<PAGE>
Registration No. 33-14692
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 13 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
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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)
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Name and complete address
of agent for service: Copy to:
Carl L. Baker, Esquire Brian Burke, Esquire
Vice President & 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
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It is proposed that this filing will become effective (check appropriate box)
[_] immediately upon filing pursuant to paragraph (b)
[X] on April 30, 1997 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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Title and amount of securities being registered: Flexible Premium Variable Life
Insurance Policies. The Policies are not issued in predetermined units or
amounts.
Proposed maximum aggregate offering price to the public of the securities being
registered: The registrant has elected to register an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940. The
Rule 24f-2 notice on Form 24F-2 for the registrant's fiscal year, ending
December 31, 1996, was filed on February 28, 1997.
Approximate date of proposed public offering: As soon as practicable after
April 30, 1997.
[_] Check box if it is proposed that this filing will become effective on
(date) at (time) pursuant to Rule 487.
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<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
FOR LINCOLN NATIONAL FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
<TABLE>
<CAPTION>
N8B-2 ITEM CAPTION IN PROSPECTUS
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<C> <S>
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 Separate Account
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N8B-2 ITEM CAPTION IN PROSPECTUS
- ---------- ---------------------
<C> <S>
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 Separate 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
</TABLE>
<PAGE>
AMERICAN LEGACY LIFE
LINCOLN NATIONAL 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 bene-
fits payable under the policy may also be increased or decreased subject to
certain restrictions.
An owner may allocate amounts to Lincoln National 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 nine funds
available:
. Global Growth Fund
. 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 in-
vestment experience of the chosen subaccounts of the Separate Account and in-
terest 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 ex-
plained under the heading Charges and deductions on page 6.
It may not be advantageous to purchase a policy: (1) as a replacement for an-
other type of life insurance; or,
(2) to obtain additional insurance protection if the purchaser already owns an-
other 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 ex-
ceed certain limits referred to as the 7-pay limitation. Because the issue pre-
mium normally exceeds the 7-pay limitation, the policy will likely be a Modi-
fied 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 gen-
erally less favorable than applies to such distributions from a life insurance
policy that is not a Modified Endowment Contract. In particular, loans or sur-
renders 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, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
SUMMARY OF THE POLICY 1
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LINCOLN LIFE AND THE SEPARATE ACCOUNT
Lincoln Life 3
The Separate Account 3
The investment advisor 3
Addition, deletion or substitution of investments 3
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THE POLICY
Requirements for issuance of a policy 4
Units and unit values 4
Premium payment and allocation of premiums 5
Dollar cost averaging program 6
Effective date 6
Right to examine policy 6
Policy termination 6
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CHARGES AND DEDUCTIONS
Surrender charges 6
Cost of insurance charges 7
Charges against the Separate Account 7
Reduction of charges 8
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POLICY BENEFITS
Death benefit 8
Guaranteed death benefit 9
Policy changes 9
Policy value 10
Transfer between subaccounts 10
Loans 11
Policy lapse and reinstatement 11
Surrender of the policy 11
Proceeds and payment options 12
</TABLE>
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<TABLE>
<CAPTION>
Page
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<S> <C>
GENERAL PROVISIONS
The contract 12
Suicide 12
Representations and contestability 12
Incorrect age or sex 13
Change of owner or beneficiary 13
Assignment 13
Reports and records 13
Projection of benefits and values 13
Postponement of payments 13
Accelerated Benefit Election Rider 13
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DISTRIBUTION OF THE POLICY 14
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FEDERAL TAX MATTERS
Tax status of the policy 14
Tax treatment of policy benefits 15
Taxation of the Separate Account 16
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VOTING RIGHTS 16
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STATE REGULATION OF LINCOLN LIFE
AND THE SEPARATE ACCOUNT 17
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SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS 17
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LEGAL PROCEEDINGS 17
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EXPERTS 17
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ADDITIONAL INFORMATION 18
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APPENDIX A: Executive Officers & Directors
of Lincoln National Life
Insurance Co. 19
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APPENDIX B: Illustrations of policy values 24
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APPENDIX C: Definitions for Separate Account F 31
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FINANCIAL STATEMENTS 33
</TABLE>
i
<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 en-
tirely qualified by more specific information contained elsewhere in this pro-
spectus. 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 sur-
render 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
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 concern-
ing the amount and frequency of premium payments. An issue premium approxi-
mately 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 limi-
tation 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 Sep-
arate Account. Currently the American Variable Insurance Series consists of
nine funds available for investment by the subaccounts:
The Global Growth Fund seeks long-term growth of capital by investing primar-
ily in common stocks or securities with common stock characteristics of is-
suers domiciled around the world. [PLEASE NOTE: AS OF THE DATE OF THIS PRO-
SPECTUS, THE GLOBAL GROWTH FUND IS NOT YET AVAILABLE IN ALL STATES. PLEASE
CONTACT YOUR INVESTMENT DEALER FOR MORE INFORMATION ABOUT THE GLOBAL GROWTH
FUND'S AVAILABILITY.]
The Growth Fund seeks growth of capital by investing primarily in common
stocks or securities with common stock characteristics, such as convertible
preferred stock, which demonstrate the potential for appreciation.
The International Fund seeks long term growth of capital by investing primar-
ily in securities of issuers domiciled outside the United States.
The Growth-Income Fund seeks high growth of capital and income by investing
primarily in common stocks or securities which demonstrate the potential for
appreciation and/or dividends.
The Asset Allocation Fund seeks high total return (including income and capi-
tal gains) consistent with preservation of capital over the long term through
a diversified portfolio that can include common stocks and other equity-type
securities, bonds and other intermediate and long-term fixed-income securities
and money market instruments in any combination.
The High-Yield Bond Fund seeks high current income and secondarily seeks capi-
tal appreciation by investing primarily in intermediate and long term corpo-
rate 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 IN-
VESTMENTS 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 secu-
rities.
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
1
<PAGE>
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.
HOW ARE PREMIUMS PROCESSED?
You determine in the application what portions of net premiums are to be allo-
cated to the various subaccounts of the Separate Account. Prior to the record
date, net premiums are automatically allocated to the Cash Management Fund. Af-
ter the record date, the policy value and all subsequent net premiums will au-
tomatically 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 of-
fered 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 de-
ferred 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 surren-
der charge will equal the amounts shown below.
<TABLE>
<CAPTION>
Percent of total premiums
During policy year paid in first policy year
- ------------------------------------------------------------------------------
<S> <C>
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%
</TABLE>
COST OF INSURANCE CHARGE. The policy value will be reduced on each monthly an-
niversary by the cost of insurance charge. See page 7 for more detailed infor-
mation.
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 tax-
es.
In addition, because the Separate Account purchases shares of the funds in-
volved, the value of the net assets of these subaccounts of the Separate Ac-
count will reflect the fees of the Investment Advisor and other miscellaneous
expenses incurred by those funds. It is estimated that, in the aggregate, such
fees and expenses for the funds, expressed as an annual percentage of each
fund's net assets, will range from .41% to .75%. See page 7 for more detailed
information.
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 14-16. You should
note in particular that the taxation of loans and surrenders of a life insur-
ance policy that becomes a Modified Endowment Contract is generally less favor-
able than applies to such distributions from a life insurance policy
2
<PAGE>
that is not a Modified Endowment Contract. Your policy will be a Modified En-
dowment Contract if the premiums you pay exceed certain limits referred to as
the 7-pay limitation (see pages 15-16). Because the issue premium normally ex-
ceeds 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 are normally reportable income to the extent of any gain in the pol-
icy and such income will also be subject to an additional 10% income tax if
the loan is taken before you attain age 59 1/2. 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 incorpo-
rated under the laws of Indiana on June 12, 1905. Lincoln Life is principally
engaged in offering individual life insurance policies and annuity contracts,
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 Common-
wealth of the Northern Mariana Islands.
Lincoln Life is wholly owned by Lincoln National Corp., a publicly held insur-
ance 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, Lin-
coln National Corp. engages primarily in the issuance of health-life insurance
and annuities, property-casualty insurance, and other financial services.
THE SEPARATE ACCOUNT
Lincoln National Flexible Premium Variable Life Account F (Separate Account)
was established by Lincoln Life as a separate account on May 29, 1987. Al-
though 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 avail-
able 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 val-
ued once daily at the close of regular trading (currently 4:00 p.m. New York
time) on each day the New York Stock Exchange is open. The New York Stock Ex-
change is currently closed on the following holidays: New Year's Day, Presi-
dents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiv-
ing 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 prac-
tices or policies of the Separate Account or Lincoln Life by the Commission.
The Separate Account is divided into nine subaccounts. Each subaccount invests
exclusively in shares of one of the funds comprising the American Variable In-
surance Series: the Global Growth Fund, 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 such 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 Man-
agement Co. is located at 333 South Hope Street, Los Angeles, Calif. 90071 and
135 South State College Boulevard, Brea, Calif. 92621. Capital Research and
Management is registered with the Securities and Exchange Commission as an in-
vestment adviser.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
Lincoln Life does not control the investment advisor and therefore cannot
guarantee that the American Vari-
3
<PAGE>
able 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 Ac-
count without notice and prior to approval of the Securities and Exchange Com-
mission, 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 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 objec-
tive. New subaccounts may be established when, at the sole discretion of Lin-
coln Life, marketing needs or investment conditions warrant, and any new
subaccounts may be made available to existing policyowners on a basis to be de-
termined by Lincoln Life. Lincoln Life may also eliminate one or more
subaccounts if, in its sole discretion, marketing, tax, or investment condi-
tions warrant.
In the event of any such substitution or change, Lincoln Life may by appropri-
ate endorsement make such changes in the policy as may be necessary or appro-
priate 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
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 insur-
ability sufficient to Lincoln Life. Acceptance is subject to Lincoln Life's un-
derwriting 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 supple-
mental application. Approval of the additional insurance will be subject to ev-
idence of insurability satisfactory to Lincoln Life.
UNITS AND UNIT VALUES
The value of policy monies invested in each subaccount is accounted for through
the use of units and unit values. A unit is an accounting unit of measure used
to calculate the value of an investment in a specified subaccount. A unit value
is the dollar value of a unit in a specified subaccount on a specified valua-
tion date. Whenever an amount is invested in a subaccount (due to net premium
payments, loan payments, or transfer of values into a subaccount), the amount
purchases units in that subaccount; the number of units purchased is determined
by dividing the dollar amount of the transaction by the unit value on the day
the transaction is made. Similarly, whenever an amount is redeemed from
subaccount (due to loans and loan interest charges, surrenders and surrender
charges, transfers of values out of a subaccount, income tax deductions (if
any), or cost of insurance charges), units are redeemed from that subaccount;
the number of units redeemed is determined by dividing the dollar amount of the
transaction by the unit value on the day the transaction is made.
The unit value is also used to measure the net investment results in a
subaccount. The policy value on any valuation day is the sum of the values in
each subaccount in which policy values are allocated. The value of each
subaccount on each valuation day is determined by multiplying the number of
units held by a policy in each subaccount by the unit value for that subaccount
as determined for that valuation day.
The unit value for a subaccount on a specified valuation date is determined by
dividing the value of all assets owned by that subaccount, net of the
subaccount's liabilities (including any accrued but unpaid daily mortality and
expense risk charges, administrative charges and guaranteed death benefit risk
charges), by the total number of units held by policies in that subaccount. Net
investment results do not increase or decrease the number of units held by the
subaccount.
As discussed under Charges against the Separate Account, on page 7, there is a
reduction in daily asset charges applicable to policies that have been in ex-
istence for more than ten years. To reflect that reduction, the preceding para-
graphs are applied by considering such policies to be funded through separate
subaccounts, the interests in which are reflected in a separately computed and
maintained series of units and unit values. The net investment results applica-
ble to those units will be higher because of the reduction in daily charges ap-
plicable to them.
4
<PAGE>
PREMIUM PAYMENT AND
ALLOCATION OF PREMIUMS
Subject to certain limitations, an owner has considerable flexibility in deter-
mining the frequency and amount of premiums. The first year issue premium is
the only premium payment required under the policy, although additional premi-
ums 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 speci-
fied 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, fre-
quency, 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 deduc-
tions, and a grace period expires without a sufficient payment. (See Policy
lapse and reinstatement, page 11.) Subject to the first year issue premium re-
quirements 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 outstand-
ing 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 es-
tablished 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 is-
sue 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 por-
tion 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. Be-
cause 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 benefits and distributions
is complex and is discussed in detail under "Federal tax matters" on pages 14-
16. 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 al-
locate net premiums or portions thereof to the various subaccounts of the Sepa-
rate Account. Notwithstanding the allocation in the application, all net premi-
ums 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 cred-
ited 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 mini-
mum 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.
5
<PAGE>
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 over-
all estate planning requirements.
DOLLAR COST AVERAGING PROGRAM
The owner may wish to make uniform monthly transfers from the Cash Management
Fund 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 desig-
nates the total amount of policy value ($5000 minimum) to be transferred from
the Cash Management Fund to the chosen subaccounts in accord with the most re-
cent 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 pre-
mium 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 With-
drawal 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 oc-
curs: 1) the grace period ends without payment of required premium, 2) the pol-
icy is surrendered, 3) the insured dies, or 4) the policy matures. Under cer-
tain defined conditions, Lincoln Life will continue until the maturity date a
death benefit on the life of the insured in an amount equal to the premiums
paid (See Guaranteed death benefit, page 9).
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 in the following.
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 underwrit-
ing 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 following table 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
6
<PAGE>
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.
<TABLE>
<CAPTION>
Percent of total premiums
During policy year paid in first policy year
- ------------------------------------------------------------------------------
<S> <C>
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%
</TABLE>
The sales charge in any policy year is not necessarily related to actual dis-
tribution expenses incurred in that year. Instead, Lincoln Life expects to in-
cur the majority of distribution expenses in the first policy year and to re-
cover any deficiency over the life of the policy from sales charges in subse-
quent years.
COST OF INSURANCE CHARGES
On the policy date and on each monthly anniversary day following, cost of in-
surance 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. It will depend, among
other things, on the amount for which Lincoln Life is at risk to pay in the
event of the insured's death. 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 insur-
ance 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 Commis-
sioner's Standard Ordinary Mortality Table, Age Last Birthday. Standard rate
classes have guaranteed rates which do not exceed 100% of the applicable ta-
ble.
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 in-
volving 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 di-
vided into three categories: preferred plus, preferred and standard. Insureds
who are preferred plus or preferred will generally incur a lower cost of in-
surance 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 re-
sult from a change in the current tax laws. Current tax laws do not charge in-
come 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.
FUND CHARGES AND EXPENSES. The investment advisor for each of the funds de-
ducts 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 re-
sults credited to the subaccounts.
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. The asset management charges, miscellaneous expenses
and total expenses for each of the funds are currently estimated, on the basis
of their most recent fiscal year experience where applicable, to be as fol-
lows:
<TABLE>
<CAPTION>
Asset Misc.
Fund Mgt. Charge* Expenses* Total*
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Growth** .69% .06% .75%
Growth .42% .02% .44%
International .61% .08% .69%
Growth-Income .39% .02% .41%
Asset Allocation .47% .02% .49%
High-Yield Bond .50% .03% .53%
Bond .51% .01% .52%
U.S. Gov't/AAA-Rated .51% .02% .53%
Cash Management .45% .02% .47%
</TABLE>
*Expressed as an annual percentage of each fund's average daily net assets.
**New fund, with no prior fiscal year experience.
See the funds' prospectus for more complete information about the expenses of
the funds.
7
<PAGE>
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 du-
ration 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 ad-
ministering 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 matu-
rity 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.
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 representatives 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 cir-
cumstances. Reductions will not be unfairly discriminatory against any person,
including the affected policyowners and owners of all other policies funded by
the Separate Account.
POLICY BENEFITS
DEATH BENEFIT
The initial death benefit is equal to the specified amount chosen by the own-
er, 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,
page 11), 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 pol-
icy. (See Proceeds and payment options, page 12.) The death benefit proceeds
payable 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, page 11.)
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:
<TABLE>
<CAPTION>
Attained Specified Attained Specified Attained Specified
age percentage age percentage age percentage
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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 death ben -
8
<PAGE>
efits. However, because the life insurance death benefit cannot be less than
250% (the applicable specified percentage) of policy value, any time the policy
value of this policy exceeds $100,000, the life insurance death benefit 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 death benefit 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 en-
titled to a life insurance death benefit of $500,000 (250% x $200,000); a pol-
icy value of $300,000 will yield a life insurance death benefit of $750,000
(250% x $300,000); a policy value of $500,000 will yield a life insurance death
benefit of $1,250,000 (250% x $500,000). Similarly, so long as policy value ex-
ceeds $100,000, each dollar taken out of policy value will reduce the life in-
surance death benefit by $2.50. If at any time the policy value multiplied by
the specified percentage is less than the specified amount, the life insurance
death benefit will equal the specified amount of the policy.
The above example describes a scenario which includes favorable investment per-
formance. 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 pay-
ments into the policy, subject to federal limitations, sufficient to pay for
cost of insurance deductions to keep the policy in force. Alternatively, pro-
vided 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 cover-
age 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 pol-
icy will be 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 pol-
icy, 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 min-
imum 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 fol-
lowing 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 invest-
ment 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 re-
ceipt 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 insur-
ance on the insured's life. The conditions for such exchange and the specifica-
tions 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, pages 14-16).
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 supple-
9
<PAGE>
mental application during the first two policy years; other evidence of insur-
ability will not be required for the increase. The total of all requested in-
creases 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 ap-
proved. 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 speci-
fied 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 deduc-
tions 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 gov-
ernmental 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:
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 gov-
ernmental income taxes.
The charges and deductions described above are further discussed in Charges
and deductions, page 6.
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;
c. The administrative charge; and
d. The asset management charges and any miscellaneous fund expenses.
The charges listed above are explained further in Charges against the separate
account, page 7.
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 regu-
lations.
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 writ-
ing on a form suitable to Lincoln Life. Transfers may be made by telephone re-
quest only if the owner has previously authorized telephone transfer in writ-
ing 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
10
<PAGE>
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 re-
quest for a loan is received at the Home Office of Lincoln Life. Payments may
be postponed under certain circumstances. (See Postponement of payments, page
13.)
A loan taken from, or secured by, a policy may have federal income tax conse-
quences. In particular, adverse tax consequences may occur if the policy lapses
with outstanding loans. (See Federal tax matters, pages 14-16.)
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 ad-
dress 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 Pol-
icy lapse and reinstatement, page 11.) In addition, the presence of any out-
standing 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 in-
terest will be deducted from the investment amount and transferred to the Lin-
coln Life General Account, where it 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 re-
sults 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, outstand-
ing 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, matu-
rity, or death of the insured will be deducted from the amount otherwise pay-
able.
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 pe-
riod 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 rein-
statement is approved.
SURRENDER OF THE POLICY
The owner may surrender the policy at any time during the lifetime of the in-
sured 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 re-
quest is received in the Home Office of Lincoln Life, or at a later date if so
requested by the owner. Ordinari-
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ly, 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, pages 14-16.
PROCEEDS AND PAYMENT OPTIONS
PROCEEDS. The amount payable under the policy on the maturity date, on the sur-
render 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 pro-
ceeds 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 op-
tions 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, ap-
proval by Lincoln Life is needed before any proceeds can be applied to a pay-
ment 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 provi-
sion.
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 in-
terest 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 supple-
mental 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, in
the absence of fraud, considered representations and not warranties. A 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 Assis-
tant 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 liabil-
ity 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 state-
ments 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.
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<PAGE>
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 pur-
chased 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 suc-
cessor. 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 Of-
fice 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 re-
ceive 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. Fur-
thermore, 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 Of-
fice. Lincoln Life will not be responsible for the validity of any assignment,
and reserves the right to require the policy for endorsement of any assign-
ment. An assignment of the policy may have tax consequences.
REPORTS AND RECORDS
Lincoln Life will maintain all records relating to the Separate Account. Lin-
coln 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 surren-
der 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 con-
tract is delivered. In addition, Lincoln Life will provide to policyowners
semi-annually, or otherwise as may be required by regulations under the In-
vestment Company Act of 1940, a report containing information about the opera-
tions of the funds.
Lincoln Life has entered into an agreement with Delaware Management Holdings,
Inc., 2005 Market Street, Philadelphia, PA 19203, to provide accounting serv-
ices to the Separate Account.
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 suit-
able 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 projec-
tion.
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 Com-
mission, as a result of which disposal of securities is not reasonably practi-
cal or it is not reasonably practical to determine the value of the Separate
Account's net assets. Transfers may also be postponed under such circumstanc-
es.
Requests for surrenders or policy loans of policy values attributable to a
premium 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 subse-
quent accelerated benefit is also available to pay premiums and interest
charges required on the policy. The amount of all advanced accelerated bene-
fits creates an interest-bearing lien against the death benefit otherwise pay-
able at death. There is no cost of insurance for this rider, but an adminis-
trative expense charge is payable upon application for benefits.
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<PAGE>
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 ap-
plication. The underwriting and issue procedures are subject to change without
notice.
DISTRIBUTION OF THE POLICY
Lincoln Life intends to offer the policy in all jurisdictions where it is li-
censed to do business. American Fund Distributors, Inc. (AFD), the principal
underwriter for the policies, is registered with the Securities and Exchange
Commission as a broker-dealer and is a member of the National Association of
Securities Dealers (NASD). The principal business address of AFD is 333 S.
Hope Street, 52nd Floor, Los Angeles, California 90071. The principal business
address of Lincoln Life is 1300 South Clinton Street, Fort Wayne, Ind. 46802.
The policy will be sold by individuals who, in addition to being licensed as
life insurance agents for Lincoln Life, are also its registered representa-
tives. The policy will also be sold by properly licensed representatives of
independent broker-dealers which in turn have selling agreements with AFD and
have been appropriately licensed by state insurance departments as agents of
Lincoln Life. These representatives ordinarily receive commissions and service
fees up to 5.5% of all premiums paid, plus .25% of accumulated policy values
in the second policy year and each year thereafter. The broker-dealer or local
agency receives additional compensation on all premiums paid. In some situa-
tions, the broker-dealer or local agency may elect to share its commission
with the registered representative. Selling representatives may also be eligi-
ble for bonuses and non-cash compensation if certain production levels are
reached. All compensation is paid from Lincoln Life's resources, which include
sales charges made under this policy.
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 pur-
port 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 understand-
ing of the present federal income tax laws as they are currently interpreted
by the Internal Revenue Service. No representation is made as to the likeli-
hood 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) in-
cludes 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. 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 is-
sued. 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 poli-
cy.
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 sec-
tion 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 pos-
sibly 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 com-
petent 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 uncer-
tainty 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 un-
certainty, 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 necessary to cause such a policy to comply with section
7702, includ-
14
<PAGE>
ing possibly refunding any premiums paid that exceed the limitations allowable
under section 7702 (together with interest or other earnings on any such pre-
miums 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 regula-
tion or otherwise for the investments of the Separate Account to be "ade-
quately 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 require-
ments 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 guid-
ance concerning the extent to which policyowners may direct their investments
to the subaccounts of a Separate Account. When additional guidance is provid-
ed, 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 ap-
plied 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 con-
tract 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 con-
trol 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 insur-
ance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. Lincoln Life believes that the proceeds and cash value in-
creases of a policy should be treated in a manner consistent with a fixed ben-
efit 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 inheri-
tance, 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 in-
crements thereof, under the policy until there is a distribution. The tax con-
sequences 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 Endow-
ment Contract depending upon the amount of premiums paid in relation to the
death benefit provided under such policy. Because of the premium level contem-
plated under the policies, all policies entered into after June 20, 1988 are
or may become modified endowment contracts. In addition, if a policy is "mate-
rially 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, classifica-
tion of a policy as a Modified Endowment Contract will depend upon the circum-
stances of each policy. Accordingly, a prospective owner should contact a com-
petent 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 pre-
mium or making any other change to, including an exchange of, a policy to de-
termine 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 lim-
itation and cause the policy to become a Modified Endowment Contract. In sim-
plified terms, the 7-pay limitation is satisfied only if the accumulated pre-
miums paid under a policy do not at any time during the first seven policy
years exceed the sum of the equal annual premiums that would have been paid
for a similar policy providing for fully funded benefits at the end of the
seven year period. If the owner has given Lincoln Life instructions that the
policy should not be allowed to become a Modified Endowment Contract, any pre-
miums 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 Modi -
15
<PAGE>
fied Endowment Contract status will be sent to the owner. The letter of notifi-
cation 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. Pol-
icies classified as 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 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 (de-
scribed 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 dis-
tribution from, or loan taken from or secured by, such a policy that is in-
cluded 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 accord-
ingly.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Distributions from a policy that is not classified as a Modified Endowment Con-
tract 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 oc-
curs in the case of a decrease in the specified amount, 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 indebted-
ness 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, in-
terest 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 busi-
ness 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 individ-
ual 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. For interest paid or accrued after October 13, 1996, addi-
tional rules apply which may reduce or eliminate any interest deduction. The
owner should consult a competent tax advisor concerning the rules and limita-
tions.
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 in-
come 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 ex-
cluded 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 Lin-
coln 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. Lincoln Life believes that
any benefits paid under the Accelerated Benefit Election Rider generally will
be excludable from the recipient's income.
TAXATION OF THE SEPARATE ACCOUNT
Lincoln Life does not initially expect to incur any income tax upon the earn-
ings or the realized capital gains attributable to the Separate Account. Based
upon these expectations, no charge is being made currently to the Separate Ac-
count for federal income taxes which may be attributable to the Separate Ac-
count. If, however, Lincoln Life determines that it may incur such taxes, it
may assess a charge for those taxes from the policy.
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 in-
terests in the Separate Account. If, however,
16
<PAGE>
the Investment Company Act of l940 or any regulation thereunder should be
amended or if the present interpretation thereof should change, and as a re-
sult Lincoln Life determines that it is permitted to vote the fund shares in
its own right, it may elect to do so.
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. Frac-
tional 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 deter-
mining shareholders eligible to vote at the meetings of the funds. Voting in-
structions 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 propor-
tion to the voting instructions which are received with respect to all poli-
cies participating in that fund. Each person having a voting interest will re-
ceive proxy material, reports and other materials relating to the appropriate
portfolio.
DISREGARD OF VOTING INSTRUCTIONS. Lincoln Life may, when required by state in-
surance regulatory authorities, disregard voting instructions if the instruc-
tions 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 ini-
tiated 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 prohib-
ited by state regulatory authorities or Lincoln Life determined that the
change would have an adverse effect on its General Account in that the pro-
posed investment policy for any fund may result in overly speculative or un-
sound investments. In the event Lincoln Life does disregard voting instruc-
tions, a summary of that action and the reasons for such action will be in-
cluded 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 Indi-
ana, is subject to regulation by the Insurance Department of the State of In-
diana. An annual statement is filed with the Indiana Department of Insurance
(Department) 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 lia-
bilities and reserves of Lincoln Life and the Separate Account and certifies
their adequacy, and a full examination of Lincoln Life's operations is con-
ducted by the Department at least once every five 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 SEPARATE 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 Ac-
count 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 Ac-
count's assets in an open account in lieu of stock certificates.
LEGAL PROCEEDINGS
There are no material legal or administrative proceedings pending or known to
be contemplated, other then ordinary routine litigation incidental to the
business, to which Lincoln Life or the Separate Account are a party or to
which the assets of the Separate Account are subject. The principal underwrit-
er, AFD, is not engaged in any material litigation of any nature.
EXPERTS
The financial statements of the Separate Account and the 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 which also appear elsewhere in this document and in the
registration statement. The financial statements and schedules audited by
Ernst & Young LLP have been included in this document in reliance on their re-
ports given on their authority 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.
17
<PAGE>
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange Com-
mission, under the Securities Act of l933, as amended, with respect to the pol-
icy offered hereby. This prospectus does not contain all the information set
forth in the registration statement and the amendments and exhibits to the reg-
istration 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
- -------------------------------------------------------------------------------
<C> <S>
NANCY J. ALFORD Vice President (formerly Second Vice President),
Vice President Lincoln National Life Insurance Company.
- -------------------------------------------------------------------------------
TIMOTHY J. ALFORD Senior Vice President (formerly Vice President
Senior Vice President and Second Vice President), Lincoln National Life
One Reinsurance Place Insurance Co.
1700 Magnavox Way
Fort Wayne, Ind. 46804
- -------------------------------------------------------------------------------
NEAL E. ARNOLD Vice President (formerly Second Vice President),
Vice President Lincoln National Life Insurance Co.
- -------------------------------------------------------------------------------
CARL L. BAKER Vice President and Deputy General Counsel
Vice President and (formerly Associate General Counsel); Lincoln
Deputy General Counsel National Life Insurance Co.
- -------------------------------------------------------------------------------
ROLAND C. BAKER President, First Penn-Pacific Life Insurance Co.
Vice President Formerly: Chairman and CEO, Baker, Ralish,
1801 S. Meyers Road Shipley & Politzer, Inc.
Oakbrook Terrace, Ill. 60181
- -------------------------------------------------------------------------------
DAVID N. BECKER Vice President, Lincoln National Life Insurance
Vice President, Co.
Appointed Actuary and
Valuation Actuary
- -------------------------------------------------------------------------------
JOANN E. BECKER Vice President, Lincoln National Life Insurance
Vice President Co. and Lincoln Investment Management Inc.;
200 East Berry Street (formerly President, The Richard Leahy Corp. and
Fort Wayne, Ind. 46802 President, LNC Equity Sales Corp.)
- -------------------------------------------------------------------------------
JOHN M. BEHRENDT Vice President, Lincoln National Life Insurance
Vice President Co. and Lincoln Financial Group, Inc. Formerly:
President, LNC Equity Sales Corp.
- -------------------------------------------------------------------------------
JON A. BOSCIA President and Chief Executive Officer (formerly
President, Director and Chief Operating Officer), Lincoln National Life
Chief Executive Officer Insurance Co. Formerly: President; Executive Vice
President, Lincoln Investment Management Inc.
- -------------------------------------------------------------------------------
CAROLYN P. BRODY Vice President (formerly Second Vice President),
Vice President Lincoln National Life Insurance Co.
- -------------------------------------------------------------------------------
STEVEN R. BRODY Senior Vice President (formerly Executive Vice
Vice President President), Lincoln Investment Management Inc.
200 East Berry Street
Fort Wayne, Ind. 46802
- -------------------------------------------------------------------------------
PRISCILLA S. BROWN Vice President, Lincoln National Life Insurance
Vice President Co. (formerly President, LNC Equity Sales
Corporation and Vice President, Lincoln
Investment Management, Inc.)
- -------------------------------------------------------------------------------
HAROLD B. CARSTENSEN, JR. Vice President, Lincoln National Life Insurance
Vice President Co.
- -------------------------------------------------------------------------------
</TABLE>
19
<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
- -------------------------------------------------------------------------------
<C> <S>
DONALD C. CHAMBERS, M.D. Senior Vice President and Chief Medical Director
Senior Vice President and (formerly Vice President and Chief Medical
Chief Medical Director Director), Lincoln National Life Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- -------------------------------------------------------------------------------
THOMAS L. CLAGG Vice President and Associate General Counsel,
Vice President and Lincoln National Life Insurance Co.
Associate General Counsel
- -------------------------------------------------------------------------------
KENNETH J. CLARK Senior Vice President, Lincoln National Life
Senior Vice President Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- -------------------------------------------------------------------------------
KELLY D. CLEVENGER Vice President, Lincoln National Life Insurance
Vice President Co.
- -------------------------------------------------------------------------------
MARTHA O. D'AMBROSIO Vice President and General Auditor, Lincoln
Vice President and National Corp. and Lincoln National Life
General Auditor Insurance Co. Formerly: Senior Manager, KPMG Peat
Marwick.
- -------------------------------------------------------------------------------
JEFFREY K. DELLINGER Vice President (formerly Second Vice President),
Vice President Lincoln National Life Insurance Co.
- -------------------------------------------------------------------------------
ARTHUR W. DETORE, M.D. Vice President (formerly Second Vice President),
Vice President Lincoln National Life Insurance Co. Formerly:
Vice President, Lincoln National Risk Management,
Inc.
- -------------------------------------------------------------------------------
C. LAWRENCE EDRIS Vice President (formerly Senior Vice President),
Vice President Lincoln National Life Insurance Co.
- -------------------------------------------------------------------------------
THOMAS W. FITCH Senior Vice President (formerly Vice President,
Vice President First Penn-Pacific Life Insurance Co. and Lincoln
1801 S. Meyers Road National Life Insurance Co.)
Oakbrook Terrace, Ill. 60181
- -------------------------------------------------------------------------------
ELIZABETH A. FREDERICK Vice President (formerly Second Vice President)
Vice President and and Associate General Counsel, Lincoln National
Associate General Counsel Life Insurance Co.
- -------------------------------------------------------------------------------
LUCY D. GASE Vice President and Assistant Secretary (formerly
Vice President and Second Vice President; Assistant Vice President),
Assistant Secretary Lincoln National Life Insurance Co.
- -------------------------------------------------------------------------------
MELANIE T. HALL Vice President (formerly Second Vice President;
Vice President Assistant Vice President), Lincoln National Life
Insurance Co.
- -------------------------------------------------------------------------------
PHILLIP A. HARTMAN Vice President, Lincoln National Life Insurance
Vice President Co. and Lincoln Financial Group, Inc.
- -------------------------------------------------------------------------------
J. MICHAEL HEMP Senior Vice President, Lincoln National Life
Senior Vice President Insurance Co. and President, LNC Equity Sales
Corporation; Formerly Regional Chief Executive
Officer, Lincoln Dallas RMO.
- -------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
APPENDIX A CONTINUED
Executive officers and directorsLincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and position(s)
with applicant Principal occupations last five years
- -------------------------------------------------------------------------------
<C> <S>
MATTHEW P. HENDERSON Vice President, Lincoln National Life Insurance
Vice President Co. Formerly: Vice President, Lincoln National
Corp.
- -------------------------------------------------------------------------------
DAVID A. HOPPER Senior Vice President (formerly Vice President),
Senior Vice President Lincoln National Life Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- -------------------------------------------------------------------------------
JACK D. HUNTER Executive Vice President and General Counsel,
Executive Vice President, Lincoln National Corp. and Lincoln National Life
General Counsel and Director Insurance Co.
200 East Berry Street
Fort Wayne, Ind. 46802
- -------------------------------------------------------------------------------
DONALD E. KELLER Vice President (formerly Second Vice President),
Vice President Lincoln National Life Insurance Co.
- -------------------------------------------------------------------------------
LAWRENCE T. KISSKO Vice President (formerly Senior Vice President),
Vice President Lincoln National Investment Management Co.
- -------------------------------------------------------------------------------
Vice President, Lincoln National Life Insurance
MICHAEL C. LA FRENAIS Co. Formerly: Assistant Vice President, Aurora
Vice President Life Assurance Co.
- -------------------------------------------------------------------------------
Senior Vice President, Lincoln National Life
STEPHEN H. LEWIS Insurance Co. Formerly President, First Penn-
Senior Vice President Pacific Life Insurance Co.
- -------------------------------------------------------------------------------
President (formerly Executive Vice President,
H. THOMAS MCMEEKIN Senior Vice President), Lincoln Investment
Director Management Inc.; Executive Vice President
200 East Berry Street (formerly Senior Vice President), Lincoln
Fort Wayne, Ind. 46802 National Corp.
- -------------------------------------------------------------------------------
Vice President (formerly Senior Vice President),
Lincoln National Life Insurance Co. Formerly:
REED P. MILLER Senior Vice President; Vice President, Lincoln
Vice President National Corp.
- -------------------------------------------------------------------------------
OLIVER H. G. NICHOLS Vice President, Lincoln Investment Management
Vice President Inc. Formerly: Vice President, Aetna Life &
200 East Berry Street Casualty Co.
Fort Wayne, Ind. 46802
- -------------------------------------------------------------------------------
DAVID M. ONGMAN Vice President, Lincoln National Life Insurance
Vice President Co. Formerly: Consultant, Computer Horizons
Group; Vice President, The Associated Group;
Consulting Center Manager, James Martin & Co.
- -------------------------------------------------------------------------------
ARTHUR L. PAGE Vice President, Lincoln National Life Insurance
Vice President Co.
- -------------------------------------------------------------------------------
RAYMOND L. PROSSER Vice President and Associate General Counsel,
Vice President and Lincoln National Life Insurance Co. (formerly
Associate General Counsel Second Vice President and Director of Claims),
One Reinsurance Place Lincoln National Life Insurance Co.; Associate
1700 Magnavox Way General Counsel, Lincoln National Corp. and
Fort Wayne, Ind. 46804 Lincoln National Life Insurance Co.
- -------------------------------------------------------------------------------
</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
- -------------------------------------------------------------------------------
<C> <S>
Vice President (formerly Second Vice
STEPHEN E. RAHN President), Lincoln National Life
Vice President Insurance Co.
- -------------------------------------------------------------------------------
Chairman, President and Chief
IAN M. ROLLAND Executive Officer, Lincoln National
Director Corp. (formerly Chairman and Chief
200 East Berry Street Executive Officer, President), Lincoln
Fort Wayne, Ind. 46802 National Life Insurance Co.
- -------------------------------------------------------------------------------
ARTHUR S. ROSS Vice President, Lincoln National Life
Vice President Insurance Co. and Lincoln Financial
Group Inc.
- -------------------------------------------------------------------------------
LAWRENCE T. ROWLAND Executive Vice President (formerly
Executive Vice President and Director Senior Vice President and Second Vice
One Reinsurance Place President), Lincoln National Life
1700 Magnavox Way Insurance Co.
Fort Wayne, Ind. 46804
- -------------------------------------------------------------------------------
Vice President, Chief Financial
Officer and Assistant Treasurer
KEITH J. RYAN (formerly Controller, Business
Vice President, Chief Financial Officer Controls Director), Lincoln National
and Assistant Treasurer Life Insurance Co.
- -------------------------------------------------------------------------------
CASEY J. TRUMBLE Vice President, Lincoln National Corp.
Vice President Formerly: tax partner, KPMG Peat
200 East Berry Street Marwick.
Fort Wayne, Ind. 46802
- -------------------------------------------------------------------------------
WILLIAM K. TYLER Senior Vice President, Lincoln
Senior Vice President National Life Insurance Co.
and Assistant Treasurer
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- -------------------------------------------------------------------------------
RICHARD C. VAUGHAN Executive Vice President (formerly
Director Senior Vice President) and Chief
200 East Berry Street Financial Officer, Lincoln National
Fort Wayne, Ind. 46802 Corp.
- -------------------------------------------------------------------------------
MICHAEL R. WALKER Vice President, Lincoln National Life
Vice President Insurance Co. Formerly: Vice
President, Employers Health Insurance
Co; Vice President/HR, Baker Hughes,
Inc.
- -------------------------------------------------------------------------------
ROY V. WASHINGTON Vice President (formerly, Associate
Vice President Counsel), Lincoln National Life
Insurance Co. Formerly: Director of
Compliance, Lincoln National
Investment, Inc.; Compliance
Consultant, Lincoln National Corp.
- -------------------------------------------------------------------------------
JANET C. WHITNEY Vice President and Treasurer, Lincoln
Vice President and National Life Insurance Co. Formerly
Treasurer Vice President and General Auditor,
200 East Berry Street Lincoln National Corp. and Lincoln
Fort Wayne, Ind. 46802 National Life Insurance Co.
- -------------------------------------------------------------------------------
</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
- -------------------------------------------------------------------------------
<C> <S>
C. SUZANNE WOMACK Secretary and Assistant Vice President, Lincoln
Secretary and National Corp. and Lincoln National Life Insurance
Assistant Vice President Co.
200 East Berry Street
Fort Wayne, Ind. 46802
- -------------------------------------------------------------------------------
O. DOUGLAS WORTHINGTON Vice President, Controller and Assistant Treasurer,
Vice President, Controller Lincoln National Life Insurance Co. Formerly Vice
and Assistant Treasurer President, Lincoln Investment Management Inc.
- -------------------------------------------------------------------------------
MICHAEL L. WRIGHT Senior Vice President, Lincoln National Life
Senior Vice President Insurance Co. Formerly: Executive Vice President &
COO, The Associated Group.
- -------------------------------------------------------------------------------
KATHERINE K. WYSS Vice President (formerly Second Vice President),
Vice President Lincoln National Life Insurance Co.
- -------------------------------------------------------------------------------
</TABLE>
* The principal business address of each person listed, unless otherwise indi-
cated, is 1300 South Clinton Street, P.O. Box 1110, Fort Wayne, Ind. 46801.
23
<PAGE>
APPENDIX B
Illustrations of policy values
The following tables have been prepared to help show how values under the pol-
icy 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 a different
classification was used or if the returns averaged 0%, 6%, and 12% but fluctu-
ated 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 insur-
ance 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 val-
ues 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 an assumed gross investment result is indicated.
The gross investment results used in the illustrations are then reduced by the
asset management charge (current average .51%), the mortality and expense risk
charge (.85% for the first 10 policy years and .75% thereafter), the adminis-
trative charge (.30% for the first 10 policy years and .10% thereafter), the
guaranteed death benefit charge (.10% for the first 10 policy years and 0%
thereafter), and other expenses incurred by the funds including printing, mail-
ing, Directors' fees, etc. (current average .03%) so that the actual numbers in
the illustrations are net of expenses.
24
<PAGE>
AMERICAN LEGACY LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 35
$132,250 specified amount
$25,000 initial premium using current preferred charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
---------------------------- ---------------------------- ---------------------------
Premiums assuming hypothetical
accumulated assuming hypothetical gross assuming hypothetical gross gross
End of at 5% annual investment return of annual investment return of annual investment return of
policy interest ---------------------------- ---------------------------- ---------------------------
year per year 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $26,250 $132,250 $132,250 $132,250 $24,341 $25,808 $ 27,275 $22,091 $23,558 $ 25,025
2 27,563 132,250 132,250 132,250 23,680 26,638 29,770 21,555 24,513 27,645
3 28,941 132,250 132,250 132,250 23,016 27,491 32,508 21,016 25,491 30,508
4 30,388 132,250 132,250 132,250 22,336 28,356 35,502 20,586 26,606 33,752
5 31,907 132,250 132,250 132,250 21,640 29,234 38,780 20,140 27,734 37,280
- ---------------------------------------------------------------------------------------------------------
6 33,502 132,250 132,250 132,250 20,929 30,125 42,372 19,679 28,875 41,122
7 35,178 132,250 132,250 132,250 20,202 31,031 46,315 19,202 30,031 45,315
8 36,936 132,250 132,250 132,250 19,458 31,952 50,644 18,708 31,202 49,894
9 38,783 132,250 132,250 132,250 18,699 32,890 55,404 18,199 32,390 54,904
10 40,722 132,250 132,250 134,600 17,909 33,835 60,631 17,659 33,585 60,381
- ---------------------------------------------------------------------------------------------------------
15 51,973 132,250 132,250 185,406 13,798 39,495 97,071 13,798 39,495 97,071
20 66,332 132,250 132,250 243,724 8,242 45,372 155,238 8,242 45,372 155,238
25 84,659 132,250 132,250 333,731 375 51,134 249,053 375 51,134 249,053
30 108,049 * 0 132,250 488,333 * 0 56,109 400,273 * 0 56,109 400,273
</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 fu-
ture 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 gross investment 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
*Please refer to the Guaranteed Minimum Death Benefit provision.
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: administration = .30% first 10 years,
then .10%; asset management = .51% (current average) all years; guaranteed
death benefit = .10% first 10 years only; mortality and expense risk = .85%
first 10 years, then .75%; and miscellaneous expense = .03% all years. Values
illustrated are also net of cost of insurance charges.
25
<PAGE>
AMERICAN LEGACY LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 35
$132,250 specified amount
$25,000 initial premium using current standard charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
---------------------------- ---------------------------- ---------------------------
Premiums assuming hypothetical
accumulated assuming hypothetical gross assuming hypothetical gross gross
End of at 5% annual investment return of annual investment return of annual investment return of
policy interest ---------------------------- ---------------------------- ---------------------------
year per year 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $26,250 $132,250 $132,250 $132,250 $24,328 $25,795 $ 27,262 $22,078 $23,545 $ 25,012
2 27,563 132,250 132,250 132,250 23,654 26,611 29,742 21,529 24,486 27,617
3 28,941 132,250 132,250 132,250 22,978 27,451 32,464 20,978 25,451 30,464
4 30,388 132,250 132,250 132,250 22,286 28,301 35,441 20,536 26,551 33,691
5 31,907 132,250 132,250 132,250 21,578 29,163 38,701 20,078 27,663 37,201
- ---------------------------------------------------------------------------------------------------------
6 33,502 132,250 132,250 132,250 20,854 30,039 42,274 19,604 28,789 41,024
7 35,178 132,250 132,250 132,250 20,115 30,928 46,195 19,115 29,928 45,195
8 36,936 132,250 132,250 132,250 19,359 31,833 50,502 18,609 31,083 49,752
9 38,783 132,250 132,250 132,250 18,574 32,741 55,226 18,074 32,241 54,726
10 40,722 132,250 132,250 134,123 17,759 33,654 60,416 17,509 33,404 60,166
- ---------------------------------------------------------------------------------------------------------
15 51,973 132,250 132,250 184,457 13,477 39,097 96,574 13,477 39,097 96,574
20 66,332 132,250 132,250 242,105 7,656 44,627 154,207 7,656 44,627 154,207
25 84,659 * 0 132,250 330,714 * 0 49,570 246,801 * 0 49,570 246,801
30 108,049 * 0 132,250 482,422 * 0 52,824 395,428 * 0 52,824 395,428
</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 fu-
ture 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 gross investment 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
*Please refer to the Guaranteed Minimum Death Benefit provision.
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: administration = .30% first 10 years,
then .10%; asset management = .51% (current average) all years; guaranteed
death benefit = .10% first 10 years only; mortality and expense risk = .85%
first 10 years, then .75%; and miscellaneous expense = .03% 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 guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums --------------------------- --------------------------- ---------------------------
accumulated assuming hypothetical gross assuming hypothetical gross assuming hypothetical gross
End of at 5% annual investment return of annual investment return of annual investment return of
policy interest --------------------------- --------------------------- ---------------------------
year per year 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $132,250 $132,250 $132,250 $24,327 $25,794 $ 27,261 $22,077 $23,544 $ 25,011
2 27,563 132,250 132,250 132,250 23,650 26,607 29,738 21,525 24,482 27,613
3 28,941 132,250 132,250 132,250 22,964 27,436 32,450 20,964 25,436 30,450
4 30,388 132,250 132,250 132,250 22,268 28,282 35,421 20,518 26,532 33,671
5 31,907 132,250 132,250 132,250 21,558 29,141 38,677 20,058 27,641 37,177
- -------------------------------------------------------------------------------------------------------
6 33,502 132,250 132,250 132,250 20,831 30,013 42,244 19,581 28,763 40,994
7 35,178 132,250 132,250 132,250 20,086 30,895 46,157 19,086 29,895 45,157
8 36,936 132,250 132,250 132,250 19,318 31,786 50,450 18,568 31,036 49,700
9 38,783 132,250 132,250 132,250 18,527 32,687 55,164 18,027 32,187 54,664
10 40,722 132,250 132,250 133,963 17,708 33,593 60,344 17,458 33,343 60,094
- -------------------------------------------------------------------------------------------------------
15 51,973 132,250 132,250 184,181 13,393 38,987 96,430 13,393 38,987 96,430
20 66,332 132,250 132,250 241,706 7,550 44,461 153,953 7,550 44,461 153,953
25 84,659 * 0 132,250 330,125 * 0 49,317 246,362 * 0 49,317 246,362
30 108,049 * 0 132,250 481,519 * 0 52,441 394,688 * 0 52,441 394,688
</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 fu-
ture 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 gross investment 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
*Please refer to the Guaranteed Minimum Death Benefit provision.
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: administration = .30% first 10 years,
then .10%; asset management = .51% (current average) all years; guaranteed
death benefit = .10% first 10 years only; mortality and expense risk = .85%
first 10 years, then .75%; and miscellaneous expense = .03% 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 55 $62,500 specified amount $25,000 initial premium using
current preferred charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums --------------------------- --------------------------- -----------------------------
accumulated assuming hypothetical gross assuming hypothetical gross assuming hypothetical gross
End of at 5% annual investment return of annual investment return of annual investment return of
policy interest --------------------------- --------------------------- -----------------------------
year per year 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6%gross 12% gross
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $62,500 $62,500 $ 62,500 $24,181 $25,649 $ 27,116 $ 21,931 $ 23,399 $ 24,866
2 27,563 62,500 62,500 62,500 23,337 26,300 29,438 21,212 24,175 27,313
3 28,941 62,500 62,500 62,500 22,465 26,954 31,991 20,465 24,954 29,991
4 30,388 62,500 62,500 62,500 21,561 27,609 34,804 19,811 25,859 33,054
5 31,907 62,500 62,500 62,500 20,617 28,261 37,909 19,117 26,761 36,409
- ---------------------------------------------------------------------------------------------------------
6 33,502 62,500 62,500 62,500 19,631 28,912 41,345 18,381 27,662 40,095
7 35,178 62,500 62,500 62,500 18,591 29,556 45,155 17,591 28,556 44,155
8 36,936 62,500 62,500 62,500 17,490 30,188 49,391 16,740 29,438 48,641
9 38,783 62,500 62,500 67,063 16,312 30,803 54,083 15,812 30,303 53,583
10 40,722 62,500 62,500 72,258 15,055 31,402 59,228 14,805 31,152 58,978
- ---------------------------------------------------------------------------------------------------------
15 51,973 62,500 62,500 110,273 7,300 34,778 95,063 7,300 34,778 95,063
20 66,332 * 0 62,500 163,656 * 0 37,378 152,950 * 0 37,378 152,950
25 84,659 * 0 62,500 259,852 * 0 37,420 247,478 * 0 37,420 247,478
30 108,049 * 0 62,500 416,859 * 0 30,849 397,009 * 0 30,849 397,009
</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 gross in-
vestment return averaged 0.00%, 6.00%
and 12.00% over a period of years,
but also fluctuated above or below
those averages for individual con-
tract years. No representations can
be made
*Please refer to the Guaranteed Minimum Death Benefit provision.
by Lincoln Life or any of the funds
that these hypothetical rates of re-
turn can be achieved for any one year
or sustained over any period of time.
All values are net of the following
charges: administration = .30% first
10 years, then .10%; asset management
= .51% (current average) all years;
guaranteed death benefit = .10% first
10 years only; mortality and expense
risk = .85% first 10 years, then
.75%; and miscellaneous expense =
.03% 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 55
$62,500 specified amount
$25,000 initial premium using current standard charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
--------------------------- --------------------------- ---------------------------
Premiums assuming hypothetical assuming hypothetical assuming hypothetical
accumulated gross gross gross
End of at 5% annual investment return of annual investment return of annual investment return of
policy interest --------------------------- --------------------------- ---------------------------
year per year 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $62,500 $62,500 $ 62,500 $24,150 $25,617 $ 27,084 $21,900 $23,367 $ 24,834
2 27,563 62,500 62,500 62,500 23,269 26,230 29,367 21,144 24,105 27,242
3 28,941 62,500 62,500 62,500 22,351 26,837 31,872 20,351 24,837 29,872
4 30,388 62,500 62,500 62,500 21,389 27,433 34,627 19,639 25,683 32,877
5 31,907 62,500 62,500 62,500 20,381 28,020 37,667 18,881 26,520 36,167
- -------------------------------------------------------------------------------------------------------
6 33,502 62,500 62,500 62,500 19,314 28,590 41,028 18,064 27,340 39,778
7 35,178 62,500 62,500 62,500 18,187 29,144 44,758 17,187 28,144 43,758
8 36,936 62,500 62,500 62,500 16,978 29,671 48,907 16,228 28,921 48,157
9 38,783 62,500 62,500 66,356 15,674 30,162 53,513 15,174 29,662 53,013
10 40,722 62,500 62,500 71,446 14,261 30,613 58,562 14,011 30,363 58,312
- -------------------------------------------------------------------------------------------------------
15 51,973 62,500 62,500 108,596 5,195 32,812 93,617 5,195 32,812 93,617
20 66,332 * 0 62,500 160,436 * 0 32,742 149,940 * 0 32,742 149,940
25 84,659 * 0 62,500 254,031 * 0 26,759 241,934 * 0 26,759 241,934
30 108,049 * 0 62,500 406,440 * 0 4,776 387,086 * 0 4,776 387,086
</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 fu-
ture 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 gross investment 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
*Please refer to the Guaranteed Minimum Death Benefit provision.
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: administration = .30% first 10 years,
then .10%; asset management = .51% (current average) all years; guaranteed
death benefit = .10% first 10 years only; mortality and expense risk = .85%
first 10 years, then .75%; and miscellaneous expense = .03% 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 55
$62,500 specified amount
$25,000 initial premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums --------------------------- --------------------------- ---------------------------
accumulated assuming hypothetical gross assuming hypothetical gross assuming hypothetical gross
End of at 5% annual investment return of annual investment return of annual investment return of
policy interest --------------------------- --------------------------- ---------------------------
year per year 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $62,500 $62,500 $ 62,500 $24,148 $25,615 $ 27,082 $21,898 $23,365 $ 24,832
2 27,563 62,500 62,500 62,500 23,263 26,224 29,361 21,138 24,099 27,236
3 28,941 62,500 62,500 62,500 22,342 26,828 31,863 20,342 24,828 29,863
4 30,388 62,500 62,500 62,500 21,379 27,423 34,616 19,629 25,673 32,866
5 31,907 62,500 62,500 62,500 20,368 28,007 37,653 18,868 26,507 36,153
- -------------------------------------------------------------------------------------------------------
6 33,502 62,500 62,500 62,500 19,301 28,575 41,012 18,051 27,325 39,762
7 35,178 62,500 62,500 62,500 18,168 29,124 44,737 17,168 28,124 43,737
8 36,936 62,500 62,500 62,500 16,955 29,646 48,882 16,205 28,896 48,132
9 38,783 62,500 62,500 66,321 15,648 30,134 53,485 15,148 29,634 52,985
10 40,722 62,500 62,500 71,407 14,233 30,582 58,531 13,983 30,332 58,281
- -------------------------------------------------------------------------------------------------------
15 51,973 62,500 62,500 108,522 5,121 32,736 93,554 5,121 32,736 93,554
20 66,332 * 0 62,500 160,306 * 0 32,572 149,819 * 0 32,572 149,819
25 84,659 * 0 62,500 253,728 * 0 26,100 241,646 * 0 26,100 241,646
30 108,049 * 0 62,500 405,112 * 0 300 385,821 * 0 300 385,821
</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 fu-
ture 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 gross investment 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
*Please refer to the Guaranteed Minimum Death Benefit provision.
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: administration = .30% first 10 years,
then .10%; asset management = .51% (current average) all years; guaranteed
death benefit = .10% first 10 years only; mortality and expense risk = .85%
first 10 years, then .75%; and miscellaneous expense = .03% all years. Values
illustrated are also net of cost of insurance charges.
30
<PAGE>
APPENDIX C
Definitions for Separate Account F
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 Lin-
coln 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 pol-
icy 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 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 as-
set 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 subse-
quently 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 Lin-
coln Life and described in this prospectus.
Policy date -- The date set forth in the policy that is used to determine pol-
icy 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 Gen-
eral 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 differ-
ent 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 outstand-
ing 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.
Separate Account -- The Lincoln National Flexible Premium Variable Life Ac-
count F, a Separate Account established by Lincoln Life to receive and invest
net premiums paid under the policy.
Series -- Any of the series in which the Separate Account may invest; current-
ly, 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 outstanding loan and any due and unpaid charges, and increased by any un-
earned loan interest.
31
<PAGE>
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.
Unit -- An accounting unit of measure used to calculate the value of an invest-
ment in a specified subaccount.
Unit value -- The dollar value of a unit in a specified subaccount on a speci-
fied valuation date.
32
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Percent Cash
of Net Bond Management
Assets Combined Account Account
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in American Variable
Insurance Series at net asset value:
. Bond Fund
5,781 shares at $10.17 per share
(cost-$58,799) 0.1% $ 58,797 $58,797
- ---------------------------------------
. Cash Management Fund
368,888 shares at $11.03 per share
(cost-$4,090,676) 8.2 4,068,836 $4,068,836
- ---------------------------------------
. High-Yield Bond Fund
274,051 shares at $14.39 per share
(cost-$3,789,394) 7.9 3,943,588
- ---------------------------------------
. Growth-Income Fund
546,277 shares at $32.66 per share
(cost-$13,947,890) 35.8 17,841,394
- ---------------------------------------
. Growth Fund
347,558 shares at $39.63 per share
(cost-$11,200,674) 27.7 13,773,718
- ---------------------------------------
. U.S. Government/AAA-Rated Securities
Fund
297,747 shares at $10.96 per share
(cost-$3,285,807) 6.5 3,263,303
- ---------------------------------------
. International Fund
325,449 shares at $15.09 per share
(cost-$4,400,654) 9.9 4,911,032
- ---------------------------------------
. Asset Allocation Fund
141,697 shares at $13.93 per share
(cost-$1,793,852) 4.0 1,973,833
- --------------------------------------- ----- ----------- ------- ----------
TOTAL ASSETS
(Cost-$42,567,746) 100.1 49,834,501 58,797 4,068,836
- ---------------------------------------
LIABILITY--
Payable to Lincoln National Life
Insurance Company 0.1 52,738 62 4,288
- --------------------------------------- ----- ----------- ------- ----------
NET ASSETS 100.0% $49,781,763 $58,735 $4,064,548
- --------------------------------------- ===== =========== ======= ==========
UNITS OUTSTANDING 54,685 2,807,126
- --------------------------------------- ======= ==========
NET ASSET VALUE PER UNIT $1.074 $1.448
- --------------------------------------- ======= ==========
</TABLE>
See accompanying notes.
34
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
High-Yield Growth- AAA-Rated Asset
Bond Income Growth Securities International Allocation
Account Account Account Account Account Account
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3,943,588
$17,841,394
$13,773,718
$3,263,303
$4,911,032
$1,973,833
- ---------- ----------- ----------- ---------- ---------- ----------
3,943,588 17,841,394 13,773,718 3,263,303 4,911,032 1,973,833
4,093 18,904 14,845 3,467 5,004 2,075
- ---------- ----------- ----------- ---------- ---------- ----------
$3,939,495 $17,822,490 $13,758,873 $3,259,836 $4,906,028 $1,971,758
========== =========== =========== ========== ========== ==========
1,567,880 5,873,814 4,100,658 1,778,313 2,862,275 1,105,171
========== =========== =========== ========== ========== ==========
$2.513 $3.034 $3.355 $1.833 $1.714 $1.784
========== =========== =========== ========== ========== ==========
</TABLE>
35
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cash
Bond Management
Combined Account Account
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Net investment income:
.Dividends from investment income $ 1,006,571 -- $ 97,445
- ------------------------------------------
.Dividends from net realized gain on
investments 702,743 -- --
- ------------------------------------------
.Mortality and expense risk charge (375,887) -- (39,302)
- ------------------------------------------ ----------- ------ --------
NET INVESTMENT INCOME 1,333,427 -- 58,143
- ------------------------------------------
Net realized and unrealized gain(loss) on
investments:
.Net realized gain (loss) on investments 376,161 -- 10,080
.Net change in unrealized appreciation or
depreciation on investments (2,045,584) -- 11,716
- ------------------------------------------ ----------- ------ --------
NET GAIN (LOSS) ON INVESTMENTS (1,669,423) -- 21,796
- ------------------------------------------ ----------- ------ --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (335,996) -- $ 79,939
- ------------------------------------------ =========== ====== ========
YEAR ENDED DECEMBER 31, 1995
Net investment income:
.Dividends from investment income $ 1,252,832 -- $125,603
- ------------------------------------------
.Dividends from net realized gain on
investments 1,586,142 -- --
- ------------------------------------------
.Mortality and expense risk charge (442,101) -- (27,945)
- ------------------------------------------ ----------- ------ --------
NET INVESTMENT INCOME 2,396,873 -- 97,658
- ------------------------------------------
Net realized and unrealized gain(loss) on
investments:
.Net realized gain on investments 527,229 -- 8,545
- ------------------------------------------
.Net change in unrealized appreciation or
depreciation on investments 4,708,861 -- (13,686)
- ------------------------------------------ ----------- ------ --------
NET GAIN (LOSS) ON INVESTMENTS 5,236,090 -- (5,141)
- ------------------------------------------ ----------- ------ --------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 7,632,963 -- $ 92,517
- ------------------------------------------ =========== ====== ========
YEAR ENDED DECEMBER 31, 1996
Net investment income:
.Dividends from investment income $ 1,278,281 $1,617 $158,350
- ------------------------------------------
.Dividends from net realized gain on
investments 2,577,711 -- --
- ------------------------------------------
.Mortality and expense risk charge (540,498) (257) (39,817)
- ------------------------------------------ ----------- ------ --------
NET INVESTMENT INCOME 3,315,494 1,360 118,533
- ------------------------------------------
Net realized and unrealized gain(loss) on
investments:
.Net realized gain on investments 1,163,196 1,419 10,778
- ------------------------------------------
.Net change in unrealized appreciation or
depreciation on investments 833,877 (2) (11,163)
- ------------------------------------------ ----------- ------ --------
NET GAIN (LOSS) ON INVESTMENTS 1,997,073 1,417 (385)
- ------------------------------------------ ----------- ------ --------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 5,312,567 $2,777 $118,148
- ------------------------------------------ =========== ====== ========
</TABLE>
See accompanying notes.
36
<PAGE>
<TABLE>
<CAPTION>
U.S.
High- Government/
Yield Growth- AAA-Rated Asset
Bond Income Growth Securities International Allocation
Account Account Account Account Account Account
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 261,748 $ 267,416 $ 57,736 $ 246,289 $ 38,224 $ 37,713
-- 422,560 192,403 -- 74,022 13,758
(35,186) (125,569) (94,923) (46,248) (24,563) (10,096)
- --------- ---------- ---------- --------- -------- --------
226,562 564,407 155,216 200,041 87,683 $ 41,375
18,558 84,577 216,161 10,152 38,096 (1,463)
(452,413) (556,183) (433,456) (423,549) (143,433) (48,266)
- --------- ---------- ---------- --------- -------- --------
(433,855) (471,606) (217,295) (413,397) (105,337) (49,729)
- --------- ---------- ---------- --------- -------- --------
($207,293) $ 92,801 ($62,079) ($213,356) ($17,654) ($8,354)
========= ========== ========== ========= ======== ========
$ 332,900 $ 318,849 $ 84,892 $ 277,020 $ 66,376 $ 47,192
-- 559,151 919,940 -- 59,299 47,752
(42,751) (153,973) (122,795) (47,668) (32,274) (14,695)
- --------- ---------- ---------- --------- -------- --------
290,149 724,027 882,037 229,352 93,401 80,249
2,863 148,499 338,085 12,456 14,231 2,550
330,754 2,434,036 1,331,301 255,811 168,842 201,803
- --------- ---------- ---------- --------- -------- --------
333,617 2,582,535 1,669,386 268,267 183,073 204,353
- --------- ---------- ---------- --------- -------- --------
$ 623,766 $3,306,562 $2,551,423 $ 497,619 $276,474 $284,602
========= ========== ========== ========= ======== ========
$ 305,128 $ 344,882 $ 75,047 $ 254,325 $ 75,494 $ 63,438
-- 1,285,259 973,370 -- 192,271 126,811
(42,312) (194,093) (152,717) (42,257) (48,336) (20,709)
- --------- ---------- ---------- --------- -------- --------
262,816 1,436,048 895,700 212,068 219,429 169,540
79,255 389,876 586,803 9,685 44,775 40,605
60,180 673,953 (64,090) (161,672) 320,050 16,621
- --------- ---------- ---------- --------- -------- --------
139,435 1,063,829 522,713 (151,987) 364,825 57,226
- --------- ---------- ---------- --------- -------- --------
$ 402,251 $2,499,877 $1,418,413 $ 60,081 $584,254 $226,766
========= ========== ========== ========= ======== ========
</TABLE>
37
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Cash
Bond Management
Combined Account Account
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSETS AT JANUARY 1, 1993 $29,283,875 -- $3,111,000
Changes from operations:
. Net investment income 1,333,427 -- 58,143
------------------------------------------
. Net realized gain (loss) on investments 376,161 -- 10,080
------------------------------------------
. Net change in unrealized appreciation or
depreciation on investments (2,045,584) -- 11,716
- ------------------------------------------- ----------- ------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (335,996) -- 79,939
- -------------------------------------------
Net increase (decrease) from unit
transactions 1,771,577 -- (585,955)
- ------------------------------------------- ----------- ------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,435,581 -- (506,016)
- ------------------------------------------- ----------- ------- ----------
NET ASSETS AT DECEMBER 31, 1994 30,719,456 -- 2,604,984
- -------------------------------------------
Changes from operations:
. Net investment income 2,396,873 -- 97,658
------------------------------------------
. Net realized gain on investments 527,229 -- 8,545
------------------------------------------
. Net change in unrealized appreciation or
depreciation on investments 4,708,861 -- (13,686)
- ------------------------------------------- ----------- ------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 7,632,963 -- 92,517
- -------------------------------------------
Net increase (decrease) from unit
transactions 1,193,904 -- (199,493)
- ------------------------------------------- ----------- ------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 8,826,867 -- (106,976)
- ------------------------------------------- ----------- ------- ----------
NET ASSETS AT DECEMBER 31, 1995 39,546,323 -- 2,498,008
- ------------------------------------------- ----------- ------- ----------
Changes from operations:
. Net investment income 3,315,494 $ 1,360 118,533
------------------------------------------
. Net realized gain on investments 1,163,196 1,419 10,778
------------------------------------------
. Net change in unrealized appreciation or
depreciation on investments 833,877 (2) (11,163)
- ------------------------------------------- ----------- ------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 5,312,567 2,777 118,148
- -------------------------------------------
Net increase (decrease) from unit
transactions 4,922,873 55,958 1,448,392
- ------------------------------------------- ----------- ------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 10,235,440 58,735 1,566,540
- ------------------------------------------- ----------- ------- ----------
NET ASSETS AT DECEMBER 31, 1996 $49,781,763 $58,735 $4,064,548
- ------------------------------------------- =========== ======= ==========
</TABLE>
See accompanying notes.
38
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
High-Yield Growth- AAA-Rated Asset
Bond Income Growth Securities International Allocation
Account Account Account Account Account Account
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3,182,233 $ 9,441,516 $ 7,479,779 $3,983,581 $1,453,393 $ 632,373
226,562 564,407 155,216 200,041 87,683 41,375
18,558 84,577 216,161 10,152 38,096 (1,463)
(452,413) (556,183) (433,456) (423,549) (143,433) (48,266)
---------- ----------- ----------- ---------- ---------- ----------
(207,293) 92,801 (62,079) (213,356) (17,654) (8,354)
331 944,450 285,007 (112,207) 942,370 297,581
---------- ----------- ----------- ---------- ---------- ----------
(206,962) 1,037,251 222,928 (325,563) 924,716 289,227
---------- ----------- ----------- ---------- ---------- ----------
2,975,271 10,478,767 7,702,707 3,658,018 2,378,109 921,600
290,149 724,027 882,037 229,352 93,401 80,249
2,863 148,499 338,085 12,456 14,321 2,550
330,754 2,434,036 1,331,301 255,811 168,842 201,803
---------- ----------- ----------- ---------- ---------- ----------
623,766 3,306,562 2,551,423 497,619 276,474 284,602
132,619 320,027 947,072 (392,338) 204,677 181,340
---------- ----------- ----------- ---------- ---------- ----------
756,385 3,626,589 3,498,495 105,281 481,151 465,942
---------- ----------- ----------- ---------- ---------- ----------
3,731,656 14,105,356 11,201,202 3,763,299 2,859,260 1,387,542
---------- ----------- ----------- ---------- ---------- ----------
262,816 1,436,048 895,700 212,068 219,429 169,540
79,255 389,876 586,803 9,685 44,775 40,605
60,180 673,953 (64,090) (161,672) 320,050 16,621
---------- ----------- ----------- ---------- ---------- ----------
402,251 2,499,877 1,418,413 60,081 584,254 226,766
(194,412) 1,217,257 1,139,258 (563,544) 1,462,514 357,450
---------- ----------- ----------- ---------- ---------- ----------
207,839 3,717,134 2,557,671 (503,463) 2,046,768 584,216
---------- ----------- ----------- ---------- ---------- ----------
$3,939,495 $17,822,490 $13,758,873 $3,259,836 $4,906,028 $1,971,758
========== =========== =========== ========== ========== ==========
</TABLE>
39
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The Separate Account: Lincoln Life Flexible Premium Variable Life Account F
(Separate Account) was established as a segregated investment account of Lin-
coln National Life Insurance Company (the Company) on May 29, 1987. The Sepa-
rate Account was registered on November 20, 1987 under the Investment Company
Act 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 eight funds: Bond Fund, 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, 1996. 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 de-
termined 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 the Company, which is taxed as a "life insurance com-
pany" 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
the Company 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. These charges are made in
return for the Company's assumption of risks associated with mortality experi-
ence and administrative expenses in connection with policies issued.
For the first ten policy years, amounts are charged daily to the Separate Ac-
count by the Company 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 the Company for an admin-
istrative charge at an annual rate of .30% of the average daily net asset value
of the Separate Account for the first ten policy years and .10% for policy
years thereafter.
Other Charges: Other charges, which are paid to the Company by redeeming Sepa-
rate Account units, are for the cost of insurance and contingent surrender
charges. These other charges for 1996, 1995 and 1994 amounted to $521,383,
$436,723 and $586,553, respectively.
The Company assumes the responsibility for providing the insurance benefits in-
cluded 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 insur-
ance 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 de-
scribed in the Separate Account's prospectus.
Surrender charges are deducted if the policy is surrendered during the first
ten policy years. The maximum rate for surrender charges, which decreases by
policy year, ranges from 9% of the total first year premiums paid for surren-
ders 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, 1996 consisted of the following:
<TABLE>
<CAPTION>
Cash High-Yield
Bond Management Bond
Combined Account Account Account
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions $28,641,193 $55,958 $3,429,218 $1,915,360
- ---------------------------------
Accumulated net investment income 10,670,225 1,360 613,801 1,641,201
- ---------------------------------
Accumulated net realized gain on
investments 3,203,590 1,419 43,369 228,740
- ---------------------------------
Net unrealized appreciation
(depreciation) on investments 7,266,755 (2) (21,840) 154,194
- --------------------------------- ----------- ------- ---------- ----------
$49,781,763 $58,735 $4,064,548 $3,939,495
=========== ======= ========== ==========
</TABLE>
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
Units Amount Units Amount
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bond Account:
Purchases 201,450 $ 208,586 -- --
- -------------------------
Redemptions (146,765) (152,628) -- --
- ------------------------- ---------- ------------ ---------- -----------
54,685 55,958
Cash Management Account:
Purchases 10,549,495 15,041,172 3,219,898 $ 4,417,577
- -------------------------
Redemptions (9,532,862) (13,592,780) (3,375,836) (4,617,070)
- ------------------------- ---------- ------------ ---------- -----------
1,016,633 1,448,392 (155,938) (199,493)
High-Yield Bond Account:
Purchases 718,336 1,716,073 194,024 397,517
- -------------------------
Redemptions (811,050) (1,910,485) (125,874) (264,898)
- ------------------------- ---------- ------------ ---------- -----------
(92,714) (194,412) 68,150 132,619
Growth-Income Account:
Purchases 1,044,112 2,936,929 523,394 1,210,343
- -------------------------
Redemptions (621,723) (1,719,672) (392,334) (890,316)
- ------------------------- ---------- ------------ ---------- -----------
422,389 1,217,257 131,060 320,027
Growth Account:
Purchases 1,276,020 3,987,975 839,058 2,292,591
- -------------------------
Redemptions (913,240) (2,848,717) (485,162) (1,345,519)
- ------------------------- ---------- ------------ ---------- -----------
362,780 1,139,258 353,896 947,072
U.S. Government/AAA-Rated
Securities Account:
Purchases 256,101 450,344 183,394 306,584
- -------------------------
Redemptions (568,288) (1,013,888) (408,679) (698,922)
- ------------------------- ---------- ------------ ---------- -----------
(312,187) (563,544) (225,285) (392,338)
International Account:
Purchases 1,277,676 2,014,548 413,293 577,192
- -------------------------
Redemptions (351,916) (552,034) (269,256) (372,515)
- ------------------------- ---------- ------------ ---------- -----------
925,760 1,462,514 144,037 204,677
Asset Allocation Account:
Purchases 387,503 647,701 151,510 206,365
- -------------------------
Redemptions (171,729) (290,251) (18,134) (25,025)
- ------------------------- ---------- ------------ ---------- -----------
215,774 357,450 133,376 181,340
------------ -----------
NET INCREASE FROM UNIT
TRANSACTIONS $ 4,922,873 $ 1,193,904
============ ===========
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
Growth- AAA-Rated Asset
Income Growth Securities International Allocation
Account Account Account Account Account
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 9,142,161 $ 7,069,409 $1,748,856 $3,867,136 $1,413,095
3,861,802 2,366,979 1,428,711 427,977 328,394
925,023 1,749,441 104,773 100,537 50,288
3,893,504 2,573,044 (22,504) 510,378 179,981
- ----------- ----------- ---------- ---------- ----------
$17,822,490 $13,758,873 $3,259,836 $4,906,028 $1,971,758
=========== =========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1994
Units Amount
- -------------------------
<S> <C>
-- --
-- --
- ----------- -----------
5,059,917 $ 6,653,789
(5,498,122) (7,239,744)
- ----------- -----------
(438,205) (585,955)
792,043 1,510,705
(771,560) (1,510,374)
- ----------- -----------
20,483 331
878,348 1,711,032
(390,554) (766,582)
- ----------- -----------
487,794 944,450
652,916 1,479,923
(530,180) (1,194,916)
- ----------- -----------
122,736 285,007
279,693 443,237
(346,287) (555,444)
- ----------- -----------
(66,594) (112,207)
1,097,521 1,488,975
(407,741) (546,605)
- ----------- -----------
689,780 942,370
333,391 404,917
(88,227) (107,336)
- ----------- -----------
245,164 297,581
-----------
$ 1,771,577
===========
</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 in-
vestments sold were as follows for 1996.
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
- ---------------------------------------------------------------------
<S> <C> <C>
Bond Account $ 209,615 $ 152,235
- -----------------------------------------------------------
Cash Management Account 7,620,714 6,052,141
- -----------------------------------------------------------
High-Yield Bond Account 1,950,964 1,882,398
- -----------------------------------------------------------
Growth-Income Account 4,168,121 1,510,795
- -----------------------------------------------------------
Growth Account 4,546,274 2,508,384
- -----------------------------------------------------------
U.S. Government/AAA-Rated Securities Account 665,513 1,017,521
- -----------------------------------------------------------
International Account 2,150,775 466,829
- -----------------------------------------------------------
Asset Allocation Account 804,066 276,464
----------- -----------
- -----------------------------------------------------------
$22,116,042 $13,866,767
=========== ===========
</TABLE>
6. NEW INVESTMENT FUND
Effective January 1, 1996, the AVIS Bond Fund became available as an investment
option for Separate Account contract owners.
7. DAILY VALUATION CALCULATIONS
Effective October 1996, the daily unit value calculation process was trans-
ferred from the Company to the Delaware Group, an affiliate of the Company.
Costs associated with the calculation of the unit value are paid by the
Company.
44
<PAGE>
REPORT OF ERNST & YOUNG LLP,INDEPENDENT AUDITORS
Board of Directors of Lincoln National Life Insurance Company and
Policyowners of Lincoln Life Flexible Premium Variable Life Account F
We have audited the accompanying statement of assets and li-
ability of Lincoln Life Flexible Premium Variable Life Ac-
count F (Separate Account) as of December 31, 1996, 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 ac-
cepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the fi-
nancial statements. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence
with the custodian. An audit also includes assessing the ac-
counting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial po-
sition of Lincoln Life Flexible Premium Variable Life Ac-
count F at December 31, 1996, and the results of its opera-
tions and the changes in its net assets for each of the
three years in the period then ended in conformity with gen-
erally accepted accounting principles.
Fort Wayne, Indiana
March 27, 1997
45
<PAGE>
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46
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
AUDITED FINANCIAL STATEMENTS
Prior to 1996, management of The Lincoln National Life Insurance Company
(Company) prepared annual financial statements of the Company using two
different types of accounting principles. Pursuant to insurance regulatory
requirements in several states, management prepared financial statements in
accordance with statutory accounting principles (STAP), which were subject to
audit by the Company's independent auditors. Additionally, solely for purposes
of inclusion in the registration statements of separate account products
requiring registration and periodic reporting to the Securities and Exchange
Commission (SEC), management also prepared financial statements of the Company
in accordance with generally accepted accounting principles (GAAP), which were
also subject to audit. In an attempt to reduce costs associated with the
preparation and audits of both GAAP and STAP-bases financial statements,
commencing with the registrations in 1997, management will prepare and have
audited only STAP-basis financial statements.
The STAP-basis financial statements included in this registration statement
have been prepared in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance, which is an "other
comprehensive basis of accounting" as that term is defined by the American
Institute of Certified Public Accountants (see notes 1 and 2 to the enclosed
audited STAP-basis financial statements for information on such prescribed and
permitted practices).
Because 1996 is the initial year for which STAP-basis financial statements are
used for purposes of these separate account product filings with the SEC,
management has included the following financial statements of the Company to
allow for comparability between years:
. Section 1 contains the STAP-basis balance sheets of the Company as of Decem-
ber 31, 1996 and 1995 and the related STAP-basis statements of income,
changes in capital and surplus, and cash flows for the three years in the pe-
riod ended December 31, 1996.
. Section 2 contains the GAAP-basis balance sheets of the Company as of Decem-
ber 31, 1995 and 1994 and the related consolidated statements of income,
shareholder's equity, and cash flows for each of the three years in the pe-
riod ended December 31, 1995.
G-1
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1995 1994
----------- -----------
(000's omitted)
-----------------------
ASSETS
<S> <C> <C>
INVESTMENTS:
Securities available-for-sale, at fair value:
. Fixed maturity (cost: 1995 -- $18,852,837; 1994 --
$18,193,928) $20,414,785 $17,692,214
- ----------------------------------------------------
. Equity (cost: 1995 -- $480,261; 1994 -- $416,351) 598,435 456,333
- ----------------------------------------------------
Mortgage loans on real estate 3,147,783 2,795,914
- ----------------------------------------------------
Real estate 746,023 679,512
- ----------------------------------------------------
Policy loans 565,325 528,731
- ----------------------------------------------------
Other investments 241,219 158,196
- ---------------------------------------------------- ----------- -----------
Total investments 25,713,570 22,310,900
- ----------------------------------------------------
Cash and invested cash 802,743 990,880
- ----------------------------------------------------
Property and equipment 53,830 54,989
- ----------------------------------------------------
Deferred acquisition costs 953,834 1,736,526
- ----------------------------------------------------
Premiums and fees receivable 117,634 123,494
- ----------------------------------------------------
Accrued investment income 352,301 367,370
- ----------------------------------------------------
Assets held in separate accounts 18,461,629 13,000,540
- ----------------------------------------------------
Federal income taxes -- 134,463
- ----------------------------------------------------
Amounts recoverable from reinsurers 2,940,976 2,069,292
- ----------------------------------------------------
Goodwill 5,149 3,385
- ----------------------------------------------------
Other assets 185,398 233,708
- ---------------------------------------------------- ----------- -----------
Total assets $49,587,064 $41,025,547
- ---------------------------------------------------- =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Policy liabilities and accruals:
. Future policy benefits, claims and claims expenses $ 8,435,019 $ 7,540,772
- ----------------------------------------------------
. Unearned premiums 55,174 61,472
- ---------------------------------------------------- ----------- -----------
Total policy liabilities and accruals 8,490,193 7,602,244
- ----------------------------------------------------
Contractholder funds 18,171,822 17,028,628
- ----------------------------------------------------
Liabilities related to separate accounts 18,461,629 13,000,540
- ----------------------------------------------------
Federal income taxes 166,430 --
- ----------------------------------------------------
Short-term debt 124,783 153,656
- ----------------------------------------------------
Long-term debt 40,827 54,794
- ----------------------------------------------------
Other liabilities 1,412,534 1,264,730
- ---------------------------------------------------- ----------- -----------
Total liabilities 46,868,218 39,104,592
- ----------------------------------------------------
SHAREHOLDER'S EQUITY:
Common stock, $2.50 par value:
. Authorized, issued and outstanding shares -- 10
million
(owned by Lincoln National Corp.) 25,000 25,000
- ----------------------------------------------------
Additional paid-in capital 809,557 791,605
- ----------------------------------------------------
Retained earnings 1,440,994 1,428,969
- ----------------------------------------------------
Net unrealized gain (loss) on securities available-
for-sale 443,295 (324,619)
- ---------------------------------------------------- ----------- -----------
Total shareholder's equity 2,718,846 1,920,955
- ---------------------------------------------------- ----------- -----------
Total liabilities and shareholder's equity $49,587,064 $41,025,547
- ---------------------------------------------------- =========== ===========
</TABLE>
See accompanying notes.
G-2
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
---------------------------------
(000's omitted)
---------------------------------
REVENUE
<S> <C> <C> <C>
Insurance premiums $ 846,873 $1,099,480 $1,972,630
- ------------------------------------------
Insurance fees 450,423 390,384 425,083
- ------------------------------------------
Net investment income 1,899,630 1,673,981 1,823,459
- ------------------------------------------
Realized gain (loss) on investments 136,195 (138,522) 92,150
- ------------------------------------------
Gain (loss) on sale of affiliates -- 68,954 (98,500)
- ------------------------------------------
Other 3,405 20,946 35,781
- ------------------------------------------ ---------- ---------- ----------
Total revenue 3,336,526 3,115,223 4,250,603
- ------------------------------------------
BENEFITS AND EXPENSES
Benefits and settlement expenses 2,122,616 2,194,047 3,033,139
- ------------------------------------------
Underwriting, acquisition, insurance and
other expenses 764,346 660,363 881,703
- ------------------------------------------
Interest expense 67 615 96
- ------------------------------------------ ---------- ---------- ----------
Total benefits and expenses 2,887,029 2,855,025 3,914,938
- ------------------------------------------ ---------- ---------- ----------
Income before federal income taxes
and cumulative effect of accounting change 449,497 260,198 335,665
- ------------------------------------------
Federal income taxes 127,472 40,400 142,544
- ------------------------------------------
Income before cumulative effect of
accounting change 322,025 219,798 193,121
- ------------------------------------------ ---------- ---------- ----------
Cumulative effect of accounting change
(postretirement benefits) -- -- 45,582
- ------------------------------------------ ---------- ---------- ----------
Net income $ 322,025 $ 219,798 $ 147,539
- ------------------------------------------ ========== ========== ==========
EARNINGS PER SHARE
Income before cumulative effect of
accounting change $32.20 $21.98 $19.31
- ------------------------------------------
Cumulative effect of accounting change
(postretirement benefits) -- -- (4.56)
- ------------------------------------------ ---------- ---------- ----------
Net income $32.20 $21.98 $14.75
- ------------------------------------------ ========== ========== ==========
</TABLE>
See accompanying notes.
G-3
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF
SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------
(000's omitted)
----------------------------------
<S> <C> <C> <C>
Common stock -- balance at beginning and
end of year $ 25,000 $ 25,000 $ 25,000
- -----------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 791,605 791,444 791,223
- -----------------------------------------
Contribution from Lincoln National Corp. 17,952 161 221
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 809,557 791,605 791,444
- -----------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 1,428,969 1,334,171 1,198,632
- -----------------------------------------
Net income 322,025 219,798 147,539
- -----------------------------------------
Dividends declared (310,000) (125,000) (12,000)
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 1,440,994 1,428,969 1,334,171
- -----------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE:
Balance at beginning of year (324,619) 621,161 47,303
- -----------------------------------------
Cumulative effect of accounting change -- -- 564,153
- -----------------------------------------
Other change during year 767,914 (945,780) 9,705
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 443,295 (324,619) 621,161
- -----------------------------------------
---------- ---------- ----------
Total shareholder's equity at end of year $2,718,846 $1,920,955 $2,771,776
- -----------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
G-4
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------- ----------- ----------
(000's omitted)
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 322,025 $ 219,798 $ 147,539
- ----------------------------------------
Adjustments to reconcile net income to
net cash
provided by operating activities:
. Deferred acquisition costs 124,526 (171,063) (92,183)
- ----------------------------------------
. Premiums and fees receivable 6,082 10,755 80,582
- ----------------------------------------
. Accrued investment income 15,069 (54,434) (18,827)
- ----------------------------------------
. Policy liabilities and accruals 621,603 114,038 345,142
- ----------------------------------------
. Contractholder funds 1,335,625 1,769,240 1,248,058
- ----------------------------------------
. Amounts recoverable from reinsurers (883,425) (884,388) (700,622)
- ----------------------------------------
. Federal income taxes 95,745 8,364 (130,308)
- ----------------------------------------
. Provisions for depreciation 39,089 38,870 41,516
- ----------------------------------------
. Amortization of discount and premium (86,653) 7,928 (100,274)
- ----------------------------------------
. Realized loss (gain) on investments (244,995) 219,682 (115,881)
- ----------------------------------------
. Loss (gain) on sale of affiliates -- (68,954) 98,500
- ----------------------------------------
. Cumulative effect of accounting change -- -- 45,582
- ----------------------------------------
. Other 458,542 (4,599) 51,369
- ---------------------------------------- ----------- ----------- ----------
Net adjustments 1,481,208 985,439 752,654
- ---------------------------------------- ----------- ----------- ----------
Net cash provided by operating
activities 1,803,233 1,205,237 900,193
- ----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
. Purchases (13,549,807) (12,100,213) (7,171,684)
- ----------------------------------------
. Sales 12,163,673 9,326,809 7,139,781
- ----------------------------------------
. Maturities 929,018 958,065 42,707
- ----------------------------------------
Fixed maturity securities held for
investment:
. Purchases -- -- (5,903,805)
- ----------------------------------------
. Sales -- -- 2,805,980
- ----------------------------------------
. Maturities -- -- 1,639,739
- ----------------------------------------
Purchases of other investments (1,711,427) (1,421,321) (1,936,013)
- ----------------------------------------
Sale or maturity of other investments 1,198,536 1,457,157 1,142,872
- ----------------------------------------
Sale of affiliates -- 520,340 --
- ----------------------------------------
Decrease in cash collateral on loaned
securities (39,681) (163,872) (40,454)
- ----------------------------------------
Other (213,708) (37,606) 83,751
- ---------------------------------------- ----------- ----------- ----------
Net cash used in investing activities (1,223,396) (1,460,641) (2,197,126)
- ----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (13,967) (200) (1,138)
- ----------------------------------------
Issuance of long-term debt -- -- 10,314
- ----------------------------------------
Net increase (decrease) in short-term
debt (28,873) 3,629 13,047
- ----------------------------------------
Universal life and investment contract
deposits 1,716,239 2,381,829 2,418,037
- ----------------------------------------
Universal life and investment contract
withdrawals (2,149,325) (1,604,450) (1,503,105)
- ----------------------------------------
Capital contribution from Lincoln
National Corp. 17,952 161 221
- ----------------------------------------
Dividends paid to shareholder (310,000) (125,000) (12,000)
- ---------------------------------------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities (767,974) 655,969 925,376
- ---------------------------------------- ----------- ----------- ----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Net increase (decrease) in cash (188,137) 400,565 (371,557)
- -------------------------------
Cash at beginning of year 990,880 590,315 961,872
- ------------------------------- -------- -------- --------
Cash at end of year $802,743 $990,880 $590,315
- ------------------------------- ======== ======== ========
</TABLE>
See accompanying notes.
G-5
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1995
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include Lincoln National
Life Insurance Co. ("Lincoln Life") and its majority owned subsidiaries.
Lincoln Life and its subsidiaries operate multiple insurance businesses.
Operations are divided into two business segments (see Note 9). These con-
solidated financial statements have been prepared in conformity with gener-
ally accepted accounting principles.
Use of estimates
The nature of the insurance business requires management to make estimates
and assumptions that affect the amounts reported in the consolidated finan-
cial statements and accompanying notes. Actual results could differ from
those estimates.
Investments
Lincoln Life classifies its fixed maturity securities and equity securities
(common and non-redeemable preferred stocks) as available-for-sale and, ac-
cordingly, such securities are carried at fair value. The cost of fixed ma-
turity securities is adjusted for amortization of premiums and discounts.
The cost of fixed maturity and equity securities is adjusted for declines
in value that are other than temporary.
For the mortgage-backed securities portion of the fixed maturity securities
portfolio, Lincoln Life recognizes income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the se-
curities. When estimates of prepayments change, the effective yield is re-
calculated to reflect actual payments to date and anticipated future pay-
ments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied since the ac-
quisition of the securities. This adjustment is reflected in net investment
income.
Mortgage loans on real estate are carried at outstanding principal balances
less unaccrued discounts and net of reserves for declines that are other
than temporary. Investment real estate is carried at cost less allowances
for depreciation. Such
real estate is carried net of reserves for declines in value that are other
than temporary. Real estate acquired through foreclosure proceedings is re-
corded at fair value on the settlement date which establishes a new cost
basis. If a subsequent periodic review of a foreclosed property indicates
the fair value, less estimated costs to sell, is lower than the carrying
value at the settlement date, the carrying value is adjusted to the lower
amount. Policy loans are carried at the aggregate unpaid balances. Any
changes to the reserves for mortgage loans on real estate and real estate
are reported as a realized gain (loss) on investments.
Cash and invested cash are carried at cost and include all highly liquid
debt instruments purchased with a maturity of three months or less, includ-
ing participation in a short-term investment pool administered by Lincoln
National Corp. (LNC), the Lincoln Life's parent.
Realized gain (loss) on investments is recognized in net income, net of re-
lated amortization of deferred acquisition costs, using the specific iden-
tification method. Changes in the fair values of securities carried at fair
value are reflected directly in shareholder's equity after deductions for
related adjustments for deferred acquisition costs and amounts required to
satisfy policyholder commitments that would have been recorded if these se-
curities would have been sold at their fair value, and after deferred taxes
or credits to the extent deemed recoverable.
Derivatives
Lincoln Life hedges certain portions of its exposure to interest rate fluc-
tuations, the widening of bond yield spreads over comparable maturity U.S.
Government obligations and foreign exchange risk by entering into deriva-
tive transactions. A description of Lincoln Life's accounting for its hedge
of such risks is discussed in the following two paragraphs.
The premium paid for interest rate caps is deferred and amortized to net
investment income on a straight-line basis over the term of the interest
rate cap. Any settlement received in accordance with the terms of the in-
terest rate caps is recorded as investment income. Spread-lock agreements,
interest rate swaps and financial futures, which hedge fixed maturity secu-
rities available-for-sale, are carried at fair value with the change in
fair value reflected directly in shareholder's equity. Realized gain (loss)
from the settlement of such derivatives is deferred and amortized over the
life of the hedged assets as an adjustment to the yield. Foreign exchange
forward contracts, foreign currency options and foreign currency swaps,
which hedge some of the foreign exchange risk of investments in fixed matu-
rity securities denominated in foreign currencies, are carried at fair
value with the
change in fair value reflected in earnings. Realized
G-6
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
gain (loss) from the settlement of such derivatives is also zreflected in
earnings.
Hedge accounting is applied as indicated above after Lincoln Life deter-
mines that the items to be hedged expose Lincoln Life to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. Government obligations and foreign exchange risk; and the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation of changes in the value of the derivatives and the items
being hedged at both the inception of the hedge and throughout the hedge
period. Should such criteria not be met, the change in value of the deriva-
tives is included in net income.
Property and equipment
Property and equipment owned for Lincoln Life use is carried at cost less
allowances for depreciation.
Premiums and fees
Revenue for universal life and other interest-sensitive life insurance pol-
icies consists of policy charges for cost of insurance, policy initiation
and administration, and surrender charges that have been assessed. Tradi-
tional individual life-health and annuity premiums are recognized as reve-
nue over the premium-paying period of the policies. Group health premiums
are prorated over the contract term of the policies.
Assets held in separate accounts/ liabilities related to separate accounts
These assets and liabilities represent segregated funds administered and
invested by Lincoln Life for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by Lincoln Life for ad-
ministrative and contractholder maintenance services performed for these
separate accounts are included in Lincoln Life's consolidated statements of
income.
Deferred acquisition costs
Commissions and other costs of acquiring universal life insurance, variable
universal life insurance, traditional life insurance, annuities and group
health insurance which vary with and are primarily related to the produc-
tion of new business, have been deferred to the extent recoverable. Acqui-
sition costs for universal and variable universal life insurance policies
are being amortized over the lives of the policies in relation to the inci-
dence of estimated gross profits from surrender charges and investment,
mortality and expense margins, and actual realized gain (loss) on invest-
ments. That amortization is adjusted retrospectively when estimates of cur-
rent or future gross profits to be realized from a group of policies are
revised. The traditional life-health and annuity acquisition costs are am-
ortized over the premium-paying period of the related policies using as-
sumptions consistent with those used in computing policy reserves.
Expenses
Expenses for universal and variable universal life insurance policies in-
clude interest credited to policy account balances and benefit claims in-
curred during the period in excess of policy account balances. Interest
crediting rates associated with funds invested in Lincoln Life's general
account during 1993 through 1995 ranged from 6.1% to 8.25%.
Goodwill
The cost of acquired subsidiaries in excess of the fair value of net assets
(goodwill) is amortized using the straight-line method over periods that
generally correspond with the benefits expected to be derived from the ac-
quisitions. Goodwill is amortized over 40 years. The carrying value of
goodwill is reviewed periodically for indicators of impairment in value.
Policy liabilities and accruals
The liabilities for future policy benefits and expenses for universal and
variable universal life insurance policies consist of policy account bal-
ances that accrue to the benefit of the policyholders, excluding surrender
charges. The liabilities for future policy benefits and expenses for tradi-
tional life policies and immediate and deferred paid-up annuities are com-
puted using a net level premium method and assumptions for investment
yields, mortality and withdrawals based principally on Lincoln Life experi-
ence projected at the time of policy issue, with provision for possible ad-
verse deviations. Interest assumptions for traditional direct individual
life reserves for all policies range from 2.3% to 11.7% graded to 5.7% af-
ter 30 years depending on time of policy issue. Interest rate assumptions
for reinsurance reserves range from 5.0% to 11.0% graded to 8.0% after 20
years. The interest assumptions for immediate and deferred paid-up annui-
ties range from 4.5% to 8.0%.
With respect to its policy liabilities and accruals, Lincoln Life carries
on a continuing review of its 1) overall reserve position, 2) reserving
techniques
G-7
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
and 3) reinsurance arrangements, and as experience develops and new infor-
mation becomes known, liabilities are adjusted as deemed necessary. The ef-
fects of changes in estimates are included in the operating results for the
period in which such estimates occur.
Reinsurance
Lincoln Life enters into reinsurance agreements with other companies in the
normal course of their business. Lincoln Life may assume reinsurance from
unaffiliated companies and/or cede reinsurance to such companies.
Assets/liabilities and premiums/benefits from certain reinsurance contracts
which grant statutory surplus to other insurance companies have been netted
on the balance sheets and income statements, respectively, since there is a
right of offset. All other reinsurance agreements are reported on a gross
basis.
Depreciation
Provisions for depreciation of investment real estate and property and
equipment owned for Lincoln Life use are computed principally on the
straight-line method over the estimated useful lives of the assets.
Postretirement medical and life insurance benefits
Lincoln Life accounts for its postretirement medical and life insurance
benefits using the full accrual method.
Income taxes
Lincoln Life and eligible subsidiaries have elected to file consolidated
Federal and state income tax returns with their parent, LNC. Pursuant to an
intercompany tax sharing agreement with LNC, Lincoln Life and its eligible
subsidiaries provide for income taxes on a separate return filing basis.
The tax sharing agreement also provides that Lincoln Life and eligible sub-
sidiaries will receive benefit for net operating losses, capital losses and
tax credits which are not usable on a separate return basis to the extent
such items may be utilized in the consolidated income tax returns of LNC.
Lincoln Life uses the liability method of accounting for income taxes. De-
ferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
used for income tax return purposes. Lincoln Life establishes a valuation
allowance for any portion of its deferred tax assets which are unlikely to
be realized.
2.CHANGES IN ACCOUNTING PRINCIPLES
AND CHANGES IN ESTIMATES
Postretirement benefits other than pensions
Effective January 1, 1993, Lincoln Life changed its method of accounting
for postretirement medical and life insurance benefits for its eligible em-
ployees and agents from a pay-as-you-go method to a full accrual method in
accordance with Financial Accounting Standards No. 106 entitled "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106").
This full accrual method recognizes the estimated obligation for retired
employees and agents and active employees and agents who are expected to
retire in the future. The effect of the change was to increase net periodic
postretirement benefit cost by $7,800,000 and decrease income before cumu-
lative effect of accounting change by $5,100,000 ($0.51 per share). The im-
plementation of FAS 106 resulted in a one-time charge to the first quarter
1993 net income of $45,600,000 or $4.56 per share ($69,000,000 pre-tax) for
the cumulative effect of the accounting change. See Note 6 for additional
disclosures regarding postretirement benefits other than pensions.
Accounting by creditors for impairment of a loan
Financial Accounting Standards No. 114 entitled "Accounting by Creditors
for Impairment of a Loan" ("FAS 114") issued in May 1993, was adopted by
Lincoln Life effective January 1, 1993. FAS 114 requires that if an im-
paired mortgage loan's fair value as described in Note 3 is less than the
recorded investment in the loan, the difference is recorded in the mortgage
loan allowance for losses account. The adoption of FAS 114 resulted in ad-
ditions to the mortgage loan allowance for losses account and reduced first
quarter 1993 income before cumulative effect of accounting change and net
income by $37,700,000, or $3.77 per share ($57,200,000 pre-tax). See Note 3
for further mortgage loan disclosures. Most of the effect of this change in
accounting was within the Life Insurance and Annuities business segment.
Accounting for certain investments in debt
and equity securities
Financial Accounting Standards No. 115 entitled "Accounting for Certain In-
vestments in Debt and Equity Securities" ("FAS 115") issued in May 1993,
was adopted by Lincoln Life as of December 31, 1993. In accordance with the
rules, the
G-8
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
2. CHANGES IN ACCOUNTING PRINCIPLESAND CHANGES IN ESTIMATES CONTINUED
prior year financial statements have not been restated to reflect the
change in accounting principle. Under FAS 115, securities can be classified
as available-for-sale, trading or held-to-maturity according to the hold-
er's intent. Lincoln Life classified its entire fixed maturity securities
portfolio as "available-for-sale." Securities classified as available-for-
sale are carried at fair value and unrealized gains and losses on such se-
curities are carried as a separate component of shareholder's equity. The
ending balance of shareholder's equity at December 31, 1993 was increased
by $564,200,000 (net of $377,500,000 of related adjustments to deferred ac-
quisition costs, $50,700,000 of policyholder commitments and $303,700,000
in deferred income taxes, all of which would have been recognized if those
securities would have been sold at their fair value, net of amounts appli-
cable to Security-Connecticut Corp.) to reflect the net unrealized gain on
fixed maturity securities classified as available-for-sale previously car-
ried at amortized cost. Prior to the adoption of FAS 115, Lincoln Life car-
ried a portion of its fixed maturity securities at fair value with
unrealized gains and losses carried as a separate component of sharehold-
er's equity. The remainder of such securities were carried at amortized
cost.
Change in estimate for net investment income related to mortgage-backed
securities
At December 31, 1993, Lincoln Life had $5,942,100,000 invested in mortgage-
backed securities. As indicated in Note 1, Lincoln Life recognizes income
on these securities using a constant effective yield based on anticipated
prepayments. With the implementation of new investment software in December
1993, Lincoln Life was able to significantly refine its estimate of the ef-
fective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the amor-
tization of purchase discount on these securities of $58,000,000 and, after
related amortization of deferred acquisition costs ($18,300,000) and income
taxes ($14,300,000), increased 1993's income before cumulative effect of
accounting change and net income by $25,500,000 or $2.55 per share.
Most of the effect of this change in estimate was within the Life Insurance
and Annuities business segment.
Change in estimate for disability income reserves
During the fourth quarter of 1993, income before cumulative effect of ac-
counting change and net income decreased by $15,500,000 or $1.55 per share
as the result of strengthening reinsurance disability income reserves by
$23,900,000. The need for this reserve increase within the Reinsurance seg-
ment was identified as the result of management's assessment of current ex-
pectations for morbidity trends and the impact of lower investment income
due to lower interest rates.
During the fourth quarter of 1995, Lincoln Life completed an in-depth re-
view of the experience of its disability income business. As a result of
this study, and based on the assumption that recent experience will con-
tinue in the future, income before cumulative effect of accounting change
and net income decreased by $33,500,000 or $3.35 per share ($51,500,000
pre-tax) as a result of strengthening disability income reserves by
$15,200,000 and writing-off deferred acquisition costs of $36,300,000 in
the Reinsurance segment.
G-9
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------
(in millions)
--------------------------
<S> <C> <C> <C>
Fixed maturity securities $1,549.4 $1,357.4 $1,497.6
-----------------------------
Equity securities 8.9 7.4 4.3
-----------------------------
Mortgage loans on real estate 268.3 271.3 294.2
-----------------------------
Real estate 110.0 97.8 75.2
-----------------------------
Policy loans 35.4 32.7 36.0
-----------------------------
Invested cash 55.4 46.4 24.8
-----------------------------
Other investments 15.8 7.3 8.0
----------------------------- -------- -------- --------
Investment revenue 2,043.2 1,820.3 1,940.1
-----------------------------
Investment expenses 143.6 146.3 116.6
----------------------------- -------- -------- --------
Net investment income $1,899.6 $1,674.0 $1,823.5
-----------------------------
======== ======== ========
</TABLE>
The realized gain (loss) on investments is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
--------------------------
(in millions)
------------------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
. Gross gain $239.6 $ 69.6 $ 91.1
------------------------------------------------
. Gross loss (87.8) (294.1) (8.4)
------------------------------------------------
Equity securities available-for-sale:
. Gross gain 82.3 50.2 88.3
------------------------------------------------
. Gross loss (31.3) (50.5) (33.7)
------------------------------------------------
Fixed maturity securities held for investment:
. Gross gain -- -- 209.9
------------------------------------------------
. Gross loss -- -- (69.5)
------------------------------------------------
Other investments 42.2 5.1 (161.8)
------------------------------------------------
Related restoration or amortization of deferred
acquisition
costs and provision for policyholder commitments (108.8) 81.2 (23.7)
------------------------------------------------ ------ ------- -------
$136.2 $(138.5) $ 92.2
====== ======= =======
</TABLE>
Provisions (credits) for write-downs and net changes in pro-
visions for losses, which are included in realized gain
(loss) on investments shown above, are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994 1993
(in millions)
-------------------
<S> <C> <C> <C>
Fixed maturity securities $10.4 $14.2 $ 55.6
-----------------------------
Equity securities 3.3 6.8 --
-----------------------------
Mortgage loans on real estate 14.7 19.5 136.7
-----------------------------
Real estate (7.2) 13.0 21.8
-----------------------------
Other long-term investments (1.5) .3 3.9
-----------------------------
Guarantees (2.2) 4.3 1.7
-----------------------------
----- ----- ------
$17.5 $58.1 $219.7
===== ===== ======
</TABLE>
G-10
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The change in unrealized appreciation (depreciation) on in-
vestments in fixed maturity and equity securities is as fol-
lows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------
(in millions)
----------------------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale $2,063.7 $(1,903.7) $1,387.1
---------------------------------------------
Equity securities available-for-sale 78.1 (26.0) 9.2
---------------------------------------------
Fixed maturity securities held for investment -- -- (959.7)
---------------------------------------------
-------- --------- --------
$2,141.8 $(1,929.7) $ 436.6
======== ========= ========
</TABLE>
The cost, gross unrealized gain and loss and fair value of
securities available-for-sale are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1995
-----------------------------------
Gross
unrealized
--------------- Fair
Cost Gain Loss value
----------------------------------------
(in millions)
-----------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $12,412.1 $1,141.0 $ 28.7 $13,524.4
-------------------------------------
U.S. Government bonds 569.6 83.9 .1 653.4
-------------------------------------
Foreign government bonds 927.9 70.3 .6 997.6
-------------------------------------
Mortgage-backed securities:
. Mortgage pass-through securities 1,072.5 41.0 3.2 1,110.3
-------------------------------------
. Collateralized mortgage obligations 3,816.3 262.5 7.4 4,071.4
-------------------------------------
. Other mortgage-backed securities 2.8 .3 -- 3.1
-------------------------------------
State and municipal bonds 12.3 .1 -- 12.4
-------------------------------------
Redeemable preferred stocks 39.3 2.9 -- 42.2
-------------------------------------
--------- -------- ------ ---------
Total fixed maturity securities 18,852.8 1,602.0 40.0 20,414.8
-------------------------------------
Equity securities 480.3 123.6 5.5 598.4
-------------------------------------
--------- -------- ------ ---------
$19,333.1 $1,725.6 $ 45.5 $21,013.2
========= ======== ====== =========
<CAPTION>
Year ended December 31, 1994
-----------------------------------
Gross
unrealized
--------------- Fair
Cost Gain Loss value
----------------------------------------
(in millions)
-----------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $11,519.3 $ 143.3 $514.4 $11,148.2
-------------------------------------
U.S. Government bonds 1,048.4 6.9 25.5 1,029.8
-------------------------------------
Foreign governments bonds 541.2 4.7 12.5 533.4
-------------------------------------
Mortgage-backed securities:
. Mortgage pass-through securities 1,176.8 3.0 44.1 1,135.7
-------------------------------------
. Collateralized mortgage obligations 3,835.5 85.8 148.6 3,772.7
-------------------------------------
. Other mortgage-backed securities 5.0 .1 .1 5.0
-------------------------------------
State and municipal bonds 16.3 .4 -- 16.7
-------------------------------------
Redeemable preferred stocks 51.4 .2 .9 50.7
-------------------------------------
--------- -------- ------ ---------
Total fixed maturity securities 18,193.9 244.4 746.1 17,692.2
-------------------------------------
Equity securities 416.3 56.4 16.4 456.3
-------------------------------------
--------- -------- ------ ---------
$18,610.2 $ 300.8 $762.5 $18,148.5
========= ======== ====== =========
</TABLE>
G-11
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
Future maturities of fixed maturity securities available-
for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------
Fair
Cost value
--------- ---------
(in millions)
-------------------
<S> <C> <C>
Due in one year or less $ 278.4 $ 282.6
--------------------------------------
Due after one year through five years 2,955.7 3,102.1
--------------------------------------
Due after five years through ten years 4,918.2 5,265.9
--------------------------------------
Due after ten years 5,808.9 6,579.4
-------------------------------------- --------- ---------
13,961.2 15,230.0
Mortgage-backed securities 4,891.6 5,184.8
-------------------------------------- --------- ---------
$18,852.8 $20,414.8
========= =========
</TABLE>
The foregoing data is based on stated maturities. Actual
maturities will differ in some cases because borrowers may
have the right to call or pre-pay obligations.
At December 31, 1995, the current par, amortized cost and
estimated fair value of investments in mortgage-backed
securities summarized by interest rates of the underlying
collateral are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------
Current Par Cost Fair value
----------- -------- ----------
(in millions)
-------------------------------
<S> <C> <C> <C>
Below 7% $ 292.6 $ 290.5 $ 293.6
--------
7%-8% 1,302.8 1,276.9 1,318.2
--------
8%-9% 1,607.0 1,564.7 1,669.8
--------
Above 9% 1,810.5 1,759.5 1,903.2
-------- -------- -------- --------
$5,012.9 $4,891.6 $5,184.8
======== ======== ========
</TABLE>
The quality ratings of fixed maturity securities available-
for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Treasuries and AAA 34.1%
------------------
AA 8.0
------------------
A 25.9
------------------
BBB 24.5
------------------
BB 3.9
------------------
Less than BB 3.6
------------------ ------
100.0%
======
</TABLE>
Mortgage loans on real estate are considered impaired when,
based on current information and events, it is probable that
the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
When Lincoln Life determines that a loan is impaired, a
provision for loss is established for the difference between
the carrying value of the mortgage loan and the estimated
value. Estimated value is based on either the present value
of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price
or the fair value of the collateral. The provision for
losses is reported as realized gain (loss) on investments.
Mortgage loans deemed to be uncollectible are charged
against the provision for losses and subsequent recoveries,
if any, are credited to the provision for losses.
G-12
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The provision for losses is maintained at a level believed
adequate by management to absorb estimated probable credit
losses. Management's periodic evaluation of the adequacy of
the provision for losses is based on the Company's past loan
loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the
estimated value of the underlying collateral, composition of
the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective
as it requires estimating the amounts and timing of future
cash flows expected to be received on impaired loans that
may be susceptible to significant change.
Impaired loans along with the related allowance for losses
are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
--------------
<S> <C> <C>
Impaired loans with allowance for losses $144.7 $246.0
-------------------------------------------
Allowance for losses (28.5) (56.6)
-------------------------------------------
Impaired loans with no allowance for losses 2.1 2.2
-------------------------------------------
------ ------
Net impaired loans $118.3 $191.6
-------------------------------------------
====== ======
</TABLE>
Impaired loans with no allowance for losses are a result of
direct write-downs or for collateral dependent loans where
the fair value of the collateral is greater than the re-
corded investment in such loans.
A reconciliation of the mortgage loan allowance for losses
for these impaired mortgage loans is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------- ------
(in millions)
-----------------------
<S> <C> <C> <C>
Balance at beginning of year $ 56.6 $ 220.7 $129.1
---------------------------------
Provisions for losses 14.7 19.5 79.5
---------------------------------
Provision for adoption of FAS 114 -- -- 57.2
---------------------------------
Releases due to write-downs (12.0) -- --
---------------------------------
Releases due to sales (15.9) (164.7) (12.2)
---------------------------------
Releases due to foreclosures (14.9) (18.9) (32.9)
---------------------------------
------ ------- ------
Balance at end of year $ 28.5 $ 56.6 $220.7
---------------------------------
====== ======= ======
</TABLE>
G-13
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The average recorded investment in impaired loans and the
interest income recognized on impaired loans were as fol-
lows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Average recorded investment in impaired loans $181.7 $467.5 $703.6
---------------------------------------------
Interest income recognized on impaired loans 16.6 36.1 47.3
---------------------------------------------
</TABLE>
All interest income on impaired loans was recognized on the
cash basis of income recognition.
As of December 31, 1995 and 1994, Lincoln Life had restruc-
tured loans of $62,500,000 and $36,200,000, respectively.
Lincoln Life recorded $6,300,000 and $800,000 interest income
on these restructured loans in 1995 and 1994, respectively.
Interest income in the amount of $6,600,000 and $3,900,000
would have been recorded on these loans according to their
original terms in 1995 and 1994, respectively. As of December
31, 1995 and 1994, Lincoln Life had no outstanding commit-
ments to lend funds on restructured loans.
As of December 31, 1995, the Company's investment commit-
ments for fixed maturity securities (primarily private
placements), mortgage loans on real estate and real estate
were $543,100,000.
Fixed maturity securities available-for-sale, mortgage loans
on real estate and real estate with a combined carrying
value at December 31, 1995 of $1,300,000 were non-income
producing for the year ended December 31, 1995.
The cost information for mortgage loans on real estate, real
estate and other long-term investments are net of allowances
for losses. The balance sheet account for other liabilities
includes a reserve for guarantees of third-party debt. The
amount of allowances and a reserve for such items is as fol-
lows:
<TABLE>
<CAPTION>
December 31
1995 1994
----- -----
(in
millions)
-----------
<S> <C> <C>
Mortgage loans on real estate $28.5 $56.6
-----------------------------
Real estate 46.6 65.2
-----------------------------
Other long-term investments 11.8 13.5
-----------------------------
</TABLE>
Details underlying the balance sheet caption "Net Unrealized
Gain (loss) on Securities Available-for-Sale," are as fol-
lows:
<TABLE>
<CAPTION>
December 31
1995 1994
--------- ---------
(in millions)
--------------------
<S> <C> <C>
Fair value of securities available-for-sale $21,013.2 $18,148.5
----------------------------------------------------
Cost of securities available-for-sale 19,333.1 18,610.2
---------------------------------------------------- --------- ---------
Unrealized gain (loss) 1,680.1 (461.7)
----------------------------------------------------
Adjustments to deferred acquisition costs (492.1) 158.2
----------------------------------------------------
Amounts required to satisfy policyholder commitments (510.1) 8.6
----------------------------------------------------
Deferred income credits (taxes) (234.6) 105.9
----------------------------------------------------
Valuation allowance for deferred tax assets -- (135.6)
----------------------------------------------------
--------- ---------
Net unrealized gain (loss) on securities available-
for-sale $ 443.3 $ (324.6)
----------------------------------------------------
========= =========
</TABLE>
G-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
Adjustments to Deferred acquisition costs and amounts re-
quired to satisfy policyholder commitments are netted
against the Deferred acquisition costs asset account and in-
cluded with the Future policy benefits, claims and claims
expense liability on the balance sheet, respectively.
4.FEDERAL INCOME TAXES
The Federal income tax expense (benefit) before cumulative
effect of accounting change is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
(in millions)
----------------------
<S> <C> <C> <C>
Current $172.5 $(93.4) $261.3
--------
Deferred (45.0) 133.8 (118.8)
-------- ------ ------ ------
$127.5 $ 40.4 $142.5
====== ====== ======
</TABLE>
Cash paid for Federal income taxes in 1995, 1994 and 1993
was $27,500,000, $41,400,000 and $272,600,000, respectively.
The cash paid in 1995 is net of a $146,900,000 cash refund
related to the carryback of 1994 capital losses to prior
years.
The effective tax rate on pre-tax income before cumulative
effect of accounting change is lower than the prevailing
corporate Federal income tax rate. A reconciliation of this
difference is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
---------
(in millions)
---------------------
<S> <C> <C> <C>
Tax rate times pre-tax income $157.3 $91.1 $117.5
------------------------------------
Effect of:
. Tax-exempt investment income (22.0) (21.5) (16.2)
------------------------------------
. Participating policyholders' share 5.4 3.4 4.1
------------------------------------
. Loss (gain) on sale of affiliates -- (24.1) 34.5
------------------------------------
. Other items (13.2) (8.5) 2.6
------------------------------------ ------ ----- ------
Provision for income taxes $127.5 $40.4 $142.5
------------------------------------ ====== ===== ======
Effective tax rate 28.4% 15.5% 42.5%
------------------------------------ ====== ===== ======
</TABLE>
The Federal income tax recoverable (liability) is as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- ------
(in millions)
---------------
<S> <C> <C>
Current $ (25.0) $118.2
--------
Deferred (141.4) 16.3
-------- ------- ------
$(166.4) $134.5
======= ======
</TABLE>
G-15
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
4.FEDERAL INCOME TAXES CONTINUED
Significant components of Lincoln Life's net deferred tax
asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- -------
(in millions)
----------------
<S> <C> <C>
Deferred tax assets:
. Policy liabilities and
accruals and
contractholder funds $ 694.5 $ 430.9
------------------------
. Loss on investments -- 16.8
------------------------
. Net unrealized loss on
securities available-
for-sale -- 161.6
------------------------
. Postretirement
benefits other than
pensions 25.3 24.2
------------------------
. Other 39.5 34.6
------------------------ ------- -------
Total deferred tax
assets 759.3 668.1
------------------------
Valuation allowance for
deferred tax assets -- (135.6)
------------------------ ------- -------
Net deferred tax assets 759.3 532.5
------------------------
Deferred tax
liabilities:
. Deferred acquisition
costs 218.8 475.5
------------------------
. Net unrealized gain on
securities available-
for-sale 579.6 --
------------------------
. Gain on investments 7.7 --
------------------------
. Other 94.6 40.7
------------------------ ------- -------
Total deferred tax
liabilities 900.7 516.2
------------------------ ------- -------
Net deferred tax
(liability) asset $(141.4) $ 16.3
------------------------ ======= =======
</TABLE>
Lincoln Life is required to establish a "valuation allow-
ance" for any portion of its deferred tax assets which are
unlikely to be realized. At December 31, 1994, $161,600,000
of deferred tax assets relating to net unrealized capital
losses on fixed maturity and equity securities available-
for-sale were available to be recorded in shareholder's eq-
uity before considering a valuation allowance. For Federal
income tax purposes, capital losses may only be used to off-
set capital gains in the current year or during a three-year
carryback and five-year carryforward period. Due to these
restrictions, and the uncertainty at that time of future
capital gains, these deferred tax assets were substantially
offset by a valuation allowance of $135,600,000. By December
31, 1995, the fair values of fixed maturity and equity secu-
rities available-for-sale were greater than the cost basis
resulting in unrealized capital gains. Accordingly, no valu-
ation allowance was established as of December 31, 1995
since management believes it is more likely than not that
Lincoln Life will realize the benefit of its deferred tax
assets.
Prior to 1984, a portion of the life companies' current
income was not subject to current income tax, but was
accumulated for income tax purposes in a memorandum account
designated as "policyholders' surplus." The total of the
life companies' balances in their respective "policyholders'
surplus" accounts at December 31, 1983 of $204,800,000 was
"frozen" by the Tax Reform Act of 1984 and, accordingly,
there have been no additions to the accounts after that
date. That portion of current income on which income taxes
have been paid will continue to be accumulated in a
memorandum account designated as "shareholder surplus," and
is available for dividends to the shareholder without
additional payment of tax. The December 31, 1995 total of
the life companies' account balances for their "shareholder
surplus" was $1,554,000,000. Should dividends to the
shareholder for each life company exceed its respective
"shareholder surplus," amounts would need to be transferred
from its respective "policyholders' surplus" and would be
subject to Federal income tax at that time. In connection
with the 1993 sale of a life insurance affiliate (see Note
10), $8,800,000 was transferred from policyholders' surplus
G-16
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
4.FEDERAL INCOME TAXES CONTINUED
to shareholder surplus and current income tax of $3,100,000
was paid. Under existing or foreseeable circumstances,
Lincoln Life neither expects nor intends that distributions
will be made from the remaining balance in "policyholders'
surplus" of $196,000,000 that will result in any such tax.
Accordingly, no provision for deferred income taxes has been
provided by Lincoln Life on its "policyholders' surplus"
account. In the event that such excess distributions are
made, it is estimated that income taxes of approximately
$68,600,000 would be due.
5.SUPPLEMENTAL FINANCIAL DATA
The balance sheet captions, "Real estate," "Other
investments" and "Property and equipment," are shown net of
allowances for depreciation as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
-------------
<S> <C> <C>
Real estate $ 51.6 $ 37.0
----------------------
Other investments 14.6 12.2
----------------------
Property and equipment 100.7 104.7
----------------------
</TABLE>
Details underlying the balance sheet caption,
"Contractholder funds," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
--------- ---------
(in millions)
-------------------
<S> <C> <C>
Premium deposit funds $17,886.9 $16,770.3
------------------------------------------------
Undistributed earnings on participating business 91.9 63.6
------------------------------------------------
Other 193.0 194.7
------------------------------------------------
--------- ---------
$18,171.8 $17,028.6
========= =========
</TABLE>
Details underlying the balance sheet captions, "Short-term
and Long-term Debt," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
-------------
<S> <C> <C>
Short-term debt:
---------------------------------------
. Short-term notes $123.5 $150.8
---------------------------------------
. Current portion of long-term debt 1.3 2.9
---------------------------------------
------ ------
Total short-term debt $124.8 $153.7
---------------------------------------
====== ======
Long-term debt less current portion:
---------------------------------------
. 7% mortgage note payable, due 1996 $ -- $ 4.9
---------------------------------------
. 9.48% mortgage note payable, due 1996 -- 7.7
---------------------------------------
. 12% mortgage note payable, due 1996 -- .2
---------------------------------------
. 8.42% mortgage note payable, due 1997 7.0 7.2
---------------------------------------
. 8.25% mortgage note payable, due 1997 10.1 10.2
---------------------------------------
. 8% mortgage note payable, due 1997 2.1 --
---------------------------------------
. 8.75% mortgage note payable, due 1998 18.4 18.8
---------------------------------------
. 9.75% mortgage note payable, due 2002 3.2 5.8
---------------------------------------
------ ------
Total long-term debt $ 40.8 $ 54.8
---------------------------------------
====== ======
</TABLE>
G-17
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Fixed maturities of long-term debt are as follows (in mil-
lions):
1996 -- $ 1.31998 -- $18.42000 -- $ --
1997 -- 19.21999 -- --Thereafter -- 3.2
Cash paid for interest for 1995, 1994 and 1993 was $67,000,
$615,000 and $96,000, respectively.
Reinsurance transactions included in the income statement
caption, "Insurance premiums," are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $777.6 $910.8 $807.5
------------------------
Insurance ceded 441.7 716.7 568.6
------------------------
------ ------ ------
Net reinsurance premiums $335.9 $194.1 $238.9
------------------------
====== ====== ======
</TABLE>
The income statement caption, "Benefits and settlement ex-
penses," is net of reinsurance recoveries of $456,000,
$524,000 and $438,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
The income statement caption, "Underwriting, acquisition,
insurance and other Expenses," includes amortization of de-
ferred acquisition costs of $399,700,000, $115,200,000 and
$241,000,000 for the years ended December 31, 1995, 1994 and
1993, respectively. An additional $(85,200,000), $81,200,000
and ($23,700,000) of deferred acquisition costs was restored
(amortized) and netted against "Realized gain (loss) on in-
vestments" for the years ended December 31, 1995, 1994 and
1993, respectively.
6.EMPLOYEE BENEFIT PLANS
Pension plans
LNC maintains funded defined benefit pension plans for most
of its employees and, prior to January 1, 1995, full-time
agents. The benefits for employees are based on total years
of service and the highest 60 months of compensation during
the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings.
The plans are funded by contributions to tax-exempt trusts.
Lincoln Life's funding policy is consistent with the funding
requirements of Federal laws and regulations. Contributions
are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the
future. Plan assets consist principally of listed equity se-
curities and corporate obligations and government bonds.
All benefits applicable to the funded defined benefit plan
for agents were frozen as of December 31, 1994. The curtail-
ment of this plan did not have a significant effect on net
pension cost for 1994. Effective January 1, 1995, pension
benefits for agents have been provided by a new defined con-
tribution plan. Contributions to this plan will be based on
2.3% of an agent's earnings up to the social security wage
base and 4.6% of any excess.
LNC also administers two types of unfunded, nonqualified,
defined benefit plans for certain employees and agents. A
supplemental retirement plan provides defined benefit pen-
sion benefits in excess of limits imposed by federal tax
law. A salary continuation plan provides certain officers of
Lincoln Life defined pension benefits based on years of
service and final monthly salary upon death or retirement.
G-18
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The status of the funded defined benefit pension plans and
the amounts recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- -------
(in millions)
----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
. Vested benefits $(162.1) $(130.5)
------------------------------------------------------
. Nonvested benefits (9.2) (7.3)
------------------------------------------------------ ------- -------
Accumulated benefit obligation (171.3) (137.8)
------------------------------------------------------
Effect of projected future compensation increases (37.2) (24.3)
------------------------------------------------------ ------- -------
Projected benefit obligation (208.5) (162.1)
------------------------------------------------------
Plan assets at fair value 196.4 159.3
------------------------------------------------------ ------- -------
Projected benefit obligations in excess of plan assets (12.1) (2.8)
------------------------------------------------------
Unrecognized net loss (gain) 12.6 (.5)
------------------------------------------------------
Unrecognized prior service cost 1.2 1.1
------------------------------------------------------ ------- -------
Prepaid (accrued) pension cost included in other
liabilities $ 1.7 $ (2.2)
------------------------------------------------------ ======= =======
</TABLE>
The status of the unfunded defined benefit pension plans and
the amounts recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ -----
(in
millions)
-------------
<S> <C> <C>
Actuarial present value of benefit obligation:
. Vested benefits $ (7.0) $(5.4)
---------------------------------------------------
. Nonvested benefits (1.5) (1.0)
--------------------------------------------------- ------ -----
Accumulated benefit obligation (8.5) (6.4)
---------------------------------------------------
Effect of projected future compensation increases (2.4) (2.5)
--------------------------------------------------- ------ -----
Projected benefit obligation (10.9) (8.9)
---------------------------------------------------
Unrecognized transition obligation -- --
---------------------------------------------------
Unrecognized net loss (gain) 1.0 (.3)
---------------------------------------------------
Unrecognized prior service cost .8 .8
--------------------------------------------------- ------ -----
Accrued pension costs included in other liabilities $ (9.1) $(8.4)
--------------------------------------------------- ====== =====
</TABLE>
The determination of the projected benefits obligation for
the defined benefit plans was based on the following assump-
tions:
<TABLE>
<CAPTION>
1995 1994 1993
------------
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 8.0% 7.0%
------------------------------------------------
Rate of increase in compensation:
. Salary continuation plan 6.0 6.5 6.0
------------------------------------------------
. All other plans 5.0 5.0 5.0
------------------------------------------------
Expected long-term rate of return on plan assets 9.0 9.0 9.0
------------------------------------------------
</TABLE>
G-19
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The components of net pension cost for the defined benefit
pension plans are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
-------------------
(in millions)
-------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 5.0 $ 8.9 $ 8.5
---------------------------------------------
Interest cost on projected benefit obligation 13.2 12.9 12.4
---------------------------------------------
Actual return on plan assets (36.3) 4.7 (20.1)
---------------------------------------------
Net amortization (deferral) 22.9 (18.6) 6.1
--------------------------------------------- ------ ------ ------
Net pension cost $ 4.8 $ 7.9 $ 6.9
--------------------------------------------- ====== ====== ======
</TABLE>
401(k)
LNC and Lincoln Life sponsor contributory defined contribu-
tion plans for eligible employees and agents. Lincoln Life's
contributions to the plans are equal to each participant's
pre-tax contribution, not to exceed 6% of base pay, multi-
plied by a percentage, ranging from 25% to 150%, which var-
ies according to certain incentive criteria as determined by
LNC's Board of Directors. Expense for these plans amounted
to $8,000,000, $13,200,000 and $11,800,000 in 1995, 1994 and
1993, respectively.
Postretirement medical and life insurance benefit plans
LNC sponsors unfunded defined benefit plans that provide
postretirement medical and life insurance benefits to full-
time employees and agents who, depending on the plan, have
worked for Lincoln Life 10 to 15 years and attained age 55
to 60. Medical benefits are also available to spouses and
other dependents of employees and agents. For medical bene-
fits, limited contributions are required from individuals
retired prior to November 1, 1988; contributions for later
retirees, which can be adjusted annually, are based on such
items as years of service at retirement and age at retire-
ment. The life insurance benefits are noncontributory, al-
though participants can elect supplemental contributory ben-
efits.
The status of the postretirement medical and life insurance
benefit plans and the amounts recognized on the balance
sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
--
(in millions)
--
<S> <C> <C>
Accumulated postretirement benefit obligation:
. Retirees $(39.8) $(34.9)
-----------------------------------------------
. Fully eligible active plan participants (9.9) (7.0)
-----------------------------------------------
. Other active plan participants (20.8) (15.0)
----------------------------------------------- ------ ------
Accumulated postretirement benefit obligation (70.5) (56.9)
-----------------------------------------------
Unrecognized net gain (.8) (5.5)
----------------------------------------------- ------ ------
Accrued plan cost included in other liabilities $(71.3) $(62.4)
----------------------------------------------- ====== ======
</TABLE>
G-20
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The components of periodic postretirement benefit cost are
as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994 1993
--
(in millions)
--
<S> <C> <C> <C>
Service cost $1.5 $1.7 $2.6
----------------------------------------
Interest cost 4.4 4.2 4.6
----------------------------------------
Amortization cost (credit) (.8) .1 --
---------------------------------------- ---- ---- ----
Net periodic postretirement benefit cost $5.1 $6.0 $7.2
---------------------------------------- ==== ==== ====
</TABLE>
The calculation of the accumulated postretirement benefit
obligation assumes a weighted-average annual rate of in-
crease in the per capita cost of covered benefits (i.e.,
health care cost trend rate) of 9.5% for 1996 gradually de-
creasing to 5.5% by 2004 and remaining at that level there-
after. The health care cost trend rate assumption has a sig-
nificant effect on the amounts reported. For example, in-
creasing the assumed health care cost trend rates by one
percentage point each year would increase the accumulated
postretirement benefit obligation as of December 1995 and
1994 by $5,100,000 and $4,100,000, respectively, and the ag-
gregate of the estimated service and interest cost compo-
nents of net periodic postretirement benefit cost for the
year ended December 31, 1995 by $488,000. The calculation
assumes a long-term rate of increase in compensation of 5.0%
for both December 31, 1995 and 1994. The weighted-average
discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% and 8.0% at De-
cember 31, 1995 and 1994, respectively.
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
Shareholder's equity restrictions
Net income as determined in accordance with statutory accounting practices
for Lincoln Life and its insurance subsidiaries in 1995, 1994 and 1993 was
$284,500,000, $366,700,000 and $237,000,000, respectively. Lincoln Life's
shareholder's equity as determined in accordance with statutory accounting
practices at December 31, 1995 and 1994 was $1,732,900,000 and
$1,679,700,000, respectively.
Lincoln Life is subject to certain insurance department regulatory restric-
tions as to the transfer of funds and payments of dividends to LNC. In
1996, Lincoln Life can transfer up to $284,500,000 without seeking prior
approval from the insurance regulators.
Disability income claims
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1995 and 1994 is a net
liability of $602,600,000 and $441,700,000, respectively, excluding de-
ferred acquisition costs. The bulk of the increase to this liability re-
lates to the assumption of a large block of disability claim reserves and
related assets during the third quarter of 1995. In addition, as indicated
in Note 2, Lincoln Life strengthened its disability income reserves and
wrote off certain related deferred acquisition costs in the fourth quarter
of 1995. The reserves were established on the assumption that the recent
experience will continue in the future. If incidence levels or claim termi-
nation rates vary significantly from these assumptions, further adjustments
to reserves may be required in the future. It is not possible to provide a
meaningful estimate of a range of possible outcomes at this time. Lincoln
Life reviews and updates the level of these reserves on an on-going basis.
Compliance of qualified annuity plans
Tax authorities continue to focus on compliance of
qualified annuity plans marketed by insurance companies. If sponsoring em-
ployers cannot demonstrate
compliance and the insurance company is held re-
sponsible due to its marketing efforts, Lincoln Life
and other insurers may be subject to potential liability. It is not possi-
ble to provide a meaningful estimate of the range of potential liability at
this time. Management continues to monitor this matter and to take steps to
minimize any potential liability.
Group pension annuities
The liabilities for guaranteed interest and group pension annuity con-
tracts, which are no longer be-
G-21
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
ing sold, are supported by a single portfolio of assets which attempts to
match the duration of these liabilities. Due to the very long-term nature
of group pension annuities and the resulting inability to exactly match
cash flows, a risk exists that future cash flows from investments will not
be reinvested at rates as high as currently earned by the portfolio. This
situation could cause losses which would be recognized at some future time.
Leases
Lincoln Life and certain of its subsidiaries lease their home office prop-
erties through sale-leaseback agreements. The agreements provide for a 25
year lease period with options to renew for six additional terms of five
years each. The agreements also provide Lincoln Life with the right of
first refusal to purchase the properties during the term of the lease, in-
cluding renewal periods, at a price as defined in the agreements. In addi-
tion, Lincoln Life has the option to purchase the leased properties at fair
market value as defined in the agreements on the last day of the initial 25
year lease period ending in 2009 or the last day of any of the renewal pe-
riods.
Total rental expense under operating leases in 1995, 1994 and 1993 was
$24,400,000, $21,700,000 and $27,100,000. Future minimum rental commitments
are as follows (in millions):
<TABLE>
<S> <C>
1996 $ 20.9
----------
1997 19.5
----------
1998 18.3
----------
1999 18.3
----------
2000 17.7
----------
Thereafter 172.4
---------- ------
$267.1
======
</TABLE>
Insurance ceded and assumed
Lincoln Life cedes insurance to other companies, including certain affili-
ates. That portion of risks exceeding each company's retention limit is re-
insured with other insurers. Lincoln Life seeks reinsurance coverage within
the business segment that sells life insurance that limits its liabilities
on an individual insured to $3,000,000. To cover products other than life
insurance, Lincoln Life acquires other insurance coverages with retentions
and limits which management believes are appropriate for the circumstances.
The accompanying financial statements reflect premiums, benefits and set-
tlement expenses and deferred acquisition costs, net of insurance ceded
(see Note 5). Lincoln Life and its subsidiaries remain liable if their re-
insurers are unable to meet their contractual obligations under the appli-
cable reinsurance agreements.
Lincoln Life assumes insurance from other companies, including certain af-
filiates. At December 31, 1995, Lincoln Life has provided $92,700,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables from the ceding company, which are secured by future profits on the
reinsured business. However, Lincoln Life is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
Vulnerability from concentrations
At December 31, 1995, Lincoln Life did not have
a material concentration of financial instruments in
a single investee, industry or geographic location. Also at December 31,
1995, Lincoln Life did not have a concentration of 1) business transactions
with a particular customer, lender or distributor, 2) revenues from a par-
ticular product or service, 3) sources of supply of labor or services used
in the
business or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a se-
vere impact to Lincoln Life's financial condition.
Other contingency matters
Lincoln Life and its subsidiaries are involved in various pending or
threatened legal proceedings arising from the conduct of their business. In
some instances, these proceedings include claims for punitive damages and
similar types of relief in unspecified or substantial amounts, in addition
to amounts for alleged contractual liability or requests for equitable re-
lief. After consultation with counsel and a review of available facts, it
is management's opinion that these proceedings ultimately will be resolved
without materially affecting the consolidated financial statements of Lin-
coln Life.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabili-
tated companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. Lincoln Life has accrued
for expected assessments net of estimated future premium tax deductions.
G-22
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Guarantees
Lincoln Life has guarantees with off-balance-sheet risks
whose contractual amounts represent credit exposure. Out-
standing guarantees with off-balance-sheet risks, shown in
notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
contract
amounts
-----------
December 31
1995 1994
---------------
(in
millions)
-----------
<S> <C> <C>
Real estate partnerships $ 3.3 $17.6
---------------------------------------
Mortgage loan pass-through certificates 63.6 78.2
--------------------------------------- ----- -----
$66.9 $95.8
===== =====
</TABLE>
Lincoln Life has invested in real estate partnerships that
use conventional mortgage loans. In some cases, the terms of
these arrangements involve guarantees by each of the part-
ners to indemnify the mortgagor in the event a partner is
unable to pay its principal and interest payments. In addi-
tion, Lincoln Life has sold commercial mortgage loans
through grantor trusts which issued pass-through certifi-
cates. Lincoln Life has agreed to repurchase any mortgage
loans which remain delinquent for 90 days at a repurchase
price substantially equal to the outstanding principal bal-
ance plus accrued interest thereon to the date of repur-
chase. It is management's opinion that the value of the
properties underlying these commitments is sufficient that
in the event of default the impact would not be material to
Lincoln Life. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1995 and
1994.
G-23
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Derivatives
Lincoln Life has derivatives with off-balance-sheet risks
whose notional or contract amounts exceed the credit expo-
sure. Lincoln Life has entered into derivative transactions
to reduce its exposure to fluctuations in interest rates,
the widening of bond yield spreads over comparable maturity
U.S. Government obligations and foreign exchange risks. In
addition, Lincoln Life is subject to the risks associated
with changes in the value of its derivatives; however, such
changes in the value generally are offset by changes in the
value of the items being hedged by such contracts. Outstand-
ing derivatives with off-balance-sheet risks, shown in
notional or contract amounts along with their carrying value
and estimated fair values, are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
------------------------------
Notional or Carrying Fair Carrying Fair
contract amounts value value value value
----------------- -------- ----- -------- -----
December 31 December 31 December 31
1995 1994 1995 1995 1994 1994
-------- -------- -------- ----- -------- -----
(in millions)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate
derivatives:
Interest rate cap
agreements $5,110.0 $4,400.0 $22.7 $5.3 $23.3 $34.4
------------------------
Spread-lock agreements 600.0 1,300.0 (.9) (.9) 3.2 3.2
------------------------
Financial futures
contracts -- 382.5 -- -- (7.5) (7.5)
------------------------
Interest rate swaps 5.0 5.0 .2 .2 .2 .2
------------------------ -------- -------- ----- ---- ----- -----
5,715.0 6,087.5 22.0 4.6 19.2 30.3
Foreign currency
derivatives:
Foreign exchange forward
contracts 15.7 21.2 (.6) (.6) .2 .2
------------------------
Foreign currency options 99.2 -- 1.9 1.4 -- --
------------------------
Foreign currency swaps 15.0 -- .4 .4 -- --
------------------------ -------- -------- ----- ---- ----- -----
129.9 21.2 1.7 1.2 .2 .2
-------- -------- ----- ---- ----- -----
$5,844.9 $6,108.7 $23.7 $5.8 $19.4 $30.5
======== ======== ===== ==== ===== =====
</TABLE>
A reconciliation and discussion of the notional or contract
amounts for the significant programs using derivative agree-
ments and contracts is as follows:
<TABLE>
<CAPTION>
Interest rate
caps Spread locks
----------------- -------------------
December 31 December 31
1995 1994 1995 1994
-------- -------- --------- --------
(in millions)
-------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,400.0 $3,800.0 $ 1,300.0 $1,700.0
----------------------------
New contracts 710.0 600.0 800.0 --
----------------------------
Terminations and maturities -- -- (1,500.0) (400.0)
---------------------------- -------- -------- --------- --------
Balance at end of year $5,110.0 $4,400.0 $ 600.0 $1,300.0
---------------------------- ======== ======== ========= ========
</TABLE>
G-24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
<TABLE>
<CAPTION>
Financial futures
-------------------------------------
Contracts Options
1995 1994 1995 1994
--------- -------- ------- -------
(in millions)
-------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 382.5 $ 33.1 $ -- $ --
----------------------------
New contracts 810.5 1,087.7 181.6 308.0
----------------------------
Terminations and maturities (1,193.0) (738.3) (181.6) (308.0)
---------------------------- --------- -------- ------- -------
Balance at end of year $ -- $ 382.5 $ -- $ --
---------------------------- ========= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Foreign currency derivatives
-----------------------------------------
Foreign
exchange Foreign Foreign
forward currency currency
contracts options swaps
1995 1994 1995 1994 1995 1994
------- ------ ------- ---- ----- ----
(in millions)
-----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 21.2 $ -- $ -- $ -- $ -- $ --
----------------------------
New contracts 131.2 38.5 356.6 -- 15.0 --
----------------------------
Terminations and maturities (136.7) (17.3) (257.4) -- -- --
---------------------------- ------- ------ ------- ---- ----- ----
Balance at end of year $ 15.7 $ 21.2 $ 99.2 $ -- $15.0 $ --
---------------------------- ======= ====== ======= ==== ===== ====
</TABLE>
Interest rate caps
The interest rate cap agreements, which expire in 1997
through 2003, entitle Lincoln Life to receive payments from
the counterparties on specified future reset dates, contin-
gent on future interest rates. For each cap, the amount of
such quarterly payments, if any, is determined by the excess
of a market interest rate over a specified cap rate times
the notional amount divided by four. The purpose of Lincoln
Life's interest rate cap agreement program is to protect its
annuity line of business from the effect of fluctuating in-
terest rates. The premium paid for the interest rate caps is
included in other assets ($22,700,000 and $23,400,000 as of
December 31, 1995 and 1994, respectively) and is being amor-
tized over the terms of the agreements and is included in
net investment income.
Spread locks
Spread-lock agreements in effect at December 31, 1995 all
expire in 2005. Spread-lock agreements provide for a lump
sum payment to or by Lincoln Life depending on whether the
spread between the swap rate and a specified U.S. Treasury
note is larger or smaller than a contractually specified
spread. Cash payments are based on the product of the
notional amount, the spread between the swap rate and the
yield of an equivalent maturity U.S. Treasury security and
the price sensitivity of the swap at that time, expressed in
dollars per basis point. The purpose of Lincoln Life's
spread-lock program is to protect a portion of its fixed ma-
turity securities against widening of spreads.
G-25
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, spread-lock agreements, in-
terest rate swaps, foreign exchange forward contracts, foreign currency op-
tions and foreign currency swaps, but Lincoln Life does not anticipate non-
performance by any of these counterparties. The credit risk associated with
such agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount
of such exposure is essentially the net replacement cost or market value
for such agreements with each counterparty if the net market value is in
Lincoln Life's favor. At December 31, 1995, the exposure was $6,900,000.
8.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of Lincoln Life's financial instruments.
Considerable judgment is required to develop these fair values and, accord-
ingly, the estimates shown are not necessarily indicative of the amounts
that would be realized in a one time, current market exchange of all of
Lincoln Life's financial instruments.
Fixed maturity and equity securities
Fair values for fixed maturity securities are based on quoted market pric-
es, where available. For fixed maturity securities not actively traded,
fair values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by discount-
ing expected future cash flows using a current market rate applicable to
the coupon rate, credit quality and maturity of the investments. The fair
values for equity securities are based on quoted market prices.
Mortgage loans on real estate
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income when compared to the expected yield for mortgages having sim-
ilar characteristics. The rating for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service cov-
erage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loans are measured based either on the present
value of expected future cash flows discounted at the loan's effective in-
terest rate, at the loan's market price or the fair value of the collateral
if the loan is collateral dependent.
7.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
Financial futures
Lincoln Life uses exchange-traded financial futures contracts and options
on those financial futures to hedge against interest rate risks and to man-
age duration of a portion of its fixed maturity securities. Financial
futures contracts obligate Lincoln Life to buy or sell a financial instru-
ment at a specified future date for a specified price and may be settled in
cash or through delivery of the financial instrument. Cash settlements on
the change in market values of financial futures contracts are made daily.
Options on financial futures give Lincoln Life the right, but not the obli-
gation, to assume a long or short position in the underlying futures at a
specified price during a specified time period.
Foreign currency derivatives
Lincoln Life uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate Lincoln Life to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give Lincoln Life the right, but not the obligation, to
buy or sell a foreign currency at a specific exchange rate during a speci-
fied time period. A foreign currency swap is a contractual agreement to ex-
change the currencies of two different countries pursuant to an agreement
to reexchange the two currencies at the same rate of exchange at a speci-
fied future date.
Additional derivative information
Expenses for the agreements and contracts described above amounted to
$5,600,000 and $5,400,000 in 1995 and 1994, respectively. Deferred losses
of $21,800,000 as of December 31, 1995, resulting from (1) terminated and
expired spread-lock agreements, (2) financial futures contracts and (3) op-
tions on financial futures, are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
G-26
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Short-term and long-term debt
Fair values for long-term debt issues are estimated using discounted cash
flow analysis based on Lincoln Life's current incremental borrowing rate
for similar types of borrowing arrangements. For short-term debt, the car-
rying value approximates fair value.
Guarantees
Lincoln Life's guarantees include guarantees related to real estate part-
nerships and mortgage loan pass-through certificates. Based on historical
performance where repurchases have been negligible and the current status,
which indicates none of the loans are delinquent, the fair value liability
for the guarantees related to the mortgage loan pass-through certificates
is insignificant. Fair values for all other guarantees are based on fees
that would be charged currently to enter into similar agreements, taking
into consideration the remaining terms of the agreements and the
counterparties' credit standing.
Derivatives
Lincoln Life's derivatives include interest rate cap agreements, spread-
lock agreements, foreign currency exchange contracts, financial futures
contracts, options on financial futures, interest rate swaps, foreign cur-
rency options and foreign currency swaps. Fair values for these contracts
are based on current settlement values. The current settlement values are
based on quoted market prices for the foreign currency exchange contracts,
financial future contracts and options on financial futures and on broker-
age quotes, which utilized pricing models or formulas using current assump-
tions, for all other swaps and agreements.
Investment commitments
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real es-
tate are based on the difference between the value of the committed invest-
ments as of the date of the accompanying balance sheets and the commitment
date, which would take into account changes in interest rates, the
counterparties' credit standing and the remaining terms of the commitments.
8.FAIR VALUE OF FINANCIAL
INSTRUMENTS CONTINUED
Policy loans
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on
historical experience.
Other investments and cash and invested cash
The carrying value for assets classified as other investments and cash and
invested cash in the accom-
panying balance sheets approximates their fair value.
Investment type insurance contracts
The balance sheet captions, "Future policy benefits, claims and claims ex-
penses" and "Contractholder funds," include investment type insurance con-
tracts (i.e., deposit contracts and guaranteed interest contracts). The
fair values for the deposit contracts and certain guaranteed interest con-
tracts are based on their approximate surrender values. The fair values for
the remaining guaranteed interest and similar contracts are estimated using
discounted cash flow calculations based on interest rates currently being
offered on similar contracts with maturities consistent with those remain-
ing for the contracts being valued.
The remainder of the balance sheet captions, "Future policy benefits,
claims and claims expenses" and "Contractholder funds," that do not fit the
definition of "investment type insurance contracts" are considered insur-
ance contracts. Fair value disclosures are not required for these insurance
contracts and have not been determined by Lincoln Life. It is Lincoln
Life's position that the disclosure of the fair value of these insurance
contracts is important in that readers of these financial statements could
draw inappropriate conclusions about Lincoln Life's shareholder's equity
determined on a fair value basis if only the fair value of assets and lia-
bilities defined as financial instruments are disclosed. Lincoln Life and
other companies in the insurance industry are monitoring the related ac-
tions of the various rule-making bodies and attempting to determine an ap-
propriate methodology for estimating and disclosing the "fair value" of
their insurance contract liabilities.
G-27
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
8.FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED
The carrying values and estimated fair values of Lincoln
Life's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
---------------------------------------------
Carrying Fair Carrying Fair
Assets (Liabilities) value value value value
---------------------------------------------------------------------------
(in millions)
----------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 20,414.8 $ 20,414.8 $ 17,692.2 $ 17,692.2
-------------------------
Equity securities 598.4 598.4 456.3 456.3
-------------------------
Mortgage loans on real
estate 3,147.8 3,330.5 2,795.9 2,720.6
-------------------------
Policy loans 565.3 557.4 528.7 508.1
-------------------------
Other investments 241.2 241.2 158.2 158.2
-------------------------
Cash and invested cash 802.7 802.7 990.9 990.9
-------------------------
Investment type insurance
contracts:
-------------------------
. Deposit contracts and
certain guaranteed
interest contracts (15,390.8) (15,179.1) (14,294.7) (14,052.5)
-------------------------
. Remaining guaranteed
interest and similar
contracts (2,470.9) (2,396.5) (2,485.5) (2,423.9)
-------------------------
Short-term debt (124.8) (124.8) (153.7) (153.7)
-------------------------
Long-term debt (40.8) (36.7) (54.8) (57.0)
-------------------------
Derivatives 23.7 5.8 19.4 30.5
-------------------------
Investment commitments -- (.8) -- (.5)
-------------------------
</TABLE>
As of December 31, 1995 and 1994, the carrying values of the
deposit contracts and certain guaranteed contracts is net of
deferred acquisition costs of $333,797,000 and $399,000,000,
respectively, excluding adjustments for deferred acquisition
costs applicable to changes in fair value of securities. The
carrying values of these contracts are stated net of de-
ferred acquisition costs in order that they be comparable
with the fair value basis.
9.SEGMENT INFORMATION
Lincoln Life has two major business segments: Life Insurance
and Annuities and Reinsurance. The Life Insurance and Annui-
ties segment offers universal life, pension products and
other individual coverages through a network of career
agents, independent general agencies and insurance agencies
located within a variety of financial institutions. These
products are sold throughout the United States by Lincoln
Life. Reinsurance sells reinsurance products and services to
insurance companies, HMOs, self-funded employers and other
primary risk accepting organizations in the U.S. and econom-
ically attractive international markets. Effective in the
fourth quarter of 1995, operating results of the direct dis-
ability income business previously included in the Life In-
surance and Annuities segment is now included in the Rein-
surance segment. This direct disability income business,
which is no longer being sold, is now managed by the Rein-
surance segment along with its disability income business.
Prior to the sale of 100% of the ownership of its primary
underwriter of employee life-health benefit coverages in
1994 (see Note 10), the Employee Life-Health Benefits seg-
ment distributed group life and health insurance, managed
health care and other related coverages through career
agents and independent general agencies. Activity which is
not included in the major business segments is shown as
"Other Operations."
"Other Operations" includes operations not directly related
to the business segments and unallocated corporate items
(i.e., corporate investment income, interest expense on cor-
porate debt and unallocated corporate overhead expenses).
G-28
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
9.SEGMENT INFORMATION CONTINUED
The revenue, pre-tax income and assets by segment for 1993
through 1995 are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
---------------------------
(in millions)
-----------------------------
<S> <C> <C> <C>
Revenue:
. Life Insurance and Annuities $ 2,569.2 $ 2,065.3 $ 2,341.9
---------------------------------------
. Reinsurance 751.2 660.4 610.7
---------------------------------------
. Employee Life-Health Benefits -- 314.9 1,326.8
---------------------------------------
. Other Operations 16.1 74.6 (28.8)
--------------------------------------- --------- --------- ---------
$ 3,336.5 $ 3,115.2 $ 4,250.6
========= ========= =========
Income (loss) before income taxes and
cumulative effect of accounting change:
. Life Insurance and Annuities $ 361.0 $ 75.6 $ 265.3
---------------------------------------
. Reinsurance 83.5 93.9 31.6
---------------------------------------
. Employee Life-Health Benefits -- 22.9 83.0
---------------------------------------
. Other Operations 5.0 67.8 (44.2)
--------------------------------------- --------- --------- ---------
$ 449.5 $ 260.2 $ 335.7
========= ========= =========
Assets:
. Life Insurance and Annuities $45,280.0 $37,675.9 $36,021.0
---------------------------------------
. Reinsurance 3,383.5 2,311.5 2,328.9
---------------------------------------
. Employee Life-Health Benefits -- -- 588.5
---------------------------------------
. Other Operations 923.6 1,038.1 770.0
--------------------------------------- --------- --------- ---------
$49,587.1 $41,025.5 $39,708.4
========= ========= =========
</TABLE>
Provisions for depreciation and capital additions were not material.
10.SALE OF AFFILIATES
In December 1993, Lincoln Life recorded a provision for loss
of $98,500,000 (also $98,500,000 after-tax) in the "Other
Operations" segment for the sale of Security-Connecticut
Life Insurance Company (Security-Connecticut). The sale was
completed on February 2, 1994 through an initial public of-
fering and Lincoln Life received cash and notes, net of re-
lated expenses, totaling $237,700,000. The loss on sale and
disposal expenses did not differ materially from the esti-
mate recorded in the fourth quarter of 1993. For the year
ended December 31, 1993, Security-Connecticut, which oper-
ated in the Life Insurance and Annuities segment, had reve-
nue of $274,500,000 and net income of $24,000,000.
In 1994, Lincoln Life completed the sale of 100% of the com-
mon stock of EMPHESYS (parent company of Employers Health
Insurance Company, which comprised the Employee Life-Health
Benefits segment) for $348,200,000 of cash, net of related
expenses, and a $50,000,000 promissory note. A gain on sale
of $69,000,000 (also $69,000,000 after-tax) was recognized
in 1994 in "Other Operations". For the year ended December
31, 1993, EMPHESYS had revenues of $1,304,700,000 and net
income of $55,300,000. EMPHESYS had revenue and net income
of $314,900,000 and $14,400,000, respectively, during the
three months of ownership in 1994.
G-29
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life provides services to and receives services from affiliated
companies which resulted in a net receipt of $7,500,000, $13,900,000 and
$18,900,000 in 1995, 1994 and 1993, respectively.
Lincoln Life both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994
---------
(in millions)
---------
<S> <C> <C>
Insurance assumed $ 17.6 $ 19.8
-----------------
Insurance ceded 214.4 481.3
-----------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies
as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
-----------------------------------------------
(in millions)
-----------------------------------------------
<S> <C> <C>
Future policy benefits and claims assumed $ 344.8 $341.3
---------------------------------------------------
Future policy benefits and claims ceded 1,344.5 857.7
---------------------------------------------------
Amounts recoverable on paid and unpaid losses 65.9 36.8
---------------------------------------------------
Reinsurance payable on paid losses 5.5 3.5
---------------------------------------------------
Funds held under reinsurance treaties-net liability 712.3 238.4
---------------------------------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with unau-
thorized companies. To take a reserve credit for such reinsurance, Lincoln
Life holds assets from the reinsurer, including funds held under reinsur-
ance treaties, and is the beneficiary on letters of credit aggregating
$340,800,000 and $308,200,000 at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, LNC had guaranteed $275,300,000 and
$298,200,000, respectively, of these letters of credit. At December 31,
1995, Lincoln Life has a receivable (included in the foregoing amounts)
from affiliated insurance companies in the amount of $241,900,000 for stat-
utory surplus relief received under financial reinsurance ceded agreements.
11.SUBSEQUENT EVENT
In January 1996, LNC announced that it had signed a definitive agreement to
acquire the group tax-sheltered annuity business of UNUM Corporation's af-
filiates. This purchase is expected to be completed in the form of a rein-
surance transaction with an initial ceding commission of approximately
$70,000,000. This ceding commission represents the present value of busi-
ness in-force and, accordingly, will be classified as other intangible as-
sets upon the close of this transaction. This transaction, which is ex-
pected to close in the third quarter of 1996, will increase LNC's assets
and policy liabilities and accruals by approximately $3,200,000,000.
12.TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with Lincoln Life under
which it sells Lincoln Life's products and provides the service that other-
wise would be provided by a home office marketing department and regional
offices. For providing these selling and marketing services, Lincoln Life
paid LFGI override commissions and operating expense allowances of
$81,900,000, $78,500,000 and $74,500,000 in 1995, 1994 and 1993, respec-
tively. LFGI incurred expenses of $10,400,000, $10,700,000 and $10,500,000
in 1995, 1994 and 1993, respectively, in excess of the override commission
and operating expense allowances received from Lincoln Life, which Lincoln
Life is not required to reimburse.
Cash and invested cash at December 31, 1995 and 1994 include Lincoln Life's
participation in a short-term investment pool with LNC of $333,800,000 and
$428,300,000, respectively. Related investment income amounted to
$22,500,000, $17,100,000 and $9,100,000 in 1995, 1994 and 1993, respective-
ly. Short-term debt at December 31, 1995 and 1994 includes $67,000,000 and
$68,600,000, respectively, borrowed from LNC. Lincoln Life paid interest to
LNC of $24,000, $8,000 and $137,000 in 1995, 1994 and 1993, respectively.
G-30
<PAGE>
FINANCIAL SCHEDULES
The following consolidated financial statement schedules of
Lincoln National Life Insurance Company and subsidiaries are
included on pages G-32 through G-36:
I. Summary of Investments--Other than Investments in Related
Parties -- December 31, 1995
III. Supplementary Insurance Information Years ended Decem-
ber 31, 1995, 1994 and 1993
IV. Reinsurance -- Years ended December 31, 1995, 1994 and
1993
V. Valuation and Qualifying Accounts -- Years ended December
31, 1995, 1994 and 1993
All other schedules for which provision is made in the ap-
plicable accounting regulation of the Securities and Ex-
change Commission are not required under the related in-
structions, are inapplicable or the required information is
included in the consolidated financial statements, and
therefore have been omitted.
G-31
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- ------------------------------------------------------------------------------
Amount at
which shown
in the
balance
Type of Investment Cost Value sheet
- ------------------------------------------------------------------------------
(000's omitted)
-----------------------------------
<S> <C> <C> <C>
Fixed maturity securities available-
for-sale:
Bonds:
. United States Government and
government agencies and authorities $ 569,552 $ 653,444 $ 653,444
--------------------------------------
. States, municipalities and political
subdivisions 12,325 12,375 12,375
--------------------------------------
. Mortgage-backed securities 4,891,521 5,184,751 5,184,751
--------------------------------------
. Foreign governments 927,901 997,567 997,567
--------------------------------------
. Public utilities 2,572,309 2,772,990 2,772,990
--------------------------------------
. Convertibles and bonds with warrants
attached 181,431 199,658 199,658
--------------------------------------
. All other corporate bonds 9,658,371 10,551,770 10,551,770
--------------------------------------
Redeemable preferred stocks 39,427 42,230 42,230
-------------------------------------- ----------- ----------- -----------
Total fixed maturity securities 18,852,837 20,414,785 20,414,785
- ---------------------------------------
Equity securities available-for-sale:
Common stocks:
. Public utilities 8,980 10,989 10,989
--------------------------------------
. Banks, trust and insurance companies 74,897 89,197 89,197
--------------------------------------
. Industrial, miscellaneous and all
other 345,434 436,556 436,556
--------------------------------------
Nonredeemable preferred stocks 50,950 61,693 61,693
-------------------------------------- ----------- ----------- -----------
Total equity securities 480,261 598,435 598,435
- ---------------------------------------
Mortgage loans on real estate 3,176,275 3,147,783(A)
Real estate:
. Investment properties 635,135 635,135
--------------------------------------
. Acquired in satisfaction of debt 157,441 110,888(A)
--------------------------------------
Policy loans 565,325 565,325
- ---------------------------------------
Other investments 253,015 241,219(A)
- --------------------------------------- ----------- -----------
Total investments $24,120,189 $25,713,570
- --------------------------------------- =========== ===========
</TABLE>
(A) Investments which are deemed to have declines in value that are other than
temporary are written down or reserved for to reduce their carrying value
to their estimated realizable value.
G-32
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------
Future policy
benefits, Other policy
Deferred claims and claims and
acquisition claim Unearned benefits Premium
Segment costs expenses premiums payable revenue (A)
- --------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance and
annuities $ 713,213 $6,530,475 $ 9,145 $-- $ 685,258
----------------------
Reinsurance 247,921 1,855,039 45,951 -- 611,416
----------------------
Other (including
consolidating
adjustments) (7,300) 49,505 78 -- 622
----------------------
---------- ---------- ------- --- ----------
$ 953,834 $8,435,019 $55,174 $-- $1,297,296
========== ========== ======= === ==========
Year ended December 31,
1994:
Life insurance and
annuities $1,427,692 $5,888,581 $11,201 $-- $ 647,416
----------------------
Reinsurance 304,913 1,626,033 51,618 -- 542,034
----------------------
Employee life-health
benefits -- -- -- -- 299,338
----------------------
Other (including
consolidating
adjustments) 3,921 26,158 (1,347) -- 1,076
----------------------
---------- ---------- ------- --- ----------
$1,736,526 $7,540,772 $61,472 $-- $1,489,864
========== ========== ======= === ==========
Year ended December 31,
1993:
Life insurance and
annuities $ 999,126 $6,782,207 $ 5,188 $-- $ 662,353
----------------------
Reinsurance 298,787 1,616,088 54,157 -- 491,397
----------------------
Employee life-health
benefits -- 228,892 -- -- 1,243,576
----------------------
Other (including
consolidating
adjustments) -- 171,043 315 -- 387
----------------------
---------- ---------- ------- --- ----------
$1,297,913 $8,798,230 $59,660 $-- $2,397,713
========== ========== ======= === ==========
</TABLE>
(A) Includes insurance fees on universal life and other interest sensitive
products.
G-33
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION CONTINUED
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
- -------------------------------------------------------------------------------------------
Amortization
Benefits, claims of deferred Other
Net investment and claim acquisition operating Premium
Segment income (B) expenses costs expenses (B) written
- -------------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance and
annuities $1,741,231 $1,649,119 $298,020 $261,016 $ --
----------------------
Reinsurance 134,000 472,198 101,729 93,750 --
----------------------
Other (including
consolidating
adjustments) 24,399 1,299 -- 9,898 --
---------------------- ---------- ---------- -------- -------- -----
$1,899,630 $2,122,616 $399,749 $364,664 $ --
========== ========== ======== ======== =====
Year ended December 31,
1994:
Life insurance and
annuities $1,542,552 $1,554,479 $ 85,697 $349,529 $ --
----------------------
Reinsurance 116,957 419,266 29,477 117,238 --
----------------------
Employee life-health
benefits (C) 10,838 218,672 -- 73,355 --
----------------------
Other (including
consolidating
adjustments) 3,634 1,630 -- 5,682 --
---------------------- ---------- ---------- -------- -------- -----
$1,673,981 $2,194,047 $115,174 $545,804 $ --
========== ========== ======== ======== =====
Year ended December 31,
1993:
Life insurance and
annuities $1,676,163 $1,615,883 $197,363 $268,066 $ --
----------------------
Reinsurance 115,582 467,824 38,351 72,840 --
----------------------
Employee life-health
benefits 54,513 943,235 -- 300,648 --
----------------------
Other (including
consolidating
adjustments) (22,799) 6,197 5,275 (744) --
---------------------- ---------- ---------- -------- -------- -----
$1,823,459 $3,033,139 $240,989 $640,810 $ --
========== ========== ======== ======== =====
</TABLE>
(B) The allocation of expenses between investments and other operations are
based on a number of assumptions and estimates. Results would change if
different methods were applied.
(C) Includes data through the March 21, 1994 date of sale of the direct writer
of employee life-health coverages.
G-34
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE (A)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------
Percentage
Ceded Assumed of amount
Gross to other from other assumed to
Segment amount companies companies Net amount net
- --------------------------------------------------------------------------------------
(000's omitted)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance in force $ 51,570,782 $17,612,782 $142,794,000 $176,752,000 80.8%
-----------------------
Premiums:
-----------------------
Health insurance 302,463 299,222 273,572 276,813 98.8
----------------------
Life insurance (B) 658,936 142,523 504,070 1,020,483 49.4
---------------------- ------------ ----------- ------------ ------------
$ 961,399 $ 441,745 $ 777,642 $ 1,297,296
============ =========== ============ ============
Year ended December 31,
1994:
Life insurance in force $ 79,802,000 $45,822,000 $125,640,000 $159,620,000 78.7%
-----------------------
Premiums:
-----------------------
Health insurance 666,609 496,090 359,659 530,178 67.8
----------------------
Life insurance (B) 629,185 220,678 551,179 959,686 57.4
---------------------- ------------ ----------- ------------ ------------
$ 1,295,794 $ 716,768 $ 910,838 $ 1,489,864
============ =========== ============ ============
Year ended December 31,
1993:
Life insurance in force $135,401,000 $61,401,000 $109,257,000 $183,257,000 59.6%
-----------------------
Premiums:
-----------------------
Health insurance 1,387,414 217,705 262,171 1,431,880 18.3
----------------------
Life insurance (B) 771,408 350,907 545,332 965,833 56.5
---------------------- ------------ ----------- ------------ ------------
$ 2,158,822 $ 568,612 $ 807,503 $ 2,397,713
============ =========== ============ ============
</TABLE>
(B) Includes insurance fees on universal life and other interest sensitive
products.
G-35
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------
Additions
-----------------------
(1) (2)
Charged to
Balance at Charged other Deductions- Balance
beginning to costs and accounts- describe at end of
Description of period expenses (A) describe (B) period
- ---------------------------------------------------------------------------------
(000's omitted)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $ 56,614 $ 2,659 $ -- $ (30,781) $ 28,492
-----------------------
. Reserve for real
estate 65,186 (7,227) -- (11,406) 46,553
-----------------------
. Reserve for other
long-term investments 13,492 (1,541) -- (155) 11,796
-----------------------
Year ended December 31,
1994:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $220,671 $ 19,464 $ -- $(183,521) $ 56,614
-----------------------
. Reserve for real
estate 121,427 13,058 -- (69,299) 65,186
-----------------------
. Reserve for other
long-term investments 26,730 262 -- (13,500) 13,492
-----------------------
Included in other
liabilities:
Investment guarantees 1,804 4,280 -- (6,084) --
-----------------------
Year ended December 31,
1993:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $129,093 $136,717 $ -- $ (45,139) $220,671
-----------------------
. Reserve for real
estate 114,178 21,776 -- (14,527) 121,427
-----------------------
. Reserve for other
long-term investments 31,582 3,905 -- (8,757) 26,730
-----------------------
Included in other
liabilities:
Investment guarantees 12,550 1,674 -- (12,420) 1,804
-----------------------
</TABLE>
(A) Exclude charges for the direct write-off of assets. The negative amounts
represent improvements in the underlying assets for which valuation ac-
counts had previously been established.
(B) Deductions reflect sales or foreclosures of the underlying holdings.
G-36
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors
Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets
of Lincoln National Life Insurance Co., a wholly owned sub-
sidiary of Lincoln National Corp., as of December 31, 1995
and 1994, and the related consolidated statements of income,
shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1995. Our audits also
included the financial statement schedules listed on page G-
31. These financial statements and schedules are the respon-
sibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally ac-
cepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the fi-
nancial statements. An audit also includes assessing the ac-
counting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Lincoln National Life Insurance Co. at
December 31, 1995 and 1994, and the consolidated result of
its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when
considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the consolidated financial state-
ments, in 1993 the Company changed its method of accounting
for postretirement benefits other than pensions, accounting
for impairment of loans and accounting for certain invest-
ments in debt and equity securities.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
February 7, 1996
G-37
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
<TABLE>
<CAPTION>
December 31
1996 1995
--------- ---------
(in millions)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $19,389.6 $17,729.7
- -------------------------------------------------------------------------------------------------------
Preferred stocks 239.7 89.9
- -------------------------------------------------------------------------------------------------------
Unaffiliated common stocks 358.3 535.5
- -------------------------------------------------------------------------------------------------------
Affiliated common stocks 241.5 193.0
- -------------------------------------------------------------------------------------------------------
Mortgage loans on real estate 2,976.7 2,909.7
- -------------------------------------------------------------------------------------------------------
Real estate 621.3 655.2
- -------------------------------------------------------------------------------------------------------
Policy loans 626.5 515.8
- -------------------------------------------------------------------------------------------------------
Other investments 282.7 248.0
- -------------------------------------------------------------------------------------------------------
Cash and short-term investments 759.2 780.9
- ----------------------------------------------------------------------------------- --------- ---------
Total cash and investments 25,495.5 23,657.7
- -------------------------------------------------------------------------------------------------------
Premiums and fees in course of collection 60.9 17.1
- -------------------------------------------------------------------------------------------------------
Accrued investment income 343.6 342.5
- -------------------------------------------------------------------------------------------------------
Funds withheld by ceding companies 25.8 595.3
- -------------------------------------------------------------------------------------------------------
Other admitted assets 355.7 217.7
- -------------------------------------------------------------------------------------------------------
Separate account assets 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total admitted assets $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,954.0 $ 5,713.3
- -------------------------------------------------------------------------------------------------------
Other policyholder funds 17,262.4 15,598.5
- -------------------------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 250.2 499.3
- -------------------------------------------------------------------------------------------------------
Funds held under reinsurance treaties 564.6 1,053.5
- -------------------------------------------------------------------------------------------------------
Asset valuation reserve 375.5 270.0
- -------------------------------------------------------------------------------------------------------
Interest maintenance reserve 76.7 116.3
- -------------------------------------------------------------------------------------------------------
Other liabilities 490.9 391.3
- -------------------------------------------------------------------------------------------------------
Federal income taxes 4.3 3.2
- -------------------------------------------------------------------------------------------------------
Net transfers due from separate accounts (659.7) (548.0)
- -------------------------------------------------------------------------------------------------------
Separate account liabilities 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities 48,054.0 41,559.0
- -------------------------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares--10 million (owned by Lincoln National
Corporation) 25.0 25.0
- -------------------------------------------------------------------------------------------------------
Paid-in surplus 883.4 783.4
- -------------------------------------------------------------------------------------------------------
Unassigned surplus 1,054.2 924.5
- ----------------------------------------------------------------------------------- --------- ---------
Total capital and surplus 1,962.6 1,732.9
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities and capital and surplus $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
</TABLE>
See accompanying notes.
S-1
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------
(in millions)
--------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $7,268.5 $4,899.1 $5,648.7
- -------------------------------------------------------------------------------
Net investment income 1,756.3 1,772.2 1,606.8
- -------------------------------------------------------------------------------
Amortization of interest maintenance reserve 27.2 34.0 9.8
- -------------------------------------------------------------------------------
Commissions and expense allowances on reinsurance
ceded 90.9 98.3 145.0
- -------------------------------------------------------------------------------
Expense charges on deposit funds 100.7 83.2 70.5
- -------------------------------------------------------------------------------
Other income 16.8 14.5 15.6
- --------------------------------------------------- -------- -------- --------
Total revenues 9,260.4 6,901.3 7,496.4
- -------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 5,989.9 4,184.0 5,071.6
- -------------------------------------------------------------------------------
Underwriting, acquisition, insurance and other
expenses 2,878.5 2,345.7 2,136.1
- --------------------------------------------------- -------- -------- --------
Total benefits and expenses 8,868.4 6,529.7 7,207.7
- --------------------------------------------------- -------- -------- --------
Gain from operations before dividends to
policyholders, income taxes and net realized gain
on investments 392.0 371.6 288.7
- -------------------------------------------------------------------------------
Dividends to policyholders 27.3 27.3 18.0
- --------------------------------------------------- -------- -------- --------
Gain from operations before federal income taxes
and net realized gain on investments 364.7 344.3 270.7
- -------------------------------------------------------------------------------
Federal income taxes 83.6 103.7 52.8
- --------------------------------------------------- -------- -------- --------
Gain from operations before net realized gain on
investments 281.1 240.6 217.9
- -------------------------------------------------------------------------------
Net realized gain on investments, net of income tax
expense (benefits) [1996--$28.5; 1995--$48.1;
1994--$(178.1)] and excluding net transfers to
(from) the interest maintenance reserve [1996--
$(12.4); 1995--$94.9; 1994--$(147.1)] 53.3 43.9 124.0
- --------------------------------------------------- -------- -------- --------
Net income $ 334.4 $ 284.5 $ 341.9
- --------------------------------------------------- ======== ======== ========
</TABLE>
See accompanying notes.
S-2
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year
ended
December
31
1996 1995 1994
-------- -------- --------
(in millions)
----------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $1,732.9 $1,679.6 $1,302.5
- ----------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 334.4 284.5 341.9
- ----------------------------------------------------------------
Differences in cost and admitted investment amounts 38.6 143.2 (123.3)
- ----------------------------------------------------------------
Nonadmitted assets (3.0) 2.9 (3.2)
- ----------------------------------------------------------------
Regulatory liability for reinsurance 0.6 (2.0) (1.1)
- ----------------------------------------------------------------
Life policy reserve valuation basis (0.4) 2.9 (1.3)
- ----------------------------------------------------------------
Asset valuation reserve (105.5) (112.5) 83.8
- ----------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- 2.2 218.6
- ----------------------------------------------------------------
Paid-in surplus 100.0 15.1 --
- ----------------------------------------------------------------
Separate account receivable due to change in valuation -- 27.0 --
- ----------------------------------------------------------------
Accounting for separate account contracts -- -- (13.3)
- ----------------------------------------------------------------
Dividends to shareholder (135.0) (310.0) (125.0)
- ---------------------------------------------------------------- -------- -------- --------
Capital and surplus at end of year $1,962.6 $1,732.9 $1,679.6
- ---------------------------------------------------------------- ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
S-3
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
----------------------------------
(in millions)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 8,059.4 $ 5,430.9 $ 5,654.5
- -------------------------------------------------------------------------------------
Allowances and reserve adjustments received (paid) on
reinsurance ceded (767.5) (383.6) 137.1
- -------------------------------------------------------------------------------------
Investment income received 1,700.6 1,713.2 1,588.5
- -------------------------------------------------------------------------------------
Benefits paid (4,050.4) (3,239.6) (3,054.1)
- -------------------------------------------------------------------------------------
Insurance expenses paid (2,972.2) (2,513.5) (2,542.5)
- -------------------------------------------------------------------------------------
Federal income taxes recovered (paid) (72.3) 38.4 (191.8)
- -------------------------------------------------------------------------------------
Dividends to policyholders (27.7) (16.5) (18.4)
- -------------------------------------------------------------------------------------
Other income received and expenses paid, net 6.3 14.4 59.2
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by operating activities 1,876.2 1,043.7 1,632.5
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,542.0 13,183.9 11,877.0
- -------------------------------------------------------------------------------------
Purchase of investments (14,175.4) (14,049.6) (12,871.8)
- -------------------------------------------------------------------------------------
Other uses (266.5) (64.0) (123.4)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash used in investing activities (1,899.9) (929.7) (1,118.2)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 100.0 15.1 --
- -------------------------------------------------------------------------------------
Proceeds from borrowings 100.0 63.0 63.0
- -------------------------------------------------------------------------------------
Repayment of borrowings (63.0) (63.0) (60.0)
- -------------------------------------------------------------------------------------
Dividends paid to shareholder (135.0) (310.0) (125.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by (used in) financing activities 2.0 (294.9) (122.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (21.7) (180.9) 392.3
- -------------------------------------------------------------------------------------
Cash and short-term investments at beginning of year 780.9 961.8 569.5
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Cash and short-term investments at end of year $ 759.2 $ 780.9 $ 961.8
- -------------------------------------------------------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
S-4
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in In-
diana. As of December 31, 1996, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific
Life Insurance Company, Lincoln National Health & Casualty Insurance Compa-
ny, Lincoln National Reassurance Company and Lincoln Life & Annuity Company
of New York.
The Company's principal business consist of underwriting annuities, depos-
it-type contracts, life and health insurance through multiple distribution
channels and the reinsurance of individual and group life and health busi-
ness. The Company is licensed and sells its products in 49 states, Canada
and several U.S. territories.
USE OF ESTIMATES
The preparation of financial statements requires management to make esti-
mates and assumptions that affect amounts reported in the financial state-
ments and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known, which could impact the
amounts reported and disclosed herein.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted accounting prin-
ciples ("GAAP"). The more significant variances from GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or market value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported di-
rectly in shareholder's equity after adjustments for related amortization
of deferred acquisition costs, additional policyholder commitments and de-
ferred income taxes.
Investments in real estate are reported net of related obligation rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the gen-
eral level of interest rates and amortizes those deferrals over the remain-
ing period to maturity of the individual security sold. The net deferral is
reported as the interest maintenance reserve in the accompanying balance
sheets. Realized capital gains and losses are reported in income net of
federal income tax and transfers to the interest maintenance reserve. The
asset valuation reserve is determined by an NAIC prescribed formula and is
reported as a liability rather than unassigned surplus. Under GAAP, real-
ized capital gains and losses are reported in the income statement on a
pre-tax basis in the period that the asset giving rise to the gain or loss
is sold and valuation allowances are provided when there has been a decline
in value deemed other than temporary, in which case, the provision for such
declines are charged to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not consoli-
dated with the accounts and operations of the Company as would be required
by GAAP. Under statutory accounting principles, the Company's subsidiaries
are carried at their statutory-basis net equity.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For uni-
versal life insurance, annuity and other investment-type products, deferred
policy acquisition costs, to the extent recoverable from future gross prof-
its, are amortized generally in proportion to the present value of expected
gross profits from surrender charges and investment, mortality and expense
margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying bal-
ance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
S-5
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method.
For mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect ac-
tual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Common stocks are reported at market value as determined by the Securities
Valuation Office of the NAIC and the related unrealized gains (losses) are
reported in unassigned surplus without adjustment for federal income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall lia-
bility-asset management program for certain investments and life insurance
and annuity products. The Company values all derivative instruments on a
basis consistent with that of the hedged item. Upon termination, gains and
losses on those instruments are included in the carrying values of the un-
derlying hedged items and are amortized over the remaining lives of the
hedged items as adjustments to investment income or benefits from the
hedged items. Any unamortized gains or losses are recognized when the un-
derlying hedged items are sold.
Mortgage loans on real estate are reported at unpaid balances, less allow-
ances for impairments. Real estate is reported at depreciated cost. As of
June 30, 1994, the Company changed its method of accounting for reserves on
impaired real estate and mortgage loans. The impaired investment is now
shown on a pre-tax basis as a nonadmitted asset. Previously, these reserves
were presented as a liability, net of related tax benefits, to approximate
the impact on surplus if losses were realized.
Realized investment gains and losses on investments sold are determined us-
ing the specific identification method. Changes in admitted asset carrying
amounts of
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required inter-
est and mortality assumptions rather than on estimated expected experience
or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other investment-
type contracts are reported as benefits and settlement expenses; in the ac-
companying statement of income, whereas, under GAAP, withdrawals are
treated as a reduction of the policy or contract liabilities and benefits
would represent the excess of benefits paid over the policy account value
and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not au-
thorized by the Indiana Department of Insurance to assume such business.
Changes to those amounts are credited or charged directly to unassigned
surplus. Under GAAP, an allowance for amounts deemed uncollectible is es-
tablished through a charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using tradi-
tional reinsurance accounting whereas such contracts would be accounted for
using deposit accounting under GAAP.
POSTRETIREMENT BENEFITS
For purposes of calculating the Company's postretirement benefit obliga-
tion, only vested employees and current retirees are included in the valua-
tion. Under GAAP, active employees not currently eligible would also be in-
cluded.
S-6
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations
and statistical analyses. Those estimates are subject to the effects of
trends in claim severity and frequency. Although considerable variability
is inherent in such estimates, management believes that the reserves for
claims and claim adjustment expenses are adequate. The estimates are con-
tinually reviewed and adjusted as necessary as experience develops or new
information becomes known; such adjustments are included in current opera-
tions.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original pol-
icies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is sys-
tematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the ex-
tent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other mea-
surement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
These assets and liabilities represent segregated funds administered and
invested by LNC's insurance subsidiaries for the exclusive benefit of pen-
sion and variable life and annuity contractholders. The fees received by
the Company for administrative and contractholder maintenance services per-
formed for these separate accounts are included in the Company's statements
of income.
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
bonds, mortgage loans and common and preferred stocks are credited or
charged directly in unassigned surplus.
DATA PROCESSING EQUIPMENT
Data processing equipment is reported at depreciated cost, with deprecia-
tion determined on a straight-line basis over five years.
GOODWILL
Goodwill, which represents the excess of the ceding commission over statu-
tory-basis net assets of business purchased under an assumption reinsurance
agreement, is amortized on a straight-line basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due. Ac-
cident and health premiums are earned prorata over the contract term of the
policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by ac-
tuarial methods and are determined based on published tables using statuto-
rily specified interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than or equal to the minimum or
guaranteed policy cash values or the amounts required by the Indiana De-
partment of Insurance. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenarios indicate the need for such
reserve. If net premiums exceed the gross premiums on any insurance in-
force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined us-
ing the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
S-7
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of the Company's net income and capital and surplus deter-
mined on a statutory accounting basis with amounts determined in accordance
with GAAP is as follows:
<TABLE>
<CAPTION>
Capital and Surplus Net Income
-------------------- -----------------------
Year ended December
December 31 31
1996 1995 1996 1995 1994
--------- --------- ------ ------ -------
(in millions)
<S> <C> <C> <C> <C> <C>
Amounts reported on a
statutory basis $ 1,962.6 $ 1,732.9 $334.4 $284.5 $ 341.9
----------------------------
GAAP adjustments:
----------------------------
Deferred policy acquisition
costs and present value of
future profits 1,119.1 850.2 66.7 (63.0) 191.1
----------------------------
Policy and contract
reserves (1,405.3) (1,562.2) (57.1) (55.3) (53.6)
----------------------------
Interest maintenance
reserve 76.7 116.3 (39.7) 60.9 (157.0)
----------------------------
Deferred income taxes (27.4) (122.5) 1.8 38.3 (138.3)
----------------------------
Policyholders' share of
earnings and surplus on
participating business (81.9) (91.9) (.3) .2 (3.0)
----------------------------
Asset valuation reserve 375.5 270.0 -- -- --
----------------------------
Net realized gain (loss) on
investments (72.0) (67.4) 78.7 30.0 47.1
----------------------------
Adjustment to unrealized
gain (loss) 825.2 1,494.0 -- -- --
----------------------------
Nonadmitted assets,
including nonadmitted
investments (7.1) 57.9 -- -- --
----------------------------
Net GAAP adjustments of
subsidiary companies 156.6 131.2 29.9 34.3 48.2
----------------------------
Other, net (99.0) (89.7) (82.6) (7.3) (58.6)
---------------------------- --------- --------- ------ ------ -------
Net increase (decrease) 860.4 985.9 (2.6) 38.1 (124.1)
---------------------------- --------- --------- ------ ------ -------
Amounts on a GAAP basis $ 2,823.0 $ 2,718.8 $331.8 $322.6 $ 217.8
---------------------------- ========= ========= ====== ====== =======
</TABLE>
S-8
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
2.PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in accor-
dance with accounting practices prescribed or permitted by the Indiana De-
partment of Insurance (the "Department"). "Prescribed" statutory accounting
practices include state laws, regulations and general administrative rules,
as well as a variety of publications of the NAIC. "Permitted" statutory ac-
counting practices encompass all accounting practices that are not pre-
scribed; such practices may differ from state to state, may differ from
company to company within a state and may change in the future. The NAIC
currently is in the process of recodifying statutory accounting practices,
the result of which is expected to constitute the only source of "pre-
scribed" statutory accounting practices. Accordingly, that project, which
is expected to be completed in 1998, will likely change, to some extent,
prescribed statutory accounting practices, and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements.
In 1994, the Company received approval from the Department to change its
accounting for surrender charges applicable to separate account liabilities
for variable life and annuity products so that the surrender charges on
these products are recorded as a liability in the separate account finan-
cial statements payable to the Company's general account. In the accompany-
ing financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds. The
cumulative effect of this change increased 1994 net income by $13,299,000.
The Company has approval from the Department to establish valuation allow-
ances on mortgage loans on real estate in accordance with GAAP, which are
in excess of that prescribed by the NAIC and the Department.
Prior to 1995, the Company has considered certain amounts under modified
coinsurance reinsurance contracts as adjustments to premiums. As such, pol-
icyholder dividends, cash surrender charges and reserve adjustments with
interest thereon and commissions on reinsurance assumed are classified as
premiums, rather than on expense lines, with no net effect on net income or
capital and surplus. On a net-of-ceded basis for the year ended December
31, 1994, this practice resulted in increases to both revenues and expenses
of approximately $600,000,000. In addition, reserve adjustments with inter-
est thereon and commissions on reinsurance ceded were also classified as
premiums, rather than in other revenue classifications. For the year ended
December 31, 1994, this intra-revenue grouping reduced premiums by approxi-
mately $50,000,000. Beginning in 1995, the Company reports modified coin-
surance agreements on a gross basis. This change was made as a result of
communications with the Department. This accounting change had no effect on
income or surplus and prior period amounts have not been restated.
S-9
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------
(in millions)
--------------------------
<S> <C> <C> <C>
Income:
Bonds $1,442.2 $1,457.4 $1,266.7
--------------------------------------------------------------------------------
Preferred stocks 9.6 6.4 5.8
--------------------------------------------------------------------------------
Unaffiliated common stocks 6.5 5.2 4.4
--------------------------------------------------------------------------------
Affiliated common stocks 9.5 12.6 62.5
--------------------------------------------------------------------------------
Mortgage loans on real estate 269.3 252.0 255.2
--------------------------------------------------------------------------------
Real estate 114.4 110.0 97.4
--------------------------------------------------------------------------------
Policy loans 35.0 32.1 29.7
--------------------------------------------------------------------------------
Other investments 22.4 62.6 121.3
--------------------------------------------------------------------------------
Cash and short-term investments 48.9 53.2 43.3
--------------------------------------------------------------- -------- -------- --------
Total investment income 1,957.8 1,991.5 1,886.3
-----------------------------------------------------------------------------------
Expenses:
Depreciation 25.0 25.9 21.9
--------------------------------------------------------------------------------
Other 176.5 193.4 257.6
--------------------------------------------------------------- -------- -------- --------
Total investment expenses 201.5 219.3 279.5
---------------------------------------------------------------- -------- -------- --------
Net investment income $1,756.3 $1,772.2 $1,606.8
---------------------------------------------------------------- ======== ======== ========
</TABLE>
Nonadmitted accrued investment income at December 31, 1996
and 1995 amounted to $2,500,000 and $11,500,000, respective-
ly, consisting principally of interest on bonds in default
and mortgage loans.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are summa-
rized as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------
(in millions)
-----------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1996:
Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0
--------------------------------------------------------------
U.S. government 1,088.7 43.2 18.0 1,113.9
--------------------------------------------------------------
Foreign government 1,234.0 105.1 1.4 1,337.7
--------------------------------------------------------------
Mortgage-backed 4,478.4 183.3 27.4 4,634.3
--------------------------------------------------------------
State and municipal 40.4 .1 -- 40.5
-------------------- --------- -------- ------ ---------
$19,389.6 $ 918.2 $113.4 $20,194.4
========= ======== ====== =========
At December 31, 1995:
Corporate $11,642.0 $1,074.7 $ 41.4 $12,675.3
--------------------------------------------------------------
U.S. government 546.4 82.2 -- 628.6
--------------------------------------------------------------
Foreign government 908.0 68.0 .6 975.4
--------------------------------------------------------------
Mortgage-backed 4,628.3 283.2 11.2 4,900.3
--------------------------------------------------------------
State and municipal 5.0 .1 -- 5.1
-------------------- --------- -------- ------ ---------
$17,729.7 $1,508.2 $ 53.2 $19,184.7
========= ======== ====== =========
</TABLE>
S-10
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
Fair values for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are esti-
mated by discounting expected future cash flows using a cur-
rent market rate applicable to the coupon rate, credit qual-
ity and maturity of the investments.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1996, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
------------------------------
(in millions)
-------------------
<S> <C> <C>
Maturity:
In 1997 $ 358.0 $ 360.1
----------------------------------------------------------------------------------------------
In 1998-2001 3,809.0 3,912.3
----------------------------------------------------------------------------------------------
In 2002-2006 4,760.9 4,917.3
----------------------------------------------------------------------------------------------
After 2006 5,983.3 6,370.4
----------------------------------------------------------------------------------------------
Mortgage-backed securities 4,478.4 4,634.3
--------------------------------------------------------------------------- --------- ---------
Total $19,389.6 $20,194.4
--------------------------------------------------------------------------- ========= =========
</TABLE>
The expected maturities may differ from the contractual ma-
turities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1996, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
Proceeds from sales of investments in bonds during 1996,
1995 and 1994 were $10,996,900,000, $12,234,100,000 and
$9,668,300,000, respectively. Gross gains during 1996, 1995
and 1994 of $169,700,000, $225,600,000 and $62,600,000, re-
spectively, and gross losses of $177,000,000, $83,100,000
and $286,800,000, respectively, were realized on those
sales.
At December 31, 1996 and 1995, investments in bonds, with an
admitted asset value of $70,700,000 and $60,700,000, respec-
tively, were on deposit with state insurance departments to
satisfy regulatory requirements.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in unaffiliated
common stocks and preferred stocks are as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------
<S> <C> <C> <C> <C>
(in millions)
-------------------------------
At December 31, 1996:
Preferred stocks $239.7 $ 10.5 $ 1.7 $248.5
----------------------------------------------------------
Unaffiliated common stocks 289.9 84.6 16.2 358.3
----------------------------------------------------------
At December 31, 1995:
Preferred stocks 89.9 13.9 .2 103.6
----------------------------------------------------------
Unaffiliated common stocks 438.0 110.0 12.5 535.5
----------------------------------------------------------
</TABLE>
S-11
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $241,500,000 and
$193,000,000 at December 31, 1996 and 1995, respectively.
The cost basis of investments in subsidiaries as of December
31, 1996 and 1995 was $194,000,000 and $123,000,000, respec-
tively.
During 1996, the maximum and minimum lending rates for mort-
gage loans were 10.5% and 6.0%, respectively. At the issu-
ance of a loan, the percentage of loan to value on any one
loan does not exceed 75%. At December 31, 1996, the Company
did not hold any mortgages with interest overdue beyond one
year. At December 31, 1996, the Company's investments in
mortgage loans were subject to $59,700,000 of prior liens.
All properties covered by mortgage loans have fire insurance
at least equal to the excess of the loan over the maximum
loan that would be allowed on the land without the building.
4.FEDERAL INCOME TAXES
The effective federal income tax rate for financial report-
ing purposes differs from the prevailing statutory tax rate
principally due to tax-exempt investment income, dividends-
received tax deductions, differences in policy acquisition
costs and policy and contract liabilities for tax return and
financial statement purposes.
Federal income taxes incurred of $83,600,000, $103,700,000
and $52,800,000 in 1996, 1995 and 1994, respectively, would
be subject to recovery in the event that the Company incurs
net operating losses within three years of the years for
which such taxes were paid.
Prior to 1984, a portion of the Company's current income was
not subject to current income tax, but was accumulated for
income tax purposes in a memorandum account designated as
"policyholders' surplus." The Company's balance in the "pol-
icyholders' surplus" account at December 31, 1983 of
$187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
accordingly, there have been no additions to the accounts
after that date. That portion of current income on which in-
come taxes have been paid will continue to be accumulated in
a memorandum account designated as "shareholder's surplus,"
and is available for dividends to the shareholder without
additional payment of tax by the Company. The December 31,
1996 memorandum account balance for "shareholder's surplus"
was $1,606,000,000. Should dividends to the shareholder ex-
ceed its respective "shareholder's surplus," amounts would
need to be transferred from the "policyholders' surplus" and
would be subject to federal income tax at that time. Under
existing or foreseeable circumstances, the Company neither
expects nor intends that distributions will be made that
will result in any such tax.
5.SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets," includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995 1994
----------------------------------------
(in millions)
----------------------------------------
<S> <C> <C> <C>
Insurance ceded $1,154.5 $1,634.0 $1,721.1
Amounts recoverable from other insurers 16.0 4.4 4.8
</TABLE>
S-12
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1996 1995 1994
--
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $241.3 $667.7 $607.3
-------------------------------
Insurance ceded 193.3 453.1 583.8
------------------------------- ------ ------ ------
Net amount included in premiums $ 48.0 $214.6 $ 23.5
------------------------------- ====== ====== ======
</TABLE>
The income statement caption, "Benefits and Settlement Ex-
penses," is net of reinsurance recoveries of $787,886,200,
$1,407,000,000 and $1,391,100,000 for 1996, 1995 and 1994,
respectively.
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption, "Pre-
miums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 3.9 $1.9 $ 2.0
---------------------
Ordinary renewal 35.1 3.0 32.1
---------------------
Group life 9.4 (.1) 9.5
---------------------
Group annuity -- -- --
--------------------- ------ ---- ------
$ 48.4 $4.8 $ 43.6
====== ==== ======
<CAPTION>
December 31, 1995
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 2.5 $1.1 $ 1.4
---------------------
Ordinary renewal (19.1) 2.8 (21.9)
---------------------
Group life 15.8 -- 15.8
---------------------
Group annuity .2 -- .2
--------------------- ------ ---- ------
$ (.6) $3.9 $ (4.5)
====== ==== ======
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance Consul-
tants, Inc. to write group life and health business. Direct
premiums written amounted to $26,200,000 $3,800,000 and
$8,600,000 in 1996 and $33,100,000, $10,600,000 and
$8,800,000 in 1995, respectively. During 1996, LNC Adminis-
trative Services entered into a similar agreement with the
Company with direct premiums written amounting to
$6,200,000. Authority granted by the managing general agents
agreements include underwriting, claims adjustment and
claims payment services.
S-13
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
6.ANNUITY RESERVES
At December 31, 1996, the Company's annuity reserves and de-
posit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are sum-
marized as follows:
<TABLE>
<CAPTION>
Amount Percent
----------------
(in millions)
-------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,971.8 6.0%
------------------------------------------------------
At book value, less surrender charge 5,228.6 12.0
------------------------------------------------------
At market value 22,703.4 51.0
------------------------------------------------------ ---------- ------
30,903.8 69.0
Subject to discretionary withdrawal without adjustment
at book value with minimal or no charge or adjustment 10,986.4 25.0
------------------------------------------------------
Not subject to discretionary withdrawal 2,601.9 6.0
------------------------------------------------------
---------- ------
Total annuity reserves and deposit fund 44,492.1
liabilities--before reinsurance 100.0%
------------------------------------------------------
======
Less reinsurance 1,848.8
------------------------------------------------------ ----------
Net annuity reserves and deposit fund liabilities,
including separate accounts $42,643.3
------------------------------------------------------ ==========
</TABLE>
7.CAPITAL AND SURPLUS
Life insurance companies are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under
those requirements, the amount of capital and surplus main-
tained by a life insurance company is to be determined based
on the various risk factors related to it. At December 31,
1996, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and can-
not be made except from earned profits. The maximum amount
of dividends that may be paid by life insurance companies
without prior approval of the Indiana Insurance Commissioner
is subject to restrictions relating to statutory surplus and
net gain from operations. In 1997, the Company can pay divi-
dends of $281,100,000 without prior approval of the Indiana
Insurance Commissioner.
8.EMPLOYEE BENEFIT PLANS
Pension plans
LNC maintains funded defined benefit pension plans for most
of its employees and, prior to January 1, 1995, full-time
agents. The benefits for employees are based on total years
of service and the highest 60 months of compensation during
the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings.
The plans are funded by contributions to tax-exempt trusts.
The Company's funding policy is consistent with the funding
requirements of Federal laws and regulations. Contributions
are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the
future. Plan assets consist principally of listed equity se-
curities, corporate obligations and government bonds.
All benefits applicable to the funded defined benefit plan
for agents were frozen as of December 31, 1994. The curtail-
ment of this plan did not have a significant effect on net
pension cost for 1994. Effective January 1, 1995, pension
benefits for agents have been provided by a new defined
S-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
contribution plan. Contributions to this plan will be based
on 2.3% of an agent's earnings up to the social security
wage base and 4.6% of any excess.
LNC also administers two types of unfunded, non-qualified,
defined benefit plans for certain employees and agents. A
supplemental retirement plan provides employees and agents
defined benefit pension benefits in excess of limits imposed
by Federal tax law. A salary continuation plan provides cer-
tain officers of the Company defined pension benefits based
on years of service and final monthly salary upon death or
retirement.
The status of the funded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
------- 1995
(in millions)
----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(156.9) $(146.1)
-------------------------------------------------------------------------
Nonvested benefits (6.0) (7.7)
-------------------------------------------------------------------------
------- -------
Accumulated benefit obligation (162.9) (153.8)
-------------------------------------------------------------------------
Effect of projected future compensation increases (27.9) (28.5)
-------------------------------------------------------------------------
------- -------
Projected benefit obligation (190.8) (182.3)
-------------------------------------------------------------------------
Plan assets at fair value 186.1 173.2
-------------------------------------------------------------------------
------- -------
Projected benefit obligation in excess of plan assets (4.7) (9.1)
-------------------------------------------------------------------------
Unrecognized net loss 4.9 9.3
-------------------------------------------------------------------------
Unrecognized prior service cost 1.4 1.5
-------------------------------------------------------------------------
------- -------
Prepaid pension costs included in other liabilities $ 1.6 $ 1.7
-------------------------------------------------------------------------
======= =======
</TABLE>
The status of the unfunded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
----- 1995
(in
millions)
------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(6.6) $(6.4)
-------------------------------------------------------------------
Nonvested benefits (.9) (1.1)
-------------------------------------------------------------------
----- -----
Accumulated benefit obligation (7.5) (7.5)
-------------------------------------------------------------------
Effect of projected future compensation increases (1.1) (1.7)
-------------------------------------------------------------------
----- -----
Projected benefit obligation (8.6) (9.2)
-------------------------------------------------------------------
Unrecognized net loss (gain) (.1) .9
-------------------------------------------------------------------
Unrecognized prior service cost .2 .3
-------------------------------------------------------------------
----- -----
Accrued pension costs included in other liabilities $(8.5) $(8.0)
-------------------------------------------------------------------
===== =====
</TABLE>
S-15
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The determination of the projected benefit obligation for
the defined benefit plans was based on the following assump-
tions:
<TABLE>
<CAPTION>
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 7.0% 8.0%
----------------------------------------------------------------------
Rate of increase in compensation:
----------------------------------------------------------------------
Salary continuation plan 5.5 6.0 6.5
----------------------------------------------------------------------
All other plans 4.5 5.0 5.0
----------------------------------------------------------------------
Expected long-term rate of return on plan assets 9.0 9.0 9.0
----------------------------------------------------------------------
The components of net pension cost for the defined benefit
pension plans are as follows:
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 5.2 $ 4.1 $ 7.9
------------------------------------------------------------------------
Interest cost on projected benefit obligation 12.9 11.9 11.6
------------------------------------------------------------------------
Actual return on plan assets (17.5) (32.0) 4.2
------------------------------------------------------------------------
Net amortization (deferral) 3.1 20.3 (16.7)
------------------------------------------------------------------------ ----- ----- -----
Net pension cost $ 3.7 $ 4.3 $ 7.0
------------------------------------------------------------------------ ===== ===== =====
</TABLE>
401K PLAN
LNC and the Company sponsor contributory defined contribu-
tion plans for eligible employees and agents. The Company's
contributions to the plans are equal to each participant's
pre-tax contribution, not to exceed 6% of base pay, multi-
plied by a percentage ranging from 25% to 150%, which varies
according to certain incentive criteria as determined by
LNC's Board of Directors. Expense for these plans amounted
to $9,300,000, $6,700,000 and $11,200,000 in 1996, 1995 and
1994, respectively.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLANS
LNC sponsors unfunded defined benefit plans that provide
postretirement medical and life insurance benefits to full-
time employees and agents who, depending on the plan, have
worked for the Company 10 to 15 years and attained age 55 to
60. Medical benefits are also available to spouses and other
dependents of employees and agents. For medical benefits,
limited contributions are required from individuals retired
prior to November 1, 1988; contributions for later retirees,
which can be adjusted annually, are based on such items as
years of service at retirement and age at retirement. The
life insurance benefits are noncontributory, although par-
ticipants can elect supplemental contributory benefits.
The status of the postretirement medical and life insur-
ance benefit plans and the amounts recognized in the bal-
ance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
--------------------------
(in millions)
--------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(32.4) $(37.9)
------------------------------------------------------------------------
Fully eligible active plan participants (8.2) (8.7)
------------------------------------------------------------------------ ------ ------
Accumulated postretirement benefit obligation (40.6) (46.6)
------------------------------------------------------------------------
Unrecognized net loss (gain) (7.0) .8
------------------------------------------------------------------------ ------ ------
Accrued plan cost included in other liabilities $(47.6) $(45.8)
------------------------------------------------------------------------ ====== ======
</TABLE>
S-16
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The components of periodic postretirement benefit cost
are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------------
(in millions)
----------------
<S> <C> <C> <C>
Service cost $1.3 $1.1 $1.4
------------------------------------------------------------------------
Interest cost 2.7 3.0 3.1
------------------------------------------------------------------------
Amortized cost (credit) (.5) (.4) .1
------------------------------------------------------------------------ ---- ---- ----
Net periodic postretirement benefit cost $3.5 $3.7 $4.6
------------------------------------------------------------------------ ==== ==== ====
</TABLE>
The calculation of the accumulated postretirement benefit
obligation assumes a weighted-average annual rate of in-
crease in the per capita cost of covered benefits (i.e.,
health care cost trend rate) of 8.5% for 1997. It further
assumes the rate will gradually decrease to 5.0% by 2005 and
remain at that level. The health care cost trend rate as-
sumption has a significant effect on the amounts reported.
For example, increasing the assumed health care cost trend
rates by one percentage point each year would increase the
accumulated postretirement benefit obligation as of December
31, 1996 and 1995 by $1,900,000 and $2,100,000, respective-
ly. The aggregate of the estimated service and interest cost
components of net periodic postretirement benefit cost for
the year ended December 31, 1996 would increase by $184,000.
The calculation assumes a long-term rate of increase in com-
pensation of 4.5% and 5.0% at December 31, 1996 and 1995,
respectively. The weighted-average discount rate used in de-
termining the accumulated postretirement benefit obligation
was 7.0% for both December 31, 1996 and 1995.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES
DISABILITY INCOME POLICIES
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1996 and 1995 is a net
liability of $572,000,000 and $503,800,000, respectively. This liability is
based on the assumption that the recent experience will continue in the fu-
ture. If incidence levels or claim termination rates vary significantly
from these assumptions, adjustments to reserves may be required in the fu-
ture. Accordingly, this liability may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company. The Company con-
tinually reviews and updates the level of these reserves.
During the fourth quarter of 1995, the Company completed an in-depth review
of the experience of its disability income business. As a result of this
study, and based on the assumption that recent experience will continue in
the future, net income decreased by $15,200,000 as a result of strengthen-
ing the disability income reserve.
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with poli-
cies that were less advantageous to the policyholder. The Company's manage-
ment continues to monitor the Company's sales materials and compliance pro-
cedures and is making an extensive effort to minimize any potential liabil-
ity. However, due to the uncertainty surrounding such matters, it is not
possible to provide a meaningful estimate of the range of potential out-
comes at this time.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity con-
tracts, which are no longer being sold by the Company, are supported by a
single portfolio of assets that attempts to match the duration of these li-
abilities. Due to the very long-term nature of group pension annuities and
the resulting inability to exactly match cash flows, a risk exists that fu-
ture cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future development will
S-17
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain affili-
ates. The portion of risks exceeding the Company's retention limit is rein-
sured with other insurers. Industry regulations prescribe the maximum cov-
erage that the Company can retain on an individual insured. As of December
31, 1996, the Company's maximum retention on a single insured was
$3,000,000. To cover products other than life insurance, the Company ac-
quires other insurance coverages with retentions and limits that management
believes are appropriate for the circumstances. The accompanying financial
statements reflect premiums and benefits and settlement expenses, net of
insurance ceded. The Company remains liable if its reinsurers are unable to
meet their contractual obligations under the applicable reinsurance agree-
ments.
The Company assumes insurance from other companies, including certain af-
filiates. At December 31, 1996, the Company has provided $17,200,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables from the ceding company, which are secured by future profits on the
reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1996, the Company did not have a concentration of: 1) busi-
ness transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of la-
bor or services used in the business; or 4) a market or geographic area in
which business is conducted that makes it vulnerable to an event that is at
least reasonably possible to occur in the near term and which could cause a
severe impact to the Company's financial condition.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
not materially affect the financial position of the Company.
LEASES
The Company leases its home office properties. The agreements provide for a
25 year lease period with options to renew for six additional terms of five
years each. The agreements also provide the Company with the right of first
refusal to purchase the properties during the term of the lease, including
renewal periods, at a price as defined in the agreements. In addition, the
Company has the option to purchase the leased properties at fair value as
defined in the agreements on the last day of the initial 25 year lease pe-
riod ending in 2009 or on the last day of any of the renewal periods.
Total rental expense on operating leases in 1996, 1995 and 1994 was
$26,400,000, $22,500,000 and $20,600,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1997 $ 17.5
1998 17.1
1999 17.4
2000 16.9
2001 17.2
Thereafter 151.6
------
$237.7
======
</TABLE>
S-18
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. In some instances, these proceedings
include claims for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for alleged contractual liability or
requests for equitable relief. After consultation with legal counsel and a
review of available facts, it is management's opinion that these proceed-
ings ultimately will be resolved without materially affecting the financial
position or results of operations of the Company.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabili-
tated companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. The Company has accrued
for expected assessments net of estimated future premium tax deductions.
REINSURANCE
The regulatory required liability for unsecured reserves ceded to unautho-
rized reinsurers was $4,300,000 and $5,600,000 at December 31, 1996 and
1995, respectively.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-balance-
sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
Contract Amounts
-----------------
December 31
-----------------
1996 1995
--------------------
(in millions)
-----------------
<S> <C> <C>
Mortgage loan pass-through certificates $ 50.3 $ 63.6
Real estate partnerships .5 3.3
-------- --------
$ 50.8 $ 66.9
======== ========
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans. In some cases, the terms of these arrangements involve
guarantees by each of the partners to indemnify the mortgagor in the event
a partner is unable to pay its principal and interest payments. In addi-
tion, the Company has sold commercial mortgage loans through grantor trusts
which issued pass-through certificates. The Company has agreed to repur-
chase any mortgage loans which remain delinquent for 90 days at a repur-
chase price substantially equal to the outstanding principal balance plus
accrued interest thereon to the date of repurchase. It is management's
opinion that the value of the properties underlying these commitments is
sufficient that in the event of default the impact would not be material to
the Company. Accordingly, both the carrying value and fair value of these
guarantees is zero at December 31, 1996 and 1995.
S-19
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
DERIVATIVES
The Company has derivatives with off-balance-sheet risks
whose notional or contract amounts exceed the credit ex-
posure. The Company has entered into derivative transac-
tions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable
maturity U.S. Government obligations and foreign exchange
risks. In addition, the Company is subject to the risks
associated with changes in the value of its derivatives;
however, such changes in the value generally are offset
by changes in the value of the items being hedged by such
contracts. Outstanding derivatives with off-balance-sheet
risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as
follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
------------------------------
Notional or Carrying Fair Carrying Fair
contract amounts value value value value
---------------------------------------------
December 31 December 31 December 31
1996 1995 1996 1996 1995 1995
---------------------------------------------
(in millions)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate
derivatives:
Interest rate cap
agreements $5,500.0 $5,110.0 $20.8 $ 8.2 $22.7 $5.3
Spread-lock agreements -- 600.0 -- -- (.9) (.9)
Swaptions 672.0 -- 11.0 10.6 -- --
Financial futures
contracts 147.7 -- (2.4) (2.4) -- --
Interest rate swaps -- 5.0 -- -- .2 .2
-------- -------- ----- ----- ----- ----
6,319.7 5,715.0 29.4 16.4 22.0 4.6
Foreign currency
derivatives:
Foreign exchange forward
contracts 251.5 15.7 .2 (.2) (.6) (.6)
Foreign currency options 43.9 99.2 .6 .4 1.9 1.4
Foreign currency swaps 15.0 15.0 -- (2.1) .4 .4
-------- -------- ----- ----- ----- ----
310.4 129.9 .8 (1.9) 1.7 1.2
-------- -------- ----- ----- ----- ----
$6,630.1 $5,844.9 $30.2 $14.5 $23.7 $5.8
======== ======== ===== ===== ===== ====
</TABLE>
S-20
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
A reconciliation and discussion of the notional or contract
amounts for the significant programs using derivative agree-
ments and contracts at December 31 is as follows:
<TABLE>
<CAPTION>
Interest Rate Caps Spread Locks Swaptions
----------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 5,110.0 $ 4,400.0 $ 600.0 $ 1,300.0 $ -- $ --
New contracts 390.0 710.0 15.0 800.0 672.0 --
Terminations and -- -- (615.0) (1,500.0) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Financial Futures
------------------------------------------
Contracts Options Interest Rate Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ -- $ 382.5 $ -- $ -- $ 5.0 $ --
New contracts 7,918.8 810.5 -- 181.6 -- --
Terminations and (7,771.1) (1,193.0) -- (181.6) (5.0) --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 147.7 $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Foreign Currency Derivatives
----------------------------------------------------------------------
Foreign Exchange Foreign Currency Foreign
Forward Contracts Options Currency Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 15.7 $ 21.2 $ 99.2 $ -- $ 15.0 $ --
New contracts 406.9 131.2 1,168.8 356.6 -- 15.0
Terminations and (171.1) (136.7) (1,224.1) (257.4) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
========= ========= ========= ========= ========= =========
</TABLE>
S-21
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1997 through 2003, enti-
tle the Company to receive payments from the counterparties on specified
future reset dates, contingent on future interest rates. For each cap, the
amount of such quarterly payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the ef-
fect of fluctuating interest rates. The premium paid for the interest rate
caps is included in other assets ($20,800,000 as of December 31, 1996) and
is being amortized over the terms of the agreements. This amortization is
included in net investment income.
SWAPTIONS
Swaptions, which expire in 2002, entitle the Company to receive settlement
payments from the counterparties on specified expiration dates, contingent
on future interest rates. For each swaption, the amount of such settlement
payments, if any, is determined by the present value of the difference be-
tween the fixed rate on a market rate swap and the strike rate multiplied
by the notional amount. The purpose of the Company's swaption program is to
protect the assets supporting its annuity line of business from the effect
of fluctuating interest rates. The premium paid for the swaptions is in-
cluded in other assets ($11,000,000 as of December 31, 1996) and is being
amortized over the terms of the agreements. This amortization is included
in net investment income.
SPREAD LOCKS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified U.S.
Treasury note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity U.S. Treasury
security and the price sensitivity of the swap at that time. It is ex-
pressed in dollars-per-basis point. The purpose of the Company's spread-
lock program is to protect a portion of its fixed maturity securities
against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts and options on
those financial futures to hedge against interest rate risks and to manage
duration of a portion of its fixed maturity securities. Financial futures
contracts obligate the Company to buy or sell a financial instrument at a
specified future date for a specified price. They may be settled in cash or
through delivery of the financial instrument. Cash settlements on the
change in market values of financial futures contracts are made daily. Op-
tions on financial futures give the Company the right, but not the obliga-
tion, to assume a long or short position in the underlying futures at a
specified price during a specified time period.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to re-
exchange the two currencies at the same rate of exchange at a specified fu-
ture date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,900,000 and $5,600,000 in 1996 and 1995, respectively. Deferred losses
of $37,600,000 as of December 31, 1996, were the result of: 1) terminated
and expired spread-lock agreements; and 2) financial futures contracts.
These losses are included with the related fixed maturity securities to
which the hedge applied and are being amortized over the life of such secu-
rities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, interest rate swaps, foreign exchange forward contracts, for-
eign currency options and foreign currency swaps. However, the Company does
not anticipate nonperformance by any of these counterparties. The credit
risk associated with such agreements is minimized by purchasing such agree-
ments from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement
cost or market value for such agreements with each counterparty if the net
market value is in the Company's favor. At December 31, 1996, the exposure
was $17,500,000.
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Ac-
S-22
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
cordingly, the estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of
all of the Company's financial instruments.
BONDS
Fair values of bonds are based on quoted market prices, where available.
For bonds not actively traded, fair values are estimated using values ob-
tained from independent pricing services. In the case of private place-
ments, fair values are estimated by discounting expected future cash flows
using a current market rate applicable to the coupon rate, credit quality
and maturity of the investments. The fair values of affiliated common
stocks are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income when compared to the expected yield for mortgages having sim-
ilar characteristics. The rating for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service cov-
erage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loan are measured based on: 1) the present
value of expected future cash flows discounted at the loan's effective in-
terest rate; 2) the loan's market price; or 3) the fair value of the col-
lateral if the loan is collateral dependent.
POLICY LOANS
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on
historical experience.
OTHER INVESTMENTS AND CASH AND INVESTED CASH
The carrying value for assets classified as other investments and cash and
invested cash in the accompanying balance sheet approximates their fair
value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment-type insurance contracts (i.e., de-
posit contracts and guaranteed interest contracts). The fair values for the
deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining guar-
anteed interest and similar contracts are based on their approximate sur-
render values. The fair values for the remaining guaranteed interest and
similar contracts are estimated using discounted cash flow calculations.
These calculations are based on interest rates currently offered on similar
contracts with maturities consistent with those remaining for the contracts
being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate con-
clusions about the Company's capital and surplus determined on a fair value
basis. It could be misleading if only the fair value of assets and liabili-
ties defined as financial instruments are disclosed. The Company and other
companies in the insurance industry are monitoring the related actions of
the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their insur-
ance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate partner-
ships and mortgage loan pass-through certificates. Based on historical per-
formance where repurchases have been negligible and the current status,
which indicates none of the loans are delinquent, the fair value liability
for the guarantees related to the mortgage loan pass-through certificates
is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, options on financial futures, interest rate swaps, call
options, foreign currency options and foreign currency swaps.
Fair values for derivative contracts are based on current settlement val-
ues. These values are based on: 1) quoted market prices for the foreign
currency exchange contracts, financial future contracts, and options on fi-
nancial futures; and 2) brokerage quotes that utilized pricing models or
formulas using current assumptions for all other swaps and agreements.
S-23
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real es-
tate are based on the difference between the value of the committed invest-
ments as of the date of the accompanying balance sheets and the commitment
date. These estimates would take into account changes in interest rates,
the counterparties' credit standing and the remaining terms of the commit-
ments.
S-24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
The carrying values and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------
1996 1995
---------------------- ----------------------
Carrying Fair Carrying Fair
Assets (Liabilities) value value value value
---------------------------------------- ---------- ---------- ---------- ----------
(in millions)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 19,389.6 $ 20,194.4 $ 17,729.7 $ 19,184.7
----------------------------------------
Preferred stock 239.7 248.5 89.9 103.6
----------------------------------------
Unaffiliated common stock 358.3 358.3 535.5 535.5
----------------------------------------
Mortgage loans on real estate 2,976.7 3,070.9 2,909.7 3,081.9
----------------------------------------
Policy loans 626.5 612.7 515.8 504.0
----------------------------------------
Other investments 282.7 282.7 248.0 248.0
----------------------------------------
Cash and short-term investments 759.2 759.2 780.9 780.9
----------------------------------------
Investment type insurance contracts:
----------------------------------------
Deposit contracts and certain
guaranteed interest contracts (17,871.6) (17,333.0) (15,586.7) (15,046.0)
----------------------------------------
Remaining guaranteed interest and
similar contracts (1,799.7) (1,835.4) (2,261.1) (2,340.4)
----------------------------------------
Short-term debt (100.0) (100.0) (63.0) (63.0)
----------------------------------------
Derivatives 26.5 13.8 23.7 5.8
----------------------------------------
Investment commitments -- (.6) -- (.8)
----------------------------------------
</TABLE>
11.ACQUISITIONS AND SALES OF SUBSIDIARIES
The Company sold its 100% interest in two subsidiaries--Se-
curity Connecticut Life Insurance Company ("SCL") and Em-
ployers Health Insurance Company ("EHI"). SCL was sold
through a public offering of stock in January 1994. This
transaction resulted in a realized gain of $90,000,000 and a
direct increase in surplus of $24,000,000. Net of expenses,
the Company received cash of $172,000,000 and notes of
$65,000,000.
EHI was also sold through public offerings in March and
April 1994. LNC purchased 29% of the stock of the new pub-
licly traded holding company from LNL. Prior to the sale,
the Company received a $50,000,000 dividend in the form of a
note. The sale transaction resulted in a realized gain of
$133,000,000 and a direct reduction in surplus of
$21,000,000 due to release of unrealized gain amounts, for a
net surplus increase of $112,000,000. Net of expenses, the
Company received cash of $348,000,000.
In October 1996, the Company and its wholly owned subsidiary
purchased a block of group tax qualified annuity business
from UNUM Corporation. The transaction was completed in the
form of a reinsurance transaction, which resulted in a ced-
ing commission of $71,800,000. The ceding commission has
been recorded as admissible goodwill of $62,300,000, which
is to be amortized on a straight-line basis over 10 years.
The Company's subsidiary was required by the New York De-
partment of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals
of the Company and its wholly owned subsidiary increased by
$3,200,000,000 as a result of this transaction.
In its previously-filed 1996 NAIC Annual Statement, the Com-
pany recorded the ceding commission as a nonadmitted asset,
which was charged directly to unassigned surplus. According-
ly, unassigned surplus was understated at December 31, 1996
by $62,300,000, net of amortization in 1996. In 1997, man-
agement will correct its opening balance of unassigned sur-
plus in its NAIC Annual Statement.
S-25
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
The balance sheets include reinsurance balances with affiliated companies
as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
-------- --------
(in millions)
-----------------
<S> <C> <C>
Future policy benefits and claims assumed $ 312.7 $ 344.8
Future policy benefits and claims ceded 891.8 1,344.5
Amounts recoverable on paid and unpaid losses 31.2 65.9
Reinsurance payable on paid losses 2.7 5.5
Funds held under reinsurance treaties--net liability 1,062.4 712.3
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with unau-
thorized companies. To take a reserve credit for such reinsurance, the Com-
pany holds assets from the reinsurer, including funds held under reinsur-
ance treaties, and is the beneficiary on letters of credit aggregating
$314,200,000 and $306,800,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, LNC had guaranteed $239,200,000 and
$241,400,000, respectively, of these letters of credit. At December 31,
1996, the Company has a receivable (included in the foregoing amounts) from
affiliated insurance companies in the amount of $135,700,000 for statutory
surplus relief received under financial reinsurance ceded agreements.
13. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying bal-
ance sheets represent funds that are separately administered, principally
for annuity contracts, and for which the contractholder, rather than the
Company, bears the investment risk. Separate account contractholders have
no claim against the assets of the general account of the Company. Separate
account assets are reported at fair value and consist primarily of long-
term bonds, common stocks, short-term investments and mutual funds. The de-
tailed operations of the separate accounts are not included in the accompa-
nying financial statements. Fees charged on separate account policyholder
deposits are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,148,700,000, $3,068,200,000 and $2,694,700,000 in 1996, 1995 and 1994,
respectively. Reserves for separate accounts with assets at fair value were
$23,047,800,000 and $17,891,400,000 at December 31, 1996 and 1995, respec-
tively. All reserves are subject to discretionary withdrawal at market val-
ue. Substantially all of the Company's separate accounts are nonguaranteed.
12. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional of-
fices. For providing these selling and marketing services, the Company paid
LFGI override commissions and operating expense allowances of $56,300,000,
$43,300,000 and $41,200,000 in 1996, 1995 and 1994, respectively. LFGI in-
curred expenses of $15,700,000, $10,400,000 and $10,700,000 in 1996, 1995
and 1994, respectively, in excess of the override commissions and operating
expense allowances received from the Company, which the Company is not re-
quired to reimburse.
Cash and short-term investments at December 31, 1996 and 1995 include the
Company's participation in a short-term investment pool with LNC of
$175,100,000 and $324,000,000, respectively. Related investment income
amounted to $15,300,000, $21,100,000 and $16,100,000 in 1996, 1995 and
1994, respectively. Other liabilities at December 31, 1996 and 1995 include
$100,000,000 of notes payable to LNC.
The Company provides services to and receives services from affiliated com-
panies which resulted in a net payment of $34,100,000 and $24,900,000 in
1996 and 1995, respectively.
The Company both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statement of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $ 17.9 $ 17.6 $ 19.8
Insurance ceded 302.8 214.4 481.3
</TABLE>
S-26
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
13. SEPARATE ACCOUNTS CONTINUED
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995
----------------------------------------------------
(in millions)
---------------------
<S> <C> <C>
Transfers as reported in the Summary of
Operations of various Separate Accounts:
Transfers to separate accounts $ 4,149.6 $ 3,070.2
Transfers from separate accounts (2,058.5) (1,457.8)
--------- ---------
Net transfer to separate accounts as reported
in the Company's NAIC Annual Statement $ 2,091.1 $ 1,612.4
========= =========
</TABLE>
S-27
<PAGE>
OTHER FINANCIAL INFORMATION
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of The Lincoln
National Life Insurance Company (a wholly owned subsidiary of Lincoln National
Corporation) as of December 31, 1996 and 1995, and the related statutory-basis
statements of income, changes in capital and surplus and cash flows for each of
the three years in the period ended December 31, 1996. These financial state-
ments are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or per-
mitted by the Indiana Department of Insurance, which practices differ from gen-
erally accepted accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the accompanying
financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial posi-
tion of The Lincoln National Life Insurance Company at December 31, 1996 and
1995, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1996.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Lincoln Na-
tional Life Insurance Company at December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance.
As described in Note 2, in 1994 the Company changed its method of accounting
for separate account contracts.
/s/ Ernst & Young LLP
February 6, 1997
S-28
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Investment income earned:
Government bonds $ 74.6
---------------------------------------------------------------------
Other bonds (unaffiliated) 1,367.6
---------------------------------------------------------------------
Preferred stocks (unaffiliated) 9.6
---------------------------------------------------------------------
Common stocks (unaffiliated) 6.5
---------------------------------------------------------------------
Common stocks of affiliates 9.5
---------------------------------------------------------------------
Mortgage loans 269.3
---------------------------------------------------------------------
Real estate 114.4
---------------------------------------------------------------------
Premium notes, policy loans and liens 35.0
---------------------------------------------------------------------
Cash on hand and on deposit 0.9
---------------------------------------------------------------------
Short-term investments 48.0
---------------------------------------------------------------------
Other invested assets 17.6
---------------------------------------------------------------------
Derivative instruments (6.3)
---------------------------------------------------------------------
Aggregate write-ins for investment income 11.1
----------------------------------------------------------- --------
Gross investment income $1,957.8
- ------------------------------------------------------------- ========
Real estate owned (cost, less encumbrances) $ 621.3
- ------------------------------------------------------------- ========
Mortgage loans (unpaid balance):
Farm mortgages $ 1.1
---------------------------------------------------------------------
Residential mortgages 3.7
---------------------------------------------------------------------
Commercial mortgages 2,971.9
----------------------------------------------------------- --------
Total mortgage loans $2,976.7
- ------------------------------------------------------------- ========
Mortgage loans by standing (unpaid balance):
Good standing $2,922.1
----------------------------------------------------------- ========
Good standing with restructured terms $ 39.6
----------------------------------------------------------- ========
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------- ========
Foreclosure in process $ 14.9
----------------------------------------------------------- ========
Other long-term assets (statement value) $ 248.1
- ------------------------------------------------------------- ========
</TABLE>
S-29
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks $ 194.0
------------------------------------------------------------- ==========
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 1,618.0
-------------------------------------------------------------
Over 1 year through 5 years 5,928.1
-------------------------------------------------------------
Over 5 years through 10 years 6,025.9
-------------------------------------------------------------
Over 10 years through 20 years 3,670.6
-------------------------------------------------------------
Over 20 years 2,860.4
------------------------------------------------------------- ----------
Total by maturity $ 20,103.0
- --------------------------------------------------------------- ==========
Bonds by class (statement value):
Class 1 $ 14,013.7
-------------------------------------------------------------
Class 2 4,504.1
-------------------------------------------------------------
Class 3 807.6
-------------------------------------------------------------
Class 4 705.9
-------------------------------------------------------------
Class 5 71.4
-------------------------------------------------------------
Class 6 0.3
------------------------------------------------------------- ----------
Total by class $ 20,103.0
- --------------------------------------------------------------- ==========
Total bonds publicly traded $ 16,520.3
- --------------------------------------------------------------- ==========
Total bonds privately placed $ 3,582.7
- --------------------------------------------------------------- ==========
Preferred stocks (cost or amortized cost) $ 239.7
- --------------------------------------------------------------- ==========
Unaffiliated common stocks (market value) $ 358.3
- --------------------------------------------------------------- ==========
Short-term investments (cost or amortized cost) $ 713.4
- --------------------------------------------------------------- ==========
Financial options and caps owned (statement value) $ 32.2
- --------------------------------------------------------------- ==========
Financial options and caps written (statement value) $ 0.3
- --------------------------------------------------------------- ==========
Swap and forward agreements open (statement value) $ 0.2
- --------------------------------------------------------------- ==========
Futures contracts open (current value) $ 161.2
- --------------------------------------------------------------- ==========
Cash on deposit $ 45.8
- --------------------------------------------------------------- ==========
Life insurance in-force:
Ordinary $ 97.9
------------------------------------------------------------- ==========
Group life $ 31.4
------------------------------------------------------------- ==========
</TABLE>
S-30
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 4.9
- ----------------------------------------------------------------------------------------------- =========
Life insurance policies with disability provisions in-force:
Ordinary $ 4.9
--------------------------------------------------------------------------------------------- =========
Group life $ 12.9
--------------------------------------------------------------------------------------------- =========
Supplementary contracts in-force:
Ordinary--not involving life contingencies:
Amount on deposit $ --
--------------------------------------------------------------------------------------------- =========
Income payable $ 3.2
--------------------------------------------------------------------------------------------- =========
Ordinary--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Group--not involving life contingencies:
Income payable $ --
--------------------------------------------------------------------------------------------- =========
Group--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Annuities:
Ordinary:
Immediate--amount of income payable $ 68.4
--------------------------------------------------------------------------------------------- =========
Deferred--fully paid account balance $ 0.6
--------------------------------------------------------------------------------------------- =========
Deferred--not fully paid account balance $ 326.6
--------------------------------------------------------------------------------------------- =========
Group:
Amount of income payable $ --
--------------------------------------------------------------------------------------------- =========
Fully paid account balance $ --
--------------------------------------------------------------------------------------------- =========
Not fully paid account balance $ 78.1
--------------------------------------------------------------------------------------------- =========
Accident and health insurance--premiums in-force:
Ordinary $ 180.6
--------------------------------------------------------------------------------------------- =========
Group $ 97.1
--------------------------------------------------------------------------------------------- =========
Deposit funds and dividend accumulations:
Deposit funds account balance $17,456.6
--------------------------------------------------------------------------------------------- =========
Dividend accumulations--account balance $ 114.7
--------------------------------------------------------------------------------------------- =========
</TABLE>
S-31
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
Claim payments 1996:
Group Accident and Health:
<TABLE>
<S> <C>
1996 $ 9.4
=====
--------------
1995 $ 3.1
=====
--------------
1994 $ 0.1
=====
--------------
1993 $ --
=====
--------------
1992 $(0.1)
=====
--------------
Prior $ --
=====
--------------
</TABLE>
S-32
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA
NOTE--BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis financial data as
of December 31, 1996 and for the year then ended for purposes of complying with
paragraph 9 of the Annual Audited Financial Reports in the General Section of
the National Association of Insurance Commissioners' Annual Statement Instruc-
tions and agrees to or is included in the amounts reported in The Lincoln Na-
tional Life Insurance Company's 1996 Statutory Annual Statement as filed with
the Indiana Department of Insurance.
S-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
The Lincoln National Life Insurance Company
Our audits were conducted for the purpose of forming an
opinion on the statutory-basis financial statements taken as
a whole. The accompanying supplemental schedule of selected
statutory-basis financial data is presented to comply with
the National Association of Insurance Commissioners' Annual
Statement Instructions and is not a required part of the
statutory-basis financial statements. Such information has
been subjected to the auditing procedures applied in our au-
dit of the statutory-basis financial statements and, in our
opinion, is fairly stated in all material respects in rela-
tion to the statutory-basis financial statements taken as a
whole.
/s/ Ernst & Young LLP
February 6, 1997
S-34
<PAGE>
This filing is made pursuant to Rule 6e-3(T)
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A)
OF THE INVESTMENT COMPANY ACT OF 1940
Lincoln National Life Insurance Company hereby represents that the fees and
charges deducted under the Policies registered by this registration statement,
in the aggregate, are reasonable in relation to the services rendered, the
expenses expected to be incurred, and the risks assumed by Lincoln National Life
Insurance Company.
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 119 pages.
The undertaking to file reports.
The representation pursuant to Section 26(e)(2)A of the Investment Company Act
of 1940
The signatures.
Written Consents of the following persons:
John L. Steinkamp, Esquire
Denis G. Schwartz, FSA
Ernst & Young LLP
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) 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.*
(9) (a) Services Agreement between Lincoln National Life Insurance
Company, Delaware Management Holding Companies Inc. and Delaware
Services Company, Inc. dated Aug. 15, 1996.
(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.
8. Financial Data Schedule
____________________________________________________________________________
*Previously filed as an exhibit to the registration statement.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Lincoln National Flexible Premium Variable Life Account F, certifies that it
meets all the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this post-effective amendment to this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized, and its seal to be hereunto
affixed and attested, all in the City of Fort Wayne, State of Indiana on this
24th day of April, 1997.
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
on its own behalf as Depositor and on behalf of
LINCOLN NATIONAL FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
By: /s/ Stephen H. Lewis
---------------------------------------
Stephen H. Lewis, Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jon A. Boscia Chief Executive Officer, President April 24, 1997
- -------------------------- and Director (Principal Executive
Jon A. Boscia Officer)
/s/ Keith J. Ryan Vice President, Assistant April 24, 1997
- -------------------------- Treasurer and Chief Financial Officer
Keith J. Ryan (Principal Financial Officer)
/s/ O. Douglas Worthington Vice President and Controller April 24, 1997
- -------------------------- (Principal Accounting Officer)
O. Douglas Worthington
/s/ Jack D. Hunter Executive Vice President, General April 24, 1997
- -------------------------- Counsel and Director
Jack D. Hunter
Director __________, 1997
- --------------------------
H. Thomas McMeekin
* Director April 24, 1997
- --------------------------
Ian M. Rolland
Director and Executive __________, 1997
- -------------------------- Vice President
Lawrence T. Rowland
/s/ Richard C. Vaughan Director April 24, 1997
- --------------------------
Richard C. Vaughan
* /s/ John L. Steinkamp
- -------------------------- pursuant to a Power-of-Attorney filed
John L. Steinkamp with Post-Effective Amendment No. 3 to this
Registration Statement.
</TABLE>
<PAGE>
Specimen Copy
[LOGO]
LINCOLN NATIONAL LIFE INSURANCE CO.
- -----------------------------------
A part of LINCOLN NATIONAL CORPORATION
THE AMOUNT OF THE DEATH BENEFIT OR THE DURATION OF THE DEATH BENEFIT MAY BE
FIXED OR MAY VARY DEPENDING ON THE INVESTMENT EXPERIENCE OF THIS POLICY.
THE CASH SURRENDER VALUE MAY INCREASE OR DECREASE IN ACCORDANCE WITH THE
EXPERIENCE OF THIS POLICY. NO MINIMUM CASH SURRENDER VALUE IS GUARANTEED.
We agree to pay the Proceeds to the Beneficiary after receipt of due proof of
the death of the Insured while this Policy is in force and before the Maturity
Date.
We agree to pay the Proceeds to the Owner if the Insured is living on the
Maturity Date.
READ THIS POLICY CAREFULLY. This is a legal contract between the Owner and the
Lincoln National Life Insurance Company.
RIGHT TO RETURN THIS POLICY. This policy may be returned to the agent through
whom it was purchased or to our Home Office by the latest of: (1) 10 days after
its receipt, or (2) 45 days after Part 1 of the application was signed, or (3)
10 days after we mail or deliver the Notice of Withdrawal Right. Upon
cancellation this Policy will be void from the beginning. The refund will be
the total of all premiums paid for this Policy.
Signed for The Lincoln National Life Insurance Company at its Home Office in
Fort Wayne, Indiana.
/s/ Jon A. Boscia /s/ C. Suzanne Womack
Jon A. Boscia, President C. Suzanne Womack, Secretary
Flexible Premium Variable Life Insurance Policy
Net Cash Surrender Value Payable at Maturity
Death Benefit Payable at Death Prior to Maturity Date
Adjustable Death Benefit
Flexible Premiums Payable During Lifetime
of Insured to Maturity Date
Nonparticipating - No Dividends
<PAGE>
POLICY SCHEDULE
MATURITY DATE IS THE POLICY ANNIVERSARY FOLLOWING THE INSURED'S NINETY-NINTH
BIRTHDAY. COVERAGE MANY EXPIRE PRIOR TO THE MATURITY DATE IF NO PREMIUMS ARE
PAID AFTER THE INITIAL PREMIUM OR IF SUBSEQUENT PREMIUMS ARE INSUFFICIENT TO
CONTINUE COVERAGE TO SUCH DATE. COVERAGE MAY ALSO BE AFFECTED BY A CHANGE IN
CURRENT VALUES.
<TABLE>
<CAPTION>
<S> <C>
POLICY NUMBER: 20 123456 POLICY DATE: NOVEMBER 1, 1995
INSURED: ABRAHAM LINCOLN MATURITY DATE: NOVEMBER 1, 2059
SPECIFIED AMOUNT: PLANNED INITIAL PREMIUM: $16,000
$100,000 TYPE 1
INCLUDES THE POLICY VALUE ISSUE PREMIUM: $15,136
MALE AGE: 35 PLANNED PERIODIC PREMIUM:
RATING CLASS: PREFERRED AMOUNT $0.00
FREQUENCY: ANNUAL
MONTHLY ANNIVERSARY DAY: 01
PERCENT OF PREMIUM CHARGED:
MINIMUM SPECIFIED AMOUNT: $10,000 0.00% OF ALL PREMIUMS
CHARGE FOR TRANSFER: $0.00 MORTALITY AND EXPENSE RISK CHARGE RATE:
.85% FIRST 10 YEARS; .75% THEREAFTER
LOAN COLLATERAL RATE: 4%
ADMINISTRATIVE CHARGE RATE:
POLICY LOAN RATE: 6% IN ARREARS .30% FIRST 10 YEARS; .10% THEREAFTER
DEATH BENEFIT FACTOR: 1.0032737 GUARANTEED DEATH BENEFIT CHARGE RATE:
.10% FIRST 10 YEARS; .00% THEREAFTER
</TABLE>
<PAGE>
POLICY SCHEDULE
POLICY NUMBER: 20 123456 POLICY DATE: NOVEMBER 1, 1995
INSURED: ABRAHAM LINCOLN
<TABLE>
<CAPTION>
TABLE OF SURRENDER CHARGES
POLICY SURRENDER CHARGES AS A
YEAR PERCENT OF INITIAL
PREMIUM
<S> <C>
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%
</TABLE>
<PAGE>
POLICY SCHEDULE
LIST OF SUBACCOUNTS
POLICY NUMBER: 20 123456 POLICY DATE: NOVEMBER 1, 1995
INSURED: ABRAHAM LINCOLN
EACH SUBACCOUNT OF THE LINCOLN NATIONAL FLEXIBLE PREMIUM VARIABLE LIFE SEPARATE
ACCOUNT F INVESTS IN A SPECIFIC FUND. LISTED BELOW ARE THE SUBACCOUNTS, THE
FUNDS, AND THE INITIAL ALLOCATION OF NET PREMIUMS.
<TABLE>
<CAPTION>
SUBACCOUNT FUND ALLOCATION
<S> <C> <C>
GROWTH AMERICAN VARIABLE INSURANCE SERIES 100%
GROWTH FUND
GROWTH-INCOME AMERICAN VARIABLE INSURANCE SERIES 0%
GROWTH-INCOME FUND
HIGH-YIELD BOND AMERICAN VARIABLE INSURANCE SERIES 0%
HIGH-YIELD BOND FUND
U.S. GOVERNMENT AMERICAN VARIABLE INSURANCE SERIES 0%
GUARANTEED/AAA- U.S. GOVERNMENT/AAA-RATED SECURITIES FUND
RATED SECURITIES
CASH MANAGEMENT AMERICAN VARIABLE INSURANCE SERIES 0%
CASH MANAGEMENT FUND
ASSET ALLOCATION AMERICAN VARIABLE INSURANCE SERIES 0%
ASSET ALLOCATION FUND
INTERNATIONAL AMERICAN VARIABLE INSURANCE SERIES 0%
INTERNATIONAL FUND
BOND AMERICAN VARIABLE INSURANCE SERIES 0%
BOND FUND
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF GUARANTEED
MAXIMUM INSURANCE RATES
STANDARD RATE CLASSIFICATION
Male
Monthly Cost of Insurance
- --------------------------------------------------------------------------------
Attained Rate Per Attained Rate Per
Age $1,000 Age $1,000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
0 $ .21838 50 $ .58367
1 .08584 51 .63540
2 .08167 52 .69465
3 .08001 53 .76141
4 .07667 54 .83486
5 .07334 55 .91417
6 .06917 56 .99850
7 .06500 57 1.08701
8 .06250 58 1.18223
9 .06084 59 1.28665
10 .06250 60 1.40196
11 .06750 61 1.53151
12 .07584 62 1.67865
13 .08917 63 1.84339
14 .10251 64 2.02576
15 .11835 65 2.22243
16 .13168 66 2.43257
17 .14335 67 2.65620
18 .15086 68 2.89586
19 .15669 69 3.15995
20 .15836 70 3.45859
21 .15836 71 3.79938
22 .15586 72 4.19082
23 .15336 73 4.63303
24 .14919 74 5.11772
25 .14585 75 5.63575
26 .14335 76 6.17962
27 .14169 77 6.74266
28 .14169 78 7.32916
29 .14252 79 7.95867
30 .14585 80 8.65171
31 .15002 81 9.42806
32 .15586 82 10.30596
33 .16253 83 11.27913
34 .17086 84 12.32677
35 .18087 85 13.42535
36 .19254 86 14.55978
37 .20754 87 15.72082
38 .22338 88 16.90865
39 .24173 89 18.13036
40 .26257 90 19.40436
41 .28508 91 20.76404
42 .30926 92 22.27016
43 .33511 93 24.07690
44 .36347 94 26.51576
45 .39432 95 30.20651
46 .42601 96 36.35803
47 .46021 97 47.20997
48 .49775 98 66.20322
49 .53779
</TABLE>
The above rates are based on the Commissioners 1980 Male Standard Ordinary
Mortality Table, age last birthday.
<TABLE>
<CAPTION>
Female
Monthly Cost of Insurance
- --------------------------------------------------------------------------------
Attained Rate Per Attained Rate Per
Age $1,000 Age $1,000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
0 $ .15669 50 .42768
1 .07000 51 .45854
2 .06667 52 .49358
3 .06500 53 .53112
4 .06334 54 .57033
5 .06167 55 .61037
6 .06000 56 .64959
7 .05917 57 .68714
8 .05750 58 .72553
9 .05667 59 .76725
10 .05667 60 .81650
11 .05834 61 .87911
12 .06084 62 .95758
13 .06417 63 1.05361
14 .06834 64 1.16051
15 .07251 65 1.27496
16 .07667 66 1.39361
17 .08001 67 1.51228
18 .08251 68 1.63517
19 .08584 69 1.77147
20 .08751 70 1.93290
21 .09001 71 2.13204
22 .09168 72 2.37730
23 .09334 73 2.67296
24 .09584 74 3.01238
25 .09751 75 3.39062
26 .10001 76 3.80106
27 .10251 77 4.24041
28 .10668 78 4.71462
29 .11001 79 5.24065
30 .11418 80 5.83889
31 .11835 81 6.52817
32 .12252 82 7.32324
33 .12752 83 8.22459
34 .13418 84 9.21837
35 .14169 85 10.29491
36 .15169 86 11.44790
37 .16336 87 12.67276
38 .17670 88 13.97426
39 .19254 89 15.36072
40 .21004 90 16.85005
41 .22922 91 18.47427
42 .24756 92 20.29451
43 .26674 93 22.44349
44 .28592 94 25.22305
45 .30593 95 29.24956
46 .32677 96 35.72116
47 .34845 97 46.86829
48 .37264 98 66.09429
49 .39933
</TABLE>
The above rates are based on the Commissioners 1980 Female Standard Ordinary
Mortality Table, age last birthday.
<PAGE>
THE CONTRACT
THE CONTRACT. The entire contract consists of:
a. this Policy;
b. the application and any supplemental application; and
c. any amendments.
This Policy is issued in consideration of the application and payment of the
Issue Premium.
A change in this Policy will be binding on us only if the change is in writing,
and the change is made by our President, Vice President, Secretary, or Assistant
Secretary.
NONPARTICIPATION. This Policy is nonparticipating. It will not share in our
profits or surplus earnings.
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
the validity of this Policy only if:
a. the statements are contained in the application for issue, reissue, or
reinstatement, or in any supplemental application; and
b. a copy of that application or supplemental application is attached to this
Policy.
This Policy will not be contestable after it has been in force for 2 years
during the lifetime of the Insured.
Any increase in coverage or any reinstatement will not be contestable after that
increase or reinstatement has been in force 2 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 "a" and "b"
above.
SUICIDE. If the Insured commits suicide, while sane or insane, within 2 years
from the Policy Date, our total liability under this Policy will be the premiums
paid, minus any policy loan, and minus any loan interest due.
If the Insured commits suicide, while sane and insane, within 2 years from the
effective date of any increase in insurance or any reinstatement, our total
liability with respect to such increase or reinstatement will be its Cost of
Insurance.
POLICY DATE. The Policy Date is shown on the Policy Schedule. Policy
anniversaries occur annually on the same month and day as the Policy Date.
RECORD DATE. The Record Date is the date we record this Policy on our books as
an in force policy.
EFFECTIVE DATE OF COVERAGE. The effective dates of coverage under this Policy
will be as follows:
1. For all coverage provided in the original application, the effective date
will be the Policy Date, provided this Policy has been delivered and the
Issue Premium has been paid prior to death of the Insured and prior to any
change in health of the Insured as shown in the application.
2. For any increase to coverage, the effective date will be the first Monthly
Anniversary Day on or next following the day we approve the application for
the increase.
3. For any insurance that has been reinstated, the effective date will be the
first Monthly Anniversary Day on or next following the day we approve the
application for reinstatement.
TERMINATION. All coverage under this Policy will terminate when any one of the
following occurs:
1. The grace period ends without payment of required premium.
2. This Policy is surrendered.
3. The Insured dies.
4. This Policy matures.
MATURITY DATE. The Maturity Date is the date this Policy matures. It is the last
date insurance coverage can remain in force and the date any remaining Net Cash
Surrender Value will be payable. The date is shown on the Policy Schedule.
Coverage will end prior to the Maturity Date if the premiums paid and the Net
Investment Results credited are not sufficient to continue coverage to such
date.
AGE. Age means the Insured's age last birthday on the Policy Date. Attained age
means age last birthday on the policy anniversary on or next preceding any
Monthly Anniversary Day.
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.
ANNUAL REPORT. We will send a report, without charge, to the Owner at least once
each year. It will show:
a. the current Policy Value;
b. the current Net Cash Surrender Value;
c. the amount of Policy Value in each Subaccount;
d. the current Death Benefit;
e. any current policy loans; and
f. activity since the last report:
1) premium paid; and
2) all charges.
The report will also include any other data that may be required where this
contract is delivered.
1
<PAGE>
Projection of Benefits and Values. We will provide a report to the Owner which
shows projected future results. The request must be in writing on a form
suitable to us. The report will be based on assumptions in regard to:
a. the Death Benefit(s) as may be specified by the Owner;
b. planned premium payments as may be specified by the Owner; and
c. such other assumptions as are necessary and specified by us and/or the
Owner.
A reasonable fee may be charged for this report.
OWNERSHIP, BENEFICIARY, AND ASSIGNMENT
Owner. Owner means the Owner identified in the application or a successor. All
the 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.
Change of Owner. The Owner may transfer all ownership rights and privileges to a
new owner. The request must be in writing on a form suitable to us. The change
will be effective when we receive it. We will not be responsible for any payment
or other action we have taken before having recorded the transfer. A change of
ownership will not, in and of itself, affect the interest of any Beneficiary.
Beneficiary. The Beneficiary:
a. will receive the Proceeds when the Insured dies;
b. is named in the application for this Policy; and
c. may be changed by the Owner. The change is subject to the terms shown in the
Change of Beneficiary provision. The request must be in writing on a form
suitable to us. we reserve the right to require this Policy for endorsement
of a change of Beneficiary designation.
If not otherwise provided:
1. The interest of any Beneficiary who dies before the Insured will pass to any
other Beneficiaries according to their interests.
2. 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.
Change of Beneficiary. The Owner may change the Beneficiary designation:
a. while the Insured is alive; and
b. if the prior designation does not prohibit such a change.
A change will revoke any prior designation.
Assignment. An assignment of this Policy will not be binding on us unless:
a. it is in writing on a form suitable to us; and
b. it is received by us at our Home Office.
We will not be responsible for the validity of any assignment. We reserve the
right to require this Policy for endorsement of any assignment.
PREMIUM, GRACE PERIOD, GUARANTEED DEATH BENEFIT, CONTINUATION OF INSURANCE, AND
REINSTATEMENT.
Payment of Premiums. The Issue Premium shown on the Policy Schedule is due on
the Policy Date. Additional premium payments may be made at any time prior to
the Maturity Date. The Initial Premium is the sum of all premiums paid during
the first policy year.
The amounts and frequency of planned premium payments are shown on the Policy
Schedule. Changes in frequency and increases or decreases in amount of Planned
Periodic Premium payments may be made by the Owner. Premiums may not be paid
after the Maturity Date shown on the Policy Schedule.
The Issue Premium and any other premiums will be credited to the Policy on the
later of the Policy Date or the date we receive the premium. All premiums
credited to this Policy prior to the Record Date will be allocated to the
Subaccount which invests in the Cash Management Series. When the value of the
assets is next determined, the value of the amount in the Cash Management Series
will be reallocated to the various Subaccounts in accord with the initial
allocation.
This Policy will not take effect until it has been delivered and the Issue
Premium has been paid prior to death of the Insured and prior to any change in
health of the Insured as shown in the application.
Premiums are payable at the Home Office or to any authorized agent. Receipts
will be furnished upon request.
We will send premium payment reminder notices to the Owner on written request.
The notices may be sent annually, semiannually, or quarterly.
Section 101(a) of the Internal Revenue Code of 1954, as amended, provides for
the exclusion of death benefits from gross income for life insurance contracts.
Section 7702 of the Code defines the term "life insurance contract." It provides
a maximum limitation on premiums which may not be exceeded if the
2
<PAGE>
policy is to qualify for the exclusion. Any portion of a premium payment
received by us in excess of that limitation will be refunded, within 7 days, to
the Owner.
GRACE PERIOD. If the Net Cash Surrender Value on a Monthly Anniversary Day is
not sufficient to cover the Cost of Insurance for the month following such
Monthly Anniversary Day, a grace period will be allowed for the payment of a
premium sufficient to keep this Policy in force until the end of the grace
period. The Net Cash Surrender Value and the Cost of Insurance are described in
the Policy Values section. Notice of such premium will be mailed to the last
known address of the Owner and any assignee of record. The grace period will end
61 days after the notice is mailed. If such premium is not paid within the grace
period, all coverage under this Policy will terminate with no value at the end
of the 61 day grace period. If a claim by death during the grace period becomes
payable under this Policy, any overdue Cost of Insurance will be deducted from
the Proceeds.
GUARANTEED DEATH BENEFIT. If this Policy terminates due to the Grace Period
provision without any outstanding loan, a Death Benefit equal to the sum of the
premiums paid into the Policy will be maintained until the Maturity Date of this
Policy, payable upon the death of the Insured.
CONTINUATION OF INSURANCE. Insurance coverage under this Policy will be
continued in force until the Net Cash Surrender Value is insufficient to cover
the Cost of Insurance. This provision will not continue this Policy beyond the
Maturity Date.
REINSTATEMENT. If this Policy terminates, as provided in the Grace Period
section, it may be reinstated at any time within 5 years after the date of
termination and prior to the Maturity Date. The reinstatement is subject to:
a. receipt of evidence of insurability satisfactory to us; and
b. payment of a premium sufficient to keep this Policy in force for a minimum of
2 months.
The effective date of a reinstatement will be the first Monthly Anniversary Day
on or next following the day we approve the application for reinstatement.
If this Policy is reinstated, coverage provided by the Guaranteed Death Benefit
provision ceases.
THE ACCOUNT
THE ACCOUNT. Account, where used without qualification, refers to the Separate
Account called Lincoln National Flexible Premium Variable Life Separate Account
F. This is a unit investment trust registered with the SEC under the Investment
Company Act of 1940. It was established under and is subject to the insurance
laws of Indiana. The assets of the Account are owned by us, but are kept
separate from the assets of our general investment account.
SUBACCOUNTS. The Account has several Subaccounts. They are listed on the Policy
Schedule. Invested premium amounts will be allocated among the Subaccounts
according to the percentages listed on the Policy Schedule. No allocation may be
less than 10%, nor may any allocation be any fractional percent.
The allocation of future invested premium amounts may be changed at any time if
the policy is not in default. The request for change must be in writing on a
form suitable to us. The change will take effect on the date the request is
received in our Home Office.
THE FUNDS. The Subaccounts invest in various underlying funds, as shown on the
Policy Schedule. Each of these Funds is registered with the SEC under the
Investment Company Act of 1940 and has its own investment goals. the investment
goals of each Fund are explained in the Prospectus.
The assets of the account will be valued once daily at the close of trading on
each day the New York Stock Exchange is open. If the value of an asset is needed
on a day that it has not been valued, the value of that asset when it was most
recently valued will be used.
The assets in the Account are used to support the Investment Amounts under
policies like this one. To the extent those assets do not exceed this amount,
they are used to support those policies; those assets are not used to support
any other business conducted. The excess over this amount may be used in any
other way.
CHANGE IN INVESTMENT POLICY AND CHANGE OF FUND. A Fund might make a material
change in its investment policy. In that case, a notice of the change 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, this Policy may be exchanged
for a new policy of fixed benefit insurance on the Insured's life. The
conditions for exchange and the specifications for the new policy are described
under Exchange of Policy.
A Fund might, in our judgment, become unsuitable for investment by a Subaccount.
This might happen because of a change in investment policy, or a change in the
laws or regulations, or because the shares are no longer available for
investment, or for some other reason. If that occurs, we have the right to
invest in a different fund.
Any Change in Investment Policy or Change of Fund will follow approval by the
SEC and will be filed with and approved by the Insurance Commissioner of the
3
<PAGE>
State of Indiana. If required, approval of such change will also be filed with
the Insurance Department of the state where this Policy is delivered.
INVESTMENT AMOUNT
Investment Amount. The Investment Amount for this Policy is the amount of the
Policy Value allocated to the Subaccounts. It is equal to the Policy Value minus
any outstanding loan. The amount of the Investment Amount and its allocation to
the Subaccounts depend on (1) how the Owner chooses to allocate Net Premiums;
(2) whether or not there are transfer amounts among Subaccounts;(3) the
investment performance of the Subaccounts to which amounts are allocated or
transferred; (4) the amount and timing of premium payments made; and (5) the
existence of any loan. The Investment Amount exists only if the Policy is not
in default past the Grace Period.
Transfer Among Subaccounts. Amounts may be transferred among Subaccounts as
often as six times in a contract year, if the Policy is not in default. The
request to transfer amounts must be in writing on a form suitable to us. The
transfer will take effect on the date it is received at our Home Office. The
Charge for Transfer is shown on the Policy Schedule.
POLICY VALUES
Net Premium. The Net Premium equals the premium paid less the Percent of Premium
Charge shown on the Policy Schedule.
Policy Value. 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 Loan Collateral Rate shown on the Policy
Schedule on any outstanding loan;
d. any invested Net Premium received.
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. the Cost of Insurance for the following month;
g. any amount charged against the Investment Amount for federal or other
governmental income taxes.
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 Loan Collateral Rate shown on the Policy
Schedule on any outstanding loan;
d. any invested Net Premiums received.
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.
The Policy Value on the Policy Date will be the initial Net Premium minus the
Cost of Insurance for the first month.
When the Cost of Insurance is deducted, it will be deducted in proportion to the
values of the Subaccounts, or by any other method requested by the Owner and
acceptable to us.
Cost of Insurance. The Cost of Insurance is the cost for this Policy and is
determined on a monthly basis. The cost for this Policy is equal to:
a. the Death Benefit on the Monthly Anniversary Day; divided by
b. the Death Benefit Factor shown on the Policy Schedule; minus
c. the Policy Value on the Monthly Anniversary Day without regard to the Cost
of Insurance; the result times
d. the cost of insurance rate as described below in the Cost of Insurance Rates
section.
If there have been increases in the Specified Amount, then the Policy Value will
be first considered a part of the initial Specified Amount. If the Policy Value
exceeds the initial Specified Amount, it will then be considered a part of
additional Specified Amounts resulting from increases in the order of the
increases.
Cost of Insurance Rates. The monthly cost of insurance rate is based on the sex,
attained age, and rating class of the person insured. Monthly cost of insurance
rates may be changed by us from time to time. A change in the cost of insurance
rates will apply to all persons of the same attained age, sex, and rating class
and whose pollcies have been in effect for the same length of time. The cost of
insurance rates will not exceed those shown in the Table of Guaranteed Maximum
Insurance Rates. These rates are based on the mortality Table named on the Table
of Guaranteed Maximum Insurance Rates.
4
<PAGE>
MORTALITY AND EXPENSE RISK CHARGE, ADMINISTRATIVE CHARGE, AND GUARANTEED DEATH
BENEFIT CHARGE. A Mortality and Expense Risk Charge, an Administrative Charge,
and a Guaranteed Death Benefit Charge will be deducted from the Gross Investment
Results at a daily rate equivalent to the annual rate shown on the Policy
Schedule.
GROSS INVESTMENT RESULTS. The Gross Investment Results are equal to the change
in the market value of the assets of the Account from the previous valuation day
to the current day, plus the investment income on those assets during the same
period.
NET INVESTMENT RESULTS. The Net Investment Results are the Gross Investment
Results minus asset management charges, minus the Mortality and Expense Risk
Charge, minus the Administrative Charge, and minus the Guaranteed Death Benefit
Charge.
CASH SURRENDER VALUE. The Cash Surrender Value as of any date is equal to:
a. The Policy Value; minus
b. any Surrender Charge shown on the Policy Schedule.
SURRENDER CHARGE. The Table of Surrender Charges is shown on the Policy
Schedule.
NET CASH SURRENDER VALUE. The Net Cash Surrender Value as of any date is equal
to:
a. the Cash Surrender Value; minus
b. any outstanding policy loan; minus
c. any loan interest due.
INSUFFICIENT VALUE. If the Net Cash Surrender Value on any Monthly Anniversary
Day is not sufficient to cover the Cost of Insurance for the next month, this
Policy will terminate subject to the Grace Period section.
BASIS OF COMPUTATIONS. Guaranteed values are at least equal to those required by
law. They are based on the Commissioners 1980 Standard Ordinary Mortality Table,
Age Last Birthday. Where required, a detailed statement of the method of
computation of values has been filed with the insurance department of the state
in which this Policy was delivered.
If the Net Investment Results credited to the Policy Value at all times from the
date of issue should equal 4% with premiums and benefits determined accordingly
under the terms of the Policy, then the resulting Cash Surrender Values will
never be less than the minimum cash surrender values calculated according to the
Standard Nonforfeiture Law using 4% and the Commissioners 1980 Standard Ordinary
Mortality Table, Age Last Birthday.
SURRENDER
SURRENDER. The Owner may surrender this Policy for the Net Cash Surrender Value.
The request must be in writing on a form suitable to us. It may be surrendered
at any time prior to termination of the Policy as provided in the Termination
provision.
Ordinarily, the surrender will be processed within 7 days from the date the
request for surrender is received at our Home Office.
LOANS
CASH LOANS. During the continuance of this Policy, we will grant a loan against
this Policy provided:
a. a written loan agreement is executed; and
b. this Policy is assigned to us.
This Policy will be the sole security for the loan. The amount of outstanding
loans with interest may not exceed the Cash Surrender Value as of the date of
the policy loan. Ordinarily, the loan will be processed within 7 days from the
date the request for a loan is received at our Home Office.
The amount of the loan will be deducted from the Investment Amount, but will
remain part of the Policy Value. The deduction will be made in proportion to the
value of the Subaccounts, or by any other method requested by the Owner and
acceptable to us. The loan amount will earn interest at not less than the Loan
Collateral Rate shown on the Policy Schedule.
If at any time the total policy loan plus loan interest equals or exceeds the
Cash Surrender Value, this Policy will become void, but not until 61 days after
notice has been mailed to the last known address of the Owner and any assignee
of record.
INTEREST ON POLICY LOANS. Interest on any loan will be at the Policy Loan Rate
shown on the Policy Schedule, payable annually in arrears. Interest not paid
when due will be deducted from the Investment Amount, but will remain part of
the Policy Value. It will be added to the loan and bear interest at the same
Policy Loan Rate.
LOAN REPAYMENTS. Loan repayments will be allocated to the Subaccounts in accord
with the most recent premium allocation or by any other method requested by the
Owner and acceptable to us.
DEATH BENEFIT
DEATH BENEFIT COVERAGE. Subject to the provisions of this Policy, the Insured's
Death Benefit at any time
5
<PAGE>
Prior to the Maturity Date will be equal to the Insured's Specified Amount.
The Insured's Death Benefit, however, will never be less than the following
percentage of the Policy Value:
In the case of an insured with an attained age as of the beginning of the
contract year of:
<TABLE>
<CAPTION>
More than: But Not More Than:
<S> <C>
0...............................................40
40...............................................45
45...............................................50
50...............................................55
55...............................................60
60...............................................65
65...............................................70
70...............................................75
75...............................................90
90...............................................95
95...............................................99
</TABLE>
The applicable percentage will decrease by a ratable portion for each full year:
<TABLE>
<CAPTION>
From: To:
<S> <C>
250%............................................250%
250%............................................215%
215%............................................185%
185%............................................150%
150%............................................130%
130%............................................120%
120%............................................115%
115%............................................105%
105%............................................105%
105%............................................100%
100%............................................100%
</TABLE>
CHANGES
CHANGES IN AMOUNT OF INSURANCE COVERAGE. The Insured's Specified Amount may be
increased or decreased. The request for change must be from the Owner and in
writing on a form suitable to us. The change is subject to:
1. Any decrease will become effective on the first Monthly Anniversary Day on
or next following the day we receive the request. Any such decrease will
reduce insurance in the following order:
a) against insurance provided by the most recent Increase;
b) against the next most recent Increases successively; and
c) against insurance provided under the original application.
2. The Insured's Specified Amount after any requested decrease may not be less
than the Minimum Specified Amount shown on the Policy Schedule.
3. Any request for an increase must be applied for on a supplemental
application.
Such increase will be subject to:
a. evidence of insurability satisfactory to us;
b. our issue rules and limits at the time of increase; and
c. the sufficiency of the Net Cash Surrender Value to cover the next Cost
of Insurance deduction.
Any increase will become effective on the effective date shown on a supplement
to the Policy Schedule.
All rights to return or exchange the Policy will apply anew to the amount of the
increase.
EXCHANGE OF POLICY. Before the second anniversary this Policy may be exchanged
for a new policy of fixed benefit insurance on the Insured's life. The new
policy will be any Flexible Premium Adjustable Life policy offered by us,
subject to conditions normally applicable to the new policy. It will have the
same policy date and will 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. Subsequently, monthly fees and surrender charges will apply if
appropriate. On the Date of Exchange, the Death Benefit will equal the Death
Benefit of this Policy, or the net amount at risk will equal the net amount at
risk of this Policy, at the Owner's option.
The request for exchange must be in writing on a form suitable to us. This
Policy must be surrendered to us, and be at our 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:
a) the date the Owner requests the change to be effective;
b) the date that the request for exchange and the surrendered policy are
received at our Home Office; or
c) the date we receive payment of the cost of exchange or other amounts due, if
any.
This Policy also may be exchanged after a material change in a Fund's investment
policy. This situation is described under The Account.
PROCEEDS
PROCEEDS. Proceeds mean the amount payable on;
a. the Maturity Date; or
b. the surrender of this Policy; or
c. the death of the Insured.
The Proceeds to be paid on the death of the Insured will be:
a. the Death Benefit; minus
b. any outstanding policy loan; minus
6
<PAGE>
c. any loan interest due.
The Proceeds to be paid on the surrender of this Policy or on the Maturity Date
will be the Net Cash Surrender Value.
PAYMENT OF PROCEEDS. Any amount to be paid at the death of the Insured or on 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 may
be applied to any Payment Option.
CLAIMS OF CREDITORS. To the extent allowed by law, Proceeds will not be subject
to any claims of a Beneficiary's creditors.
PAYMENT OPTIONS
Upon written request, we will apply all or part of the Proceeds payable under
this policy in accordance with any one of the options below. These options will
be available only with our consent if:
a. the Proceeds to be settled under any option are $2,500 or less; or
b. any installment or interest payment is $25 or less; or
c. any payee is a corporation, partnership, association, trustee, or assignee.
While the Insured is alive, the Owner may elect any Payment Option. The Owner
may change any election if that right has been reserved.
At the time Proceeds are payable, a Beneficiary may elect or change any Payment
Option if Proceeds are available to the Beneficiary in one sum.
The Option Date is any date this Policy terminates under the Termination
provision.
OPTION A: Payment for a Designated Number of Years. We will pay equal monthly
installments for the number of years elected. Payments will begin on the Option
Date. The amount of each installment will be determined from the Option A Table.
The Option A Table is based on a guaranteed interest rate of 4% per year
compounded yearly.
OPTION B: Payment of Life Income. We will pay equal monthly installments
beginning on the Option Date. Payments will continue while the payee is alive.
Payments are guaranteed for 10, 15, or 20 years, as elected, and for life
thereafter. The amount of payment will depend on the age and sex of the payee
and may be determined from the Option B Table. If the payee is not an
individual, the amount of payment will depend on the age and sex of a person
chosen by the payee and agreed to by us. Payments will continue while the chosen
person is alive. Payment will be subject to acceptable proof of age. We may
require proof that the person on whose life the payment is based is alive when
each payment is due.
OPTION C: Proceeds Left at Interest. We will retain the Proceeds while the payee
is alive and will pay interest at a rate of not less than 4% per year. The
interest may be paid monthly, quarterly, semiannually, or annually, as elected,
or may be left with us to accumulate.
OPTION D: Payment of a Designated Amount. We will pay equal monthly, quarterly,
semiannual, or annual payments until the Proceeds with any interest are
exhausted. Payments will begin on the Option Date. The payment amount must be at
least $120 per year per $1,000 of Proceeds applied. Interest will be payable at
a rate of not less than 4% per year compounded yearly.
ADDITIONAL OPTIONS. Any Proceeds payable under this Policy may also be settled
under any other method of settlement we offer on the Option Date.
ADDITIONAL INTEREST. Additional interest as we determine may be paid or credited
from time to time in addition to the payments guaranteed under a Payment Option.
PAYMENT CONTRACTS. When Proceeds become payable under a Payment Option, a
Payment Contract will be issued to the payee in exchange for this Policy. The
effective date of a Payment Contract will be the Option Date.
Payment Contracts may not be assigned.
A change in payment may be made only if it is provided for in the Payment
Contract.
WITHDRAWALS OF PROCEEDS UNDER PAYMENT CONTRACT. Proceeds may be withdrawn under
a Payment Option if provided in the Payment Contract. Under Payment for a
Designated Number of Years, the sum of the remaining guaranteed payments
discounted at an interest rate of 4% compounded annually may be withdrawn. Under
Payment of a Designated Amount and Proceeds Left at Interest, all or part of the
remaining proceeds and any interest earned but not paid may be withdrawn.
Proceeds may not be withdrawn from any of the Payment of Life Income Options. We
may postpone payment of any withdrawal for not more than 6 months from the date
we receive the written request.
DEATH OF PAYEE UNDER PAYMENT CONTRACT. If any payments remain to be paid under a
Payment Option when the payee dies, payment will be made according to the
Payment Contract.
7
<PAGE>
Optional Methods of Settlement
Amount of Installment For Each $1,000 Of Proceeds Applied
<TABLE>
<CAPTION>
Option A Table ------------------------ Option B Table ------------------------
For Males For Females
- --------------------------- ---------------------------------------------------------------------------------
Number of Amount of Settlement Age Number of Monthly Number of Monthly
Years Monthly Of Payee Installments Installments
Payable Installment Last Birthday Certain Certain
- --------------------------- ---------------------------------------------------------------------------------
120 180 240 120 180 240
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $84.84 10* $3.56 $3.55 $3.55 $3.49 $3.49 $3.49
2 43.25 11 3.57 3.56 3.56 3.50 3.50 3.50
3 29.40 12 3.58 3.58 3.57 3.51 3.51 3.51
4 22.47 13 3.59 3.59 3.58 3.52 3.52 3.52
5 18.32 14 3.60 3.60 3.60 3.53 3.53 3.53
6 15.56 15 3.62 3.61 3.61 3.54 3.54 3.54
7 13.59 16 3.63 3.63 3.62 3.55 3.55 3.55
8 12.12 17 3.65 3.64 3.64 3.56 3.56 3.56
9 10.97 18 3.66 3.66 3.65 3.57 3.57 3.57
10 10.06 19 3.68 3.67 3.67 3.59 3.59 3.58
11 9.31 20 3.70 3.69 3.69 3.60 3.60 3.60
12 8.69 21 3.71 3.71 3.70 3.62 3.61 3.61
13 8.17 22 3.73 3.73 3.72 3.63 3.63 3.62
14 7.72 23 3.75 3.75 3.74 3.64 3.64 3.64
15 7.34 24 3.77 3.77 3.76 3.66 3.66 3.65
16 7.00 25 3.79 3.79 3.78 3.68 3.67 3.67
17 6.71 26 3.82 3.81 3.80 3.70 3.69 3.69
18 6.44 27 3.84 3.83 3.82 3.71 3.71 3.71
19 6.21 28 3.86 3.86 3.85 3.73 3.73 3.72
20 6.00 29 3.89 3.88 3.87 3.75 3.75 3.74
21 5.81 30 3.92 3.91 3.90 3.77 3.77 3.76
22 5.64 31 3.94 3.94 3.92 3.80 3.79 3.78
23 5.49 32 3.97 3.97 3.95 3.82 3.81 3.81
24 5.35 33 4.01 4.00 3.98 3.84 3.84 3.83
25 5.22 34 4.04 4.03 4.01 3.87 3.86 3.85
35 4.07 4.06 4.04 3.89 3.89 3.88
36 4.11 4.10 4.07 3.92 3.92 3.91
37 4.15 4.13 4.11 3.95 3.94 3.93
38 4.19 4.17 4.14 3.98 3.97 3.96
39 4.23 4.21 4.18 4.02 4.01 3.99
40 4.27 4.25 4.22 4.05 4.04 4.02
41 4.32 4.29 4.26 4.09 4.07 4.06
42 4.37 4.34 4.30 4.12 4.11 4.09
43 4.42 4.39 4.34 4.16 4.15 4.13
44 4.47 4.43 4.38 4.20 4.19 4.17
45 4.53 4.48 4.43 4.25 4.23 4.20
46 4.58 4.54 4.47 4.29 4.27 4.25
47 4.64 4.59 4.52 4.34 4.32 4.29
48 4.71 4.65 4.57 4.39 4.37 4.33
49 4.77 4.71 4.63 4.45 4.42 4.38
</TABLE>
*Ages 10 and under.
<PAGE>
----------------------Option B Table---------------------
(Continued)
For Males For Females
- ---------------------------------------------------------------------------
Settlement Age Number of Monthly Number of Monthly
of Payee Installments Installments
Last Birthday Certain Certain
- ---------------------------------------------------------------------------
120 180 240 120 180 240
----------------------------------------------------
50 $4.84 $4.77 $4.68 $4.50 $4.47 $4.43
51 4.91 4.84 4.73 4.56 4.53 4.48
52 4.99 4.91 4.79 4.62 4.59 4.53
53 5.07 4.98 4.85 4.69 4.65 4.58
54 5.15 5.05 4.91 4.76 4.71 4.64
55 5.24 5.13 4.97 4.83 4.78 4.70
56 5.33 5.21 5.03 4.91 4.85 4.76
57 5.43 5.29 5.09 4.99 4.92 4.82
58 5.54 5.37 5.15 5.08 5.00 4.88
59 5.85 5.46 5.21 5.17 5.08 4.95
60 5.76 5.55 5.27 5.27 5.16 5.01
61 5.88 5.64 5.34 5.37 5.25 5.08
62 6.01 5.74 5.40 5.48 5.34 5.15
63 6.14 5.84 5.45 5.59 5.44 5.22
64 6.28 5.93 5.51 5.71 5.53 5.29
65 6.43 6.03 5.57 5.84 5.63 5.35
66 6.58 6.13 5.62 5.97 5.74 5.42
67 6.73 6.23 5.67 6.11 5.84 5.48
68 6.89 6.32 5.71 6.26 5.95 5.54
69 7.05 6.42 5.75 6.42 6.06 5.60
70 7.22 6.51 5.79 6.58 6.17 5.66
71 7.39 6.60 5.82 6.75 6.28 5.71
72 7.57 6.68 5.85 6.93 6.38 5.76
73 7.74 6.76 5.88 7.12 6.49 5.80
74 7.91 6.83 5.90 7.31 6.59 5.83
75 8.08 6.90 5.92 7.50 6.68 5.87
76 8.25 6.96 5.94 7.70 6.77 5.89
77 8.42 7.02 5.95 7.89 6.86 5.92
78 8.58 7.07 5.97 8.09 6.93 5.94
79 8.73 7.12 5.97 8.28 7.00 5.95
80 8.88 7.16 5.98 8.47 7.06 5.96
81 9.02 7.19 5.99 8.65 7.11 5.97
82 9.15 7.22 5.99 8.82 7.15 5.98
83 9.26 7.24 6.00 8.98 7.19 5.99
84# 9.37 7.27 6.00 9.13 7.22 5.99
#Ages 84 and over.
<PAGE>
Flexible Premium Variable Life Insurance Policy
Net Cash Surrender Value Payable at Maturity
Death Benefit Payable at Death Prior to Maturity Date
Adjustable Death Benefit
Flexible Premiums Payable During Lifetime of
Insured to Maturity Date
Nonparticipating - No Dividends
If you have any questions concerning this Policy or if
anyone suggests that you change or replace this Policy,
please contact your Lincoln National Life agent or the
Home Office of the Company.
THE LINCOLN NATIONAL
LIFE INSURANCE COMPANY
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, Indiana 46801
[LINCOLN NATIONAL LOGO]
<PAGE>
SERVICES AGREEMENT
------------------
(Exhibit B and Schedules Omitted)
THIS SERVICES AGREEMENT (the "Agreement") is made as of August 15, 1996, by
and among Delaware Management Holdings, Inc., a Delaware corporation
("Holdings"), Delaware Service Company, Inc., a Delaware corporation and a
wholly owned subsidiary of Holdings ("Delaware"), Lincoln National Life
Insurance Company, an Indiana insurance corporation ("Lincoln Life"), and each
of the investment companies listed in Exhibit A hereto, each a Maryland
corporation (together with any other investment company designated in accordance
with Section 5.1, the "Funds," or individually, a "Fund").
The parties hereto, in consideration of the mutual covenants hereinafter
expressed, agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Section 1.1 Definitions. The following terms shall have the respective
meanings set forth in this Section 1.1 for all purposes of this Agreement except
where the application of such definitions is limited by reference in this
Section 1.1 to a specific Article of this Agreement (such definitions to be
equally applicable to both the singular and plural forms of the terms herein
defined):
"Acceptance Test" means a test, reasonably acceptable to Lincoln Life,
Delaware and the Funds, of the performance of the Value Calculation Services for
the Accounts included in the respective Phases, to be conducted in accordance
with Article 4.
"Accounting Services" means the services listed in the Cutover Schedule
with respect to the Accounts.
"Accounts" means the Funds and the Separate Accounts, collectively.
"Affiliate" means, with respect to any entity, any other entity
controlling, controlled by or under common control with such entity.
"Business Day" means a day on which the New York Stock Exchange is open for
trading.
"Calculation Losses" means any losses suffered by a Contractowner, Third
Party Administrator, Fund or Separate Account directly caused by an error in a
Net Asset Value or Unit Value, or by the delivery to Lincoln Life or any Fund of
a Net Asset Value or Unit Value after the applicable deadline provided for in
Section 2.1; provided, however, that such losses shall not include any
consequential damages.
<PAGE>
"Contractowner" means the present or former owner of an insurance or
annuity contract supported by a Separate Account, or any beneficiary or
annuitant thereof.
"Cutover Date," with respect to any Phase, means the date, which shall be a
Business Day, on which Delaware actually commences providing the Accounting
Services with respect to such Phase in accordance with Section 4.2. The planned
Cutover Date for each Phase is set forth in the Cutover Schedule.
"Cutover Schedule" means Schedule 1.1(a) hereto, which sets forth the
accounting services to be rendered pursuant to this Agreement and the planned
Cutover Dates, as such Schedule may be amended from time to time pursuant to
Section 16.1.
"Delaware" has the meaning set forth in the preamble to this Agreement.
"Delaware Affiliate" means Holdings and any entity that is directly or
indirectly controlled by Holdings.
"Fee Schedule" means Schedule 6.1 hereto, as such Schedule may be amended
from time to time pursuant to Section 16.1.
"Fund" has the meaning set forth in the preamble to this Agreement.
"Holdings" has the meaning set forth in the preamble to this Agreement.
"Lincoln Affiliate" means any Affiliate of Lincoln Life other than a
Delaware Affiliate.
"Lincoln Life" has the meaning set forth in the preamble to this Agreement.
"Net Asset Value" means the daily net asset value per share of the
respective Funds for each Business Day, all determined in accordance with the
terms of the Cutover Schedule and with any applicable prospectus or regulatory
requirement.
"Phase" means a set of Accounts comprising the Phase I Accounts, the Phase
II Accounts or the Phase III Accounts.
"Phase I Account" means an Account designated as such on the Cutover
Schedule.
"Phase II Account" means an Account designated as such on the Cutover
Schedule.
"Phase III Account" means an Account designated as such on the Cutover
Schedule.
"Renewal Term" means each successive one-year term occurring
<PAGE>
after the expiration of the initial term of this Agreement as described in
Section 11.1.
"Separate Account" means a separate account of Lincoln Life identified as
such on the Cutover Schedule, and any additional separate account or sub-account
of Lincoln Life or any Lincoln Affiliate (or of any other person if Lincoln Life
or any Lincoln Affiliate has administrative responsibilities with respect to
such separate account or sub-account pursuant to any reinsurance agreement or
otherwise) designated in accordance with Section 5.1.
"Test Period" means, with respect to each Phase, a period of time prior to
the Cutover Date for such Phase, commencing on the date specified by Delaware
pursuant to Section 4.1 and having a duration of three weeks or such longer
period as may be determined pursuant to Section 4.1.
"Third Party Administrator" means an administrator of insurance or annuity
contracts acting on behalf of Contractowners.
"Unit Value" means the daily unit value per unit of the respective Separate
Accounts or sub-accounts thereof for each Business Day, all determined in
accordance with the terms of the Cutover Schedule and with any applicable
prospectus or regulatory requirement.
"Value Calculation Services" means those Accounting Services consisting of
or incidental to the calculation and communication of Unit Values and Net Asset
Values in accordance with the terms of this Agreement.
ARTICLE 2
SCOPE OF SERVICES; CUTOVER
--------------------------
Section 2.1 Scope of Services. Delaware shall provide the Accounting
Services to each of the Funds and to Lincoln Life with respect to each of the
Separate Accounts, all in accordance with the terms of this Agreement. Without
limiting the generality of the foregoing, from and after the Cutover Date for
each respective Phase, Delaware, no later than 6:00 p.m. (New York City time) on
each Business Day, shall in accordance with the terms of this Agreement provide
to Lincoln Life and to the Funds the Value Calculation Services for each of the
Accounts included in such Phase. In the event of any error in the Value
Calculation Services, the parties hereto will follow the procedures set forth in
Schedule 2.1, without prejudice to any other rights described in this Agreement.
Section 2.2 Cutover Schedule. Delaware, Lincoln Life and the Funds shall
use their respective best efforts to cause the Cutover Date to occur no later
than (a) August 15, 1996, with respect to the Phase I Accounts, (b) October 31,
1996, with
<PAGE>
respect to the Phase II Accounts and (c) January 1, 1997 with respect to the
Phase III Accounts.
ARTICLE 3
LINCOLN LIFE'S SUPPORT OBLIGATIONS
----------------------------------
Section 3.1 Provision of Data. Lincoln Life shall use its best efforts to
provide or cause to be provided to Delaware the data identified in Schedule 3.1
during the periods and in accordance with the procedures identified in such
Schedule, it being understood that Delaware shall not be responsible for any
Calculation Losses or other claims, suits, hearings, actions, damages,
liabilities, fines, penalties, costs, losses or expenses, including reasonable
attorney's fees, which any party may sustain or incur, directly or indirectly,
in each case to the extent caused by or arising from Lincoln Life's failure to
provide such data in accordance with such Schedule 3.1.
Section 3.2 Data to Be Provided by Third Parties. With respect to each of
the mutual funds identified in Schedule 3.2 as an available investment of one or
more of the Separate Accounts (other than mutual funds managed by Lincoln Life
or Delaware or their respective Affiliates) and each third party service
provider identified in such Schedule, Lincoln Life shall direct each of the
managers of such funds or such service provider, as the case may be, to provide
or cause to be provided to Delaware the data identified in Schedule 3.2 in
accordance with the procedures and time deadlines identified in such Schedule.
Section 3.3 Information for Periods Prior to Cutover Date. Lincoln Life
will provide appropriate financial and other information with respect to the
Accounts to Delaware, and will cooperate with Delaware, in connection with the
preparation of data for 1996 annual reports to Contractowner and other elements
of the Accounting Services that relate to periods prior to the Cutover Dates for
the respective Accounts. In addition, Lincoln Life will provide to Delaware
appropriate financial and other information regarding the Accounts for periods
prior to 1996 to the extent relevant to the performance of the Accounting
Services for 1996 and subsequent periods.
ARTICLE 4
ACCEPTANCE TEST; CUTOVER DATE
-----------------------------
Section 4.1 Acceptance Testing. Delaware shall notify Lincoln Life of the
date, which shall be a Business Day, on which the Value Calculation Services for
each respective Phase will be ready for the commencement of the Acceptance Test
for such Phase. During the Test Period for each Phase, Delaware, Lincoln Life
and the Funds shall cooperate in performing the Acceptance Test for such Phase,
and Delaware and Lincoln Life, respectively, shall use its best efforts to
remedy any failure in the performance of the Value Calculation Services caused
by such party. In the event that, during the Test Period with respect to any
Phase,
<PAGE>
performance of the Value Calculation Services is suspended for such Phase in
order to effect such remedy or for any other reason, the Test Period for such
Phase shall be extended by the number of days of such suspension. Further, if
at the date that would otherwise be the end of the Test Period for any Phase
Delaware is not performing the Value Calculation Services with respect to such
Phase to the reasonable satisfaction of Lincoln Life, and Lincoln Life shall so
notify Delaware, the Test Period shall be extended until the date on which
Lincoln Life notifies Delaware that the Value Calculation Services are being
performed to the reasonable satisfaction of Lincoln Life. All references in this
Section 4.1 to the performance of the Value Calculation Services shall refer to
the performance thereof in a test mode.
Section 4.2 Cutover Date. With respect to each Phase, upon the
termination of the Test Period, Lincoln Life, the Funds and Delaware shall
execute a written acknowledgment in the form of Exhibit B hereto confirming such
termination and specifying the Cutover Date, which shall be the Business Day
immediately following the date of such termination unless Lincoln Life, the
Funds and Delaware shall agree upon a different date.
ARTICLE 5
NEW ACCOUNTS; NEW INVESTMENT MANAGERS
-------------------------------------
Section 5.1 Additional Accounts. Lincoln Life may from time to time
designate (i) one or more additional investment companies or separate accounts
to constitute Funds or Separate Accounts, as the case may be, for all purposes
of this Agreement, or (ii) one or more newly established sub-accounts of any
Separate Account. Such designation shall be:
(a) subject to Delaware's consent, which shall not be unreasonably
withheld; provided, that such consent shall be considered to be
unreasonably withheld if Delaware does not make reasonable
efforts to accept such new investment companies, separate
accounts and sub-accounts, which efforts shall include, but not
be limited to, reasonable consideration of the expansion of
Delaware's infrastructure to handle such new investment
companies, separate accounts and sub-accounts; and
(b) evidenced by a writing executed by Lincoln Life, Delaware and, if
applicable, each such investment company, setting forth the name
of such investment company, separate account or new sub-account,
the applicable rate under the Fee Schedule that shall apply to
the Accounting Services for such investment company, separate
account or new sub-account, the effective date of the designation
thereof as a Fund, Separate Account or new sub-account, and any
other matters the parties wish to include.
<PAGE>
Notwithstanding clause (b) of the preceding sentence, if Delaware's performance
of the Accounting Services for such additional Funds, Separate Accounts, or sub-
accounts of such Separate Accounts would, in Delaware's reasonable opinion,
result in higher costs than the costs Delaware incurs for providing the
Accounting Services to the current Accounts, then the affected parties hereto
shall negotiate in good faith an addendum to the Fee Schedule for such
additional Funds, Separate Accounts and sub-accounts and Delaware shall not be
deemed to have unreason ably withheld its consent under clause (b) of this
Section 5.1 until such addendum has been agreed to. Except as otherwise
specified in such writing, from and after such effective date, Delaware shall
provide to such Fund, or to Lincoln Life with respect to a Separate Account or
new sub-account, the same Accounting Services as are specified in the Cutover
Schedule with respect to the other Funds, Separate Accounts or sub-account of a
Separate Account, as the case may be.
Section 5.2 New Investment Managers. If new investment managers are added
to provide investment advisory services to any of the Accounts, and Delaware's
performance of the Accounting Services is, as a result thereof, significantly
more costly to Delaware, the affected parties shall negotiate in good faith an
addendum to the Fee Schedule for such Accounts.
ARTICLE 6
FEES
----
Section 6.1 Accrual of Fees. From and after the Cutover Date with respect
to each Phase, Lincoln Life shall pay fees for the Accounting Services for each
of the Separate Accounts included in such Phase, and each Fund included in such
Phase shall pay fees for the Accounting Services for such Fund, in each case at
the respective rates per annum determined in accordance with the Fee Schedule.
Fees accrued pursuant to this Section 6.1 shall be payable in arrears on a
monthly basis.
Section 6.2 Payment of Fees by Lincoln Life. Delaware shall submit to
Lincoln Life an invoice for each month for all of the fees payable pursuant to
Section 6.1 with respect to each of the Separate Accounts, which invoice shall
be itemized to show the portion of such fees allocable to each of the Separate
Accounts in accordance with the Fee Schedule. Subject to the terms of this
Agreement, invoices for such fees shall be payable within 30 days of receipt.
Section 6.3 Payment of Fees by the Funds. Delaware shall submit to
each Fund, with a copy to Lincoln Life, an invoice for each month for all of the
fees payable pursuant to Section 6.1 with respect to such Fund. Subject to the
terms of this Agreement, invoices for such fees shall be payable within 30 days
of receipt.
<PAGE>
ARTICLE 7
STANDARD OF CARE; INDEMNIFICATION
---------------------------------
Section 7.1 Standard of Care. Delaware shall provide the Accounting
Services with a level of care equal to or greater than the level of care at
which it performs similar functions for mutual funds that are sponsored or
managed by any Delaware Affiliate, and in any event, Delaware shall always
exercise reasonable care in performing the Accounting Services.
Section 7.2 Indemnification
(a) Indemnification by Lincoln Life. Lincoln Life shall indemnify,
defend and hold harmless Delaware and any Delaware Affiliate, and the directors,
officers and employees of the fore going (each individually, a "Delaware
Indemnified Party"), against any and all claims, suits, hearings, actions,
damages, liabilities, fines, penalties, costs, losses or expenses, including
reasonable attorney's fees, which any Delaware Indemnified Party may sustain or
incur, directly or indirectly, in each case to the extent caused by or arising
from (i) the negligence, recklessness or intentional misconduct of Lincoln Life
or any Lincoln Affiliate, or any director, officer or employee thereof, in the
performance of this Agreement; or (ii) the failure of Lincoln Life to comply
with the terms of this Agreement.
(b) Indemnification by Delaware. Subject to Section 3.1, Delaware
shall indemnify, defend and hold harmless Lincoln Life, the Lincoln Affiliates
and the Funds, and the directors, officers and employees of the foregoing (each
individually, a "Lincoln Indemnified Party") against any and all claims, suits,
hearings, actions, damages, liabilities, fines, penalties, costs, losses
(including but not limited to (a) Calculation Losses reimbursed by Lincoln Life
and (b) any market fluctuation losses incurred by Lincoln Life in effecting such
reimbursement) or expenses, including reasonable attorney's fees, which any
Lincoln Indemnified Party may sustain or incur, directly or indirectly, in each
case to the extent caused by or arising from (i) the negligence, recklessness or
intentional misconduct of Delaware or any Delaware Affiliate, or any director,
officer or employee thereof, in the performance of this Agreement; or (ii) the
failure of Delaware to comply with the terms of this Agreement.
(c) Procedures. Subject to the provisions of Section 7.2(d), promptly
after receipt by a Delaware Indemnified Party or a Lincoln Indemnified Party
(each, an "Indemnified Party") of notice of the commencement of any action,
proceeding, investigation or claim by any Contractowner or other third party (a
"Proceeding"), the Indemnified Party shall, if a claim in respect thereof is to
be made pursuant to this Section 7.2 against another party to this Agreement
(the "Indemnifying Party"), notify the Indemnifying Party in writing of the
commencement thereof; but the failure so to notify the Indemnifying Party
<PAGE>
shall not relieve the Indemnifying Party from any liability under this Section
7.2, except to the extent that such failure to notify actually prejudices the
Indemnifying Party. In case any such Proceeding shall be brought against an
Indemnified Party, the Indemnifying Party shall be entitled to participate in
and to assume the defense thereof, with counsel satisfactory to the Indemnified
Party, and after notice from the Indemnifying Party to the Indemnified Party of
the Indemnifying Party's election to assume the defense thereof, the
Indemnifying Party shall not be liable to the Indemnified Party for any legal or
other expenses subsequently incurred by the Indemnified Party in connection with
the defense thereof other than reasonable costs of investigation; provided,
however, that (i) if, in the reasonable judgment of the Indemnified Party, it is
advisable for the Indemnified Party to be represented by separate counsel other
than counsel for the Indemnifying Party, the Indemnified Party shall have the
right to employ a single counsel to represent the Indemnified Party, in which
event the reasonable fees and expenses of such separate single counsel shall be
borne by the Indemnifying Party, and (ii) in the case of any Proceeding brought
by any governmental authority, the Indemnifying Party shall have the right to
participate in, but not to assume the defense of, such Proceeding. The
Indemnifying Party shall not be obligated under any settlement agreement
relating to any Proceeding under this Section 7.2 to which it has not consented
in writing, which consent shall not be unreasonably withheld.
(d) Preserving Rights with Respect to Calculation Losses. Notwithstanding
Section 7.2(c), Lincoln Life may in its sole discretion elect to reimburse a
Contractowner, Third Party Administrator, Separate Account or Fund for
Calculation Losses out of Lincoln Life's own funds and such reimbursement shall
have no effect on the respective indemnification obligations of the parties
pursuant to Section 7.2(a) and (b).
(e) Overpayments. The parties agree that there may be circumstances in
which it would not be commercially reasonable for Lincoln Life and the Funds to
seek reimbursement from one or more Contractowners of overpayments made them,
taking into account relevant factors such as industry practice; the amount of
such overpayments; the number of Contractowners overpaid; the cost of seeking
reimbursement; and the implications for customer relations of seeking
reimbursement. In the event of any overpayment to a Contractowner for which
Lincoln Life or any Fund intends to seek indemnification from Delaware pursuant
to Section 7.2(b) without seeking reimbursement from the Contractowner, the
parties shall negotiate in good faith as to what effect, if any, the
determination not to seek such reimbursement should have under the circumstances
on the rights of Lincoln Life or the Funds to indemnification for the amounts
overpaid.
<PAGE>
ARTICLE 8
INSURANCE COVERAGE
------------------
Section 8.1 Insurance. Delaware and Holdings shall maintain
insurance coverage at a level at least equal to the insurance coverage held by
each of them at the time this Agreement becomes effective.
ARTICLE 9
FORCE MAJEURE AND DISASTER RECOVERY PLAN
----------------------------------------
Section 9.1 Force Majeure; Disaster Recovery Plan. No party shall be
liable to any other party for any damages caused by delays beyond its reasonable
control, including, without limitation, those delays occasioned by fire, strike,
labor dispute, acts of the other party, acts of any common carrier, pricing
service, corporate action service, or telephone network, acts of the power
supply company or its networks, restrictions by civil or military authorities,
acts of nature, or unforeseen transportation failures. In the event of any such
delay, the hindered party shall promptly notify the other parties and, upon the
giving of such notice, the period of time for performance of obligations
hereunder affected by such delays will be extended by the same number of days as
the delay. Notwithstanding the foregoing, Delaware shall maintain and implement
a customary disaster recovery plan and such plan shall be reasonably acceptable
to Lincoln Life and the Funds. This Article 9 shall not excuse any failure to
perform, or extend the time for performance of, any obligation of Delaware under
this Agreement to the extent that such failure or delay would have been avoided
by compliance with such disaster recovery plan, or by the use of reasonable,
readily available alternatives.
ARTICLE 10
EFFECTIVENESS
-------------
Section 10.1 Effectiveness.
(a) This Agreement shall become effective upon the later of:
(i) the date first set forth above; or
(ii) the date as of which Lincoln Life has complied with the
requirements of the Indiana insurance holding company laws
at Section 27-1-23-4 of the Indiana Code.
(b) Lincoln Life shall diligently and reasonably pursue the satisfaction
of the requirements of the Indiana insurance holding company laws at
Section 27-1-23-4 of the Indiana Code.
<PAGE>
ARTICLE 11
TERM AND TERMINATION
--------------------
Section 11.1 Term. The initial term of this Agreement shall end on
the fourth anniversary of the Cutover Date of Phase III, and this Agreement
shall be automatically renewed for subsequent Renewal Terms thereafter unless
sooner terminated under Section 11.2.
Section 11.2 Termination. Subject to the procedures set forth in
Article 12 and to Section 11.3, this Agreement may be terminated as follows:
(a) by Lincoln Life, Delaware, or any Fund, in each case upon notice
to each of the other parties at least 180 days prior to the
expiration of the initial term or any Renewal Term, with such
termination to become effective upon such expiration; and
(b) by Lincoln Life, Delaware or any Fund upon 30 days notice to each
of the other parties, for any material breach of this Agreement
unless such breach is cured within such notice period.
For the purpose of this Section 11.2(b) only, a "material breach" shall include,
but not be limited to, the failure by Delaware to provide Accounting Services
hereunder of a quality reasonably determined by Lincoln Life or any Fund to be
consistent with a superior level of service in the industry.
Section 11.3 Effect of Termination by a Fund. In the event one or
more Funds shall terminate this Agreement, this Agreement shall nonetheless
continue in full force and effect between and among those parties who have not
terminated this Agreement.
ARTICLE 12
PROCEDURES UPON TERMINATION
---------------------------
Section 12.1 Obligations Upon Termination. Upon termination of this
Agreement by any party under Article 11, each party shall be obligated to
cooperate with each other party to provide for the transfer of all
responsibilities, duties and obligations of this Agreement as may be necessary
to ensure the orderly, undisrupted business of each party. Such cooperation
shall include, but not be limited to, returning all papers, documents, materials
or equipment to the party owning such materials. In the event that this
Agreement is terminated by Lincoln Life or any Fund under Section 11.2(b),
Lincoln Life and the Funds shall have the right to require Delaware to continue
performing all or any part of its responsibilities, duties and obligations under
this Agreement until the earlier of (a) 210 days following the date notice of
such termination was given, or (b) the date that is 30 days after notice from
Lincoln Life or the Funds that
<PAGE>
Delaware shall cease such performance. For this purpose, (a) the terms of this
Agreement (including without limitation the obligation of Lincoln Life and the
Funds to pay Delaware's fees under Article 6, and the obligation of Delaware to
continue to exercise the standard of care required under Section 7.1 shall
remain in effect with respect to the period in which Delaware is obligated to
continue such performance, and (b) if any portion of Delaware's
responsibilities, duties and obligations during such period are not so extended
as required by Lincoln Life, the parties shall mutually agree in good faith on a
reduction of fees which reflects the termination of such responsibilities,
duties and obligations.
ARTICLE 13
REPRESENTATIONS AND WARRANTIES
------------------------------
Each party represents and warrants to the other parties as follows:
Section 13.1 Organization and Authority. Such party is duly organized,
validly existing and in good standing as a corporation under the laws of the
state indicated on the first page of this Agreement, with the requisite
authority and power, in conformity with applicable laws, rules and regulations,
to execute and deliver this Agreement and to perform its obligations hereunder.
Such party has taken all necessary action to authorize such execution, delivery
and performance.
Section 13.2 No Conflict with Laws. The execution, delivery and
performance of this Agreement by such party do not conflict with or violate any
laws applicable to such party, any provision of its constituent documents, any
order or judgment of any court or governmental agency applicable to it or any of
its assets or any contractual restriction binding on it or its assets.
Section 13.3 Obligation. This Agreement constitutes a legal, valid and
binding obligation of such party, enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws relating to the enforcement of creditors' rights generally and
subject to principles of equity.
ARTICLE 14
PARENT GUARANTY
---------------
Section 14.1 Parent Guaranty. Holdings hereby unconditionally guarantees
the full and punctual performance of the covenants, agreements and obligations
of Delaware under this Agreement, including but not limited to the payment when
due of all amounts that may from time to time be payable by Delaware pursuant to
Section 7.2(b) (the "Guaranteed Obligations").
Section 14.2 Guaranty Unconditional. The obligations of
<PAGE>
Holdings hereunder shall be unconditional and absolute and, without limiting the
generality of the foregoing, shall not be released or discharged by:
(a) any extension, settlement, compromise, waiver or release in
respect of any obligation of Delaware under this Agreement;
(b) any modification or amendment of or supplement to this
Agreement;
(c) any change in the corporate existence, structure or ownership of
Delaware, or any insolvency, bankruptcy, reorganization or other similar
proceeding affecting Delaware or its assets; or
(d) any other act or omission to act or delay of any kind by
Delaware, Lincoln Life, any Fund or any other person which would, but for
the provisions of this paragraph (d), constitute a legal or equitable
discharge of Holding's obligations hereunder;
provided, however, that in the event of any extension, settlement, compromise,
waiver or release of any obligation of Delaware under this Agreement, or any
modification or amendment of or supplement to this Agreement, the guaranty
provided for in this Article 14 shall apply to the obligations of Delaware as so
extended, settled, compromised, waived, released, modified, amended or
supplemented.
Section 14.3 Discharge Only Upon Payment or Performance in Full;
Reinstatement in Certain Circumstances. Holding's obligations hereunder shall
remain in full force and effect until the Guaranteed Obligations shall have been
paid or performed in full. If at any time any payment of Guaranteed Obligations
by Delaware under this Agreement is rescinded or must be otherwise restored or
returned upon the insolvency, bankruptcy or reorganization of Delaware or
otherwise, Holding's obligations hereunder with respect to such payment shall be
reinstated as though such payment had been due but not made at such time.
Section 14.4 Waiver by Holdings. Holdings irrevocably waives acceptance
hereof, presentment, demand, protest and any notice not provided for herein, as
well as any requirement that at any time any action be taken by any person
against Delaware or any other person.
Section 14.5 Subrogation. Upon making any payment with respect to
Delaware hereunder, Holdings shall be subrogated to the rights of the payee
against Delaware with respect to such payment; provided that Holdings shall not
enforce payment by way of subrogation until all Guaranteed Obligations have been
paid or performed in full.
<PAGE>
ARTICLE 15
DISPUTE RESOLUTION
------------------
Before commencing litigation of any dispute arising out of or relating to
this Agreement, the parties shall attempt in good faith to resolve the dispute
by the following means:
Section 15.1 Negotiation. The parties shall in good faith attempt to
resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle the controversy. A
party may give the other parties written notice of any dispute not resolved in
the normal course of business. Within 20 days after delivery of that notice,
executives of the affected parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to exchange
relevant information and to attempt to resolve the dispute. If the matter has
not been resolved within 60 days of the disputing party's notice, or if the
parties fail to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in Section 15.2. If a negotiator intends to be
accompanied at a meeting by an attorney, the other negotiator shall be given at
least 3 Business Days' notice of that intention and may also be accompanied by
an attorney.
Section 15.2 Mediation. If the dispute has not been resolved by
negotiation as provided in Section 15.1, the parties shall endeavor for an
additional period of 60 days to settle the dispute by mediation under the then-
current Center for Public Resources (CPR) Model Procedure for Mediation of
Business Disputes. The neutral third party will be selected from the CPR Panel
of Neutrals. If the parties encounter difficulty in agreeing on a neutral, they
will seek the assistance of CPR in the selection process.
Section 15.3 Confidentiality. All activities under this Article 15 are
confidential and shall be treated as compromise and settlement negotiations for
purposes of the Federal Rules of Evidence and state rules of evidence.
ARTICLE 16
MISCELLANEOUS
-------------
Section 16.1 Amendment. This Agreement, including any Exhibits or
Schedules, may be amended, modified or supplemented only in writing signed by
Delaware, Lincoln Life and any Fund affected thereby. This Agreement shall be
binding upon all successors, assigns or transferees of the parties to this
Agreement.
Section 16.2 Assignment. This Agreement and the rights, duties and
obligations of the parties hereto shall not be assign able by any party, except
assignment to successors in the case of mergers, sales of all or substantially
all of the assets of such
<PAGE>
party or transfer of ownership by reorganization or similar restructuring to a
successor in interest to the business of such party, without the prior written
consent of the other parties, and any purported assignment in the absence of
such consent shall be void.
Section 16.3 Notices. All notices given or submitted pursuant to this
Agreement shall be made in writing and shall be deemed given when (a) deposited
with the United States Postal Service, postage prepaid, registered or certified
mail, return receipt requested; (b) deposited with a nationally recognized
overnight mail delivery service; (c) sent by facsimile with electronic
confirmation of delivery or with a copy sent by mail as described in (a) or (b)
above; or (d) delivered in person; all to the last address of record of each
party being notified.
Any notice under this Agreement to Lincoln Life shall be given to:
ATTN: O. Douglas Worthington
Vice President and Controller
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801
Phone: (219) 455-3669
Facsimile: (219) 455-1939
Any notice under this Agreement to Delaware or Holdings
shall be given to:
ATTN: Michael J. Bishof
Vice President and Treasurer
Delaware Management Company
1818 Market Street; 7th Floor
Philadelphia, PA 19103
Phone: (215) 255-2852
Facsimile: (215) 255-1645
With a copy to:
Richard J. Flannery
Managing Director, Corporate
& Tax Affairs
Delaware Management Company
2005 Market Street
Philadelphia, PA 19103
Phone: (215) 255-1244
Facsimile: (215) 255-2822
<PAGE>
Any notice under this Agreement to any Fund shall be given
to:
ATTN: Kelly D. Clevenger
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801
Phone: (219) 455-5119
Facsimile: (219) 455-1773
Any party may, by means of written notice in compliance with this Section
16.3, change the address or the identity of the person to whom any notice, or
copy thereof, is to be sent.
Section 16.4 Severability. If any provision of this Agreement, as applied
to any party or to any circumstances, shall be found by a court of competent
jurisdiction to be void, invalid or unenforceable, the same shall in no way
affect any other provision of this Agreement, the application of any such provi
sion in any other circumstances, or the validity or enforce ability of this
Agreement; provided, however, that nothing in this Section 16.4 shall adversely
affect the fundamental benefits received by the parties under this Agreement.
Section 16.5 Waiver. A waiver by any party of any of the terms and
conditions of this Agreement in any one instance shall not be deemed or
construed to be waiver of any such term or condition for the future, or of any
subsequent breach thereof, nor shall it be deemed a waiver of performance of any
other obligation hereunder. No waiver of any provision of this Agreement shall
be valid unless agreed to in writing by the party or parties against whom such
waiver is sought to be enforced.
Section 16.6 Entire Agreement. This Agreement contains the entire
understanding of the parties hereto relating to the subject matter of this
Agreement and supersedes all prior and collateral agreements, understandings,
statements and negotiations of the parties.
Section 16.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana, without giving
effect to the conflict of law provisions thereof.
Section 16.8 Section and Paragraph Headings. The titles of the sections
and paragraphs of this Agreement are for convenience only and shall not in any
way affect the interpretation of any provision or condition of this Agreement.
Section 16.9 Counterparts. This Agreement may be executed in counterparts
which, taken together, shall constitute the whole of the Agreement as between
the parties.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
LINCOLN LIFE:
LINCOLN NATIONAL LIFE INSURANCE COMPANY
By: ____________________________
O. Douglas Worthington
Title: Vice President and
Controller
Date: __________________________
HOLDINGS:
DELAWARE MANAGEMENT HOLDINGS, INC.
By: ____________________________
Title: _________________________
Date: __________________________
DELAWARE:
DELAWARE SERVICE COMPANY, INC.
By: ____________________________
Title: _________________________
Date: __________________________
<PAGE>
FUNDS:
LINCOLN NATIONAL AGGRESSIVE GROWTH
FUND, INC.
LINCOLN NATIONAL BOND FUND, INC.
LINCOLN NATIONAL CAPITAL
APPRECIATION FUND, INC.
LINCOLN NATIONAL EQUITY-INCOME
FUND, INC.
LINCOLN NATIONAL GLOBAL ASSET
ALLOCATION FUND, INC.
LINCOLN NATIONAL GROWTH AND INCOME
FUND, INC.
LINCOLN NATIONAL INTERNATIONAL
FUND, INC.
LINCOLN NATIONAL MANAGED FUND, INC.
LINCOLN NATIONAL MONEY MARKET FUND,
INC.
LINCOLN NATIONAL SOCIAL AWARENESS
FUND, INC.
LINCOLN NATIONAL SPECIAL
OPPORTUNITIES FUND, INC.
By: ____________________________
Kelly D. Clevenger
In his capacity as President of each of
the above-named Funds.
Date: __________________________
<PAGE>
EXHIBIT A
---------
INVESTMENT COMPANIES
<PAGE>
EXHIBIT A
---------
INVESTMENT COMPANIES
Lincoln National Aggressive Growth Fund, Inc.
Lincoln National Bond Fund, Inc.
Lincoln National Capital Appreciation Fund, Inc.
Lincoln National Equity-Income Fund, Inc.
Lincoln National Global Asset Allocation Fund, Inc.
Lincoln National Growth and Income Fund, Inc.
Lincoln National International Fund, Inc.
Lincoln National Managed Fund, Inc.
Lincoln National Money Market Fund, Inc.
Lincoln National Social Awareness Fund, Inc.
Lincoln National Special Opportunities Fund, Inc.
<PAGE>
EXHIBIT B
---------
FORM OF WRITTEN ACKNOWLEDGEMENT OF CUTOVER DATE
<PAGE>
SCHEDULE 1.1(a)
---------------
CUTOVER SCHEDULE
<PAGE>
SCHEDULE 2.1
------------
PROCEDURES FOR CORRECTING ERRORS
<PAGE>
SCHEDULE 3.1
------------
DATA PROVIDED BY LINCOLN LIFE
<PAGE>
SCHEDULE 3.2
------------
UNAFFILIATED MUTUAL FUNDS
AND
SERVICE PROVIDERS
<PAGE>
SCHEDULE 6.1
------------
FEE SCHEDULE
<PAGE>
Exhibit 6
[LINCOLN LIFE - LETTERHEAD]
April 15, 1997
Gentlemen:
This Opinion is furnished in connection with the filing of Post-Effective
Amendment #13 to Registration #33-14692 for the Lincoln National Flexible
Premium Variable Life Account F. In my capacity as Second Vice President -
Business Engineering, I am familiar with the Registration Statement, its
exhibits, and the policy forms associated with the Registration Statement. In
my opinion:
1. The fees and charges deducted under the contract, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by the Lincoln National Life Insurance
Company.
2. The illustrations of death benefits, policy values, and accumulated
premiums shown in Appendix D to the Prospectus contained in the
Registration Statement, based on the assumptions stated in the
illustrations, are consistent with the assumptions stated in the policies.
The rate structure of the policies has not been designed so as to make the
relationship between premiums and benefits, as shown in the illustrations,
appear to be correspondingly more favorable to the prospective purchaser of
policies that are Standard Male Nonsmokers or Smokers Age 35 or Age 55 than
to prospective purchasers for policies that are Males or Females at other
ages or classifications.
3. The information contained in the illustrations in the section of the
Prospectus entitled "Policy Benefits", based on the assumptions stated in
the examples, is consistent with the provisions of the policies.
I hereby consent to the use of this opinion as an Exhibit to Post-Effective
Amendment # 13 to the Registration Statement and the use of my name under the
heading "Experts" in the Prospectus contained in the Registration Statement.
Sincerely,
/s/ Denis G. Schwartz
Denis G. Schwartz, FSA
Second Vice President
Business Engineering
<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. 13 to the Registration Statement (Form S-6 No. 33-14692)
and the related Prospectus appearing therein and pertaining to the Lincoln
National Flexible Premium Variable Life Account F, and to the use therein of our
reports dated (a) February 6, 1997 with respect to the statutory-basis financial
statements of The Lincoln National Life Insurance Company for each of the three
years in the period ended December 31, 1996; (b) February 7, 1996, with respect
to the consolidated financial statements of the Lincoln National Life Insurance
Company for each of the three years in the period ended December 31, 1995; and
(c) dated March 27, 1997 with respect to the financial statements of Lincoln
National Flexible Premium Variable Life Account F.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND> This schedule contains summary financial information extracted from
Lincoln Life Flexible Premium Variable Life Account F plan financial statements
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 42,567,746
<INVESTMENTS-AT-VALUE> 49,834,501
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 49,834,501
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 52,738
<TOTAL-LIABILITIES> 52,738
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 28,641,193
<SHARES-COMMON-STOCK> 20,149,922
<SHARES-COMMON-PRIOR> 17,556,802
<ACCUMULATED-NII-CURRENT> 10,670,225
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,203,590
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,266,755
<NET-ASSETS> 49,781,763
<DIVIDEND-INCOME> 3,855,992
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 540,498
<NET-INVESTMENT-INCOME> 3,315,494
<REALIZED-GAINS-CURRENT> 1,163,196
<APPREC-INCREASE-CURRENT> 833,877
<NET-CHANGE-FROM-OPS> 5,312,567
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,710,693
<NUMBER-OF-SHARES-REDEEMED> 13,117,573
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 10,235,440
<ACCUMULATED-NII-PRIOR> 7,354,731
<ACCUMULATED-GAINS-PRIOR> 2,040,394
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 540,498
<AVERAGE-NET-ASSETS> 44,664,043
<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>
