the
assets of the VAA and of Lincoln Life Flexible Premium Variable Life Account
K, for variable life insurance contracts. Shares of some, but not all, of the
funds are also sold to Lincoln Life for investment of the assets of Lincoln
Life Flexible Premium Variable Life Accounts D and G, also to fund variable
life insurance contracts. In addition, shares of the Delaware Group Premium
Fund, Inc. are sold to separate accounts of life insurance companies other
than Lincoln Life. See Other information. Shares of the funds and series are
not sold directly to the general public.
We will purchase shares of the funds and series at net asset value and direct
them to the appropriate subaccounts of the VAA. We will redeem sufficient
shares of the appropriate funds and series to pay annuity payouts, death
benefits, surrender/ withdrawal proceeds or for purposes described in the
contract. If you desire to transfer all or part of your investment from one
subaccount to another, we may redeem shares held in the first and purchase
shares for the other subaccount. The shares are retired, but they may be
reissued later.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
All of the investment objectives of the funds and series are fundamental which
means that no changes may be made without the affirmative vote of a majority
of the outstanding voting securities of each respective fund or series. The
extent to which the particular investment policies, practices or restrictions
for each fund or series are fundamental or nonfundamental depends on the
particular fund or series. If they are nonfundamental, they may be changed by
the Board of Directors of the funds or series without shareholder approval.
You are urged to consult the Prospectuses in this booklet and SAIs for each
individual fund or series for additional information regarding the fundamental
and non-fundamental policies, practices and restrictions of each of the funds
and series.
REINVESTMENT
All dividend and capital gain distributions of the funds and series are
automatically reinvested in shares of the distributing funds and series at
their net asset value on the date of distribution. Dividends are not paid out
to contractowners as additional units, but are reflected in changes in unit
values.
11
<PAGE>
Account C
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, within the law, to make additions, deletions and
substitutions for the funds and series held by the VAA. (We may substitute
shares of another series or of other funds for shares already purchased, or to
be purchased in the future, under the contract. This substitution might occur
if shares of a fund and series should no longer be available, or if investment
in any fund's and series' shares should become inappropriate, in the judgement
of our management, for the purposes for the contract.) No substitution of the
shares attributable to your account may take place without notice to you and
prior approval of the SEC, in accordance with the 1940 Act.
CHARGES AND OTHER DEDUCTIONS
DEDUCTIONS FROM PURCHASE PAYMENTS
There are no front-end deductions for sales charges made from purchase
payments. However, we will deduct premium taxes, when applicable.
ACCOUNT CHARGE
There is no account charge for single premium deferred contracts and flexible
premium deferred contracts, Multi Fund 3 and 4. For periodic and flexible
premium, Multi Fund 2 deferred contracts, we will deduct $25 from the contract
value on the last valuation date of each contract year to compensate us for the
administrative services provided to you; this $25 account charge will also be
deducted from the contract value upon surrender. Administrative services
include processing applications; issuing contracts; processing purchase and
redemptions of fund shares; maintaining records; administering annuity payouts;
providing accounting, valuation, regulatory and reporting services.
SURRENDER CHARGES
There are charges associated with the surrender of a contract or the withdrawal
of contract value (or of purchase payments, for flexible contracts) before the
annuity commencement date. The surrender charges associated with surrender or
withdrawal are paid to us to compensate us for the loss we experience on
contract distribution costs when contractowners surrender or withdraw before
distribution costs have been recovered. Charges are the same for
surrenders/withdrawals except that, for the first withdrawal in a contract
year, up to 15% of contract value (purchase payments for flexible contracts)
may be withdrawn free of charges. This 15% withdrawal exception does not apply
to a surrender of a contract.
A. PERIODIC PREMIUM DEFERRED CONTRACT
For the first withdrawal in a contract year in excess of 15%, for any
subsequent withdrawals in the same contract year, or for surrender of the
contract, there will be a surrender charge of 8% for years 1-5; 4% in years 6-
10; and no charge after the contract has been in force for 10 years. In
addition, as explained previously, an account charge will be deducted for a
surrender.
Surrender charges will be waived in the event of the death of the annuitant. If
between the effective date of the contract and the annuitant's 65th birthday,
the annuitant should become totally and permanently disabled [as defined in
Section 22(e)(3) of the code], surrender charges will also be waived. In
addition, for 403(b) and 457 contracts only, surrender charges will be waived
in the event the annuitant: (1) has terminated employment with the employer
that sponsored the contract; and (2) has been in the contract for at least five
years (the five year date beginning either November 1, 1991 or the date of the
contract, whichever is later); and (3) is at least age 55.
B. SINGLE PREMIUM DEFERRED CONTRACT OR NONRECURRING LUMP SUM PAYMENT TO
PERIODIC PREMIUM DEFERRED CONTRACT
For a single premium deferred contract or a nonrecurring lump sum payment made
to a periodic premium deferred contract, the surrender/withdrawal charges (when
applicable as described previously) will be:
<TABLE>
<CAPTION>
Contract year in which surrender/withdrawal
occurs
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 7 8+
Charge as a percent
of proceeds withdrawn 7% 6 5 4 3 2 1 0
</TABLE>
Investment gains attributable to a nonrecurring lump sum payment made to a
periodic premium deferred contract will be subject to surrender charges of 8%
in years 1-5, 4% in years 6-10, and no charge after the contract has been in
force for 10 years.
Lump sum payments may be deposited into a periodic premium deferred contract
within 12 months of the effective date of the contract. After the 12-month
period, a new contract must be established for a lump sum payment.
For periodic premium deferred contracts under which a nonrecurring lump sum has
been received, withdrawals will be made first from any amount subject to the
lowest charge until that amount is gone.
Surrender charges will be waived in the event of the death of the annuitant. If
between the effective date of the contract and the annuitant's 65th birthday,
the annuitant should become totally and permanently disabled, surrender charges
will also be waived.
12
<PAGE>
Account C
C. FLEXIBLE PREMIUM DEFERRED CONTRACT
For a flexible premium deferred contract, the surrender/withdrawal charges
(when applicable as described previously) will be:
<TABLE>
<CAPTION>
Completed contract years
between date of purchase
payments and date of
surrender/withdrawal*
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 1 2 3 4 5 6 7+
Charge as a percent of
total purchase payments surrendered/withdrawn
in a contract year 7% 6 5 4 3 2 1 0
</TABLE>
*The surrender charge is calculated separately for each contract year's
purchase payments.
For the first withdrawal of purchase payments in each contract year, up to 15%
of purchase payments will be free of these charges. In addition, as explained
previously, an account charge will be deducted for a surrender on Multi Fund 2
flexible premium contracts.
Surrender charges will be waived in the event of the death of the annuitant. If
between the effective date of the contract and the annuitant's 65th birthday,
the annuitant should become totally and permanently disabled, surrender charges
will also be waived.
The surrender charge is calculated separately for each contract year's purchase
payments to which a charge applies. (FOR PURPOSES OF CALCULATING THIS CHARGE,
WE ASSUME THAT PURCHASE PAYMENTS ARE WITHDRAWN ON A FIRST IN-FIRST OUT BASIS,
AND THAT ALL PURCHASE PAYMENTS ARE WITHDRAWN BEFORE ANY EARNINGS ARE
WITHDRAWN.) The surrender charges associated with surrender or withdrawal are
paid to us to compensate us for the loss we experience on contract
distributions costs when contractowners surrender or withdraw before
distribution costs have been recovered.
ADDITIONAL INFORMATION
Participants in the Texas Optional Retirement Program should refer to
Restrictions under the Texas Optional Retirement Program, later in this
Prospectus booklet.
The charges associated with surrender/withdrawal are paid to us to compensate
us for the cost of distributing the contracts. As required by the National
Association Securities Dealers, in no event will the aggregate surrender
charges under a contract exceed 8.5% of your total purchase payments.
The surrender and account charges described previously may be reduced or
eliminated for any particular contract. However these charges will be reduced
only to the extent that we anticipate lower distribution and/or administrative
expenses or that we perform fewer sales or administrative services than those
originally contemplated in establishing the level of those charges. Lower
distribution and administrative expenses may be the result of economies
associated with (1) the use of mass enrollment procedures, (2) the performance
of administrative or sales functions by the employer, (3) the use by an
employer of automated techniques in submitting deposits or information related
to deposits on behalf of its employees, or (4) any other circumstances which
reduce distribution or administrative expenses. The exact amount of surrender
and account charges applicable to a particular contract will be stated in that
contract.
DEDUCTIONS FROM THE VAA FOR ASSUMPTION OF MORTALITY AND EXPENSE RISKS
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 1.002% of the daily net asset value, to compensate us for our
assumption of certain risks described below. This charge is made up of two
parts: (1) our assumption of mortality risks (0.900%) and (2) our assumption of
expense risks (0.102%). The level of this charge is guaranteed not to change.
Our assumption of mortality risks guarantees that the annuity payouts made to
our contractowners will not be affected by the mortality experience (life span)
either of persons receiving those payouts or of the general population. We
assume this mortality risk through guaranteed annuity rates incorporated into
the contract which cannot be changed. We also assume the risk that the charges
for administrative expenses, which cannot be changed by us, will be
insufficient to cover actual administrative costs.
If the 1.002% charge proves insufficient to cover underwriting and
administrative costs in excess of the charges made for administrative expenses,
we will absorb the loss. However, if the amount deducted proves more than
sufficient, we will keep the profit.
DEDUCTIONS FOR PREMIUM TAXES
Any premium tax or other tax levied by any governmental entity as a result of
the existence of the contracts or the VAA will be deducted from the contract
value when incurred, or at another time of our choosing.
The applicable premium tax rates that states and other governmental entities
impose on the purchase of an annuity are subject to change by legislation, by
administrative interpretation, or by judicial action. These premium taxes will
generally depend upon the law of your state of residence. The tax ranges from
0.5% to 4.0%.
DEDUCTION FOR THE EGMDB
When the EGMDB becomes effective, we will begin deducting from the VAA an
amount, computed daily, which is equal to an annual rate of 0.30% of the daily
13
<PAGE>
Account C
net asset value. This charge will start at the beginning of the next valuation
period. This charge will continue for all future contract years unless the
owner elects to discontinue the EGMDB. If the EGMDB is discontinued, the 0.30%
annual charge will cease at the end of the valuation period when the EGMDB is
terminated. See The contracts--Death benefit before the annuity commencement
date.
OTHER CHARGES AND DEDUCTIONS
There are deductions from and expenses paid out of the assets of the eleven
funds and the three series that are described later in this booklet in the
Appendix to the funds' Prospectuses and in the Prospectus for the series
respectively.
THE CONTRACTS
PURCHASE OF CONTRACTS
If you wish to purchase a contract, you must apply for it through one of our
authorized sales representatives. The completed application is sent to us and
we decide whether to accept or reject it. If the application is accepted, a
contract is prepared and executed by our legally authorized officers. The
contract is then sent to you through your sales representative. See
Distribution of the contracts.
If a completed application and all other information necessary for processing a
purchase order are received, an initial purchase payment will be priced no
later than two business days after we receive the order. While attempting to
finish an incomplete application, we may hold the initial purchase payment for
no more than five business days. If the incomplete application cannot be
completed within those five days, you will be informed of the reasons, and the
purchase payment will be returned immediately (unless you specifically
authorize us to keep it until the application is complete). Once the
application is complete, the initial purchase payment must be priced within two
business days.
WHO CAN INVEST
To apply for a periodic premium deferred contract, you must be of legal age in
a state where the contracts may be lawfully sold and also be eligible to
participate in any of the qualified or nonqualified plans for which the
contracts are designed. The annuitant cannot be older than age 74.
To apply for a flexible premium deferred contract, a single premium deferred
contract or to make a nonrecurring lump sum payment to a periodic premium
deferred contract, you must meet the same requirements as for an application of
a periodic premium deferred contract, except that the annuitant cannot be older
than age 84.
PURCHASE PAYMENTS
Purchase payments are payable to us at a frequency and in an amount selected by
you in the application. The minimum purchase payment for a single premium
deferred contract is $3,000 ($1,000 for IRAs and SEPs). The minimum initial
purchase payment for a flexible premium deferred contract is $3,000 ($1,000 for
IRAs and SEPs), and subsequent purchase payments must be at least $100. For a
periodic premium deferred contract, the minimum amount of any scheduled
purchase payment is $25, and the scheduled purchase payments must total at
least $600 per year. Purchase payments in any one contract year which exceed
twice the amount of purchase payments made in the first contract year may be
made only with our permission. Purchase payments in total may not exceed $1
million for each annuitant. If you stop making purchase payments, the contract
will remain in force as a paid-up contract as long as the total contract value
is at least $600. Payments may be resumed at any time until the annuity
commencement date, the maturity date, the surrender of the contract, or payment
of any death benefit, whichever comes first.
VALUATION DATE
Accumulation and annuity units will be valued once daily as of the close of
trading (currently 4:00 p.m., New York time) on each day that the NYSE is open
for trading (valuation date). On any date other than a valuation date, the
accumulation unit value and the annuity unit value will not change.
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments are placed into the VAA's subaccounts, each of which invests
in shares of its corresponding fund or series, according to your instructions.
The minimum amount of any purchase payment which can be put into any one
subaccount is $20 under periodic premium deferred contracts, $1,000 under
single premium deferred contracts and $100 under flexible premium deferred
contracts. Upon allocation to the appropriate subaccount, purchase payments are
converted into accumulation units. The number of accumulation units credited is
determined by dividing the amount allocated to each subaccount by the value of
an accumulation unit for that subaccount on the valuation date on which the
purchase payment is received at the home office if received before 4:00 p.m.,
New York time. If the purchase payment is received at or after 4:00 p.m., New
York time, we will use the accumulation unit value computed on the next
valuation date. The number of accumulation units determined in this way shall
not be changed by any subsequent change in the value of an accumulation unit.
However, the dollar value of an accumulation unit will vary depending not only
upon how well the investments perform, but also upon the related expenses of
the VAA and the underlying funds and series.
VALUATION OF ACCUMULATION UNITS
Accumulation units for each subaccount are valued separately. Initially, the
value of each accumulation unit was set at $1.00. Thereafter, the value of an
accumulation unit in any subaccount on any valuation date
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equals the value of an accumulation unit in that subaccount as of the preceding
valuation date multiplied by the net investment factor of that subaccount for
the current valuation period.
The net investment factor is an index used to measure the investment
performance of a subaccount from one valuation date to the next. The net
investment factor for any subaccount for any valuation date reflects the change
in the net asset value per share of the fund held in the subaccount from one
valuation period to the next, adjusted for the daily deduction of the
administrative and mortality and expense risk charges from assets in the
subaccount. If any ex-dividend date occurs during the valuation period, the per
share amount of any dividend or capital gain distribution is taken into
account. Also, if any taxes need to be reserved, a per share charge or credit
for any taxes reserved for, which is determined by us to have resulted from the
operations of the subaccount, is taken into account.
Because a different daily charge is made for contracts with the EGMDB than for
those without, a different net investment factor is calculated for each of the
two types of contracts, resulting in different corresponding accumulation unit
values on any given day.
TRANSFERS ON OR BEFORE THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment from one subaccount to
another. A transfer involves the surrender of accumulation units in one
subaccount and the purchase of accumulation units in the other subaccount. A
transfer will be done using the respective accumulation unit values as of the
valuation date immediately following receipt of the transfer request.
Transfers between subaccounts are restricted to once every 30 days; although,
we reserve the right to waive this 30-day period. The minimum amount which may
be transferred between subaccounts is $500 or the entire amount in the
subaccount, if less than $500. If the transfer from a subaccount would leave
you with less than $100 in the subaccount, we may transfer the total balance of
the subaccount. (We have the right to reduce these minimum amounts.)
A transfer may be made by writing to the home office or, if a Telephone
Exchange Authorization form (available from us) is on file with us, by a toll-
free telephone call. In order to prevent unauthorized or fraudulent telephone
transfers, we may require a contractowner to provide certain identifying
information before we will act upon their instructions. We may also assign the
contractowner a Personal Identification Number (PIN) to serve as
identification. We will not be liable for following telephone instructions we
reasonably believe are genuine. Telephone tranfer requests may be recorded and
written confirmation of all transfer requests will be mailed to the
contractowner on the next valuation date. Telephone transfers will be processed
on the valuation date that they are received when they are received at our
customer service center before 4:00 PM New York time.
You may also transfer all or any part of the contract value from the
subaccount(s) to the fixed side of the contract. Transfers from the fixed side
of the contract to the various subaccount(s) are allowed subject to the
following restrictions: (1) the sum of the percentages of the fixed value
transferred is limited to 25% of the value of the fixed side in any 12 month
period; and (2) the minimum amount which can be transferred is $500 or the
amount in the fixed account. We reserve the right to waive any of these
restrictions.
When thinking about a transfer of contract value, you should consider the
inherent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time.
There is no charge to you for a transfer. However, we reserve the right to
impose a charge in the future for any transfers.
TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment in one subaccount to
another subaccount or to the fixed side of the contract. Those transfers will
be limited to three times per contract year. HOWEVER, AFTER THE ANNUITY
COMMENCEMENT DATE, NO TRANSFERS ARE ALLOWED FROM THE FIXED SIDE OF THE CONTRACT
TO THE SUBACCOUNTS.
DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE
You may designate a beneficiary during the life of the annuitant and change the
beneficiary by filing a written request with the home office. Each change of
beneficiary revokes any previous designation. We reserve the right to request
that you send us the contract for endorsement of a change of beneficiary.
If the annuitant dies before the annuity commencement date and the EGMDB is not
in effect, a death benefit equal to the contract value will be paid to your
designated beneficiary.
An optional EGMDB is available for nonqualified and IRA flexible premium
deferred annuity contracts, for annuitants up to age 75. (Please check with
your representative for availability to current contractowners.) The EGMDB will
take effect on the valuation date when the EGMDB election form is approved at
our home office, if before 4:00 p.m. New York time. The owner may discontinue
the EGMDB at any time. If discontinued, the EGMDB will terminate on the
valuation date written notice is received at our home office, if before 4:00
p.m. New York time. If after 4:00 p.m. New York time, the EGMDB election or
termination will be effective with
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the next valuation date. The owner may not reelect the EGMDB once it is
discontinued. As of the annuity commencement date the EGMDB will be
discontinued and the charge for the EGMDB will cease. See Charges and other
deductions--Deduction for the EGMDB.
If the annuitant dies before the annuity commencement date and the EGMDB is in
effect, the death benefit paid to your designated beneficiary will be the
greater of:
1. the contract value at the end of the valuation period when the death claim
is approved for payment by Lincoln Life, or
2. the higher of:
(a) the contract value at the end of the valuation period when the EGMDB
becomes effective and;
(b) the highest contract value, at the end of the valuation period, on any
contract anniversary date up to and including age 75 following election
of the EGMDB;
increased by purchase payments and decreased by any withdrawals,
annuitizations, and premium taxes incurred after the contract anniversary or
EGMDB effective date the highest contract value occurred.
The contract value available upon death is the value of the contract at the end
of the valuation period during which the death claim is approved for payment by
Lincoln Life. The approval of the death claim payment will occur after receipt
of: (1) proof, satisfactory to us, of the death of the annuitant; (2) written
authorization for payment; and (3) our receipt of all required claim forms
fully completed.
The EGMDB may not be elected on or after the annuity commencement date.
At any time during a 60-day period the beneficiary may elect to receive payment
either in the form of a lump sum settlement or an annuity payout.
If a lump sum settlement is requested and the amount of the settlement is
$10,000 or more, a SecureLine(R) account will be established in the name of the
beneficiary for that amount. If the lump sum amount is less than $10,000, it
will be sent to the beneficiary. In either event, the proceeds will be
disbursed within seven days of receipt of satisfactory claim documentation, as
discussed previously, subject to the laws and regulations governing payment of
death benefits. If an election has not been made by the end of the 60-day
period, a lump sum settlement will be made at that time using SecureLine(R) if
the amount is $10,000 or more; if the amount is under $10,000 it will be sent
to the beneficiary. This payment may be postponed as permitted by the 1940 Act.
SecureLine(R) is an interest-bearing checking account established in the name
of the beneficiary which is administered by State Street Bank and Trust Company
of Boston, MA. Once the SecureLine(R) account is established, only the
beneficiary can authorize check drawn on the account. SecureLine(R) is expected
to be available after June 1997.
Annuity payouts will be made in accordance with applicable laws and regulations
governing payment of death benefits.
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of a beneficiary:
1. If any beneficiary dies before the annuitant, that beneficiary's interest
will go to any other beneficiaries named, according to their respective
interests. There are no restrictions on the beneficiary's use of the
proceeds; and/or
2. If no beneficiary survives the annuitant, the proceeds will be paid to the
contractowner or to his/her estate, as applicable.
JOINT/CONTINGENT OWNERSHIP
If joint owners are named in the application, the joint owners shall be treated
as having equal undivided interests in the contract. Either owner,
independently of the other, may exercise any ownership rights in this contract.
Only the spouse can be a joint owner on Multi Fund 4, flexible premium deferred
annuity contracts.
A contingent owner may exercise ownership rights in this contract only after
the contractowner dies.
DEATH OF CONTRACTOWNER
If the contractowner of a nonqualified contract dies before the annuity
commencement date, then, in compliance with the code, the cash surrender value
of the contract will be paid as follows:
1. Upon the death of a non-annuitant contractowner, the proceeds shall be paid
to any surviving joint or contingent owner(s). If no joint or contingent
owner has been named, then the cash surrender value shall be paid to the
annuitant named in the contract; and
2. Upon the death of a contractowner, who is also the annuitant, the death will
be treated as death of the annuitant and the provisions of this contract
regarding death of annuitant will control. If the recipient of the proceeds
is the surviving spouse of the contractowner, the contract may be continued
in the name of that spouse as the new contractowner.
The code requires that any distribution be paid within five years of the death
of the contractowner unless the beneficiary begins receiving, within one year
of the contractowner's death, the distribution in the form of a life annuity or
an annuity for a period certain not exceeding the beneficiary's life
expectancy.
SURRENDERS AND WITHDRAWALS
Before the annuity commencement date, we will allow the surrender of the
contract or a withdrawal of the contract value upon your written request,
subject to the rules below.
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Special restrictions on surrenders/withdrawals apply if your contract is
purchased as part of a retirement plan of a public school system or Section
501(c)(3) organization under Section 403(b) of the code. Beginning January 1,
1989, in order for a contract to retain its tax-qualified status, Section
403(b) prohibits a withdrawal from a Section 403(b) contract of post-1988
contributions (and earnings on those contributions) pursuant to a salary
reduction agreement. However, this restriction does not apply if the annuitant
attains age (a) 59 1/2 (b) separates from service, (c) dies, (d) becomes
totally and permanently disabled and/or (e) experiences financial hardship (in
which event the income attributable to those contributions may not be
withdrawn).
A surrender/withdrawal after the annuity commencement date depends upon the
annuity option selected.
Pre-1989 contributions and earnings through December 31, 1988, are not subject
to the previously stated restriction.
The contract value available upon surrender/withdrawal is the cash surrender
value at the end of the valuation period during which the written request for
surrender/withdrawal is received at the home office. Unless a request for
withdrawal specifies otherwise, withdrawals will be made from all subaccounts
within the VAA and from the general account in the same proportion that the
amount of withdrawal bears to the total contract value. The minimum amount
which can be withdrawn is $100, and the remaining contract value must be at
least $300. Where permitted by contract, surrender/withdrawal payments will be
mailed within seven days after we receive a valid written request at the home
office. The payment may be postponed as permitted by the 1940 Act. You may
specify that the charges be deducted from the amount you request withdrawn or
from the remaining contract value.
There are charges associated with surrender of a contract or withdrawal of
contract value before the annuity commencement date. See Charges and other
deductions.
The tax consequences of a surrender/withdrawal are discussed later in this
booklet. See Federal tax status.
If the total contract value is less than $600, and if no purchase payments have
been made for at least two years, we reserve the right to terminate the
contract.
REINVESTMENT PRIVILEGE
You may elect to make a reinvestment purchase with any part of the proceeds of
a surrender/withdrawal, and we will recredit the surrender/withdrawal charges
previously deducted. This election must be made within 30 days of the date of
the surrender/withdrawal, and the repurchase must be of a contract covered by
this Prospectus. In the case of a qualified contract, a representation must be
made that the proceeds being used to make the purchase have retained their tax-
favored status under an arrangement for which the contracts offered by this
Prospectus are designed. The number of accumulation units which will be
credited when the proceeds are reinvested will be based on the value of the
accumulation unit(s) on the next valuation date. This computation will occur
following receipt of the proceeds and request for reinvestment at the home
office. You may utilize the reinvestment privilege only once. For tax reporting
purposes, we will treat a surrender/withdrawal and a subsequent reinvestment
purchase as separate transactions. You should consult a tax advisor before you
request a surrender/withdrawal or subsequent reinvestment purchase.
AMENDMENT OF CONTRACT
We reserve the right to amend the contract to meet the requirements of the 1940
Act or other applicable federal or state laws or regulations. You will be
notified in writing of any changes, modifications or waivers.
COMMISSIONS
For the flexible premium deferred annuity Multi Fund 2 and 3 contracts, the
maximum commission which could be paid to dealers is equal to 5.25% on each
purchase payment; plus up to 0.10% of the value of purchase payments in the
variable annuity account while the EGMDB is in effect. For flexible premium
deferred annuity Multi Fund 4 contracts, the maximum commission which could be
paid to dealers is equal to 4.50% on each purchase payment; plus an annual
continuing commission up to .40% of the value of the contract purchase payments
invested for at least 15 months; plus up to 0.10% of the value of purchase
payments in the variable annuity account while the EGMDB is in effect.
For the periodic premium deferred annuity contract, the maximum commission
which could be paid to dealers is 9% on the total purchase payments received
during the first contract year and 5.25% on each purchase payment in renewal
contract years (or an equivalent schedule).
OWNERSHIP
As contractowner, you have all rights under the contract. According to Indiana
law, the assets of the VAA are held for the exclusive benefit of all
contractowners and their designated beneficiaries. The assets of the VAA are
not chargeable with liabilities arising from any other business that we may
conduct. Contracts used for qualified plans may not be assigned or transferred
except as permitted by the Employee Retirement Income Security Act (ERISA) of
1974 and upon written notification to us. We assume no responsibility for the
validity or effect of any assignment. Consult your tax advisor about the tax
consequences of an assignment.
CONTRACTOWNER QUESTIONS
The obligations to purchasers under the contracts are those of Lincoln Life.
Your questions and concerns should be directed to us at 1-800-4LINCOLN
(454-6265).
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ANNUITY PAYOUTS
When you apply for a contract, you may select any annuity commencement date
permitted by law. (PLEASE NOTE THE FOLLOWING EXCEPTION: Contracts issued under
qualified employee pension and profit-sharing trusts [described in Section
401(a) and tax exempt under Section 501(a) of the code] and qualified annuity
plans [described in Section 403(a) of the code], including H.R. 10 trusts and
plans covering self-employed individuals and their employees, provide for
annuity payouts to start at the date and under the option specified in the
plan.)
The contract provides that all or part of the contract value may be used to
purchase an annuity. Optional forms of payout of annuities (annuity options)
are available, each of which is payable on a variable basis, a fixed basis or a
combination of both. We may choose to make other annuity options available in
the future.
You may elect annuity payouts in monthly, quarterly, semiannual or annual
installments. If the payouts from any subaccount would be or become less than
$50, we have the right to reduce their frequency until the payouts are at least
$50 each. Following are explanations of the annuity options available.
ANNUITY OPTIONS
LIFE ANNUITY. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant. This
option offers the highest periodic payout since there is no guarantee of a
minimum number of payouts or provision for a death benefit for beneficiaries.
HOWEVER, THERE IS THE RISK UNDER THIS OPTION THAT THE ANNUITANT WOULD RECEIVE
NO PAYOUTS IF DEATH OCCURS BEFORE THE DATE SET FOR THE FIRST PAYOUT; ONLY ONE
PAYOUT IF DEATH OCCURS BEFORE THE SECOND SCHEDULED PAYOUT, AND SO ON.
LIFE INCOME WITH PAYOUTS GUARANTEED FOR DESIGNATED PERIOD. This option
guarantees periodic payouts during a designated period, usually 10 or 20 years,
and then continues throughout the lifetime of the annuitant. The designated
period is selected by the contractowner.
JOINT LIFE ANNUITY. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts
continue during the lifetime of the survivor.
JOINT LIFE ANNUITY WITH GUARANTEED PERIOD. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues
during the joint lifetime of the annuitant and a designated joint annuitant.
The payouts continue during the lifetime of the survivor. The designated period
is selected by the contractowner.
JOINT-AND-TWO-THIRDS SURVIVOR ANNUITY. This option provides a periodic payout
during the joint lifetime of the annuitant and a designated joint annuitant.
When one of the joint annuitants dies, the survivor, during their lifetime,
receives two thirds of the periodic payout made when both were alive.
UNIT REFUND LIFE ANNUITY. This option offers a periodic payout during the
lifetime of the annuitant with the guarantee that upon death a payout will be
made of the value of the number of annuity units (see Variable annuity payouts)
equal to the excess, if any, of: (a) the total amount applied under this option
divided by the annuity unit value for the date payouts begin, divided by (b)
the annuity units represented by each payout to the annuitant multiplied by the
number of payouts paid before death. The value of the number of annuity units
is computed on the date the death claim is approved for payment by the home
office.
None of the options listed above currently provide withdrawal features,
permitting the contractowner to withdraw commuted values as a lump sum payment.
Other options may be made available by us. Options are only available to the
extent they are consistent with the requirements of the contract and Section
72(s) of the code, if applicable. The mortality and expense risk charge will be
assessed on all variable annuity payouts, including options that do not have a
life contingency and therefore no mortality risk.
The annuity commencement date is usually on or before the annuitant's 85th
birthday; however you may change the annuity commencement date, change the
annuity option, or change the allocation of the investment among subaccounts up
to 30 days before the scheduled annuity commencement date, upon written notice
to the home office. You must give us at least 30 days notice before the date on
which you want payouts to begin. If proceeds become available to a beneficiary
in a lump sum, the beneficiary may choose any annuity payout option.
Unless you select another option, the contract automatically provides for a
life with a 10 year guaranteed period annuity (on a fixed, variable or
combination fixed and variable basis, in proportion to the account allocation
at the time of annuitization), except when a joint life payout is required by
law. Under any option providing for guaranteed payouts, the number of payouts
which remain unpaid at the date of the annuitant's death (or surviving
annuitant's death in the case of a joint life annuity) will be paid to your
beneficiary as payouts become due.
The contract contains no provision under which an annuitant or a beneficiary
may surrender their contract or make a withdrawal and receive a lump-sum
settlement once annuity payouts have begun. See Surrenders and withdrawals.
Options are only available to the extent they are consistent with the
requirements of Section 72(s) of the code, if applicable.
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VARIABLE ANNUITY PAYOUTS
Variable annuity payouts will be determined using:
1. The contract value on the annuity commencement date;
2. The annuity tables contained in the contract;
3. The annuity option selected; and
4. The investment performance of the fund(s) selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
2. Credit the contract with a fixed number of annuity units equal to the first
periodic payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each month thereafter.
We assume an investment return of 5% per year, as applied to the applicable
mortality table. The amount of each payout after the initial payout will depend
upon how the underlying fund(s) and series perform, relative to the 5% assumed
rate. There is a more complete explanation of this calculation in the SAI.
FEDERAL TAX STATUS
This section is a discussion of the Federal income tax rules applicable to the
contracts as of the date of this
Prospectus. More information is provided in the SAI. THESE DISCUSSIONS AND
THOSE IN THE SAI ARE NOT INTENDED AS TAX ADVICE. This section does not discuss
the Federal tax consequences resulting from every possible situation. No
attempt has been made to consider any applicable state, local or foreign tax
law, other than the imposition of any state premium taxes (See Charges and
other deductions). If you are concerned about the tax implications with respect
to the contracts, you should consult a tax advisor. The following discussion is
based upon our understanding of the present Federal income tax laws as they are
currently interpreted by the Internal Revenue Service (IRS). No representation
is made about the likelihood of continuation of the present Federal income tax
laws or their current interpretations by the IRS.
TAXATION OF NONQUALIFIED CONTRACTS
You are generally not taxed on increases in the value of your contract until a
distribution occurs. This distribution can be in the form of a lump sum payout
received by requesting all or part of the cash surrender value (i.e.
surrenders/withdrawals) or as annuity payouts. For this purpose, the assignment
or pledge of, or the agreement to assign or pledge, any portion of the value of
a contract will be treated as a distribution. A transfer of ownership of a
contract, or designation of an annuitant (or other beneficiary) who is not also
the contractowner, may also result in tax consequences. The taxable portion of
a distribution (in the form of a lump sum payout or an annuity) is taxed as
ordinary income. For purchase payments made after February 28, 1986, a
contractowner who is not a natural person (for example, a corporation) [subject
to limited exceptions] will be taxed on any increase in the contract's cash
value over the investment in the contract during the taxable year, even if no
distribution occurs. The next discussion applies to contracts owned by natural
persons.
In the case of a surrender under the contract or withdrawal of contract value,
generally amounts received are first treated as taxable income to the extent
that the cash value of the contract immediately before the surrender exceeds
the investment in the contract at that time. Any additional amount withdrawn is
not taxable. In the case of a surrender under a contract issued before August
14, 1982, and allocable to an investment in the contract made before that date,
amounts received are treated as taxable income only to the extent that they
exceed the investment in the contract. The investment in the contract generally
equals the portion, if any, of any purchase payment paid by or on behalf of an
individual under a contract which is not excluded from the individual's gross
income.
Even though the tax consequences may vary depending on the form of annuity
payout selected under the contract, the contractowner of an annuity payout
generally is taxed on the portion of such payout that exceeds the investment in
the contract. For variable annuity payouts, the taxable portion is determined
by a formula that establishes a specific dollar amount of each payout that is
not taxed. The dollar amount is determined by dividing the investment in the
contract by the total number of expected periodic payouts. For fixed annuity
payouts, there generally is no tax on the portion of each payout that
represents the same ratio that the investment in the contract bears to the
total expected value of payouts for the term of the annuity; the remainder of
each payout is taxable. For individuals whose annuity starting date is after
December 31, 1986, the entire distribution (whether fixed or variable) will be
fully taxable once the recipient is deemed to have recovered the dollar amount
of the investment in the contract.
There may be imposed a penalty tax on distributions equal to 10% of the amount
treated as taxable income. The penalty tax is not imposed in certain
circumstances, which generally are distributions:
1. Received on or after age 59 1/2;
2. Made as a result of death or disability of contractowner;
3. Received in substantially equal periodic payments as a life annuity (subject
to special recapture rules if the series of payouts is subsequently
modified);
4. Allocable to the investment in the contract before August 14, 1982;
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5. Under a qualified funding asset in a structured settlement;
6. Under an immediate annuity contract as defined in the code; and/or
7. Under a contract purchased in connection with the termination of certain
retirement plans.
TAXATION OF QUALIFIED CONTRACTS
The contracts may be purchased in connection with the following types of tax-
favored retirement plans:
1 Contracts purchased for employees of public school systems and certain tax-
exempt organizations, qualified under Section 403(b) of the code;
2. Pension and profit-sharing plans of self-employed individuals (H.R. 10 or
Keogh plans) or corporations, qualified under Section 401(a) or 403(a) of
the code;
3. IRAs, qualified under Section 408 of the code;
4. Deferred compensation plans of state or local governments, qualified under
Section 457 of the code; and/or
5. SEPs, qualified under Section 408(k) of the code.
The tax rules applicable to these plans, including restrictions on
contributions and benefits, taxation of distributions and any tax penalties,
vary according to the type of plan and its terms and conditions. Participants
under such plans, as well as contractowners, annuitants and beneficiaries,
should 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 contracts. Purchasers of contracts for use
with any qualified plan, as well as plan participants and beneficiaries, should
consult counsel and other advisors as to the suitability of the contracts to
their specific needs, and as to applicable code limitations and tax
consequences.
MULTIPLE CONTRACTS
All contracts entered into after October 21, 1988, and issued by the same
insurance company (or its affiliates) to the same contractowner during any
calendar year will be treated as a single contract for tax purposes.
INVESTOR CONTROL
The Treasury Department has indicated that guidelines may be issued under which
a variable annuity contract will not be treated as an annuity contract for tax
purposes if the contractowner has excessive control over the investments
underlying the contract. They may consider the number of investment options or
the number of transfer opportunities available between options as relevant when
determining excessive control. The issuance of those guidelines may require us
to impose limitations on your right to control the investment. We do not know
whether any such guidelines would have a retroactive effect.
Section 817(h) of the code and the related regulation that the Treasury
Department has adopted require that assets underlying a variable annuity
contract be adequately diversified. The regulations provide that a variable
annuity contract which does not satisfy the diversification standards will not
be treated as an annuity contract, unless the failure to satisfy the
regulations was inadvertent, the failure is corrected, and the contractowner or
we pay an amount to the IRS. The amount will be based on the tax that would
have been paid by the contractowner if the income, for the period the contract
was not diversified, had been received by the contractowner. If the faulure to
diversify is not corrected in this manner, the contractowner of an annuity
contract will be deemed the owner of the underlying securities and will be
taxed on the earnings of his or her account. We believe, under our
interpretation of the code and regulations thereunder, that the investments
underlying this contract meet these diversification standards.
WITHHOLDING
Generally, pension and annuity distributions are subject to withholding for the
recipient's Federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Under the code, 20% income tax withholding may apply to eligible
rollover distributions. All taxable distributions from qualified plans and
Section 403(b) annuities are eligible rollover distributions, except (1)
annuities paid out over life or life expectancy, (2) installments paid for a
period spanning 10 years or more, and (3) required minimum distributions. The
code imposes a mandatory 20% income tax withholding on any eligible rollover
distribution that the contractowner does not elect to have paid in a direct
rollover to another qualified plan,
Section 403(b) annuity or individual retirement account.
Distributions from Section 457 plans are subject to the general wage
withholding rules.
VOTING RIGHTS
As required by law, we will vote the fund and series shares held in the VAA at
meetings of the shareholder of the various funds and series. The voting will be
done according to the instructions of contractowners who have interests in any
subaccounts which invest in a fund or funds and series. If the 1940 Act or any
regulation under it should be amended or if present interpretations should
change, and if as a result we determine that we are permitted to vote the fund
shares in our own right, we may elect to do so.
The number of votes which you have the right to cast will be determined by
applying your percentage interest in a subaccount to the total number of votes
attributable to the subaccount. In determining the
20
<PAGE>
Account C
number of votes, fractional shares will be recognized. After the annuity
commencement date, the votes attributable to a contract will decrease.
Fund shares held in a subaccount for which no timely instructions are received
will be voted by us in proportion to the voting instructions which are received
for all contracts participating in that subaccount. Voting instructions to
abstain on any item to be voted on will be applied on a pro rata basis to
reduce the number of votes eligible to be cast.
Maryland law and the bylaws of each fund and series allow investment companies
registered under the 1940 Act to dispense with annual meetings of shareholders
in certain cases where the meetings are only a formality. The Board of
Directors of each fund will decide each year whether or not to hold the
shareholder's annual meeting for that year.
The dispensing with annual meetings of the shareholder in effect results in
retaining the existing Directors in office. Consequently, the SEC requires the
funds to assure contractowners that a majority of those Directors have at some
point been elected by the shareholder. The SEC also requires that the funds
comply with Section 16(c) of the 1940 Act, concerning procedures by which
shareholders may remove Directors. For a more detailed explanation of this
procedure, see Description of shares in the Appendix to the Prospectuses for
the funds; also see the Prospectus for the series.
Annual meetings of each fund and of the series normally will not be held,
unless the Board of Directors decides to hold them. Special meetings of the
shareholder may be called for any valid purpose. Whenever a shareholder's
meeting is called, each person having a voting interest in a subaccount will
receive proxy voting material, reports and other materials relating to the
fund, and series involved.
DISTRIBUTION OF THE CONTRACTS
We are the distributor of the contracts. They will be sold by our registered
representatives who have been licensed by state insurance departments. The
contracts will also be sold by independent broker-dealers who have been
licensed by state insurance departments to represent us and who have selling
agreements with us. We are registered with the SEC under the Securities
Exchange Act of 1934 as a broker-dealer and are a member of the National
Association of Securities Dealers (NASD). Lincoln Life will offer contracts in
all states where it is licensed to do business.
RETURN PRIVILEGE
Within the free-look period after you first receive the contract, you may
cancel it for any reason by delivering or mailing it postage prepaid, to the
home office at P.O. Box 2340, 1300 South Clinton Street, Fort Wayne,
Indiana, 46801. A contract canceled under this provision will be void. With
respect to the fixed portion of a contract, we will return purchase payments.
With respect to the VAA, except as explained in the following paragraph, we
will return the contract value as of the date of receipt of the cancellation,
plus any account charge and any premium taxes which had been deducted. No
surrender charge will be made. A PURCHASER WHO PARTICIPATES IN THE VAA IS
SUBJECT TO THE RISK OF A MARKET LOSS DURING THE FREE-LOOK PERIOD.
For contracts written in those states whose laws require that we assume this
market risk during the free-look period, a contract may be canceled, subject to
the conditions explained before, except that we will return only the purchase
payment(s).
STATE REGULATION
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance.
Our books and accounts are subject to review and examination by the Indiana
Insurance Department at all times. A full examination of our operations is
conducted by that Department at least once every five years.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits
participants in the Texas Optional Retirement Program (ORP) to redeem their
interest in a variable annuity contract issued under the ORP only upon:
1. Termination of employment in all institutions of higher education as
defined in Texas law;
2. Retirement; or
3. Death.
Accordingly, participants in the ORP will be required to obtain a certificate
of termination from their employer(s) before accounts can be redeemed.
RECORDS AND REPORTS
As presently required by the 1940 Act and applicable regulations, we are
responsible for maintaining all records and accounts relating to the VAA. We
will mail to you, at your last known address of record at the home office, at
least semiannually after the first contract
21
<PAGE>
Account C
year, reports containing information required by the 1940 Act or any other
applicable law or regulation. We have entered into an agreement with the
Delaware Management Co., 2005 Market Street, Philadelphia, PA 19203, to provide
accounting services to the VAA.
OTHER INFORMATION
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered by this Prospectus. This
Prospectus does not contain all the information in the Registration Statement,
its amendments and exhibits. Please refer to the Registration Statement for
further information about the VAA, Lincoln Life and the contracts offered.
Statements in this Prospectus about the content of contracts and other legal
instruments are summaries. For the complete text of those contracts and
instruments, please refer to those documents as filed with the SEC.
Lincoln National Flexible Premium Variable Life Accounts D, G and K, segregated
investment accounts of ours registered under the 1940 Act, are authorized to
invest assets in the following funds and series: Bond, Growth and Income,
Managed, Money Market and Special Opportunities (for Account D); Growth and
Income and Special Opportunities (for Account G) and all funds and series for
Account K. Through the VAA and the Variable Life Accounts we are the sole
shareholder in the eleven funds. However, we are not the sole shareholder of
series shares in the Delaware Group Premium Fund, Inc. Collectively, the VAA
and the Variable Life Accounts may be referred to in this booklet and in the
SAI as the variable accounts.
Due to differences in redemption rates, tax treatment or other considerations,
the interests of contractowners under the Variable Life Accounts could conflict
with those of contractowners under the VAA. In those cases where assets from
variable life and variable annuity separate accounts are invested in the same
fund or funds or series (i.e., where mixed funding occurs), the Boards of
Directors of the funds involved will monitor for any material conflicts and
determine what action, if any, should be taken. If it becomes necessary for any
separate account to replace shares of any fund or series with another
investment, that fund or series may have to liquidate securities on a
disadvantageous basis. Refer to the Prospectus for each fund and for the series
fund for more information about mixed funding.
In the future, we may purchase shares in the funds and series for one or more
unregistered segregated investment accounts.
ADVERTISEMENTS/SALES LITERATURE
In marketing the variable annuity contracts, we and our various sales
representatives may refer to certain ratings assigned to us under the Rating
System of the A.M. Best Co., Oldwick, New Jersey. The objective of Best's
Rating System is to evaluate the various factors affecting the overall
performance of an insurance company in order to provide Best's opinion about
that company's relative financial strength and ability to meet its contractual
obligations. The procedure includes both a quantitative and qualitative review
of the insurance company. In marketing the contracts and the underlying funds
and series, we may at times use data published by other nationally-known
independent statistical services. These service organizations provide relative
measures of such factors as an insurer's claim-paying ability, the features of
particular contracts, and the comparative investment performance of the funds
and series with other portfolios having similar objectives. A few such services
are: Duff & Phelps, the Lipper Group, Moody's, Morningstar, Standard and Poor's
and VARDS. There is more information about each of these services under
Advertising and sales literature in the SAI. Marketing materials may employ
illustrations of compound interest and dollar-cost averaging; discuss automatic
withdrawal services; describe our customer base, assets, and our relative size
in the industry. They may also discuss other features of Lincoln Life, the VAA,
the funds, the series and their investment management.
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS FOR VAA
<TABLE>
<CAPTION>
Item
- ------------------------------------------------------
<S> <C>
General information and history of Lincoln Life
Special terms
Services
Purchase of securities being offered Underwriters
Calculation of performance data
</TABLE>
For a free copy of the SAI please see page one of this booklet.
<TABLE>
<CAPTION>
Item
- ---------------------------------------------------------
<S> <C>
Annuity payouts
Federal tax status
Determination of accumulation and annuity unit value
Advertising and sales literature/graphics
Financial statements
</TABLE>
22
<PAGE>
PREFACE TO THE MULTI FUND(R) PROSPECTUSES
THE PREFACE AND DIRECTORY ARE PART OF THE PROSPECTUS FOR EACH OF THE FOLLOWING
FUNDS:
Lincoln National Aggressive Growth Fund, Inc. (AG)
Lincoln National Bond Fund, Inc. (B)
Lincoln National Capital Appreciation Fund, Inc. (CA)
Lincoln National Equity-Income Fund, Inc. (E-I)
Lincoln National Global Asset Allocation Fund, Inc. (GAA)
Lincoln National Growth and Income Fund, Inc. (GI)
Lincoln National International Fund, Inc. (I)
Lincoln National Managed Fund, Inc. (M)
Lincoln National Money Market Fund, Inc. (MM)
Lincoln National Social Awareness Fund, Inc. (SA)
Lincoln National Special Opportunities Fund, Inc. (SO)
Preface/Directory
Shares of all the funds are sold to Lincoln National Life Insurance Co.
(Lincoln Life) for allocation to its Variable Annuity Account C (the variable
annuity account [VAA]) to fund variable annuity contracts and for allocation to
its Variable Life Account K to fund variable life insurance contracts.
To fund its variable life contracts, Variable Life Account D buys shares of the
Bond, Growth and Income, Managed, Money Market and Special Opportunities Funds.
To fund its variable life contracts, Variable Life Account G buys shares of the
Growth and Income and Special Opportunities Funds.
Each of these Variable Life and Annuity Accounts may be referred to as a
variable account. For each fund listed above, see Description of the fund in
its Prospectus for a statement of that fund's investment objective. Each of
these funds is referred to individually as a fund; collectively, as the funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THESE PROSPECTUSES. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
These Prospectuses set forth concisely the information about each fund that you
ought to know before investing. Please read and keep this Prospectus booklet
for future reference.
A separate Statement of Additional Information (SAI) for each fund has been
filed with the SEC. By this reference, each SAI, dated May 1, 1997, is
incorporated into the Prospectus of the fund with which it is registered. A
free copy will be provided upon request. Either write Lincoln National Life
Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or call 1-800-4LINCOLN
(454-6265).
The Financial Highlights table of each fund contains per-share data calculated
on the basis of a share outstanding throughout the period, together with
financial ratios and other supplemental data. The Financial Highlights table is
incorporated by reference to the fund's 1996 Annual Report. A copy of the
Annual Report will be provided on request and without charge. Either write
Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801
or call 1-800-4LINCOLN (454-6265).
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THESE
PROSPECTUSES, IN CONNECTION WITH THE OFFERS CONTAINED IN THEM. IF ANY ARE GIVEN
OR MADE, THE INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND(S) IN QUESTION. THESE PROSPECTUSES DO NOT
CONSTITUTE OFFERS BY THE FUNDS TO SELL, OR SOLICITATIONS OF ANY OFFERS TO BUY,
ANY OF THE SECURITIES OFFERED BY THEM IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL FOR THE FUNDS TO MAKE THOSE OFFERS.
Prospectuses dated May 1, 1997
23
<PAGE>
DIRECTORY FOR THE FUND PROSPECTUSES
Preface/Directory
<TABLE>
<CAPTION>
Subject Page
- ----------------------------------------
<S> <C>
PREFACE 23
DESCRIPTION OF THE FUND
Aggressive Growth Fund 25
Bond Fund 31
Capital Appreciation Fund 35
Equity-Income Fund 39
Global Asset Allocation Fund 43
Growth and Income Fund 49
International Fund 51
Managed Fund 55
Money Market Fund 59
Social Awareness Fund 61
Special Opportunities Fund 65
- ----------------------------------------
INVESTMENT POLICIES AND TECHNIQUES
Aggressive Growth Fund 25
Bond Fund 31
Capital Appreciation Fund 35
Equity-Income Fund 39
Global Asset Allocation Fund 43
Growth and Income Fund 49
International Fund 51
Managed Fund 55
Money Market Fund 59
Social Awareness Fund 61
Special Opportunities Fund 65
- ----------------------------------------
INVESTMENT RESTRICTIONS
Aggressive Growth Fund 28
Bond Fund 33
Capital Appreciation Fund 38
Equity-Income Fund 41
Global Asset Allocation Fund 46
Growth and Income Fund 49
International Fund 53
Managed Fund 57
Money Market Fund 60
Social Awareness Fund 62
Special Opportunities Fund 66
</TABLE>
<TABLE>
<CAPTION>
Subject Page
- -------------------------------------------------------------
<S> <C>
STRATEGIC PORTFOLIO TRANSACTIONS
Aggressive Growth Fund 29
Bond Fund 33
Capital Appreciation Fund 38
Equity-Income Fund 42
Global Asset Allocation Fund 46
Growth and Income Fund 50
International Fund 53
Managed Fund 57
Money Market Fund 60
Social Awareness Fund 62
Special Opportunities Fund 67
- -------------------------------------------------------------
APPENDIX - CONTAINS IMPORTANT INFORMATION FOR ALL FUNDS
Net asset value 69
Management of the funds 69
Purchase of securities being offered 71
Sale and redemption of shares 72
Distributions and federal income tax considerations 72
Management discussion of fund performance 72
Description of shares 72
Strategic portfolio transactions-Additional information 73
Foreign investments 75
General information 76
Statement of Additional Information
Table of contents - 11 underlying funds 79
</TABLE>
24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
AUDITED FINANCIAL STATEMENTS
Prior to 1996, management of The Lincoln National Life Insurance Company
(Company) prepared annual financial statements of the Company using two
different types of accounting principles. Pursuant to insurance regulatory
requirements in several states, management prepared financial statements in
accordance with statutory accounting principles (STAP), which were subject to
audit by the Company's independent auditors. Additionally, solely for purposes
of inclusion in the registration statements of separate account products
requiring registration and periodic reporting to the Securities and Exchange
Commission (SEC), management also prepared financial statements of the Company
in accordance with generally accepted accounting principles (GAAP), which were
also subject to audit. In an attempt to reduce costs associated with the
preparation and audits of both GAAP and STAP-bases financial statements,
commencing with the registrations in 1997, management will prepare and have
audited only STAP-basis financial statements.
The STAP-basis financial statements included in this registration statement
have been prepared in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance, which is an "other
comprehensive basis of accounting" as that term is defined by the American
Institute of Certified Public Accountants (see notes 1 and 2 to the enclosed
audited STAP-basis financial statements for information on such prescribed and
permitted practices).
Because 1996 is the initial year for which STAP-basis financial statements are
used for purposes of these separate account product filings with the SEC,
management has included the following financial statements of the Company to
allow for comparability between years:
. Section 1 contains the STAP-basis balance sheets of the Company as of Decem-
ber 31, 1996 and 1995 and the related STAP-basis statements of income,
changes in capital and surplus, and cash flows for the three years in the pe-
riod ended December 31, 1996.
. Section 2 contains the GAAP-basis balance sheets of the Company as of Decem-
ber 31, 1995 and 1994 and the related consolidated statements of income,
shareholder's equity, and cash flows for each of the three years in the pe-
riod ended December 31, 1995.
G-1
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1995 1994
----------- -----------
(000's omitted)
-----------------------
ASSETS
<S> <C> <C>
INVESTMENTS:
Securities available-for-sale, at fair value:
. Fixed maturity (cost: 1995 -- $18,852,837; 1994 --
$18,193,928) $20,414,785 $17,692,214
- ----------------------------------------------------
. Equity (cost: 1995 -- $480,261; 1994 -- $416,351) 598,435 456,333
- ----------------------------------------------------
Mortgage loans on real estate 3,147,783 2,795,914
- ----------------------------------------------------
Real estate 746,023 679,512
- ----------------------------------------------------
Policy loans 565,325 528,731
- ----------------------------------------------------
Other investments 241,219 158,196
- ---------------------------------------------------- ----------- -----------
Total investments 25,713,570 22,310,900
- ----------------------------------------------------
Cash and invested cash 802,743 990,880
- ----------------------------------------------------
Property and equipment 53,830 54,989
- ----------------------------------------------------
Deferred acquisition costs 953,834 1,736,526
- ----------------------------------------------------
Premiums and fees receivable 117,634 123,494
- ----------------------------------------------------
Accrued investment income 352,301 367,370
- ----------------------------------------------------
Assets held in separate accounts 18,461,629 13,000,540
- ----------------------------------------------------
Federal income taxes -- 134,463
- ----------------------------------------------------
Amounts recoverable from reinsurers 2,940,976 2,069,292
- ----------------------------------------------------
Goodwill 5,149 3,385
- ----------------------------------------------------
Other assets 185,398 233,708
- ---------------------------------------------------- ----------- -----------
Total assets $49,587,064 $41,025,547
- ---------------------------------------------------- =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Policy liabilities and accruals:
. Future policy benefits, claims and claims expenses $ 8,435,019 $ 7,540,772
- ----------------------------------------------------
. Unearned premiums 55,174 61,472
- ---------------------------------------------------- ----------- -----------
Total policy liabilities and accruals 8,490,193 7,602,244
- ----------------------------------------------------
Contractholder funds 18,171,822 17,028,628
- ----------------------------------------------------
Liabilities related to separate accounts 18,461,629 13,000,540
- ----------------------------------------------------
Federal income taxes 166,430 --
- ----------------------------------------------------
Short-term debt 124,783 153,656
- ----------------------------------------------------
Long-term debt 40,827 54,794
- ----------------------------------------------------
Other liabilities 1,412,534 1,264,730
- ---------------------------------------------------- ----------- -----------
Total liabilities 46,868,218 39,104,592
- ----------------------------------------------------
SHAREHOLDER'S EQUITY:
Common stock, $2.50 par value:
. Authorized, issued and outstanding shares -- 10
million
(owned by Lincoln National Corp.) 25,000 25,000
- ----------------------------------------------------
Additional paid-in capital 809,557 791,605
- ----------------------------------------------------
Retained earnings 1,440,994 1,428,969
- ----------------------------------------------------
Net unrealized gain (loss) on securities available-
for-sale 443,295 (324,619)
- ---------------------------------------------------- ----------- -----------
Total shareholder's equity 2,718,846 1,920,955
- ---------------------------------------------------- ----------- -----------
Total liabilities and shareholder's equity $49,587,064 $41,025,547
- ---------------------------------------------------- =========== ===========
</TABLE>
See accompanying notes.
G-2
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
---------------------------------
(000's omitted)
---------------------------------
REVENUE
<S> <C> <C> <C>
Insurance premiums $ 846,873 $1,099,480 $1,972,630
- ------------------------------------------
Insurance fees 450,423 390,384 425,083
- ------------------------------------------
Net investment income 1,899,630 1,673,981 1,823,459
- ------------------------------------------
Realized gain (loss) on investments 136,195 (138,522) 92,150
- ------------------------------------------
Gain (loss) on sale of affiliates -- 68,954 (98,500)
- ------------------------------------------
Other 3,405 20,946 35,781
- ------------------------------------------ ---------- ---------- ----------
Total revenue 3,336,526 3,115,223 4,250,603
- ------------------------------------------
BENEFITS AND EXPENSES
Benefits and settlement expenses 2,122,616 2,194,047 3,033,139
- ------------------------------------------
Underwriting, acquisition, insurance and
other expenses 764,346 660,363 881,703
- ------------------------------------------
Interest expense 67 615 96
- ------------------------------------------ ---------- ---------- ----------
Total benefits and expenses 2,887,029 2,855,025 3,914,938
- ------------------------------------------ ---------- ---------- ----------
Income before federal income taxes
and cumulative effect of accounting change 449,497 260,198 335,665
- ------------------------------------------
Federal income taxes 127,472 40,400 142,544
- ------------------------------------------
Income before cumulative effect of
accounting change 322,025 219,798 193,121
- ------------------------------------------ ---------- ---------- ----------
Cumulative effect of accounting change
(postretirement benefits) -- -- 45,582
- ------------------------------------------ ---------- ---------- ----------
Net income $ 322,025 $ 219,798 $ 147,539
- ------------------------------------------ ========== ========== ==========
EARNINGS PER SHARE
Income before cumulative effect of
accounting change $32.20 $21.98 $19.31
- ------------------------------------------
Cumulative effect of accounting change
(postretirement benefits) -- -- (4.56)
- ------------------------------------------ ---------- ---------- ----------
Net income $32.20 $21.98 $14.75
- ------------------------------------------ ========== ========== ==========
</TABLE>
See accompanying notes.
G-3
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF
SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------
(000's omitted)
----------------------------------
<S> <C> <C> <C>
Common stock -- balance at beginning and
end of year $ 25,000 $ 25,000 $ 25,000
- -----------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 791,605 791,444 791,223
- -----------------------------------------
Contribution from Lincoln National Corp. 17,952 161 221
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 809,557 791,605 791,444
- -----------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 1,428,969 1,334,171 1,198,632
- -----------------------------------------
Net income 322,025 219,798 147,539
- -----------------------------------------
Dividends declared (310,000) (125,000) (12,000)
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 1,440,994 1,428,969 1,334,171
- -----------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE:
Balance at beginning of year (324,619) 621,161 47,303
- -----------------------------------------
Cumulative effect of accounting change -- -- 564,153
- -----------------------------------------
Other change during year 767,914 (945,780) 9,705
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 443,295 (324,619) 621,161
- -----------------------------------------
---------- ---------- ----------
Total shareholder's equity at end of year $2,718,846 $1,920,955 $2,771,776
- -----------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
G-4
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------- ----------- ----------
(000's omitted)
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 322,025 $ 219,798 $ 147,539
- ----------------------------------------
Adjustments to reconcile net income to
net cash
provided by operating activities:
. Deferred acquisition costs 124,526 (171,063) (92,183)
- ----------------------------------------
. Premiums and fees receivable 6,082 10,755 80,582
- ----------------------------------------
. Accrued investment income 15,069 (54,434) (18,827)
- ----------------------------------------
. Policy liabilities and accruals 621,603 114,038 345,142
- ----------------------------------------
. Contractholder funds 1,335,625 1,769,240 1,248,058
- ----------------------------------------
. Amounts recoverable from reinsurers (883,425) (884,388) (700,622)
- ----------------------------------------
. Federal income taxes 95,745 8,364 (130,308)
- ----------------------------------------
. Provisions for depreciation 39,089 38,870 41,516
- ----------------------------------------
. Amortization of discount and premium (86,653) 7,928 (100,274)
- ----------------------------------------
. Realized loss (gain) on investments (244,995) 219,682 (115,881)
- ----------------------------------------
. Loss (gain) on sale of affiliates -- (68,954) 98,500
- ----------------------------------------
. Cumulative effect of accounting change -- -- 45,582
- ----------------------------------------
. Other 458,542 (4,599) 51,369
- ---------------------------------------- ----------- ----------- ----------
Net adjustments 1,481,208 985,439 752,654
- ---------------------------------------- ----------- ----------- ----------
Net cash provided by operating
activities 1,803,233 1,205,237 900,193
- ----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
. Purchases (13,549,807) (12,100,213) (7,171,684)
- ----------------------------------------
. Sales 12,163,673 9,326,809 7,139,781
- ----------------------------------------
. Maturities 929,018 958,065 42,707
- ----------------------------------------
Fixed maturity securities held for
investment:
. Purchases -- -- (5,903,805)
- ----------------------------------------
. Sales -- -- 2,805,980
- ----------------------------------------
. Maturities -- -- 1,639,739
- ----------------------------------------
Purchases of other investments (1,711,427) (1,421,321) (1,936,013)
- ----------------------------------------
Sale or maturity of other investments 1,198,536 1,457,157 1,142,872
- ----------------------------------------
Sale of affiliates -- 520,340 --
- ----------------------------------------
Decrease in cash collateral on loaned
securities (39,681) (163,872) (40,454)
- ----------------------------------------
Other (213,708) (37,606) 83,751
- ---------------------------------------- ----------- ----------- ----------
Net cash used in investing activities (1,223,396) (1,460,641) (2,197,126)
- ----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (13,967) (200) (1,138)
- ----------------------------------------
Issuance of long-term debt -- -- 10,314
- ----------------------------------------
Net increase (decrease) in short-term
debt (28,873) 3,629 13,047
- ----------------------------------------
Universal life and investment contract
deposits 1,716,239 2,381,829 2,418,037
- ----------------------------------------
Universal life and investment contract
withdrawals (2,149,325) (1,604,450) (1,503,105)
- ----------------------------------------
Capital contribution from Lincoln
National Corp. 17,952 161 221
- ----------------------------------------
Dividends paid to shareholder (310,000) (125,000) (12,000)
- ---------------------------------------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities (767,974) 655,969 925,376
- ---------------------------------------- ----------- ----------- ----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Net increase (decrease) in cash (188,137) 400,565 (371,557)
- -------------------------------
Cash at beginning of year 990,880 590,315 961,872
- ------------------------------- -------- -------- --------
Cash at end of year $802,743 $990,880 $590,315
- ------------------------------- ======== ======== ========
</TABLE>
See accompanying notes.
G-5
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1995
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include Lincoln National
Life Insurance Co. ("Lincoln Life") and its majority owned subsidiaries.
Lincoln Life and its subsidiaries operate multiple insurance businesses.
Operations are divided into two business segments (see Note 9). These con-
solidated financial statements have been prepared in conformity with gener-
ally accepted accounting principles.
Use of estimates
The nature of the insurance business requires management to make estimates
and assumptions that affect the amounts reported in the consolidated finan-
cial statements and accompanying notes. Actual results could differ from
those estimates.
Investments
Lincoln Life classifies its fixed maturity securities and equity securities
(common and non-redeemable preferred stocks) as available-for-sale and, ac-
cordingly, such securities are carried at fair value. The cost of fixed ma-
turity securities is adjusted for amortization of premiums and discounts.
The cost of fixed maturity and equity securities is adjusted for declines
in value that are other than temporary.
For the mortgage-backed securities portion of the fixed maturity securities
portfolio, Lincoln Life recognizes income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the se-
curities. When estimates of prepayments change, the effective yield is re-
calculated to reflect actual payments to date and anticipated future pay-
ments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied since the ac-
quisition of the securities. This adjustment is reflected in net investment
income.
Mortgage loans on real estate are carried at outstanding principal balances
less unaccrued discounts and net of reserves for declines that are other
than temporary. Investment real estate is carried at cost less allowances
for depreciation. Such
real estate is carried net of reserves for declines in value that are other
than temporary. Real estate acquired through foreclosure proceedings is re-
corded at fair value on the settlement date which establishes a new cost
basis. If a subsequent periodic review of a foreclosed property indicates
the fair value, less estimated costs to sell, is lower than the carrying
value at the settlement date, the carrying value is adjusted to the lower
amount. Policy loans are carried at the aggregate unpaid balances. Any
changes to the reserves for mortgage loans on real estate and real estate
are reported as a realized gain (loss) on investments.
Cash and invested cash are carried at cost and include all highly liquid
debt instruments purchased with a maturity of three months or less, includ-
ing participation in a short-term investment pool administered by Lincoln
National Corp. (LNC), the Lincoln Life's parent.
Realized gain (loss) on investments is recognized in net income, net of re-
lated amortization of deferred acquisition costs, using the specific iden-
tification method. Changes in the fair values of securities carried at fair
value are reflected directly in shareholder's equity after deductions for
related adjustments for deferred acquisition costs and amounts required to
satisfy policyholder commitments that would have been recorded if these se-
curities would have been sold at their fair value, and after deferred taxes
or credits to the extent deemed recoverable.
Derivatives
Lincoln Life hedges certain portions of its exposure to interest rate fluc-
tuations, the widening of bond yield spreads over comparable maturity U.S.
Government obligations and foreign exchange risk by entering into deriva-
tive transactions. A description of Lincoln Life's accounting for its hedge
of such risks is discussed in the following two paragraphs.
The premium paid for interest rate caps is deferred and amortized to net
investment income on a straight-line basis over the term of the interest
rate cap. Any settlement received in accordance with the terms of the in-
terest rate caps is recorded as investment income. Spread-lock agreements,
interest rate swaps and financial futures, which hedge fixed maturity secu-
rities available-for-sale, are carried at fair value with the change in
fair value reflected directly in shareholder's equity. Realized gain (loss)
from the settlement of such derivatives is deferred and amortized over the
life of the hedged assets as an adjustment to the yield. Foreign exchange
forward contracts, foreign currency options and foreign currency swaps,
which hedge some of the foreign exchange risk of investments in fixed matu-
rity securities denominated in foreign currencies, are carried at fair
value with the
change in fair value reflected in earnings. Realized
G-6
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
gain (loss) from the settlement of such derivatives is also zreflected in
earnings.
Hedge accounting is applied as indicated above after Lincoln Life deter-
mines that the items to be hedged expose Lincoln Life to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. Government obligations and foreign exchange risk; and the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation of 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, the change in value of the deriva-
tives is included in net income.
Property and equipment
Property and equipment owned for Lincoln Life use is carried at cost less
allowances for depreciation.
Premiums and fees
Revenue for universal life and other interest-sensitive life insurance pol-
icies consists of policy charges for cost of insurance, policy initiation
and administration, and surrender charges that have been assessed. Tradi-
tional individual life-health and annuity premiums are recognized as reve-
nue over the premium-paying period of the policies. Group health premiums
are prorated over the contract term of the policies.
Assets held in separate accounts/ liabilities related to separate accounts
These assets and liabilities represent segregated funds administered and
invested by Lincoln Life for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by Lincoln Life for ad-
ministrative and contractholder maintenance services performed for these
separate accounts are included in Lincoln Life's consolidated statements of
income.
Deferred acquisition costs
Commissions and other costs of acquiring universal life insurance, variable
universal life insurance, traditional life insurance, annuities and group
health insurance which vary with and are primarily related to the produc-
tion of new business, have been deferred to the extent recoverable. Acqui-
sition costs for universal and variable universal life insurance policies
are being amortized over the lives of the policies in relation to the inci-
dence of estimated gross profits from surrender charges and investment,
mortality and expense margins, and actual realized gain (loss) on invest-
ments. That amortization is adjusted retrospectively when estimates of cur-
rent or future gross profits to be realized from a group of policies are
revised. The traditional life-health and annuity acquisition costs are am-
ortized over the premium-paying period of the related policies using as-
sumptions consistent with those used in computing policy reserves.
Expenses
Expenses for universal and variable universal life insurance policies in-
clude interest credited to policy account balances and benefit claims in-
curred during the period in excess of policy account balances. Interest
crediting rates associated with funds invested in Lincoln Life's general
account during 1993 through 1995 ranged from 6.1% to 8.25%.
Goodwill
The cost of acquired subsidiaries in excess of the fair value of net assets
(goodwill) is amortized using the straight-line method over periods that
generally correspond with the benefits expected to be derived from the ac-
quisitions. Goodwill is amortized over 40 years. The carrying value of
goodwill is reviewed periodically for indicators of impairment in value.
Policy liabilities and accruals
The liabilities for future policy benefits and expenses for universal and
variable universal life insurance policies consist of policy account bal-
ances that accrue to the benefit of the policyholders, excluding surrender
charges. The liabilities for future policy benefits and expenses for tradi-
tional life policies and immediate and deferred paid-up annuities are com-
puted using a net level premium method and assumptions for investment
yields, mortality and withdrawals based principally on Lincoln Life experi-
ence projected at the time of policy issue, with provision for possible ad-
verse deviations. Interest assumptions for traditional direct individual
life reserves for all policies range from 2.3% to 11.7% graded to 5.7% af-
ter 30 years depending on time of policy issue. Interest rate assumptions
for reinsurance reserves range from 5.0% to 11.0% graded to 8.0% after 20
years. The interest assumptions for immediate and deferred paid-up annui-
ties range from 4.5% to 8.0%.
With respect to its policy liabilities and accruals, Lincoln Life carries
on a continuing review of its 1) overall reserve position, 2) reserving
techniques
G-7
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
and 3) reinsurance arrangements, and as experience develops and new infor-
mation becomes known, liabilities are adjusted as deemed necessary. The ef-
fects of changes in estimates are included in the operating results for the
period in which such estimates occur.
Reinsurance
Lincoln Life enters into reinsurance agreements with other companies in the
normal course of their business. Lincoln Life may assume reinsurance from
unaffiliated companies and/or cede reinsurance to such companies.
Assets/liabilities and premiums/benefits from certain reinsurance contracts
which grant statutory surplus to other insurance companies have been netted
on the balance sheets and income statements, respectively, since there is a
right of offset. All other reinsurance agreements are reported on a gross
basis.
Depreciation
Provisions for depreciation of investment real estate and property and
equipment owned for Lincoln Life use are computed principally on the
straight-line method over the estimated useful lives of the assets.
Postretirement medical and life insurance benefits
Lincoln Life accounts for its postretirement medical and life insurance
benefits using the full accrual method.
Income taxes
Lincoln Life and eligible subsidiaries have elected to file consolidated
Federal and state income tax returns with their parent, LNC. Pursuant to an
intercompany tax sharing agreement with LNC, Lincoln Life and its eligible
subsidiaries provide for income taxes on a separate return filing basis.
The tax sharing agreement also provides that Lincoln Life and eligible sub-
sidiaries 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.
Lincoln Life uses the liability method of accounting for income taxes. De-
ferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
used for income tax return purposes. Lincoln Life establishes a valuation
allowance for any portion of its deferred tax assets which are unlikely to
be realized.
2.CHANGES IN ACCOUNTING PRINCIPLES
AND CHANGES IN ESTIMATES
Postretirement benefits other than pensions
Effective January 1, 1993, Lincoln Life changed its method of accounting
for postretirement medical and life insurance benefits for its eligible em-
ployees and agents from a pay-as-you-go method to a full accrual method in
accordance with Financial Accounting Standards No. 106 entitled "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106").
This full accrual method recognizes the estimated obligation for retired
employees and agents and active employees and agents who are expected to
retire in the future. The effect of the change was to increase net periodic
postretirement benefit cost by $7,800,000 and decrease income before cumu-
lative effect of accounting change by $5,100,000 ($0.51 per share). The im-
plementation of FAS 106 resulted in a one-time charge to the first quarter
1993 net income of $45,600,000 or $4.56 per share ($69,000,000 pre-tax) for
the cumulative effect of the accounting change. See Note 6 for additional
disclosures regarding postretirement benefits other than pensions.
Accounting by creditors for impairment of a loan
Financial Accounting Standards No. 114 entitled "Accounting by Creditors
for Impairment of a Loan" ("FAS 114") issued in May 1993, was adopted by
Lincoln Life effective January 1, 1993. FAS 114 requires that if an im-
paired mortgage loan's fair value as described in Note 3 is less than the
recorded investment in the loan, the difference is recorded in the mortgage
loan allowance for losses account. The adoption of FAS 114 resulted in ad-
ditions to the mortgage loan allowance for losses account and reduced first
quarter 1993 income before cumulative effect of accounting change and net
income by $37,700,000, or $3.77 per share ($57,200,000 pre-tax). See Note 3
for further mortgage loan disclosures. Most of the effect of this change in
accounting was within the Life Insurance and Annuities business segment.
Accounting for certain investments in debt
and equity securities
Financial Accounting Standards No. 115 entitled "Accounting for Certain In-
vestments in Debt and Equity Securities" ("FAS 115") issued in May 1993,
was adopted by Lincoln Life as of December 31, 1993. In accordance with the
rules, the
G-8
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
2. CHANGES IN ACCOUNTING PRINCIPLESAND CHANGES IN ESTIMATES CONTINUED
prior year financial statements have not been restated to reflect the
change in accounting principle. Under FAS 115, securities can be classified
as available-for-sale, trading or held-to-maturity according to the hold-
er's intent. Lincoln Life classified its entire fixed maturity securities
portfolio as "available-for-sale." Securities classified as available-for-
sale are carried at fair value and unrealized gains and losses on such se-
curities are carried as a separate component of shareholder's equity. The
ending balance of shareholder's equity at December 31, 1993 was increased
by $564,200,000 (net of $377,500,000 of related adjustments to deferred ac-
quisition costs, $50,700,000 of policyholder commitments and $303,700,000
in deferred income taxes, all of which would have been recognized if those
securities would have been sold at their fair value, net of amounts appli-
cable to Security-Connecticut Corp.) to reflect the net unrealized gain on
fixed maturity securities classified as available-for-sale previously car-
ried at amortized cost. Prior to the adoption of FAS 115, Lincoln Life car-
ried a portion of its fixed maturity securities at fair value with
unrealized gains and losses carried as a separate component of sharehold-
er's equity. The remainder of such securities were carried at amortized
cost.
Change in estimate for net investment income related to mortgage-backed
securities
At December 31, 1993, Lincoln Life had $5,942,100,000 invested in mortgage-
backed securities. As indicated in Note 1, Lincoln Life recognizes income
on these securities using a constant effective yield based on anticipated
prepayments. With the implementation of new investment software in December
1993, Lincoln Life was able to significantly refine its estimate of the ef-
fective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the amor-
tization of purchase discount on these securities of $58,000,000 and, after
related amortization of deferred acquisition costs ($18,300,000) and income
taxes ($14,300,000), increased 1993's income before cumulative effect of
accounting change and net income by $25,500,000 or $2.55 per share.
Most of the effect of this change in estimate was within the Life Insurance
and Annuities business segment.
Change in estimate for disability income reserves
During the fourth quarter of 1993, income before cumulative effect of ac-
counting change and net income decreased by $15,500,000 or $1.55 per share
as the result of strengthening reinsurance disability income reserves by
$23,900,000. The need for this reserve increase within the Reinsurance seg-
ment was identified as the result of management's assessment of current ex-
pectations for morbidity trends and the impact of lower investment income
due to lower interest rates.
During the fourth quarter of 1995, Lincoln Life completed an in-depth re-
view of the experience of its disability income business. As a result of
this study, and based on the assumption that recent experience will con-
tinue in the future, income before cumulative effect of accounting change
and net income decreased by $33,500,000 or $3.35 per share ($51,500,000
pre-tax) as a result of strengthening disability income reserves by
$15,200,000 and writing-off deferred acquisition costs of $36,300,000 in
the Reinsurance segment.
G-9
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------
(in millions)
--------------------------
<S> <C> <C> <C>
Fixed maturity securities $1,549.4 $1,357.4 $1,497.6
-----------------------------
Equity securities 8.9 7.4 4.3
-----------------------------
Mortgage loans on real estate 268.3 271.3 294.2
-----------------------------
Real estate 110.0 97.8 75.2
-----------------------------
Policy loans 35.4 32.7 36.0
-----------------------------
Invested cash 55.4 46.4 24.8
-----------------------------
Other investments 15.8 7.3 8.0
----------------------------- -------- -------- --------
Investment revenue 2,043.2 1,820.3 1,940.1
-----------------------------
Investment expenses 143.6 146.3 116.6
----------------------------- -------- -------- --------
Net investment income $1,899.6 $1,674.0 $1,823.5
-----------------------------
======== ======== ========
</TABLE>
The realized gain (loss) on investments is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
--------------------------
(in millions)
------------------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
. Gross gain $239.6 $ 69.6 $ 91.1
------------------------------------------------
. Gross loss (87.8) (294.1) (8.4)
------------------------------------------------
Equity securities available-for-sale:
. Gross gain 82.3 50.2 88.3
------------------------------------------------
. Gross loss (31.3) (50.5) (33.7)
------------------------------------------------
Fixed maturity securities held for investment:
. Gross gain -- -- 209.9
------------------------------------------------
. Gross loss -- -- (69.5)
------------------------------------------------
Other investments 42.2 5.1 (161.8)
------------------------------------------------
Related restoration or amortization of deferred
acquisition
costs and provision for policyholder commitments (108.8) 81.2 (23.7)
------------------------------------------------ ------ ------- -------
$136.2 $(138.5) $ 92.2
====== ======= =======
</TABLE>
Provisions (credits) for write-downs and net changes in pro-
visions for losses, which are included in realized gain
(loss) on investments shown above, are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994 1993
(in millions)
-------------------
<S> <C> <C> <C>
Fixed maturity securities $10.4 $14.2 $ 55.6
-----------------------------
Equity securities 3.3 6.8 --
-----------------------------
Mortgage loans on real estate 14.7 19.5 136.7
-----------------------------
Real estate (7.2) 13.0 21.8
-----------------------------
Other long-term investments (1.5) .3 3.9
-----------------------------
Guarantees (2.2) 4.3 1.7
-----------------------------
----- ----- ------
$17.5 $58.1 $219.7
===== ===== ======
</TABLE>
G-10
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The change in unrealized appreciation (depreciation) on in-
vestments in fixed maturity and equity securities is as fol-
lows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------
(in millions)
----------------------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale $2,063.7 $(1,903.7) $1,387.1
---------------------------------------------
Equity securities available-for-sale 78.1 (26.0) 9.2
---------------------------------------------
Fixed maturity securities held for investment -- -- (959.7)
---------------------------------------------
-------- --------- --------
$2,141.8 $(1,929.7) $ 436.6
======== ========= ========
</TABLE>
The cost, gross unrealized gain and loss and fair value of
securities available-for-sale are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1995
-----------------------------------
Gross
unrealized
--------------- Fair
Cost Gain Loss value
----------------------------------------
(in millions)
-----------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $12,412.1 $1,141.0 $ 28.7 $13,524.4
-------------------------------------
U.S. Government bonds 569.6 83.9 .1 653.4
-------------------------------------
Foreign government bonds 927.9 70.3 .6 997.6
-------------------------------------
Mortgage-backed securities:
. Mortgage pass-through securities 1,072.5 41.0 3.2 1,110.3
-------------------------------------
. Collateralized mortgage obligations 3,816.3 262.5 7.4 4,071.4
-------------------------------------
. Other mortgage-backed securities 2.8 .3 -- 3.1
-------------------------------------
State and municipal bonds 12.3 .1 -- 12.4
-------------------------------------
Redeemable preferred stocks 39.3 2.9 -- 42.2
-------------------------------------
--------- -------- ------ ---------
Total fixed maturity securities 18,852.8 1,602.0 40.0 20,414.8
-------------------------------------
Equity securities 480.3 123.6 5.5 598.4
-------------------------------------
--------- -------- ------ ---------
$19,333.1 $1,725.6 $ 45.5 $21,013.2
========= ======== ====== =========
<CAPTION>
Year ended December 31, 1994
-----------------------------------
Gross
unrealized
--------------- Fair
Cost Gain Loss value
----------------------------------------
(in millions)
-----------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $11,519.3 $ 143.3 $514.4 $11,148.2
-------------------------------------
U.S. Government bonds 1,048.4 6.9 25.5 1,029.8
-------------------------------------
Foreign governments bonds 541.2 4.7 12.5 533.4
-------------------------------------
Mortgage-backed securities:
. Mortgage pass-through securities 1,176.8 3.0 44.1 1,135.7
-------------------------------------
. Collateralized mortgage obligations 3,835.5 85.8 148.6 3,772.7
-------------------------------------
. Other mortgage-backed securities 5.0 .1 .1 5.0
-------------------------------------
State and municipal bonds 16.3 .4 -- 16.7
-------------------------------------
Redeemable preferred stocks 51.4 .2 .9 50.7
-------------------------------------
--------- -------- ------ ---------
Total fixed maturity securities 18,193.9 244.4 746.1 17,692.2
-------------------------------------
Equity securities 416.3 56.4 16.4 456.3
-------------------------------------
--------- -------- ------ ---------
$18,610.2 $ 300.8 $762.5 $18,148.5
========= ======== ====== =========
</TABLE>
G-11
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
Future maturities of fixed maturity securities available-
for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------
Fair
Cost value
--------- ---------
(in millions)
-------------------
<S> <C> <C>
Due in one year or less $ 278.4 $ 282.6
--------------------------------------
Due after one year through five years 2,955.7 3,102.1
--------------------------------------
Due after five years through ten years 4,918.2 5,265.9
--------------------------------------
Due after ten years 5,808.9 6,579.4
-------------------------------------- --------- ---------
13,961.2 15,230.0
Mortgage-backed securities 4,891.6 5,184.8
-------------------------------------- --------- ---------
$18,852.8 $20,414.8
========= =========
</TABLE>
The foregoing data is based on stated maturities. Actual
maturities will differ in some cases because borrowers may
have the right to call or pre-pay obligations.
At December 31, 1995, the current par, amortized cost and
estimated fair value of investments in mortgage-backed
securities summarized by interest rates of the underlying
collateral are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------
Current Par Cost Fair value
----------- -------- ----------
(in millions)
-------------------------------
<S> <C> <C> <C>
Below 7% $ 292.6 $ 290.5 $ 293.6
--------
7%-8% 1,302.8 1,276.9 1,318.2
--------
8%-9% 1,607.0 1,564.7 1,669.8
--------
Above 9% 1,810.5 1,759.5 1,903.2
-------- -------- -------- --------
$5,012.9 $4,891.6 $5,184.8
======== ======== ========
</TABLE>
The quality ratings of fixed maturity securities available-
for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Treasuries and AAA 34.1%
------------------
AA 8.0
------------------
A 25.9
------------------
BBB 24.5
------------------
BB 3.9
------------------
Less than BB 3.6
------------------ ------
100.0%
======
</TABLE>
Mortgage loans on real estate are considered impaired when,
based on current information and events, it is probable that
the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
When Lincoln Life determines that a loan is impaired, a
provision for loss is established for the difference between
the carrying value of the mortgage loan and the estimated
value. Estimated value is based on either the present value
of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price
or the fair value of the collateral. The provision for
losses is reported as realized gain (loss) on investments.
Mortgage loans deemed to be uncollectible are charged
against the provision for losses and subsequent recoveries,
if any, are credited to the provision for losses.
G-12
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The provision for losses is maintained at a level believed
adequate by management to absorb estimated probable credit
losses. Management's periodic evaluation of the adequacy of
the provision for losses is based on the Company's past loan
loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the
estimated value of the underlying collateral, composition of
the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective
as it requires estimating the amounts and timing of future
cash flows expected to be received on impaired loans that
may be susceptible to significant change.
Impaired loans along with the related allowance for losses
are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
--------------
<S> <C> <C>
Impaired loans with allowance for losses $144.7 $246.0
-------------------------------------------
Allowance for losses (28.5) (56.6)
-------------------------------------------
Impaired loans with no allowance for losses 2.1 2.2
-------------------------------------------
------ ------
Net impaired loans $118.3 $191.6
-------------------------------------------
====== ======
</TABLE>
Impaired loans with no allowance for losses are a result of
direct write-downs or for collateral dependent loans where
the fair value of the collateral is greater than the re-
corded investment in such loans.
A reconciliation of the mortgage loan allowance for losses
for these impaired mortgage loans is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------- ------
(in millions)
-----------------------
<S> <C> <C> <C>
Balance at beginning of year $ 56.6 $ 220.7 $129.1
---------------------------------
Provisions for losses 14.7 19.5 79.5
---------------------------------
Provision for adoption of FAS 114 -- -- 57.2
---------------------------------
Releases due to write-downs (12.0) -- --
---------------------------------
Releases due to sales (15.9) (164.7) (12.2)
---------------------------------
Releases due to foreclosures (14.9) (18.9) (32.9)
---------------------------------
------ ------- ------
Balance at end of year $ 28.5 $ 56.6 $220.7
---------------------------------
====== ======= ======
</TABLE>
G-13
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The average recorded investment in impaired loans and the
interest income recognized on impaired loans were as fol-
lows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Average recorded investment in impaired loans $181.7 $467.5 $703.6
---------------------------------------------
Interest income recognized on impaired loans 16.6 36.1 47.3
---------------------------------------------
</TABLE>
All interest income on impaired loans was recognized on the
cash basis of income recognition.
As of December 31, 1995 and 1994, Lincoln Life had restruc-
tured loans of $62,500,000 and $36,200,000, respectively.
Lincoln Life recorded $6,300,000 and $800,000 interest income
on these restructured loans in 1995 and 1994, respectively.
Interest income in the amount of $6,600,000 and $3,900,000
would have been recorded on these loans according to their
original terms in 1995 and 1994, respectively. As of December
31, 1995 and 1994, Lincoln Life had no outstanding commit-
ments to lend funds on restructured loans.
As of December 31, 1995, the Company's investment commit-
ments for fixed maturity securities (primarily private
placements), mortgage loans on real estate and real estate
were $543,100,000.
Fixed maturity securities available-for-sale, mortgage loans
on real estate and real estate with a combined carrying
value at December 31, 1995 of $1,300,000 were non-income
producing for the year ended December 31, 1995.
The cost information for mortgage loans on real estate, real
estate and other long-term investments are net of allowances
for losses. The balance sheet account for other liabilities
includes a reserve for guarantees of third-party debt. The
amount of allowances and a reserve for such items is as fol-
lows:
<TABLE>
<CAPTION>
December 31
1995 1994
----- -----
(in
millions)
-----------
<S> <C> <C>
Mortgage loans on real estate $28.5 $56.6
-----------------------------
Real estate 46.6 65.2
-----------------------------
Other long-term investments 11.8 13.5
-----------------------------
</TABLE>
Details underlying the balance sheet caption "Net Unrealized
Gain (loss) on Securities Available-for-Sale," are as fol-
lows:
<TABLE>
<CAPTION>
December 31
1995 1994
--------- ---------
(in millions)
--------------------
<S> <C> <C>
Fair value of securities available-for-sale $21,013.2 $18,148.5
----------------------------------------------------
Cost of securities available-for-sale 19,333.1 18,610.2
---------------------------------------------------- --------- ---------
Unrealized gain (loss) 1,680.1 (461.7)
----------------------------------------------------
Adjustments to deferred acquisition costs (492.1) 158.2
----------------------------------------------------
Amounts required to satisfy policyholder commitments (510.1) 8.6
----------------------------------------------------
Deferred income credits (taxes) (234.6) 105.9
----------------------------------------------------
Valuation allowance for deferred tax assets -- (135.6)
----------------------------------------------------
--------- ---------
Net unrealized gain (loss) on securities available-
for-sale $ 443.3 $ (324.6)
----------------------------------------------------
========= =========
</TABLE>
G-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
Adjustments to Deferred acquisition costs and amounts re-
quired to satisfy policyholder commitments are netted
against the Deferred acquisition costs asset account and in-
cluded with the Future policy benefits, claims and claims
expense liability on the balance sheet, respectively.
4.FEDERAL INCOME TAXES
The Federal income tax expense (benefit) before cumulative
effect of accounting change is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
(in millions)
----------------------
<S> <C> <C> <C>
Current $172.5 $(93.4) $261.3
--------
Deferred (45.0) 133.8 (118.8)
-------- ------ ------ ------
$127.5 $ 40.4 $142.5
====== ====== ======
</TABLE>
Cash paid for Federal income taxes in 1995, 1994 and 1993
was $27,500,000, $41,400,000 and $272,600,000, respectively.
The cash paid in 1995 is net of a $146,900,000 cash refund
related to the carryback of 1994 capital losses to prior
years.
The effective tax rate on pre-tax income before cumulative
effect of accounting change is lower than the prevailing
corporate Federal income tax rate. A reconciliation of this
difference is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
---------
(in millions)
---------------------
<S> <C> <C> <C>
Tax rate times pre-tax income $157.3 $91.1 $117.5
------------------------------------
Effect of:
. Tax-exempt investment income (22.0) (21.5) (16.2)
------------------------------------
. Participating policyholders' share 5.4 3.4 4.1
------------------------------------
. Loss (gain) on sale of affiliates -- (24.1) 34.5
------------------------------------
. Other items (13.2) (8.5) 2.6
------------------------------------ ------ ----- ------
Provision for income taxes $127.5 $40.4 $142.5
------------------------------------ ====== ===== ======
Effective tax rate 28.4% 15.5% 42.5%
------------------------------------ ====== ===== ======
</TABLE>
The Federal income tax recoverable (liability) is as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- ------
(in millions)
---------------
<S> <C> <C>
Current $ (25.0) $118.2
--------
Deferred (141.4) 16.3
-------- ------- ------
$(166.4) $134.5
======= ======
</TABLE>
G-15
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
4.FEDERAL INCOME TAXES CONTINUED
Significant components of Lincoln Life's net deferred tax
asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- -------
(in millions)
----------------
<S> <C> <C>
Deferred tax assets:
. Policy liabilities and
accruals and
contractholder funds $ 694.5 $ 430.9
------------------------
. Loss on investments -- 16.8
------------------------
. Net unrealized loss on
securities available-
for-sale -- 161.6
------------------------
. Postretirement
benefits other than
pensions 25.3 24.2
------------------------
. Other 39.5 34.6
------------------------ ------- -------
Total deferred tax
assets 759.3 668.1
------------------------
Valuation allowance for
deferred tax assets -- (135.6)
------------------------ ------- -------
Net deferred tax assets 759.3 532.5
------------------------
Deferred tax
liabilities:
. Deferred acquisition
costs 218.8 475.5
------------------------
. Net unrealized gain on
securities available-
for-sale 579.6 --
------------------------
. Gain on investments 7.7 --
------------------------
. Other 94.6 40.7
------------------------ ------- -------
Total deferred tax
liabilities 900.7 516.2
------------------------ ------- -------
Net deferred tax
(liability) asset $(141.4) $ 16.3
------------------------ ======= =======
</TABLE>
Lincoln Life is required to establish a "valuation allow-
ance" for any portion of its deferred tax assets which are
unlikely to be realized. At December 31, 1994, $161,600,000
of deferred tax assets relating to net unrealized capital
losses on fixed maturity and equity securities available-
for-sale were available to be recorded in shareholder's eq-
uity before considering a valuation allowance. For Federal
income tax purposes, capital losses may only be used to off-
set capital gains in the current year or during a three-year
carryback and five-year carryforward period. Due to these
restrictions, and the uncertainty at that time of future
capital gains, these deferred tax assets were substantially
offset by a valuation allowance of $135,600,000. By December
31, 1995, the fair values of fixed maturity and equity secu-
rities available-for-sale were greater than the cost basis
resulting in unrealized capital gains. Accordingly, no valu-
ation allowance was established as of December 31, 1995
since management believes it is more likely than not that
Lincoln Life will realize the benefit of its deferred tax
assets.
Prior to 1984, a portion of the life companies' current
income was not subject to current income tax, but was
accumulated for income tax purposes in a memorandum account
designated as "policyholders' surplus." The total of the
life companies' balances in their respective "policyholders'
surplus" accounts at December 31, 1983 of $204,800,000 was
"frozen" by the Tax Reform Act of 1984 and, accordingly,
there have been no additions to the accounts after that
date. That portion of current income on which income taxes
have been paid will continue to be accumulated in a
memorandum account designated as "shareholder surplus," and
is available for dividends to the shareholder without
additional payment of tax. The December 31, 1995 total of
the life companies' account balances for their "shareholder
surplus" was $1,554,000,000. Should dividends to the
shareholder for each life company exceed its respective
"shareholder surplus," amounts would need to be transferred
from its respective "policyholders' surplus" and would be
subject to Federal income tax at that time. In connection
with the 1993 sale of a life insurance affiliate (see Note
10), $8,800,000 was transferred from policyholders' surplus
G-16
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
4.FEDERAL INCOME TAXES CONTINUED
to shareholder surplus and current income tax of $3,100,000
was paid. Under existing or foreseeable circumstances,
Lincoln Life neither expects nor intends that distributions
will be made from the remaining balance in "policyholders'
surplus" of $196,000,000 that will result in any such tax.
Accordingly, no provision for deferred income taxes has been
provided by Lincoln Life on its "policyholders' surplus"
account. In the event that such excess distributions are
made, it is estimated that income taxes of approximately
$68,600,000 would be due.
5.SUPPLEMENTAL FINANCIAL DATA
The balance sheet captions, "Real estate," "Other
investments" and "Property and equipment," are shown net of
allowances for depreciation as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
-------------
<S> <C> <C>
Real estate $ 51.6 $ 37.0
----------------------
Other investments 14.6 12.2
----------------------
Property and equipment 100.7 104.7
----------------------
</TABLE>
Details underlying the balance sheet caption,
"Contractholder funds," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
--------- ---------
(in millions)
-------------------
<S> <C> <C>
Premium deposit funds $17,886.9 $16,770.3
------------------------------------------------
Undistributed earnings on participating business 91.9 63.6
------------------------------------------------
Other 193.0 194.7
------------------------------------------------
--------- ---------
$18,171.8 $17,028.6
========= =========
</TABLE>
Details underlying the balance sheet captions, "Short-term
and Long-term Debt," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
-------------
<S> <C> <C>
Short-term debt:
---------------------------------------
. Short-term notes $123.5 $150.8
---------------------------------------
. Current portion of long-term debt 1.3 2.9
---------------------------------------
------ ------
Total short-term debt $124.8 $153.7
---------------------------------------
====== ======
Long-term debt less current portion:
---------------------------------------
. 7% mortgage note payable, due 1996 $ -- $ 4.9
---------------------------------------
. 9.48% mortgage note payable, due 1996 -- 7.7
---------------------------------------
. 12% mortgage note payable, due 1996 -- .2
---------------------------------------
. 8.42% mortgage note payable, due 1997 7.0 7.2
---------------------------------------
. 8.25% mortgage note payable, due 1997 10.1 10.2
---------------------------------------
. 8% mortgage note payable, due 1997 2.1 --
---------------------------------------
. 8.75% mortgage note payable, due 1998 18.4 18.8
---------------------------------------
. 9.75% mortgage note payable, due 2002 3.2 5.8
---------------------------------------
------ ------
Total long-term debt $ 40.8 $ 54.8
---------------------------------------
====== ======
</TABLE>
G-17
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Fixed maturities of long-term debt are as follows (in mil-
lions):
1996 -- $ 1.31998 -- $18.42000 -- $ --
1997 -- 19.21999 -- --Thereafter -- 3.2
Cash paid for interest for 1995, 1994 and 1993 was $67,000,
$615,000 and $96,000, respectively.
Reinsurance transactions included in the income statement
caption, "Insurance premiums," are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $777.6 $910.8 $807.5
------------------------
Insurance ceded 441.7 716.7 568.6
------------------------
------ ------ ------
Net reinsurance premiums $335.9 $194.1 $238.9
------------------------
====== ====== ======
</TABLE>
The income statement caption, "Benefits and settlement ex-
penses," is net of reinsurance recoveries of $456,000,
$524,000 and $438,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
The income statement caption, "Underwriting, acquisition,
insurance and other Expenses," includes amortization of de-
ferred acquisition costs of $399,700,000, $115,200,000 and
$241,000,000 for the years ended December 31, 1995, 1994 and
1993, respectively. An additional $(85,200,000), $81,200,000
and ($23,700,000) of deferred acquisition costs was restored
(amortized) and netted against "Realized gain (loss) on in-
vestments" for the years ended December 31, 1995, 1994 and
1993, respectively.
6.EMPLOYEE BENEFIT PLANS
Pension plans
LNC maintains funded defined benefit pension plans for most
of its employees and, prior to January 1, 1995, full-time
agents. The benefits for employees are based on total years
of service and the highest 60 months of compensation during
the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings.
The plans are funded by contributions to tax-exempt trusts.
Lincoln Life's funding policy is consistent with the funding
requirements of Federal laws and regulations. Contributions
are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the
future. Plan assets consist principally of listed equity se-
curities and corporate obligations and government bonds.
All benefits applicable to the funded defined benefit plan
for agents were frozen as of December 31, 1994. The curtail-
ment of this plan did not have a significant effect on net
pension cost for 1994. Effective January 1, 1995, pension
benefits for agents have been provided by a new defined con-
tribution plan. Contributions to this plan will be based on
2.3% of an agent's earnings up to the social security wage
base and 4.6% of any excess.
LNC also administers two types of unfunded, nonqualified,
defined benefit plans for certain employees and agents. A
supplemental retirement plan provides defined benefit pen-
sion benefits in excess of limits imposed by federal tax
law. A salary continuation plan provides certain officers of
Lincoln Life defined pension benefits based on years of
service and final monthly salary upon death or retirement.
G-18
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The status of the funded defined benefit pension plans and
the amounts recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- -------
(in millions)
----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
. Vested benefits $(162.1) $(130.5)
------------------------------------------------------
. Nonvested benefits (9.2) (7.3)
------------------------------------------------------ ------- -------
Accumulated benefit obligation (171.3) (137.8)
------------------------------------------------------
Effect of projected future compensation increases (37.2) (24.3)
------------------------------------------------------ ------- -------
Projected benefit obligation (208.5) (162.1)
------------------------------------------------------
Plan assets at fair value 196.4 159.3
------------------------------------------------------ ------- -------
Projected benefit obligations in excess of plan assets (12.1) (2.8)
------------------------------------------------------
Unrecognized net loss (gain) 12.6 (.5)
------------------------------------------------------
Unrecognized prior service cost 1.2 1.1
------------------------------------------------------ ------- -------
Prepaid (accrued) pension cost included in other
liabilities $ 1.7 $ (2.2)
------------------------------------------------------ ======= =======
</TABLE>
The status of the unfunded defined benefit pension plans and
the amounts recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ -----
(in
millions)
-------------
<S> <C> <C>
Actuarial present value of benefit obligation:
. Vested benefits $ (7.0) $(5.4)
---------------------------------------------------
. Nonvested benefits (1.5) (1.0)
--------------------------------------------------- ------ -----
Accumulated benefit obligation (8.5) (6.4)
---------------------------------------------------
Effect of projected future compensation increases (2.4) (2.5)
--------------------------------------------------- ------ -----
Projected benefit obligation (10.9) (8.9)
---------------------------------------------------
Unrecognized transition obligation -- --
---------------------------------------------------
Unrecognized net loss (gain) 1.0 (.3)
---------------------------------------------------
Unrecognized prior service cost .8 .8
--------------------------------------------------- ------ -----
Accrued pension costs included in other liabilities $ (9.1) $(8.4)
--------------------------------------------------- ====== =====
</TABLE>
The determination of the projected benefits obligation for
the defined benefit plans was based on the following assump-
tions:
<TABLE>
<CAPTION>
1995 1994 1993
------------
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 8.0% 7.0%
------------------------------------------------
Rate of increase in compensation:
. Salary continuation plan 6.0 6.5 6.0
------------------------------------------------
. All other plans 5.0 5.0 5.0
------------------------------------------------
Expected long-term rate of return on plan assets 9.0 9.0 9.0
------------------------------------------------
</TABLE>
G-19
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The components of net pension cost for the defined benefit
pension plans are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
-------------------
(in millions)
-------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 5.0 $ 8.9 $ 8.5
---------------------------------------------
Interest cost on projected benefit obligation 13.2 12.9 12.4
---------------------------------------------
Actual return on plan assets (36.3) 4.7 (20.1)
---------------------------------------------
Net amortization (deferral) 22.9 (18.6) 6.1
--------------------------------------------- ------ ------ ------
Net pension cost $ 4.8 $ 7.9 $ 6.9
--------------------------------------------- ====== ====== ======
</TABLE>
401(k)
LNC and Lincoln Life sponsor contributory defined contribu-
tion plans for eligible employees and agents. Lincoln Life's
contributions to the plans are equal to each participant's
pre-tax contribution, not to exceed 6% of base pay, multi-
plied by a percentage, ranging from 25% to 150%, which var-
ies according to certain incentive criteria as determined by
LNC's Board of Directors. Expense for these plans amounted
to $8,000,000, $13,200,000 and $11,800,000 in 1995, 1994 and
1993, respectively.
Postretirement medical and life insurance benefit plans
LNC sponsors unfunded defined benefit plans that provide
postretirement medical and life insurance benefits to full-
time employees and agents who, depending on the plan, have
worked for Lincoln Life 10 to 15 years and attained age 55
to 60. Medical benefits are also available to spouses and
other dependents of employees and agents. For medical bene-
fits, limited contributions are required from individuals
retired prior to November 1, 1988; contributions for later
retirees, which can be adjusted annually, are based on such
items as years of service at retirement and age at retire-
ment. The life insurance benefits are noncontributory, al-
though participants can elect supplemental contributory ben-
efits.
The status of the postretirement medical and life insurance
benefit plans and the amounts recognized on the balance
sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
--
(in millions)
--
<S> <C> <C>
Accumulated postretirement benefit obligation:
. Retirees $(39.8) $(34.9)
-----------------------------------------------
. Fully eligible active plan participants (9.9) (7.0)
-----------------------------------------------
. Other active plan participants (20.8) (15.0)
----------------------------------------------- ------ ------
Accumulated postretirement benefit obligation (70.5) (56.9)
-----------------------------------------------
Unrecognized net gain (.8) (5.5)
----------------------------------------------- ------ ------
Accrued plan cost included in other liabilities $(71.3) $(62.4)
----------------------------------------------- ====== ======
</TABLE>
G-20
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The components of periodic postretirement benefit cost are
as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994 1993
--
(in millions)
--
<S> <C> <C> <C>
Service cost $1.5 $1.7 $2.6
----------------------------------------
Interest cost 4.4 4.2 4.6
----------------------------------------
Amortization cost (credit) (.8) .1 --
---------------------------------------- ---- ---- ----
Net periodic postretirement benefit cost $5.1 $6.0 $7.2
---------------------------------------- ==== ==== ====
</TABLE>
The calculation of the accumulated postretirement benefit
obligation assumes a weighted-average annual rate of in-
crease in the per capita cost of covered benefits (i.e.,
health care cost trend rate) of 9.5% for 1996 gradually de-
creasing to 5.5% by 2004 and remaining at that level there-
after. The health care cost trend rate assumption has a sig-
nificant effect on the amounts reported. For example, in-
creasing the assumed health care cost trend rates by one
percentage point each year would increase the accumulated
postretirement benefit obligation as of December 1995 and
1994 by $5,100,000 and $4,100,000, respectively, and the ag-
gregate of the estimated service and interest cost compo-
nents of net periodic postretirement benefit cost for the
year ended December 31, 1995 by $488,000. The calculation
assumes a long-term rate of increase in compensation of 5.0%
for both December 31, 1995 and 1994. The weighted-average
discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% and 8.0% at De-
cember 31, 1995 and 1994, respectively.
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
Shareholder's equity restrictions
Net income as determined in accordance with statutory accounting practices
for Lincoln Life and its insurance subsidiaries in 1995, 1994 and 1993 was
$284,500,000, $366,700,000 and $237,000,000, respectively. Lincoln Life's
shareholder's equity as determined in accordance with statutory accounting
practices at December 31, 1995 and 1994 was $1,732,900,000 and
$1,679,700,000, respectively.
Lincoln Life is subject to certain insurance department regulatory restric-
tions as to the transfer of funds and payments of dividends to LNC. In
1996, Lincoln Life can transfer up to $284,500,000 without seeking prior
approval from the insurance regulators.
Disability income claims
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1995 and 1994 is a net
liability of $602,600,000 and $441,700,000, respectively, excluding de-
ferred acquisition costs. The bulk of the increase to this liability re-
lates to the assumption of a large block of disability claim reserves and
related assets during the third quarter of 1995. In addition, as indicated
in Note 2, Lincoln Life strengthened its disability income reserves and
wrote off certain related deferred acquisition costs in the fourth quarter
of 1995. The reserves were established on the assumption that the recent
experience will continue in the future. If incidence levels or claim termi-
nation rates vary significantly from these assumptions, further adjustments
to reserves may be required in the future. It is not possible to provide a
meaningful estimate of a range of possible outcomes at this time. Lincoln
Life reviews and updates the level of these reserves on an on-going basis.
Compliance of qualified annuity plans
Tax authorities continue to focus on compliance of
qualified annuity plans marketed by insurance companies. If sponsoring em-
ployers cannot demonstrate
compliance and the insurance company is held re-
sponsible due to its marketing efforts, Lincoln Life
and other insurers may be subject to potential liability. It is not possi-
ble to provide a meaningful estimate of the range of potential liability at
this time. Management continues to monitor this matter and to take steps to
minimize any potential liability.
Group pension annuities
The liabilities for guaranteed interest and group pension annuity con-
tracts, which are no longer be-
G-21
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
ing sold, are supported by a single portfolio of assets which attempts to
match the duration of these liabilities. Due to the very 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. This
situation could cause losses which would be recognized at some future time.
Leases
Lincoln Life and certain of its subsidiaries lease their home office prop-
erties 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 Lincoln Life with the right of
first refusal to purchase the properties during the term of the lease, in-
cluding renewal periods, at a price as defined in the agreements. In addi-
tion, Lincoln Life 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 period ending in 2009 or the last day of any of the renewal pe-
riods.
Total rental expense under operating leases in 1995, 1994 and 1993 was
$24,400,000, $21,700,000 and $27,100,000. Future minimum rental commitments
are as follows (in millions):
<TABLE>
<S> <C>
1996 $ 20.9
----------
1997 19.5
----------
1998 18.3
----------
1999 18.3
----------
2000 17.7
----------
Thereafter 172.4
---------- ------
$267.1
======
</TABLE>
Insurance ceded and assumed
Lincoln Life cedes insurance to other companies, including certain affili-
ates. That portion of risks exceeding each company's retention limit is re-
insured with other insurers. Lincoln Life seeks reinsurance coverage within
the business segment that sells life insurance that limits its liabilities
on an individual insured to $3,000,000. To cover products other than life
insurance, Lincoln Life acquires other insurance coverages with retentions
and limits which management believes are appropriate for the circumstances.
The accompanying financial statements reflect premiums, benefits and set-
tlement expenses and deferred acquisition costs, net of insurance ceded
(see Note 5). Lincoln Life and its subsidiaries remain liable if their re-
insurers are unable to meet their contractual obligations under the appli-
cable reinsurance agreements.
Lincoln Life assumes insurance from other companies, including certain af-
filiates. At December 31, 1995, Lincoln Life has provided $92,700,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables from the ceding company, which are secured by future profits on the
reinsured business. However, Lincoln Life is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
Vulnerability from concentrations
At December 31, 1995, Lincoln Life did not have
a material concentration of financial instruments in
a single investee, industry or geographic location. Also at December 31,
1995, Lincoln Life did not have a concentration of 1) business transactions
with a particular customer, lender or distributor, 2) revenues from a par-
ticular 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 se-
vere impact to Lincoln Life's financial condition.
Other contingency matters
Lincoln Life and its subsidiaries are involved in various pending or
threatened legal proceedings arising from the conduct of their business. In
some instances, these proceedings include claims for punitive damages and
similar types of relief in unspecified or substantial amounts, in addition
to amounts for alleged contractual liability or requests for equitable re-
lief. After consultation with counsel and a review of available facts, it
is management's opinion that these proceedings ultimately will be resolved
without materially affecting the consolidated financial statements of Lin-
coln Life.
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 rehabili-
tated companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. Lincoln Life has accrued
for expected assessments net of estimated future premium tax deductions.
G-22
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Guarantees
Lincoln Life has guarantees with off-balance-sheet risks
whose contractual amounts represent credit exposure. Out-
standing guarantees with off-balance-sheet risks, shown in
notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
contract
amounts
-----------
December 31
1995 1994
---------------
(in
millions)
-----------
<S> <C> <C>
Real estate partnerships $ 3.3 $17.6
---------------------------------------
Mortgage loan pass-through certificates 63.6 78.2
--------------------------------------- ----- -----
$66.9 $95.8
===== =====
</TABLE>
Lincoln Life has invested in real estate partnerships that
use conventional mortgage loans. In some cases, the terms of
these arrangements involve guarantees by each of the part-
ners to indemnify the mortgagor in the event a partner is
unable to pay its principal and interest payments. In addi-
tion, Lincoln Life has sold commercial mortgage loans
through grantor trusts which issued pass-through certifi-
cates. Lincoln Life has agreed to repurchase any mortgage
loans which remain delinquent for 90 days at a repurchase
price substantially equal to the outstanding principal bal-
ance plus accrued interest thereon to the date of repur-
chase. 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
Lincoln Life. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1995 and
1994.
G-23
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Derivatives
Lincoln Life has derivatives with off-balance-sheet risks
whose notional or contract amounts exceed the credit expo-
sure. Lincoln Life 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 and foreign exchange risks. In
addition, Lincoln Life is subject to the risks associated
with changes in the value of its derivatives; however, such
changes in the value generally are offset by changes in the
value of the items being hedged by such contracts. Outstand-
ing 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
1995 1994 1995 1995 1994 1994
-------- -------- -------- ----- -------- -----
(in millions)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate
derivatives:
Interest rate cap
agreements $5,110.0 $4,400.0 $22.7 $5.3 $23.3 $34.4
------------------------
Spread-lock agreements 600.0 1,300.0 (.9) (.9) 3.2 3.2
------------------------
Financial futures
contracts -- 382.5 -- -- (7.5) (7.5)
------------------------
Interest rate swaps 5.0 5.0 .2 .2 .2 .2
------------------------ -------- -------- ----- ---- ----- -----
5,715.0 6,087.5 22.0 4.6 19.2 30.3
Foreign currency
derivatives:
Foreign exchange forward
contracts 15.7 21.2 (.6) (.6) .2 .2
------------------------
Foreign currency options 99.2 -- 1.9 1.4 -- --
------------------------
Foreign currency swaps 15.0 -- .4 .4 -- --
------------------------ -------- -------- ----- ---- ----- -----
129.9 21.2 1.7 1.2 .2 .2
-------- -------- ----- ---- ----- -----
$5,844.9 $6,108.7 $23.7 $5.8 $19.4 $30.5
======== ======== ===== ==== ===== =====
</TABLE>
A reconciliation and discussion of the notional or contract
amounts for the significant programs using derivative agree-
ments and contracts is as follows:
<TABLE>
<CAPTION>
Interest rate
caps Spread locks
----------------- -------------------
December 31 December 31
1995 1994 1995 1994
-------- -------- --------- --------
(in millions)
-------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,400.0 $3,800.0 $ 1,300.0 $1,700.0
----------------------------
New contracts 710.0 600.0 800.0 --
----------------------------
Terminations and maturities -- -- (1,500.0) (400.0)
---------------------------- -------- -------- --------- --------
Balance at end of year $5,110.0 $4,400.0 $ 600.0 $1,300.0
---------------------------- ======== ======== ========= ========
</TABLE>
G-24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
<TABLE>
<CAPTION>
Financial futures
-------------------------------------
Contracts Options
1995 1994 1995 1994
--------- -------- ------- -------
(in millions)
-------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 382.5 $ 33.1 $ -- $ --
----------------------------
New contracts 810.5 1,087.7 181.6 308.0
----------------------------
Terminations and maturities (1,193.0) (738.3) (181.6) (308.0)
---------------------------- --------- -------- ------- -------
Balance at end of year $ -- $ 382.5 $ -- $ --
---------------------------- ========= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Foreign currency derivatives
-----------------------------------------
Foreign
exchange Foreign Foreign
forward currency currency
contracts options swaps
1995 1994 1995 1994 1995 1994
------- ------ ------- ---- ----- ----
(in millions)
-----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 21.2 $ -- $ -- $ -- $ -- $ --
----------------------------
New contracts 131.2 38.5 356.6 -- 15.0 --
----------------------------
Terminations and maturities (136.7) (17.3) (257.4) -- -- --
---------------------------- ------- ------ ------- ---- ----- ----
Balance at end of year $ 15.7 $ 21.2 $ 99.2 $ -- $15.0 $ --
---------------------------- ======= ====== ======= ==== ===== ====
</TABLE>
Interest rate caps
The interest rate cap agreements, which expire in 1997
through 2003, entitle Lincoln Life to receive payments from
the counterparties on specified future reset dates, contin-
gent on future interest rates. For each cap, the amount of
such quarterly payments, if any, is determined by the excess
of a market interest rate over a specified cap rate times
the notional amount divided by four. The purpose of Lincoln
Life's interest rate cap agreement program is to protect its
annuity line of business from the effect of fluctuating in-
terest rates. The premium paid for the interest rate caps is
included in other assets ($22,700,000 and $23,400,000 as of
December 31, 1995 and 1994, respectively) and is being amor-
tized over the terms of the agreements and is included in
net investment income.
Spread locks
Spread-lock agreements in effect at December 31, 1995 all
expire in 2005. Spread-lock agreements provide for a lump
sum payment to or by Lincoln Life depending on whether the
spread between the swap rate and a specified U.S. Treasury
note is larger or smaller than a contractually specified
spread. Cash payments are based on the product of the
notional amount, the spread between the swap rate and the
yield of an equivalent maturity U.S. Treasury security and
the price sensitivity of the swap at that time, expressed in
dollars per basis point. The purpose of Lincoln Life's
spread-lock program is to protect a portion of its fixed ma-
turity securities against widening of spreads.
G-25
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, spread-lock agreements, in-
terest rate swaps, foreign exchange forward contracts, foreign currency op-
tions and foreign currency swaps, but Lincoln Life does not anticipate non-
performance by any of these counterparties. The credit risk associated with
such agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount
of such exposure is essentially the net replacement cost or market value
for such agreements with each counterparty if the net market value is in
Lincoln Life's favor. At December 31, 1995, the exposure was $6,900,000.
8.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of Lincoln Life's financial instruments.
Considerable judgment is required to develop these fair values and, accord-
ingly, the estimates shown are not necessarily indicative of the amounts
that would be realized in a one time, current market exchange of all of
Lincoln Life's financial instruments.
Fixed maturity and equity securities
Fair values for fixed maturity securities are based on quoted market pric-
es, where available. For fixed maturity securities not actively traded,
fair values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by discount-
ing expected future cash flows using a current market rate applicable to
the coupon rate, credit quality and maturity of the investments. The fair
values for equity securities are based on quoted market prices.
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 when compared to the expected yield for mortgages having sim-
ilar characteristics. The rating for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service cov-
erage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loans are measured based either on the present
value of expected future cash flows discounted at the loan's effective in-
terest rate, at the loan's market price or the fair value of the collateral
if the loan is collateral dependent.
7.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
Financial futures
Lincoln Life uses exchange-traded financial futures contracts and options
on those financial futures to hedge against interest rate risks and to man-
age duration of a portion of its fixed maturity securities. Financial
futures contracts obligate Lincoln Life to buy or sell a financial instru-
ment at a specified future date for a specified price and may be settled in
cash or through delivery of the financial instrument. Cash settlements on
the change in market values of financial futures contracts are made daily.
Options on financial futures give Lincoln Life the right, but not the obli-
gation, to assume a long or short position in the underlying futures at a
specified price during a specified time period.
Foreign currency derivatives
Lincoln Life uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate Lincoln Life to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give Lincoln Life the right, but not the obligation, to
buy or sell a foreign currency at a specific exchange rate during a speci-
fied time period. A foreign currency swap is a contractual agreement to ex-
change the currencies of two different countries pursuant to an agreement
to reexchange the two currencies at the same rate of exchange at a speci-
fied future date.
Additional derivative information
Expenses for the agreements and contracts described above amounted to
$5,600,000 and $5,400,000 in 1995 and 1994, respectively. Deferred losses
of $21,800,000 as of December 31, 1995, resulting from (1) terminated and
expired spread-lock agreements, (2) financial futures contracts and (3) op-
tions on financial futures, are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
G-26
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Short-term and long-term debt
Fair values for long-term debt issues are estimated using discounted cash
flow analysis based on Lincoln Life's current incremental borrowing rate
for similar types of borrowing arrangements. For short-term debt, the car-
rying value approximates fair value.
Guarantees
Lincoln Life's guarantees include guarantees related to real estate part-
nerships and 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 insignificant. Fair values for all other guarantees are based on fees
that would be charged currently to enter into similar agreements, taking
into consideration the remaining terms of the agreements and the
counterparties' credit standing.
Derivatives
Lincoln Life's derivatives include interest rate cap agreements, spread-
lock agreements, foreign currency exchange contracts, financial futures
contracts, options on financial futures, interest rate swaps, foreign cur-
rency options and foreign currency swaps. Fair values for these contracts
are based on current settlement values. The current settlement values are
based on quoted market prices for the foreign currency exchange contracts,
financial future contracts and options on financial futures and on broker-
age quotes, which utilized pricing models or formulas using current assump-
tions, for all other swaps and agreements.
Investment commitments
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real es-
tate are based on the difference between the value of the committed invest-
ments as of the date of the accompanying balance sheets and the commitment
date, which would take into account changes in interest rates, the
counterparties' credit standing and the remaining terms of the commitments.
8.FAIR VALUE OF FINANCIAL
INSTRUMENTS CONTINUED
Policy loans
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on
historical experience.
Other investments and cash and invested cash
The carrying value for assets classified as other investments and cash and
invested cash in the accom-
panying balance sheets approximates their fair value.
Investment type insurance contracts
The balance sheet captions, "Future policy benefits, claims and claims ex-
penses" and "Contractholder funds," include investment type insurance con-
tracts (i.e., deposit contracts and guaranteed interest contracts). The
fair values for the deposit contracts and certain guaranteed interest con-
tracts 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 based on interest rates currently being
offered on similar contracts with maturities consistent with those remain-
ing for the contracts being valued.
The remainder of the balance sheet captions, "Future policy benefits,
claims and claims expenses" and "Contractholder funds," that do not fit the
definition of "investment type insurance contracts" are considered insur-
ance contracts. Fair value disclosures are not required for these insurance
contracts and have not been determined by Lincoln Life. It is Lincoln
Life's position that the disclosure of the fair value of these insurance
contracts is important in that readers of these financial statements could
draw inappropriate conclusions about Lincoln Life's shareholder's equity
determined on a fair value basis if only the fair value of assets and lia-
bilities defined as financial instruments are disclosed. Lincoln Life and
other companies in the insurance industry are monitoring the related ac-
tions of the various rule-making bodies and attempting to determine an ap-
propriate methodology for estimating and disclosing the "fair value" of
their insurance contract liabilities.
G-27
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
8.FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED
The carrying values and estimated fair values of Lincoln
Life's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
---------------------------------------------
Carrying Fair Carrying Fair
Assets (Liabilities) value value value value
---------------------------------------------------------------------------
(in millions)
----------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 20,414.8 $ 20,414.8 $ 17,692.2 $ 17,692.2
-------------------------
Equity securities 598.4 598.4 456.3 456.3
-------------------------
Mortgage loans on real
estate 3,147.8 3,330.5 2,795.9 2,720.6
-------------------------
Policy loans 565.3 557.4 528.7 508.1
-------------------------
Other investments 241.2 241.2 158.2 158.2
-------------------------
Cash and invested cash 802.7 802.7 990.9 990.9
-------------------------
Investment type insurance
contracts:
-------------------------
. Deposit contracts and
certain guaranteed
interest contracts (15,390.8) (15,179.1) (14,294.7) (14,052.5)
-------------------------
. Remaining guaranteed
interest and similar
contracts (2,470.9) (2,396.5) (2,485.5) (2,423.9)
-------------------------
Short-term debt (124.8) (124.8) (153.7) (153.7)
-------------------------
Long-term debt (40.8) (36.7) (54.8) (57.0)
-------------------------
Derivatives 23.7 5.8 19.4 30.5
-------------------------
Investment commitments -- (.8) -- (.5)
-------------------------
</TABLE>
As of December 31, 1995 and 1994, the carrying values of the
deposit contracts and certain guaranteed contracts is net of
deferred acquisition costs of $333,797,000 and $399,000,000,
respectively, excluding adjustments for deferred acquisition
costs applicable to changes in fair value of securities. The
carrying values of these contracts are stated net of de-
ferred acquisition costs in order that they be comparable
with the fair value basis.
9.SEGMENT INFORMATION
Lincoln Life has two major business segments: Life Insurance
and Annuities and Reinsurance. The Life Insurance and Annui-
ties segment offers universal life, pension products and
other individual coverages through a network of career
agents, independent general agencies and insurance agencies
located within a variety of financial institutions. These
products are sold throughout the United States by Lincoln
Life. Reinsurance sells reinsurance products and services to
insurance companies, HMOs, self-funded employers and other
primary risk accepting organizations in the U.S. and econom-
ically attractive international markets. Effective in the
fourth quarter of 1995, operating results of the direct dis-
ability income business previously included in the Life In-
surance and Annuities segment is now included in the Rein-
surance segment. This direct disability income business,
which is no longer being sold, is now managed by the Rein-
surance segment along with its disability income business.
Prior to the sale of 100% of the ownership of its primary
underwriter of employee life-health benefit coverages in
1994 (see Note 10), the Employee Life-Health Benefits seg-
ment distributed group life and health insurance, managed
health care and other related coverages through career
agents and independent general agencies. Activity which is
not included in the major business segments is shown as
"Other Operations."
"Other Operations" includes operations not directly related
to the business segments and unallocated corporate items
(i.e., corporate investment income, interest expense on cor-
porate debt and unallocated corporate overhead expenses).
G-28
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
9.SEGMENT INFORMATION CONTINUED
The revenue, pre-tax income and assets by segment for 1993
through 1995 are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
---------------------------
(in millions)
-----------------------------
<S> <C> <C> <C>
Revenue:
. Life Insurance and Annuities $ 2,569.2 $ 2,065.3 $ 2,341.9
---------------------------------------
. Reinsurance 751.2 660.4 610.7
---------------------------------------
. Employee Life-Health Benefits -- 314.9 1,326.8
---------------------------------------
. Other Operations 16.1 74.6 (28.8)
--------------------------------------- --------- --------- ---------
$ 3,336.5 $ 3,115.2 $ 4,250.6
========= ========= =========
Income (loss) before income taxes and
cumulative effect of accounting change:
. Life Insurance and Annuities $ 361.0 $ 75.6 $ 265.3
---------------------------------------
. Reinsurance 83.5 93.9 31.6
---------------------------------------
. Employee Life-Health Benefits -- 22.9 83.0
---------------------------------------
. Other Operations 5.0 67.8 (44.2)
--------------------------------------- --------- --------- ---------
$ 449.5 $ 260.2 $ 335.7
========= ========= =========
Assets:
. Life Insurance and Annuities $45,280.0 $37,675.9 $36,021.0
---------------------------------------
. Reinsurance 3,383.5 2,311.5 2,328.9
---------------------------------------
. Employee Life-Health Benefits -- -- 588.5
---------------------------------------
. Other Operations 923.6 1,038.1 770.0
--------------------------------------- --------- --------- ---------
$49,587.1 $41,025.5 $39,708.4
========= ========= =========
</TABLE>
Provisions for depreciation and capital additions were not material.
10.SALE OF AFFILIATES
In December 1993, Lincoln Life recorded a provision for loss
of $98,500,000 (also $98,500,000 after-tax) in the "Other
Operations" segment for the sale of Security-Connecticut
Life Insurance Company (Security-Connecticut). The sale was
completed on February 2, 1994 through an initial public of-
fering and Lincoln Life received cash and notes, net of re-
lated expenses, totaling $237,700,000. The loss on sale and
disposal expenses did not differ materially from the esti-
mate recorded in the fourth quarter of 1993. For the year
ended December 31, 1993, Security-Connecticut, which oper-
ated in the Life Insurance and Annuities segment, had reve-
nue of $274,500,000 and net income of $24,000,000.
In 1994, Lincoln Life completed the sale of 100% of the com-
mon stock of EMPHESYS (parent company of Employers Health
Insurance Company, which comprised the Employee Life-Health
Benefits segment) for $348,200,000 of cash, net of related
expenses, and a $50,000,000 promissory note. A gain on sale
of $69,000,000 (also $69,000,000 after-tax) was recognized
in 1994 in "Other Operations". For the year ended December
31, 1993, EMPHESYS had revenues of $1,304,700,000 and net
income of $55,300,000. EMPHESYS had revenue and net income
of $314,900,000 and $14,400,000, respectively, during the
three months of ownership in 1994.
G-29
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life provides services to and receives services from affiliated
companies which resulted in a net receipt of $7,500,000, $13,900,000 and
$18,900,000 in 1995, 1994 and 1993, respectively.
Lincoln Life both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994
---------
(in millions)
---------
<S> <C> <C>
Insurance assumed $ 17.6 $ 19.8
-----------------
Insurance ceded 214.4 481.3
-----------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies
as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
-----------------------------------------------
(in millions)
-----------------------------------------------
<S> <C> <C>
Future policy benefits and claims assumed $ 344.8 $341.3
---------------------------------------------------
Future policy benefits and claims ceded 1,344.5 857.7
---------------------------------------------------
Amounts recoverable on paid and unpaid losses 65.9 36.8
---------------------------------------------------
Reinsurance payable on paid losses 5.5 3.5
---------------------------------------------------
Funds held under reinsurance treaties-net liability 712.3 238.4
---------------------------------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with unau-
thorized companies. To take a reserve credit for such reinsurance, Lincoln
Life holds assets from the reinsurer, including funds held under reinsur-
ance treaties, and is the beneficiary on letters of credit aggregating
$340,800,000 and $308,200,000 at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, LNC had guaranteed $275,300,000 and
$298,200,000, respectively, of these letters of credit. At December 31,
1995, Lincoln Life has a receivable (included in the foregoing amounts)
from affiliated insurance companies in the amount of $241,900,000 for stat-
utory surplus relief received under financial reinsurance ceded agreements.
11.SUBSEQUENT EVENT
In January 1996, LNC announced that it had signed a definitive agreement to
acquire the group tax-sheltered annuity business of UNUM Corporation's af-
filiates. This purchase is expected to be completed in the form of a rein-
surance transaction with an initial ceding commission of approximately
$70,000,000. This ceding commission represents the present value of busi-
ness in-force and, accordingly, will be classified as other intangible as-
sets upon the close of this transaction. This transaction, which is ex-
pected to close in the third quarter of 1996, will increase LNC's assets
and policy liabilities and accruals by approximately $3,200,000,000.
12.TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with Lincoln Life under
which it sells Lincoln Life's products and provides the service that other-
wise would be provided by a home office marketing department and regional
offices. For providing these selling and marketing services, Lincoln Life
paid LFGI override commissions and operating expense allowances of
$81,900,000, $78,500,000 and $74,500,000 in 1995, 1994 and 1993, respec-
tively. LFGI incurred expenses of $10,400,000, $10,700,000 and $10,500,000
in 1995, 1994 and 1993, respectively, in excess of the override commission
and operating expense allowances received from Lincoln Life, which Lincoln
Life is not required to reimburse.
Cash and invested cash at December 31, 1995 and 1994 include Lincoln Life's
participation in a short-term investment pool with LNC of $333,800,000 and
$428,300,000, respectively. Related investment income amounted to
$22,500,000, $17,100,000 and $9,100,000 in 1995, 1994 and 1993, respective-
ly. Short-term debt at December 31, 1995 and 1994 includes $67,000,000 and
$68,600,000, respectively, borrowed from LNC. Lincoln Life paid interest to
LNC of $24,000, $8,000 and $137,000 in 1995, 1994 and 1993, respectively.
G-30
<PAGE>
FINANCIAL SCHEDULES
The following consolidated financial statement schedules of
Lincoln National Life Insurance Company and subsidiaries are
included on pages G-32 through G-36:
I. Summary of Investments--Other than Investments in Related
Parties -- December 31, 1995
III. Supplementary Insurance Information Years ended Decem-
ber 31, 1995, 1994 and 1993
IV. Reinsurance -- Years ended December 31, 1995, 1994 and
1993
V. Valuation and Qualifying Accounts -- Years ended December
31, 1995, 1994 and 1993
All other schedules for which provision is made in the ap-
plicable accounting regulation of the Securities and Ex-
change Commission are not required under the related in-
structions, are inapplicable or the required information is
included in the consolidated financial statements, and
therefore have been omitted.
G-31
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- ------------------------------------------------------------------------------
Amount at
which shown
in the
balance
Type of Investment Cost Value sheet
- ------------------------------------------------------------------------------
(000's omitted)
-----------------------------------
<S> <C> <C> <C>
Fixed maturity securities available-
for-sale:
Bonds:
. United States Government and
government agencies and authorities $ 569,552 $ 653,444 $ 653,444
--------------------------------------
. States, municipalities and political
subdivisions 12,325 12,375 12,375
--------------------------------------
. Mortgage-backed securities 4,891,521 5,184,751 5,184,751
--------------------------------------
. Foreign governments 927,901 997,567 997,567
--------------------------------------
. Public utilities 2,572,309 2,772,990 2,772,990
--------------------------------------
. Convertibles and bonds with warrants
attached 181,431 199,658 199,658
--------------------------------------
. All other corporate bonds 9,658,371 10,551,770 10,551,770
--------------------------------------
Redeemable preferred stocks 39,427 42,230 42,230
-------------------------------------- ----------- ----------- -----------
Total fixed maturity securities 18,852,837 20,414,785 20,414,785
- ---------------------------------------
Equity securities available-for-sale:
Common stocks:
. Public utilities 8,980 10,989 10,989
--------------------------------------
. Banks, trust and insurance companies 74,897 89,197 89,197
--------------------------------------
. Industrial, miscellaneous and all
other 345,434 436,556 436,556
--------------------------------------
Nonredeemable preferred stocks 50,950 61,693 61,693
-------------------------------------- ----------- ----------- -----------
Total equity securities 480,261 598,435 598,435
- ---------------------------------------
Mortgage loans on real estate 3,176,275 3,147,783(A)
Real estate:
. Investment properties 635,135 635,135
--------------------------------------
. Acquired in satisfaction of debt 157,441 110,888(A)
--------------------------------------
Policy loans 565,325 565,325
- ---------------------------------------
Other investments 253,015 241,219(A)
- --------------------------------------- ----------- -----------
Total investments $24,120,189 $25,713,570
- --------------------------------------- =========== ===========
</TABLE>
(A) Investments which are deemed to have declines in value that are other than
temporary are written down or reserved for to reduce their carrying value
to their estimated realizable value.
G-32
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------
Future policy
benefits, Other policy
Deferred claims and claims and
acquisition claim Unearned benefits Premium
Segment costs expenses premiums payable revenue (A)
- --------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance and
annuities $ 713,213 $6,530,475 $ 9,145 $-- $ 685,258
----------------------
Reinsurance 247,921 1,855,039 45,951 -- 611,416
----------------------
Other (including
consolidating
adjustments) (7,300) 49,505 78 -- 622
----------------------
---------- ---------- ------- --- ----------
$ 953,834 $8,435,019 $55,174 $-- $1,297,296
========== ========== ======= === ==========
Year ended December 31,
1994:
Life insurance and
annuities $1,427,692 $5,888,581 $11,201 $-- $ 647,416
----------------------
Reinsurance 304,913 1,626,033 51,618 -- 542,034
----------------------
Employee life-health
benefits -- -- -- -- 299,338
----------------------
Other (including
consolidating
adjustments) 3,921 26,158 (1,347) -- 1,076
----------------------
---------- ---------- ------- --- ----------
$1,736,526 $7,540,772 $61,472 $-- $1,489,864
========== ========== ======= === ==========
Year ended December 31,
1993:
Life insurance and
annuities $ 999,126 $6,782,207 $ 5,188 $-- $ 662,353
----------------------
Reinsurance 298,787 1,616,088 54,157 -- 491,397
----------------------
Employee life-health
benefits -- 228,892 -- -- 1,243,576
----------------------
Other (including
consolidating
adjustments) -- 171,043 315 -- 387
----------------------
---------- ---------- ------- --- ----------
$1,297,913 $8,798,230 $59,660 $-- $2,397,713
========== ========== ======= === ==========
</TABLE>
(A) Includes insurance fees on universal life and other interest sensitive
products.
G-33
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION CONTINUED
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
- -------------------------------------------------------------------------------------------
Amortization
Benefits, claims of deferred Other
Net investment and claim acquisition operating Premium
Segment income (B) expenses costs expenses (B) written
- -------------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance and
annuities $1,741,231 $1,649,119 $298,020 $261,016 $ --
----------------------
Reinsurance 134,000 472,198 101,729 93,750 --
----------------------
Other (including
consolidating
adjustments) 24,399 1,299 -- 9,898 --
---------------------- ---------- ---------- -------- -------- -----
$1,899,630 $2,122,616 $399,749 $364,664 $ --
========== ========== ======== ======== =====
Year ended December 31,
1994:
Life insurance and
annuities $1,542,552 $1,554,479 $ 85,697 $349,529 $ --
----------------------
Reinsurance 116,957 419,266 29,477 117,238 --
----------------------
Employee life-health
benefits (C) 10,838 218,672 -- 73,355 --
----------------------
Other (including
consolidating
adjustments) 3,634 1,630 -- 5,682 --
---------------------- ---------- ---------- -------- -------- -----
$1,673,981 $2,194,047 $115,174 $545,804 $ --
========== ========== ======== ======== =====
Year ended December 31,
1993:
Life insurance and
annuities $1,676,163 $1,615,883 $197,363 $268,066 $ --
----------------------
Reinsurance 115,582 467,824 38,351 72,840 --
----------------------
Employee life-health
benefits 54,513 943,235 -- 300,648 --
----------------------
Other (including
consolidating
adjustments) (22,799) 6,197 5,275 (744) --
---------------------- ---------- ---------- -------- -------- -----
$1,823,459 $3,033,139 $240,989 $640,810 $ --
========== ========== ======== ======== =====
</TABLE>
(B) The allocation of expenses between investments and other operations are
based on a number of assumptions and estimates. Results would change if
different methods were applied.
(C) Includes data through the March 21, 1994 date of sale of the direct writer
of employee life-health coverages.
G-34
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE (A)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------
Percentage
Ceded Assumed of amount
Gross to other from other assumed to
Segment amount companies companies Net amount net
- --------------------------------------------------------------------------------------
(000's omitted)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance in force $ 51,570,782 $17,612,782 $142,794,000 $176,752,000 80.8%
-----------------------
Premiums:
-----------------------
Health insurance 302,463 299,222 273,572 276,813 98.8
----------------------
Life insurance (B) 658,936 142,523 504,070 1,020,483 49.4
---------------------- ------------ ----------- ------------ ------------
$ 961,399 $ 441,745 $ 777,642 $ 1,297,296
============ =========== ============ ============
Year ended December 31,
1994:
Life insurance in force $ 79,802,000 $45,822,000 $125,640,000 $159,620,000 78.7%
-----------------------
Premiums:
-----------------------
Health insurance 666,609 496,090 359,659 530,178 67.8
----------------------
Life insurance (B) 629,185 220,678 551,179 959,686 57.4
---------------------- ------------ ----------- ------------ ------------
$ 1,295,794 $ 716,768 $ 910,838 $ 1,489,864
============ =========== ============ ============
Year ended December 31,
1993:
Life insurance in force $135,401,000 $61,401,000 $109,257,000 $183,257,000 59.6%
-----------------------
Premiums:
-----------------------
Health insurance 1,387,414 217,705 262,171 1,431,880 18.3
----------------------
Life insurance (B) 771,408 350,907 545,332 965,833 56.5
---------------------- ------------ ----------- ------------ ------------
$ 2,158,822 $ 568,612 $ 807,503 $ 2,397,713
============ =========== ============ ============
</TABLE>
(B) Includes insurance fees on universal life and other interest sensitive
products.
G-35
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------
Additions
-----------------------
(1) (2)
Charged to
Balance at Charged other Deductions- Balance
beginning to costs and accounts- describe at end of
Description of period expenses (A) describe (B) period
- ---------------------------------------------------------------------------------
(000's omitted)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $ 56,614 $ 2,659 $ -- $ (30,781) $ 28,492
-----------------------
. Reserve for real
estate 65,186 (7,227) -- (11,406) 46,553
-----------------------
. Reserve for other
long-term investments 13,492 (1,541) -- (155) 11,796
-----------------------
Year ended December 31,
1994:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $220,671 $ 19,464 $ -- $(183,521) $ 56,614
-----------------------
. Reserve for real
estate 121,427 13,058 -- (69,299) 65,186
-----------------------
. Reserve for other
long-term investments 26,730 262 -- (13,500) 13,492
-----------------------
Included in other
liabilities:
Investment guarantees 1,804 4,280 -- (6,084) --
-----------------------
Year ended December 31,
1993:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $129,093 $136,717 $ -- $ (45,139) $220,671
-----------------------
. Reserve for real
estate 114,178 21,776 -- (14,527) 121,427
-----------------------
. Reserve for other
long-term investments 31,582 3,905 -- (8,757) 26,730
-----------------------
Included in other
liabilities:
Investment guarantees 12,550 1,674 -- (12,420) 1,804
-----------------------
</TABLE>
(A) Exclude charges for the direct write-off of assets. The negative amounts
represent improvements in the underlying assets for which valuation ac-
counts had previously been established.
(B) Deductions reflect sales or foreclosures of the underlying holdings.
G-36
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors
Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets
of Lincoln National Life Insurance Co., a wholly owned sub-
sidiary of Lincoln National Corp., as of December 31, 1995
and 1994, and the related consolidated statements of income,
shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1995. Our audits also
included the financial statement schedules listed on page G-
31. These financial statements and schedules are the respon-
sibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally ac-
cepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the fi-
nancial statements. An audit also includes assessing the ac-
counting 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.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Lincoln National Life Insurance Co. at
December 31, 1995 and 1994, and the consolidated result of
its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when
considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the consolidated financial state-
ments, in 1993 the Company changed its method of accounting
for postretirement benefits other than pensions, accounting
for impairment of loans and accounting for certain invest-
ments in debt and equity securities.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
February 7, 1996
G-37
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
<TABLE>
<CAPTION>
December 31
1996 1995
--------- ---------
(in millions)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $19,389.6 $17,729.7
- -------------------------------------------------------------------------------------------------------
Preferred stocks 239.7 89.9
- -------------------------------------------------------------------------------------------------------
Unaffiliated common stocks 358.3 535.5
- -------------------------------------------------------------------------------------------------------
Affiliated common stocks 241.5 193.0
- -------------------------------------------------------------------------------------------------------
Mortgage loans on real estate 2,976.7 2,909.7
- -------------------------------------------------------------------------------------------------------
Real estate 621.3 655.2
- -------------------------------------------------------------------------------------------------------
Policy loans 626.5 515.8
- -------------------------------------------------------------------------------------------------------
Other investments 282.7 248.0
- -------------------------------------------------------------------------------------------------------
Cash and short-term investments 759.2 780.9
- ----------------------------------------------------------------------------------- --------- ---------
Total cash and investments 25,495.5 23,657.7
- -------------------------------------------------------------------------------------------------------
Premiums and fees in course of collection 60.9 17.1
- -------------------------------------------------------------------------------------------------------
Accrued investment income 343.6 342.5
- -------------------------------------------------------------------------------------------------------
Funds withheld by ceding companies 25.8 595.3
- -------------------------------------------------------------------------------------------------------
Other admitted assets 355.7 217.7
- -------------------------------------------------------------------------------------------------------
Separate account assets 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total admitted assets $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,954.0 $ 5,713.3
- -------------------------------------------------------------------------------------------------------
Other policyholder funds 17,262.4 15,598.5
- -------------------------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 250.2 499.3
- -------------------------------------------------------------------------------------------------------
Funds held under reinsurance treaties 564.6 1,053.5
- -------------------------------------------------------------------------------------------------------
Asset valuation reserve 375.5 270.0
- -------------------------------------------------------------------------------------------------------
Interest maintenance reserve 76.7 116.3
- -------------------------------------------------------------------------------------------------------
Other liabilities 490.9 391.3
- -------------------------------------------------------------------------------------------------------
Federal income taxes 4.3 3.2
- -------------------------------------------------------------------------------------------------------
Net transfers due from separate accounts (659.7) (548.0)
- -------------------------------------------------------------------------------------------------------
Separate account liabilities 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities 48,054.0 41,559.0
- -------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------
Paid-in surplus 883.4 783.4
- -------------------------------------------------------------------------------------------------------
Unassigned surplus 1,054.2 924.5
- ----------------------------------------------------------------------------------- --------- ---------
Total capital and surplus 1,962.6 1,732.9
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities and capital and surplus $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
</TABLE>
See accompanying notes.
S-1
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------
(in millions)
--------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $7,268.5 $4,899.1 $5,648.7
- -------------------------------------------------------------------------------
Net investment income 1,756.3 1,772.2 1,606.8
- -------------------------------------------------------------------------------
Amortization of interest maintenance reserve 27.2 34.0 9.8
- -------------------------------------------------------------------------------
Commissions and expense allowances on reinsurance
ceded 90.9 98.3 145.0
- -------------------------------------------------------------------------------
Expense charges on deposit funds 100.7 83.2 70.5
- -------------------------------------------------------------------------------
Other income 16.8 14.5 15.6
- --------------------------------------------------- -------- -------- --------
Total revenues 9,260.4 6,901.3 7,496.4
- -------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 5,989.9 4,184.0 5,071.6
- -------------------------------------------------------------------------------
Underwriting, acquisition, insurance and other
expenses 2,878.5 2,345.7 2,136.1
- --------------------------------------------------- -------- -------- --------
Total benefits and expenses 8,868.4 6,529.7 7,207.7
- --------------------------------------------------- -------- -------- --------
Gain from operations before dividends to
policyholders, income taxes and net realized gain
on investments 392.0 371.6 288.7
- -------------------------------------------------------------------------------
Dividends to policyholders 27.3 27.3 18.0
- --------------------------------------------------- -------- -------- --------
Gain from operations before federal income taxes
and net realized gain on investments 364.7 344.3 270.7
- -------------------------------------------------------------------------------
Federal income taxes 83.6 103.7 52.8
- --------------------------------------------------- -------- -------- --------
Gain from operations before net realized gain on
investments 281.1 240.6 217.9
- -------------------------------------------------------------------------------
Net realized gain on investments, net of income tax
expense (benefits) [1996--$28.5; 1995--$48.1;
1994--$(178.1)] and excluding net transfers to
(from) the interest maintenance reserve [1996--
$(12.4); 1995--$94.9; 1994--$(147.1)] 53.3 43.9 124.0
- --------------------------------------------------- -------- -------- --------
Net income $ 334.4 $ 284.5 $ 341.9
- --------------------------------------------------- ======== ======== ========
</TABLE>
See accompanying notes.
S-2
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year
ended
December
31
1996 1995 1994
-------- -------- --------
(in millions)
----------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $1,732.9 $1,679.6 $1,302.5
- ----------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 334.4 284.5 341.9
- ----------------------------------------------------------------
Differences in cost and admitted investment amounts 38.6 143.2 (123.3)
- ----------------------------------------------------------------
Nonadmitted assets (3.0) 2.9 (3.2)
- ----------------------------------------------------------------
Regulatory liability for reinsurance 0.6 (2.0) (1.1)
- ----------------------------------------------------------------
Life policy reserve valuation basis (0.4) 2.9 (1.3)
- ----------------------------------------------------------------
Asset valuation reserve (105.5) (112.5) 83.8
- ----------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- 2.2 218.6
- ----------------------------------------------------------------
Paid-in surplus 100.0 15.1 --
- ----------------------------------------------------------------
Separate account receivable due to change in valuation -- 27.0 --
- ----------------------------------------------------------------
Accounting for separate account contracts -- -- (13.3)
- ----------------------------------------------------------------
Dividends to shareholder (135.0) (310.0) (125.0)
- ---------------------------------------------------------------- -------- -------- --------
Capital and surplus at end of year $1,962.6 $1,732.9 $1,679.6
- ---------------------------------------------------------------- ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
S-3
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
----------------------------------
(in millions)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 8,059.4 $ 5,430.9 $ 5,654.5
- -------------------------------------------------------------------------------------
Allowances and reserve adjustments received (paid) on
reinsurance ceded (767.5) (383.6) 137.1
- -------------------------------------------------------------------------------------
Investment income received 1,700.6 1,713.2 1,588.5
- -------------------------------------------------------------------------------------
Benefits paid (4,050.4) (3,239.6) (3,054.1)
- -------------------------------------------------------------------------------------
Insurance expenses paid (2,972.2) (2,513.5) (2,542.5)
- -------------------------------------------------------------------------------------
Federal income taxes recovered (paid) (72.3) 38.4 (191.8)
- -------------------------------------------------------------------------------------
Dividends to policyholders (27.7) (16.5) (18.4)
- -------------------------------------------------------------------------------------
Other income received and expenses paid, net 6.3 14.4 59.2
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by operating activities 1,876.2 1,043.7 1,632.5
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,542.0 13,183.9 11,877.0
- -------------------------------------------------------------------------------------
Purchase of investments (14,175.4) (14,049.6) (12,871.8)
- -------------------------------------------------------------------------------------
Other uses (266.5) (64.0) (123.4)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash used in investing activities (1,899.9) (929.7) (1,118.2)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 100.0 15.1 --
- -------------------------------------------------------------------------------------
Proceeds from borrowings 100.0 63.0 63.0
- -------------------------------------------------------------------------------------
Repayment of borrowings (63.0) (63.0) (60.0)
- -------------------------------------------------------------------------------------
Dividends paid to shareholder (135.0) (310.0) (125.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by (used in) financing activities 2.0 (294.9) (122.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (21.7) (180.9) 392.3
- -------------------------------------------------------------------------------------
Cash and short-term investments at beginning of year 780.9 961.8 569.5
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Cash and short-term investments at end of year $ 759.2 $ 780.9 $ 961.8
- -------------------------------------------------------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
S-4
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in In-
diana. As of December 31, 1996, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific
Life Insurance Company, Lincoln National Health & Casualty Insurance Compa-
ny, Lincoln National Reassurance Company and Lincoln Life & Annuity Company
of New York.
The Company's principal business consist of underwriting annuities, depos-
it-type contracts, life and health insurance through multiple distribution
channels and the reinsurance of individual and group life and health busi-
ness. The Company is licensed and sells its products in 49 states, Canada
and several U.S. territories.
USE OF ESTIMATES
The preparation of financial statements requires management to make esti-
mates and assumptions that affect amounts reported in the financial state-
ments and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known, which could impact the
amounts reported and disclosed herein.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted accounting prin-
ciples ("GAAP"). The more significant variances from GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or market value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported di-
rectly in shareholder's equity after adjustments for related amortization
of deferred acquisition costs, additional policyholder commitments and de-
ferred income taxes.
Investments in real estate are reported net of related obligation rather
than on a gross basis.
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 gen-
eral level of interest rates and amortizes those deferrals over the remain-
ing period to maturity of the individual security sold. The net deferral is
reported as the interest maintenance reserve in the accompanying balance
sheets. Realized capital gains and losses are reported in income net of
federal income tax and transfers to the interest maintenance reserve. The
asset valuation reserve is determined by an NAIC prescribed formula and is
reported as a liability rather than unassigned surplus. Under GAAP, real-
ized capital gains and losses are reported in the income statement on a
pre-tax basis in the period that the asset giving rise to the gain or loss
is sold and valuation allowances are provided when there has been a decline
in value deemed other than temporary, in which case, the provision for such
declines are charged to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not consoli-
dated with the accounts and operations of the Company as would be required
by GAAP. Under statutory accounting principles, the Company's subsidiaries
are carried at their statutory-basis net equity.
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 uni-
versal life insurance, annuity and other investment-type products, deferred
policy acquisition costs, to the extent recoverable from future gross prof-
its, 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 bal-
ance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
S-5
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS 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.
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method.
For mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect ac-
tual 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.
Common stocks are reported at market 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 lia-
bility-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 un-
derlying hedged items and are amortized over the remaining lives of the
hedged items as adjustments to investment income or benefits from the
hedged items. Any unamortized gains or losses are recognized when the un-
derlying hedged items are sold.
Mortgage loans on real estate are reported at unpaid balances, less allow-
ances for impairments. Real estate is reported at depreciated cost. As of
June 30, 1994, the Company changed its method of accounting for reserves on
impaired real estate and mortgage loans. The impaired investment is now
shown on a pre-tax basis as a nonadmitted asset. Previously, these reserves
were presented as a liability, net of related tax benefits, to approximate
the impact on surplus if losses were realized.
Realized investment gains and losses on investments sold are determined us-
ing the specific identification method. Changes in admitted asset carrying
amounts of
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required inter-
est 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 ac-
companying statement of income, whereas, under GAAP, withdrawals are
treated as a reduction of the policy or contract liabilities and benefits
would represent the excess of benefits paid over the policy account value
and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not au-
thorized by the Indiana Department of Insurance 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 es-
tablished 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.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using tradi-
tional reinsurance accounting whereas such contracts would be accounted for
using deposit accounting under GAAP.
POSTRETIREMENT BENEFITS
For purposes of calculating the Company's postretirement benefit obliga-
tion, only vested employees and current retirees are included in the valua-
tion. Under GAAP, active employees not currently eligible would also be in-
cluded.
S-6
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
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 con-
tinually reviewed and adjusted as necessary as experience develops or new
information becomes known; such adjustments are included in current opera-
tions.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original pol-
icies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is sys-
tematically 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. 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 ex-
tent 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 LNC's common stock at the grant date, or other mea-
surement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
These assets and liabilities represent segregated funds administered and
invested by LNC's insurance subsidiaries for the exclusive benefit of pen-
sion and variable life and annuity contractholders. The fees received by
the Company for administrative and contractholder maintenance services per-
formed for these separate accounts are included in the Company's statements
of income.
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
bonds, mortgage loans and common and preferred stocks are credited or
charged directly in unassigned surplus.
DATA PROCESSING EQUIPMENT
Data processing equipment is reported at depreciated cost, with deprecia-
tion determined on a straight-line basis over five years.
GOODWILL
Goodwill, which represents the excess of the ceding commission over statu-
tory-basis net assets of business purchased 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. Ac-
cident and health premiums are earned prorata over the contract term of the
policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by ac-
tuarial methods and are determined based on published tables using statuto-
rily 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 Indiana De-
partment of Insurance. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenarios indicate the need for such
reserve. If net premiums exceed the gross premiums on any insurance in-
force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined us-
ing 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.
S-7
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of the Company's net income and capital and surplus deter-
mined on a statutory accounting basis with amounts determined in accordance
with GAAP is as follows:
<TABLE>
<CAPTION>
Capital and Surplus Net Income
-------------------- -----------------------
Year ended December
December 31 31
1996 1995 1996 1995 1994
--------- --------- ------ ------ -------
(in millions)
<S> <C> <C> <C> <C> <C>
Amounts reported on a
statutory basis $ 1,962.6 $ 1,732.9 $334.4 $284.5 $ 341.9
----------------------------
GAAP adjustments:
----------------------------
Deferred policy acquisition
costs and present value of
future profits 1,119.1 850.2 66.7 (63.0) 191.1
----------------------------
Policy and contract
reserves (1,405.3) (1,562.2) (57.1) (55.3) (53.6)
----------------------------
Interest maintenance
reserve 76.7 116.3 (39.7) 60.9 (157.0)
----------------------------
Deferred income taxes (27.4) (122.5) 1.8 38.3 (138.3)
----------------------------
Policyholders' share of
earnings and surplus on
participating business (81.9) (91.9) (.3) .2 (3.0)
----------------------------
Asset valuation reserve 375.5 270.0 -- -- --
----------------------------
Net realized gain (loss) on
investments (72.0) (67.4) 78.7 30.0 47.1
----------------------------
Adjustment to unrealized
gain (loss) 825.2 1,494.0 -- -- --
----------------------------
Nonadmitted assets,
including nonadmitted
investments (7.1) 57.9 -- -- --
----------------------------
Net GAAP adjustments of
subsidiary companies 156.6 131.2 29.9 34.3 48.2
----------------------------
Other, net (99.0) (89.7) (82.6) (7.3) (58.6)
---------------------------- --------- --------- ------ ------ -------
Net increase (decrease) 860.4 985.9 (2.6) 38.1 (124.1)
---------------------------- --------- --------- ------ ------ -------
Amounts on a GAAP basis $ 2,823.0 $ 2,718.8 $331.8 $322.6 $ 217.8
---------------------------- ========= ========= ====== ====== =======
</TABLE>
S-8
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
2.PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in accor-
dance with accounting practices prescribed or permitted by the Indiana De-
partment of Insurance (the "Department"). "Prescribed" statutory accounting
practices include state laws, regulations and general administrative rules,
as well as a variety of publications of the NAIC. "Permitted" statutory ac-
counting practices encompass all accounting practices that are not pre-
scribed; such practices may differ from state to state, may differ from
company to company within a state and may change in the future. The NAIC
currently is in the process of recodifying statutory accounting practices,
the result of which is expected to constitute the only source of "pre-
scribed" statutory accounting practices. Accordingly, that project, which
is expected to be completed in 1998, 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.
In 1994, the Company received approval from the Department to change its
accounting for surrender charges applicable to separate account liabilities
for variable life and annuity products so that the surrender charges on
these products are recorded as a liability in the separate account finan-
cial statements payable to the Company's general account. In the accompany-
ing financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds. The
cumulative effect of this change increased 1994 net income by $13,299,000.
The Company has approval from the Department to establish valuation allow-
ances on mortgage loans on real estate in accordance with GAAP, which are
in excess of that prescribed by the NAIC and the Department.
Prior to 1995, the Company has considered certain amounts under modified
coinsurance reinsurance contracts as adjustments to premiums. As such, pol-
icyholder dividends, cash surrender charges and reserve adjustments with
interest thereon and commissions on reinsurance assumed are classified as
premiums, rather than on expense lines, with no net effect on net income or
capital and surplus. On a net-of-ceded basis for the year ended December
31, 1994, this practice resulted in increases to both revenues and expenses
of approximately $600,000,000. In addition, reserve adjustments with inter-
est thereon and commissions on reinsurance ceded were also classified as
premiums, rather than in other revenue classifications. For the year ended
December 31, 1994, this intra-revenue grouping reduced premiums by approxi-
mately $50,000,000. Beginning in 1995, the Company reports modified coin-
surance agreements on a gross basis. This change was made as a result of
communications with the Department. This accounting change had no effect on
income or surplus and prior period amounts have not been restated.
S-9
<PAGE>
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
1996 1995 1994
-----------------------------------------
(in millions)
--------------------------
<S> <C> <C> <C>
Income:
Bonds $1,442.2 $1,457.4 $1,266.7
--------------------------------------------------------------------------------
Preferred stocks 9.6 6.4 5.8
--------------------------------------------------------------------------------
Unaffiliated common stocks 6.5 5.2 4.4
--------------------------------------------------------------------------------
Affiliated common stocks 9.5 12.6 62.5
--------------------------------------------------------------------------------
Mortgage loans on real estate 269.3 252.0 255.2
--------------------------------------------------------------------------------
Real estate 114.4 110.0 97.4
--------------------------------------------------------------------------------
Policy loans 35.0 32.1 29.7
--------------------------------------------------------------------------------
Other investments 22.4 62.6 121.3
--------------------------------------------------------------------------------
Cash and short-term investments 48.9 53.2 43.3
--------------------------------------------------------------- -------- -------- --------
Total investment income 1,957.8 1,991.5 1,886.3
-----------------------------------------------------------------------------------
Expenses:
Depreciation 25.0 25.9 21.9
--------------------------------------------------------------------------------
Other 176.5 193.4 257.6
--------------------------------------------------------------- -------- -------- --------
Total investment expenses 201.5 219.3 279.5
---------------------------------------------------------------- -------- -------- --------
Net investment income $1,756.3 $1,772.2 $1,606.8
---------------------------------------------------------------- ======== ======== ========
</TABLE>
Nonadmitted accrued investment income at December 31, 1996
and 1995 amounted to $2,500,000 and $11,500,000, respective-
ly, consisting principally of interest on bonds in default
and mortgage loans.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are summa-
rized 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, 1996:
Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0
--------------------------------------------------------------
U.S. government 1,088.7 43.2 18.0 1,113.9
--------------------------------------------------------------
Foreign government 1,234.0 105.1 1.4 1,337.7
--------------------------------------------------------------
Mortgage-backed 4,478.4 183.3 27.4 4,634.3
--------------------------------------------------------------
State and municipal 40.4 .1 -- 40.5
-------------------- --------- -------- ------ ---------
$19,389.6 $ 918.2 $113.4 $20,194.4
========= ======== ====== =========
At December 31, 1995:
Corporate $11,642.0 $1,074.7 $ 41.4 $12,675.3
--------------------------------------------------------------
U.S. government 546.4 82.2 -- 628.6
--------------------------------------------------------------
Foreign government 908.0 68.0 .6 975.4
--------------------------------------------------------------
Mortgage-backed 4,628.3 283.2 11.2 4,900.3
--------------------------------------------------------------
State and municipal 5.0 .1 -- 5.1
-------------------- --------- -------- ------ ---------
$17,729.7 $1,508.2 $ 53.2 $19,184.7
========= ======== ====== =========
</TABLE>
S-10
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
Fair values for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are esti-
mated by discounting expected future cash flows using a cur-
rent market rate applicable to the coupon rate, credit qual-
ity and maturity of the investments.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1996, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
------------------------------
(in millions)
-------------------
<S> <C> <C>
Maturity:
In 1997 $ 358.0 $ 360.1
----------------------------------------------------------------------------------------------
In 1998-2001 3,809.0 3,912.3
----------------------------------------------------------------------------------------------
In 2002-2006 4,760.9 4,917.3
----------------------------------------------------------------------------------------------
After 2006 5,983.3 6,370.4
----------------------------------------------------------------------------------------------
Mortgage-backed securities 4,478.4 4,634.3
--------------------------------------------------------------------------- --------- ---------
Total $19,389.6 $20,194.4
--------------------------------------------------------------------------- ========= =========
</TABLE>
The expected maturities may differ from the contractual ma-
turities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1996, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
Proceeds from sales of investments in bonds during 1996,
1995 and 1994 were $10,996,900,000, $12,234,100,000 and
$9,668,300,000, respectively. Gross gains during 1996, 1995
and 1994 of $169,700,000, $225,600,000 and $62,600,000, re-
spectively, and gross losses of $177,000,000, $83,100,000
and $286,800,000, respectively, were realized on those
sales.
At December 31, 1996 and 1995, investments in bonds, with an
admitted asset value of $70,700,000 and $60,700,000, respec-
tively, were on deposit with state insurance departments to
satisfy regulatory requirements.
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
-------------------------------
<S> <C> <C> <C> <C>
(in millions)
-------------------------------
At December 31, 1996:
Preferred stocks $239.7 $ 10.5 $ 1.7 $248.5
----------------------------------------------------------
Unaffiliated common stocks 289.9 84.6 16.2 358.3
----------------------------------------------------------
At December 31, 1995:
Preferred stocks 89.9 13.9 .2 103.6
----------------------------------------------------------
Unaffiliated common stocks 438.0 110.0 12.5 535.5
----------------------------------------------------------
</TABLE>
S-11
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $241,500,000 and
$193,000,000 at December 31, 1996 and 1995, respectively.
The cost basis of investments in subsidiaries as of December
31, 1996 and 1995 was $194,000,000 and $123,000,000, respec-
tively.
During 1996, the maximum and minimum lending rates for mort-
gage loans were 10.5% and 6.0%, respectively. At the issu-
ance of a loan, the percentage of loan to value on any one
loan does not exceed 75%. At December 31, 1996, the Company
did not hold any mortgages with interest overdue beyond one
year. At December 31, 1996, the Company's investments in
mortgage loans were subject to $59,700,000 of prior liens.
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.
4.FEDERAL INCOME TAXES
The effective federal income tax rate for financial report-
ing purposes differs from the prevailing statutory tax rate
principally due to tax-exempt investment income, dividends-
received tax deductions, differences in policy acquisition
costs and policy and contract liabilities for tax return and
financial statement purposes.
Federal income taxes incurred of $83,600,000, $103,700,000
and $52,800,000 in 1996, 1995 and 1994, respectively, would
be subject to recovery in the event that the Company incurs
net operating losses within three years of the years for
which such taxes were paid.
Prior to 1984, a portion of the Company's current income was
not subject to current income tax, but was accumulated for
income tax purposes in a memorandum account designated as
"policyholders' surplus." The Company's balance in the "pol-
icyholders' surplus" account at December 31, 1983 of
$187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
accordingly, there have been no additions to the accounts
after that date. That portion of current income on which in-
come taxes have been paid will continue to be accumulated in
a memorandum account designated as "shareholder's surplus,"
and is available for dividends to the shareholder without
additional payment of tax by the Company. The December 31,
1996 memorandum account balance for "shareholder's surplus"
was $1,606,000,000. Should dividends to the shareholder ex-
ceed its respective "shareholder's surplus," amounts would
need to be transferred from the "policyholders' surplus" and
would be subject to federal income tax at that time. Under
existing or foreseeable circumstances, the Company neither
expects nor intends that distributions will be made that
will result in any such tax.
5.SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets," includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995 1994
----------------------------------------
(in millions)
----------------------------------------
<S> <C> <C> <C>
Insurance ceded $1,154.5 $1,634.0 $1,721.1
Amounts recoverable from other insurers 16.0 4.4 4.8
</TABLE>
S-12
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1996 1995 1994
--
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $241.3 $667.7 $607.3
-------------------------------
Insurance ceded 193.3 453.1 583.8
------------------------------- ------ ------ ------
Net amount included in premiums $ 48.0 $214.6 $ 23.5
------------------------------- ====== ====== ======
</TABLE>
The income statement caption, "Benefits and Settlement Ex-
penses," is net of reinsurance recoveries of $787,886,200,
$1,407,000,000 and $1,391,100,000 for 1996, 1995 and 1994,
respectively.
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption, "Pre-
miums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 3.9 $1.9 $ 2.0
---------------------
Ordinary renewal 35.1 3.0 32.1
---------------------
Group life 9.4 (.1) 9.5
---------------------
Group annuity -- -- --
--------------------- ------ ---- ------
$ 48.4 $4.8 $ 43.6
====== ==== ======
<CAPTION>
December 31, 1995
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 2.5 $1.1 $ 1.4
---------------------
Ordinary renewal (19.1) 2.8 (21.9)
---------------------
Group life 15.8 -- 15.8
---------------------
Group annuity .2 -- .2
--------------------- ------ ---- ------
$ (.6) $3.9 $ (4.5)
====== ==== ======
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance Consul-
tants, Inc. to write group life and health business. Direct
premiums written amounted to $26,200,000 $3,800,000 and
$8,600,000 in 1996 and $33,100,000, $10,600,000 and
$8,800,000 in 1995, respectively. During 1996, LNC Adminis-
trative Services entered into a similar agreement with the
Company with direct premiums written amounting to
$6,200,000. Authority granted by the managing general agents
agreements include underwriting, claims adjustment and
claims payment services.
S-13
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
6.ANNUITY RESERVES
At December 31, 1996, the Company's annuity reserves and de-
posit 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 sum-
marized as follows:
<TABLE>
<CAPTION>
Amount Percent
----------------
(in millions)
-------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,971.8 6.0%
------------------------------------------------------
At book value, less surrender charge 5,228.6 12.0
------------------------------------------------------
At market value 22,703.4 51.0
------------------------------------------------------ ---------- ------
30,903.8 69.0
Subject to discretionary withdrawal without adjustment
at book value with minimal or no charge or adjustment 10,986.4 25.0
------------------------------------------------------
Not subject to discretionary withdrawal 2,601.9 6.0
------------------------------------------------------
---------- ------
Total annuity reserves and deposit fund 44,492.1
liabilities--before reinsurance 100.0%
------------------------------------------------------
======
Less reinsurance 1,848.8
------------------------------------------------------ ----------
Net annuity reserves and deposit fund liabilities,
including separate accounts $42,643.3
------------------------------------------------------ ==========
</TABLE>
7.CAPITAL AND SURPLUS
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 main-
tained by a life insurance company is to be determined based
on the various risk factors related to it. At December 31,
1996, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and can-
not 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 1997, the Company can pay divi-
dends of $281,100,000 without prior approval of the Indiana
Insurance Commissioner.
8.EMPLOYEE BENEFIT PLANS
Pension plans
LNC maintains funded defined benefit pension plans for most
of its employees and, prior to January 1, 1995, full-time
agents. The benefits for employees are based on total years
of service and the highest 60 months of compensation during
the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings.
The plans are funded by contributions to tax-exempt trusts.
The Company's funding policy is consistent with the funding
requirements of Federal laws and regulations. Contributions
are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the
future. Plan assets consist principally of listed equity se-
curities, corporate obligations and government bonds.
All benefits applicable to the funded defined benefit plan
for agents were frozen as of December 31, 1994. The curtail-
ment of this plan did not have a significant effect on net
pension cost for 1994. Effective January 1, 1995, pension
benefits for agents have been provided by a new defined
S-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
contribution plan. Contributions to this plan will be based
on 2.3% of an agent's earnings up to the social security
wage base and 4.6% of any excess.
LNC also administers two types of unfunded, non-qualified,
defined benefit plans for certain employees and agents. A
supplemental retirement plan provides employees and agents
defined benefit pension benefits in excess of limits imposed
by Federal tax law. A salary continuation plan provides cer-
tain officers of the Company defined pension benefits based
on years of service and final monthly salary upon death or
retirement.
The status of the funded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
------- 1995
(in millions)
----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(156.9) $(146.1)
-------------------------------------------------------------------------
Nonvested benefits (6.0) (7.7)
-------------------------------------------------------------------------
------- -------
Accumulated benefit obligation (162.9) (153.8)
-------------------------------------------------------------------------
Effect of projected future compensation increases (27.9) (28.5)
-------------------------------------------------------------------------
------- -------
Projected benefit obligation (190.8) (182.3)
-------------------------------------------------------------------------
Plan assets at fair value 186.1 173.2
-------------------------------------------------------------------------
------- -------
Projected benefit obligation in excess of plan assets (4.7) (9.1)
-------------------------------------------------------------------------
Unrecognized net loss 4.9 9.3
-------------------------------------------------------------------------
Unrecognized prior service cost 1.4 1.5
-------------------------------------------------------------------------
------- -------
Prepaid pension costs included in other liabilities $ 1.6 $ 1.7
-------------------------------------------------------------------------
======= =======
</TABLE>
The status of the unfunded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
----- 1995
(in
millions)
------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(6.6) $(6.4)
-------------------------------------------------------------------
Nonvested benefits (.9) (1.1)
-------------------------------------------------------------------
----- -----
Accumulated benefit obligation (7.5) (7.5)
-------------------------------------------------------------------
Effect of projected future compensation increases (1.1) (1.7)
-------------------------------------------------------------------
----- -----
Projected benefit obligation (8.6) (9.2)
-------------------------------------------------------------------
Unrecognized net loss (gain) (.1) .9
-------------------------------------------------------------------
Unrecognized prior service cost .2 .3
-------------------------------------------------------------------
----- -----
Accrued pension costs included in other liabilities $(8.5) $(8.0)
-------------------------------------------------------------------
===== =====
</TABLE>
S-15
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The determination of the projected benefit obligation for
the defined benefit plans was based on the following assump-
tions:
<TABLE>
<CAPTION>
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 7.0% 8.0%
----------------------------------------------------------------------
Rate of increase in compensation:
----------------------------------------------------------------------
Salary continuation plan 5.5 6.0 6.5
----------------------------------------------------------------------
All other plans 4.5 5.0 5.0
----------------------------------------------------------------------
Expected long-term rate of return on plan assets 9.0 9.0 9.0
----------------------------------------------------------------------
The components of net pension cost for the defined benefit
pension plans are as follows:
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 5.2 $ 4.1 $ 7.9
------------------------------------------------------------------------
Interest cost on projected benefit obligation 12.9 11.9 11.6
------------------------------------------------------------------------
Actual return on plan assets (17.5) (32.0) 4.2
------------------------------------------------------------------------
Net amortization (deferral) 3.1 20.3 (16.7)
------------------------------------------------------------------------ ----- ----- -----
Net pension cost $ 3.7 $ 4.3 $ 7.0
------------------------------------------------------------------------ ===== ===== =====
</TABLE>
401K PLAN
LNC and the Company sponsor contributory defined contribu-
tion plans for eligible employees and agents. The Company's
contributions to the plans are equal to each participant's
pre-tax contribution, not to exceed 6% of base pay, multi-
plied by a percentage ranging from 25% to 150%, which varies
according to certain incentive criteria as determined by
LNC's Board of Directors. Expense for these plans amounted
to $9,300,000, $6,700,000 and $11,200,000 in 1996, 1995 and
1994, respectively.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLANS
LNC sponsors unfunded defined benefit plans that provide
postretirement medical and life insurance benefits to full-
time employees and agents who, depending on the plan, have
worked for the Company 10 to 15 years and attained age 55 to
60. Medical benefits are also available to spouses and other
dependents of employees and agents. For medical benefits,
limited contributions are required from individuals retired
prior to November 1, 1988; contributions for later retirees,
which can be adjusted annually, are based on such items as
years of service at retirement and age at retirement. The
life insurance benefits are noncontributory, although par-
ticipants can elect supplemental contributory benefits.
The status of the postretirement medical and life insur-
ance benefit plans and the amounts recognized in the bal-
ance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
--------------------------
(in millions)
--------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(32.4) $(37.9)
------------------------------------------------------------------------
Fully eligible active plan participants (8.2) (8.7)
------------------------------------------------------------------------ ------ ------
Accumulated postretirement benefit obligation (40.6) (46.6)
------------------------------------------------------------------------
Unrecognized net loss (gain) (7.0) .8
------------------------------------------------------------------------ ------ ------
Accrued plan cost included in other liabilities $(47.6) $(45.8)
------------------------------------------------------------------------ ====== ======
</TABLE>
S-16
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The components of periodic postretirement benefit cost
are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------------
(in millions)
----------------
<S> <C> <C> <C>
Service cost $1.3 $1.1 $1.4
------------------------------------------------------------------------
Interest cost 2.7 3.0 3.1
------------------------------------------------------------------------
Amortized cost (credit) (.5) (.4) .1
------------------------------------------------------------------------ ---- ---- ----
Net periodic postretirement benefit cost $3.5 $3.7 $4.6
------------------------------------------------------------------------ ==== ==== ====
</TABLE>
The calculation of the accumulated postretirement benefit
obligation assumes a weighted-average annual rate of in-
crease in the per capita cost of covered benefits (i.e.,
health care cost trend rate) of 8.5% for 1997. It further
assumes the rate will gradually decrease to 5.0% by 2005 and
remain at that level. The health care cost trend rate as-
sumption has a significant effect on the amounts reported.
For example, increasing the assumed health care cost trend
rates by one percentage point each year would increase the
accumulated postretirement benefit obligation as of December
31, 1996 and 1995 by $1,900,000 and $2,100,000, respective-
ly. The aggregate of the estimated service and interest cost
components of net periodic postretirement benefit cost for
the year ended December 31, 1996 would increase by $184,000.
The calculation assumes a long-term rate of increase in com-
pensation of 4.5% and 5.0% at December 31, 1996 and 1995,
respectively. The weighted-average discount rate used in de-
termining the accumulated postretirement benefit obligation
was 7.0% for both December 31, 1996 and 1995.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES
DISABILITY INCOME POLICIES
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1996 and 1995 is a net
liability of $572,000,000 and $503,800,000, respectively. This liability is
based on the assumption that the recent experience will continue in the fu-
ture. If incidence levels or claim termination rates vary significantly
from these assumptions, adjustments to reserves may be required in the fu-
ture. Accordingly, this liability may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company. The Company con-
tinually reviews and updates the level of these reserves.
During the fourth quarter of 1995, the Company completed an in-depth review
of the experience of its disability income business. As a result of this
study, and based on the assumption that recent experience will continue in
the future, net income decreased by $15,200,000 as a result of strengthen-
ing the disability income reserve.
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with poli-
cies that were less advantageous to the policyholder. The Company's manage-
ment continues to monitor the Company's sales materials and compliance pro-
cedures and is making an extensive effort to minimize any potential liabil-
ity. However, due to the uncertainty surrounding such matters, it is not
possible to provide a meaningful estimate of the range of potential out-
comes at this time.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity con-
tracts, 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 li-
abilities. Due to the very long-term nature of group pension annuities and
the resulting inability to exactly match cash flows, a risk exists that fu-
ture 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
S-17
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain affili-
ates. The portion of risks exceeding the Company's retention limit is rein-
sured with other insurers. Industry regulations prescribe the maximum cov-
erage that the Company can retain on an individual insured. As of December
31, 1996, the Company's maximum retention on a single insured was
$3,000,000. To cover products other than life insurance, the Company ac-
quires other insurance coverages with retentions and limits that management
believes are appropriate for the circumstances. The accompanying financial
statements reflect premiums and benefits and settlement expenses, net of
insurance ceded. The Company remains liable if its reinsurers are unable to
meet their contractual obligations under the applicable reinsurance agree-
ments.
The Company assumes insurance from other companies, including certain af-
filiates. At December 31, 1996, the Company has provided $17,200,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables 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.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1996, the Company did not have a concentration of: 1) busi-
ness transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of la-
bor 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.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
not materially affect the financial position of the Company.
LEASES
The Company leases its home office properties. 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. In addition, the
Company has the option to purchase the leased properties at fair value as
defined in the agreements on the last day of the initial 25 year lease pe-
riod ending in 2009 or on the last day of any of the renewal periods.
Total rental expense on operating leases in 1996, 1995 and 1994 was
$26,400,000, $22,500,000 and $20,600,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1997 $ 17.5
1998 17.1
1999 17.4
2000 16.9
2001 17.2
Thereafter 151.6
------
$237.7
======
</TABLE>
S-18
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. In some instances, these proceedings
include claims for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for alleged contractual liability or
requests for equitable relief. After consultation with legal counsel and a
review of available facts, it is management's opinion that these proceed-
ings ultimately will be resolved without materially affecting the financial
position or results of operations of the Company.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabili-
tated 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.
REINSURANCE
The regulatory required liability for unsecured reserves ceded to unautho-
rized reinsurers was $4,300,000 and $5,600,000 at December 31, 1996 and
1995, respectively.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-balance-
sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
Contract Amounts
-----------------
December 31
-----------------
1996 1995
--------------------
(in millions)
-----------------
<S> <C> <C>
Mortgage loan pass-through certificates $ 50.3 $ 63.6
Real estate partnerships .5 3.3
-------- --------
$ 50.8 $ 66.9
======== ========
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans. In some cases, the terms of these arrangements involve
guarantees by each of the partners to indemnify the mortgagor in the event
a partner is unable to pay its principal and interest payments. In addi-
tion, the Company has sold commercial mortgage loans through grantor trusts
which issued pass-through certificates. The Company has agreed to repur-
chase any mortgage loans which remain delinquent for 90 days at a repur-
chase price substantially equal to the outstanding principal balance plus
accrued interest thereon to the date of repurchase. 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, 1996 and 1995.
S-19
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
DERIVATIVES
The Company has derivatives with off-balance-sheet risks
whose notional or contract amounts exceed the credit ex-
posure. The Company has entered into derivative transac-
tions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable
maturity U.S. Government obligations 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 the 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
1996 1995 1996 1996 1995 1995
---------------------------------------------
(in millions)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate
derivatives:
Interest rate cap
agreements $5,500.0 $5,110.0 $20.8 $ 8.2 $22.7 $5.3
Spread-lock agreements -- 600.0 -- -- (.9) (.9)
Swaptions 672.0 -- 11.0 10.6 -- --
Financial futures
contracts 147.7 -- (2.4) (2.4) -- --
Interest rate swaps -- 5.0 -- -- .2 .2
-------- -------- ----- ----- ----- ----
6,319.7 5,715.0 29.4 16.4 22.0 4.6
Foreign currency
derivatives:
Foreign exchange forward
contracts 251.5 15.7 .2 (.2) (.6) (.6)
Foreign currency options 43.9 99.2 .6 .4 1.9 1.4
Foreign currency swaps 15.0 15.0 -- (2.1) .4 .4
-------- -------- ----- ----- ----- ----
310.4 129.9 .8 (1.9) 1.7 1.2
-------- -------- ----- ----- ----- ----
$6,630.1 $5,844.9 $30.2 $14.5 $23.7 $5.8
======== ======== ===== ===== ===== ====
</TABLE>
S-20
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
A reconciliation and discussion of the notional or contract
amounts for the significant programs using derivative agree-
ments and contracts at December 31 is as follows:
<TABLE>
<CAPTION>
Interest Rate Caps Spread Locks Swaptions
----------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 5,110.0 $ 4,400.0 $ 600.0 $ 1,300.0 $ -- $ --
New contracts 390.0 710.0 15.0 800.0 672.0 --
Terminations and -- -- (615.0) (1,500.0) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Financial Futures
------------------------------------------
Contracts Options Interest Rate Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ -- $ 382.5 $ -- $ -- $ 5.0 $ --
New contracts 7,918.8 810.5 -- 181.6 -- --
Terminations and (7,771.1) (1,193.0) -- (181.6) (5.0) --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 147.7 $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Foreign Currency Derivatives
----------------------------------------------------------------------
Foreign Exchange Foreign Currency Foreign
Forward Contracts Options Currency Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 15.7 $ 21.2 $ 99.2 $ -- $ 15.0 $ --
New contracts 406.9 131.2 1,168.8 356.6 -- 15.0
Terminations and (171.1) (136.7) (1,224.1) (257.4) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
========= ========= ========= ========= ========= =========
</TABLE>
S-21
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1997 through 2003, enti-
tle the Company to receive payments from the counterparties on specified
future reset dates, contingent on future interest rates. For each cap, the
amount of such quarterly 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 ef-
fect of fluctuating interest rates. The premium paid for the interest rate
caps is included in other assets ($20,800,000 as of December 31, 1996) and
is being amortized over the terms of the agreements. This amortization is
included in net investment income.
SWAPTIONS
Swaptions, which expire in 2002, 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 be-
tween 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 the assets supporting its annuity line of business from the effect
of fluctuating interest rates. The premium paid for the swaptions is in-
cluded in other assets ($11,000,000 as of December 31, 1996) and is being
amortized over the terms of the agreements. This amortization is included
in net investment income.
SPREAD LOCKS
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 U.S.
Treasury note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity U.S. Treasury
security and the price sensitivity of the swap at that time. It is ex-
pressed in dollars-per-basis point. The purpose of the Company's spread-
lock program is to protect a portion of its fixed maturity securities
against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts and options on
those financial futures to hedge against interest rate risks and to manage
duration of a portion of its fixed maturity securities. Financial futures
contracts obligate the Company to buy or sell a financial instrument at a
specified future date for a specified price. They may be settled in cash or
through delivery of the financial instrument. Cash settlements on the
change in market values of financial futures contracts are made daily. Op-
tions on financial futures give the Company the right, but not the obliga-
tion, to assume a long or short position in the underlying futures at a
specified price during a specified time period.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to re-
exchange the two currencies at the same rate of exchange at a specified fu-
ture date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,900,000 and $5,600,000 in 1996 and 1995, respectively. Deferred losses
of $37,600,000 as of December 31, 1996, were the result of: 1) terminated
and expired spread-lock agreements; and 2) financial futures contracts.
These losses are included with the related fixed maturity securities to
which the hedge applied and are being amortized over the life of such secu-
rities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, interest rate swaps, foreign exchange forward contracts, for-
eign currency options and foreign currency swaps. However, the Company does
not anticipate nonperformance by any of these counterparties. The credit
risk associated with such agreements is minimized by purchasing such agree-
ments from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement
cost or market value for such agreements with each counterparty if the net
market value is in the Company's favor. At December 31, 1996, the exposure
was $17,500,000.
10.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. Ac-
S-22
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
cordingly, 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
Fair values of bonds are based on quoted market prices, where available.
For bonds not actively traded, fair values are estimated using values ob-
tained from independent pricing services. In the case of private place-
ments, 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 affiliated common
stocks are based on quoted market prices.
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 when compared to the expected yield for mortgages having sim-
ilar characteristics. The rating for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service cov-
erage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loan are measured based on: 1) the present
value of expected future cash flows discounted at the loan's effective in-
terest rate; 2) the loan's market price; or 3) the fair value of the col-
lateral if the loan is collateral dependent.
POLICY LOANS
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on
historical experience.
OTHER INVESTMENTS AND CASH AND INVESTED CASH
The carrying value for assets classified as other investments and cash and
invested cash in the accompanying balance sheet approximates their fair
value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment-type insurance contracts (i.e., de-
posit 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 guar-
anteed interest and similar contracts are based on their approximate sur-
render 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 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 con-
clusions 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 liabili-
ties defined as financial instruments are disclosed. The Company and other
companies in the insurance industry are monitoring the related actions of
the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their insur-
ance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate partner-
ships and mortgage loan pass-through certificates. Based on historical per-
formance 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 insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, options on financial futures, interest rate swaps, call
options, foreign currency options and foreign currency swaps.
Fair values for derivative contracts are based on current settlement val-
ues. These values are based on: 1) quoted market prices for the foreign
currency exchange contracts, financial future contracts, and options on fi-
nancial futures; and 2) brokerage quotes that utilized pricing models or
formulas using current assumptions for all other swaps and agreements.
S-23
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real es-
tate are based on the difference between the value of the committed invest-
ments 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 commit-
ments.
S-24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.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
----------------------------------------------
1996 1995
---------------------- ----------------------
Carrying Fair Carrying Fair
Assets (Liabilities) value value value value
---------------------------------------- ---------- ---------- ---------- ----------
(in millions)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 19,389.6 $ 20,194.4 $ 17,729.7 $ 19,184.7
----------------------------------------
Preferred stock 239.7 248.5 89.9 103.6
----------------------------------------
Unaffiliated common stock 358.3 358.3 535.5 535.5
----------------------------------------
Mortgage loans on real estate 2,976.7 3,070.9 2,909.7 3,081.9
----------------------------------------
Policy loans 626.5 612.7 515.8 504.0
----------------------------------------
Other investments 282.7 282.7 248.0 248.0
----------------------------------------
Cash and short-term investments 759.2 759.2 780.9 780.9
----------------------------------------
Investment type insurance contracts:
----------------------------------------
Deposit contracts and certain
guaranteed interest contracts (17,871.6) (17,333.0) (15,586.7) (15,046.0)
----------------------------------------
Remaining guaranteed interest and
similar contracts (1,799.7) (1,835.4) (2,261.1) (2,340.4)
----------------------------------------
Short-term debt (100.0) (100.0) (63.0) (63.0)
----------------------------------------
Derivatives 26.5 13.8 23.7 5.8
----------------------------------------
Investment commitments -- (.6) -- (.8)
----------------------------------------
</TABLE>
11.ACQUISITIONS AND SALES OF SUBSIDIARIES
The Company sold its 100% interest in two subsidiaries--Se-
curity Connecticut Life Insurance Company ("SCL") and Em-
ployers Health Insurance Company ("EHI"). SCL was sold
through a public offering of stock in January 1994. This
transaction resulted in a realized gain of $90,000,000 and a
direct increase in surplus of $24,000,000. Net of expenses,
the Company received cash of $172,000,000 and notes of
$65,000,000.
EHI was also sold through public offerings in March and
April 1994. LNC purchased 29% of the stock of the new pub-
licly traded holding company from LNL. Prior to the sale,
the Company received a $50,000,000 dividend in the form of a
note. The sale transaction resulted in a realized gain of
$133,000,000 and a direct reduction in surplus of
$21,000,000 due to release of unrealized gain amounts, for a
net surplus increase of $112,000,000. Net of expenses, the
Company received cash of $348,000,000.
In October 1996, the Company and its wholly owned subsidiary
purchased a block of group tax qualified annuity business
from UNUM Corporation. The transaction was completed in the
form of a reinsurance transaction, which resulted in a ced-
ing commission of $71,800,000. The ceding commission has
been recorded as admissible goodwill of $62,300,000, which
is to be amortized on a straight-line basis over 10 years.
The Company's subsidiary was required by the New York De-
partment of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals
of the Company and its wholly owned subsidiary increased by
$3,200,000,000 as a result of this transaction.
In its previously-filed 1996 NAIC Annual Statement, the Com-
pany recorded the ceding commission as a nonadmitted asset,
which was charged directly to unassigned surplus. According-
ly, unassigned surplus was understated at December 31, 1996
by $62,300,000, net of amortization in 1996. In 1997, man-
agement will correct its opening balance of unassigned sur-
plus in its NAIC Annual Statement.
S-25
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
The balance sheets include reinsurance balances with affiliated companies
as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
-------- --------
(in millions)
-----------------
<S> <C> <C>
Future policy benefits and claims assumed $ 312.7 $ 344.8
Future policy benefits and claims ceded 891.8 1,344.5
Amounts recoverable on paid and unpaid losses 31.2 65.9
Reinsurance payable on paid losses 2.7 5.5
Funds held under reinsurance treaties--net liability 1,062.4 712.3
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with unau-
thorized companies. To take a reserve credit for such reinsurance, the Com-
pany holds assets from the reinsurer, including funds held under reinsur-
ance treaties, and is the beneficiary on letters of credit aggregating
$314,200,000 and $306,800,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, LNC had guaranteed $239,200,000 and
$241,400,000, respectively, of these letters of credit. At December 31,
1996, the Company has a receivable (included in the foregoing amounts) from
affiliated insurance companies in the amount of $135,700,000 for statutory
surplus relief received under financial reinsurance ceded agreements.
13. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying bal-
ance sheets represent funds that are separately administered, principally
for annuity contracts, and for which the contractholder, rather than the
Company, bears the investment risk. Separate account contractholders have
no claim against the assets of the general account of the Company. Separate
account assets are reported at fair value and consist primarily of long-
term bonds, common stocks, short-term investments and mutual funds. The de-
tailed operations of the separate accounts are not included in the accompa-
nying financial statements. Fees charged on separate account policyholder
deposits are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,148,700,000, $3,068,200,000 and $2,694,700,000 in 1996, 1995 and 1994,
respectively. Reserves for separate accounts with assets at fair value were
$23,047,800,000 and $17,891,400,000 at December 31, 1996 and 1995, respec-
tively. All reserves are subject to discretionary withdrawal at market val-
ue. Substantially all of the Company's separate accounts are nonguaranteed.
12. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents 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 of-
fices. For providing these selling and marketing services, the Company paid
LFGI override commissions and operating expense allowances of $56,300,000,
$43,300,000 and $41,200,000 in 1996, 1995 and 1994, respectively. LFGI in-
curred expenses of $15,700,000, $10,400,000 and $10,700,000 in 1996, 1995
and 1994, respectively, in excess of the override commissions and operating
expense allowances received from the Company, which the Company is not re-
quired to reimburse.
Cash and short-term investments at December 31, 1996 and 1995 include the
Company's participation in a short-term investment pool with LNC of
$175,100,000 and $324,000,000, respectively. Related investment income
amounted to $15,300,000, $21,100,000 and $16,100,000 in 1996, 1995 and
1994, respectively. Other liabilities at December 31, 1996 and 1995 include
$100,000,000 of notes payable to LNC.
The Company provides services to and receives services from affiliated com-
panies which resulted in a net payment of $34,100,000 and $24,900,000 in
1996 and 1995, respectively.
The Company both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statement of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $ 17.9 $ 17.6 $ 19.8
Insurance ceded 302.8 214.4 481.3
</TABLE>
S-26
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
13. SEPARATE ACCOUNTS CONTINUED
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995
----------------------------------------------------
(in millions)
---------------------
<S> <C> <C>
Transfers as reported in the Summary of
Operations of various Separate Accounts:
Transfers to separate accounts $ 4,149.6 $ 3,070.2
Transfers from separate accounts (2,058.5) (1,457.8)
--------- ---------
Net transfer to separate accounts as reported
in the Company's NAIC Annual Statement $ 2,091.1 $ 1,612.4
========= =========
</TABLE>
S-27
<PAGE>
OTHER FINANCIAL INFORMATION
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of The Lincoln
National Life Insurance Company (a wholly owned subsidiary of Lincoln National
Corporation) as of December 31, 1996 and 1995, and the related statutory-basis
statements of income, changes in capital and surplus and cash flows for each of
the three years in the period ended December 31, 1996. These financial state-
ments are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting 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 pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or per-
mitted by the Indiana Department of Insurance, which practices differ from gen-
erally accepted accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the accompanying
financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial posi-
tion of The Lincoln National Life Insurance Company at December 31, 1996 and
1995, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1996.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Lincoln Na-
tional Life Insurance Company at December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance.
As described in Note 2, in 1994 the Company changed its method of accounting
for separate account contracts.
/s/ Ernst & Young LLP
February 6, 1997
S-28
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Investment income earned:
Government bonds $ 74.6
---------------------------------------------------------------------
Other bonds (unaffiliated) 1,367.6
---------------------------------------------------------------------
Preferred stocks (unaffiliated) 9.6
---------------------------------------------------------------------
Common stocks (unaffiliated) 6.5
---------------------------------------------------------------------
Common stocks of affiliates 9.5
---------------------------------------------------------------------
Mortgage loans 269.3
---------------------------------------------------------------------
Real estate 114.4
---------------------------------------------------------------------
Premium notes, policy loans and liens 35.0
---------------------------------------------------------------------
Cash on hand and on deposit 0.9
---------------------------------------------------------------------
Short-term investments 48.0
---------------------------------------------------------------------
Other invested assets 17.6
---------------------------------------------------------------------
Derivative instruments (6.3)
---------------------------------------------------------------------
Aggregate write-ins for investment income 11.1
----------------------------------------------------------- --------
Gross investment income $1,957.8
- ------------------------------------------------------------- ========
Real estate owned (cost, less encumbrances) $ 621.3
- ------------------------------------------------------------- ========
Mortgage loans (unpaid balance):
Farm mortgages $ 1.1
---------------------------------------------------------------------
Residential mortgages 3.7
---------------------------------------------------------------------
Commercial mortgages 2,971.9
----------------------------------------------------------- --------
Total mortgage loans $2,976.7
- ------------------------------------------------------------- ========
Mortgage loans by standing (unpaid balance):
Good standing $2,922.1
----------------------------------------------------------- ========
Good standing with restructured terms $ 39.6
----------------------------------------------------------- ========
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------- ========
Foreclosure in process $ 14.9
----------------------------------------------------------- ========
Other long-term assets (statement value) $ 248.1
- ------------------------------------------------------------- ========
</TABLE>
S-29
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks $ 194.0
------------------------------------------------------------- ==========
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 1,618.0
-------------------------------------------------------------
Over 1 year through 5 years 5,928.1
-------------------------------------------------------------
Over 5 years through 10 years 6,025.9
-------------------------------------------------------------
Over 10 years through 20 years 3,670.6
-------------------------------------------------------------
Over 20 years 2,860.4
------------------------------------------------------------- ----------
Total by maturity $ 20,103.0
- --------------------------------------------------------------- ==========
Bonds by class (statement value):
Class 1 $ 14,013.7
-------------------------------------------------------------
Class 2 4,504.1
-------------------------------------------------------------
Class 3 807.6
-------------------------------------------------------------
Class 4 705.9
-------------------------------------------------------------
Class 5 71.4
-------------------------------------------------------------
Class 6 0.3
------------------------------------------------------------- ----------
Total by class $ 20,103.0
- --------------------------------------------------------------- ==========
Total bonds publicly traded $ 16,520.3
- --------------------------------------------------------------- ==========
Total bonds privately placed $ 3,582.7
- --------------------------------------------------------------- ==========
Preferred stocks (cost or amortized cost) $ 239.7
- --------------------------------------------------------------- ==========
Unaffiliated common stocks (market value) $ 358.3
- --------------------------------------------------------------- ==========
Short-term investments (cost or amortized cost) $ 713.4
- --------------------------------------------------------------- ==========
Financial options and caps owned (statement value) $ 32.2
- --------------------------------------------------------------- ==========
Financial options and caps written (statement value) $ 0.3
- --------------------------------------------------------------- ==========
Swap and forward agreements open (statement value) $ 0.2
- --------------------------------------------------------------- ==========
Futures contracts open (current value) $ 161.2
- --------------------------------------------------------------- ==========
Cash on deposit $ 45.8
- --------------------------------------------------------------- ==========
Life insurance in-force:
Ordinary $ 97.9
------------------------------------------------------------- ==========
Group life $ 31.4
------------------------------------------------------------- ==========
</TABLE>
S-30
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 4.9
- ----------------------------------------------------------------------------------------------- =========
Life insurance policies with disability provisions in-force:
Ordinary $ 4.9
--------------------------------------------------------------------------------------------- =========
Group life $ 12.9
--------------------------------------------------------------------------------------------- =========
Supplementary contracts in-force:
Ordinary--not involving life contingencies:
Amount on deposit $ --
--------------------------------------------------------------------------------------------- =========
Income payable $ 3.2
--------------------------------------------------------------------------------------------- =========
Ordinary--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Group--not involving life contingencies:
Income payable $ --
--------------------------------------------------------------------------------------------- =========
Group--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Annuities:
Ordinary:
Immediate--amount of income payable $ 68.4
--------------------------------------------------------------------------------------------- =========
Deferred--fully paid account balance $ 0.6
--------------------------------------------------------------------------------------------- =========
Deferred--not fully paid account balance $ 326.6
--------------------------------------------------------------------------------------------- =========
Group:
Amount of income payable $ --
--------------------------------------------------------------------------------------------- =========
Fully paid account balance $ --
--------------------------------------------------------------------------------------------- =========
Not fully paid account balance $ 78.1
--------------------------------------------------------------------------------------------- =========
Accident and health insurance--premiums in-force:
Ordinary $ 180.6
--------------------------------------------------------------------------------------------- =========
Group $ 97.1
--------------------------------------------------------------------------------------------- =========
Deposit funds and dividend accumulations:
Deposit funds account balance $17,456.6
--------------------------------------------------------------------------------------------- =========
Dividend accumulations--account balance $ 114.7
--------------------------------------------------------------------------------------------- =========
</TABLE>
S-31
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
Claim payments 1996:
Group Accident and Health:
<TABLE>
<S> <C>
1996 $ 9.4
=====
--------------
1995 $ 3.1
=====
--------------
1994 $ 0.1
=====
--------------
1993 $ --
=====
--------------
1992 $(0.1)
=====
--------------
Prior $ --
=====
--------------
</TABLE>
S-32
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA
NOTE--BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis financial data as
of December 31, 1996 and for the year then ended for purposes of complying with
paragraph 9 of the Annual Audited Financial Reports in the General Section of
the National Association of Insurance Commissioners' Annual Statement Instruc-
tions and agrees to or is included in the amounts reported in The Lincoln Na-
tional Life Insurance Company's 1996 Statutory Annual Statement as filed with
the Indiana Department of Insurance.
S-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
The Lincoln National Life Insurance Company
Our audits were conducted for the purpose of forming an
opinion on the statutory-basis financial statements taken as
a whole. The accompanying supplemental schedule of selected
statutory-basis financial data is presented to comply with
the National Association of Insurance Commissioners' Annual
Statement Instructions and is not a required part of the
statutory-basis financial statements. Such information has
been subjected to the auditing procedures applied in our au-
dit of the statutory-basis financial statements and, in our
opinion, is fairly stated in all material respects in rela-
tion to the statutory-basis financial statements taken as a
whole.
/s/ Ernst & Young LLP
February 6, 1997
S-34
<PAGE>
Account C
LINCOLN NATIONAL
VARIABLE ANNUITY ACCOUNT C (VAA) (REGISTRANT)
LINCOLN NATIONAL
LIFE INSURANCE COMPANY (DEPOSITOR)
STATEMENT OF ADDITIONAL INFORMATION (SAI)
This SAI should be read in conjunction with the Prospectus of the VAA dated May
1, 1997. You may obtain a copy of the VAA Prospectus on request and without
charge. Please write Lincoln National Life Insurance Co., P.O. Box 2340, Fort
Wayne, Indiana 46801 or call 1-800-4LINCOLN (454-6265).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ------------------------------------------
<S> <C>
GENERAL INFORMATION AND HISTORY
OF LINCOLN LIFE 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
</TABLE>
<TABLE>
<CAPTION>
Page
- ------------------------------------------------
<S> <C>
ANNUITY PAYOUTS B- 6
- ------------------------------------------------
FEDERAL TAX STATUS B- 7
- ------------------------------------------------
DETERMINATION OF ACCUMULATION AND ANNUITY
UNIT VALUE B- 9
- ------------------------------------------------
ADVERTISING AND SALES LITERATURE/GRAPHICS B-10
- ------------------------------------------------
FINANCIAL STATEMENTS B-12
</TABLE>
SPECIAL NOTICE TO CONTRACTOWNERS ABOUT THIS YEAR'S LINCOLN LIFE FINANCIAL
STATEMENTS. Each year Lincoln Life is required by law to prepare financial
statements for different purposes. Two of the most important purposes are for
filing with state insurance departments and for inclusion in the securities
registration statements for our variable products, like this one. In the past
we have interpreted the prevailing regulations as requiring presentation of
these statements according to two different sets of accounting principles--one
for the insurance regulators (known as Statutory Accounting Principles, or
STAP) and one for the SEC (known as Generally Accepted Accounting Principles,
or GAAP).
When we create two sets of financial statements for the same insurer it
requires nearly double the time commitment of our internal accounting staff,
and two separate audits by our independent auditors. In an effort to control
costs and eliminate duplication of effort, we have reviewed the SEC's
requirements for the mode of presentation of the insurer's financial statements
in this registration statement. As a result of our review and on advice of
counsel, we shall now begin to use the STAP-basis statements (which we call
Statutory Statements) exclusively, both for the insurance regulators and for
our securities registration statements. This is consistent with the current
practice of many other insurers.
We believe that both Statutory and GAAP statements fairly present the financial
position of Lincoln Life for the periods indicated, in accordance with those
respective accounting principles. However, between the two there are some
important differences in accounting theory and financial statement
presentation. FOR THAT REASON, IN THIS TRANSITION YEAR WE INCLUDE HERE BOTH
STATUTORY AND GAAP STATEMENTS. This should permit you to evaluate the financial
position of Lincoln Life from both points of view, and should help you
understand the differences between Statutory and GAAP statements. BEGINNING
NEXT YEAR WE SHALL PRESENT ONLY THE STATUTORY STATEMENTS.
THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is May 1, 1997
B-1
<PAGE>
Account C
GENERAL INFORMATION
AND HISTORY OF LINCOLN NATIONAL LIFE
INSURANCE CO. (LINCOLN LIFE)
The prior Depositor of the account, Lincoln National Pension Insurance Co., was
merged into Lincoln Life, effective January 1, 1989. Lincoln Life, organized in
1905, is an Indiana stock insurance corporation, engaged primarily in insurance
and financial services. Lincoln Life is owned by Lincoln National Corp., 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. They
are italicized to make this document more understandable.
SERVICES
INDEPENDENT AUDITORS
The financial statements of the VAA and the financial statements and schedules
of Lincoln Life appearing in this SAI 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 and schedules audited by Ernst & Young LLP
have been included in this document in reliance on their report given on their
authority as experts in accounting and auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life. No separate charge
against the assets of the VAA is made by Lincoln Life for this service. We have
entered into an agreement with Delaware Management Co., 2005 Market Street,
Philadelphia, PA 19203, to provide accounting services to the VAA.
PRINCIPAL UNDERWRITER
Lincoln Life is the principal underwriter for the variable annuity contracts.
PURCHASE OF SECURITIES BEING OFFERED
The variable annuity contracts are offered to the public through licensed
insurance agents who specialize in selling Lincoln Life products; through
independent insurance brokers; and through certain securities broker/dealers
selected by Lincoln Life whose personnel are legally authorized to sell annuity
products. There are no special purchase plans for any class of prospective
buyers. However, under certain limited circumstances described in the
Prospectus under the section Charges and other deductions, the contract and/or
the surrender charges may be waived.
There are exchange privileges between subaccounts, and between the VAA and
Lincoln Life's General Account (See Transfers of accumulation units between
subaccounts in the Prospectus.) No exchanges are
permitted between the VAA and other separate accounts.
UNDERWRITERS
Lincoln Life has contracted with some broker/dealers, and may contract with
others, to sell the variable annuity contracts through certain legally
authorized persons and organizations. These dealers are compensated under a
standard Compensation Schedule.
Lincoln Life is the principal underwriter for the variable annuity contracts.
We may not offer a contract continuously or in every state. Lincoln Life
retains no underwriting commissions from the sale of the variable annuity
contracts.
CALCULATION OF PERFORMANCE DATA
A. MONEY MARKET FUNDED SUBACCOUNTS:
1. Seven-day yield: 3.71%
Length of base period used in computing the yield: 7 days
Last Day in the base period: December 31, 1996
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,
1996); 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 contractowner's account, and
excludes any
realized gains and losses from the sale of securities.
B-2
<PAGE>
Account C
B. OTHER SUBACCOUNTS:
1. TOTAL RETURN -- the tables below show, for the various subaccounts of the
VAA, 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.
The first table below sets out performance data for each of the subaccounts for
contracts without the EGMDB. The second table below sets out hypothetical
performance data for each of the subaccounts for contracts with the EGMDB. The
hypothetical performance shown in the second table is based on the actual
performance of the subaccounts, but reflects the charges that hypothetically
would have been made had the EGMDB been available under the contracts for the
period indicated.
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1996 CONTRACTS WITHOUT EGMDB
<TABLE>
<CAPTION>
1-year 5-years 10-years
Single & Single & Single &
Periodic flexible Periodic flexible Periodic flexible
pymt. prem. pymt. prem. pymt. prem.
contracts contracts contracts contracts contracts contracts
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bond
Commenced Activity on
December 21, 1981 -6.87% -4.84% 5.20% 5.63% 7.01% 7.01%
- ------------------------------------------------------------------------------------
Growth and Income
Commenced Activity on
December 21, 1981 8.92% 11.29% 11.98% 12.44% 13.24% 13.24%
- ------------------------------------------------------------------------------------
International
Commenced Activity on
May 1, 1991 0.05% 2.22% 7.55% 7.99% 6.41%* 6.80%*
- ------------------------------------------------------------------------------------
Managed
Commenced Activity on
April 29, 1983 2.36% 4.58% 8.48% 8.93% 10.00% 10.00%
- ------------------------------------------------------------------------------------
Global Asset Allocation
Commenced Activity on
August 3, 1987 5.16% 7.45% 9.83% 10.28% 8.68%* 9.51%*
- ------------------------------------------------------------------------------------
Social Awareness
Commenced Activity on
May 2, 1988 17.66% 20.21% 14.74% 15.21% 15.42%* 15.96%*
- ------------------------------------------------------------------------------------
Special Opportunities
Commenced Activity on
December 21, 1981 6.47% 8.78% 12.08% 12.54% 13.19% 13.19%
- ------------------------------------------------------------------------------------
Aggressive Growth
Commenced Activity on
January 3, 1994 6.46% 8.78% * * 8.34%* 9.50%*
- ------------------------------------------------------------------------------------
Capital Appreciation
Commenced Activity on
January 3, 1994 8.01% 10.36% * * 11.76%* 12.96%*
- ------------------------------------------------------------------------------------
Equity-Income
Commenced Activity on
January 3, 1994 9.95% 12.34% * * 15.16%* 16.40%*
- ------------------------------------------------------------------------------------
DE Emerging Growth
Commenced Activity on
May 1, 1996 -8.86% -7.87%* * * * *
- ------------------------------------------------------------------------------------
DE Equity/Income
Commenced Activity on
May 1, 1996 3.56% 4.69%* * * * *
- ------------------------------------------------------------------------------------
DE Global Bond
Commenced Activity on
May 1, 1996 2.11% 3.22%* * * * *
- ------------------------------------------------------------------------------------
</TABLE>
* The lifetime of this subaccount is less than the complete period indicated.
The performance shown is for the period from commencement of activity.
B-3
<PAGE>
Account C
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1996CONTRACTS WITH EGMDB
<TABLE>
<CAPTION>
1-year 5-years 10-years
Single & Single & Single &
Periodic flexible Periodic flexible Periodic flexible
pymt. prem. pymt. prem. pymt. prem.
contracts contracts contracts contracts contracts contracts
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bond
Commenced Activity on
December 21, 1981 -7.15% -5.13% 4.88% 5.31% 6.69% 6.69%
- ------------------------------------------------------------------------------------
Growth and Income
Commenced Activity on
December 21, 1981 8.60% 10.95% 11.65% 12.11% 12.90% 12.90%
- ------------------------------------------------------------------------------------
International
Commenced Activity on
May 1, 1991 -0.26% 1.91% 7.22% 7.67% 6.10%* 6.48%*
- ------------------------------------------------------------------------------------
Managed
Commenced Activity on
April 29, 1983 2.05% 4.27% 8.16% 8.61% 9.67% 9.67%
- ------------------------------------------------------------------------------------
Global Asset Allocation
Commenced Activity on
August 3, 1987 4.85% 7.13% 9.50% 9.95% 8.35%* 8.83%*
- ------------------------------------------------------------------------------------
Social Awareness
Commenced Activity on
May 2, 1988 17.30% 19.85% 14.40% 14.87% 15.07%* 15.61%*
- ------------------------------------------------------------------------------------
Special Opportunities
Commenced Activity on
December 21, 1981 6.14% 8.45% 11.74% 12.20% 12.85% 12.85%
- ------------------------------------------------------------------------------------
Aggressive Growth
Commenced Activity on
January 3, 1994 6.14% 8.45% * * 8.01%* 9.18%*
- ------------------------------------------------------------------------------------
Capital Appreciation
Commenced Activity on
January 3, 1994 7.68% 10.02% * * 11.43%* 12.62%*
- ------------------------------------------------------------------------------------
Equity-Income
Commenced Activity on
January 3, 1994 9.61% 12.00% * * 14.82%* 16.06%*
- ------------------------------------------------------------------------------------
DE Emerging Growth
Commenced Activity on
May 1, 1996 -9.04% -8.05%* * * * *
- ------------------------------------------------------------------------------------
DE Equity/Income
Commenced Activity on
May 1, 1996 3.35% 4.48%* * * * *
- ------------------------------------------------------------------------------------
DE Global Bond
Commenced Activity on
May 1, 1996 1.91% 3.01%* * * * *
- ------------------------------------------------------------------------------------
</TABLE>
* The lifetime of this subaccount is less than the complete period indicated.
The performance shown is for the period from commencement of activity.
The length of the periods and the last day of each period used in the above
tables are set out in the table headings. 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 --
P (1 + T)n = 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
contractowner accounts; 2) all applicable nonrecurring 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
tables above relate to the contract form containing the highest level of
charges.
B-4
<PAGE>
Account C
2. NONSTANDARDIZED PERFORMANCE DATA
The VAA advertises the performance of its various subaccounts by observing how
they perform over various time periods--monthly, year-to-date, yearly (fiscal
year); and over periods of three years and more. Monthly, year-to-date and
yearly performance are computed on a cumulative basis; performance for a three-
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. The calculation reflects the mortality and
expense risk fees under the contracts and the management fees and other
expenses of the fund and series. The calculation does not include surrender
charges or the account charge, which, if included, would decrease the
performance.
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 first table below sets out performance data for each of the subaccounts for
contracts without the EGMDB. The second table below sets out hypothetical
performance data for each of the subaccounts for contracts with the EGMDB. The
hypothetical performance shown in the second table is based on the actual
performance of the subaccounts, but reflects the charges that hypothetically
would have been made had the EGMDB been available under the contracts for the
period indicated.
The tables below set out representative performance quotations, according to
the definitions above, for each of the subaccounts, for the following base
periods: 1) monthly; 2) year-to-date; 3) yearly; and 4) a three-year period.
For all quotations except 2), the end of the base period is December 31, 1996.
For quotation 2, the end of the base period is November 30, 1996. (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 VAA may advertise
by quotations with base periods of more than three years. These will be
calculated in an identical manner to the method used to calculate the quotation
for the three-year period; the only difference is that the base period utilized
in the formula will be longer.
NONSTANDARDIZED PERFORMANCE DATA SUBACCOUNTS OF ACCOUNT C (CONTRACTS WITHOUT
EGMDB)
<TABLE>
<CAPTION>
Type of
performance Subaccount
data AG B CA EI GAA GI I M
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monthly
(12/31/96) -0.19% -1.30% -0.76% -1.02% -0.45% -2.24% 0.20% -1.41%
Year-to-Date
(11/30/96) 16.01 2.62 18.37 20.80 14.89 21.18 8.59 12.92
Yearly
(12/31/96) 15.79 1.29 17.47 19.57 14.37 18.46 8.81 11.32
3-Year Cumulative * 13.29 * * 36.25 62.79 19.75 38.41
3-Year Annualized * 4.25 * * 10.86 17.64 6.19 11.44
<CAPTION>
Type of
performance Subaccount
data MM SA SO DEG DEI DGB
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monthly
(12/31/96) 0.30% -1.93% -0.04% -0.42% -1.26% -0.53%
Year-to-Date
(11/30/96) 3.68 30.48 15.84 -0.45* 14.06* 11.65*
Yearly
(12/31/96) 3.99 27.96 15.79 -0.87* 12.63* 11.06*
3-Year Cumulative 11.79 79.99 48.12 * * *
3-Year Annualized 3.79 21.64 13.99 * * *
</TABLE>
Key: AG=Aggressive Growth; B=Bond; CA=Capital Appreciation; EI=Equity-Income;
GAA=Global Asset Allocation; GI=Growth and Income; I=International; M=Managed;
MM=Money Market; SA=Social Awareness; SO=Special Opportunities; DEG=Delaware
Emerging Growth; DEI=Delaware Equity/Income; DGB=Delaware Global Bond
* The lifetime of this subaccount is less than the complete period indicated.
The performance shown is for the period from commencement of activity.
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.
B-5
<PAGE>
Account C
NONSTANDARDIZED PERFORMANCE DATA SUBACCOUNTS OF ACCOUNT C (CONTRACTS WITH
EGMDB)
<TABLE>
<CAPTION>
Type of
performance Subaccount
data AG B CA EI GAA GI I M
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monthly
(12/31/96) -0.22% -1.32% -0.78% -1.04% -0.47% -2.27% 0.18% -1.43%
Year-to-Date
(11/30/96) 15.69 2.34 18.04 20.47 14.57 20.84 8.29 12.60
Yearly
(12/31/96) 15.44 0.99 17.11 19.21 14.03 18.10 8.48 10.99
3-Year Cumulative * 12.28 * * 35.03 61.33 18.68 37.16
3-Year Annualized * 3.94 * * 10.53 17.28 5.87 11.11
<CAPTION>
Type of
performance Subaccount
data MM SA SO DEG DEI DGB
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monthly
(12/31/96) 0.27% -1.96% -0.07% -0.45% -1.28% -0.56%
Year-to-Date
(11/30/96) 3.39 30.12 15.52 -0.62* 13.68* 11.45*
Yearly
(12/31/96) 3.67 27.57 15.44 -1.07* 12.40* 10.83*
3-Year Cumulative 10.79 78.37 46.79 * * *
3-Year Annualized 3.47 21.28 13.65 * * *
</TABLE>
Key: AG=Aggressive Growth; B=Bond; CA=Capital Appreciation; EI=Equity-Income;
GAA=Global Asset Allocation; GI=Growth and Income; I=International; M=Managed;
MM=Money Market; SA=Social Awareness; SO=Special Opportunities; DEG=Delaware
Emerging Growth; DEI=Delaware Equity/Income; DGB=Delaware Global Bond
* The lifetime of this subaccount is less than the complete period indicated.
The performance shown is for the period from commencement of activity.
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.
ANNUITY PAYOUTS
VARIABLE ANNUITY PAYOUTS
Variable annuity payouts will be determined on the basis of: (1) the value of
the contract on 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 payouts, Lincoln Life makes the following
calculation: first, it determines the dollar amount of the first payout;
second, it credits the annuitant with a fixed number of annuity units based on
the amount of the first payout; 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 payout is determined by
applying the total value of the accumulation units credited under the contract
valued as of the annuity commencement date (less any premium taxes) to the
annuity tables contained in the contract. The first variable annuity payout
will be paid 14 days after the annuity commencement date. This date will become
the date on which all future annuity payouts will be paid. Amounts shown in the
tables are based on the 1971 Individual Annuity Mortality Tables for the single
premium, periodic premium and flexible premium Multi Fund 2 and 3 annuity
contracts and the 1983(a) Individual Mortality Table for flexible premium
annuity contract Multi Fund 4 modified, with an assumed investment return at
the rate of 5% per annum. The first annuity payout is determined by multiplying
the benefit per $1,000 of value shown in the contract tables by the number of
thousands of dollars of contract value under the contract. These 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 payouts. 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
payouts will decrease. If the assumed rate of interest
B-6
<PAGE>
Account C
were to be increased, annuity payouts would start at a higher level but would
decrease more rapidly or increase more slowly.
Lincoln Life 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 subaccount on which variable annuity payouts are based. The number of
annuity units to be credited is determined by dividing the amount of the first
payout by the value of an annuity unit in each subaccount 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 payouts is determined by multiplying the
contractowner's fixed number of annuity units in each subaccount by the
appropriate annuity unit value for the valuation date ending 14 days before the
date that payment is due.
The value of each subaccount annuity unit was set initially at $1.00. The
annuity unit value for each subaccount at the end of any valuation date is
determined by multiplying the subaccount annuity unit value for the immediately
preceding valuation date by the product of:
a. The net investment factor of the subaccount 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
before the payout date in order to permit calculation of amounts of annuity
payouts 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
Lincoln Life may require proof of age, sex or survival of any payee upon whose
age, sex or survival payouts depend.
FEDERAL TAX STATUS
GENERAL
The operations of the VAA form a part of, and are taxed with, the operations of
Lincoln Life under the Internal Revenue Code of 1986, as amended (the code).
Investment income and realized net capital gains on the assets of the VAA 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, Lincoln Life believes that VAA 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, Lincoln Life
does not anticipate that it will incur any federal income tax liability
attributable to the VAA, 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 Lincoln Life's being taxed on income or gains attributable to
the VAA, then Lincoln Life may impose a charge against the VAA in order to make
provision for payment of such taxes.
TAX STATUS OF NONQUALIFIED CONTRACTS
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 contractowner dies on or after the annuity
starting date, but before 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 contractowner's death; and (B) if any contractowner dies before the annuity
starting date, the entire interest must be distributed within five years after
the death of the contractowner. These requirements are considered satisfied to
the extent that any portion of the contractowner'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 contractowner'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. Lincoln Life 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.
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 Lincoln Life's
understanding of the current federal tax laws as interpreted by the Internal
Revenue Service (IRS). Purchasers of contracts for use with such a plan and
plan participants and beneficiaries should consult counsel and other competent
advisors 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 contractowners, annuitants and beneficiaries,
should
B-7
<PAGE>
Account C
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 (403(B))
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 payouts 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 before 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 January 1, 1986, eligible for
taxation at a 20% rate to the extent the distribution reflects payouts made
before January 1, 1974. For plan years beginning after December 31, 1996, tax
exempt organizations (except state or local governments) may have 401(k) plans.
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 an IRA. An individual may make an annual IRA contribution of
up to the lesser of $2,000 (or $4,000 if IRAs are maintained for both the
individual and the nonworking spouse and they file a joint tax return) or 100%
of compensation. However, IRA contributions may be nondeductible in whole or in
part if (1) the individual or the spouse is an active participant in certain
other retirement programs and (2) the income of the individual (or of the
individual and the 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. Plans of state or
local governments established on August 20, 1996, or later, must hold all
assets and income in trust (or custodial accounts or an annuity contract) for
the exclusive benefit of participants and their beneficiaries. Section 457
plans that were in existence before August 20, 1996 are allowed until January
1, 1999 to meet this requirement. 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
B-8
<PAGE>
Account C
which can be deferred in any one year is the lesser of $7,500 (as indexed) 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 (SEP)
An employer may make contributions on behalf of employees to a SEP 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. For tax years after 1996, salary reduction SEP's (SAR/SEP)
may no longer be established. However, SAR/SEPs in existence prior to January
1, 1997 may continue to receive contributions.
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.
SAVINGS INCENTIVE MATCHED PLAN FOR EMPLOYEES (SIMPLE)
Employers with 100 or fewer employees who earned $5,000 during the proceeding
year, may establish SIMPLEs. For tax years beginning after December 31, 1996,
SIMPLE plans are available and may be in the form of an IRA or part of a 401(k)
plan. Under a SIMPLE IRA, employees are permitted to make elective
contributions to an IRA, stated as a percentage of the employees compensation,
but not to exceed $6,000 annually as indexed. Such deferrals are not subject to
income tax until withdrawn. Withdrawals made by an employee in the first two
years of the employees participation are subject to a 25% penalty. Later
withdrawals are subject to penalties applicable to IRAs. Under a SIMPLE 401(k),
employee deferrals are limited to no more than $6,000 annually. Employer
contributions are usually required for each type of SIMPLE.
TAX ON DISTRIBUTIONS FROM QUALIFIED CONTRACTS
The following rules generally apply to distributions from contracts purchased
in connection with the plans discussed previously, 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 nondeductible contributions) constitutes the
investment in the contract. If a distribution is made in the form of annuity
payouts, the employee's investment in the contract (adjusted for certain refund
provisions) divided by the life expectancy (or other period for which annuity
payouts are expected to be made) constitutes a tax-free return of capital each
year. The dollar amount of annuity payouts received in any year in excess of
such return is taxable as ordinary income. All distributions will be fully
taxable once the employee is deemed to have recovered the dollar amount of the
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 payout, 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. 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, SEPs, 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 (as indexed), which will not be imposed on distributions in
1997, 1998 and 1999, subject to various special rules. 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 the beneficiary
generally follows these same principles, subject to a variety of special rules.
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 advisor should be consulted.
DETERMINATION OF ACCUMULATION AND ANNUITY UNIT VALUE
A description of the days on which accumulation and
annuity units will be valued is given in the Prospectus. The New York Stock
Exchange's (NYSE) most recent
B-9
<PAGE>
Account C
announcement (which is subject to change) states that in 1997 it will be closed
on New Year's Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day. It may also be closed on
other days.
Since the portfolios of some of the funds and series 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 series and of the variable account could therefore be significantly
affected) on days when the investor has no access to those funds and series.
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, Lincoln Life 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 20 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 annuity contracts.
STANDARD & POOR's CORP. 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.
STANDARD & POOR'S 500 INDEX (S&P 500) -- broad-based measurement of changes in
stock-market conditions based on the average performance of 500 widely held
common stocks; commonly known as the 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 Corp., a
financial advisory, securities rating and publishing firm.
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
Co. and American Telephone and Telegraph Co. Prepared and published by Dow
Jones & Co., it is the oldest and most widely quoted of all the market
indicators. The average is quoted in points, not dollars.
INTERNET -- As an electronic communications network may be used to provide
information regarding Lincoln Life performance of the subaccounts and
advertisement literature.
In its advertisements and other sales literature for the VAA and the eligible
funds, Lincoln Life 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
B-10
<PAGE>
Account C
literature may emphasize the potential savings through tax deferral; the
potential advantage of the variable account over the fixed side; and the
compounding effect
when a client makes regular contributions to his or her account.
DOLLAR-COST AVERAGING ILLUSTRATIONS. These illustrations will generally discuss
the price-leveling effect of making regular purchases in the same subaccounts
over a period of time, to take advantage of the trends in market prices of the
portfolio securities purchased for those subaccounts.
AUTOMATIC WITHDRAWAL SERVICE. A service provided by Lincoln Life, through which
a contractowner may take any distribution allowed by code Section 401(a)(9) in
the case of qualified contracts, or permitted under code Section 72 in the case
of nonqualified contracts, by way of an automatically generated payment.
EARNINGS SWEEP. A service provided by Lincoln Life which allows a client to
designate one of the variable subaccounts or the fixed side as a holding
account, and to transfer earnings from that side to any other variable
subaccount. The contractowner 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.
LINCOLN LIFE'S CUSTOMERS. Sales literature for the VAA, the funds and series
may refer to the number of employers and the number of individual annuity
clients which Lincoln Life serves. As of February 28, 1997, Lincoln Life was
serving over 13,000 organizations and had more than 940,000 annuity clients.
LINCOLN LIFE'S ASSETS, SIZE. Lincoln Life may discuss its general financial
condition (see, for example, the reference to A.M. Best Co., 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 subclassification of those companies,
based upon recognized evaluation criteria. For example, at year-end 1995,
Lincoln Life was the 12th 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 VAA. 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 annuity.
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.
The graphs below compare accumulations attributable to contributions to
conventional savings vehicles such as savings accounts at a bank or credit
union, nonqualified contracts purchased with after tax contributions, and
qualified contracts purchased with pre-tax contributions under tax-favored
retirement programs.
THE POWER OF TAX DEFERRED GROWTH
The hypothetical chart below compares the results of contributing $1,200 per
year ($100 per month) during the time periods illustrated. Each graph assumes a
28% tax rate and an 8% fixed rate of return (before fees
[GRAPH APPEARS HERE]
and charges). For tax deferred annuities (TDA), the results are based on
contributing $1,666.66 ($138.88 per month) during the time periods illustrated.
The additional $38.88 per month is the amount of federal taxes paid by those
contributing to the conventional savings accounts or nonqualified 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). See Charges and other deductions in
the Prospectus for discussion of 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 nonqualified 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 nonqualified plan increases the
accumulation power of savings over time.
As you can see, a tax deferred plan can provide a much higher account value
over a long period of time. Therefore, tax deferral is an important component
of a retirement plan or 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).
B-11
<PAGE>
Preface/Directory
TAX BENEFITS TODAY
When you put a portion of
your salary in a tax
deferred retirement plan,
your contributions don't
appear as taxable income on
your W-2 form at the end of
the calendar year. So while
you are contributing, 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 47,600
*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 currently.
*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 before age 59 1/2.
For illustrative purposes only.
FINANCIAL STATEMENTS
Financial statements for
the VAA and the company
appear on the following
pages. For more information
about the financial
statements for the company
provided in this SAI,
please see the cover page
of this SAI.
B-12
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1996
Account C
<TABLE>
<CAPTION>
Lincoln Lincoln
National National Delaware Delaware Delaware
Percent Aggressive Lincoln Capital Emerging Equity/ Global
of Net Growth National Appreciation Growth Income Bond
Assets Combined Account Bond Account Account Series Series Series
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at net
asset value:
. Lincoln National
Aggressive Growth
Fund, Inc. -
17,106,328 shares at
$13.98 per share
(cost -
$188,454,578) 3.6% $ 239,146,924 $239,146,924
----------------------
. Lincoln National
Bond Fund, Inc. -
21,423,134 shares at
$11.77 per share
(cost -
$253,111,909) 3.8 252,058,041 $252,058,041
----------------------
. Lincoln National
Capital Appreciation
Fund, Inc. -
18,122,894 shares at
$14.50 per share
(cost -
$218,532,949) 4.0 262,866,019 $262,866,019
----------------------
. Delaware Emerging
Growth Series
1,602,862 shares at
$14.55 per share
(cost - $23,271,797) 0.4 23,321,643 $23,321,643
----------------------
. Delaware
Equity/Income Series
861,954 shares at
$15.98 per share
(cost - $12,836,651) 0.2 13,774,029 $13,774,029
----------------------
. Delaware Global Bond
Series 769,961
shares at $10.96 per
share (cost -
$8,008,262) 0.1 8,438,778 $8,438,778
----------------------
. Lincoln National
Equity-Income Fund,
Inc. - 28,632,354
shares at $15.78 per
share
(cost -
$357,021,298) 6.9 451,806,742
----------------------
. Lincoln National
Global Asset
Allocation Fund,
Inc. - 22,130,562
shares at $14.23 per
share (cost -
$254,907,751) 4.8 314,826,922
----------------------
. Lincoln National
Growth and Income
Fund, Inc. -
73,558,929 shares at
$33.11 per share
(cost -
$1,741,206,198) 37.0 2,435,499,113
----------------------
. Lincoln National
International Fund,
Inc. - 30,006,278
shares at $14.56 per
share
(cost -
$368,504,647) 6.6 436,764,067
----------------------
. Lincoln National
Managed Fund, Inc. -
41,392,393 shares at
$16.27 per share
(cost -
$551,253,027) 10.2 673,279,459
----------------------
. Lincoln National
Money Market Fund,
Inc. - 8,887,324
shares at $10.00 per
share
(cost - $88,873,236) 1.4 88,873,236
----------------------
. Lincoln National
Social Awareness
Fund,
Inc. - 23,196,311
shares at $27.32 per
share
(cost -
$467,670,401) 9.6 633,627,195
----------------------
. Lincoln National
Special
Opportunities Fund,
Inc. - 21,251,823
shares at $29.42 per
share (cost -
$512,970,098) 9.5 625,270,859
---------------------- ----- -------------- ------------ ------------ ------------ ----------- ----------- ----------
TOTAL INVESTMENTS
(Cost -
$5,046,622,802) 98.1 6,459,553,027 239,146,924 252,058,041 262,866,019 23,321,643 13,774,029 8,438,778
----------------------
Dividends receivable 2.0 131,876,199 56,202 16,753,640 1,892,356 -- -- 22,988
---------------------- ----- -------------- ------------ ------------ ------------ ----------- ----------- ----------
TOTAL ASSETS 100.1 6,591,429,226 239,203,126 268,811,681 264,758,375 23,321,643 13,774,029 8,461,766
----------------------
LIABILITY -
Payable to The Lincoln
National Life
Insurance Company 0.1 5,563,391 200,333 229,380 220,037 18,135 10,975 6,745
---------------------- ----- -------------- ------------ ------------ ------------ ----------- ----------- ----------
NET ASSETS 100.0% $6,585,865,835 $239,002,793 $268,582,301 $264,538,338 $23,303,508 $13,763,054 $8,455,021
---------------------- ===== ============== ============ ============ ============ =========== =========== ==========
NET ASSETS ARE
REPRESENTED BY:
Units in accumulation
period 172,348,704 62,601,599 173,669,929 23,508,087 12,171,506 7,604,588
----------------------
Annuity reserves units 281,934 108,087 403,137 -- 48,319 8,798
----------------------
Unit value $1.384 $4.283 $1.520 $0.991 $1.126 $1.111
----------------------
Value in accumulation
period $238,612,462 $268,119,369 $263,925,692 $23,303,508 $13,708,632 $8,445,250
----------------------
Annuity reserves 390,331 462,932 612,646 -- 54,422 9,771
---------------------- ------------ ------------ ------------ ----------- ----------- ----------
$239,002,793 $268,582,301 $264,538,338 $23,303,508 $13,763,054 $8,455,021
============ ============ ============ =========== =========== ==========
</TABLE>
See accompanying notes.
B-13
<PAGE>
Account C
<TABLE>
<CAPTION>
Lincoln Lincoln Lincoln Lincoln
Lincoln National National Lincoln Lincoln National National
National Global Asset Growth and National National Lincoln Social Special
Equity- Allocation Income International Managed National Money Awareness Opportunities
Income Account Account Account Account Account Market Account Account Account
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$451,806,742
$314,826,922
$2,435,499,113
$436,764,067
$673,279,459
$88,873,236
$633,627,195
$625,270,859
- ------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
451,806,742 314,826,922 2,435,499,113 436,764,067 673,279,459 88,873,236 633,627,195 625,270,859
6,862,518 8,265,770 47,726,365 2,052,321 25,825,055 4,308,840 7,040,556 11,069,588
- ------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
458,669,260 323,092,692 2,483,225,478 438,816,388 699,104,514 93,182,076 640,667,751 636,340,447
383,095 271,373 2,111,491 367,080 594,624 80,013 536,176 533,934
- ------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
$458,286,165 $322,821,319 $2,481,113,987 $438,449,308 $698,509,890 $93,102,063 $640,131,575 $635,806,513
============ ============ ============== ============ ============ =========== ============ ============
274,532,257 139,793,544 329,100,617 294,029,977 177,985,692 39,989,097 175,642,988 97,605,646
1,099,608 448,150 3,784,640 540,010 510,194 68,503 326,720 138,109
$1.663 $2.302 $7.453 $1.488 $3.913 $2.324 $3.638 $6.505
$456,457,874 $321,789,726 $2,452,905,697 $437,645,537 $696,513,340 $92,942,848 $638,943,055 $634,908,139
1,828,291 1,031,593 28,208,290 803,771 1,996,550 159,215 1,188,520 898,374
- ------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
$458,286,165 $322,821,319 $2,481,113,987 $438,449,308 $698,509,890 $93,102,063 $640,131,575 $635,806,513
============ ============ ============== ============ ============ =========== ============ ============
</TABLE>
B-14
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
Account C
<TABLE>
<CAPTION>
Lincoln Lincoln
National Lincoln National Delaware Delaware Delaware
Aggressive National Capital Emerging Equity/ Global
Growth Bond Appreciation Growth Income Bond
Combined Account Account Account Account Account Account
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Investment Income
(Loss):
. Dividends from
investment income $132,051,988 $ 56,202 $16,753,640 $ 1,892,356 -- $ 87,587 $111,190
- ------------------------
. Dividends from net
realized gains on
investments 235,001,313 2,762,880 -- 6,479,865 -- -- --
- ------------------------
. Mortality and expense
guarantees (56,306,360) (1,894,804) (2,665,393) (1,926,986) ($81,542) (42,434) (33,548)
- ------------------------ ------------ ----------- ----------- ----------- -------- -------- --------
NET INVESTMENT INCOME
(LOSS) 310,746,941 924,278 14,088,247 6,445,235 (81,542) 45,153 77,642
- ------------------------
Net realized and
unrealized gain on
investments:
. Net realized gain
(loss) on investments 19,985,015 738,003 (371,046) 164,449 (14,135) 11,020 7,815
- ------------------------
. Net change in
unrealized
appreciation or
depreciation on
investments 505,243,452 24,903,548 (10,488,612) 22,742,026 49,846 937,378 430,516
- ------------------------ ------------ ----------- ----------- ----------- -------- -------- --------
NET GAIN (LOSS) ON
INVESTMENTS 525,228,467 25,641,551 (10,859,658) 22,906,475 35,711 948,398 438,331
- ------------------------ ------------ ----------- ----------- ----------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS $835,975,408 $26,565,829 $ 3,228,589 $29,351,710 $(45,831) $993,551 $515,973
- ------------------------ ============ =========== =========== =========== ======== ======== ========
</TABLE>
See accompanying notes.
B-15
<PAGE>
Account C
<TABLE>
<CAPTION>
Lincoln
Lincoln National Lincoln Lincoln Lincoln Lincoln
National Global National Lincoln Lincoln National National National
Equity Asset Growth National National Money Social Special
Income Allocation and Income International Managed Market Awareness Opportunities
Account Account Account Account Account Account Account Account
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 6,862,518 $ 8,265,770 $ 47,726,365 $ 2,052,321 $25,825,055 $4,308,840 $ 7,040,556 $11,069,588
4,238,291 14,494,873 111,146,666 2,485,245 37,827,091 -- 18,531,075 37,035,327
(3,488,982) (2,885,950) (21,748,019) (4,045,242) (6,531,065) (880,570) (4,483,713) (5,598,112)
- ----------- ----------- ------------ ----------- ----------- ---------- ------------ -----------
7,611,827 19,874,693 137,125,012 492,324 57,121,081 3,428,270 21,087,918 42,506,803
532,812 954,000 7,374,542 2,393,084 3,421,787 -- 428,694 4,343,990
55,461,900 18,296,226 225,053,722 31,230,726 10,510,800 -- 90,089,795 36,025,581
- ----------- ----------- ------------ ----------- ----------- ---------- ------------ -----------
55,994,712 19,250,226 232,428,264 33,623,810 13,932,587 -- 90,518,489 40,369,571
- ----------- ----------- ------------ ----------- ----------- ---------- ------------ -----------
$63,606,539 $39,124,919 $369,553,276 $34,116,134 $71,053,668 $3,428,270 $111,606,407 $82,876,374
=========== =========== ============ =========== =========== ========== ============ ===========
</TABLE>
B-16
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996 AND 1995
Account C
<TABLE>
<CAPTION>
Lincoln Lincoln
National Lincoln National Delaware Delaware Delaware
Aggressive National Capital Emerging Equity/ Global
Growth Bond Appreciation Growth Income Bond
Combined Account Account Account Account Account Account
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSETS AT JANUARY 1,
1995 $3,125,230,395 $ 60,588,953 $207,926,326 $ 53,051,687 -- -- --
- ------------------------
Changes from operations:
. Net investment income
(loss) 176,428,785 (905,936) 13,169,598 (9,631) -- -- --
- ------------------------
. Net realized gain
(loss) on investments 8,981,733 896,058 (282,800) 580,996 -- -- --
- ------------------------
. Net change in
unrealized
appreciation or
depreciation on
investments 790,623,398 27,064,946 25,508,393 21,258,762 -- -- --
- ------------------------ -------------- ------------ ------------ ------------ ----------- ----------- ----------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS 976,033,916 27,055 068 38,295,191 21,830,127 -- -- --
- ------------------------
Net increase (decrease)
from unit transactions 626,658,984 49,434,067 18,988,437 52,227,582 -- -- --
- ------------------------ -------------- ------------ ------------ ------------ ----------- ----------- ----------
TOTAL INCREASE
(DECREASE) IN NET
ASSETS 1,602,692,900 76,489,135 57,383,628 74,057,709 -- -- --
- ------------------------ -------------- ------------ ------------ ------------ ----------- ----------- ----------
NET ASSETS AT DECEMBER
31, 1995 4,727,923,295 137,078,088 265,308,954 127,109,396 -- -- --
- ------------------------
Changes from operations:
. Net investment income
(loss) 310,746,941 924,278 14,088,247 6,445,235 ($81,542) $ 45,153 $ 77,642
- ------------------------
. Net realized gain
(loss) on investments 19,985,015 738,003 (371,046) 164,449 (14,135) 11,020 7,815
- ------------------------
. Net change in
unrealized
appreciation or
depreciation on
investments 505,243,452 24,903,548 (10,488,612) 22,742,026 49,846 937,378 430,516
- ------------------------ -------------- ------------ ------------ ------------ ----------- ----------- ----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS 835,975,408 26,565,829 3,228,589 29,351,710 (45,831) 993,651 515,973
- ------------------------
Net increase from unit
transactions 1,021,967,132 75,358,876 44,758 108,077,232 23,349,339 12,769,503 7,939,048
- ------------------------ -------------- ------------ ------------ ------------ ----------- ----------- ----------
TOTAL INCREASE IN NET
ASSETS 1,857,942,540 101,924,705 3,273,347 137,428,942 23,303,508 13,763,054 8,455,021
- ------------------------ -------------- ------------ ------------ ------------ ----------- ----------- ----------
NET ASSETS AT DECEMBER
31, 1996 $6,585,865,835 $239,002,793 $268,582,301 $264,538,338 $23,303,508 $13,763,054 $8,455,021
- ------------------------ ============== ============ ============ ============ =========== =========== ==========
</TABLE>
See accompanying notes.
B-17
<PAGE>
Account C
<TABLE>
<CAPTION>
Lincoln
Lincoln National Lincoln Lincoln Lincoln Lincoln
National Global National Lincoln Lincoln National National National
Equity Asset Growth National National Money Social Special
Income Allocation and Income International Managed Market Awareness Opportunities
Account Account Account Account Account Account Account Account
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$79,453,780 $201,124,981 $1,182,300,170 $316,542,569 $460,701,876 $79,390,642 $166,764,683 $317,285,728
2,485,598 5,231,968 92,592,420 13,300,217 17,756,955 3,678,470 8,824,306 20,304,820
441,027 950,383 2,581,323 1,927,628 1,287,963 -- 229,227 369,928
39,159,306 39,936,516 366,086,845 9,952,160 110,426,495 -- 67,848,514 83,381,460
- ------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
42,085,931 46,118,867 461,260,589 25,180,005 129,471,413 3,678,470 76,902,047 104,056,208
118,250,480 8,467,208 210,527,753 16,481,346 18,988,168 (4,315,482) 58,588,662 79,020,763
- ------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
160,336,411 54,586,075 671,788,342 41,661,351 148,459,581 (637,012) 135,490,709 183,076,971
- ------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
239,790,191 255,711,056 1,854,088,512 358,203,920 609,161,457 78,753,630 302,255,392 500,462,699
7,611,827 19,874,693 137,125,012 492,324 57,121,081 3,428,270 21,087,918 42,506,803
532,812 954,000 7,374,542 2,393,084 3,421,787 -- 428,694 4,343,990
55,461,900 18,296,226 225,053,722 31,230,726 10,510,800 -- 90,089,795 36,025,581
- ------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
63,606,539 39,124,919 369,553,276 34,116,134 71,053,668 3,428,270 111,606,407 82,876,374
154,889,435 27,985,344 257,472,199 46,129,254 18,294,765 10,920,163 226,269,776 52,467,440
- ------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
218,495,974 67,110,263 627,025,475 80,245,388 89,348,433 14,348,433 337,876,183 135,343,814
- ------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
$458,286,165 $322,821,319 $2,481,113,987 $438,449,308 $698,509,890 $93,102,063 $640,131,575 $635,806,513
============ ============ ============== ============ ============ =========== ============ ============
</TABLE>
B-18
<PAGE>
Account C
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS
1.ACCOUNTING POLICIES
The account: The Lincoln National Variable Annuity Account C (the Variable
Account) is a segregated investment account of The Lincoln National Life
Insurance Company (the Company) and is registered under the Investment
Company Act of 1940, as amended, as a unit investment trust.
Investments: The Variable Account invests in the Lincoln National Aggressive
Growth Fund, Inc., Lincoln National Bond Fund, Inc., Lincoln National
Capital Appreciation Fund, Inc., Lincoln National Equity-Income Fund, Inc.,
Lincoln National Global Asset Allocation Fund, Inc., Lincoln National Growth
and Income Fund, Inc., Lincoln National International Fund, Inc., Lincoln
National Managed Fund, Inc., Lincoln National Money Market Fund, Inc.,
Lincoln National Social Awareness Fund, Inc., Lincoln National Special
Opportunities Fund, Inc., Delaware Emerging Growth Fund, Delaware
Equity/Income Fund and the Delaware Global Bond Fund (the Funds).
Investments in the Funds are stated at the closing net values per share on
December 31, 1996. The Funds are registered as open end investment
management companies.
Investment transactions are accounted for on a trade date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by the average cost method.
Dividends: Dividends are automatically reinvested in shares of the Funds on
the payable date.
Federal income taxes: Operations of the Variable Account form a part of and
are taxed with operations of the Company, which is taxed as a "life
insurance company" under the Internal Revenue Code. Using current law, no
federal income taxes are payable with respect to the Variable Account's net
investment income and the net realized gain on investments.
Annuity reserves: Reserves on contracts not involving life contingencies are
calculated using an assumed investment rate of 5%. Reserves on contracts
involving life contingencies are calculated using a modification of the 1971
Individual Annuitant Mortality Table and an assumed investment rate of 5%.
2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATE
Amounts are paid to the Company for mortality and expense guarantees at the
rate of .002745% of the current value of the Variable Account per day
(1.002% on an annual basis). In addition, amounts retained by the Company
from the proceeds of the sales of annuity contracts for contract charges and
surrender charges were as follows during 1996:
<TABLE>
<S> <C>
Lincoln National Aggressive Growth Account $ 53,623
-------------------------------
Lincoln National Bond Account 618,359
-------------------------------
Lincoln National Capital Appreciation Account 57,159
-------------------------------
Delaware Emerging Growth Account 752
-------------------------------
Delaware Equity Income Account 555
-------------------------------
Delaware Global Bond Account 30
-------------------------------
Lincoln National Equity-Income Account 111,894
-------------------------------
Lincoln National Global Asset Allocation Account 414,764
-------------------------------
Lincoln National Growth and Income Account 3,139,521
-------------------------------
Lincoln National International Account 603,355
-------------------------------
Lincoln National Managed Account 849,563
-------------------------------
Lincoln National Money Market Account 516,693
-------------------------------
Lincoln National Social Awareness Account 619,615
-------------------------------
Lincoln National Special Opportunities Account 771,057
-------------------------------
----------
$7,756,940
==========
</TABLE>
Accordingly, the Company is responsible for all sales, general, and
administrative expenses applicable to the Variable Account.
B-19
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
Account C
3. NET ASSETS
Net assets at December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
Lincoln Lincoln
National Lincoln National Delaware Delaware Delaware
Aggressive National Capital Emerging Equity Global
Growth Bond Appreciation Growth Income Bond
Combined Account Account Account Account Account Account
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Unit transactions:
Accumulation units $3,968,205,189 $186,588,814 $149,181,040 $212,426,715 $23,349,338 $12,716,291 $7,929,807
- ---------------
Annuity reserves 21,125,772 328,748 365,097 513,202 -- 53,211 9,241
- ------------------------
-------------- ------------ ------------ ------------ ----------- ----------- ----------
3,989,330,961 186,917,562 149,546,137 212,939,917 23,349,338 12,769,502 7,939,048
Accumulated net
investment income
(loss) 1,112,690,381 (228,155) 120,805,383 6,519,473 (81,542) 45,153 77,642
- ---------------
Accumulated net realized
gain (loss) on
investments 70,914,268 1,621,039 (715,348) 745,877 (14,135) 11,020 7,815
- ---------------
Net unrealized
appreciation on
investments 1,412,930,225 50,692,347 (1,053,871) 44,333,071 49,847 937,379 430,516
- ------------------------
-------------- ------------ ------------ ------------ ----------- ----------- ----------
$6,585,865,835 $239,002,793 $268,582,301 $264,538,338 $23,303,508 $13,763,054 $8,455,021
============== ============ ============ ============ =========== =========== ==========
</TABLE>
B-20
<PAGE>
Account C
<TABLE>
<CAPTION>
Lincoln Lincoln Lincoln Lincoln Lincoln
National National Lincoln Lincoln Lincoln National National National
Equity- Global Asset National National National Money Social Special
Income Allocation Growth and International Managed Market Awareness Opportunities
Account Account Income Account Account Account Account Account Account
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$350,514,039 $201,343,648 $1,302,285,706 $353,492,729 $352,971,585 $41,331,352 $424,120,986 $349,953,139
1,368,946 643,555 14,251,762 652,275 1,265,306 129,355 924,509 620,565
------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
351,882,985 201,987,203 1,316,537,468 354,145,004 354,236,891 41,460,707 425,045,495 350,573,704
10,637,551 58,376,260 449,961,832 10,827,918 216,182,551 51,641,356 45,414,629 142,510,330
980,185 2,538,685 20,321,772 5,216,966 6,064,017 -- 3,714,657 30,421,718
94,785,444 59,919,171 694,292,915 68,259,420 122,026,431 -- 165,956,794 112,300,761
------------ ------------ -------------- ------------ ------------ ----------- ------------ ------------
$458,286,165 $322,821,319 $2,481,113,987 $438,449,308 $698,509,890 $93,102,063 $640,131,575 $635,806,513
============ ============ ============== ============ ============ =========== ============ ============
</TABLE>
B-21
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
Account C
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
------------------------- ------------------------
Units Amount Units Amount
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lincoln National
Aggressive Growth
Account
Accumulation Units:
Contract purchases 98,305,494 $128,159,029 86,104,243 $89,562,485
- -------------------------------------------------
Terminated contracts and
transfers to annuity
reserves (40,474,949) (53,011,052) (39,132,839) (40,190,032)
----------- ------------ ----------- -----------
- -------------------------------------------------
57,830,545 75,147,977 46,971,404 49,372,453
Annuity Reserves:
Transfers from
accumulation units and
between accounts 187,292 246,263 84,743 82,683
Annuity payments (26,469) (35,009) (20,294) (21,424)
Receipt (reimbursement)
of mortality guarantee
adjustment (260) (355) 313 355
----------- ------------ ----------- -----------
160,563 210,899 64,762 61,614
Lincoln National Bond
Account
Accumulation Units:
Contract purchases 19,495,617 81,335,083 19,365,131 75,287,744
- -------------------------------------------------
Terminated contracts and
transfers to annuity
reserves (19,537,780) (81,314,773) (14,621,455) (56,288,542)
----------- ------------ ----------- -----------
- -------------------------------------------------
(42,163) 20,310 4,743,676 18,999,202
Annuity Reserves:
Transfers from
accumulation units and
between accounts 20,646 72,918 12,671 42,825
Annuity payments (14,803) (48,134) (16,433) (55,063)
Receipt (reimbursement)
of mortality guarantee
adjustment (78) (336) 386 1,473
----------- ------------ ----------- -----------
5,765 24,448 (3,376) (10,765)
Lincoln National Capital
Appreciation Account
Accumulation Units:
Contract purchases 98,616,139 141,597,465 66,122,712 75,254,717
- -------------------------------------------------
Terminated contracts and
transfers to annuity
reserves (23,013,157) (33,832,749) (20,180,412) (23,190,279)
----------- ------------ ----------- -----------
- -------------------------------------------------
75,602,982 107,764,716 45,942,300 52,064,438
Annuity Reserves:
Transfers from
accumulation units and
between accounts 252,282 358,307 161,891 180,041
Annuity payments (33,426) (45,539) (15,470) (18,086)
Receipt (reimbursement)
of mortality guarantee
adjustment (169) (252) 1,002 1,189
----------- ------------ ----------- -----------
218,687 312,516 147,423 163,144
Delaware Emerging Growth
Series
Accumulation Units:
Contract purchases 30,391,549 30,078,694 -- --
- -------------------------------------------------
Terminated contracts and
transfers to annuity
reserves (6,883,462) (6,729,355) -- --
----------- ------------ ----------- -----------
- -------------------------------------------------
23,508,087 23,349,339 -- --
</TABLE>
B-22
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
Account C
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------
Units Amount Units Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Annuity Reserves:
Transfers from
accumulation units and
between accounts -- -- -- --
Annuity payments -- -- -- --
Receipt (reimbursement) of
mortality guarantee
adjustment -- -- -- --
----------- ----------- ----------- -----------
Delaware Equity/Income
Series
Accumulation Units:
Contract purchases 13,194,259 13,803,232 -- --
- -------------------------------------------------
Terminated contracts and
transfers to annuity
reserves (1,022,753) (1,086,940) -- --
----------- ----------- ----------- -----------
- -------------------------------------------------
12,171,506 12,716,292 -- --
Annuity Reserves:
Transfers from
accumulation units and
between accounts 49,346 54,319 -- --
Annuity payments (1,027) (1,108) -- --
Receipt (reimbursement) of
mortality guarantee
adjustment -- -- -- --
----------- ----------- ----------- -----------
48,319 53,211 -- --
Delaware Global Bond
Series
Accumulation Units:
Contract purchases 8,540,427 8,841,232 -- --
- -------------------------------------------------
Terminated contracts and
transfers to annuity
reserves (935,839) (911,425) -- --
----------- ----------- ----------- -----------
- -------------------------------------------------
7,604,588 7,929,807 -- --
Annuity Reserves:
Transfers from
accumulation units and
between accounts 9,011 9,537 -- --
Annuity payments (177) (257) -- --
- -------------------------------------------------
Reimbursement of mortality
guarantee adjustment (36) (39) -- --
----------- ----------- ----------- -----------
- -------------------------------------------------
8,798 9,241 -- --
Lincoln National Equity-
Income Account
Accumulation Units:
Contract purchases 140,613,459 214,658,603 126,796,961 154,590,919
- -------------------------------------------------
Terminated contracts and
transfers to annuity
reserves (37,898,146) (60,482,903) (30,362,775) (36,426,079)
----------- ----------- ----------- -----------
- -------------------------------------------------
102,715,313 154,175,700 96,434,186 118,164,840
Annuity Reserves:
Transfers from
accumulation units and
between accounts 636,113 968,086 269,564 220,202
Annuity payments (168,185) (254,362) (178,459) (133,771)
Receipt (reimbursement) of
mortality guarantee
adjustment 7 11 (696) (791)
----------- ----------- ----------- -----------
467,935 713,735 90,409 85,640
</TABLE>
B-23
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
Account C
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
Units Amount Units Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lincoln National Global
Asset Allocation
Account
Accumulation Units:
Contract purchases 36,839,595 78,403,293 30,492,535 54,864,824
- ----------------------------------------------
Terminated contracts and
transfers to annuity
reserves (23,604,273) (50,316,084) (25,995,053) (46,489,629)
----------- ------------ ------------ ------------
- ----------------------------------------------
13,235,322 28,087,209 4,497,482 8,375,195
Annuity Reserves:
Transfers from
accumulation units and
between accounts (5,422) (10,658) 93,022 167,479
Annuity payments (42,349) (90,846) (44,060) (79,943)
Receipt (reimbursement)
of mortality guarantee
adjustment (160) (361) 3,189 4,477
----------- ------------ ------------ ------------
(47,951) (101,865) 52,151 92,013
Lincoln National Growth
and Income Account
Accumulation Units:
Contract purchases 94,595,773 650,788,764 78,788,015 435,781,433
- ----------------------------------------------
Terminated contracts and
transfers to annuity
reserves (56,557,630) (394,499,393) (41,346,455) (224,231,067)
----------- ------------ ------------ ------------
- ----------------------------------------------
38,038,143 256,287,371 37,441,560 211,550,366
Annuity Reserves:
Transfers from
accumulation units and
between accounts 510,180 3,004,447 120,000 664,486
Annuity payments (339,756) (1,883,645) (303,716) (1,689,271)
Receipt (reimbursement)
of mortality guarantee
adjustment 8,746 64,026 (6,247) 2,172
----------- ------------ ------------ ------------
179,170 1,184,828 (189,983) (1,022,613)
Lincoln National
International Account
Accumulation Units:
Contract purchases 112,601,196 163,360,279 125,636,747 161,050,848
- ----------------------------------------------
Terminated contracts and
transfers to annuity
reserves (80,079,799) (117,493,077) (112,767,417) (144,572,098)
----------- ------------ ------------ ------------
- ----------------------------------------------
32,521,387 45,867,202 12,869,330 16,478,750
Annuity Reserves:
Transfers from
accumulation units and
between accounts 282,552 399,875 157,378 104,047
Annuity payments (95,015) (137,742) (157,737) (102,827)
Receipt (reimbursement)
of mortality guarantee
adjustment (56) (81) 1,063 1,376
----------- ------------ ------------ ------------
187,481 262,052 704 2,596
</TABLE>
B-24
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
Account C
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------------
Units Amount Units Amount
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lincoln National Managed
Account
Accumulation Units:
Contract purchases 35,504,608 128,898,876 30,628,296 95,910,986
- ----------------------------------------------
Terminated contracts and
transfers to annuity
reserves (30,307,976) (111,630,287) (25,023,163) (76,850,028)
----------- -------------- ----------- ------------
- ----------------------------------------------
5,196,632 18,268,589 5,605,133 19,060,958
Annuity Reserves:
Transfers from
accumulation units and
between accounts 96,225 352,325 87,231 183,273
Annuity payments (81,051) (297,057) (112,721) (257,050)
Receipt (reimbursement)
of mortality guarantee
adjustment (7,523) (29,092) 143 987
----------- -------------- ----------- ------------
7,651 26,176 (25,347) (72,790)
Lincoln National Money
Market Account
Accumulation Units:
Contract purchases 63,610,822 143,349,365 45,135,781 96,320,764
- ----------------------------------------------
Terminated contracts and
transfers to annuity
reserves (58,757,647) (132,358,398) (47,105,496) (100,754,678)
----------- -------------- ----------- ------------
- ----------------------------------------------
4,852,975 10,990,957 (1,969,715) (4,433,914)
Annuity Reserves:
Transfers from
accumulation units and
between accounts 60,600 8,458 70,227 150,907
Annuity payments (90,926) (80,073) (18,070) (34,758)
Receipt of mortality
guarantee adjustment 354 821 1,052 2,283
----------- -------------- ----------- ------------
(29,972) (70,794) 53,209 118,432
Lincoln National Social
Awareness Account
Accumulation Units:
Contract purchases 94,393,888 308,894,873 39,371,799 97,257,107
- ----------------------------------------------
Terminated contracts and
transfers to annuity
reserves (24,955,052) (83,338,067) (16,236,637) (38,656,851)
----------- -------------- ----------- ------------
- ----------------------------------------------
69,438,834 225,556,806 23,135,162 58,600,256
Annuity Reserves:
Transfers from
accumulation units and
between accounts 243,625 805,720 17,276 37,515
Annuity payments (29,485) (93,573) (19,731) (40,978)
Receipt (reimbursement)
of mortality guarantee
adjustment 232 823 (2,827) (8,131)
----------- -------------- ----------- ------------
214,372 712,970 (5,282) (11,594)
</TABLE>
B-25
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
Account C
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------------
Units Amount Units Amount
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lincoln National Special
Opportunities Account
Accumulation Units:
Contract purchases 33,491,123 193,907,939 37,792,494 169,910,302
- ----------------------------------------------
Terminated contracts and
transfers to annuity
reserves (24,879,192) (141,723,304) (26,432,618) (90,956,261)
----------- -------------- ----------- ------------
- ----------------------------------------------
8,611,931 52,184,635 11,359,876 78,954,041
Annuity Reserves:
Transfers from
accumulation units and
between accounts 64,182 383,208 20,826 121,796
Annuity payments (5,361) (91,944) (10,796) (58,948)
Reimbursement of
mortality guarantee
adjustment (1,335) (8,459) (332) 3,874
----------- -------------- ----------- ------------
47,486 282,805 9,698 66,722
Net increase from unit
transactions $1,021,967,132 $626,658,984
============== ============
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1996.
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
- -----------------------------------------------------------------
<S> <C> <C>
Lincoln National Aggressive Growth
Account $ 80,247,024 $ 3,871,798
Lincoln National Bond Account 36,044,670 23,143,139
Lincoln National Capital Appreciation
Account 114,955,071 1,011,035
Delaware Emerging Growth Account 24,157,773 871,841
Delaware Equity/Income Account 13,032,457 206,826
Delaware Global Bond Account 8,205,951 205,504
Lincoln National Equity-Income Account 162,205,193 2,928,094
Lincoln National Global Asset
Allocation Account 53,672,995 6,537,814
Lincoln National Growth and Income
Account 416,692,620 29,992,516
Lincoln National International Account 64,913,346 18,344,715
Lincoln National Managed Account 94,645,496 22,601,805
Lincoln National Money Market Account 75,871,425 61,319,825
Lincoln National Social Awareness
Account 247,305,890 1,792,745
Lincoln National Special Opportunities
Account 133,204,643 39,339,966
-------------- ------------
$1,524,854,554 $212,167,623
============== ============
</TABLE>
6. DAILY VALUATION CALCULATIONS
Effective October 1996, the daily unit value calculation process was
transferred from the Company to the Delaware Group, an affiliate of the
Company. Costs associated with the calculation of the unit value are paid by
the Company.
B-26
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
Account C
7. CHANGE IN MANAGEMENT
Effective August 29, 1996, Clay Finlay Inc., Subadvisor of the Lincoln National
International Fund Inc., accepted an offer to sell their ownership interest in
the firm to United Asset Management, a New York Stock Exchange ("NYSE") listed
company. In October 1996, variable contractholders, via proxy solicitation,
instructed the Company to vote to retain Clay Finlay as the Subadvisor of the
Lincoln National International Fund.
The shares were voted as follows:
. 91.56% for retaining Clay Finlay,
. 3.26% against retaining Clay Finlay,
. 5.18% abstained
8. ADDITIONAL INVESTMENT OPTIONS
Effective May 1996, three investment options were added to the Variable
Account. The options include the Delaware Group Premium Funds, Inc. which
consist of the Equity/Income Series, Emerging Growth Series and the Global Bond
Series.
B-27
<PAGE>
Account C
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors of The Lincoln National Life Insurance Company and
Contract Owners of Lincoln National Variable Annuity Account C
We have audited the accompanying statement of assets and liability of Lincoln
National Variable Annuity Account C (Variable Account) as of December 31, 1996,
and the related statement of operations for the year then ended, and the
statement of changes in net assets for each of the two years in the period then
ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1996,
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 audits provide 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 Lincoln National Variable
Annuity Account C at December 31, 1996, the results of its operations for the
year then ended, and the changes in its net assets for each of the two years in
the period then ended in conformity with generally accepted accounting
principles.
Fort Wayne, Indiana
March 18, 1997
B-28
<PAGE>
PART C--OTHER INFORMATION
Item 24.
- --------
(a) LIST OF FINANCIAL STATEMENTS
(1) Part A The Table of Condensed Financial Information is included in
Part A of this Registration Statement.
(2) Part B
The following financial statements of Account C are included in the
SAI:
Statement of Assets and Liability -- December 31, 1996
Statement of Operations -- Year ended December 31, 1996
Statements of Changes in Net Assets -- Years ended
December 31, 1996 and 1995
Note to Financial Statements -- December 31, 1996
Report of Ernst & Young LLP, Independent Auditors
(3) Part B
The following GAAP Consolidated Financial Statements and Schedules
of Lincoln National Life Insurance Company are included in the SAI:
Consolidated Balanced Sheets -- December 31, 1995 and 1994
Consolidated Statements of Income -- Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholder's Equity -- Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements -- December 31, 1995
Schedule I -- Summary of Investments -- Other than Investments
In Related Parties -- December 31, 1995
Schedule III -- Supplementary Insurance Information -- Years
Ended December 31, 1995, 1994 and 1993
Schedule IV -- Reinsurance -- Years Ended December 31, 1995, 1994
and 1993
Schedule V -- Valuation and Qualifying Accounts -- Years Ended
December 31, 1995, 1994 and 1993
Report of Ernst & Young LLP, Independent Auditors
The following Statutory Financial Statements and Schedules
of Lincoln National Life Insurance Company are included in the SAI:
Balance Sheets -- Statutory Basis -- Years ended
December 31, 1996 and 1995
Statements of Income -- Statutory Basis -- Years ended
December 31, 1996, 1995 and 1994
Statements of Capital and Surplus -- Statutory Basis --
Years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements -- December 31, 1996
Supplemental Schedule of Selected Statutory Basis
Financial Data -- December 31, 1996
Report of Ernst & Young LLP, Independent Auditors
24 (b) LIST OF EXHIBITS
(4) Variable Annuity Contract
(a) Multi Fund - Single Premium Contract*
(b) Multi Fund 1 - Periodic*
(c) Multi Fund 2 - Flexible**
(d) Multi Fund 3 - Flexible**
(e) Multi Fund 4 - Flexible
(f) Contract Rider - Multi Fund 2 & Multi Fund 3***
(g) Contract Rider - Multi Fund 4***
(5) (a) Deferred Annuity Application
(b) 403(b) Annuity Application
(8) Services Agreement between Delaware Management Holdings, Inc.,
Delaware Service Company, Inc. and Lincoln National Life Insurance
Company dated 8/29/96.***
(9) Opinion and Consent of Jeremy Sachs, Senior Counsel
(10) Opinion and Consent of Ernst & Young LLP, Independent Auditors
(13) Schedule of Computation.***
(14) Financial Data Schedule
(15) (a) Organizational Chart of Lincoln National Life Insurance
Holding Company System***
(b) Memorandum Concerning Books and Records
* Filed with registration statement in 1981.
** Previously filed with registration statement.
***Incorporated by reference to post-effective amendment No. 13 filed on
February 28, 1997.
<PAGE>
Item 25.
- --------
DIRECTORS AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
Positions and Offices with Lincoln National
Name Life Insurance Company
- ---- ----------------------
<S> <C>
Ian M. Rolland** Director
Jon A. Boscia* President, Chief Executive Officer and Director
Carolyn P. Brody* Vice President
Thomas L. Clagg* Vice President and Associate General Counsel
Kelly D. Clevenger* Vice President
Jeffrey K. Dellinger* Vice President
Jack D. Hunter** Executive Vice President and General Counsel
Donald E. Keller* Vice President
H. Thomas Mc Meekin** Director
Reed P. Miller* Vice President
Stephen H. Lewis* Senior Vice President
Lawrence T. Rowland*** Executive Vice President
Keith J. Ryan* Vice President, Asst. Treasurer and Chief Financial Officer
Richard C. Vaughan** Director
Roy V. Washington* Vice President
Janet C. Whitney** Vice President and Treasurer
C. Suzanne Womack** Assistant Vice President and Secretary
O. Douglas Worthington* Vice President, Controller and Assistant Treasurer
</TABLE>
* Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana
46802.
** Principal business address is 200 East Berry Street, Fort Wayne, Indiana
46802-2706.
*** Principal business address is 1700 Magnavox Way, One Reinsurance Place, Fort
Wayne, Indiana 46804.
Item 26.
- --------
PERSONS CONTROLLED BY OR UNDER COMMON
CONTROL WITH THE DEPOSITOR OR REGISTRANT
See Exhibit 15(a): The Organizational Chart of The Lincoln National
Insurance Holding Company System is hereby incorporated herein by this
reference.
Item 27.
- --------
NUMBER OF CONTRACT OWNERS
As of February 28, 1997, there were 452,265 Contract Owners under Account
C.
Item 28.
- --------
INDEMNIFICATION--UNDERTAKING
(a) Brief description of indemnification provisions.
In general, Article VII of the By-Laws of The Lincoln National Life
Insurance Company (LNL) provides that LNL will indemnify certain
persons against expenses, judgments and certain other specified costs
incurred by any such person if he/she is made a party or is threatened
to be made a party to a suit or proceeding because he/she was a
director, officer, or employee of LNL, as long as he/she acted in good
faith and in a manner he/she reasonably believed to be in the best
interests of, or not opposed to the best interests of, LNL. Certain
additional conditions apply to indemnification in criminal proceedings.
In particular, separate conditions govern indemnification of directors,
officers, and employees of LNL in connection with suits by, or in the
rights of, LNL.
Please refer to Article VII of the By-Laws of LNL (Exhibit No. 6(b)
hereto) for the full text of the indemnification provisions.
Indemnification is permitted by, and is subject to the requirements of,
Indiana law.
(b) Undertaking pursuant to Rule 484 of Regulation C under the Securities
Act of 1933:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item
28(a) above or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any such action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 29.
- --------
PRINCIPAL UNDERWRITER
(a) Lincoln National Variable Annuity Fund A (Group); Lincoln National
Variable Annuity Fund A (Individual); Lincoln National Flexible Premium
Variable Life Account D; Lincoln National Variable Annuity Account E;
Lincoln National Flexible Premium Variable Life Account F; Lincoln
National Flexible Premium Variable Life Account G; Lincoln National
Variable Annuity Account H; Lincoln Life Flexible Premium Variable Life
Account K; Lincoln National Variable Annuity Accounts 50 and 51;
(b) See Item 25.
(c) Commissions and Other Compensation Received by Lincoln National Life
Insurance Company from Account C during the fiscal year which ended
December 31, 1996:
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting
Name of Principal Discounts and Compensation Brokerage
Underwriter Commissions on Redemption Commissions Compensation
- ----------------- ---------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
The Lincoln National
Life Insurance a b
Company None $7,757,400 None $55,971,371
</TABLE>
Notes:
(a) These figures represent compensation received by Lincoln National Life
Insurance Company for surrender, withdrawal and contract charges. See Charges
and other deductions, in the Prospectus.
(b) These figures represent compensation received by Lincoln National Life
Insurance Company for mortality and expense guarantees. See Charges and other
deductions, in the Prospectus.
Item 30.
- --------
LOCATION OF ACCOUNTS AND RECORDS
Exhibit 15(b) is hereby expressly incorporated herein by this reference.
Item 31.
- --------
Item 32. Undertakings
- --------
(a) Registrant undertakes that it will file a post-effective amendment to this
registration statement as frequently as necessary to ensure that the
audited financial statements in the registration statement are never more
than 16 months old for so long as payments under the variable annuity
contracts may be accepted.
(b) Registrant undertakes that it will include either (1) as part of any
application to purchase a Certificate or an Individual Contract offered by
the Prospectus, a space that an applicant can check to request a Statement
of Additional Information, or (2) a post cared or similar written
communication affixed to or included in the Prospectus that the applicant
can remove to send for a Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional Information
and any financial statement required to be made available under this Form
promptly upon written or oral request to Lincoln Life at the address or
phone number listed in the Prospectus.
(d) The Lincoln National Life Insurance company hereby represents that the fees
and charges deducted under the contract, in the aggregate, are reasonable
in relation to the services rendered, the expenses expected to be incurred,
and the risks assumed by The Lincoln National Life Insurance Company.
Item 33.
- --------
(Additional Item) - Undertaking Concerning the Texas Optional Retirement
Program
Refer to the initial Registration Statement.
Item 34.
- --------
(Additional Item) - Undertaking Concerning Withdrawal Restrictions on IRC
Section 403(b) Plan Participants
Refer to the initial Registration Statement.
<PAGE>
EXHIBIT INDEX
(4) Variable Annuity Contract
(a) Multi Fund - Single Premium Contract*
(b) Multi Fund 1 - Periodic*
(c) Multi Fund 2 - Flexible**
(d) Multi Fund 3 - Flexible**
(e) Multi Fund 4 - Flexible
(f) Contract Rider - Multi Fund 2 & Multi Fund 3***
(g) Contract Rider - Multi Fund 4***
(5) (a) Deferred Annuity Application
(b) 403(b) Annuity Application
(8) Services Agreement between Delaware Management Holdings, Inc.,
Delaware Service Company, Inc. and Lincoln National Life Insurance
Company dated 8/29/96.***
(9) Opinion and Consent of Jeremy Sachs, Senior Counsel
(10) Opinion and Consent of Ernst & Young LLP, Independent Auditors
(13) Schedule of Computation.***
(14) Financial Data Schedule
(15)
(a) Organizational Chart of The Lincoln National Life Insurance
Holding Company System***
(b) Memorandum Concerning Books and Records
*Filed with registration statement in 1981.
**Previously filed with registration statement.
***Incorporated by reference to post-effective amendment No. 13 filed on
February 28, 1997.
<PAGE>
EXHIBIT 4(e)
Multi Fund 4 Contract
ARTICLE 1
DEFINITIONS
ACCOUNT or VARIABLE ACCOUNT -- The segregated investment account into which the
Lincoln National Life Insurance Company sets aside and invests the variable
assets attributable to this Variable Annuity Contract.
ACCUMULATION UNIT -- A unit of measure used to calculate the variable Contract
Value during the accumulation period.
ANNUITANT -- The person upon whose life the annuity benefit payments made after
the Annuity Commencement Date will be based.
ANNUITY COMMENCEMENT DATE -- The Valuation Date when money is withdrawn for
payment of annuity benefits under the Annuity Payment Option selected.
ANNUITY PAYMENT OPTION -- An optional form of payment of the annuity provided
for under this Contract.
ANNUITY UNIT -- A unit of measure used after the Annuity Commencement Date to
calculate the amount of variable annuity payments.
BENEFICIARY -- The person or entity designated by the Owner to receive the Death
Benefit, if any, payable upon the death of the Annuitant.
CODE -- The Internal Revenue Code (IRC) of 1986, as amended.
CONTINGENT DEFERRED SALES CHARGE (CDSC) -- Charges assessed on premature
surrender of the Contract, calculated according to the Contract provisions.
CONTRACT -- The agreement between LNL and the Owner in which LNL provides a
variable annuity.
CONTRACT VALUE -- The sum of the values of all the Accumulation Units
attributable to this Contract at a given time and the value of monies in the
Fixed Account.
CONTRACT YEAR -- The period from the anniversary of the Contract Date on your
Contract Data Page 3 to the anniversary in the following year.
DEATH BENEFIT -- The amount payable upon death of the Annuitant, or Owner or
Joint Owner.
FUNDS -- the mutual fund into which Purchase Payments allocated to the Variable
Account are invested.
FIXED ACCOUNT -- The fixed portion of this Contract which is invested in the
general account of LNL.
HOME OFFICE -- The principal office of LNL located at 1300 South Clinton Street,
Fort Wayne, Indiana 46802.
LNL -- The Lincoln National Life Insurance Company.
MATURITY DATE -- The date specified on Page 3 of this Contract.
NET ASSET VALUE PER SHARE -- The market value of a fund share calculated at the
close of the exchanges each day by taking the closing market value of all
securities owned, adding all other assets (such as cash), subtracting all
liabilities, and then dividing the result (total net assets) by the number of
shares outstanding.
OWNER -- The individual or entity who exercises rights of ownership under this
Contract.
PURCHASE PAYMENTS -- Amounts paid into this Contract.
RECIPIENT--The individual or entity who may receive Death Benefits under this
contract. This term includes the Beneficiary or Surviving Joint Owner or
Contingent Owner.
QUALIFIED PLAN -- A retirement plan qualified for special tax treatment under
the Internal Revenue Code of 1986, as amended, including Sections 401, 403, 408
and 457. All other plans are considered to be Non-Qualified.
SERIES -- Any of the underlying portfolios of the Delaware Group Premium Fund,
Inc. in which Purchase Payments allocated to the Variable Account are invested.
SUB-ACCOUNT -- That portion of the Variable Account which pertains to
investments in the Accumulation Units and Annuity Units of a particular Fund or
Series.
VALUATION DATE -- Each day the New York Stock
<PAGE>
Exchange (NYSE) is open for trading.
VALUATION PERIOD -- The period commencing at the close of trading on each day
that the New York Stock Exchange is open for trading (Valuation Date) and ending
at the close of such trading on the next succeeding Valuation Date.
ARTICLE 2
PURCHASE PAYMENTS, OPTIONS, AND
BENEFITS
2.01 WHERE PAYABLE
All Purchase Payments must be made to LNL at its Home Office.
2.02 AMOUNT AND FREQUENCY
Purchase Payments are made in an amount and at the frequency shown on page 3.
The Owner may change the frequency or amount of Purchase Payments subject to
LNL's rules in effect at the time of the change.
The minimum initial Purchase Payment is $1,000 for Individual Retirement Annuity
(IRA) Plans under Code Section 408 and $3,000 for all other Contracts. Minimum
subsequent Purchase Payments for all plans are $100.00 per payment.
Purchase Payments may be made until the earliest of the Annuity Commencement
Date, the surrender of the Contract, the Maturity Date, or payment of any Death
Benefit.
2.03 VARIABLE ACCOUNT
Purchase Payments under the Contract may be allocated to the Lincoln National
Variable Annuity Account C (Variable Account) and/or to the Fixed Account of the
Contract. The Variable Account is for the exclusive benefit of persons entitled
to receive benefits under variable annuity contracts. The Variable Account will
not be charged with the liabilities arising from any other part of LNL's
business. The Owner may direct Purchase Payments under the Contract to any of
the available Sub-accounts subject to the following limitations. A minimum
payment to any one Sub-account must be at least $100. If the Owner elects to
direct Purchase Payments to a new Sub-account not previously selected, the
election must be in writing to LNL or by telephone transfer provided LNL has
received the appropriate authorization. The amounts allocated to each Sub-
account will be invested at net asset value in the shares of one of the
regulated investment companies (the Funds or Series). The Funds and Series are
listed on the Contract Data Page 3 of your Contract.
LNL reserves the right to eliminate the shares of any of the Funds or Series and
substitute the securities of a different investment company if the shares of a
Fund or Series are no longer available for investment, or, if in the
judgment of LNL, further investment in any Fund or Series should become
inappropriate in view of the purposes of the Contract. LNL may add a Fund or
Series in order to invest the assets of a new Sub-account in the Variable
Account. LNL shall give the Owner written notice of the elimination and
substitution of any Fund or Series within fifteen days after such substitution
occurs.
LNL shall use each Purchase Payment allocated to the Variable Account by the
Owner to buy Accumulation Units in the Sub-account(s) selected by the Owner. The
number of Accumulation Units bought shall be determined by dividing the amount
directed to the Sub-account by the dollar value of an Accumulation Unit in such
Sub-account as of the point of the next valuation of such Sub-account
immediately following receipt of the Purchase Payment at the Home Office of
LNL. The number of Accumulation Units held for the Variable Account of an Owner
shall not be changed by any change in the dollar value of Accumulation Units in
any Sub-account.
<PAGE>
2.04 VALUATION OF ACCUMULATION UNITS
The variable Contract Value of an Owner's Contract at any time prior to the
Annuity Commencement Date equals the sum of the values of the Accumulation Units
credited in the Variable Account under the Contract.
The value of a Sub-account is the number of units in the Sub-account multiplied
by the value of an Accumulation Unit of the Sub-account.
Accumulation Units for each Sub-account are valued separately. Initially, the
value of an Accumulation Unit was set at $1.00. Thereafter, the value of an
Accumulation Unit in any Sub-account on any Valuation Date equals the value of
an Accumulation Unit in that Sub-account as of the immediately preceding
Valuation Date, multiplied by the "Net Investment Factor" of that Sub-account
for the current Valuation Period.
The Net Investment Factor is an index which measures the investment performance
of a Sub-account from one Valuation Period to the next. The Net Investment
Factor for any Sub-account for any Valuation Period is equal to (1) divided by
(2) and subtracting (3) from the result, where:
(1) is the result of:
(a) the Net Asset Value Per Share of the Fund or Series held in the Sub-
account, determined at the end of the current Valuation Date; plus
(b) the per share amount of any dividend or capital gain distribution made
by the Fund or Series in the Sub-account, if the "ex-dividend" date occurs
during the Valuation Period; plus or minus
(c) a per share charge or credit for any taxes reserved for;
(2) is the Net Asset Value Per Share of the Fund or Series held in the Sub-
account, determined at the end of the prior Valuation Date;
(3) is a daily factor representing the mortality and expense risk and
administrative charge deducted from the Sub-account adjusted for the number of
days in the Valuation Period. On an annual basis, this charge will not exceed
1.002%.
The Accumulation Unit value and Annuity Unit value may increase or decrease the
dollar value of benefits under the Contract. The dollar value of benefits will
not be adversely affected by expenses incurred by LNL.
2.05 FIXED ALLOCATIONS
Purchase Payments under the Contract may be allocated to the Variable Account
and/or to the Fixed Account of the Contract. A minimum allocation to the Fixed
Account must be at least $100.
2.06 CREDITING OF INTEREST ON FIXED ALLOCATIONS
Interest shall be credited daily on all Purchase Payments that are allocated to
the Fixed Account of this Contract.
Prior to the Annuity Commencement Date, payment of any Death Benefit, or
surrender of this Contract, whichever occurs first, LNL guarantees that it will
credit interest on fixed allocations at an effective annual rate not less than
3.0% during all years. A table of guaranteed values for the fixed allocations
may be found in Article 8.
LNL may credit interest at rates in excess of the guaranteed rates at any time.
2.07 AUTOMATIC NONFORFEITURE OPTION
In the event that Purchase Payments are stopped, this Contract will continue as
a paid-up Contract until the earlier of the Maturity Date, surrender of the
Contract, payment of any Death Benefit, or the Annuity Commencement Date.
Purchase Payments may be resumed at any time prior to the Maturity Date,
surrender of the Contract, payment of any Death Benefit, or the Annuity
Commencement Date. LNL reserves the right to surrender this Contract in
accordance with the terms set forth in the nonforfeiture law, applicable in your
state, for individual deferred annuities.
2.08 TRANSFERS
Prior to the earlier of the Maturity Date, surrender of the Contract, payment of
any Death Benefit, or the
<PAGE>
Annuity Commencement Date, the Owner may direct a transfer of assets from one
Sub-account to another Sub-account or to the Fixed Account of the Contract. The
Owner may also direct a transfer of assets from the Fixed Account of the
Contract to one or more Sub-accounts of the Variable Account, subject to the
limitations described later in this section. Such a transfer request must be in
writing or by telephone provided LNL has received the appropriate authorization
from the Owner. Amounts transferred to the Sub-account(s) will purchase
Accumulation Units as described in Section 2.03.
A transfer will result in the purchase of Accumulation Units in one Sub-account
and the redemption of Accumulation Units in the other Sub-account. Such a
transfer will be accomplished at relative Accumulation Unit values as of the
Valuation Date the transfer request is received. The valuation of Accumulation
Units is described in Section 2.04.
LNL reserves the right to impose a charge in the future for transfers between
Sub-accounts.
The minimum transfer amount is $500 or the entire amount in the Sub-
account/Fixed Account, whichever is less. If, after the transfer, the amount
remaining under this Contract in the Sub-account/Fixed Account from which the
transfer is taken is less than $500, the entire amount held in that Sub-
account/Fixed Account will be transferred.
For transfers between Sub-accounts and from the Sub-account(s) to the Fixed
Account of the Contract, there are no restrictions on the maximum amount which
may be transferred. For transfers from the Fixed Account of the Contract to the
Variable Account, the sum of the percentages of fixed value transferred will be
limited to 25% in any 12 month period. Transfers cannot be made during the first
30 days after the Contract Date and no more than six transfers will be allowed
in any Contract Year. LNL reserves the right to waive any of these restrictions.
2.09 WITHDRAWAL OPTION
The Owner may withdraw a part of the surrender value of this Contract, subject
to the charges outlined under Surrender Option (see Section 2.10). The first
partial withdrawal of Contract Value during a Contract Year will be free of
Contingent Deferred Sales Charges to the extent that the withdrawal does not
exceed 15% of total Purchase Payments. Withdrawals will be treated as "first in-
first out (FIFO)" for purposes of calculating the Contingent Deferred Sales
Charge (see Section 2.11). Withdrawals will be effective on the Valuation Date
on which LNL receives a written request at its Home Office.
The minimum withdrawal is $100. LNL reserves the right to surrender this
Contract if any withdrawal reduces the Contract Value to a level in which this
Contract may be surrendered in accordance with the terms set forth in the
nonforfeiture law, applicable in your state, for individual deferred annuities.
The remaining value will be subject to the charges as provided under Surrender
Option (see Section 2.10). The request should specify from which Sub-account the
withdrawal will be made. If no Sub-account is specified, LNL will withdraw, on a
pro-rata basis from each Sub-account, the amount requested.
Any cash payment will be mailed from LNL's Home Office within seven days after
the date of withdrawal; however, LNL may be permitted to defer such payment
under the Investment Company Act of 1940, as in effect at the time such request
for withdrawal is received in its Home Office.
For purposes of this Section, the Fixed Account of the Contract is considered a
Sub-account.
The Withdrawal Option is not available after the Annuity Commencement Date.
2.10 SURRENDER OPTION
The Owner may surrender this Contract for its surrender value. On surrender,
this Contract terminates. Surrender will be effective on the Valuation Date on
which LNL receives a written request at its Home Office. The surrender value
will be the total Contract Value on the Valuation Date, less a Contingent
Deferred Sales Charge.
Any cash payment will be mailed from LNL's Home Office within seven days after
the date of surrender; however, LNL may be permitted to defer such payment under
the Investment Company Act of 1940, as in effect at the time a request for
surrender is received in its Home Office.
The Surrender Option is not available after the Annuity
<PAGE>
Commencement Date.
2.11 CONTINGENT DEFERRED SALES CHARGE
The Contingent Deferred Sales Charge (CDSC) is calculated separately for each
Contract Year's Purchase Payments to which a charge applies. Charges are
applied as follows:
Number of complete Contract Years that
a Purchase Payment has been invested.
Less
than At least
--------------------------------------
1 yr 1 2 3 4 5 6 7+
CDSC as a percentage 7% 6 5 4 3 2 1 0%
of the surrendered or
withdrawn Purchase
Payments.
A CDSC will be waived under certain circumstances (see Section 2.12 for
details).
For purposes of calculating CDSC, LNL assumes that Purchase Payments are
withdrawn on a "first in-first out (FIFO)" basis, and that all Purchase Payments
are withdrawn before any earnings are withdrawn.
2.12 WAIVER OF CONTINGENT DEFERRED SALES CHARGES
A surrender of this Contract or withdrawal of Contract Value prior to the
Annuity Commencement Date may be subject to a Contingent Deferred Sales Charge
as described in Sections 2.09 and 2.10, except that such charges do not apply
to: (1) the first withdrawal of Contract Value during a Contract Year to the
extent that the amount withdrawn does not exceed 15% of total Purchase Payments
(this 15% withdrawal exception does not apply to a surrender of a Contract); (2)
a surrender of the Contract as a result of "permanent and total disability"of
the Annuitant as defined in section 22(e)(3) of the Internal Revenue Code
subsequent to the effective date of this Contract and prior to the 65th birthday
of the Annuitant; (3) the assumption of Contract ownership by the surviving
spouse as Beneficiary of the Contract as a result of the death of the Annuitant
(in such case, the CDSC would be waived on the Contract Value as of the date
which the surviving spouse assumed the Contract ownership); (4) a surrender of
the Contract as a result of the death of the Annuitant; (5) annuitization.
The Contingent Deferred Sales Charge will only be waived if LNL is in receipt of
proof, satisfactory to LNL, of the exception.
2.13 DEATH BEFORE THE ANNUITY COMMENCEMENT DATE
A. Entitlement and Determination of Death Benefit.
Upon the death of the Annuitant, including an Owner/Annuitant or Joint
Owner/Annuitant, a Death Benefit equal to the Contract Value will be paid to the
Beneficiary.
Upon the Death of the non-Annuitant/Owner, or non-Annuitant/Joint Owner, a
Death Benefit equal to the surrender value will be paid to the surviving Joint
Owner, if any. If no Joint Owner survives, the surrender value will be paid to
the Contingent Owner, if any. If no Joint or Contingent Owner exists, the
surrender value will be paid to the Annuitant.
All Death Benefit payments will be subject to the laws and regulations governing
death benefits.
B. Proof of Death.
The Death Benefit will be payable after LNL is in receipt of: (1) proof,
satisfactory to LNL, of the death; (2) written authorization for payment; and
(3) all claim forms, fully completed.
Due proof of death may be a certified copy of a death certificate, a certified
copy of the statement of death from the attending physician, a certified copy of
a decree of a court of competent jurisdiction as to the finding of death, or any
other proof of death acceptable to LNL.
C. Payment of Death Benefits.
1. Death of Owner or Owner / Annuitant
Notwithstanding any provision of this Contract to the contrary, no payment of
Death Benefits provided upon the death of the Owner or Joint Owner will be
allowed that does not satisfy the requirements of Code Section 72(s) or
401(a)(9) as applicable, as amended from time to time.
The Death Benefit payable on the death of the Owner, including the Owner/
Annuitant, or after the death of the first Joint Owner including a Joint
Owner/Annuitant, will be distributed as follows:
a. the Death Benefit must be completely distributed within five years of the
Owner's or Joint Owner's date of death; or
<PAGE>
b. the designated recipient may elect, within the one year period after the
Owner's or Joint Owner's date of death, to receive the Death Benefit in
substantially equal installments over the life of such designated recipient or
over a period not extending beyond the life expectancy of such designated
recipient; provided that such distributions begin not later than one year
after the Owner's or Joint Owner's date of death.
If the Owner is a corporation or other non-individual (non-natural person), the
death of the Annuitant will be treated as the death of the Owner for purposes of
distributing the Death Benefit payments described in a. and b. above.
If a lump sum settlement is elected, the proceeds will be paid within seven days
of approval by LNL of the claim. This payment may be postponed as permitted by
the Investment Company Act of 1940.
If the surviving spouse of the deceased is the designated recipient of the Death
Benefit, the surviving spouse may elect to continue the Contract as the new
Owner. If the deceased was also the annuitant, the surviving spouse will also
become the Annuitant.
2. Death of Non-Owner/Annuitant
Upon the death of the non-Owner/Annuitant or non-Joint Owner/Annuitant, Death
Benefits will be paid to the Beneficiary in a lump sum. The Beneficiary then may
select one of the Annuity Payment Options within 60 days of the lump sum
becoming payable.
If the surviving spouse of the deceased is a designated Beneficiary, the
surviving spouse may elect to continue the Contract as the new Owner and
Annuitant.
If a lump sum settlement is elected, the proceeds will be paid within seven days
of approval by LNL of the claim. This payment may be postponed as permitted by
the Investment Company Act of 1940.
ARTICLE 3
ANNUITY PAYMENT OPTION BENEFITS
3.01 ANNUITY PAYMENTS
An election to receive payments under an Annuity Payment Option must be made by
the Maturity Date.
If an Annuity Payment Option is not chosen prior to the Maturity Date,
payments will commence to the Owner on the Maturity Date under the Annuity
Payment Option providing a Life Annuity with annuity payments guaranteed for 10
years.
The Maturity Date is set forth on Page 3. Upon written request by the Owner and
any Beneficiary who cannot be changed, the Maturity Date may be deferred.
Purchase Payments may be made until the new Maturity Date.
If the new Maturity Date extends beyond age 85, LNL reserves the right to
restrict the availability of certain Annuity Payment Options.
3.02 CHOICE OF ANNUITY PAYMENT OPTION
By Owner
Prior to the Annuity Commencement Date, the Owner may choose or change any
Annuity Payment Option.
By Recipient of Death Benefit
Prior to the Annuity Commencement Date, at the time a Death Benefit is payable,
a designated recipient may choose or change any Annuity Payment Option if the
Death Benefit is available to the recipient in a lump sum. If the Owner,
Owner/Annuitant, or Joint Owner is the deceased, the Annuity Payment Option must
meet the requirements of Code Section 72(s) or 401(a)(9) as applicable.
A choice or change must be in writing to LNL.
For a 100% fixed annuity payment, the Annuity Commencement Date must be at least
thirty days prior to the first payment date. For a combination fixed and
variable annuity payment or a 100% variable annuity payment, the Annuity
Commencement Date will be fourteen days prior to the first payment date.
After the Annuity Commencement Date, the Annuity Payment Option may not be
changed.
3.03 ANNUITY PAYMENT OPTIONS
1. Life Annuity /Life Annuity with Guaranteed Period
<PAGE>
- -- Payments will be made for the life of the Annuitant with no certain period,
or with a 10 years certain period, or with a 20 years certain period. Upon the
death of the Annuitant, payments will continue to the Beneficiary for the
remainder, if any, of the certain period.
2. Unit Refund Life Annuity -- Payments will be made for the life of the
Annuitant with the guarantee that upon the death of the Annuitant a payment to
the Beneficiary will be made of the value of the number of Annuity Units equal
to the excess, if any, of (a) over (b) where (a) is the total amount applied
under the option divided by the Annuity Unit Value at the Annuity Commencement
Date and (b) is the product of the number of Annuity Units represented by each
payment and the number of payments paid prior to death.
3. Joint Life Annuity/Joint Life Annuity with Guaranteed Period -- Payments will
be made for the joint lives of the Annuitant and a Joint Annuitant of the
Owner's choice with no certain period, or with a 10 years certain period, or
with a 20 years certain period. Payments continue for the life of the survivor
at the death of the Annuitant or Joint Annuitant. Upon the deaths of both
Annuitant's, payments will continue to the Beneficiary for the remainder, if
any, of the certain period.
4. Other options may be available as agreed upon in writing by LNL.
At the time an Annuity Payment Option is selected under the provisions of this
Contract, the Owner may elect to have the total Contract Value applied to
provide a variable annuity payment, a fixed annuity payment, or a combination
fixed and variable annuity payment. If no election is made, the value of the
Owner's Variable Account shall be used to provide a variable annuity payment and
the value of the Owner's Fixed Account shall be used to provide a fixed annuity
payment.
The amount of annuity payment will depend on the age and sex (except in cases
where unisex rates are required) of the Annuitant as of the Annuity Commencement
Date. A choice may be made to receive payments once each month, four times each
year, twice each year, or once each year. The Contract Value and Annuity Unit
value used to effect benefit payments will be calculated as of the Annuity
Commencement Date.
Article 6 of this Contract illustrates the minimum payment amounts and the age
adjustments which will be used to determine the first monthly payment under a
variable annuity payment option. The tables show the dollar amount of the first
monthly payment which can be purchased with each $1,000 of Contract Value,
after deduction of any applicable premium taxes. Amounts shown use the 1983 'a'
Individual Annuity Mortality Table, modified, with an assumed rate of return
of 5% per year.
Article 7 of this Contract illustrates the minimum payment amounts and the age
adjustments which will be used to determine the monthly payments under a fixed
annuity payment option. The tables show the dollar amount of the guaranteed
monthly payments which can be purchased with each $1,000 of Contract Value,
after deduction of any applicable premium tax. Amounts shown use the 1983 'a'
Individual Annuity Mortality Table, modified, with an interest rate of 3.0% per
year and a 2.0% expense load.
3.04 DETERMINATION OF THE AMOUNT OF VARIABLE ANNUITY PAYMENTS AFTER THE FIRST
PAYMENT
The first variable annuity payment is sub-divided into components each of which
represents the product of: (a) the percentage elected by the Contract Owner of a
specific Sub-account the performance of which will determine future variable
annuity payments, and (b) the entire first variable annuity payment. Each
variable annuity payment after the first payment attributable to a specific Sub-
account will be determined by multiplying the Annuity Unit value for that Sub-
account for the date each payment is due by a constant number of Annuity Units.
This constant for each specific Sub-account is determined by dividing the
component of the first payment attributable to such Sub-account as described
above by the Annuity Unit value for that Sub-account on the Annuity Commencement
Date. The total variable annuity payment will be the sum of the payments
attributable to each Sub-account.
The Annuity Unit value for any Valuation Period for any Sub-account is
determined by multiplying the Annuity Unit value for the immediately preceding
Valuation Period by the product of (a) 0.999866337 raised to a power equal to
the number of days in the current Valuation Period and (b) the Net Investment
Factor of the Sub-account for the Valuation Period for
<PAGE>
which the Annuity Unit value is being determined.
The valuation of all assets in the Sub-account shall be determined in accordance
with the provisions of applicable laws, rules, and regulations. The method of
determination by LNL of the value of an Accumulation Unit and of an Annuity Unit
will be conclusive upon the Owner and any recipient of Death Benefits.
LNL guarantees that the dollar amount of each installment after the first shall
not be affected by variations in mortality experience from mortality assumptions
on which the first installment is based.
After the Annuity Commencement Date, if any portion of the annuity payment is a
variable annuity payment, the Owner may direct a transfer of assets from one
Sub-account to another Sub-account or to a fixed annuity payment. Such
transfers will be limited to three (3) times per Contract Year. Assets may not
be transferred from a fixed annuity payment to a variable annuity payment.
A transfer from one Sub-account to another Sub-account will result in the
purchase of Annuity Units in one Sub-account, and the redemption of Annuity
Units in the other Sub-account. Such a transfer will be accomplished at
relative Annuity Unit values as of the Valuation Date the transfer request is
received. The valuation of Annuity Units is described above. A transfer from
one Sub-account to a fixed annuity payment will result in the redemption of
Annuity Units in one Sub-account and the purchase of a fixed annuity payment.
3.05 PROOF OF AGE
Payment will be subject to proof of age that LNL will accept such as a certified
copy of a birth certificate.
3.06 MINIMUM ANNUITY PAYMENT REQUIREMENTS
If the Annuity Payment Option chosen results in payments of less than $50 per
Sub-account, the frequency will be changed so that payments will be at least
$50.
For the purposes of this Section, the fixed annuity payment of the Contract is
considered a Sub-account.
3.07 EVIDENCE OF SURVIVAL
LNL has the right to ask for proof that the person on whose life the payment is
based is alive when each payment is due.
3.08 CHANGE IN ANNUITY PAYMENT OPTION
The Annuity Payment Option may not be changed after the Annuity Commencement
Date.
ARTICLE 4
BENEFICIARY
4.01 DESIGNATION
The Owner may designate a Beneficiary(s).
Unless otherwise stated in the Beneficiary designation, if there is more than
one Beneficiary they are presumed to share equally.
4.02 CHANGE
The Owner may change any Beneficiary unless otherwise provided in the previous
designation.
A change of Beneficiary will revoke any previous designation.
A change may be made by filing a written request, in a form acceptable to LNL,
at its Home Office. The change will become effective upon receipt of the written
request by LNL at its Home Office.
LNL reserves the right to request the Contract for endorsement of the change.
4.03 DEATH OF BENEFICIARY
Unless otherwise provided in the Beneficiary designation, if any Beneficiary
dies before the Annuitant, that Beneficiary's interest will go to any other
Beneficiaries named, according to their respective
<PAGE>
interests. If there are no Beneficiaries, benefits will be paid to a Contingent
Beneficiary(s), if any. If no Beneficiary or Contingent Beneficiary survives
the Annuitant, the proceeds will be paid to the Owner if living; otherwise, to
the Owner's estate.
Once a Beneficiary is entitled to death proceeds, the Beneficiary may name his
or her own Beneficiary(s) to receive any remaining benefits due under the
Contract, should the original Beneficiary die prior to receipt of all benefits.
If no Beneficiary is named by the original Beneficiary, any remaining benefits
will be paid to the original Beneficiary's estate. This designation must be made
to the LNL Home Office.
ARTICLE 5
GENERAL PROVISIONS
5.01 THE CONTRACT
The Contract, the application, and any riders attached constitute the entire
Contract. Only the President, a Vice President, the Secretary or an Assistant
Secretary of LNL has the power, on behalf of LNL, to change, modify, or waive
any provisions of this Contract.
LNL reserves the right to unilaterally change the Contract for the purpose of
keeping the Contract in compliance with federal or state law.
Any changes, modifications, or waivers must be in writing. No representative
or person other than the above named officers has authority to change or modify
this Contract or waive any of its provisions. All terms used in this Contract
will have their usual and customary meaning except when specifically defined.
5.02 OWNERSHIP
The Owner is the person who has the ability to exercise the rights within this
Contract.
The Owner may name only his or her spouse as a Joint Owner. Joint Owner(s)
shall be treated as having equal, undivided interests in the Contract, including
rights of survivorship. Either Joint Owner, independently of the other, may
exercise any ownership rights in the Contract.
The Owner may name a Contingent Owner. A Contingent Owner cannot exercise any
ownership rights in this Contract while the Contract Owner or Joint Owner are
alive.
5.03 ASSIGNMENTS
If this Contract is used with a Qualified Plan, the Contract will not be
transferable. It may not be sold, assigned, discounted or pledged as collateral
for a loan or as security for the performance of an obligation or for any other
purpose.
To the extent allowed by law, the Contract Value and Death Benefits will not be
subject to any claims of creditors.
5.04 INCONTESTABILITY
This Contract will not be contested by LNL.
5.05 MISSTATEMENT OF AGE AND/OR SEX
If the age and/or sex of the Annuitant has been misstated, the benefits
available under this Contract will be those which the Purchase Payments would
have purchased using the correct age and/or sex. Any underpayment already made
by LNL shall be made up immediately and any overpayments already made by LNL
shall be charged against the annuity payments falling due after the correction
is made.
5.06 NONPARTICIPATING
The Contract is nonparticipating and will not share in the surplus earnings of
LNL.
5.07 VOTING RIGHTS
The Owner shall have the right to vote only at the meetings of the Fund(s) or
Series invested in by the Owner due to the Owner's interest in the Sub-accounts
of the Variable Account. Ownership of this Contract shall not entitle any
person to vote at any meeting of shareholders of LNL. Votes attributable to the
Contract shall be cast in conformity with applicable law.
5.08 OWNERSHIP OF THE ASSETS
LNL shall have exclusive and absolute ownership and control of its assets,
including all assets in the Variable Account.
<PAGE>
5.09 REPORTS
At least once each Contract Year LNL shall mail a report to the Owner. The
report shall be mailed to the last address known to LNL. Prior to the Annuity
Commencement Date, the report shall include a statement of the number of
Accumulation Units credited to the Variable Account under this Contract and the
dollar value of such units as well as a statement of the value of the fixed
portion of this Contract. The information in the report shall be as of a date
not more than two months prior to the date of mailing the report. LNL shall
also mail to the Owner at least once in each Contract Year a report of the
investments held in the Sub-accounts under this Contract.
5.10 PREMIUM TAX
State and local government premium tax, if applicable, will be deducted from
Purchase Payments or Contract Value. This will be deducted when incurred by
LNL or at another time of LNL's choosing.
5.11 MAXIMUM ISSUE AGE
This Contract will not be issued with an Annuitant over the age of 84.
<PAGE>
<TABLE>
<CAPTION>
ARTICLE 6
ANNUITY PURCHASE RATES UNDER A VARIABLE PAYMENT OPTION
- -----------------------------------------------------------------------------------------------------------------------------------
DOLLAR AMOUNT OF FIRST MONTHLY PAYMENT WHICH IS
PURCHASED WITH EACH $1,000 APPLIED
- ------------------------------------------------------------------------------------------------------------------------------------
SINGLE LIFE ANNUITIES
No 120 240
Period Months Months Cash
age Certain Certain Certain Refund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
60 5.54 5.48 5.29 5.36
61 5.63 5.56 5.35 5.43
62 5.73 5.65 5.42 5.51
63 5.84 5.75 5.48 5.59
64 5.95 5.85 5.54 5.68
65 6.07 5.96 5.60 5.78
66 6.21 6.07 5.67 5.88
67 6.35 6.19 5.73 5.98
68 6.50 6.32 5.79 6.09
69 6.66 6.45 5.85 6.21
70 6.84 6.60 5.91 6.34
71 7.03 6.75 5.97 6.47
72 7.24 6.90 6.02 6.61
73 7.47 7.07 6.07 6.76
74 7.71 7.24 6.11 6.91
75 7.98 7.41 6.15 7.08
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
JOINT AND SURVIVOR ANNUITIES
Joint and Full to Survivor Joint and Two-Thirds Survivor
Certain Period Joint Certain Period
None 120 240 Age None 120 240
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5.11 5.10 5.07 60 5.54 5.49 5.30
5.18 5.17 5.13 61 5.64 5.57 5.36
5.25 5.25 5.19 62 5.74 5.66 5.42
5.33 5.32 5.26 63 5.84 5.75 5.48
5.42 5.41 5.32 64 5.96 5.86 5.54
5.51 5.50 5.39 65 6.08 5.96 5.61
5.60 5.59 5.46 66 6.21 6.07 5.67
5.71 5.70 5.54 67 6.35 6.19 5.73
5.82 5.80 5.61 68 6.50 6.32 5.79
5.95 5.92 5.68 69 6.66 6.45 5.85
6.08 6.05 5.75 70 6.83 6.59 5.91
6.22 6.18 5.82 71 7.02 6.73 5.97
6.37 6.32 5.89 72 7.22 6.89 6.02
6.53 6.47 5.95 73 7.43 7.04 6.07
6.71 6.63 6.01 74 7.67 7.21 6.11
6.90 6.79 6.07 75 7.92 7.38 6.15
- ------------------------------------------------------------------------------------------------------------------------------------
Age Adjustment Table
Year of Birth Adjustment to Age Year of Birth Adjustment to Age
- ------------------------------------------------------------------------------------------------------------------------------------
Before 1920 + 2 1960-1969 - 3
1920-1929 + 1 1970-1979 - 4
1930-1939 0 1980-1989 - 5
1940-1949 - 1 1990-1999 - 6
1950-1959 - 2 ETC. ETC.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE 7
ANNUITY PURCHASE RATES UNDER A FIXED PAYMENT OPTION
- -------------------------------------------------------------------------------------------
DOLLAR AMOUNT OF FIRST MONTHLY PAYMENT WHICH IS
PURCHASED WITH EACH $1,000 APPLIED
- -------------------------------------------------------------------------------------------
SINGLE LIFE ANNUITIES
No 120 240
Period Months Months Cash
age Certain Certain Certain Refund
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
60 4.42 4.38 4.22 4.18
61 4.52 4.47 4.29 4.26
62 4.62 4.56 4.36 4.34
63 4.73 4.66 4.43 4.42
64 4.85 4.77 4.50 4.51
65 4.97 4.89 4.57 4.60
66 5.11 5.01 4.64 4.69
67 5.25 5.13 4.71 4.79
68 5.41 5.27 4.78 4.90
69 5.57 5.41 4.85 5.01
70 5.75 5.56 4.91 5.13
71 5.95 5.71 4.98 5.25
72 6.16 5.88 5.04 5.38
73 6.38 6.05 5.09 5.52
74 6.63 6.23 5.14 5.66
75 6.90 6.42 5.19 5.81
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
JOINT AND SURVIVOR ANNUITIES
Joint and Full to Survivor Joint and Two-Thirds Survivor
Certain Period Joint Certain Period
None 120 240 Age None 120 240
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
4.01 4.01 3.98 60 4.43 4.38 4.22
4.09 4.08 4.05 61 4.52 4.47 4.29
4.17 4.16 4.12 62 4.63 4.57 4.36
4.25 4.25 4.19 63 4.74 4.67 4.43
4.34 4.34 4.26 64 4.85 4.78 4.50
4.44 4.43 4.34 65 4.98 4.89 4.57
4.54 4.54 4.42 66 5.11 5.01 4.64
4.66 4.64 4.50 67 5.26 5.13 4.71
4.77 4.76 4.58 68 5.41 5.27 4.78
4.90 4.88 4.66 69 5.57 5.41 4.85
5.04 5.01 4.74 70 5.75 5.55 4.91
5.18 5.15 4.82 71 5.94 5.70 4.98
5.34 5.30 4.89 72 6.14 5.86 5.03
5.51 5.45 4.96 73 6.35 6.03 5.09
5.69 5.62 5.03 74 6.59 6.20 5.14
5.89 5.79 5.09 75 6.84 6.38 5.18
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Age Adjustment Table
Year of Birth Adjustment to Age Year of Birth Adjustment to Age
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Before 1920 + 2 1960-1969 - 3
1920-1929 + 1 1970-1979 - 4
1930-1939 0 1980-1989 - 5
1940-1949 - 1 1990-1999 - 6
1950-1959 - 2 ETC. ETC.
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ARTICLE 8
GUARANTEED ACCUMULATED VALUES AND SURRENDER VALUES
FOR FIXED ALLOCATIONS*
<TABLE>
<CAPTION>
$1,000 Annual Contribution $100 Monthly Contribution
- ----------------------------------------------- -------------------------------------------
Guaranteed Guaranteed Guaranteed Guaranteed
End of Accumulated Surrender End of Accumulated Surrender
Year Value Value Year Value Value
- ----------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C>
1 1,030.00 960.00 1 1,219.41 1,135.41
2 2,090.90 1,960.90 2 2,475.41 2,319.41
3 3,183.63 3,003.63 3 3,769.08 3,553.08
4 4,309.14 4,089.14 4 5,101.56 4,837.56
5 5,468.41 5,218.41 5 6,474.02 6,174.02
6 6,662.46 6,392.46 6 7,887.66 7,563.66
7 7,892.34 7,612.34 7 9,343.70 9,007.70
8 9,159.11 8,879.11 8 10,843.42 10,507.42
9 10,463.88 10,183.88 9 12,388.14 12,052.14
10 11,807.80 11,527.80 10 13,979.19 13,643.19
11 13,192.03 12,912.03 11 15,617.98 15,281.98
12 14,617.79 14,337.79 12 17,305.93 16,969.93
13 16,086.32 15,806.32 13 19,044.52 18,708.52
14 17,598.91 17,318.91 14 20,835.27 20,499.27
15 19,156.88 18,876.88 15 22,679.74 22,343.74
16 20,761.59 20,481.59 16 24,579.54 24,243.54
17 22,414.44 22,134.44 17 26,536.34 26,200.34
18 24,116.87 23,836.87 18 28,551.84 28,215.84
19 25,870.37 25,590.37 19 30,627.81 30,291.81
20 27,676.49 27,396.49 20 32,766.06 32,430.06
21 29,536.78 29,256.78 21 34,968.45 34,632.45
22 31,452.88 31,172.88 22 37,236.91 36,900.91
23 33,426.47 33,146.47 23 39,573.43 39,237.43
24 35,459.26 35,179.26 24 41,980.05 41,644.05
25 37,553.04 37,273.04 25 44,458.86 44,122.86
26 39,709.63 39,429.63 26 47,012.04 46,676.04
27 41,930.92 41,650.92 27 49,641.81 49,305.81
28 44,218.85 43,938.85 28 52,350.48 52,014.48
29 46,575.42 46,295.42 29 55,140.41 54,804.41
30 49,002.68 48,722.68 30 58,014.03 57,678.03
31 51,502.76 51,222.76 31 60,973.86 60,637.86
32 54,077.84 53,797.84 32 64,022.49 63,686.49
33 56,730.18 56,450.18 33 67,162.58 66,826.58
34 59,462.08 59,182.08 34 70,396.87 70,060.87
35 62,275.94 61,995.94 35 73,728.18 73,392.18
36 65,174.22 64,894.22 36 77,159.44 76,823.44
37 68,159.45 67,879.45 37 80,693.64 80,357.64
38 71,234.23 70,954.23 38 84,333.86 83,997.86
39 74,401.26 74,121.26 39 88,083.29 87,747.29
40 77,663.30 77,383.30 40 91,945.20 91,609.20
41 81,023.20 80,743.20 41 95,922.96 95,586.96
42 84,483.89 84,203.89 42 100,020.07 99,684.07
43 88,048.41 87,768.41 43 104,240.08 103,904.08
44 91,719.86 91,439.86 44 108,586.69 108,250.69
45 95,501.46 95,221.46 45 113,063.71 112,727.71
</TABLE>
*Guaranteed Accumulated Values and Guaranteed Surrender Values may be more or
less than shown in the table because of the variable of the day of receipt of
the Purchase Payment at the Home Office from period to period and the crediting
of interest to the Annuitant's account on a daily basis. Values shown are based
upon contributions equally spaced with interest occurring at the beginning of
the year. These values do not provide for premium tax, if any.
<PAGE>
Exhibit 5(a)
[LOGO OF LINCOLN NATIONAL
LIFE INSURANCE CO.]
1300 South Clinton
Fort Wayne, Indiana 46801
1-800-348-1212
The Lincoln National Life Insurance Company
Deferred Annuity Application
- --------------------------------------------------------------------------------
1. PRODUCT
Periodic Flexible Premium
[_] Multi Fund(R) [_] Multi Fund(R) 4
[_] IFA [_] IFA 4
- --------------------------------------------------------------------------------
2. MULTIFUND(R) RIDER EGMDB ELECTION
. This rider is only available for Non-Qualified and IRA contracts
. This rider can only be elected prior to contract issue
. See your representative for details
[_] Yes, I elect the EGMDB rider
[_] No, I do not elect the EGMDB rider.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
3. MARKET [_] Non-Qualified Deferred Compensation [_] IRA
[_] 1035 Exchange [_] Governmental 457 [_] Transfer
[_] HR-10 (Keogh) [_] Non-Profit 457 [_] Rollover
[_] SAR-SEP [_] SEP [_] Executive Benefit Plan [_] Direct
Rollover
</TABLE>
- --------------------------------------------------------------------------------
4. ANNUITANT INFORMATION
Name SS#
----------------------------------- ------------------------------
Last First Middle Initial
Address Birthdate Sex [_]M [_]F
--------------------------------- --------
Number and Street
Phone (Home) ( )
--------------------
--------------------------------- (Work} ( )
City State Zip Code --------------------
- --------------------------------------------------------------------------------
5. [_] CONTRACT OWNER
NOTE: Name
Complete ---------------------------------------
only if Last First Middle Initial
owner is
not the Address
Annuitant. -------------------------------------
Number and Street
-------------------------------------
City State Zip Code
SS# Date of Birth
------------- -------------
[_] JOINT OWNER [_] CONTINGENT OWNER
(limited to spouse only)
Name
---------------------------------------
Last First Middle Initial
Address
-------------------------------------
Number and Street
-------------------------------------
City State Zip Code
SS# Date of Birth
------------- -------------
Relationship to Contract Owner
------------
- --------------------------------------------------------------------------------
6. BENEFICIARY
Name SS# Relationship
Primary
------------------------------- ----------------- -----------------
Contingent
------------------------------- ----------------- -----------------
- --------------------------------------------------------------------------------
7. REMITTER INFORMATION
Is this an Employer Sponsored Plan? [_] Yes [_] No Remitter Number
---------
Employer's Name
--------------
- --------------------------------------------------------------------------------
8. *See reverse side for Source type information
<TABLE>
<CAPTION>
-------------------------------------------
Multi Fund(R) FUNDING ALLOCATIONS
Must Be in Whole Percentages and Equal 100%
-------------------------------------------
<S> <C> <C>
01 GROWTH & INCOME %
-------------------------------------------
02 BOND %
-------------------------------------------
03 MONEY MARKET %
-------------------------------------------
04 MANAGED %
-------------------------------------------
05 SPECIAL OPPORTUNITIES %
-------------------------------------------
18 GLOBAL ASSET ALLOCATION %
-------------------------------------------
41 SOCIAL AWARENESS %
-------------------------------------------
87 INTERNATIONAL %
-------------------------------------------
2Q EQUITY-INCOME %
-------------------------------------------
2R AGGRESSIVE GROWTH %
-------------------------------------------
2S CAPITAL APPRECIATION %
-------------------------------------------
4K DELAWARE EMERGING GROWTH %
-------------------------------------------
4L DELAWARE EQUITY/INCOME %
-------------------------------------------
4M DELAWARE GLOBAL BOND %
-------------------------------------------
55 FIXED ACCOUNT %
-------------------------------------------
TOTAL 100%
-------------------------------------------
</TABLE>
Payments
*Source Payment Beginning Amount Beginning **Payment
Type Amount Mo/Yr Changes To Mo/Yr Frequency
1 $ / $ /
--------- -------- -------- -------- -------- --------
2 $ / $ /
--------- -------- -------- -------- -------- --------
3 $ / $ /
--------- -------- -------- -------- -------- --------
-----------------------------------------
PAYMENT INFORMATION
-----------------------------------------
Recurring Annual Payment $
---------
Additional Lump Sum Payment $
---------
Single Premium Amount $
---------
Apply IRA Payment for tax year $
---------
-----------------------------------------
**AVAILABLE PAYMENT FREQUENCY
-----------------------------------------
(A) ANNUAL (M) MONTHLY
-----------------------------------------
(S/A) SEMI-ANNUAL (S/M) SEMI-MONTHLY
-----------------------------------------
(Q) QUARTERLY (B/W) BI-WEEKLY
-----------------------------------------
"X" MONTHS TO BE EXCLUDED
-----------------------------------------
J F M A M J J A S O N D
-----------------------------------------
- --------------------------------------------------------------------------------
9. REMARKS
- --------------------------------------------------------------------------------
10. TELEPHONE TRANSFER AUTHORIZATION (for Multi-Fund(R) only)
I hereby authorize and direct The Lincoln National Life Insurance company to
accept telephone instructions from any person who can furnish proper
identification to shift units from any sub-account to any other sub-account
and/or to change the allocation of future deposits. The undersigned agrees that
LNL is not liable for any loss arising from any telephone exchange or change in
allocation of future deposits. For additional information, see the center page
of this application.
Initials of contract owner:
-----------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
11. REPLACEMENTS
Will the proposed contract replace any existing annuity or insurance contract
(including any Lincoln National contracts) which have been, or are being,
reduced in premium amount, placed on paid-up, or surrendered? [_] Yes [_] No
If yes, Existing Co._____________________________
In accordance with TEFRA (1982), provide the cost basis of the contract if these
funds are transferring to Lincoln National.
Pre-TEFRA $__________________ Post-TEFRA $_______________
- --------------------------------------------------------------------------------
12. SUITABILITY
This section MUST BE COMPLETED for Multi Fund(R) contracts. Information
should profile the Contract Owner.
Number of dependents:___________ Total family income: $________ Estimated
net worth: $_____________
Financial Objectives: [_] Long term growth [_] Maximum capital appreciation
[_] Preservation of capital [_] Income_________
Contract Owner's occupation_____________________.
Name and Address of Contract Owner's Employer (not required for Employer
Sponsored Plans)______________________
------------------------------------------------------------------------
I understand the representative has requested suitability information as
required by the SEC, but I choose not to provide it.
----------------------------------
Signature of Contract Owner
- --------------------------------------------------------------------------------
13. SIGNATURES
-UNDER PENALTY OF PERJURY, THE CONTRACT OWNER CERTIFIES THAT THE SOCIAL
SECURITY (OR TAXPAYER IDENTIFICATION) NUMBER IS CORRECT AS IT APPEARS IN THIS
APPLICATION.
-IF I HAVE APPLIED FOR A VARIABLE ANNUITY CONTRACT, I ACKNOWLEDGE RECEIPT OF A
PROSPECTUS.
-I UNDERSTAND AND ALL PAYMENTS AND VALUES PROVIDED BY A CONTRACT WHEN BASED ON
THE INVESTMENT EXPERIENCE OF A VARIABLE ACCOUNT ARE VARIABLE AND ARE NOT
GUARANTEED TO A FIXED DOLLAR AMOUNT.
APPLICATION SIGNED AT______________________________ _________________
City, State Date
- ---------------------- ---------------------------------------------------
Signature of Annuitant Signature of Contract Owner if other than Annuitant
- ---------------------------
Signature of Representative
- --------------------------------------------------------------------------------
14. REPRESENTATIVE REPORT
-The representative certifies that an appropriate exclusion allowance was
calculated for the named participant in accordance with current tax laws and
regulations.
-Do you have any knowledge or reason to believe that the proposed contract will
replace any existing annuity or insurance contracts (including any Lincoln
National contracts) which have been, or are being, reduced in premium amount,
placed on paid up or surrendered)? [_] Yes [_] No
If yes, provide details___________________________________________
Representative's Compensation Election:
[_] A [_] B [_] C _______________________________________ _________________
Signature of Representative Date
- --------------------------------------------------------------------------------
15. REPRESENTATIVE USE ONLY (MUST BE COMPLETED)
NAME SSN SA CODE %
- ---------------------- ---------------------- ---------------------- --------
(servicing agent)
- ---------------------- ---------------------- ---------------------- --------
- ---------------------- ---------------------- ---------------------- --------
- ---------------------- ---------------------- ---------------------- --------
- --------------------------------------------------------------------------------
16. HOME OFFICE USE ONLY
---------------------------- -------------
Authorized Reviewer/Approver Date
- --------------------------------------------------------------------------------
Send to: The Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne,
IN 46801-2340
To determine the proper source(s) for this account, please refer to the
listing (by market) that follows:
NON-QUALIFIED
* Source I -Employee Non-deductible Voluntary Payment
SEP/SAR-SEP/IRS
* Source A -Employer Payment
Source E -Rollover Payment
** Source H -Employee Deductible Payments and Single
Payment Transfers
** Source G -(SAR-SEP ONLY) Employee Salary Reduction
Payments
KEOGH-(HR-10)
* Source A -Employer Payments
Source E -Rollover Payments
Source H -Employee Deductible Payments
Source I -Employee Non-deductible Voluntary
Payments
Source J -Employee Non-deductible Mandatory
Payments
Source K -Forfeitures
DEFERRED COMPENSATION
* Source A -Employer Payments
Source F -Employee Deferred Compensation
* These sources will be used whenever sourcing is not required.
** The recurring payments for Source H should not exceed $2,000. This amount
represents the IRA portion of the payment.
Home Office Copy - White and Yellow - Leave These Pages Intact
Representative - Pull Beige Copy
<PAGE>
LINCOLN NATIONAL LINCOLN NATIONAL LIFE INSURANCE COMPANY
LIFE INSURANCE CO. NATIONAL DISTRIBUTORS, LINCOLN NATIONAL LIFE
A part of LINCOLN VARIABLE ANNUITY ACCOUNT C CONTRACTS
NATIONAL CORPORATION P.O. BOX 2340, FORT WAYNE, INDIANA 46801-2340
Telephone Transfer Information
The following information explains the use of the Lincoln National Variable
Annuity Account C Telephone Exchange Program...Here's how it works.
By indicating that you wish to have telephone transfer authorization on the
attached application, you authorize and direct LNL to act on telephone
instructions, from any person who can furnish proper identification, to shift
units from any sub-account to any other sub-account. LNL reserves the right to
refuse at any time any telephone instructions if the caller cannot properly
identify themselves by providing the name, contract number, date of birth and
social security number of the account.
This authorization will remain in effect until LNL receives written notice of
any change. The contract owner agrees that LNL is not liable for any loss
arising from a telephone exchange.
There is currently no restriction on the number of shifts allowed. However,
Lincoln National retains the right to limit shifts to once every 30 days. The
minimum transfer amount is $500. If, after the shift, a balance of less than
$500 would remain in any one Fund, the entire fund value will be shifted. When
shifting from the fixed account, the maximum that can be transferred is 25% of
the fixed value in any 12 month period.
The telephone exchange service cannot be used to redeem units for cash in any
LNL Variable Annuity sub-account.
By calling toll-free 800-348-1212, exchanges for Variable annuity Account C
sub-account units will be made at their respective unit values at the close of
the business day on which telephone instructions are received from any person
provided such instructions are received by 4:00 p.m. Eastern Standard Time.
(Instructions received after 4:00 p.m. are effective at the close of business
the following business day). The allocation of future deposits may also be
requested by calling this number.
NOTE: Please retain this form for your records.
<PAGE>
Exhibit 5(b)
[LOGO OF LINCOLN NATIONAL LIFE INSURANCE CO.]
The Lincoln National Life Insurance Company
403(b) Annuity Application
- --------------------------------------------------------------------------------
1. PRODUCT Periodic Flexible Premium
[_] Multi Fund(R) [_] Multi Fund(R) 4
[_] IFA [_] IFA
- --------------------------------------------------------------------------------
2. MARKET/SERVICE [_] 403(b) [_] ORP [_] Other _______________
[_] 403(b) Employer Payments (LNL Serviced)
[_] 403(b) Employer Payments (Non-LNL Serviced)
- --------------------------------------------------------------------------------
3. ANNUITANT INFORMATION
___________________________________________________ SS# _______________________
Last Name First Name Middle Initial
Birthdate _______________ Sex [_] M [_] F
___________________________________________________ Phone: Home (___)__________
Number and Street Work (___)__________
___________________________________________________
City State Zip Code
- --------------------------------------------------------------------------------
4. BENEFICIARY
Primary Contingent For ERISA plans only: Spouse
and have signature witnessed
Name ___________________ ______________________ by Plan Administrator or
notary Public if Primary
SS# ____________________ ______________________ Beneficiary is other than
Spouse.
Relationship ____________________ _______________
____________________________
______________________________ [_] Not Married Witnessed by: (Plan
Spouse Signature Administrator or Notary
Public)
____________________________
My Commission Expires:
- --------------------------------------------------------------------------------
5. REMITTER INFORMATION
Employer Name _____________________________________________ Remitter # _________
- --------------------------------------------------------------------------------
6. EXCLUSION ALLOWANCE INFORMATION
Date of Hire ______________ Annual Payments to Other Carriers $___________
Annual Salary $___________
- --------------------------------------------------------------------------------
7. PAYMENTS
<TABLE>
<CAPTION>
Periodic Amount
Payment Beginning Changes Beginning *Payment
Sources Amount Mo/Yr to Mo/Yr Frequency
<S> <C> <C> <C> <C> <C>
EE Elective Deferral (G) $__________ _____/_____ $__________ _____/_____ ___________
EE Excess Deferral (H) $__________ _____/_____ $__________ _____/_____ ___________
EE Mandatory Deferral (F) $__________ _____/_____ $__________ _____/_____ ___________
ER Matching Payments (D) $__________ _____/_____ $__________ _____/_____ ___________
EE Discretionary Payments (C) $__________ _____/_____ $__________ _____/_____ ___________
</TABLE>
-------------------------------------------
Months that payments
will not be received
-------------------------------------------
Jan. April July Oct.
-------------------------------------------
Feb. May August Nov.
-------------------------------------------
March June Sept. Dec.
-------------------------------------------
-------------------------------------------
Payment Information
-------------------------------------------
Recurring Annual Payment $_________
Additional Lump Sum Payment $_________
Single Premium Amount $_________
-------------------------------------------
-----------------------
*Available
Payment
Frequencies
-----------------------
(A) Annual
(S/A) Semi-Annual
(Q) Quarterly
(M) Monthly
(S/M) Semi-Monthly
(B/W) Bi-Weekly
-----------------------
--------------------------------------
Multi Fund (R) Funding Allocations
(Must Be Whole Percentages)
and Equal 100%
--------------------------------------
01 Growth & Income %
--------------------------------------
02 Bond %
--------------------------------------
03 Money Market %
--------------------------------------
04 Managed %
--------------------------------------
05 Special Opportunities %
--------------------------------------
18 Global Asset Allocation %
--------------------------------------
41 Social Awareness %
--------------------------------------
87 International %
--------------------------------------
2Q Equity-Income %
--------------------------------------
2R Aggressive Growth %
--------------------------------------
2S Capital Appreciation %
--------------------------------------
4K Delaware Emerging Growth %
--------------------------------------
4L Delaware Equity/Income %
--------------------------------------
4M Delaware Global Bond %
--------------------------------------
55 Fixed Account %
--------------------------------------
TOTAL 100
--------------------------------------
8. Remarks
_________________________________________
_________________________________________
_________________________________________
<PAGE>
- --------------------------------------------------------------------------------
9. REPLACEMENT
Will the proposed contract replace any existing annuity or insurance contract
(including any Lincoln National contracts) which have been, or are being,
reduced in premium amount, placed on paid-up, or surrendered? [_] Yes [_] No
If yes, provide the following information:
- ------------------------------ -------------------------- -----------------
Existing Company 12-31-86 Value 12-31-88
Employee Elective
Deferrals
Is the account being replaced an IRC Section(b)(7) Custodial Account (mutual
fund)? [_] Yes [_] No
Will there be a full or partial transfer to LNL [_] Yes [_] No
- --------------------------------------------------------------------------------
10. SUITABILITY (Must Be Completed for Multi Fund (R) contracts)
Number of dependents ____ Total family income $ ______________ Estimated net
worth $ _______________ Occupation: ________________
Financial Objectives: [_] Long term growth [_] Maximum capital appreciation
[_] Preservation of capital [_] Income _______________________
I understand the representative has requested suitability information as
required by the SEC, but I choose not to provide it.
--------------------------------------
Signature of Contract Owner
- --------------------------------------------------------------------------------
11. 403(b) DISCLOSURE STATEMENT
My Lincoln National representative has fully explained to me the distribution
rules as they apply to my 403(b) contract as described in IRC Section
403(b)(11): I understand that effective January 1, 1989, IRC Section 403(b)(11)
prohibits the distribution of post 1988 salary reduction elective deferrals and
earnings from 403(b) contracts except in the event of one of the following:
(1) attainment of age 59-1/2 (4) total and permanent disability of
(2) separation from service annuitant
(3) death of annuitant (5) financial hardship (in which event only
the elective deferrals may be withdrawn)
I understand that other investment alternatives may be available under my
employer's 403(b) program.
- --------------------------------------------------------------------------------
12. TELEPHONE TRANSFER AUTHORIZATION (for Multi Fund(R) only)
I hereby authorize and direct The Lincoln National Life Insurance Company to
accept telephone instructions from any person who can furnish proper
identification to shift units from any sub-account to any other sub-account
and/or to change the allocation of future deposits. The undersigned agrees that
LNL is not liable for any loss arising from any telephone exchange or change in
allocation of future deposits. For additional information, see the center page
of this application.
Initials of contract owner: _______________________
- --------------------------------------------------------------------------------
13. SIGNATURES
- - UNDER PENALTY OF PERJURY, THE CONTRACT OWNER CERTIFIES THAT THE SOCIAL
SECURITY (OR TAXPAYER IDENTIFICATION) NUMBER IS CORRECT AS IT APPEARS IN THIS
APPLICATION.
- - I UNDERSTAND THE 403(B) DISCLOSURE STATEMENT IN SECTION 11.
IF I HAVE APPLIED FOR A VARIABLE ANNUITY CONTRACT, I ACKNOWLEDGE RECEIPT OF A
PROSPECTUS.
- - I UNDERSTAND ALL PAYMENTS AND VALUES PROVIDED BY A CONTRACT, WHEN BASED ON THE
INVESTMENT EXPERIENCE OF A VARIABLE ACCOUNT, ARE VARIABLE AND ARE NOT
GUARANTEED AS TO A FIXED DOLLAR AMOUNT.
Signed at
-------------------------- ----------------------------- ------------
City, State Signature of Annuitant Date
Employer signature required for plans
owned by employer: ----------------------------- ------------
Signature of Contract Owner Date
- --------------------------------------------------------------------------------
14. REPRESENTATIVE REPORT
- - The representative certifies that an appropriate exclusion allowance was
calculated for the named participant in accordance with current tax laws and
regulations.
- - Do you have any knowledge or reason to believe that the proposed contract will
replace any existing annuity or insurance contracts (including any Lincoln
National contracts) which have been, or are being, reduced in premium amount,
placed on paid up or surrendered)? [_] Yes [_] No
If yes, provide details ______________________________________________________
<PAGE>
Representative's Compensation Election: [_] A [_] B [_] C
(Only available for LFG Reps. and Periodic Business)
--------------------------------------- ------------
Signature of Representative Date
- --------------------------------------------------------------------------------
15. REPRESENTATIVE USE ONLY (must be completed)
Name SSN SA Code %
------------------- -------------------- ------------ -----------
(servicing agent)
------------------- -------------------- ------------ -----------
------------------- -------------------- ------------ -----------
------------------- -------------------- ------------ -----------
- --------------------------------------------------------------------------------
16. HOME OFFICE USE ONLY
------------------------------------------ --------------
Authorized Reviewer/Approver Date
- --------------------------------------------------------------------------------
<PAGE>
[LINCOLN NATIONAL LOGO] LINCOLN NATIONAL LIFE INSURANCE COMPANY
NATIONAL DISTRIBUTOR, LINCOLN NATIONAL LIFE
VARIABLE ANNUITY ACCOUNT C CONTRACTS
P.O. BOX 2340, FORT WAYNE, INDIANA 46801-2340
Telephone Transfer Information
The following information explains the use of the Lincoln National Variable
Annuity Account C Telephone Exchange Program...Here's how it works.
By indicating that you wish to have telephone transfer authorization on the
attached application, you authorize and direct LNL to act on telephone
instructions, from any person who can furnish proper identification, to shift
units from any sub-account to any other sub-account. LNL reserves the right to
refuse at any time any telephone instructions if the caller cannot properly
identify themselves by providing the name, contract number, date of birth and
social security number of the account.
This authorization will remain in effect until LNL receives written notice of
any change. The contract owner agrees that LNL is not liable for any loss
arising from a telephone exchange.
There is currently no restriction on the number of shifts allowed. However,
Lincoln National retains the right to limit shifts to once every 30 days. The
minimum transfer amount is $500. If, after the shift, a balance of less than
$500 would remain in any one Fund, the entire fund value will be shifted. When
shifting from the fixed account, the maximum that can be transferred is 25% of
the fixed value in any 12 month period.
The telephone exchange service cannot be used to redeem units for cash in any
LNL Variable Annuity sub-account.
By calling toll-free 800-348-1212, exchanges for Variable Annuity Account C
sub-account units will be made at their respective unit values at the close of
the business day on which telephone instructions are received from any person
provided such instructions are received by 4:00 p.m. Eastern Standard Time.
(Instructions received after 4:00 p.m. are effective at the close of business
the following business day). The allocation of future deposits may also be
requested by calling this number.
NOTE: Please retain this form for your records.
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
Law Division 7C03
1300 South Clinton
Fort Wayne, Indiana 46802
Phone: (219) 455-3018
Fax: (219) 455-5135
Exhibit 9
VIA EDGAR
- ---------
April 24, 1997
Securities and Exchange Commission
Division of Investment Management
Office of Insurance Products
450 Fifth Street, N.W.
Washington, DC 20549
Re: Lincoln National Variable Annuity Account C
File Nos. 33-25990; 811-3214
Opinion and Consent of Counsel
Ladies and Gentlemen:
I have recently made such examination of law and have examined such records and
documents as I have deemed necessary to render the opinion expressed below.
I am of the opinion that upon acceptance by Lincoln National Variable Annuity
Account C (the "Account"), a segregated account of Lincoln National Life
Insurance Company (Lincoln Life), of contributions from a person pursuant to an
insurance policy issued in accordance with the prospectus contained in this
amended Registration Statement on Form N-4, and upon compliance with applicable
law, such person will have a legally issued interest in his or her individual
account with the Account, and the securities issued will represent binding
obligations of Lincoln Life.
I consent to the filing of this Opinion as an exhibit to the Account's
Post-Effective Amendment No. 14 to the Registration Statement on Form N-4.
Very truly yours,
/s/ Jeremy Sachs
Jeremy Sachs
Senior Counsel
<PAGE>
Exhibit 10
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Post-Effective Amendment No. 14 to the Registration Statement (Form N-4
No. 33-25990) and the related Statement of Additional Information pertaining to
Lincoln National Variable Annuity Account C, and to the use therein of our
reports dated (a) February 6, 1997, with respect to the statutory-basis
financial statements of The Lincoln National Life Insurance Company for each of
the three years in the period ended December 31, 1996; (b) February 7, 1996 with
respect to the statutory-basis financial statements of the Lincoln National Life
Insurance Company for each of the three years in the period ended December 31,
1995; and (c) March 18, 1997 with respect to the financial statements of Lincoln
National Variable Annuity Account C.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND> This schedule contains summary financial information extracted from
Lincoln National Variable Annuity Account C financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 5,046,622,802
<INVESTMENTS-AT-VALUE> 6,459,553,027
<RECEIVABLES> 131,876,199
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,591,429,226
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,563,391
<TOTAL-LIABILITIES> 5,563,391
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,989,330,965
<SHARES-COMMON-STOCK> 1,988,350,442
<SHARES-COMMON-PRIOR> 1,535,596,045
<ACCUMULATED-NII-CURRENT> 1,112,690,381
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 70,914,268
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,412,930,221
<NET-ASSETS> 6,585,865,835
<DIVIDEND-INCOME> 367,053,301
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 56,306,360
<NET-INVESTMENT-INCOME> 310,746,941
<REALIZED-GAINS-CURRENT> 19,985,015
<APPREC-INCREASE-CURRENT> 505,243,452
<NET-CHANGE-FROM-OPS> 835,975,408
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 886,066,231
<NUMBER-OF-SHARES-REDEEMED> 401,934,797
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,857,942,540
<ACCUMULATED-NII-PRIOR> 801,943,440
<ACCUMULATED-GAINS-PRIOR> 50,929,253
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 56,306,360
<AVERAGE-NET-ASSETS> 5,656,894,565
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
