<PAGE>
As filed with the Securities and Exchange Commission on May 1, 1996
Registration No. 33-14692
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
POST-EFFECTIVE AMENDMENT NO. 12 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
------------------------
LINCOLN NATIONAL FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
(Exact name of Trust)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Name of depositor)
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, IN 46801
(Complete address of depositor's principal executive offices)
-------------------------
Name and complete address
of agent for service: Copy to:
Carl L. Baker, Esquire Roy V. Washington, Esquire
Vice President & Associate Counsel
Deputy General Counsel The Lincoln National
The Lincoln National Life Insurance Company
Life Insurance Company 1300 South Clinton Street
1300 South Clinton Street P.O. Box 1110
P.O. Box 1110 Fort Wayne, Indiana 46801
Fort Wayne, IN 46801
-------------------------
Flexible Premium Variable Life Insurance Policies -- Registration of
indefinite amount of securities pursuant to Rule 24f-2 under the Investment
Company Act of 1940. The 24f-2 Notice for the trust's most recent fiscal year,
1995, was filed with the Securities and Exchange Commission on February 27,
1996.
This filing is made pursuant to Rule 6c-3 and Rule 6e-3(T), as amended,
under the Investment Company Act of 1940.
It is proposed this post-effective amendment become effective pursuant to
Rule 485(b) on May 1, 1996.
================================================================================
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
FOR LINCOLN NATIONAL FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
N8B-2 ITEM CAPTION IN PROSPECTUS
- ---------- ---------------------
1 Cover Page
2 Cover Page
3 Not applicable
4 Lincoln Life
5 Lincoln Life
6 The Separate Account
7 Not applicable
8 Not applicable
9 Legal Proceedings
10 The Separate Account; Surrender of the Policy; The Policy;
Premium Payment and Allocation of Premiums; Policy Lapse and
Reinstatement; Voting Rights; Policy Changes; Addition,
Deletion, and Substitution of Investments; Guaranteed Death
Benefit
11 Lincoln Life; The Separate Account
12 Lincoln Life; The American Variable Insurance Series
13 Charges and Deductions
14 Requirements for Issuance of Policy
15 Premium Payment and Allocation of Premiums
16 Premium Payment and Allocation of Premiums
17 Surrender of the Policy
18 The Separate Account
19 Reports and Records; Projections of Benefits & Values
20 Not Applicable
21 Loans
22 Not applicable
23 Safekeeping of the Account's Assets
24 General Provisions
25 Lincoln Life
26 Not applicable
27 Lincoln Life
28 Executive Officers and Directors of Lincoln National Life
Insurance Co.
29 Lincoln Life
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 Distribution of The Policy
36 Not applicable
<PAGE>
N8B-2 ITEM CAPTION IN PROSPECTUS
- ---------- ---------------------
37 Not applicable
38 Distribution of the Policy
39 Distribution of the Policy
40 Not applicable
41 Lincoln Life; Distribution of the Policy
42 Not applicable
43 Not applicable
44 Not applicable
45 Not applicable
46 Not applicable
47 The Separate Account
48 Not applicable
49 Not applicable
50 The Separate Account
51 Lincoln Life; Premium Payment and Allocation of Premiums; Charges
Against the Account
52 Addition, Deletion and Substitution of Investments
53 Federal Tax Matters
54 Not applicable
55 Not applicable
56 Not applicable
57 Not applicable
58 Not applicable
59 Not applicable
<PAGE>
American Legacy Life
Lincoln Life Flexible Premium Variable Life
Account F individual flexible premium
variable life insurance policy
issued by:
Lincoln National Life Insurance Co.
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, Ind. 46801
(800) 348-0851
The flexible premium variable life insurance policy (policy) offered by Lincoln
National Life Insurance Co. (Lincoln Life) and described in this prospectus is
designed to provide life insurance protection. A policy may be issued only to
persons age 80 or younger and only for an initial premium of $10,000 or more.
The owner may pay a single premium, or subject to certain restrictions, vary the
frequency and amount of premium payments. The level of life insurance benefits
payable under the policy may also be increased or decreased subject to certain
restrictions.
An owner may allocate amounts to the Lincoln Life Flexible Premium Variable Life
Account F (Separate Account). Amounts allocated to the Separate Account may be
invested in the American Variable Insurance Series, which has eight funds
available:
. Growth Fund
. International Fund
. Growth-Income Fund
. Asset Allocation Fund
. High-Yield Bond Fund
. Bond Fund
. U.S. Government/AAA-Rated Securities Fund
. Cash Management Fund
The amount of the death benefit may, and the policy value will, reflect the
investment experience of the chosen subaccounts of the Separate Account and
interest credited to the policy on loans held in the General Account, as well as
the frequency and amount of premiums, and the charges assessed in connection
with the policy. As long as the policy remains in force, the death benefit will
not be less than the current specified amount of the policy. The policy will
remain in force so long as net cash surrender value is sufficient to pay the
monthly deductions imposed in connection with the policy. The owner bears the
entire investment risk for all amounts allocated to the Separate Account; no
minimum policy value or net cash surrender value is guaranteed.
The purchase and ownership of the policy involves various charges which are
explained under the heading "Charges and deductions" on page 8.
It may not be advantageous to purchase a policy as: (1) a replacement for
another type of life insurance; or, (2) to obtain additional insurance
protection if the purchaser already owns another flexible premium variable life
insurance policy.
The policy is or may be a Modified Endowment Contract. A life insurance policy
becomes a Modified Endowment Contract if the premiums paid for the policy exceed
certain limits referred to as the 7-pay Limitation. Because the issue premium
normally exceeds the 7-pay Limitation, the policy will likely be a Modified
Endowment Contract unless it is purchased with cash values transferred from a
pre-existing life insurance policy which is not a Modified Endowment Contract
and the transfer meets the requirements for a tax-free exchange. The taxation
of loans from, or surrenders of, a Modified Endowment Contract is generally less
favorable than applies to such distributions from a life insurance policy that
is not a Modified Endowment Contract. In particular, loans or surrenders made
from a Modified Endowment Contract are normally reportable income to the extent
of any gain in the policy and such income will also be subject to an additional
10% income tax if the loan is taken before the owner attains age 59 1/2.
This prospectus is valid only if accompanied or preceded by a prospectus for
American Variable Insurance Series.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR BY ANY STATE REGULATORY AGENCY, NOR HAS THE COMMISSION,
OR ANY STATE REGULATORY AGENCY, PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Please read this prospectus carefully and retain it for future reference.
The date of this prospectus is April 30, 1996.
<PAGE>
<TABLE>
<CAPTION>
Table of contents
Page
- ---------------------------------------------------------------------------------------
<S> <C>
Summary of the policy 3
- ---------------------------------------------------------------------------------------
Lincoln Life and the Separate Account
Lincoln Life 5
The Separate Account 5
The investment advisor 5
Addition, deletion or substitution of investments 5
- ---------------------------------------------------------------------------------------
The policy
Requirements for issuance of a policy 6
Premium payment and allocation of premiums 6
Dollar Cost Averaging Program 7
Effective date 7
Right to examine policy 7
Policy termination 7
- ---------------------------------------------------------------------------------------
Charges and deductions
Surrender charge 8
Cost of insurance charges 8
Charges against the Separate Account 8
Reduction of charges 9
- ---------------------------------------------------------------------------------------
Policy benefits
Death benefit 10
Guaranteed death benefit 10
Policy changes 10
Policy value 11
Transfer between subaccounts 12
Loans 12
Policy lapse and reinstatement 13
Surrender of the policy 13
Proceeds and payment options 13
- ---------------------------------------------------------------------------------------
General provisions
The contract 13
Suicide 14
Representations and contestability 14
Incorrect age or sex 14
Change of owner or beneficiary 14
Assignment 14
Reports and records 14
Projection of benefits and values 14
Postponement of payments 14
Accelerated Benefit Election Rider 15
- ---------------------------------------------------------------------------------------
Distribution of the policy 15
- ---------------------------------------------------------------------------------------
Federal tax matters
Tax status of the policy 15
Tax treatment of policy benefits 16
Taxation of the Separate Account 17
- ---------------------------------------------------------------------------------------
Voting rights 17
- ---------------------------------------------------------------------------------------
State regulation of Lincoln Life
and the Separate Account 18
- ---------------------------------------------------------------------------------------
Safekeeping of the account's assets 18
- ---------------------------------------------------------------------------------------
Legal proceedings 18
- ---------------------------------------------------------------------------------------
Experts 18
- ---------------------------------------------------------------------------------------
Additional information 18
- ---------------------------------------------------------------------------------------
Appendix A: Executive Officers & Directors
of Lincoln National Life
Insurance Co. 20
- ---------------------------------------------------------------------------------------
Appendix B: Illustrations of policy values 25
- ---------------------------------------------------------------------------------------
Appendix C: Definitions 32
- ---------------------------------------------------------------------------------------
Financial statements 34
</TABLE>
<PAGE>
Summary of the policy
The following summary is intended to give you a brief explanation of the most
important features of your policy. The Summary is not comprehensive and is
entirely qualified by more specific information contained elsewhere in this
prospectus. Throughout this prospectus, in order to make the following documents
more understandable, we have italicized the special terms.
What type of policy am I purchasing?
Your policy is a flexible premium variable life insurance policy whose primary
purpose is to provide life insurance protection on the insured. As long as your
policy remains in force, the policy will provide for: (1) the payment of a death
benefit to a beneficiary upon the insured's death; (2) policy loan privileges
and surrender privileges; and (3) the payment of the net cash surrender value to
the owner, if living, on the maturity date.
How does the life insurance
protection work?
The policy provides for the payment of benefits upon the death of the insured.
So long as your policy remains in force, the minimum death benefit payable under
either option will be the current specified amount, reduced by any outstanding
loan and any due and unpaid charges. Under certain conditions, a guaranteed
death benefit on the life of the insured in an amount equal to the sum of all
premiums paid will be provided until the maturity date despite the lapse of the
policy.
You also have flexibility to adjust the death benefit prior to the maturity date
by increasing or decreasing the specified amount of the policy. During the first
two policy years, the insured may apply for an increase equal to the lesser of
10% of the original specified amount or $25,000, without evidence of
insurability.
How are the premiums flexible?
The owner may choose to pay a single premium or may have flexibility concerning
the amount and frequency of premium payments. An issue premium approximately
equal to 80% of the federal maximum premium limitation (as defined in Section
7702 of the Internal Revenue Code of 1986, as amended) is required to issue the
policy. An owner who has not paid the federal maximum premium limitation may,
subject to certain restrictions, make premium payments at any time and in any
amount and at any frequency.
What makes my policy variable?
Your policy is described as variable because the death benefit and the policy
value can vary with the investment performance of amounts you have allocated to
the subaccounts you have selected. While you bear the entire investment risk on
such amounts, you also enjoy the opportunity to obtain market rates of return on
those amounts.
What funds are available to select?
You have the option to allocate amounts to one or more subaccounts of the
Separate Account. Currently the American Variable Insurance Series consists of
eight funds available for investment by the subaccounts:
The Growth Fund seeks growth of capital by investing primarily in common stocks
or securities with common stock characteristics.
The International Fund seeks long term growth of capital by investing primarily
in securities of issuers domiciled outside the United States.
The Growth-Income Fund seeks growth of capital and income by investing primarily
in common stocks, but other securities may be held when deemed advisable,
including preferred stocks and corporate bonds, including convertible bonds.
The Asset Allocation Fund seeks total return (including income and capital
gains) and preservation of capital over the long term through a diversified
portfolio that can include common stock and other equity type securities (such
as convertible bonds and preferred stock), bonds and other intermediate and
long-term fixed-income securities and money market instruments (debt securities
maturing in one year or less).
The High-Yield Bond Fund seeks high current income and secondarily seeks capital
appreciation by investing primarily in intermediate and long term corporate
obligations, with emphasis on higher yielding, higher risk, lower rated or
unrated securities. In addition to other risks, high-yield, high-risk bonds
(also known as "junk bonds") are subject to greater fluctuations in value and
risk of loss of income and principal due to default by the issuer than are
investments in lower yielding, higher rated bonds. For further information on
the risks associated with such securities, please refer to the prospectus for
the American Variable Insurance series, which must accompany or precede this
prospectus and which should be read carefully.
The Bond Fund seeks a high level of current income as is consistent with the
preservation of capital by investing in a broad variety of fixed income
securities including: marketable corporate debt securities, loan participations,
U.S. Government Securities, mortgage-related securities, other asset-backed
securities and cash or money market instruments. [Please note: As of the date of
this prospectus, the Bond Fund is not yet available in all states.
The U.S. Government/AAA-Rated Securities Fund seeks a high level of current
income consistent with prudent investment risk and preservation of capital by
investing primarily in a combination of securities guaranteed by the United
States Government and other debt securities rated AAA or Aaa.
The Cash Management Fund seeks high current yield while preserving capital by
investing in a diversified selection of money market instruments.
3
<PAGE>
Please consult your investment dealer for current information about the Bond
Fund's availability.]
How are premiums processed?
You determine in the application what portions of net premiums are to be
allocated to the various subaccounts of the Separate Account. Prior to the
record date, net premiums are automatically allocated to the Cash Management
Fund. After the record date, the policy value and all subsequent net premiums
will automatically be invested in the subaccounts of the Separate Account in
accord with your instructions in the application. You may change future
allocations of net premiums at any time without charge by notifying us in
writing. Subject to certain restrictions, you may transfer amounts among the
subaccounts of the Separate Account.
When does my policy terminate?
Your policy may terminate due to any one of the following: voluntary return or
surrender of the policy, lapse due to insufficient net cash surrender value,
payment of the death benefit, or maturity. During the free look period, you may
return the policy for a refund of all premiums paid. Anytime after the free look
period, you may surrender the policy and receive its net cash surrender value.
In addition to these rights, during the first 24 policy months, the owner may
exchange this policy for a policy of fixed-benefit insurance on the insured's
life under any compatible flexible premium adjustable life policy offered by us.
Do I have access to the policy values?
You may access the net cash surrender value through loans. You may borrow the
net cash surrender value at any time. Loans decrease both the death benefit and
future policy values and may have federal income tax consequences.
What charges and deductions are made from my policy?
Surrender Charge. During the first 10 years of the policy, a Contingent Deferred
Sales Charge, called the surrender charge, will be deducted from your policy
value upon lapse or voluntary surrender as compensation for distribution
expenses we incur in the sales process. These distribution expenses include
sales commissions, the cost of printing, the prospectus and sales literature,
and any advertising costs. The initial surrender charge is calculated as 9% of
total premiums paid in the first policy year. Lower sales charges will result if
payment of premium in excess of the issue premium (but subject to federal
maximum premium limitations) is deferred until after the first policy year. The
surrender charge will not exceed $56 per $1000 of specified amount. The
surrender charge will equal the amounts shown below.
Percent of total premiums
During policy year paid in first policy year
- ------------------------------------------------------------
1 9.0%
2 8.5%
3 8.0%
4 7.0%
5 6.0%
6 5.0%
7 4.0%
8 3.0%
9 2.0%
10 1.0%
Cost of insurance charge. The policy value will be reduced on each monthly
anniversary by the cost of insurance charge.
Charges against the Separate Account. A daily mortality and expense risk charge
equivalent to an annual rate of .85% of the daily net assets of the Separate
Account is imposed for the first ten years. In subsequent years, this charge is
reduced to an annual rate of .75%. In addition, a daily administrative charge
equal to an annual rate of .30% of the daily net assets of the Separate Account
is imposed for the first ten years; in subsequent years, this charge is reduced
to .10%. Finally, a daily charge equivalent to an annual rate of .10% of the
daily net assets of the Separate Account is imposed for the first ten years for
the assumption of the guaranteed death benefit risk.
No charges are currently made from the Separate Account for federal or state
income taxes. Should Lincoln Life determine that such taxes may be imposed, the
company reserves the right to make deductions from the policy to pay those
taxes.
In addition, because the Separate Account purchases shares of the funds
involved, the value of the net assets of these subaccounts of the Separate
Account will reflect the fees of the Investment Advisor and other miscellaneous
expenses incurred by those funds.
How is my policy and its benefits taxed?
The taxation of life insurance death benefits and distributions is complex and
is discussed in detail under "Federal tax matters" on pages 15-17. You should
note in particular that the taxation of loans and surrenders of a life insurance
policy that becomes a Modified Endowment Contract is generally less favorable
than applies to such distributions from a life insurance policy that is not a
Modified Endowment Contract. Your policy will be a Modified Endowment Contract
if the premiums you pay exceed certain limits referred to as the 7-pay
Limitation. Because the issue premium normally exceeds the 7-pay Limitation,
your policy will likely be a Modified Endowment Contract unless you purchase the
policy with cash values transferred from a pre-existing life insurance policy
which is not a Modified Endowment Contract and the transfer meets the
requirements for a tax-free exchange. You should note, in particular, that loans
or surrenders made from a Modified Endowment Contract
4
<PAGE>
are normally reportable income to the extent of any gain in the policy and such
income will also be subject to an additional 10% income tax if the loan is taken
before you attain age 591/2. A qualified tax advisor should be able to help you
determine the tax status of your policy.
Lincoln Life and the
Separate Account
Lincoln Life
Lincoln National Life Insurance Co. is a stock life insurance company
incorporated under the laws of Indiana on June 12, 1905. Lincoln Life is
principally engaged in offering individual life insurance policies and annuity
policies, and ranks among the largest United States stock life insurance
companies in terms of assets and life insurance in force. Lincoln Life is also
one of the leading life reinsurers in the United States. Lincoln Life is
licensed in all states (except New York) and the District of Columbia, Guam, and
the Virgin Islands.
Lincoln Life is wholly owned by Lincoln National Corp., a publicly held
insurance holding company incorporated under Indiana law on January 5, 1968. The
principal office of Lincoln Life is located at 1300 South Clinton Street, Fort
Wayne, Ind. 46802. The Principal office of Lincoln National Corp. is located at
200 East Berry Street, Fort Wayne, Ind. 46802. Through subsidiaries, Lincoln
National Corp. engages primarily in the issuance of health-life insurance and
annuities, property-casualty insurance, and other financial services.
The Separate Account
Lincoln Life Flexible Premium Variable Life Account F (Separate Account) was
established by Lincoln Life as a Separate Account on May 29, 1987. Although the
assets of the Separate Account are the property of Lincoln Life, the laws of
Indiana under which the Separate Account was established provide that the assets
in the Separate Account attributable to the policies are not chargeable with
liabilities arising out of any other business which Lincoln Life may conduct.
The assets of the Separate Account shall, however, be available to cover the
liabilities of the General Account of Lincoln Life to the extent that the
Separate Account's assets exceed its liabilities arising under the policies
supported by it. The assets of the Separate Account will be valued once daily at
the close of trading (currently 4:00 p.m. New York time) on each day the New
York Stock Exchange is open. The New York Stock Exchange is currently closed on
the following holidays: New Year's Day, Washington's Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Separate Account has been registered as an investment company under the
Investment Company Act of 1940 and meets the definition of "Separate Account"
under federal securities laws. Registration with the Securities and Exchange
Commission does not involve supervision of the management or investment
practices or policies of the Separate Account or Lincoln Life by the Commission.
The Separate Account is divided into eight subaccounts. Each subaccount invests
exclusively in shares of one of the funds comprising the American Variable
Insurance Series: the Growth Fund, the International Fund, the Growth-Income
Fund, the Asset Allocation Fund, the High-Yield Bond Fund, the Bond Fund, the
U.S. Government/AAA-Rated Securities Fund, and the Cash Management Fund. Income
and both realized and unrealized gains or losses from the assets of the Separate
Account are credited to or charged against the Separate Account without regard
to the income, gains or losses arising out of any other business Lincoln Life
may conduct. The funds are also invested in by variable annuity contract
holders. For an explanation of the risk involved with mixed and/or shared
funding, see the prospectus for the underlying funds.
There is no assurance that any fund of the American Variable Insurance Series
will achieve its stated investment objective. For a complete description of the
American Variable Insurance Series, please refer to the prospectus for the
series which must accompany or precede this prospectus and which should be read
carefully.
The investment advisor
Capital Research and Management Co., an investment management organization
founded in 1931, is the investment advisor to the series and other mutual funds,
including those in The American Funds Group. Capital Research and Management Co.
is located at 333 South Hope Street, Los Angeles, Calif. 90071 and 135 South
State College Boulevard, Brea, Calif. 92621.
Addition, deletion, or substitution
of investments
Lincoln Life does not control the investment advisor and therefore cannot
guarantee that the American Variable Insurance Series or any particular funds
will be available for investment by the subaccounts. Lincoln Life reserves the
right, subject to compliance with applicable law, to make additions to,
deletions from, or substitutions for the shares that are held by the Separate
Account or that the Separate Account may purchase. Lincoln Life reserves the
right to eliminate the shares of any fund and to substitute shares of another
open-end, registered investment company, if the shares are no longer available
for investment, or if in the judgment of Lincoln Life further investment in any
fund should become inappropriate in view of the purposes of the Separate
Account. Lincoln Life will not substitute any shares attributable to an owner's
interest in a subaccount of the Separate Account without notice and prior to
approval of the Securities and Exchange Commission, to the extent required by
the Investment Company Act of 1940 or other applicable law. Nothing contained
herein shall prevent the Separate Account from purchasing other securities for
other series or classes of policies, or from permitting a conversion
5
<PAGE>
between series or classes of policies on the basis of requests made by
policyowners.
Lincoln Life also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new fund or series of a fund,
or in shares of another investment company, with a specified investment
objective. New subaccounts may be established when, at the sole discretion of
Lincoln Life, marketing needs or investment conditions warrant, and any new
subaccounts may be made available to existing policyowners on a basis to be
determined by Lincoln Life. Lincoln Life may also eliminate one or more
subaccounts if, in its sole discretion, marketing, tax, or investment conditions
warrant.
In the event of any such substitution or change, Lincoln Life may by appropriate
endorsement make such changes in the policy as may be necessary or appropriate
to reflect such substitution or change. If deemed by Lincoln Life to be in the
best interests of persons having voting rights under the Policies, the Separate
Account may be operated as a management company under the Investment Company Act
of 1940, it may be deregistered under that Act in the event such registration is
no longer required, or it may be combined with other Lincoln Life separate
accounts.
The policy
Requirements for issuance of a policy
Individuals wishing to purchase a policy must send a completed application to
Lincoln Life, 1300 South Clinton Street, Fort Wayne, Ind. 46802. The minimum
specified amount of a policy is $10,000; the minimum acceptable premium is
$10,000. A policy will generally be issued only to insureds 80 years of age or
under who supply satisfactory evidence of insurability sufficient to Lincoln
Life. Acceptance is subject to Lincoln Life's underwriting rules and, except in
California, Lincoln Life reserves the right to reject an application for any
reason.
Additional insurance on the life of other persons may be applied for by
supplemental application. Approval of the additional insurance will be subject
to evidence of insurability satisfactory to Lincoln Life.
Premium payment and allocation of premiums
Subject to certain limitations, an owner has considerable flexibility in
determining the frequency and amount of premiums. The first year issue premium
is the only premium payment required under the policy, although additional
premiums may be necessary to keep the policy in force. Payment of the issue
premium will not guarantee that the policy will remain in force. The amount of
the first year issue premium is based on the insured's issue age and the
specified amount of the policy and is approximately equal to 80% of the federal
maximum premium limitation at issue, as described below. The owner must pay the
issue premium in full on or before the record date and may pay as much as 100%
of the federal maximum premium limitation at issue.
Any owner who has not chosen to pay the federal maximum premium limitation at
issue will also define a planned periodic premium schedule that provides for
payment of a level premium (which may be zero) at fixed intervals for a
specified period of time. The owner is not required to pay premiums in accord
with this schedule. Furthermore, the owner has flexibility to alter the amount,
frequency, and the time period over which planned periodic premiums are paid.
Failure to pay planned periodic premiums will not of itself cause the policy to
lapse, nor will the payment of planned periodic premiums guarantee that the
policy will remain in force. The policy will lapse any time outstanding loans
exceed policy value less surrender charge or policy value less outstanding loans
and less surrender charge is insufficient to pay certain monthly deductions, and
a grace period expires without a sufficient payment. (See Policy lapse and
reinstatement, p. 13.) Subject to the first year issue premium requirements and
the maximum premium limitations established under section 7702 of the Internal
Revenue Code 1986, as amended ("the Code"), an owner may make unscheduled
premium payments at any time in any amount during the lifetime of the insured
until the maturity date. Monies received that are not designated as premium
payments will be assumed to be loan repayments if there is an outstanding loan
on the policy; otherwise, such monies will be assumed to be an unscheduled
premium payment.
Premium limitations. In no event can the total of all premiums paid, both
scheduled and unscheduled, exceed the current maximum premium limitations
established for life insurance policies to meet the definition of life
insurance, as set forth under Section 7702 of the Code. Those limitations will
vary by issue age, sex, classification, benefits provided, and even policy
duration. If at any time a premium is paid which would result in total premiums
exceeding the current maximum premium limitation, Lincoln Life will only accept
that portion of the premium which will make total premiums equal that amount.
Any part of the premium in excess of that amount will first be applied to reduce
any outstanding loan on the policy, and any further excess will be refunded to
the owner within 7 days of receipt and no further premiums will be accepted
until allowed by subsequent maximum premium limitations.
The tax status of a policy and the tax treatment of distributions from a policy
are dependent in part on whether or not the policy becomes a Modified Endowment
Contract. A policy will become a Modified Endowment Contract if premiums paid
into the policy exceed certain limits referred to as the 7-pay Limitation.
Because the issue premium normally exceeds the 7-pay Limitation, the policy will
likely be a Modified Endowment Contract unless it has been purchased with cash
values transferred from a pre-existing life insurance policy which is not a
Modified Endowment Contract and the transfer meets the requirements for a tax-
free exchange. The taxation of life insurance death
6
<PAGE>
benefits and distributions is complex and is discussed in detail under "Federal
tax matters" on pages 15-17. Of particular note is the fact that the taxation of
loans and surrenders of a life insurance policy that becomes a Modified
Endowment Contract is generally less favorable than applies to such
distributions from a life insurance policy that is not a Modified Endowment
Contract.
Net premiums. The net premium equals the premium paid.
Allocation of net premiums. In the application for a policy, the owner can
allocate net premiums or portions thereof to the various subaccounts of the
Separate Account. Notwithstanding the allocation in the application, all net
premiums received prior to the record date will initially be allocated to the
Cash Management Fund. Net premiums received prior to the record date will be
credited to the policy on the later of the policy date or the date the premium
is received. The record date is the date the policy is recorded on the books of
Lincoln Life as an in-force policy, and may coincide with the policy date. Net
premiums will continue to be allocated to the Cash Management Fund until the
record date. When the assets of the Separate Account are next valued following
the record date, the value of the policy's assets in the Cash Management Fund
will automatically be transferred to the subaccounts of the Separate Account in
accord with the owner's percentage allocation in the application. No charge will
be imposed for this initial transfer. Net premiums paid after the record date
will be credited to the policy on the date they are received and will be
allocated in accord with the owner's instructions in the application. The
minimum percentage of each premium that may be allocated to any subaccount of
the Separate Account is 10%; percentages must be in whole numbers. The
allocation of future net premiums may be changed without charge at any time by
providing written notification on a form suitable to Lincoln Life, unless the
owner has made previous arrangements with Lincoln Life to allow the allocation
of future net premiums to be changed upon telephone request.
The value of the amount allocated to subaccounts of the Separate Account will
vary with the investment experience of these subaccounts and the owner bears the
entire investment risk. owners should periodically review their allocations of
premiums and values in light of market conditions, interest rates, and overall
estate planning requirements.
Dollar Cost Averaging Program
The owner may wish to make uniform monthly transfers from the General Account to
one or more of the subaccounts over a 12, 24 or 36-month period through the
Dollar Cost Averaging ("DCA") program. Under the program, the owner designates
the total amount of policy value to be transferred from the Cash Management Fund
to the chosen subaccounts in accord with the most recent premium allocation. The
transfers continue until the end of the DCA period or until the policy value in
the Cash Management Fund has been exhausted, whichever occurs sooner. DCA may
also be terminated upon written request by the owner.
The theory of DCA is that transfers of uniform dollar amounts purchase a greater
number of subaccount units when unit values are relatively low than are
purchased when unit values are higher. This has the effect, when purchases are
made at fluctuating prices, of reducing the aggregate average cost per unit to
less than the average of the unit values on the same purchase dates. However,
participation in the DCA program does not assure the owner of a greater return
on purchases under the program, nor will it prevent or necessarily alleviate
losses in a declining market.
There are no charges associated with the DCA program. In order to participate in
(or terminate participation in) the DCA program, the owner must complete a
written request on a form suitable to Lincoln Life.
Effective date
For all coverage provided in the original application, the effective date will
be the policy date, provided the policy has been delivered and the issue premium
has been paid prior to death and prior to any change in health or any other
factor affecting insurability of the insured as shown in the application. The
policy date is ordinarily the earlier of the date the full issue premium is
received or the date on which the policy is approved for issue by Lincoln Life.
For any increase, the effective date will be the first monthly anniversary day
on or next following the day the application for the increase is approved.
For any insurance that has been reinstated, the effective date will be the first
monthly anniversary day on or next following the day the application for
reinstatement is approved.
Right to examine policy
The owner may, until a specified period of time has expired, examine the policy
and return it for refund of all premiums paid. The applicable period of time
will depend on the State in which the policy is issued, but will not expire
sooner than the latest of ten days after receipt of the policy, 45 days after
Part 1 of the application is completed, or ten days after the Notice of
Withdrawal Right is mailed or delivered to the owner. Upon cancellation the
policy will be void from the beginning. An owner wanting a refund should return
the policy to either Lincoln Life at its Home Office or to the registered agent
who sold it.
Policy termination
All coverage under the policy will terminate when any one of the following
occurs: 1) the grace period ends without payment of required premium, 2) the
policy is surrendered, 3) the insured dies, or 4) the policy matures. Under
certain defined conditions, Lincoln Life will continue until the maturity date a
death benefit on the life of
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the insured in an amount equal to the premiums paid (See Guaranteed death
benefit, p. 10).
Charges and deductions
Charges will be deducted in connection with the policy to compensate Lincoln
Life for:
1. providing the insurance benefit set forth in the policy and any optional
insurance benefits added by rider;
2. administering the policy;
3. assuming certain risks in connection with the policy;
4. incurring expenses in distributing the policy.
The nature and amount of these charges are described more fully below.
Surrender charges
Sales charges may be deducted in the form of contingent deferred surrender
charges (referred to as the surrender charge) as compensation for distribution
expenses incurred by Lincoln Life. These expenses include sales commissions, the
cost of printing the prospectus and sales literature, and any advertising costs.
Expressed as a percentage of premiums, the total sales charges imposed under the
policy during the first twelve policy months will depend on the policy's
specified amount, the insured's attained age, the insured's underwriting class,
and the amount of actual premium paid during that period, but in no event will
sales charges exceed 9.0% of the total premium paid in the first policy year.
The table below shows the surrender charge as percent of total premiums paid
during the first policy year. Lower sales charges will result if payment of
premium in excess of the issue premium (total premium must be less than the
federal maximum premium limitation) is deferred until after the first policy
year. The surrender charge will not exceed $56 per $1,000 of specified amount.
Percent of total premiums
During policy year paid in first policy year
- ----------------------------------------------
1 9.0%
2 8.5%
3 8.0%
4 7.0%
5 6.0%
6 5.0%
7 4.0%
8 3.0%
9 2.0%
10 1.0%
The sales charge in any policy year is not necessarily related to actual
distribution expenses incurred in that year. Instead, Lincoln Life expects to
incur the majority of distribution expenses in the first policy year and to
recover any deficiency over the life of the policy from sales charges in
subsequent years.
Cost of insurance charges
On the policy date and on each monthly anniversary day following, Cost of
insurance charges will be deducted from the policy value. Ordinarily, the cost
of insurance charges are deducted in proportion to the values in the
subaccounts. The cost of insurance charges may be made by some other method if
requested by the owner, and if such method is acceptable to Lincoln Life.
The cost of insurance charges depend upon a number of variables, and the cost
for each policy month can vary from month to month. On each monthly anniversary
day, Lincoln Life will determine the monthly cost of insurance for the following
month as equal to:
a. the death benefit on the monthly anniversary day; divided by
b. 1.0032737 (the monthly interest factor equivalent to an annual interest rate
of 4%); minus,
c. the policy value on the monthly anniversary day without regard to the cost
of insurance; divided by
d. 1,000; the result multiplied by
e. the applicable cost of insurance rate per $1,000 as described below.
The cost of insurance rates are based on the sex, attained age, and rate class
of the person insured. The monthly cost of insurance rates may be changed by
Lincoln Life from time to time. A change in the cost of insurance rates will
apply to all persons of the same attained age, sex and rate class and whose
policies have been in effect for the same length of time. The cost of insurance
rates will not exceed those described in the Table of Guaranteed Maximum
Insurance Rates shown in the policy. These rates are based on the l980
Commissioner's Standard Ordinary Mortality Table, Age Last Birthday. Standard
rate classes have guaranteed rates which do not exceed 100% of the applicable
table.
The rate class of an insured will affect the cost of insurance rate. Lincoln
Life currently places insureds into a standard rate class or rate classes
involving a higher mortality risk. In an otherwise identical policy, insureds in
the standard rate class will have a lower cost of insurance than those in the
rate class with the higher mortality risk. The standard rate class is also
divided into three categories: standard, preferred and preferred plus. Insureds
who are preferred or preferred plus will generally incur a lower cost of
insurance than those insureds who are standard.
Lincoln Life also reserves the right to deduct from the policy value any amounts
charged for federal or other Governmental income taxes that might result from a
change in the current tax laws. Current tax laws do not charge income taxes on
the policy value.
Charges against the separate account
Several charges are made directly or indirectly against the Separate Account and
have the effect of reducing net investment results credited to the subaccounts.
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Asset management charge. The investment advisor for each of the funds deducts a
daily charge as a percent of the net assets in each fund as an asset management
charge. The charge has the effect of reducing the investment results credited to
the subaccounts.
The investment advisor for the American Variable Insurance Series deducts a
daily charge as a percent of the net assets in each particular fund which is
equivalent to the following annual rates:
Growth Fund: 0.60% on the first $30 million of net assets, plus 0.50% on net
assets between $30 million and $600 million, plus 0.45% on net assets between
$600 million and $1.2 billion, plus 0.42% on net assets between $1.2 billion and
$2 billion, plus 0.37% on net assets in excess of $2 billion.
International Fund: 0.90% on the first $60 million of net assets, plus 0.78% on
net assets between $60 million and $600 million, plus 0.60% on net assets
between $600 million and $1.5 billion, plus 0.40% on net assets between $1.5
billion and $2.5 billion, plus 0.32% on net assets in excess of $2.5
billion.
Growth-Income Fund: 0.60% on the first $30 million of net assets, plus 0.50% on
net assets between $30 million and $600 million, plus 0.45% on net assets
between $600 million and $1.5 billion, plus 0.40% on net assets between $1.5
billion and $2.5 billion, plus 0.32% on net assets in excess of $2.5 billion.
Asset Allocation Fund: 0.60% on the first $30 million of net assets, plus 0.50%
on net assets between $30 million and $600 million, plus 0.42% on net assets in
excess of $600 million.
High-Yield Bond Fund: 0.60% on the first $30 million of net assets, plus 0.50%
on net assets between $30 million and $600 million, plus 0.46% on net assets in
excess of $600 million.
Bond Fund: 0.60% of the first $30 million, plus 0.50% in excess of $30
million.
U.S. Government/AAA-Rated Securities Fund: 0.60% on the first $30 million of net
assets, plus 0.50% on net assets between $30 million and $600 million, plus
0.40% on net assets in excess of $600 million.
Cash Management Fund: 0.50% on the first $100 million of net assets, plus 0.42%
on net assets between $100 million and $400 million, plus 0.38% on net assets in
excess of $400 million.
Because the Separate Account purchases shares of the funds involved, the value
of the net assets of the subaccounts of the Separate Account will reflect not
only the fees of the Investment Advisor, but also other miscellaneous expenses
incurred by those funds.
Mortality and expense risk charge. Lincoln Life deducts a daily charge as a
percent of the assets of the Separate Account as a mortality and expense risk
charge. The daily rate charged is equal to an annual rate of .85% of the value
of the net assets of the Separate Account for the first 10 policy years, and
.75% for policy years thereafter. This deduction will not increase for the
duration of the policy.
The mortality risk assumed is that insureds may live for a shorter period of
time than estimated and, therefore, a greater amount of death benefits will be
payable. The expense risk assumed is that expenses incurred in issuing and
administering the policies will be greater than estimated.
Guaranteed death benefit charge. For the first ten policy years Lincoln Life
deducts a daily charge as a percent of the assets of the Separate Account as a
charge for the guaranteed death benefit. The daily rate charged is equal to an
annual rate of .10% of the value of the net assets of the Separate Account. This
charge compensates Lincoln Life for the risk that the combination of cost of
insurance deductions and poor net investment results may reduce net cash
surrender values to zero and require Lincoln Life to continue until the maturity
date a death benefit on the life of the insured in an amount equal to the sum of
premiums paid.
Administrative charge. Lincoln Life deducts a daily charge as a percent of the
assets of the Separate Account as an administrative charge. The daily rate
charged is equal to an annual rate of .30% of the value of the net assets of the
Separate Account for the first ten policy years, and .10% for policy years
thereafter. This charge compensates Lincoln Life for underwriting, issue, and
other administrative expenses incurred in issuing and maintaining the policy in
force. Although most of these expenses are incurred in the first policy year,
the administrative charge is assessed over the life of the policy. This charge
will not increase for the duration of the policy. Lincoln Life does not
anticipate any profit resulting from this charge. Under federal securities
regulations, the deductions for administrative charges may not exceed the
average expected costs of underwriting, issuing, and maintaining the policy
until its maturity.
Reduction of charges
The surrender charge set forth in this prospectus may be reduced because of
special circumstances that result in lower sales or administrative expenses. In
particular, the surrender charge will not be deducted on policies issued to
employees and registered representative of any member of the selling group and
their spouses and minor children, or to officers, directors, trustees or bona-
fide full-time employees of Lincoln National Corp. or The Capital Group, Inc. or
their affiliated or managed companies (based on the owner's status at the time
the policy was purchased). The amounts of any reductions will reflect the
reduced sales and administrative expenses resulting from the special
circumstances. Reductions will not be unfairly discriminatory against any
person, including the affected policyowners and owners of all other policies
funded by the Separate Account.
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Policy benefits
Death benefit
The initial death benefit is equal to the specified amount chosen by the owner,
subject to certain limitations. The minimum specified amount per $1,000 of
premium results from paying the Federal maximum premium limitation at issue. The
maximum specified amount per $1,000 of premium results from paying only the
required issue premium (approximately equal to 80% of the federal maximum
premium limitation at issue) for that specified amount.
As long as the policy remains in force (see Policy lapse and reinstatement, p.
13), Lincoln Life will, upon proof of the insured's death, pay the death benefit
proceeds of the policy to the named beneficiary. The proceeds may be paid in
cash or under one or more of the payment options set forth in the policy. (See
Proceeds and payment options, p. 13.) The death benefit proceeds payable under
the designated death benefit type will be increased by any unearned cost of
insurance charge, and will be reduced by any outstanding loan and any due and
unpaid charges. (See Policy lapse and reinstatement, p. 13.)
The death benefit is the greater of the specified amount of the policy or a
specified percentage of the policy value on or prior to the date of death. The
specified percentage at any time is based on the attained age of the insured as
of the beginning of the policy year.
* The specified percentages are shown in the table below:
Attained Specified Attained Specified Attained Specified
age percentage age percentage age percentage
- ------------------------------------------------------------------
40 or
younger 250% 59 134% 91 104%
41 243 60 130 92 103
42 236 61 128 93 102
43 229 62 126 94 101
44 222 63 124 95 or 100
45 215 64 122 older
46 209 65 120
47 203 66 119
48 197 67 118
49 191 68 117
50 185 69 116
51 178 70 115
52 171 71 113
53 164 72 111
54 157 73 109
55 150 74 107
56 146 75 105
57 142 through
58 138 90
Examples. For this example, assume that the insured is under the age of 40 and
that there is no outstanding policy loan. A policy with a specified amount of
$250,000 will generally pay $250,000 in life insurance proceeds. However,
because life insurance proceeds cannot be less than 250% (the applicable
specified percentage) of policy value, any time the policy value of this policy
exceeds $100,000, life insurance proceeds will exceed the $250,000 specified
amount. If the policy value equals or exceeds $100,000, each additional dollar
added to the policy value will increase the life insurance proceeds by $2.50.
Thus, for a policy with a specified amount of $250,000 and a policy value of
$200,000, the beneficiary will be entitled to life insurance proceeds of
$500,000 (250% x $200,000); a policy value of $300,000 will yield life insurance
proceeds of $750,000 (250% x $300,000); a policy value of $500,000 will yield
life insurance proceeds of $1,250,000 (250% x $500,000). Similarly, so long as
policy value exceeds $100,000, each dollar taken out of policy value will reduce
the life insurance proceeds by $2.50. If at any time the policy value multiplied
by the specified percentage is less than the specified amount, the life
insurance proceeds will equal the specified amount of the policy.
The above example describes a scenario which includes favorable investment
performance. In addition, the applicable percentage of 250% that is used is for
ages 40 or younger. Because the applicable percentage decreases as the attained
age increases, the impact of the applicable percentage on the death benefit
payment levels will be lessened as the attained age progresses beyond age 40.
Guaranteed death benefit
Lincoln Life expects that the issue premium will ordinarily be sufficient, when
combined with the net investment results, to pay for all charges to the policy
and thereby provide life insurance protection on the insured until age 99. In
some situations, however, the combination of poor net investment results and
cost of insurance deductions could result in the net cash surrender value being
reduced to zero. In such situations, the owner may make additional premium
payments into the policy, subject to federal limitations, sufficient to pay for
cost of insurance deductions to keep the policy in force. Alternatively,
provided that no outstanding loans exist on the policy, the owner may allow the
policy to lapse and take advantage of the guaranteed death benefit described
below. The presence of any outstanding policy loan voids the guaranteed death
benefit until the loan is repaid.
The guaranteed death benefit provides that Lincoln Life will continue until the
maturity date a death benefit on the life of the insured in an amount equal to
the sum of premiums paid into the policy, provided no outstanding policy loans
exist and provided the policy entered the grace period due to insufficient net
cash surrender value and the grace period has expired. No cash value will be
available to the owner of the lapsed policy. Lincoln Life will provide the death
benefit until the insured reaches the attained age of 99, when all coverage will
terminate.
Policy changes
Exchanges of policy. Before the second anniversary the policy may be exchanged
for a new policy of fixed benefit insurance on the insured's life. The new
policy will be
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any compatible Flexible Premium Adjustable Life policy offered by Lincoln Life,
subject to any conditions normally applicable to the new policy. It will have
the same policy date and be issued at the same rating class and issue age as
this policy. No evidence of insurability will be required. The net cash
surrender value of the new policy will equal that of this policy on the date of
exchange. The surrender charge of the new policy will equal that of this policy
on the date of exchange. On the date of exchange, the death benefit of the new
policy will equal the death benefit of this policy, or the net amount at risk on
the new policy will equal the net amount at risk on this policy, at the owner's
option. If the total premiums paid into this policy exceed the federal maximum
premium limitation of the new policy, the death benefit of the new policy will
be increased (without evidence of insurability) to the minimum death benefit
which will allow compliance with that limitation.
The request for exchange of the policy must be in writing on a form suitable to
Lincoln Life. This policy must be surrendered to Lincoln Life, and be at the
Home Office while the policy is in force. The owner of the new policy must be
the owner of this policy.
The date of exchange will be the first monthly anniversary day on or next
following the latest of the date the owner requests the change to be effective,
the date that the request for exchange and the surrendered policy are received
at the Home Office, or the date the cost of exchange or any other amount due is
paid. The policy may also be exchanged after a material change in the investment
policy of any fund or series of a fund. In that event, a notice of the change of
investment policy will be sent to the owner. Within 60 days after receipt of the
notice, or within 60 days after the effective date of the change, if later, the
policy may be exchanged for a new policy of fixed-benefit insurance on the
insured's life. The conditions for such exchange and the specifications for the
new policy are the same as those for an exchange of policy before the second
anniversary, as described above.
The exchange of the policy for a new policy may have federal tax implications.
(See Federal tax matters, pp. 15-17).
Changes in amount of insurance coverage. The owner may request to increase the
specified amount anytime during the first two years or decrease the specified
amount at any time. The specified amount may not be increased after the second
anniversary of the policy. The request for such a change must be from the owner
and in writing on a form suitable to Lincoln Life. Any request for an increase
must be applied for on a supplemental application during the first two policy
years; other evidence of insurability will not be required for the increase. The
total of all requested increases may not exceed the lesser of 10% of the initial
specified amount or $25,000. Any increase will become effective on the first
monthly anniversary day on or next following the date the application for the
increase is approved. All rights to return or exchange the policy will apply
anew to the amount of the increase. Any decrease will become effective on the
first monthly anniversary day on or next following the day the request is
received by Lincoln Life. Any such decrease will reduce insurance first against
insurance provided by the most recent increase, next against the next most
recent increases successively, and finally against insurance provided under the
original application. The specified amount after any requested decrease may not
be less than $10,000.
Policy value
The policy provides for the accumulation of policy value, which is calculated as
often as the assets of the Separate Account are valued. The policy value will
vary with the investment performance of the General Account and of the Separate
Account, as well as other factors. In particular, policy value also depends on
any premiums received, any policy loans, and any charges and deductions assessed
the policy. The policy has no guaranteed minimum policy value or net cash
surrender value.
On the policy date, the policy value will be the initial net premium, minus the
cost of insurance for the first month.
On each monthly anniversary day, the policy value is equal to the sum of the
following:
a. The policy value on the preceding day;
b. Any increase due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
c. Interest at not less than the rate shown on the policy schedule on any
outstanding loan amount;
d. Any net premiums received since the preceding day.
Minus the sum of the following:
e. Any decrease due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
f. Any amount charged against the investment amount for federal or other
governmental income taxes;
g. The cost of insurance for the following month.
On any day other than a monthly anniversary day, the policy value is equal to
the sum of the following:
a. The policy value on the preceding day;
b. Any increase due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
c. Interest at not less than the rate shown on the policy schedule on any
outstanding loan amount;
d. Any net premiums received since the preceding day.
Minus the sum of the following:
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e. Any decrease due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
f. Any amount charged against the investment amount for federal or other
governmental income taxes.
The charges and deductions described above are further discussed in Charges and
deductions, p. 8.
Gross investment results. The gross investment results are equal to the change
in the market value of the assets of a fund from the previous valuation day to
the current day, plus the investment income on those assets during the same
period.
Net investment results. When the assets of the Separate Account are valued, the
net investment results will equal the gross investment results minus the sum of
the following:
a. The mortality and expense risk charge;
b. The guaranteed death benefit charge; and
c. The administrative charge.
d. The asset management charges and any miscellaneous fund expenses.
The charges listed above are explained further in Charges against the Separate
Account, p. 8.
The value of the assets in the funds will be taken at their fair market value in
accordance with accepted accounting practices and applicable laws and
regulations.
Transfer between subaccounts
Any time after the record date, the owner may request to transfer an amount from
one subaccount to another. The request to transfer funds must be in writing on a
form suitable to Lincoln Life. Transfers may be made by telephone request only
if the owner has previously authorized telephone transfer in writing on a form
suitable to Lincoln Life. Lincoln Life will follow reasonable procedures to
determine that the telephone requester is authorized to request such transfer,
including requiring certain identifying information contained in the written
authorization. If such procedures are followed, Lincoln Life will not be liable
for any loss arising from any telephone transfer. Transfers will take effect on
the date that the request in writing or by telephone is received at the Home
Office of Lincoln Life. The minimum amount which may be transferred between
subaccounts is $100. The maximum number of transfers allowed in a policy year is
twelve.
Loans
At any time while the policy is in force the owner may make written request
for a loan against the policy. A written loan agreement will be executed
between the owner and Lincoln Life. The policy will be the sole security for the
loan, and the policy must be assigned to Lincoln Life as part of the loan
agreement. Ordinarily, the loan will be processed within seven days from the
date the request for a loan is received at the Home Office of Lincoln Life.
Payments may be postponed under certain circumstances. (See Postponement of
payments, p. 14.)
A loan taken from, or secured by, a policy may have federal income tax
consequences. In particular, adverse tax consequences may occur if the policy
lapses with outstanding loans. (See Federal tax matters, pp. 15-17.)
Loan amount. The amount of all outstanding loans with interest may not exceed
the policy value less surrender charge as of the date of the policy loan. If at
any time the total of policy loans plus loan interest equals or exceeds the
policy value less surrender charge, notice will be sent to the last known
address of the owner, and any assignee of record, and the policy will enter into
the grace period. If sufficient payment is not received within 61 days after
notice is mailed, the policy will lapse and terminate without value. (See Policy
lapse and reinstatement, p 13.) In addition, the presence of any outstanding
policy loan negates the guaranteed death benefit.
Loan interest. Interest on any loan will be payable annually in arrears at an
annual rate of 6.0%. Any interest not paid when due will be added to the loan
amount and will bear interest at the same policy loan rate.
Deduction of loan and loan interest. The amount of any loan or unpaid loan
interest will be deducted from the investment amount and transferred to the
Lincoln Life General Account, where they will earn interest at the then
currently declared annual rate, which may not be less than the annual rate of
4.0%. The current annual rate is 6.0%. The amount will remain a part of the
policy value, but will not be increased or decreased by investment results in
the Separate Account. Therefore, the policy value could be more or less than
what it would have been if the policy loan had not been made, depending on the
investment results in the Separate Account compared to the interest credited to
the assets transferred to the General Account to secure the loan. In this way, a
loan may have a permanent effect upon both the policy value and the death
benefit and may increase or decrease the potential for policy lapse. In
addition, outstanding policy loans reduce the death benefit. Ordinarily, the
amount of any loan or unpaid loan interest will be deducted from the subaccounts
in proportion to the values of the subaccounts. The deduction may be made by
some other method if the owner requests it, and if such method is acceptable to
Lincoln Life.
Loan repayments. Loan repayments will ordinarily be allocated to the subaccount
in accord with the most recent premium allocation. They may be allocated by some
other method if the owner requests it, and if such method is acceptable to
Lincoln Life. Any loan not repaid at the time of surrender of the policy,
maturity, or death of the insured will be deducted from the amount otherwise
payable.
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Policy lapse and reinstatement
Insurance coverage under the policy will be continued in force until the net
cash surrender value is insufficient to cover the monthly deductions, except
that the policy will not be continued beyond the maturity date. Lapse will only
occur when the policy value less surrender charges and less outstanding policy
loans is insufficient to cover the cost of insurance deductions and a grace
period expires without a sufficient payment. Insurance coverage will continue
during the grace period, but the policy will be deemed to have no policy value
for purposes of policy loans and surrenders.
A grace period of 61 days will begin on the date Lincoln Life sends a notice of
any shortfall to the last known address of the owner or any assignee. The owner
must, during the grace period, make a payment sufficient to cover the monthly
deductions and any other charges due under the policy until the end of the grace
period. Failure to make a sufficient payment during the grace period will cause
the policy to lapse. Any net cash surrender value will be returned to the owner.
If the insured dies during the grace period, any due and unpaid monthly
deductions will be deducted from the death benefit.
A lapsed policy may be reinstated at any time within five years after the date
of lapse and before the maturity date by submitting evidence of insurability
satisfactory to Lincoln Life and a premium sufficient to keep the policy in
force for two months. The effective date of a reinstatement will be the first
monthly anniversary day on or next following the day the application for
reinstatement is approved.
Surrender of the policy
The owner may surrender the policy at any time during the lifetime of the
insured and receive the net cash surrender value. The net cash surrender value
is equal to the policy value minus any surrender charge, minus any outstanding
loan and minus any unpaid loan interest. The request must be made in writing on
a form suitable to Lincoln Life. The request will be effective the date the
request is received in the Home Office of Lincoln Life, or at a later date if so
requested by the owner. Ordinarily, the surrender will be processed within seven
days from the date the request for surrender is received at the Home Office of
Lincoln Life. The tax treatment of a surrendered policy is discussed under
Federal tax matters, pp. 15-17.
Proceeds and payment options
Proceeds. The amount payable under the policy on the maturity date, on the
surrender of the policy, or upon the death of any insured person is called the
proceeds of the policy.
The proceeds to be paid on the death of the insured will be the death benefit
minus any outstanding policy loan, and minus any unpaid loan interest. The
proceeds to be paid on the surrender of the policy or on the maturity date will
be the net cash surrender value.
Any amount to be paid at the death of the insured or any other termination of
this policy will be paid in one sum unless otherwise provided. Interest will be
paid on this amount from date of death or maturity to date of payment at a
specified rate, not less than that required by law. All or part of the sum of
this amount and such interest credited to date of payment will be applied to any
payment option.
To the extent allowed by law, proceeds are not to be subject to any claims of a
beneficiary's creditors.
Payment options. Upon written request, all or part of the proceeds and interest
credited thereon may be applied to any payment option available from Lincoln
Life at the time payment is to be made. Under certain conditions, payment
options will only be available with the consent of Lincoln Life. Such conditions
will exist if the proceeds to be settled under any option are $2,500 or less, or
if any installment or interest payment is $25 or less. In addition, if any payee
is a corporation, partnership, association, trustee, or assignee, approval by
Lincoln Life is needed before any proceeds can be applied to a payment option.
The owner may elect any payment option while the insured is alive and may change
that election if that right has been reserved. When the proceeds become payable
to a beneficiary, the beneficiary may elect any payment option if the proceeds
are available to the beneficiary in one sum.
The option date is any date the policy terminates under the termination
provision.
Any proceeds payable under the policy may also be settled under any other method
of settlement offered by Lincoln Life on the option date. Additional interest as
determined by Lincoln Life may be paid or credited from time to time in addition
to the payments guaranteed under a payment option.
When proceeds become payable under a payment option, a payment contract will be
issued to the payee in exchange for the policy. Such payment contract may not be
assigned. Any change in payment option may be made only if it is provided for in
the payment contract. Under some of the payment options, proceeds may be
withdrawn under such payment option if provided for in the payment contract. The
amount to be withdrawn varies by the payment option.
General provisions
The contract
The entire contract consists of the policy plus the application and any
supplemental application, plus any riders, plus any amendments. The policy is
issued in consideration of the application and payment of the Initial Premium.
Only statements in the application and any supplemental applications can be used
to contest the validity of the policy or defend a claim. These statements are
considered representations and not warranties. A
13
<PAGE>
change in the policy will be binding on Lincoln Life only if the change is in
writing and the change is made by the President, Vice President, Secretary, or
Assistant Secretary of Lincoln Life.
The policy is nonparticipating; it will not share in the profit or surplus
earnings of Lincoln Life.
Suicide
If the insured commits suicide, while sane or insane, within two years from the
policy date, the total liability of Lincoln Life under the policy will be the
premiums paid, minus any policy loan, and minus any loan interest due.
If the insured commits suicide, while sane or insane, within two years from the
effective date of any increase in insurance or reinstatement, our total
liability with respect to such increase will be its cost of insurance and
monthly charges.
Representations and contestability
All statements made in an application by, or on behalf of, the insured will, in
the absence of fraud, be deemed representations and not warranties. Statements
may be used to contest a claim or validity of the policy only if these
statements are contained in the application for issue, reissue, or
reinstatement, or in any supplemental application, and a copy of that
application or supplemental application is attached to the policy. The policy
will not be contestable after it has been in force for two years during the
lifetime of the insured. Also, any increase in coverage or any reinstatement
will not be contestable after that increase or reinstatement has been in force
two years from its effective date during the lifetime of the insured. Any
contest will then be based only on the application for the increase or
reinstatement and will be subject to the same conditions as for contest of the
policy.
Incorrect age or sex
If there is an error in the age or sex of the insured, the excess of the death
benefit over the policy value will be adjusted to that which would be purchased
by the most recent cost of insurance at the correct age and sex.
Change of owner or beneficiary
The owner of the policy is the owner identified in the application, or a
successor. All rights of the owner belong to the owner while the insured is
alive. The rights pass to the estate of the owner if the owner dies before the
insured. The owner may transfer all ownership rights and privileges to a new
owner. The request must be in writing on a form suitable to Lincoln Life. The
change will be effective the day that the request is received in the Home Office
of Lincoln Life. Lincoln Life will not be responsible for any payment or other
action taken before having recorded the transfer. A change of ownership will
not, in and of itself, affect the interest of any beneficiary. A change of
ownership may have tax consequences.
The beneficiary is identified in the application for the policy, and will
receive the proceeds when the insured dies. The beneficiary may be changed by
the owner while the insured is alive, and provided that any prior designation
does not prohibit such a change. A change will revoke any prior designation of
the beneficiary. The request to change beneficiary must be in writing on a form
suitable to Lincoln Life. Lincoln Life reserves the right to require the policy
for endorsement of the change of beneficiary designation.
If not otherwise provided, the interest of any beneficiary who dies before the
insured will pass to any other beneficiaries according to their interest.
Furthermore, if no beneficiary survives the insured, the proceeds will be paid
in one sum to the owner, if living. If the owner is not living, the proceeds
will be paid to the owner's estate.
Assignment
Any assignment of the policy will not be binding on Lincoln Life unless it is in
writing on a form suitable to Lincoln Life and is received at the Home Office.
Lincoln Life will not be responsible for the validity of any assignment, and
reserves the right to require the policy for endorsement of any assignment. An
assignment of the policy may have tax consequences.
Reports and records
Lincoln Life will maintain all records relating to the Separate Account. Lincoln
Life will mail to the owner at least once each year a report, without charge,
which will show the current policy value, the current net cash surrender value,
the current death benefit, any current policy loans, any premiums paid, any cost
of insurance charges deducted, and any withdrawals made. The report will also
include any other data that may be required where the contract is delivered.
Projection of benefits and values
At the owner's request, Lincoln Life will provide a report to the owner which
shows projected future results. The request must be in writing on a form
suitable to Lincoln Life. The report will be comparable in format to those shown
in Appendix B and will be based on assumptions in regard to the death benefit as
may be specified by the owner, planned premium payments as may be specified by
the owner, and such other assumptions as are necessary and specified either by
the owner or Lincoln Life. A reasonable fee may be charged for this
projection.
Postponement of payments
Payments of any amount payable on surrender, loan, or benefits payable at death
or maturity may be postponed whenever: (i) the New York Stock Exchange is closed
other than customary week-end and holiday closings, or trading on the New York
Stock Exchange is restricted as determined by the Securities and Exchange
Commission; (ii) the Commission by order permits postponement for the protection
of owners; or (iii) an emergency exists, as determined by the Commission, as a
result of which disposal of securities is not reasonably practical or it is not
reasonably practical to determine the value of the
14
<PAGE>
Separate Account's net assets. Transfers may also be postponed under such
circumstances.
Requests for surrenders or policy loans of policy values paid by check may be
delayed until such time as the check has cleared the owner's bank.
Accelerated Benefit Election Rider
This rider is available to issue ages 0 through 80 and gives the owner the right
to receive a portion of the death benefit prior to death if the insured is
diagnosed as having an illness which with reasonable medical certainty will
cause death within 12 months. Upon receipt of proof of loss, up to one-half of
the eligible death benefit (as defined in the rider) may be advanced to the
owner in cash as an initial accelerated benefit. A limited amount of Subsequent
accelerated benefit is also available to pay premiums and interest charges
required on the policy. The amount of all advanced accelerated benefits creates
an interest-bearing lien against the death benefit otherwise payable at death.
There is no cost of insurance for this rider, but an administrative expense
charge is payable upon application for benefits.
The availability of this rider is subject to approval by the State Insurance
Department of the State in which the policy is issued, and is also subject to
the current underwriting and issue procedures in place at the time of the
application. The underwriting and issue procedures are subject to change without
notice.
Distribution of the policy
The policy will be sold by individuals who, in addition to being licensed as
life insurance agents for Lincoln Life, are also National Association of
Securities Dealers (NASD) registered representatives. American Fund
Distributors, Inc., the principal underwriter of the policy is registered with
the Securities and Exchange Commission under the Securities Exchange Act of 1934
as a broker-dealer and is a member of the NASD.
Federal tax matters
The following discussion is intended to provide a general description of the
federal income tax considerations associated with the policy. It does not
purport either to be complete or to cover all situations; this discussion is not
intended to be taken as tax advice. Consult a qualified tax advisor for more
complete information. This discussion is based upon Lincoln Life's understanding
of the present federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of
continuation of the present federal income tax laws or of the current
interpretation by the Internal Revenue Service. Federal tax laws may change
without notice and as a result the taxable consequences to the insured,
policyowner, or beneficiary may be altered.
Tax status of the policy
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
includes a definition of a life insurance contract for Federal tax purposes.
This definition can be satisfied by complying with either of two tests set forth
in section 7702. With respect to a policy which has an "accelerated death
benefit rider", there is some uncertainty as to qualification of the policy as
life insurance due to the limited guidance provided. Although the Secretary of
the Treasury (the "Treasury") is authorized to prescribe regulations
interpreting the manner in which the tests under section 7702 are to be applied,
such regulations have not been issued. In addition, section 7702 of the Code was
amended by imposing certain modified requirements with respect to the mortality
(i.e., "cost of insurance") and other expense charges that are to be used in
determining compliance of the Policies with section 7702. Guidance as to how
these modified requirements are to be applied is extremely limited. If a policy
was determined not to be a life insurance contract for purposes of section 7702,
such policy would not provide most of the tax advantages normally provided by a
life insurance policy.
With respect to a policy entered into before October 21, 1988, although there
are no regulations interpreting the manner in which the tests are under section
7702 are to be applied, Lincoln Life believes that such a policy should meet the
definition of a life insurance contract for Federal tax purposes. However, an
exchange of a policy entered into before October 21, 1988, or possibly other
changes, might cause such a policy to be treated as entered into after October
20, 1988, and in such circumstances, the policy would be subject to modified
mortality and other expense charge requirements. Accordingly, the owner, of a
policy entered into before October 21, 1988, should contact a competent tax
advisor before exchanging or making any other change, to such a policy to
determine whether the exchange or change would cause the policy to be treated as
entered into after October 20, 1988.
With respect to a policy entered into after October 20, 1988, that is issued on
the basis of a standard rate class or a rate involving a lower mortality risk
(i.e., a preferred or preferred plus basis), while there is some uncertainty due
to the limited guidance on the modified section 7702 requirement, Lincoln Life
nonetheless believes that such a policy should meet the section 7702 definition
of a life insurance contract. With respect to a policy entered into after
October 20, 1988, that is issued on a substandard basis (i.e., rate class
involving higher than standard mortality risk), there is even more uncertainty,
in particular as to how the modified requirements are to be applied in
determining whether such a policy meets the section 7702 definition of a life
insurance contract. Thus, it is not clear whether or not such a policy would
satisfy section 7702, particularly if the owner pays the full amount of premiums
permitted under the policy. If it is subsequently determined that a policy does
not satisfy section 7702, Lincoln Life will take whatever steps are appropriate
and
15
<PAGE>
necessary to cause such a policy to comply with section 7702, including possibly
refunding any premiums paid that exceed the limitations allowable under section
7702 (together with interest or other earnings on any such premiums refunded as
required by law). For these reasons, Lincoln Life reserves the right to modify
the policy as necessary to qualify it as a life insurance contract under section
7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of the Separate Account to be
"adequately diversified" in order for the policy to be treated as a life
insurance contract for Federal tax purposes. The Separate Account, through the
various funds in which it invests, intends to comply with the diversification
requirements prescribed in Treasury Regulations, which affect how each fund's
assets may be invested. Lincoln Life does not have control over the American
Variable Insurance Series or its investments. Nonetheless, Lincoln Life believes
that the funds will be operated in compliance with the requirements prescribed
by the Treasury.
The regulations relating to diversification requirements do not provide guidance
concerning the extent to which policyowners may direct their investments to the
subaccounts of a Separate Account. When additional guidance is provided, the
policy may need to be modified to comply with such guidance. It is not clear
what this additional guidance will provide nor whether it will be applied on a
prospective basis only. For these reasons, Lincoln Life reserves the right to
modify the policy as necessary to prevent the owner from being considered the
owner of the assets of the Separate Account or otherwise to qualify the policy
for favorable tax treatment.
The Treasury Department has indicated that guidelines may be forthcoming under
which a variable life contract will not be treated as a life insurance contract
for tax purposes if the owner of the contract has excessive control over the
investments underlying the contract. The issuance of such guidelines may require
the company to impose limitations on a Contract owner's right to control the
investment. It is not known whether any such guidelines would have a retroactive
effect.
The following discussion assumes that the policy will qualify as a life
insurance contract for federal income tax purposes.
Tax treatment of policy benefits
1. In general. Lincoln Life believes that the proceeds and cash value increases
of a policy should be treated in a manner consistent with a fixed benefit life
insurance policy for federal income tax purposes. Thus, the death benefit under
the policy should be excludable from the gross income of the beneficiary under
Section 101(a)(1) of the Code.
A change in a policy's specified amount, a change in death benefit option, the
payment of premiums, the addition of additional insurance, a policy loan, a
lapse with outstanding indebtedness, exchange of a policy, or a surrender may
have tax consequences depending upon the circumstances. In addition, federal
estate and generation skipping transfer, and state and local estate inheritance,
and other tax consequences of ownership or receipt of policy proceeds depend
upon the circumstances of each owner or beneficiary. A competent tax advisor
should be consulted for further information. Generally, the owner will not be
deemed to be in constructive receipt of the cash value, including increments
thereof, under the policy until there is a distribution. The tax consequences of
distributions from, and loans taken from or secured by, a policy depend on
whether the policy is classified as a "Modified Endowment Contract" under
section 7702A.
2. Modified Endowment Contracts. A policy may be treated as a Modified Endowment
Contract depending upon the amount of premiums paid in relation to the death
benefit provided under such policy. Because of the premium level contemplated
under the Policies, all Policies entered into after June 20, 1988 are or may
become modified endowment contracts. In addition, if a policy is "materially
changed," it may be treated as a Modified Endowment Contract depending upon such
relationship after such change. The premium limitation and material change rules
for determining whether a policy is a Modified Endowment Contract are extremely
complex. Moreover, due to the policy's flexibility, classification of a policy
as a Modified Endowment Contract will depend upon the circumstances of each
policy. Accordingly, a prospective owner should contact a competent tax advisor
before purchasing a policy to determine the circumstances in which the policy
would be a Modified Endowment Contract. In addition, an owner should contact a
competent tax advisor before paying any additional premium or making any other
change to, including an exchange of, a policy to determine whether such premium
payment or change would cause the policy to be treated as a Modified Endowment
Contract.
Lincoln Life will monitor premiums paid into each policy after the date of this
prospectus to determine when a premium payment will exceed the 7-pay test and
cause the policy to become a Modified Endowment Contract. If the owner has given
Lincoln Life instructions that the policy should not be allowed to become a
Modified Endowment Contract, any premiums in excess of the 7-pay Limitation will
first be applied to reduce any outstanding loan on the policy, and any further
excess will be refunded to the owner within 7 days. If the owner has not given
Lincoln Life instructions to the contrary, however, the premium will be paid
into the policy and a letter of notification of Modified Endowment Contract
status will be sent to the owner. The letter of notification will include the
available options, if any, for remedying the Modified Endowment Contract status
of the policy.
3. Distributions from policies classified as modified endowment contracts.
Policies classified as a modified endowment contracts are subject to the
following tax rules: First, all distributions, including distributions upon
surrender and benefits paid at maturity, from such a
16
<PAGE>
policy are treated as ordinary income subject to tax up to the amount equal to
the excess (if any) of the cash value immediately before the distribution over
the investment in the policy (described below) at such time. Second, loans taken
from, or secured by, such a policy are treated as distributions from such a
policy and taxed accordingly. Third, a 10 percent additional income tax is
imposed on the portion of any distribution from, or loan taken from or secured
by, such a policy that is included in income except where the distribution or
loan is made on or after the owner attains age 59-1/2, is attributable to the
owner's becoming disabled, or is part of a series of substantially equal
periodic payments for the life of the owner or the joint lives of the owner and
the owner's beneficiary. Fourth, the cost of insurance for certain riders which
are not "qualified additional benefits" may be treated as distributions from
such a policy and taxed accordingly.
4. Distributions from policies not classified as Modified Endowment Contracts.
Distributions from a policy that is not classified as a Modified Endowment
Contract are generally treated as first recovering the investment in the policy
(described below) and then, only after the return of all such investment in the
policy, as distributing taxable income. An exception to this general rule occurs
in the case of a decrease in the specified amount, a change in death benefits
from Type 2 to Type 1, or any other change that reduces benefits under the
policy in the first 15-years after the policy is issued and that results in a
cash distribution to the owner in order for the policy to continue complying
with the section 7702 definitional limits. In that case, such distribution will
be taxed in whole or in part as ordinary income (to the extent of any gain in
the policy) under rules prescribed in section 7702.
Loans from, or secured by, a policy that is not a Modified Endowment Contract
are not treated as distributions. Instead, such loans are treated as
indebtedness of the owner.
Upon a complete surrender or lapse of a policy that is not a Modified Endowment
Contract, or when benefits are paid at such a policy's maturity date, if the
amount received plus the amount of indebtedness exceeds the total investment in
the policy, the excess will generally be treated as ordinary income subject to
tax.
Finally, neither distributions (including distributions upon surrender or lapse)
nor loans from, or secured by, a policy that is not a Modified Endowment
Contract are subject to the 10 percent additional income tax.
5. Policy loan interest. Generally, interest paid on any loan under a policy
which is owned by an individual is not deductible after 1990. In addition,
interest on any loan under a policy owned by a taxpayer and covering the life of
any individual who is an officer of or is financially interested in the business
carried on by that taxpayer will not be tax deductible to the extent the
aggregate amount of such loans with respect to contracts covering such
individual exceeds $50,000. No amount of policy loan interest is, however,
deductible if the policy was deemed for federal tax purposes to be a single
premium life insurance contract. The owner should consult a competent tax
advisor as to whether the policy would be so deemed.
6. Investment in the policy. Investment in the policy means (i) the aggregate
amount of any premiums or other consideration paid for a policy, minus (ii) the
aggregate amount received under the policy which is excluded from the gross
income of the owner (except that the amount of any loan from, or secured by, a
policy that is a Modified Endowment Contract, to the extent such amount is
excluded from gross income, will be disregarded), plus, (iii) the amount of any
loan from, or secured by, a policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the owner.
7. Multiple policies. All modified endowment contracts that are issued by
Lincoln Life (or its affiliates) to the same owner during any calendar year are
treated as one Modified Endowment Contract for purposes of determining the
amount includible in gross income under section 72 (e) of the Code.
8. Taxation of accelerated benefit election rider. The tax treatment of benefits
paid under the Accelerated Benefit Election Rider, as well as the tax treatment
of a policy with such riders, is uncertain. Future legislation or
interpretations may treat all or part of such payments as taxable distributions
from the policy. Alternatively, such payments may be excluded from taxable
income to the extent they are used to pay for actual long-term care services or
are considered a death benefit under section 101(a)(1) of the Code. A competent
tax advisor should be consulted for further information.
Taxation of the Separate Account
Lincoln Life does not initially expect to incur any income tax upon the earnings
or the realized capital gains attributable to the Separate Account. Based upon
these expectations, no charge is being made currently to the Separate Account
for federal income taxes which may be attributable to the Separate Account. If,
however, Lincoln Life determines that it may incur such taxes, it may assess a
charge for those taxes from the Separate Account.
Voting rights
To the extent required by law, Lincoln Life will vote shares of the funds held
in the Separate Account at regular and special shareholder meetings of the funds
in accordance with instructions received from persons having voting interests in
the Separate Account. If, however, the Investment Company Act of l940 or any
regulation thereunder should be amended or if the present interpretation thereof
should change, and as a result Lincoln Life determines that it is permitted to
vote the fund shares in its own right, it may elect to do so.
17
<PAGE>
The number of votes which each policyowner has the right to instruct will be
determined as one vote for each $100 of policy value in each subaccount.
Fractional shares will be allocated for amounts less than $100. The number of
votes which the policyowner has the right to instruct will be determined as of
the date coincident with the date established by the various series for
determining shareholders eligible to vote at the meetings of the funds. Voting
instructions will be solicited by written communications prior to such meeting
in accordance with procedures established by the funds. Lincoln Life will vote
shares of each fund as to which no timely instructions are received in
proportion to the voting instructions which are received with respect to all
policies participating in that fund. Each person having a voting interest will
receive proxy material, reports and other materials relating to the appropriate
portfolio.
Disregard of voting instructions. Lincoln Life may, when required by state
insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
sub-classification or investment objective of any of the series of a fund or to
approve or disapprove an investment advisory contract for a fund. In addition,
Lincoln Life itself may disregard voting instructions in favor of changes
initiated by a policyowner in the investment policy or the investment advisor of
a fund if Lincoln Life reasonably disapproves of such changes. A change would be
disapproved only if the proposed change is contrary to state law or prohibited
by state regulatory authorities or Lincoln Life determined that the change would
have an adverse effect on its General Account in that the proposed investment
policy for any fund may result in overly speculative or unsound investments. In
the event Lincoln Life does disregard voting instructions, a summary of that
action and the reasons for such action will be included in the next semiannual
report to policyowners.
State regulation of Lincoln Life and the Separate Account
Lincoln Life, a stock life insurance company organized under the laws of
Indiana, is subject to regulation by the Insurance Department of the State of
Indiana. An annual statement is filed with the Indiana Commissioner of Insurance
on or before March 1st of each year covering the operations and reporting on the
financial condition of Lincoln Life as of December 31 of the preceding year.
Periodically, the Commissioner of Insurance examines the liabilities and
reserves of Lincoln Life and the Separate Account and certifies their adequacy,
and a full examination of Lincoln Life's operations is conducted by the National
Association of Insurance Commissioners at least once every three years.
In addition, Lincoln Life is subject to the insurance laws and regulations of
other states within which it is licensed or may become licensed to operate.
Generally, the insurance department of any other state applies the laws of the
state of domicile in determining permissible investments.
Safekeeping of the account's assets
Lincoln Life holds title to the assets of the Separate Account. The assets are
kept physically segregated and held separate and apart from the General Account
assets. Records are maintained of all purchases and redemptions of fund shares
held by each subaccount. Additional protection is provided in the form of a
blanket fidelity bond which covers directors and employees of Lincoln Life. The
bond, which was issued by Fidelity and Deposit Company of Maryland covers up to
$25,000,000.
The funds do not issue certificates. Thus, Lincoln Life holds the Separate
Account's assets in an open account in lieu of stock certificates.
Legal proceedings
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. Lincoln Life is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
Experts
The financial statements of the Separate Account and the consolidated financial
statements and schedules of Lincoln Life appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon also appearing elsewhere herein
and in the registration statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
Actuarial matters included in this prospectus have been examined by Denis G.
Schwartz, FSA as stated in the opinion filed as an exhibit to the registration
statement.
Additional information
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of l933, as amended, with respect to the
policy offered hereby. This prospectus does not contain all the information set
forth in the registration statement and the amendments and exhibits to the
registration statement, to all of which reference is made for further
information concerning the Separate Account, Lincoln Life and the policy offered
hereby. Statements contained in this prospectus as to the contents of the policy
and other legal instruments are summaries. For a complete statement of the terms
thereof reference is made to such instruments as filed.
18
<PAGE>
Appendix A
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and position(s)
with registrant Principal occupations last five years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Timothy J. Alford Senior Vice President (formerly Vice President and Second Vice President), Lincoln National Life
Senior Vice President Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------------------------------------
Neal Arnold Vice President (formerly Second Vice President), Lincoln National Life Insurance Co.
Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
Robert A. Anker President and Chief Operating Officer, Lincoln National Corp. and Chairman and Chief Executive
Chairman of the Board, Chief Officer (formerly President and Chief Operating Officer) Lincoln National Life Insurance Co.
Executive Officer and Director Formerly: Chairman; President, American States Insurance Co.; Executive Vice President, American
200 East Berry Street States Life Insurance Co.
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
Carl L. Baker Vice President and Deputy General Counsel (formerly Associate General Counsel);
Vice President and Lincoln National Life Insurance Co.
Deputy General Counsel
- ------------------------------------------------------------------------------------------------------------------------------------
Roland C. Baker President, First Penn-Pacific Life Insurance Co. Formerly: Chairman and CEO, Baker, Ralish,
Vice President Shipley & Politzer, Inc.
1801 S. Meyers Road
Oakbrook Terrace, Ill. 60181
- ------------------------------------------------------------------------------------------------------------------------------------
David N. Becker Vice President, Lincoln National Life Insurance Co.
Vice President,
Appointed Actuary and
Valuation Actuary
- ------------------------------------------------------------------------------------------------------------------------------------
Joann E. Becker Vice President, Lincoln National Life Insurance Co. and Lincoln Investment Management
Vice President Inc.; President, The Richard Leahy Corp. and President, LNC Equity Sales Corp.
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
John M. Behrendt Vice President, Lincoln National Life Insurance Co. and Lincoln Financial Group, Inc.
Vice President Formerly: President, LNC Equity Sales Corp.
- ------------------------------------------------------------------------------------------------------------------------------------
Jon A. Boscia President and Chief Operating Officer, Lincoln National Life Insurance Co.
President, Director and Formerly: President; Executive Vice President, Lincoln Investment Management Inc.
Chief Operating Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Carolyn P. Brody Vice President (formerly Second Vice President), Lincoln National Life Insurance Co.
Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
Steven R. Brody Senior Vice President (formerly Executive Vice President), Lincoln Investment
Vice President Management Inc.
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
Harold B. Carstensen, Jr. Vice President, Lincoln National Life Insurance Co. Formerly: Software Director, Magnavox
Vice President Electronic Systems Co.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Appendix A continued
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and position(s)
with applicant Principal occupations last five years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Donald C. Chambers, M.D. Senior Vice President and Chief Medical Director (formerly Vice President and Chief Medical
Senior Vice President and Director), Lincoln National Life Insurance Co.
Chief Medical Director
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas L. Clagg Vice President and Associate General Counsel, Lincoln National Life Insurance Co.
Vice President and
Associate General Counsel
- ------------------------------------------------------------------------------------------------------------------------------------
Kenneth J. Clark Senior Vice President (formerly Vice President), Lincoln National Life Insurance Co.
Senior Vice President
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------------------------------------
Kelly D. Clevenger Vice President, Lincoln National Life Insurance Co.
Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
Martha O. D'Ambrosio Vice President and General Auditor, Lincoln National Corp. and Lincoln National Life
Vice President and Insurance Co. Formerly: Senior Manager, KPMG Peat Marwick.
General Auditor
- ------------------------------------------------------------------------------------------------------------------------------------
Arthur W. DeTore, M.D. Vice President (formerly Second Vice President), Lincoln National Life Insurance Co.
Vice President Formerly: Vice President, Lincoln National Risk Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
C. Lawrence Edris Vice President (formerly Senior Vice President), Lincoln National Life Insurance Co.
Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas W. Fitch Vice President, First Penn-Pacific Life Insurance Co. and Lincoln National Life Insurance Co.
Vice President
1801 S. Meyers Road
Oakbrook Terrace, Ill. 60181
- ------------------------------------------------------------------------------------------------------------------------------------
Elizabeth A. Frederick Vice President (formerly Second Vice President) and Associate General Counsel, Lincoln National
Vice President and Life Insurance Co.
Associate General Counsel
- ------------------------------------------------------------------------------------------------------------------------------------
Lucy D. Gase Vice President and Assistant Secretary (formerly Second Vice President; Assistant Vice
Vice President and President), Lincoln National Life Insurance Co.
Assistant Secretary
- ------------------------------------------------------------------------------------------------------------------------------------
Melanie T. Hall Vice President (formerly Second Vice President; Assistant Vice President), Lincoln
Vice President National Life Insurance Co.
- ------------------------------------------------------------------------------------------------------------------------------------
Phillip A. Hartman Vice President, Lincoln National Life Insurance Co. and Lincoln Financial Group, Inc.
Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
J. Michael Hemp Senior Vice President (formerly Regional Chief Executive Officer), Lincoln Dallas RMO
Senior Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
Matthew P. Henderson Vice President, Lincoln National Life Insurance Co. (formerly Vice President,
Vice President Second Vice President), Lincoln National Corp.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Appendix A continued
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and position(s)
with applicant Principal occupations last five years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
David A. Hopper Vice President, Lincoln National Life Insurance Co.
Vice President
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------------------------------------
James R. Horein Senior Vice President, Lincoln National Life Insurance Co.
Senior Vice President
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------------------------------------
Jack D. Hunter Executive Vice President and General Counsel, Lincoln National Corp. and The Lincoln National
Executive Vice President, Life Insurance Co.
General Counsel and Director
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
J. Michael Keefer Vice President and Associate General Counsel, Lincoln National Corp.
Vice President and
Associate General Counsel
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
Donald E. Keller Vice President (formerly Second Vice President), Lincoln National Life Insurance Co.
Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
Lawrence T. Kissko Vice President, Lincoln National Investment Management Co.
Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
Michael C. La Frenais Vice President, Lincoln National Life Insurance Co. Formerly: Assistant Vice President, Aurora
Vice President Life Assurance Co.
- ------------------------------------------------------------------------------------------------------------------------------------
Stephen H. Lewis Senior Vice President, Lincoln National Life Insurance Co. Formerly President, First
Senior Vice President Penn-Pacific Life Insurance Co.
- ------------------------------------------------------------------------------------------------------------------------------------
Edward B. Martin Vice President (formerly Senior Vice President), Lincoln National Life Insurance Co.;
Vice President President and CEO (formerly Executive Vice President and COO), Corporate Benefit Systems
Services Corp.
- ------------------------------------------------------------------------------------------------------------------------------------
H. Thomas McMeekin President (formerly Executive Vice President, Senior Vice President), Lincoln
Director Investment Management Inc.; Executive Vice President (formerly Senior Vice President), Lincoln
200 East Berry Street National Corp.
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
Reed P. Miller Vice President (formerly Senior Vice President), Lincoln National Life Insurance Co.
Vice President Formerly: Senior Vice President; Vice President, Lincoln National Corp.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
Appendix A continued
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and position(s)
with applicant Principal occupations last five years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Oliver H. G. Nichols Vice President, Lincoln Investment Management Inc. Formerly Vice President, Aetna Life
Vice President & Casualty Co.
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
David M. Ongman Vice President, Lincoln National Life Insurance Co. Formerly: Consultant, Computer Horizons Group;
Vice President Vice President, The Associated Group; Consulting Center Manager, James Martin & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
Arthur L. Page Vice President (formerly Second Vice President), Lincoln National Life Insurance Co.
Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
Raymond L. Prosser Vice President and Associate General Counsel, Lincoln National Life Insurance Co.
Vice President and (formerly Second Vice President and Director of Claims), Lincoln National Life Insurance Co.;
Associate General Counsel Associate General Counsel, Lincoln National Corp. and Lincoln National Life Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------------------------------------
Ian M. Rolland Chairman and Chief Executive Officer, Lincoln National Corp. (formerly Chairman and
Director Chief Executive Officer, President), Lincoln National Life Insurance Co.
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
Arthur S. Ross Vice President, Lincoln National Life Insurance Co. and Lincoln Financial Group Inc.
Vice President Formerly: Director of PR, Guthrie Group; President and COO, Quorum Comm.
- ------------------------------------------------------------------------------------------------------------------------------------
Lawrence T. Rowland Senior Vice President (formerly Vice President and Second Vice President), Lincoln National
Senior Vice President Life Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------------------------------------
Keith J. Ryan Vice President, Chief Financial Officer and Assistant Treasurer (formerly Controller,
Vice President, Chief Business Controls Director), Lincoln National Life Insurance Co.
Financial Officer and
Assistant Treasurer
- ------------------------------------------------------------------------------------------------------------------------------------
Gabriel L. Shaheen Executive Vice President (formerly Senior Vice President; Vice President), Lincoln National
Executive Vice President Life Insurance Co.
and Director
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Appendix A continued
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and position(s)
with applicant Principal occupations last five years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
John L. Steinkamp Vice President and Associate General Counsel, Lincoln National Corp.
Vice President and
Associate General Counsel
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
Casey J. Trumble Vice President, Lincoln National Corp. Formerly: tax partner, KPMG Peat Marwick.
Vice President
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
James A. Tunis Vice President, Lincoln National Life Insurance Co. (formerly President), Lincoln National
Vice President Information Services, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
William K. Tyler Senior Vice President, Lincoln National Life Insurance Co.
Senior Vice President
and Assistant Treasurer
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------------------------------------
Michael R. Walker Vice President, Lincoln National Life Insurance Co. Formerly: Vice President, Employers
Vice President Health Insurance Co; Vice President/HR, Baker Hughes, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Janet C. Whitney Vice President and Treasurer, Lincoln National Life Insurance Co. (formerly Vice President and
Vice President and General Auditor), Lincoln National Corp. and Lincoln National Life Insurance Co.
Treasurer
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
Michael D. Wilkins Vice President and Associate General Counsel, Lincoln National Corp.
Vice President and
Associate General Counsel
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
C. Suzanne Womack Secretary and Assistant Vice President, Lincoln National Corp. and Lincoln National Life
Secretary and Insurance Co.
Assistant Vice President
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------------------------------------
O. Douglas Worthington Vice President, Controller and Assistant Treasurer, Lincoln National Life Insurance Co.
Vice President, Controller (formerly Vice President), Lincoln Investment Management Inc.
and Assistant Treasurer
- ------------------------------------------------------------------------------------------------------------------------------------
Michael L. Wright Senior Vice President, Lincoln National Life Insurance Co. Formerly: Executive Vice President
Senior Vice President & COO; Senior Vice President, The Associated Group.
- ------------------------------------------------------------------------------------------------------------------------------------
Katherine K. Wyss Vice President (formerly Second Vice President), Lincoln National Life Insurance Co.
Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The principal business address of each person listed, unless otherwise
indicated, is 1300 South Clinton Street, P.O. Box 1110, Fort Wayne, Ind.
46801.
24
<PAGE>
Appendix B
Illustrations of policy values
The following tables have been prepared to help show how values under the policy
change with investment performance. The tables show death benefits, policy
values, and net cash surrender values for each of the first 10 policy years, and
for every five year period thereafter through the thirtieth policy year,
assuming that the return on the assets invested in the Account were a uniform,
gross, after tax, annual rate of 0%, 6%, and 12%. The actual death benefits and
net cash surrender values would be different from those shown if different
policyowner underwriting assumptions were used or if the returns averaged 0%,
6%, and 12% but fluctuated over and under those averages throughout the years.
The death benefits and net cash surrender values shown on pages using current
charges are approximately those likely to be provided under the policy for the
investment returns indicated, assuming that the current cost of insurance
charges are deducted. Although the contract allows for maximum cost of
insurance charges specified in the l980 Commissioners Standard Ordinary
Mortality Table, Lincoln Life expects that it will continue to charge the
current cost of insurance charges for the indefinite future. The figures shown
on pages using guaranteed maximum charges show the death benefits and net cash
surrender values which would result if the guaranteed maximum cost of insurance
charges were deducted. However, these are primarily of interest only to show by
comparison the benefits of the lower current cost of insurance charges.
In each of the illustrations, the gross investment return is indicated and the
net investment return is listed below in parentheses. The net investment return
is lower than the gross return because the daily asset management charge, the
daily mortality and expense risk charge, the daily guaranteed death benefit
charge, and the daily administrative charge are deducted from the gross return.
The gross return used in the illustrations is also reduced because of other
expenses reflected in the value of the net assets of the subaccounts of the
account, including printing, mailing, Directors' fees, etc. For purposes of the
illustrations, this reduction is .04%, which is the estimated recent average of
these expenses. The Asset management charge is .51%, which is the current
average charge for the eight subaccounts. The mortality and expense risk charge
is .85% for the first 10 policy years and .75% thereafter. The administrative
charge is .30% for the first 10 policy years and .10% thereafter. The guaranteed
death benefit charge is .10% for the first 10 policy years. Thus, for example,
based on current charges and expenses a 6% gross return results in a 4.16% net
return for the first 10 policy years, and 4.56% return thereafter. The net
return is indicated in parentheses below the gross return.
25
<PAGE>
American Legacy Life
Flexible Premium Variable Life Insurance
Male issue age 35
$132,250 specified amount
$25,000 initial premium using current preferred mortality charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
------------------------------------- ------------------------------------- -------------------------------------
assuming hypothetical assuming hypothetical assuming hypothetical
Premiums gross (and net) gross (and net) gross (and net)
accumulated annual investment return of annual investment return of annual investment return of
End of at 5% ------------------------------------- ------------------------------------- -------------------------------------
policy interest 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
year per year (-1.80% net) (4.20% net) (10.20% net) (-1.80% net) (4.20% net) (10.20% net) (-1.80% net) (4.20% net) (10.20% net)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $132,250 $132,250 $132,250 $24,334 $25,828 $ 27,322 $22,084 $23,578 $ 25,072
2 27,563 132,250 132,250 132,250 23,665 26,679 29,874 21,540 24,554 27,749
3 28,941 132,250 132,250 132,250 22,994 27,556 32,679 20,994 25,556 30,679
4 30,388 132,250 132,250 132,250 22,308 28,445 35,752 20,558 26,695 34,002
5 31,907 132,250 132,250 132,250 21,606 29,350 39,124 20,106 27,850 37,624
- -----------------------------------------------------------------------------------------------------------------------------------
6 33,502 132,250 132,250 132,250 20,889 30,269 42,826 19,639 29,019 41,576
7 35,178 132,250 132,250 132,250 20,156 31,205 46,897 19,156 30,205 45,897
8 36,936 132,250 132,250 132,250 19,407 32,160 51,376 18,657 31,410 50,626
9 38,783 132,250 132,250 132,250 18,642 33,133 56,309 18,142 32,633 55,809
10 40,722 132,250 132,250 136,533 17,848 34,114 61,735 17,598 33,864 61,485
- -----------------------------------------------------------------------------------------------------------------------------------
15 51,973 132,250 132,250 190,073 13,724 39,974 99,515 13,724 39,974 99,515
20 66,332 132,250 132,250 160,229 8,159 46,135 160,229 8,159 46,135 160,229
25 84,659 132,250 132,250 346,806 289 52,307 258,810 289 52,307 258,810
30 108,049 0 132,250 510,920 0 57,895 418,787 0 57,895 418,787
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual rates of return averaged 0.00%, 6.00%
and 12.00% over a period of years, but also fluctuated above or below those
averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time. All values are
net of the following charges: admin = .30% first 10 years, then .10%; asset
mgmt = .51% (curr ave) all years; guar death benefit = .10% first 10 years only;
mortality and expense risk = .85% first 10 years, then .75%; and misc expense =
.04% all years. Values illustrated are also net of cost of insurance charges.
26
<PAGE>
American Legacy Life
Flexible Premium Variable Life Insurance
Male issue age 35
$132,250 specified amount
$25,000 initial premium using current standard mortality charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
------------------------------------- ------------------------------------- -------------------------------------
assuming hypothetical assuming hypothetical assuming hypothetical
Premiums gross (and net) gross (and net) gross (and net)
accumulated annual investment return of annual investment return of annual investment return of
End of at 5% ------------------------------------- ------------------------------------- -------------------------------------
policy interest 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
year per year (-1.80% net) (4.20% net) (10.20% net) (-1.80% net) (4.20% net) (10.20% net) (-1.80% net) (4.20% net) (10.20% net)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $132,250 $132,250 $132,250 $24,321 $25,815 $127,309 $22,071 $23,565 $125,059
2 27,563 132,250 132,250 132,250 23,640 26,653 29,846 21,515 24,528 27,721
3 28,941 132,250 132,250 132,250 22,956 27,515 32,635 20,956 25,515 30,635
4 30,388 132,250 132,250 132,250 22,258 28,390 35,692 20,508 26,640 33,942
5 31,907 132,250 132,250 132,250 21,544 29,279 39,045 20,044 27,779 37,545
- -----------------------------------------------------------------------------------------------------------------------------------
6 33,502 132,250 132,250 132,250 20,814 30,183 42,728 19,565 28,933 41,478
7 35,178 132,250 132,250 132,250 20,069 31,103 46,777 19,069 30,103 45,777
8 36,936 132,250 132,250 132,250 19,308 32,040 51,233 18,558 31,290 50,483
9 38,783 132,250 132,250 132,250 18,518 32,983 56,131 18,018 32,483 55,631
10 40,722 132,250 132,250 136,055 17,698 33,934 61,520 17,448 33,684 61,270
- ------------------------------------------------------------------------------------------------------------------------------------
15 51,973 132,250 132,250 189,111 13,403 39,575 99,011 13,403 39,575 99,011
20 66,332 132,250 132,250 249,903 7,574 45,388 159,174 7,574 45,388 159,174
25 84,659 0 132,250 343,690 0 50,745 256,485 0 50,745 256,48
30 108,049 0 132,250 504,765 0 54,626 413,742 0 54,626 413,742
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual rates of return averaged 0.00%, 6.00%
and 12.00% over a period of years, but also fluctuated above or below those
averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time. All values are
net of the following charges: admin = .30% first 10 years, then .10%;
asset mgmt = .51% (curr ave) all years; guar death benefit = .10% first
10 years only; mortality and expense risk= .85% first 10 years, then .75%;
and misc expense = .04% all years. Values illustrated are also net of cost of
insurance charges.
27
<PAGE>
American Legacy Life
Flexible Premium Variable Life Insurance
Male issue age 35
$132,250 specified amount
$25,000 initial premium using guaranteed mortality charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
------------------------------------- ------------------------------------- -------------------------------------
assuming hypothetical assuming hypothetical assuming hypothetical
Premiums gross (and net) gross (and net) gross (and net)
accumulated annual investment return of annual investment return of annual investment return of
End of at 5% ------------------------------------- ------------------------------------- -------------------------------------
policy interest 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
year per year (-1.80% net) (4.20% net) (10.20% net) (-1.80% net) (4.20% net) (10.20% net) (-1.80% net) (4.20% net) (10.20% net)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $26,250 $132,250 $132,250 $132,250 $24,320 $ 25,814 $27,308 $22,070 $23,564 $ 25,058
2 27,563 132,250 132,250 132,250 23,635 26,648 29,842 21,510 24,523 27,717
3 28,941 132,250 132,250 132,250 22,942 27,501 32,621 20,942 25,501 30,621
4 30,388 132,250 132,250 132,250 22,240 28,371 35,672 20,490 26,621 33,922
5 31,907 132,250 132,250 132,250 21,524 29,257 39,021 20,024 27,757 37,521
- -----------------------------------------------------------------------------------------------------------------------------------
6 33,502 132,250 132,250 132,250 20,791 30,147 42,698 19,541 28,907 41,448
7 35,178 132,250 132,250 132,250 20,040 31,069 46,738 19,040 30,069 45,738
8 36,936 132,250 132,250 132,250 19,267 31,994 51,180 18,517 31,244 50,430
9 38,783 132,250 132,250 132,250 18,471 32,929 56,068 17,971 32,429 55,568
10 40,722 132,250 132,250 135,895 17,647 33,873 61,447 17,397 33,623 61,197
- -----------------------------------------------------------------------------------------------------------------------------------
15 51,973 132,250 132,250 188,831 13,320 39,464 98,965 13,320 39,464 98,865
20 66,332 132,250 132,250 249,497 7,468 45,221 158,915 7,468 45,221 158,915
25 84,659 0 132,250 343,085 0 50,490 256,034 0 50,490 256,034
30 108,049 0 132,250 503,831 0 54,240 412,976 0 54,240 412,976
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual rates of return averaged 0.00%, 6.00%
and 12.00% over a period of years, but also fluctuated above or below those
averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time. All values are
net of the following charges: admin = .30% first 10 years, then .10%; asset
mgmt = .51% (curr ave) all years; guar death benefit = .10% first 10 years only;
mortality and expense risk = .85% first 10 years, then .75%; and misc expense =
.04% all years. Values illustrated are also net of cost of insurance charges.
28
<PAGE>
American Legacy Life
Flexible Premium Variable Life Insurance
Male issue age 35
$62,500 specified amount
$25,000 initial premiun using current preferred charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
---------------------------------- ---------------------------------- ----------------------------------
assuming hypothetical assuming hypothetical assuming hypothetical
Premiums gross (and net) gross (and net) gross (and net)
accumulated annual investment return of annual investment return of annual investment return of
End of at 5% ---------------------------------- ---------------------------------- ----------------------------------
policy interest 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
year per year (-1.80%net) (4.20%net) (10.20%net) (-1.80%net) (4.20%net) (10.20%net) (-1.80%net) (4.20%net) (10.20%net)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $62,500 $62,500 $ 62,500 $24,174 $25,669 $27,164 $21,924 $23,419 $ 24,914
2 27,563 62,500 62,500 62,500 23,322 26,341 29,542 21,197 24,216 27,417
3 28,941 62,500 62,500 62,500 22,444 27,019 32,163 20,444 25,019 30,163
4 30,388 62,500 62,500 62,500 21,533 27,699 35,057 19,783 25,949 33,307
5 31,907 62,500 62,500 62,500 20,582 28,378 38,257 19,082 26,878 36,757
- -----------------------------------------------------------------------------------------------------------------------------------
6 33,502 62,500 62,500 62,500 19,590 29,058 41,807 18,340 27,808 40,557
7 35,178 62,500 62,500 62,500 18,545 29,733 45,751 17,545 28,733 44,751
8 36,936 62,500 62,500 63,183 17,438 30,400 50,145 16,688 29,650 49,395
9 38,783 62,500 62,500 68,210 16,256 31,053 55,008 15,756 30,553 54,508
10 40,722 62,500 62,500 73,620 14,993 31,692 60,345 14,743 31,442 60,095
- -----------------------------------------------------------------------------------------------------------------------------------
15 51,973 62,500 62,500 113,117 7,222 35,308 97,515 7,222 35,308 97,515
20 66,332 0 62,500 169,021 0 38,326 157,694 0 38,326 157,964
25 84,659 0 62,500 270,197 0 39,229 257,331 0 39,229 257,331
30 108,049 0 62,500 436,407 0 34,813 415,625 0 34,813 415,625
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. the death benefits and cash value for a contract would be
different from those shown if the actual rates of return averaged 0.00%, 6.00%
and 12.00% over a period of years, but also fluctuated above or below those
averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time. All values are
net of the following charges: admin = .30% first 10 years, then .10%;
asset mgmt = .51% (curr ave) all years; guar death benefit = .10% first
10 years only; mortality and expense risk = .85% first 10 years, then .75%;
and misc expense = .04% all years. Values illustrated are also net of cost of
insurance charges.
29
<PAGE>
American Legacy Life
Flexible Premium Variable Life Insurance
Male issue age 35
$62,500 specified amount
$25,000 initial premium using current standard charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
------------------------------------ ------------------------------------- -----------------------------------
assuming hypothetical assuming hypothetical assuming hypothetical
Premiums gross (and net) gross (and net) gross (and net)
accumulated annual investment return of annual investment return of annual investment return of
End of at 5% ------------------------------------ ------------------------------------- -----------------------------------
policy interest 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
year per year (-1.80% net) (4.20% net) (10.20% net) (-1.80% net) (4.20% net) (10.20% net) (-1.80% net) (4.20% net) (10.20% net)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $62,500 $62,500 $62,500 $24,142 $25,637 $27,131 $21,892 $23,287 $24,881
2 27,563 62,500 62,500 62,500 23,254 26,272 29,471 21,129 24,147 27,346
3 28,941 62,500 62,500 62,500 22,349 26,901 32,044 20,329 24,901 30,044
4 30,388 62,500 62,500 62,500 21,361 27,523 34,880 19,611 25,773 33,130
5 31,907 62,500 62,500 62,500 20,346 28,137 38,016 18,846 26,637 36,516
- ------------------------------------------------------------------------------------------------------------------------------------
6 33,502 62,500 62,500 62,500 19,274 28,736 41,491 18,024 27,486 40,241
7 35,178 62,500 62,500 62,500 18,141 29,322 45,355 17,141 28,332 44,355
8 36,936 62,500 62,500 62,576 16,927 29,883 49,664 16,177 29,133 48,914
9 38,783 62,500 62,500 67,508 15,617 30,412 54,442 15,117 29,912 53,942
10 40,722 62,500 62,500 72,812 14,200 30,904 59,682 13,950 30,654 59,432
- ------------------------------------------------------------------------------------------------------------------------------------
15 51,973 62,500 62,500 111,425 5,117 33,350 96,056 5,117 33,350 96,056
20 66,332 0 62,500 165,737 0 33,732 154,895 0 33,732 154,895
25 84,659 0 62,500 264,211 0 28,725 251,630 0 28,725 251,630
30 108,049 0 62,500 425,606 0 9,243 405,339 0 9,243 405,339
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual rates of return averaged 0.00%, 6.00%
and 12.00% over a period of years, but also fluctuated above or below those
averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time. All values are
net of the following charges: admin = .30% first 10 years, then .10%; asset
mgmt = .51% (curr ave) all years; guar death benefit = .10% first 10 years only;
mortality and expense risk = .85% first 10 years, then .75%; and misc expense =
.04% all years. Values illustrated are also net of cost of insurance charges.
30
<PAGE>
American Legacy Life
Flexible Premium Variable Life Insurance
Male issue age 55
$62,500 specified amount
$25,000 initial premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
---------------------------------- ---------------------------------- ----------------------------------
assuming hypothetical assuming hypothetical assuming hypothetical
Premiums gross (and net) gross (and net) gross (and net)
accumulated annual investment return of annual investment return of annual investment return of
End of at 5% ---------------------------------- ---------------------------------- ----------------------------------
policy interest 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
year per year (-1.80%net) (4.20%net) (10.20%net) (-1.80%net) (4.20%net) (10.20%net) (-1.80%net) (4.20%net) (10.20%net)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $ 62,500 $ 62,500 $ 62,500 $24,141 25,635 27,129 21,891 23,385 24,879
2 27,563 62,500 62,500 62,500 23,249 26,266 29,465 21,124 24,141 27,340
3 28,941 62,500 62,500 62,500 22,320 26,892 32,035 20,320 24,892 30,035
4 30,388 62,500 62,500 62,500 21,351 27,512 34,869 19,601 25,762 33,119
5 31,907 62,500 62,500 62,500 20,334 28,123 38,002 18,834 26,623 36,502
- -----------------------------------------------------------------------------------------------------------------------------------
6 33,502 62,500 62,500 62,500 19,261 28,722 41,474 18,011 27,472 40,224
7 35,178 62,500 62,500 62,500 18,122 29,302 45,354 17,122 28,302 44,334
8 36,936 62,500 62,500 62,576 16,903 29,858 49,638 16,153 29,108 48,888
9 38,783 62,500 62,500 67,508 15,592 30,384 54,414 15,092 29,884 53,914
10 40,722 62,500 62,500 72,812 14,172 30,873 59,650 13,922 30,623 59,400
- -----------------------------------------------------------------------------------------------------------------------------------
15 51,973 62,500 62,500 111,425 5,043 33,275 95,292 5,043 33,275 95,992
20 66,332 0 62,500 165,737 0 33,564 154,771 0 33,564 154,771
25 84,659 0 62,500 264,211 0 28,083 251,333 0 28,083 251,333
30 108,049 0 62,500 425,606 0 4,998 404,019 0 4,998 404,019
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual rates of return averaged 0.00%, 6.00%
and 12.00% over a period of years, but also fluctuated above or below those
averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time. All values are
net of the following charges: admin = .30% first 10 years, then .10%; asset
mgmt = .51% (curr ave) all years; guar death benefit = .10% first 10 years only;
mortality and expense risk = .85% first 10 years, then .75%; and misc expense =
.04% all years. Values illustrated are also net of cost of insurance charges.
31
<PAGE>
Appendix C
Definitions
Separate Account -- The Lincoln Life Flexible Premium Variable Life Account F, a
Separate Account established by Lincoln Life to receive and invest net premiums
paid under the policy.
Age -- The age at the insured's last birthday on the policy date.
Attained age -- The age of the insured on the policy anniversary on or next
preceding any monthly anniversary day.
Beneficiary -- The beneficiary is designated by the owner in the application. If
changed, the beneficiary is as shown in the latest change filed with Lincoln
Life. If no beneficiary survives the insured, the owner or the owner's estate
will receive the benefit.
Free look period -- The period of time in which the owner may cancel the policy
and receive a refund. The owner may cancel the policy within 10 days of receipt,
or 45 days after Part 1 of the application is signed, or within 10 days after
mailing or personal delivery of the Notice of Withdrawal Right.
Fund -- Any of the funds in which the Separate Account may invest; currently,
the American Variable Insurance Series is available.
General account -- The assets of Lincoln Life other than those allocated to the
Separate Account or any other Separate Account.
Gross investment results -- The gross investment results are equal to the change
in the market value of the assets of a fund from the previous valuation day to
the current day, plus the investment income on those assets during the same
period.
Guaranteed death benefit -- The Death Benefit protection provided by Lincoln
Life on the life of the insured if net cash surrender value has been reduced to
zero and if there are no outstanding policy loans.
Insured -- The person upon whose life the policy is issued, and who is so named
on the Policy Schedule.
Investment amount -- The portion of the policy value invested in the Separate
Account, and equal in amount to the policy value minus amounts invested in the
General Account (including any outstanding loans).
Issue premium -- The total premium required to be paid to issue the policy.
Lincoln Life (we, our, us) -- Lincoln National Life Insurance Co.
Maturity date -- The policy Anniversary following the insured's 99th birthday,
if living. It is the last date insurance coverage can remain in force and the
date any remaining net cash surrender value will be payable.
Monthly anniversary day -- The same date in each month as the policy date.
Net cash surrender value -- The amount payable to the owner upon surrender of
the policy. It is equal to the policy value minus any surrender charge, minus
any outstanding loan and minus any unpaid loan interest.
Net investment results -- The gross investment results of a fund minus the Asset
Management Charges and any miscellaneous fund expenses, and the Mortality and
Expense Risk Charge, minus guaranteed death benefit Charge, and minus the
Administrative Charge.
Option date -- Any date the policy terminates under the Termination Provision.
Owner (you, your) -- The person so designated in the application or as
subsequently changed. If a policy has been absolutely assigned, the assignee is
the owner. A collateral assignee is not the owner.
Planned periodic premium -- A scheduled premium of a level amount at a fixed
interval over a specified period of time.
Policy -- The Flexible Premium Variable Life Insurance policy offered by Lincoln
Life and described in this prospectus.
Policy date -- The date set forth in the policy that is used to determine policy
years and policy months. Policy anniversaries are measured from the policy date.
The policy date is ordinarily the earlier of the date the full initial premium
is received from the owner or the date on which the policy is approved for
issue.
Policy value -- The sum of all values in the Separate Account and in the General
Account at any time, irrespective of outstanding loans or surrender charge.
Proceeds -- The amount payable on the maturity date, or on surrender of the
policy, or after the death of any insured person. The proceeds will be different
on each of these events.
Record date -- The date the policy is recorded on the books of Lincoln Life as
an in-force policy. Ordinarily, the policy will be recorded as in-force within
three business days after the later of the date we receive the last outstanding
requirement or the date of underwriting approval. The record date controls the
timing of the transfer of initial assets from the Cash Management Fund to the
various subaccounts.
Series -- Any of the series in which the Separate Account may invest; currently,
the sole series is American Variable Insurance Series.
Specified amount -- The minimum Death Benefit payable under the policy so long
as the policy remains in force. The Death Benefit proceeds will be reduced by
any out-
32
<PAGE>
standing loan and any due and unpaid charges, and increased by any unearned loan
interest.
Subaccount -- A subdivision of the Separate Account. Each subaccount invests
exclusively in the shares of a specified fund.
Surrender charge -- A charge deducted from policy value upon surrender of the
policy.
33
<PAGE>
Lincoln Life Flexible Premium Variable Life Account F
Statement of assets and liability
December 31, 1995
<TABLE>
<CAPTION>
Percent Cash High-Yield
of net Management Bond Growth-Income
assets Combined Account Account Account
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Investments in American Variable
Insurance Series at net asset value:
. Cash Management Fund
227,125 shares at $11.01 per share
(cost-$2,511,325) 6.3% $ 2,500,648 $2,500,648
-------------------------------------------------------
. High-Yield Bond Fund
268,554 shares at $13.91 per share
(cost-$3,641,573) 9.5 3,735,587 $3,735,587
-------------------------------------------------------
. Growth-Income Fund
466,168 shares at $30.29 per share
(cost-$10,900,688) 35.7 14,120,239 $14,120,239
-------------------------------------------------------
. Growth Fund
296,486 shares at $37.82 per share
(cost-$8,575,981) 28.4 11,213,115
-------------------------------------------------------
. U.S. Government/AAA-Rated Securities Fund
328,448 shares at $11.47 per share
(cost-$3,628,130) 9.5 3,767,298
-------------------------------------------------------
. International Fund
209,997 shares at $13.63 per share
(cost-$2,671,933) 7.2 2,862,261
-------------------------------------------------------
. Asset Allocation Fund
104,045 shares at $13.35 per share
(cost-$1,225,645) 3.5 1,389,005
------------------------------------------------------- ----- ----------- ---------- ---------- -----------
TOTAL ASSETS (Cost--$33,155,275) 100.1 39,588,153 2,500,648 3,735,587 14,120,239
- ---------------------------------------------------------
LIABILITY--Payable to Lincoln National Life Insurance Co. 0.1 21,830 2,640 3,931 14,883
- --------------------------------------------------------- ----- ----------- ---------- ---------- -----------
NET ASSETS 100.0% $39,546,323 $2,498,008 $3,731,656 $14,105,356
- --------------------------------------------------------- ===== =========== ========== ========== ===========
UNITS OUTSTANDING 1,790,493 1,660,594 5,451,425
- --------------------------------------------------------- ========== ========== ===========
NET ASSET VALUE PER UNIT $ 1.395 $ 2.247 $ 2.587
- --------------------------------------------------------- ========== ========== ===========
</TABLE>
See accompanying Notes to financial statements.
34
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
AAA-Rated Asset
Growth Securities International Allocation
Account Account Account Account
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Investments in American Variable
Insurance Series at net asset value:
. Cash Management Fund
227,125 shares at $11.01 per share
(cost-$2,511,325)
-------------------------------------------------------
. High-Yield Bond Fund
268,554 shares at $13.91 per share
(cost-$3,641,573)
-------------------------------------------------------
. Growth-Income Fund
466,168 shares at $30.29 per share
(cost-$10,900,688)
-------------------------------------------------------
. Growth Fund
296,486 shares at $37.82 per share
(cost-$8,575,981) $11,213,115
-------------------------------------------------------
. U.S. Government/AAA-Rated Securities Fund
328,448 shares at $11.47 per share
(cost-$3,628,130) $3,767,298
-------------------------------------------------------
. International Fund
209,997 shares at $13.63 per share
(cost-$2,671,933) 2,862,261
-------------------------------------------------------
. Asset Allocation Fund
104,045 shares at $13.35 per share
(cost-$1,225,645) $1,389,005
------------------------------------------------------- ----------- ----------- ---------- ----------
TOTAL ASSETS (Cost--$33,155,275) 11,213,115 3,767,298 2,862,261 1,389,005
- ---------------------------------------------------------
LIABILITY--Payable to Lincoln National Life Insurance Co. 11,913 3,999 3,001 1,463
- --------------------------------------------------------- ----------- ----------- ---------- ----------
NET ASSETS $11,201,202 $ 3,763,299 $2,859,260 $1,387,542
- --------------------------------------------------------- =========== =========== ========== ==========
UNITS OUTSTANDING 3,737,878 2,090,500 1,936,515 889,397
- --------------------------------------------------------- =========== =========== ========== ==========
NET ASSET VALUE PER UNIT $ 2.997 $ 1.800 $ 1.476 $ 1.560
- --------------------------------------------------------- =========== =========== ========== ==========
</TABLE>
35
<PAGE>
Lincoln Life Flexible Premium Variable Life Account F
Statements of operations
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Cash High-Yield Growth-
Management Bond Income
Combined Account Account Account
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1993
Net investment income:
. Dividends from investment income $ 822,525 $ 71,098 $ 209,117 $ 215,875
- ---------------------------------------------------------------------
. Dividends from net realized gain on investments 665,245 -- 51,881 312,661
- ---------------------------------------------------------------------
. Mortality and expense risk charge (323,261) (33,210) (35,967) (104,896)
- --------------------------------------------------------------------- ----------- -------- --------- ----------
NET INVESTMENT INCOME 1,164,509 37,888 225,031 423,640
- ---------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments:
- ---------------------------------------------------------------------
. Net realized gain (loss) on investments 519,160 (6,598) 79,843 120,843
- ---------------------------------------------------------------------
. Net change in unrealized appreciation or depreciation on investments 1,185,635 5,626 84,536 328,829
- --------------------------------------------------------------------- ----------- -------- --------- ----------
NET GAIN (LOSS) ON INVESTMENTS 1,704,795 (972) 164,379 449,672
- --------------------------------------------------------------------- ----------- -------- --------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,869,304 $ 36,916 $ 389,410 $ 873,312
- --------------------------------------------------------------------- =========== ======== ========= ==========
Year Ended December 31, 1994
Net investment income:
. Dividends from investment income $ 1,006,571 $ 97,445 $ 261,748 $ 267,416
- ---------------------------------------------------------------------
. Dividends from net realized gain on investments 702,743 -- -- 422,560
- ---------------------------------------------------------------------
. Mortality and expense risk charge (375,887) (39,302) (35,186) (125,569)
- --------------------------------------------------------------------- ----------- -------- --------- ----------
NET INVESTMENT INCOME 1,333,427 58,143 226,562 564,407
- ---------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments:
. Net realized gain (loss) on investments 376,161 10,080 18,558 84,577
- ---------------------------------------------------------------------
. Net change in unrealized appreciation or depreciation on investments (2,045,584) 11,716 (452,413) (556,183)
- --------------------------------------------------------------------- ----------- -------- --------- ----------
NET GAIN (LOSS) ON INVESTMENTS (1,669,423) 21,796 (433,855) (471,606)
- --------------------------------------------------------------------- ----------- -------- --------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (335,996) $ 79,939 $(207,293) $ 92,801
- --------------------------------------------------------------------- =========== ======== ========= ==========
Year Ended December 31, 1995
Net investment income:
. Dividends from investment income $ 1,252,832 $125,603 $ 332,900 $ 318,849
- ---------------------------------------------------------------------
. Dividends from net realized gain on investments 1,586,142 -- -- 559,151
- ---------------------------------------------------------------------
. Mortality and expense risk charge (442,101) (27,945) (42,751) (153,973)
- --------------------------------------------------------------------- ----------- -------- --------- ----------
NET INVESTMENT INCOME 2,396,873 97,658 290,149 724,027
- ---------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments:
- ---------------------------------------------------------------------
. Net realized gain on investments 527,229 8,545 2,863 148,499
- ---------------------------------------------------------------------
. Net change in unrealized appreciation or depreciation on investments 4,708,861 (13,686) 330,754 2,434,036
- --------------------------------------------------------------------- ----------- -------- --------- ----------
NET GAIN (LOSS) ON INVESTMENT 5,236,090 (5,141) 333,617 2,582,535
- --------------------------------------------------------------------- ----------- -------- --------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,632,963 $ 92,517 $ 623,766 $3,306,562
- --------------------------------------------------------------------- =========== ======== ========= ==========
</TABLE>
See accompanying Notes to financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
U.S.
Government/
AAA-Rated Asset
Growth Securities International Allocation
Account Account Account Account
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1993
Net investment income:
. Dividends from investment income $ 56,516 $ 233,087 $ 10,759 $ 26,073
- -----------------------------------------------------------------------
. Dividends from net realized gain on investments 245,233 22,919 23,164 9,387
- -----------------------------------------------------------------------
. Mortality and expense risk charge (86,495) (47,761) (8,291) (6,641)
- ----------------------------------------------------------------------- ---------- -------- --------- ---------
NET INVESTMENT INCOME 215,254 208,245 25,632 28,819
- -----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments:
- -----------------------------------------------------------------------
. Net realized gain (loss) on investments 270,893 41,077 5,684 7,418
- -----------------------------------------------------------------------
. Net change in unrealized appreciation or depreciation on investments 483,539 100,217 174,461 8,427
- ----------------------------------------------------------------------- ---------- -------- --------- ---------
NET GAIN (LOSS) ON INVESTMENTS 754,432 141,294 180,145 15,845
- ----------------------------------------------------------------------- ---------- -------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 969,686 $ 349,539 $ 205,777 $ 44,664
- ----------------------------------------------------------------------- ========== ========= ========= =========
Year Ended December 31, 1994
Net investment income:
. Dividends from investment income $ 57,736 $ 246,289 $ 38,224 $ 37,713
- -----------------------------------------------------------------------
. Dividends from net realized gain on investments 192,403 -- 74,022 13,758
- -----------------------------------------------------------------------
. Mortality and expense risk charge (94,923) (46,248) (24,563) (10,096)
- ----------------------------------------------------------------------- ---------- -------- --------- ---------
NET INVESTMENT INCOME 155,216 200,041 87,683 41,375
- -----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments:
. Net realized gain (loss) on investments 216,161 10,152 38,096 (1,463)
- -----------------------------------------------------------------------
. Net change in unrealized appreciation or depreciation on investments (433,456) (423,549) (143,433) (48,266)
- ----------------------------------------------------------------------- ---------- -------- --------- ---------
NET GAIN (LOSS) ON INVESTMENTS (217,295) (413,397) (105,337) (49,729)
- ----------------------------------------------------------------------- ---------- -------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (62,079) $(213,356) $ (17,654) $ (8,354)
- ----------------------------------------------------------------------- ========== ========= ========= =========
Year Ended December 31, 1995
Net investment income:
. Dividends from investment income $ 84,892 $ 277,020 $ 66,376 $ 47,192
- -----------------------------------------------------------------------
. Dividends from net realized gain on investments 919,940 -- 59,299 47,752
- -----------------------------------------------------------------------
. Mortality and expense risk charge (122,795) (47,668) (32,274) (14,695)
- ----------------------------------------------------------------------- ---------- -------- --------- ---------
NET INVESTMENT INCOME 882,037 229,352 93,401 80,249
- -----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments:
- -----------------------------------------------------------------------
. Net realized gain on investments 338,085 12,456 14,231 2,550
- -----------------------------------------------------------------------
. Net change in unrealized appreciation or depreciation on investments 1,331,301 255,811 168,842 201,803
- ----------------------------------------------------------------------- ---------- -------- --------- ---------
NET GAIN (LOSS) ON INVESTMENT 1,669,386 268,267 183,073 204,353
- ----------------------------------------------------------------------- ---------- -------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,551,423 $ 497,619 $ 276,474 $ 284,602
- ----------------------------------------------------------------------- ========== ========= ========= =========
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Lincoln Life Flexible Premium Variable Life Account F
Statements of changes in net assets
Cash High-Yield Growth-
Management Bond Income
Combined Account Account Account
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSETS AT JANUARY 1, 1993 $23,147,867 $2,856,864 $2,401,253 $ 7,568,820
Changes from operations:
. Net investment income 1,164,509 37,888 225,031 423,640
- ------------------------------------------------------
. Net realized gain (loss) on investments 519,160 (6,598) 79,843 120,843
- ------------------------------------------------------
. Net change in unrealized appreciation
or depreciation on investments 1,185,635 5,626 84,536 328,829
- ------------------------------------------------------ ----------- ---------- ---------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 2,869,304 36,916 389,410 873,312
- ------------------------------------------------------
Net increase from unit transactions 3,266,704 217,220 391,570 999,384
- ------------------------------------------------------ ----------- ---------- ---------- -----------
TOTAL INCREASE IN NET ASSETS 6,136,008 254,136 780,980 1,872,696
- ------------------------------------------------------ ----------- ---------- ---------- -----------
NET ASSETS AT DECEMBER 31, 1993 29,283,875 3,111,000 3,182,233 9,441,516
- ------------------------------------------------------
Changes from operations:
. Net investment income 1,333,427 58,143 226,562 564,407
- ------------------------------------------------------
. Net realized gain (loss) on
investments 376,161 10,080 18,558 84,577
- ------------------------------------------------------
. Net change in unrealized appreciation
or depreciation on investments (2,045,584) 11,716 (452,413) (556,183)
- ------------------------------------------------------ ----------- ---------- ---------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS (335,996) 79,939 (207,293) 92,801
- ------------------------------------------------------
Net increase (decrease) from unit transactions 1,771,577 (585,955) 331 944,450
- ------------------------------------------------------ ----------- ---------- ---------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,435,581 (506,016) (206,962) 1,037,251
- ------------------------------------------------------ ----------- ---------- ---------- -----------
NET ASSETS AT DECEMBER 31, 1994 30,719,456 2,604,984 2,975,271 10,478,767
- ------------------------------------------------------
Changes from operations:
. Net investment income 2,396,873 97,658 290,149 724,027
- ------------------------------------------------------
. Net realized gain on investments 527,229 8,545 2,863 148,499
- ------------------------------------------------------
. Net change in unrealized appreciation
or depreciation on investments 4,708,861 (13,686) 330,754 2,434,036
- ------------------------------------------------------ ----------- ---------- ---------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 7,632,963 92,517 623,766 3,306,562
- ------------------------------------------------------
Net increase (decrease) from unit transactions 1,193,904 (199,493) 132,619 320,027
- ------------------------------------------------------ ----------- ---------- ---------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 8,826,867 (106,976) 756,385 3,626,589
- ------------------------------------------------------ ----------- ---------- ---------- -----------
NET ASSETS AT DECEMBER 31, 1995 $39,546,323 $2,498,008 $3,731,656 $14,105,356
- ------------------------------------------------------ =========== ========== ========== ===========
</TABLE>
See accompanying Notes to financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
AAA-Rated Asset
Growth Securities International Allocation
Account Account Account Account
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSETS AT JANUARY 1, 1993 $ 6,116,653 $3,622,519 $ 288,219 $ 293,539
Changes from operations:
. Net investment income 215,254 208,245 25,632 28,819
- ------------------------------------------------------
. Net realized gain (loss) on investments 270,893 41,077 5,684 7,418
- ------------------------------------------------------
. Net change in unrealized appreciation
or depreciation on investments 483,539 100,217 174,461 8,427
- ------------------------------------------------------ ----------- ---------- ------------ ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 969,686 349,539 205,777 44,664
- ------------------------------------------------------
Net increase from unit transactions 393,440 11,523 959,397 294,170
- ------------------------------------------------------ ----------- ---------- ------------ ----------
TOTAL INCREASE IN NET ASSETS 1,363,126 361,062 1,165,174 338,834
- ------------------------------------------------------ ----------- ---------- ------------ ----------
NET ASSETS AT DECEMBER 31, 1993 7,479,779 3,983,581 1,453,393 632,373
- ------------------------------------------------------ ----------- ---------- ------------ ----------
Changes from operations:
. Net investment income 155,216 200,041 87,683 41,375
- ------------------------------------------------------
. Net realized gain (loss) on investments 216,161 10,152 38,096 (1,463)
- ------------------------------------------------------
. Net change in unrealized appreciation
or depreciation on investments (433,456) (423,549) (143,433) (48,266)
- ------------------------------------------------------ ----------- ---------- ------------ ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS (62,079) (213,356) (17,654) (8,354)
- -----------------------------------------------------
Net increase (decrease) from unit transactions 285,007 (112,207) 942,370 297,581
- ------------------------------------------------------ ----------- ---------- ------------ ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 222,928 (325,563) 924,716 289,227
- ------------------------------------------------------ ----------- ---------- ------------ ----------
NET ASSETS AT DECEMBER 31, 1994 7,702,707 3,658,018 2,378,109 921,600
- ------------------------------------------------------
Changes from operations:
. Net investment income 882,037 229,352 93,401 80,249
- ------------------------------------------------------
. Net realized gain on investments 338,085 12,456 14,231 2,550
- ------------------------------------------------------
. Net change in unrealized appreciation
or depreciation on investments 1,331,301 255,811 168,842 201,803
- ------------------------------------------------------ ----------- ---------- ------------ ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 2,551,423 497,619 276,474 284,602
- ------------------------------------------------------
Net increase (decrease) from unit transactions 947,072 (392,338) 204,677 181,340
- ------------------------------------------------------ ----------- ---------- ------------ ----------
TOTAl INCREASE (DECREASE) IN NET ASSETS 3,498,495 105,281 481,151 465,942
- ------------------------------------------------------ ----------- ---------- ------------ ----------
NET ASSETS AT DECEMBER 31, 1995 $11,201,202 $3,763,299 $2,859,260 $1,387,542
- ------------------------------------------------------ =========== ========== ============ ==========
</TABLE>
39
<PAGE>
Lincoln Life Flexible Premium Variable Life Account F
Notes to financial statements
December 31, 1995
1. Accounting policies
The Separate Account: Lincoln Life Flexible Premium Variable Life Account F
(Separate Account) was established as a segregated investment account of
Lincoln National Life Insurance Co. (Lincoln Life) on May 29, 1987. The
Separate Account was registered on November 20, 1987, under the Investment
Company Acy of 1940, as amended, as a unit investment trust, and commenced
investment activity on January 4, 1988.
Investments: The Separate Account invests in the American Variable Insurance
Series (AVIS) which consists of seven funds: Cash Management Fund, High-Yield
Bond Fund, Growth-Income Fund, Growth Fund, U.S. Government/AAA-Rated
Securities Fund, International Fund, and Asset Allocation Fund (funds).
Investments in the Funds are stated at the closing net asset values per share
on December 31, 1995. AVIS is registered as an open-end management investment
company.
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 paid to the Separate Account are automatically
reinvested in shares of the funds on the payable date.
Federal Income Taxes: Operations of the Separate Account form a part of and
are taxed with operations of Lincoln Life, which is taxed as a "life
insurance company" under the Internal Revenue Code. Using current law, no
federal income taxes are payable with respect to the Separate Account's net
investment income and the net realized gain on investments.
2. Mortality and expense risk charge and other transactions with affiliate
Separate Account charges: Amounts are charged daily to the Separate Account
by Lincoln Life for a mortality and expense risk charge at an annual rate of
.85% of the average daily net asset value of the Separate Account for the
first ten policy years, and .75% for policy years thereafter.
For the first 10 policy years, amounts are charged daily to the Separate
Account by Lincoln Life for the guaranteed death benefit at an annual rate of
.10% of the average daily net asset value of the Separate Account.
Amounts are charged daily to the Separate Account by Lincoln Life for an
administrative charge at an annual rate of .30% of the average daily net
asset value of the Separate Account for the first 10 policy years and .10%
for policy years thereafter.
Other charges: Other charges, which are paid to Lincoln Life by redeeming
Separate Account units, are for the cost of insurance and contingent
surrender charges. These other charges for 1995, 1994 and 1993 amounted to
$436,723, $586,553 and $296,673, respectively.
Lincoln Life assumes the responsibility for providing the insurance benefits
included in the policy. The cost of insurance is determined each month based
upon the applicable insurance rate and the current death benefit. The cost of
insurance can vary from month to month since the determination of both the
insurance rate and the current death benefit depends upon a number of
variables as described in the Separate Account's prospectus.
Surrender charges are deducted if the policy is surrendered during the first
10 policy years. The maximum rate for surrender charges, which decreases by
policy year, ranges from 9% of the total first year premiums paid for
surrenders during the first policy year to 1% for surrenders during the tenth
policy year.
40
<PAGE>
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41
<PAGE>
Lincoln Life Flexible Premium Variable Life Account F
Notes to financial statements continued
3. Net assets
Net Assets at December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
Cash High-Yield Growth-
Management Bond Income Growth
Combined Account Account Account Account
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit transactions $23,718,320 $1,980,826 $2,109,772 $ 7,924,904 $ 5,930,151
- ---------------------------------------------------------
Accumulated net investment income 7,354,731 495,268 1,378,385 2,425,754 1,471,279
- ---------------------------------------------------------
Accumulated net realized gain on investments 2,040,394 32,591 149,485 535,147 1,162,638
- ---------------------------------------------------------
Net unrealized appreciation (depreciation) on investments 6,432,878 (10,677) 94,014 3,219,551 2,637,134
- --------------------------------------------------------- ----------- ---------- ---------- ----------- -----------
$39,546,323 $2,498,008 $3,731,656 $14,105,356 $11,201,202
=========== ========== ========== =========== ===========
</TABLE>
4. Summary of changes from unit transactions
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
Units Amount Units Amount Units Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash Management Account:
Purchases 3,219,898 $ 4,417,577 5,059,917 $ 6,653,789 6,545,382 $ 8,488,712
- -----------------------------------
Redemptions (3,375,836) (4,617,070) (5,498,122) (7,239,744) (6,381,125) (8,271,492)
- ----------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
(155,938) (199,493) (438,205) (585,955) 164,257 217,220
High-Yield Bond Account:
Purchases 194,024 397,517 792,043 1,510,705 638,836 1,226,937
- -----------------------------------
Redemptions (125,874) (264,898) (771,560) (1,510,374) (430,909) (835,367)
- ----------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
68,150 132,619 20,483 331 207,927 391,570
Growth-Income Account:
Purchases 523,394 1,210,343 878,348 1,711,032 1,040,729 1,935,748
- -----------------------------------
Redemptions (392,334) (890,316) (390,554) (766,582) (505,119) (936,364)
- ----------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
131,060 320,027 487,794 944,450 535,610 999,384
Growth Account:
Purchases 839,058 2,292,591 652,916 1,479,923 802,889 1,679,188
- -----------------------------------
Redemptions (485,162) (1,345,519) (530,180) (1,194,916) (605,718) (1,285,748)
- ----------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
353,896 947,072 122,736 285,007 197,171 393,440
U.S. Government/AAA-Rated
Securities Account:
Purchases 183,394 306,584 279,693 443,237 263,841 433,764
- -----------------------------------
Redemptions (408,679) (698,922) (346,287) (555,444) (260,277) (422,241)
- ----------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
(225,285) (392,338) (66,594) (112,207) 3,564 11,523
International Account:
Purchases 413,293 577,192 1,097,521 1,488,975 895,154 1,057,981
- -----------------------------------
Redemptions (269,256) (372,515) (407,741) (546,605) (82,632) (98,584)
- ----------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
144,037 204,677 689,780 942,370 812,522 959,397
Asset Allocation Account:
Purchases 151,510 206,365 333,391 404,917 445,415 531,007
- -----------------------------------
Redemptions (18,134) (25,025) (88,227) (107,336) (193,171) (236,837)
- ----------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
133,376 181,340 245,164 297,581 252,244 294,170
----------- ----------- -----------
NET INCREASE FROM UNIT TRANSACTIONS $ 1,193,904 $ 1,771,577 $ 3,266,704
- ----------------------------------- =========== =========== ===========
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
U.S.
Government/
AAA-Rated Asset
Securities International Allocation
Account Account Account
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unit transactions $2,312,400 $2,404,622 $1,055,645
- ---------------------------------------------------------
Accumulated net investment income 1,216,643 208,548 158,854
- ---------------------------------------------------------
Accumulated net realized gain on investments 95,088 57,762 9,683
- ---------------------------------------------------------
Net unrealized appreciation (depreciation) on investments 139,168 190,328 163,360
- --------------------------------------------------------- ---------- ---------- ----------
$3,763,299 $2,859,260 $1,387,542
========== ========== ==========
</TABLE>
43
<PAGE>
Lincoln Life Flexible Premium Variable Life Account F
Notes to financial statements continued
5. Purchases and sales of investments
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1995:
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash Management Account $1,546,442 $1,648,752
- ----------------------------------------------------
High-Yield Bond Account 716,216 292,290
- ----------------------------------------------------
Growth-Income Account 1,796,456 748,562
- ----------------------------------------------------
Growth Account 2,983,462 1,150,434
- ----------------------------------------------------
U.S. Government/AAA-Rated Securities Account 554,718 717,580
- ----------------------------------------------------
International Account 622,818 324,194
- ----------------------------------------------------
Asset Allocation Account 297,857 35,736
- ---------------------------------------------------- ---------- ----------
$8,517,969 $4,917,548
========== ==========
</TABLE>
44
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors of Lincoln National Life Insurance Co. and Policyowners of
Lincoln Life Flexible Premium Variable Life Account F
We have audited the accompanying statement of assets and liability of Lincoln
Life Flexible Premium Variable Life Account F (Separate Account) as of December
31, 1995, and the related statements of operations and changes in net assets for
each of the three years in the period then ended. These financial statements are
the responsibility of the Separate 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, 1995, 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 Life Flexible Premium
Variable Life Account F at December 31, 1995, and the results of its operations
and the changes in its net assets for each of the three years in the period then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 13, 1996
45
<PAGE>
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46
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1995 1994
(000's omitted)
<S> <C> <C>
Assets
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
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
December 31
1995 1994
(000's omitted)
<S> <C> <C>
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 Corporation) 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.
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(000's omitted)
<S> <C> <C> <C>
Revenue:
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.
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Shareholder's Equity
Year ended December 31
1995 1994 1993
(000's omitted)
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 Corporation 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 the 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
See accompanying notes.
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Cash Flows
Year ended December 31
1995 1994 1993
(000's omitted)
Cash flows from operating activities
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)
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Cash Flows (continued)
Year ended December 31
1995 1994 1993
(000's omitted)
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 Corporation 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
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
See accompanying notes.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include The Lincoln National
Life Insurance Company ("Company") and its majority-owned subsidiaries. The
Company and its subsidiaries operate multiple insurance businesses. Operations
are divided into two business segments (see Note 9). These consolidated
financial statements have been prepared in conformity with generally 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 financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investments
The Company classifies its fixed maturity securities and equity securities
(common and non-redeemable preferred stocks) as available-for-sale and,
accordingly, such securities are carried at fair value. The cost of fixed
maturity 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, the Company recognizes income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied since the
acquisition of the securities. 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 recorded at fair value on the settlement date which establishes
a new cost basis. If
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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, including
participation in a short-term investment pool administered by Lincoln National
Corporation ("LNC"), the Company's parent.
Realized gain (loss) on investments is recognized in net income, net of
related amortization of deferred acquisition costs, using the specific
identification 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
securities would have been sold at their fair value, and after deferred taxes
or credits to the extent deemed recoverable.
Derivatives
The Company hedges certain portions of its exposure to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity U.S.
Government obligations and foreign exchange risk by entering into derivative
transactions. A description of the Company's accounting for its hedge of such
risks is discussed in the following two paragraphs.
The premium paid for an interest rate cap 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 interest
rate caps is recorded as investment income. Spread-lock agreements, interest
rate swaps and financial futures, which hedge fixed maturity securities
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 maturity securities
denominated in foreign currencies, are carried at fair value with the change
in fair value reflected in earnings. Realized gain (loss) from the settlement
of such derivatives is also reflected in earnings.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate fluctuations,
the widening of bond yield spreads over comparable maturity U.S. Government
obligations and foreign exchange risk; 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 derivatives is included in net income.
Property and Equipment
Property and equipment owned for company use is carried at cost less
allowances for depreciation.
Premiums and Fees
Revenue for universal life and other interest-sensitive life insurance policies
consists of policy charges for cost of insurance, policy initiation and
administration, and surrender charges that have been assessed. Traditional
individual life-health and annuity premiums are recognized as revenue 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 the Company for the exclusive benefit of pension and variable life
and annuity contractholders. The fees received by the Company for
administrative and contractholder maintenance services performed for these
separate accounts are included in the Company's consolidated statements of
income.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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 production
of new business, have been deferred to the extent recoverable. Acquisition
costs for universal and variable universal life insurance policies are being
amortized over the lives of the policies in relation to the incidence of
estimated gross profits from surrender charges and investment, mortality and
expense margins, and actual realized gain (loss) on investments. That
amortization is adjusted retrospectively when estimates of current or future
gross profits to be realized from a group of policies are revised. The
traditional life-health and annuity acquisition costs are amortized over the
premium-paying period of the related policies using assumptions consistent
with those used in computing policy reserves.
Expenses
Expenses for universal and variable universal life insurance policies include
interest credited to policy account balances and benefit claims incurred
during the period in excess of policy account balances. Interest crediting
rates associated with funds invested in the Company'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
acquisitions. 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 balances
that accrue to the benefit of the policyholders, excluding surrender charges.
The liabilities for future policy benefits and expenses for traditional life
policies and immediate and deferred paid-up annuities are computed using a net
level premium method and assumptions for investment yields, mortality and
withdrawals based principally on Company experience projected at the time of
policy issue, with provision for possible adverse deviations. Interest
assumptions for traditional direct individual life reserves for all policies
range from 2.3% to 11.7% graded to 5.7% after 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 annuities range from 4.5% to 8.0%.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
With respect to its policy liabilities and accruals, the Company carries on a
continuing review of its 1) overall reserve position, 2) reserving techniques
and 3) reinsurance arrangements, and as experience develops and new
information becomes known, liabilities are adjusted as deemed necessary. The
effects of changes in estimates are included in the operating results for the
period in which such estimates occur.
Reinsurance
The Company enters into reinsurance agreements with other companies in the
normal course of their business. The Company 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 Company use are computed principally on the straight-line
method over the estimated useful lives of the assets.
Postretirement Medical and Life Insurance Benefits
The Company accounts for its postretirement medical and life insurance
benefits using the full accrual method.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company 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, the Company and its eligible
subsidiaries provide for income taxes on a separate return filing basis. The
tax sharing agreement also provides that the Company and eligible subsidiaries
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.
The Company uses the liability method of accounting for income taxes.
Deferred 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. The Company
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, the Company changed its method of accounting for
postretirement medical and life insurance benefits for its eligible employees
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 cumulative effect of
accounting change by $5,100,000 ($0.51 per share). The implementation 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.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. Changes in Accounting Principles and Changes in Estimates (continued)
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 the
Company effective January 1, 1993. FAS 114 requires that if an impaired
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 additions
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
Investments in Debt and Equity Securities" ("FAS 115") issued in May 1993, was
adopted by the Company as of December 31, 1993. In accordance with the rules,
the 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 holder's
intent. The Company 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 securities 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 acquisition 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 applicable to Security-
Connecticut Corporation) to reflect the net unrealized gain on fixed maturity
securities classified as available-for-sale previously carried at amortized
cost. Prior to the adoption of FAS 115, the Company carried a portion of its
fixed maturity securities at fair value with unrealized gains and losses
carried as a separate component of shareholder's equity. The remainder of
such securities were carried at amortized cost.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. Changes in Accounting Principles and Changes in Estimates (continued)
Change in Estimate for Net Investment Income Related to Mortgage-Backed
Securities
At December 31, 1993, the Company had $5,942,100,000 invested in mortgage-
backed securities. As indicated in Note 1, the Company recognizes income on
these securities using a constant effective yield based on anticipated
prepayments. With the implementation of new investment software in December
1993, the Company was able to significantly refine its estimate of the
effective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the
amortization 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
accounting 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
segment was identified as the result of management's assessment of current
expectations for morbidity trends and the impact of lower investment income
due to lower interest rates.
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, 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.
<PAGE>
The Lincoln National Life Insurance Company
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)
Total $136.2 $(138.5) $ 92.2
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Provisions (credits) for write-downs and net changes in provisions 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
Total $17.5 $58.1 $219.7
</TABLE>
The change in unrealized appreciation (depreciation) on investments in fixed
maturity and equity securities is as follows:
<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)
Total $2,141.8 $(1,929.7) $ 436.6
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The cost, gross unrealized gain and loss and fair value of securities
available-for-sale are as follows:
<TABLE>
<CAPTION>
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 governments 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
Total $19,333.1 $1,725.6 $45.5 $21,013.2
</TABLE>
<TABLE>
<CAPTION>
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
Total $18,610.2 $300.8 $762.5 $18,148.5
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
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
Subtotal 13,961.2 15,230.0
Mortgage-backed securities 4,891.6 5,184.8
Total $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 Fair
Par Cost 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
Total $5,012.9 $4,891.6 $5,184.8
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
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 the Company 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.
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.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
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 recorded 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>
<PAGE>
The Lincoln National Life Insurance Company
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 follows:
<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, the Company had restructured loans of
$62,500,000 and $36,200,000, respectively. The Company 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, the Company
had no outstanding commitments to lend funds on restructured loans.
As of December 31, 1995, the Company's investment commitments 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.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
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 follows:
<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 follows:
<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>
Adjustments to deferred acquisition costs and amounts required to satisfy
policyholder commitments are netted against the Deferred Acquisition Costs
asset account and included with the Future Policy Benefits, Claims and Claims
Expense liability account on the balance sheet, respectively.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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)
Total $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>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Federal Income Taxes (continued)
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
Total $(166.4) $134.5
</TABLE>
Significant components of the Company'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>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Federal Income Taxes (continued)
The Company is required to establish a "valuation allowance" 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 equity before considering a
valuation allowance. For Federal income tax purposes, capital losses may only
be used to offset 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 securities
available-for-sale were greater than the cost basis resulting in unrealized
capital gains. Accordingly, no valuation allowance was established as of
December 31, 1995 since management believes it is more likely than not that
the Company 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 to shareholder surplus and current income tax of
$3,100,000 was paid. Under existing or foreseeable circumstances, the Company
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 the Company 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.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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
Total $18,171.8 $17,028.6
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Supplemental Financial Data (continued)
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>
Future maturities of long-term debt are as follows (in millions):
1996 -- $ 1.3 1998 -- $18.4 2000 -- $ --
1997 -- 19.2 1999 -- -- 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>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Supplemental Financial Data (continued)
The income statement caption, "Benefits and Settlement Expenses," 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 deferred 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 Investments" 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. 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 securities 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 curtailment 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 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, nonqualified, defined benefit
plans for certain employees and agents. A supplemental retirement plan
provides defined benefit pension benefits in excess of limits imposed by
Federal tax law. A salary continuation plan provides certain officers of the
Company defined pension benefits based on years of service and final monthly
salary upon death or retirement.
<PAGE>
The Lincoln National Life Insurance Company
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>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Employee Benefit Plans (continued)
The determination of the projected benefits obligation for the defined benefit
plans was based on the following assumptions:
<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>
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 the Company sponsor contributory defined contribution 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, multiplied 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 $8,000,000, $13,200,000 and
$11,800,000 in 1995, 1994 and 1993, respectively.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Employee Benefit Plans (continued)
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 participants can elect
supplemental contributory benefits.
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>
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>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Employee Benefit Plans (continued)
The calculation of the accumulated postretirement benefit obligation assumes a
weighted-average annual rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) of 9.5% for 1996 gradually
decreasing to 5.5% by 2004 and remaining at that level thereafter. The health
care cost trend rate assumption 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 1995 and 1994 by $5,100,000 and $4,100,000,
respectively, and the aggregate of the estimated service and interest cost
components 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 December 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
the Company and its insurance subsidiaries in 1995, 1994 and 1993 was
$284,500,000, $366,700,000 and $237,000,000, respectively. The Company'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.
The Company is subject to certain insurance department regulatory restrictions
as to the transfer of funds and payments of dividends to LNC. In 1996, the
Company 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 deferred
acquisition costs. The bulk of the increase to this liability relates 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, the
Company 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 termination 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. The Company 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 employers cannot demonstrate
compliance and the insurance company is held responsible due to its marketing
efforts, the Company and other insurers may be subject to potential liability.
It is not possible 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 contracts,
which are no longer being 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
The Company and certain of its subsidiaries lease their home office properties
through sale-leaseback agreements. The agreements provide for a 25 year lease
period with options to renew for six additional terms of five years each. The
agreements also provide the Company with the right of first refusal to
purchase the properties during the term of the lease, including renewal
periods, at a price as defined in the agreements. In addition, the Company
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 periods.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
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>
<CAPTION>
<S> <C>
1996 $ 20.9
1997 19.5
1998 18.3
1999 18.3
2000 17.7
Thereafter 172.4
Total $267.1
</TABLE>
Insurance Ceded and Assumed
The Company cedes insurance to other companies, including certain affiliates.
The portion of risks exceeding each companys retention limit is reinsured
with other insurers. The Company 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, the Company acquires other insurance coverages with retentions and
limits which management believes are appropriate for the circumstances. The
accompanying financial statements reflect premiums, benefits and settlement
expenses and deferred acquisition costs, net of insurance ceded (see Note 5).
The Company and its subsidiaries remain liable if their reinsurers are unable
to meet their contractual obligations under the applicable reinsurance
agreements.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1995, the Company has provided $92,700,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receivables
from the ceding company, which are secured by future profits on the reinsured
business. However, the Company is subject to the risk that the ceding company
may become insolvent and the right of offset would not be permitted.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Vulnerability from Concentrations
At December 31, 1995, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic location.
Also at December 31, 1995, the Company did not have a concentration of 1)
business transactions with a particular customer, lender or distributor, 2)
revenues from a particular product of 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 serve
impact to the Company's financial condition.
Other Contingency Matters
The Company 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 relief. 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 the Company.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabilitated
companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. The Company has accrued for
expected assessments net of estimated future premium tax deductions.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
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
1995 1994
(in millions)
<S> <C> <C>
Real estate partnerships $ 3.3 $17.6
Mortgage loan pass-through certificates 63.6 78.2
Total $66.9 $95.8
</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 addition,
the Company has sold commercial mortgage loans through grantor trusts which
issued pass-through certificates. The Company has agreed to repurchase any
mortgage loans which remain delinquent for 90 days at a repurchase price
substantially equal to the outstanding principal balance plus accrued interest
thereon to the date of repurchase. 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,
1995 and 1994.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Derivatives
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
Government obligations 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
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>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements 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>
<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>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Interest Rate Caps
The interest rate cap agreements, which expire in 1997 through 2003, entitle
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 times the notional amount divided by
four. The purpose of the Company's interest rate cap agreement program is to
protect its annuity line of business from the effect of fluctuating interest
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 amortized 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 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, expressed 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 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 the Company the right, but not the obligation, to
assume a long or short position in the underlying futures at a specified price
during a specified time period.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Foreign Currency Derivatives
The Company uses a combination of foreign exchange forward contracts, foreign
currency options and foreign currency swaps, all of which are traded over-the-
counter, to hedge some of the foreign exchange risk of investments in fixed
maturity securities denominated in foreign currencies. The foreign currency
forward contracts obligate the Company to deliver a specified amount of
currency at a future date at a specified exchange rate. Foreign currency
options give the Company the right, but not the obligation, to buy or sell a
foreign currency at a specific exchange rate during a specified time period.
A foreign currency swap is a contractual agreement to exchange the currencies
of two different countries pursuant to an agreement to reexchange the two
currencies at the same rate of exchange at a specified 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) options 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.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, spread-lock agreements,
interest rate swaps, foreign exchange forward contracts, foreign currency
options and foreign currency swaps, but the Company does not anticipate
nonperformance 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 the Company'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 the Company's financial instruments.
Considerable judgment is required to develop these fair values and,
accordingly, the estimates shown are not necessarily indicative of the amounts
that would be realized in a one time, current market exchange of all of the
Company's financial instruments.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Fair Value of Financial Instruments (continued)
Fixed Maturity and Equity Securities
Fair values for fixed maturity securities are based on quoted market prices,
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 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 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 similar
characteristics. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service coverage,
loan to value, caliber of tenancy, borrower and payment record. Fair values
for impaired mortgage loans are measured based either on the present value of
expected future cash flows discounted at the loan's effective interest rate,
at the loan's market price or the fair value of the collateral if the loan is
collateral dependent.
Policy Loans
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consistent
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 sheets approximates their fair
value.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Fair Value of Financial Instruments (continued)
Investment Type Insurance Contracts
The balance sheet captions, "Future Policy Benefits, Claims and Claims
Expenses" and "Contractholder Funds," include investment type insurance
contracts (i.e., deposit contracts and guaranteed interest contracts). The
fair values for the deposit contracts and certain guaranteed interest
contracts are based on their approximate surrender values. The fair values
for the remaining guaranteed interest and similar contracts are estimated
using discounted cash flow calculations based on interest rates currently
being 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, Claims
and Claims Expenses" and "Contractholder 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 in that readers of these financial statements could draw
inappropriate conclusions about the Company's shareholder's equity determined
on a fair value basis if only the fair value of assets and liabilities defined
as financial instruments are disclosed. The Company and other companies in
the insurance industry are monitoring the related actions of the various rule-
making bodies and attempting to determine an appropriate methodology for
estimating and disclosing the "fair value" of their insurance contract
liabilities.
Short-Term and Long-Term Debt
Fair values for long-term debt issues are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for similar
types of borrowing arrangements. For short-term debt, the carrying value
approximates fair value.
Guarantees
The Company's guarantees include guarantees related to real estate
partnerships 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.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Fair Value of Financial Instruments (continued)
Derivatives
The Company'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 currency 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 brokerage quotes, which
utilized pricing models or formulas using current assumptions, 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 estate
are based on the difference between the value of the committed investments as
of the date of the accompanying balance sheets and the commitment date, which
would take into account changes in interest rates, the counterparties' credit
standing and the remaining terms of the commitments.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. 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
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 value 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 deferred acquisition
costs in order that they be comparable with the fair value basis.
9. Segment Information
The Company has two major business segments: Life Insurance and Annuities and
Reinsurance. The Life Insurance and Annuities 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 the Company. Reinsurance sells reinsurance products and
services to insurance companies, HMOs, self-funded employers and other primary
risk accepting organizations in the U.S. and economically attractive
international markets. Effective in the fourth quarter of 1995, operating
results of the direct disability income business previously included in the
Life Insurance and Annuities segment is now included in the Reinsurance
segment. This direct disability income business, which is no longer being
sold, is now managed by the Reinsurance 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 segment 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 corporate debt and unallocated corporate overhead
expenses).
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)
Total $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)
Total $ 449.5 $ 260.2 $ 335.7
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. Segment Information (continued)
<TABLE>
<CAPTION>
December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
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
Total $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, the Company 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 offering and
the Company received cash and notes, net of related expenses, totaling
$237,700,000. The loss on sale and disposal expenses did not differ
materially from the estimate recorded in the fourth quarter of 1993. For the
year ended December 31, 1993, Security-Connecticut, which operated in the Life
Insurance and Annuities segment, had revenue of $274,500,000 and net income of
$24,000,000.
In 1994, the Company completed the sale of 100% of the common 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.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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
affiliates. This purchase is expected to be completed in the form of a
reinsurance transaction with an initial ceding commission of approximately
$70,000,000. This ceding commission represents the present value of business
in-force and, accordingly, will be classified as other intangible assets upon
the close of this transaction. This transaction, which is expected 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 the Company under which it
sells the Company's products and provides the service that otherwise would be
provided by a home office marketing department and regional offices. For
providing these selling and marketing services, the Company paid LFGI override
commissions and operating expense allowances of $81,900,000, $78,500,000 and
$74,500,000 in 1995, 1994 and 1993, respectively. 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 the Company, which the Company is not required to reimburse.
Cash and invested cash at December 31, 1995 and 1994 include the Company'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, respectively.
Short-term debt at December 31, 1995 and 1994 includes $67,000,000 and
$68,600,000, respectively, borrowed from LNC. The Company paid interest to
LNC of $24,000, $8,000 and $137,000 in 1995, 1994 and 1993, respectively.
The Company 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.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. Transactions With Affiliates (continued)
The Company 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
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit aggregating
$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, the Company
has a receivable (included in the foregoing amounts) from affiliated insurance
companies in the amount of $241,900,000 for statutory surplus relief received
under financial reinsurance ceded agreements.
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Lincoln
National Life Insurance Company, a wholly owned subsidiary of Lincoln National
Corporation, 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 B- . These financial statements and
schedules are the responsibility 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 accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Lincoln
National Life Insurance Company at December 31, 1995, and 1994, and the
consolidated results 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 statements, in 1993 the
Company changed its method of accounting for postretirement benefits other than
pensions, accounting for impairment of loans and accounting for certain
investments in debt and equity securities.
/S/ ERNST & YOUNG LLP
Fort Wayne, Indiana
February 7, 1996
<PAGE>
FINANCIAL SCHEDULES
The following consolidated financial statement schedules of The Lincoln National
Life Insurance Company and subsidiaries are included on Pages B- through
B- .
I Summary of Investments Other than Investments in Related Parties December
31, 1995
III Supplementary Insurance Information Years ended December 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 applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or the required information is included
in the consolidated financial statements, and therefore have been omitted.
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule I
Summary of Investments Other Than Investments in Related Parties
December 31, 1995
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
Amount at
Which
Shown in
the Balance
Type of Investment Cost Value Sheet
<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.
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule III
Supplementary Insurance Information
(000's omitted)
<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)
<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
Total $ 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
Total $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
Total $1,297,913 $8,798,230 $ 59,660 $-- $2,397,713
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule III
Supplementary Insurance Information (continued)
(000's omitted)
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
Amortization
Benefits, of Deferred
Net Claims and Policy Other
Investment Claim Acquisition Operating Premium
Segment Income (B) Expenses Costs Expenses (B) Written
<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 --
Total $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 --
Total $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) --
Total $1,823,459 $3,033,139 $240,989 $640,810 $--
(A) Includes insurance fees on universal life and other interest sensitive products.
(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.
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule IV
Reinsurance (A)
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
<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
Total $ 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
Total $ 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
Total $ 2,158,822 $ 568,612 $ 807,503 $ 2,397,713
(A) Special-purpose bulk reinsurance transactions have been excluded.
(B) Includes insurance fees on universal life and other interest sensitive products.
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule V
Valuation and Qualifying Accounts
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
(1) (2)
Charged
Charged to
Balance at to Other Balance at
Beginning Costs and Accounts- Deductions- End of
of Period Expenses (A) Describe Describe (B) Period
<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
(A) Exclude charges for the direct write-off of assets. The negative amounts represent improvements in the underlying assets for
which valuation accounts had previously been established.
(B) Deductions reflect sales or foreclosures of the underlying holdings.
</TABLE>
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
A reconciliation and tie-in of information shown in the Prospectus with the
items of Form N-8B-2.
The Prospectus consisting of __ pages.
The signatures.
The following exhibits:
1. The following exhibits correspond to those required by paragraph A of the
instructions as to exhibits in Form N-8B-2:
(1) Resolution of the Board of Directors of The Lincoln National Life
Insurance Company and related documents authorizing establishment of
the Account.*
(2) Not applicable.
(3) (a) Not applicable.
(b) Not applicable.
(c) Commission Schedule .*
(4) Not applicable.
(5) Proposed form of Policy.*
(6) (a) Articles of Incorporation of The Lincoln National Life Insurance
Company.*
(b) By-Laws of The Lincoln National Life Insurance Company.*
(7) Not applicable.
(8) Proposed Form of Agreement to Purchase Shares.*
(9) Proposed form of Indemnification Agreement related to compliance with
IRC Section 817(h) and the regulations thereunder.*
<PAGE>
(10) See Exhibit 1(5).
2. See Exhibit 1(5)
3. Opinion and Consent of John L. Steinkamp, Vice President and Associate
General Counsel of The Lincoln National Life Insurance Company.*
4. Not applicable.
5. Not applicable.
6. Opinion and Consent of Denis G. Schwartz, FSA, Assistant Vice President*
7. Consent of Ernst & Young LLP, Independent Auditors.
____________________________________________________________________________ *
Previously filed as an exhibit to the registration statement.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and The Lincoln
National Life Insurance Company has duly caused this Registration Statement to
be signed on its behalf by the undersigned hereunto duly authorized, in the City
of Fort Wayne, State of Indiana, on the 30th day of April, 1996.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY on its own
behalf of its SEPARATE ACCOUNT F
By: /S/ REED P. MILLER
------------------
Reed P. Miller
Vice President
Pursuant to the Securities Act of 1933, this Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/S/ IAN M. ROLLAND Director 4/30/96
- --------------------------
Ian M. Rolland
/S/ ROBERT A. ANKER Chief Executive Officer and 4/30/96
- -------------------------- Director (Principal Executive Officer)
Robert A. Anker
/S/ JON A. BOSCIA President, Chief Operating 4/30/96
- -------------------------- Officer and Director
Jon A. Boscia
Director and Executive ----------
- -------------------------- Vice President
Gabriel L. Shaheen
/S/ KEITH J. RYAN Vice President, Assistant 4/30/96
- -------------------------- Treasurer and Chief Financial Officer
Keith J. Ryan (Principal Financial Officer)
/S/ RICHARD C. VAUGHAN Director 4/30/96
- --------------------------
Richard C. Vaughan
/S/ H. THOMAS MCMEEKIN Director 4/30/96
- --------------------------
H. Thomas McMeekin
/S/ JACK D. HUNTER Executive Vice President, 4/30/96
- -------------------------- General Counsel and Director
Jack D. Hunter
/S/ O. DOUGLAS WORTHINGTON Vice President and 4/30/96
- -------------------------- Assistant Treasurer
O. Douglas Worthington (Chief Accounting Officer)
<PAGE>
Exhibit 7
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Post-Effective Amendment No. 12 to the Registration Statement (Form S-6 No.
33-14692) and related Prospectus pertaining to the Lincoln National Flexible
Premium Variable Life Account F and to the use therein of our reports (a) dated
February 7, 1996 with respect to the consolidated financial statements of The
Lincoln National Life Insurance Company and (b) dated March 13, 1996 with
respect to the financial statements of Lincoln National Flexible Premium
Variable Life Account F.
/S/ ERNST & YOUNG LLP
Fort Wayne, Indiana
April 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JAN-01-1995
<INVESTMENTS-AT-COST> 33,155,275
<INVESTMENTS-AT-VALUE> 39,588,153
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,588,153
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 41,830
<TOTAL-LIABILITIES> 41,830
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,718,320
<SHARES-COMMON-STOCK> 17,556,802
<SHARES-COMMON-PRIOR> 17,107,506
<ACCUMULATED-NII-CURRENT> 7,354,731
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,040,394
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,432,878
<NET-ASSETS> 39,546,323
<DIVIDEND-INCOME> 2,838,974
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 442,101
<NET-INVESTMENT-INCOME> 2,396,873
<REALIZED-GAINS-CURRENT> 527,229
<APPREC-INCREASE-CURRENT> 4,708,861
<NET-CHANGE-FROM-OPS> 7,632,963
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,524,571
<NUMBER-OF-SHARES-REDEEMED> 5,075,275
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,826,867
<ACCUMULATED-NII-PRIOR> 4,957,858
<ACCUMULATED-GAINS-PRIOR> 1,513,165
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 442,101
<AVERAGE-NET-ASSETS> 35,132,890
<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>
