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AMERICAN LEGACY ESTATE BUILDER
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
issued by:
Lincoln National Life Insurance Co.
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, Ind. 46801
(800) 4 LINCOLN (800-454-6265)
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 generally may be issued
only to persons age 80 or younger (ages 81-85 by exception only) 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.
An owner may choose to allocate amounts to the General Account of Lincoln Life
(General Account) or to the Lincoln Life Flexible Premium Variable Life Account
F (Separate Account). Amounts allocated to the Separate Account will be invested
in the Class 2 shares of the American Variable Insurance Series, which has ten
funds available:
. Global Small Capitalization Fund
. 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
investment experience of the chosen subaccounts of the Separate Account and
interest credited to the policy by the General Account, as well as the timing
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.
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The purchase and ownership of the policy involves various charges which are
explained under the heading Charges and deductions on page 7.
It may not be advantageous to purchase a policy: (1) as a replacement for
another type of life insurance; or, (2) to obtain additional insurance
protection if the purchaser already owns another flexible premium variable life
insurance policy.
The policy is or may be a Modified Endowment Contract. A life insurance policy
becomes a Modified Endowment Contract if the premiums paid for the policy exceed
certain limits referred to as the 7-pay limitation. Because the initial premium
exceeds the 7-pay limitation, the policy will be a Modified Endowment Contract
unless it is purchased with cash values transferred from a pre-existing life
insurance policy which is not a Modified Endowment Contract and the transfer
meets the requirements for a tax-free exchange. The taxation of loans or
withdrawals from, or surrenders of, a Modified Endowment Contract is generally
less favorable than applies to such distributions from a life insurance policy
that is not a Modified Endowment Contract. In particular, loans, withdrawals, or
surrenders made from a Modified Endowment Contract are normally reportable
income to the extent of any gain in the policy and such income will also be
subject to an additional 10% income tax if income is received before the owner
attains age 59 1/2.
This prospectus is valid only if accompanied or preceded by a current 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 May 26, 1998.
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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 General Account 3
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The Separate Account 3
American Variable Insurance Series 4
The investment advisor 4
Addition, deletion or substitution of investments 4
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THE POLICY
Requirements for issuance of a policy 5
Units and unit values 5
Premium payment and allocation of premiums 5
Dollar cost averaging program 6
Effective date 7
Right to examine policy 7
Policy termination 7
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CHARGES AND DEDUCTIONS
Surrender charges 7
Cost of insurance charges 7
Policy value charge 8
Other policy charges 8
Charges against the Separate Account 8
Reduction of charges 9
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POLICY BENEFITS
Death benefit 9
Policy changes 10
Policy value 10
Transfer between subaccounts 10
Transfer to and from General Account 11
Withdrawals 11
Loans 11
Policy lapse and reinstatement 12
No Lapse Benefit 12
Surrender of the policy 12
Proceeds and payment options 12
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</TABLE>
<TABLE>
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<S> <C>
GENERAL PROVISIONS
The contract 13
Suicide 13
Representations and contestability 13
Incorrect age or sex 13
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Change of owner or beneficiary 13
Assignment 13
Reports and records 14
Projection of benefits and values 14
Postponement of payments 14
Accelerated Benefit Election Rider 14
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DISTRIBUTION OF THE POLICY 14
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FEDERAL TAX MATTERS
Tax status of the policy 15
Tax treatment of policy benefits 16
Taxation of the Separate Account 17
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VOTING RIGHTS 17
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STATE REGULATION OF LINCOLN LIFE
AND THE SEPARATE ACCOUNT 18
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SAFEKEEPING OF THE SEPARATE 18
ACCOUNT'S ASSETS
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PREPARING FOR YEAR 2000 18
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LEGAL PROCEEDINGS 19
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EXPERTS 19
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ADDITIONAL INFORMATION 19
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APPENDIX A: Executive Officers & Directors
of Lincoln National Life
Insurance Co. 20
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APPENDIX B: Illustrations of policy values 22
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APPENDIX C: Definitions for Separate
Account F 35
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FINANCIAL STATEMENTS 38
</TABLE>
i
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SUMMARY OF THE POLICY
The following summary is intended to give you a brief explanation of the most
important features of your policy. The summary is not comprehensive and is
entirely qualified by more specific information contained elsewhere in this
prospectus. Throughout this prospectus, in order to make the following documents
more understandable, we have italicized the special terms.
WHAT TYPE OF POLICY AM I PURCHASING?
Your policy is a flexible premium variable life insurance policy whose primary
purpose is to provide life insurance protection on the insured. As long as your
policy remains in force, the policy will provide for: (1) the payment of a death
benefit to a beneficiary upon the insured's death; and (2) policy loan
privileges, withdrawal privileges and surrender privileges.
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 proceeds
payable will be the current specified amount, reduced by any outstanding loan
and any due and unpaid charges. Under certain conditions, for issue ages under
age 76, a no lapse benefit guarantees that the policy will stay in force for the
first 10 policy years, even if poor net investment results and policy charges
might otherwise cause the policy to lapse.
HOW ARE THE PREMIUMS FLEXIBLE?
The owner will normally choose to pay an initial single premium approximately
equal to 100% of the federal maximum premium limitation (as defined in Section
7702 of the Internal Revenue Code of 1986, as amended). However, any owner who
at any time has not yet paid the current federal maximum premium limitation may,
subject to certain restrictions, make premium payments at any time and in any
amount and at any frequency.
WHAT MAKES MY POLICY VARIABLE?
Your policy is described as variable because the death benefit and the policy
value can vary with the investment performance of amounts you have allocated to
the subaccounts you have selected. While you bear the entire investment risk on
such amounts, you also enjoy the opportunity to obtain market rates of return on
those amounts.
WHAT FUNDS ARE AVAILABLE TO SELECT?
You have the option to allocate amounts to one or more subaccounts of the
Separate Account. Currently the owner may select from the Class 2 shares of the
American Variable Insurance Series, which consists of ten funds:
The Global Small Capitalization Fund seeks long-term growth of capital by
investing primarily in equity securities of companies domiciled around the world
with relatively small market capitalizations (share price times the number of
equity securities outstanding). The fund may also invest in securities
convertible into common stocks, straight debt securities, government securities
or non-convertible preferred stocks. [PLEASE NOTE: AS OF THE DATE OF THIS
PROSPECTUS, THE GLOBAL SMALL CAPITALIZATION FUND IS NOT YET AVAILABLE
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IN ALL STATES. PLEASE CONTACT YOUR INVESTMENT DEALER FOR MORE
INFORMATION ABOUT THE GLOBAL SMALL CAPITALIZATION FUND'S
AVAILABILITY.]
The Global Growth Fund seeks long-term growth of capital by investing primarily
in common stocks or securities with common stock characteristics of issuers
domiciled around the world.
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 primarily
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 capital
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 capital
appreciation by investing primarily in intermediate and long term corporate
obligations, with emphasis on higher yielding, higher risk, lower rated or
unrated securities. IN ADDITION TO OTHER RISKS, HIGH-YIELD, HIGH-RISK BONDS
(ALSO KNOWN AS "JUNK BONDS") ARE SUBJECT TO GREATER FLUCTUATIONS IN VALUE AND
RISK OF LOSS OF INCOME AND PRINCIPAL DUE TO DEFAULT BY THE ISSUER THAN ARE
INVESTMENTS IN LOWER YIELDING, HIGHER RATED BONDS. FOR FURTHER INFORMATION ON
THE RISKS ASSOCIATED WITH SUCH SECURITIES, PLEASE REFER TO THE PROSPECTUS FOR
THE AMERICAN VARIABLE INSURANCE SERIES, WHICH MUST ACCOMPANY OR PRECEDE THIS
PROSPECTUS AND WHICH SHOULD BE READ CAREFULLY.
The Bond Fund seeks as high a level of current income as is consistent with the
preservation of capital by investing in a broad variety of fixed income
securities.
1
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The U.S. Government/AAA-Rated Securities Fund seeks a high level of current
income consistent with prudent investment risk and preservation of capital by
investing primarily in a combination of securities guaranteed by the United
States Government and other debt securities rated AAA or Aaa.
The Cash Management Fund seeks high current yield while preserving capital by
investing in a
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diversified selection of money market instruments.
HOW ARE PREMIUMS PROCESSED?
You determine in the application what portions of net premiums are to be
allocated to the General Account or the various subaccounts of the Separate
Account. Prior to the record date, net premiums are automatically allocated to
the General Account. After the record date, the policy value and all subsequent
net premiums will automatically be invested in the General Account and 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 General Account and 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, or
payment of the death benefit. 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.
DO I HAVE ACCESS TO THE POLICY VALUES?
You may access the net cash surrender value through loans or withdrawals. You
may borrow up to 100% of the net cash surrender value at any time. In addition,
subject to some restrictions and charges, you may withdraw portions of the net
cash surrender value. Loans reduce the death benefit proceeds by the amount of
the loan. Withdrawals reduce the specified amount by an amount proportionate to
the amount of policy value withdrawn. For example, if 10% of the policy value is
withdrawn, the specified amount will be reduced by 10% of the specified amount.
Both loans and withdrawals reduce future policy values and may have federal
income tax consequences.
WHAT CHARGES AND DEDUCTIONS ARE MADE FROM MY POLICY?
SURRENDER CHARGE. During the first 12 years of the policy, a surrender charge
will be deducted from your policy value upon lapse or voluntary surrender. The
surrender charge during the first two policy years is calculated as 6.5% of
premiums paid. The surrender charge will not exceed $43 per $1000 of specified
amount. The surrender charge in a given policy year will equal the amounts shown
below. <TABLE> <CAPTION>
Percent of premiums
During policy year paid
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<S> <C>
1 6.5%
2 6.5%
3 6.0%
4 6.0%
5 5.5%
6 5.5%
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7 5.0%
8 5.0%
9 4.5%
10 4.5%
11 4.0%
12 2.0%
</TABLE>
COST OF INSURANCE CHARGE. The policy value will be reduced on each monthly
anniversary day by the cost of insurance charge. See page 7 for more detailed
information. The cost of insurance charge ceases when the insured attains age
100.
POLICY VALUE CHARGE. The policy value will be reduced on each monthly
anniversary day by the policy value charge. The policy value charge for the
first 10 policy years is .10% of the policy value each month (1.20% annually),
and thereafter is .0166666% of the policy value each month (.20% annually). The
policy value charge ceases when the insured attains age 100. The policy value
charge recovers our expenses incurred in the sale and issue of the policies
(such as premium tax and other taxes, commissions, and underwriting and issue
expenses), and some ongoing maintenance expenses.
OTHER POLICY CHARGES. A monthly administrative charge of $5.00 is deducted from
the policy value on any monthly anniversary day when the policy value is less
than $50,000. Currently, no charge is made for transfers of amounts among the
General Account and the subaccounts, although a maximum of $10 per transfer may
be charged. A withdrawal charge of $20 is deducted from the amount of any
withdrawal of policy value.
CHARGES AGAINST THE SEPARATE ACCOUNT. A daily mortality and expense risk charge
currently equal to .0016438% (equivalent to an annual rate of .60%) of the daily
net assets of the Separate Account is imposed. This charge is guaranteed not to
exceed .00246575% (equivalent to an annual rate of .90%).
No charges are currently made from the Separate Account for federal or state
income taxes. Should Lincoln Life determine that such taxes may be imposed, the
company reserves the right to make deductions from the policy to pay those
taxes.
In addition, because the Separate Account purchases shares of the funds
involved, the value of the net assets of these subaccounts of the Separate
Account will reflect
2
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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%. In addition to these fees and expenses, and pursuant to
a 12b-1 plan, the Class 2 shares of each fund also bear expenses equal to
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.25% annually of each fund's net assets. See page 8 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, withdrawals and surrenders of a
life insurance policy that becomes a Modified Endowment Contract is generally
less favorable than applies to such distributions from a life insurance policy
that is not a Modified Endowment Contract. Your policy will be a Modified
Endowment Contract if the premiums you pay exceed certain limits referred to as
the 7-pay limitation (see pages 15-16). Because the initial premium always
exceeds the 7-pay limitation, your policy will 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, withdrawals, and surrenders made from a Modified
Endowment Contract are normally reportable income to the extent of any gain in
the policy and such income will also be subject to an additional 10% income tax
if income is received 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
incorporated 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 Commonwealth of the Northern Mariana Islands.
Lincoln Life is wholly owned by Lincoln National Corp., a publicly held
insurance holding company incorporated under Indiana law on January 5, 1968. The
principal office of Lincoln Life is located at 1300 South Clinton Street, Fort
Wayne, Ind. 46802. The Principal office of Lincoln National Corp. is located at
200 East Berry Street, Fort Wayne, Ind. 46802. Through its affiliated companies,
Lincoln National Corp. provides wealth accumulation and protection products and
services--including annuities, life insurance, 401(k) plans, life-health
reinsurance, institutional management and mutual funds.
THE GENERAL ACCOUNT
The General Account refers to the General Account of Lincoln Life. The General
Account consists of all assets owned by Lincoln Life other than those allocated
to any of its separate accounts, including the Separate Account. The General
Account supports Lincoln Life's insurance and annuity obligations. Because of
applicable exemptive and exclusionary provisions, interests in the General
Account have not been registered under the Securities Act of 1933, and the
General Account has not been registered as an investment company under the
Investment Company Act of 1940.
THE SEPARATE ACCOUNT
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Lincoln Life Flexible Premium Variable Life Account F (Separate Account) was
established by Lincoln Life as a separate account on May 29, 1987 to fund
variable life insurance policies. Although the assets of the Separate Account
are the property of Lincoln Life, the laws of Indiana under which the Separate
Account was established provide that the assets in the Separate Account
attributable to the policies are not chargeable with liabilities arising out of
any other business which Lincoln Life may conduct. The assets of the Separate
Account shall, however, be available to cover the liabilities of the General
Account of Lincoln Life to the extent that the Separate Account's assets exceed
its liabilities arising under the policies supported by it. The assets of the
Separate Account will be valued once daily at the close of regular trading
(currently 4:00 p.m. New York time) on each day the New York Stock Exchange is
open. The New York Stock Exchange is currently closed on the following holidays:
New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Separate Account has been registered as an investment company under the
Investment Company Act of 1940 and meets the definition of "separate account"
under federal securities laws. Registration with the Securities and Exchange
Commission does not involve supervision of the management or investment
practices or policies of the Separate Account or Lincoln Life by the Commission.
As of the date of this prospectus, no policies have been sold, and the Separate
Account has no assets or liabilities attributable to the policies. The Separate
Account, however, also supports other variable life insurance policies that are
not described in this prospectus. Consequently, the assets in the Separate
Account, as reflected in its financial statements included herein, are
attributable solely to such other policies.
The Separate Account is divided into ten subaccounts. Each subaccount
invests exclusively in shares of one of the classes of one of the funds
comprising the American Variable Insurance Series: the Global Small Capitaliza-
3 <PAGE>
tion Fund, 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. Should Lincoln Life become aware of any
material irreconcilable conflict, either potential or existing, between its
variable annuity and variable life insurance contractowners, Lincoln Life has
agreed to notify the series' Board of Trustees and to remedy, at Lincoln Life's
own expense, any such conflict.
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.
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THE AMERICAN VARIABLE INSURANCE SERIES
The series was organized as a Massachusetts business trust in 1983 and is
registered as a diversified, open-end management investment company under the
Investment Company Act of 1940. Diversified means not owning too great a
percentage of the securities of any one company. An open-end company is one
which, in this case, permits Lincoln Life to sell its shares back to the series
when you make a withdrawal, surrender the policy, or transfer from one fund to
another. Management investment company is a legal term for a mutual fund. These
definitions are very general. The precise legal definitions for these terms are
contained in the Investment Company Act of 1940.
The series has nine separate portfolios of funds. Funds as sets are segregated
and a shareholder's interest is limited to those funds in which the shareholder
owns shares. The series has adopted a plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 to permit the series to establish a multiple
class distribution system for all of its portfolios. The series' Board of
Trustees may at any time establish additional funds or classes, which may or may
not be available to the Separate Account.
Under the multi-class system adopted by the series, shares of each multi-class
fund represent an equal pro rata interest in that fund and, generally, have
identical voting, dividend, liquidation, and other rights, preferences, powers,
restrictions, limitations, qualifications and terms and conditions, except that:
(1) each class has a different designation; (2) each class of shares bears its
class expenses; (3) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its distribution arrangement;
and (4) each class has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class. Expenses currently designated as class expenses by the series'
Board of Trustees under the plan pursuant to Rule 18f-3 include, for example,
service fees paid under 12b-1 plan to cover servicing fees paid to dealers
selling the policy as well as related expenses incurred by Lincoln Life.
Each fund has two classes of shares, designated as Class 1 shares and Class 2
shares. Class 1 and 2 differ primarily in that Class 2 (but not Class 1) shares
are subject to a 12b-1 plan. Only Class 2 shares are available under the policy.
Lincoln Life together with affiliates, expects to receive a portion of the 12b-1
fees attributable to its investment on behalf of the Separate Account in the
funds. Such portion is anticipated to be approximately .25% of the value of the
Separate Account's investment in the funds and constitutes reimbursement to
Lincoln Life for certain expenses incurred in connection with certain
administrative and distribution support services provided to the series. See the
prospectus for the series for more information about the 12b-1 plan it has
adopted for its Class 2 shares.
THE INVESTMENT ADVISOR
Capital Research and Management Company, an investment management
organization founded in 1931, is the investment advisor to the series and other
mutual funds, including those in The American Funds Group. Capital Research and
Management Co. is located at 333 South Hope Street, Los Angeles, Calif. 90071
and 135 South State College Boulevard, Brea, Calif. 92821. Capital Research and
Management is registered with the Securities and Exchange Commission as an
investment adviser.
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ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
Lincoln Life does not control the investment advisor and therefore cannot
guarantee that the American Variable Insurance Series or any particular funds
will be available for investment by the subaccounts. Lincoln Life reserves the
right, subject to compliance with applicable law, to make additions to,
deletions from, or substitutions for the shares that are held by the Separate
Account or that the Separate Account may purchase. Lincoln Life reserves the
right to eliminate the shares of any fund and to substitute shares of another
open-end, registered investment company, if the shares are no longer available
for investment, or if in the judgment of Lincoln Life further investment in any
fund should become inappropriate in view of the purposes of the Separate
Account. Lincoln Life will not substitute any shares attributable to an owner's
interest in a subaccount of the Separate Account without notice and prior to
approval of the Securities and Exchange Commission, to the extent required by
the Investment Company Act of 1940 or other applicable law. Nothing contained
herein shall prevent the Separate Account from purchasing other securities for
other classes of policies, or from permitting a conversion between classes of
policies on the basis of requests made by policy owners.
4
<PAGE>
Lincoln Life also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new fund or series of a fund
or in shares of another investment company, with a specified investment
objective. New subaccounts may be established when, at the sole discretion of
Lincoln Life, marketing needs or investment conditions warrant, and any new
subaccounts may be made available to existing policy owners on a basis to be
determined by Lincoln Life. Lincoln Life may also eliminate one or more
subaccounts if, in its sole discretion, marketing, tax, or investment conditions
warrant.
In the event of any such substitution or change, Lincoln Life may by appropriate
endorsement make such changes in the policy as may be necessary or appropriate
to reflect such substitution or change. If deemed by Lincoln Life to be in the
best interests of persons having voting rights under the Policies, the Separate
Account may be operated as a management company under the Investment Company Act
of 1940, it may be deregistered under that Act in the event such registration is
no longer required, or it may be combined with other Lincoln Life separate
accounts.
THE POLICY
REQUIREMENTS FOR ISSUANCE OF A POLICY
Individuals wishing to purchase a policy must send a completed application to
Lincoln Life, 1300 South Clinton Street, Fort Wayne, Ind. 46802. The minimum
acceptable premium is $10,000. A policy will generally be issued only to
insureds 80 years of age or younger who supply satisfactory evidence of
insurability sufficient to Lincoln Life. Acceptance is subject to Lincoln Life's
underwriting rules and, except in California, Lincoln Life reserves the right to
reject an application for any reason.
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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 valuation
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 a
subaccount (due to loans and loan interest charges, surrenders and surrender
charges, withdrawals and withdrawal charges, transfers of values out of a
subaccount, income tax deductions (if any), policy value charges, monthly
administrative charges, 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 amounts
allocated to each subaccount plus the amounts allocated to the General Account
plus any outstanding loan. 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), 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.
PREMIUM PAYMENT AND ALLOCATION OF PREMIUMS
Subject to certain limitations, an owner has flexibility in determining the
frequency and amount of premiums. The initial premium is the only premium
payment required under the policy, although additional premiums may be necessary
to keep the policy in force. Payment of the initial premium will not guarantee
that the policy will remain in force. The amount of the initial premium is based
on the insured's issue age and the specified amount of the policy and is
normally approximately equal to 100% of the federal maximum premium limitation
at issue, as described below. The initial premium may be as little as 80% of the
federal maximum premium limitation at issue, but if the initial premium is less
than 98% of the limitation, higher cost of insurance charges will result.
Any owner who has not chosen to pay the federal maximum premium limitation at
issue may pay additional premiums up to the limitation at any time. However,
Lincoln Life reserves the right to require evidence of insurability if the
payment of any premium will increase the death benefit by more than the amount
of the premium paid. The failure to pay the maximum premium will not of itself
cause the policy to lapse, nor will the payment of the maximum premium guarantee
that the policy will remain in force. The policy will lapse any time outstanding
loans exceed policy value less surrender charge, or policy value less
outstanding loans and less surrender charge is insufficient to pay certain
monthly deductions, and a grace period expires without a sufficient payment.
(See Policy
<PAGE>
lapse and reinstatement, page 12.) Subject to the initial premium requirements
and the maximum premium limitations established under section 7702 of the
Internal Revenue Code 1986, as amended (the Code), an owner may make
5
<PAGE>
unscheduled premium payments at any time in any amount during the lifetime of
the insured. Monies received that are not designated as premium payments will be
assumed to be loan repayments if there is an outstanding loan on the policy;
otherwise, such monies will be assumed to be an unscheduled premium payment.
PREMIUM LIMITATIONS. In no event can the total of all premiums paid, both
scheduled and unscheduled, exceed the current maximum premium limitations
established for life insurance policies to meet the definition of life
insurance, as set forth under Section 7702 of the Code. Those limitations will
vary by issue age, sex, classification, benefits provided, and even policy
duration. If at any time a premium is paid which would result in total premiums
exceeding the current maximum premium limitation, Lincoln Life will only accept
that portion of the premium which will make total premiums equal that amount.
Any part of the premium in excess of that amount will first be applied to reduce
any outstanding loan on the policy, and any further excess will be refunded to
the owner within 7 days of receipt and no further premiums will be accepted
until allowed by subsequent maximum premium limitations.
The tax status of a policy and the tax treatment of distributions from a policy
are dependent in part on whether or not the policy becomes a Modified Endowment
Contract. A policy will become a Modified Endowment Contract if premiums paid
into the policy exceed certain limits referred to as the 7-pay limitation.
Because the initial premium exceeds the 7-pay limitation, the policy will 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 taxfree
exchange. The taxation of life insurance death benefits and distributions is
complex and is discussed in detail under "Federal tax matters" on pages 1416. Of
particular note is the fact that the taxation of loans, withdrawals, 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.
Lincoln Life reserves the right to require evidence of insurability if the
payment of any premium will increase the death benefit by more than the amount
of the premium paid.
NET PREMIUMS. The net premium equals the premium paid.
ALLOCATION OF NET PREMIUMS. In the application for a policy, the owner can
allocate net premiums or portions thereof to the General Account and the
subaccounts of the Separate Account. Notwithstanding the allocation in the
application, all net premiums received prior to the record date will initially
be allocated to the General Account. Net premiums received prior to the record
date will be credited to the policy on the later of the policy date or the date
the premium is received. The
<PAGE>
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 General Account 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 General Account will automatically be
transferred to the General Account and the subaccounts of the Separate Account
in accord with the owner's percentage allocation in the application. No charge
will be imposed for this initial transfer. Net premiums paid after the record
date will be credited to the policy on the date they are received and will be
allocated in accord with the owner's instructions in the application. The
minimum percentage of each premium that may be allocated to the General Account
or to any subaccount of the Separate Account is 10%; percentages must be in
whole numbers. The allocation of future net premiums may be changed without
charge at any time by providing written notification on a form suitable to
Lincoln Life, unless the owner has made previous arrangements with Lincoln Life
to allow the allocation of future net premiums to be changed upon telephone
request.
The value of the amount allocated to subaccounts of the Separate Account will
vary with the investment experience of these subaccounts and the owner bears the
entire investment risk. The value of the amount allocated to the General Account
will earn a current interest rate guaranteed to be at least equal to the General
Account guaranteed interest rate shown on the Policy Schedule. Owners should
periodically review their allocations of premiums and values in light of market
conditions, interest rates, and overall estate planning requirements.
DOLLAR COST AVERAGING PROGRAM
The owner may wish to make uniform monthly transfers from the General Account to
one or more of the subaccounts over a 12, 24 or 36-month period through the
Dollar Cost Averaging (DCA) program. Under the program, the owner designates the
total amount of policy value ($5000 minimum) to be transferred from the General
Account to the chosen subaccounts in accord with the most recent premium
allocation. The transfers continue until the end of the DCA period or until the
policy value allocated to the General Account 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
6
<PAGE>
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.
<PAGE>
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 initial
premium has been paid prior to death and prior to any change in health or any
other factor affecting insurability of the insured as shown in the application.
The policy date is ordinarily the earlier of the date the full initial premium
is received or the date on which the policy is approved for issue by Lincoln
Life.
For any insurance that has been reinstated, the effective date will be the first
monthly anniversary day on or next following the day the application for
reinstatement is approved.
RIGHT TO EXAMINE POLICY
The owner may, until a specified period of time has expired, examine the policy
and return it for refund of all premiums paid. The applicable period of time
will depend on the state in which the policy is issued, but will not expire
sooner than the latest of ten days after receipt of the policy, 45 days after
Part 1 of the application is completed, or ten days after the Notice of
Withdrawal Right is mailed or delivered to the owner. Upon cancellation the
policy will be void from the beginning. An owner wanting a refund should return
the policy to either Lincoln Life at its Home Office or to the registered agent
who sold it.
POLICY TERMINATION
All coverage under the policy will terminate when any one of the following
occurs: 1) the grace period ends without payment of required premium, 2) the
policy is surrendered, or 3) the insured dies. Under certain defined conditions,
Lincoln Life will continue to keep the policy in force despite insufficient net
cash surrender value (See No lapse benefit, page 12).
CHARGES AND DEDUCTIONS
The nature and amount of these charges are described in the following
paragraphs. Lincoln Life may make a profit on any of these charges, and may use
the profit from a charge for any purpose, including covering shortfalls from
other charges.
Charges will be deducted in connection with the policy to compensate Lincoln
Life for:
1. providing the insurance benefit set forth in the policy;
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
Surrender charges are deducted upon surrender of the policy during the first 12
policy years. The
<PAGE>
following table shows the surrender charge as a percent of premiums paid. The
surrender charge will not exceed $43 per $1,000 of specified amount.
<TABLE>
<CAPTION>
Percent of
During policy year premiums paid
- ------------------------------------------------------------------------------
<S> <C>
1 6.5%
2 6.5%
3 6.0%
4 6.0%
5 5.5%
6 5.5%
7 5.0%
8 5.0%
9 4.5%
10 4.5%
11 4.0%
12 2.0%
</TABLE>
COST OF INSURANCE CHARGES
On the policy date and on each monthly anniversary day following, cost of
insurance charges will be deducted from the policy value. Ordinarily, the cost
of insurance charges are deducted in proportion to the values in the
subaccounts. The cost of insurance charges may be made by some other method if
requested by the owner, and if such method is acceptable to Lincoln Life.
The current cost of insurance charges depend currently upon these variables: the
amount of the initial premium as a percentage of the federal maximum premium
limitation, the classification of the insured, the amount of policy value, and
the maximum cost of insurance deduction allowed under state insurance laws. The
current cost of insurance deduction each month is calculated by multiplying the
policy value by the appropriate percentage rate described below. The current
cost of insurance deduction may never exceed the maximum cost of insurance
deduction allowed under state insurance laws. The cost of insurance charge
ceases when the insured reaches age 100.
If the initial premium is at least 98% of the federal maximum premium limitation
at issue, the current monthly percentage rate used to calculate the cost of
insurance deduction is .05% for select non-tobacco users and .10% for select
tobacco users. If the initial premium is less than 98% of the maximum
limitation, higher per-
7
<PAGE>
<PAGE>
centage rates will be used. If the insured's classification is other than select
non-tobacco user or select tobacco user, higher percentages will also be used.
The current cost of insurance deduction may never exceed the maximum cost of
insurance deduction allowed under state insurance laws, as calculated according
to the Cost of Insurance provision of the policy.
The current monthly cost of insurance rates may be changed by Lincoln Life from
time to time. A change in the current cost of insurance rates will apply to all
persons of the same attained age, sex and rate class and whose policies have
been in effect for the same length of time. The cost of insurance rates will not
exceed those described in the table of guaranteed maximum insurance rates shown
in the policy. These rates are based on the 1980 Commissioner's Standard
Ordinary Mortality Table, Age Last Birthday, for attained ages under sixteen; on
the 1980 Commissioner's Standard Ordinary Nonsmoker Mortality Table, Age Last
Birthday, or the 1980 Commissioner's Standard Ordinary Smoker Mortality Table,
Age Last Birthday, for attained ages sixteen and over, depending on the tobacco
usage of the insured. Select rate classes have guaranteed rates which do not
exceed 100% of the applicable table. In states requiring unisex rates, in
federally qualified pension plan sales, in employer sponsored situations, and in
any other situation where unisex rates are required by law, the cost of
insurance rates (whether current or guaranteed) are not based on sex.
The rate class of an insured will affect the cost of insurance rate. Lincoln
Life currently places insureds into a select rate class or rate classes
involving a higher mortality risk. In an otherwise identical policy, insureds in
the select rate class will have a lower cost of insurance than those in rate
classes with higher mortality risk.
POLICY VALUE CHARGE
On the policy date and on each monthly anniversary day following, a policy
charge will be deducted from the policy value. Ordinarily, the policy value
charge is deducted in proportion to the values in the subaccounts. The policy
value charge may be deducted by some other method if requested by the owner, and
if such method is acceptable to Lincoln Life.
The policy value will be reduced on each monthly anniversary day by the policy
value charge. The policy value charge for the first 10 policy years is .10% of
the policy value each month (1.20% annually), and thereafter is 0.166666% of the
policy value each month (.20% annually). The policy value charge ceases when the
insured attains age 100. The policy value charge recovers our expenses incurred
in the sale and issue of the policies (such as premium tax and other taxes,
commissions, and underwriting and issue expenses), and some ongoing maintenance
expenses.
OTHER POLICY CHARGES
A monthly administrative charge of $5.00 is deducted from the policy value on
any monthly anniversary day when the policy value is less than $50,000.
Currently, no charge is made for transfers of amounts among the General Account
and the subaccounts, although a maximum of $10 per transfer may be charged in
the future. A withdrawal charge of $20 is deducted from the amount of any
withdrawal of policy value other than full surrender of the policy. The monthly
administrative charge, the transfer charge, and the withdrawal charge cease when
the insured reaches age 100.
Lincoln Life also reserves the right to deduct from the policy value any amounts
charged for federal
<PAGE>
or other Governmental income taxes that might result from a change in the
current tax laws. Current tax laws do not charge income taxes on the policy
value.
CHARGES AGAINST THE SEPARATE ACCOUNT
Several charges are made directly or indirectly against the Separate Account and
have the effect of reducing net investment results credited to the subaccounts.
FUND CHARGES AND EXPENSES. The investment advisor for each of the funds deducts
a daily charge as a percent of the net assets in each fund as an asset
management charge. Each of the funds also deducts a 12b-1 fee for Class 2
shares. These charges have the effect of reducing the investment results
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 charges and fees of the Investment Advisor, but also other
miscellaneous expenses incurred by those funds. The asset management charges,
12b-1 fees, 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 follows:
<TABLE>
<CAPTION>
Asset 12b-1 Misc.
Fund Mgt. Charge* Fees* Expenses* Total*
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Small
Capitalization** .80% .25% .06% 1.11%
Global Growth*** .71% .25% .05% 1.01%
Growth .41% .25% .01% .67%
International .58% .25% .09% .92%
Growth-Income .36% .25% .01% .62%
Asset Allocation .45% .25% .02% .72%
High-Yield Bond .50% .25% .02% .77%
Bond .53% .25% .02% .80%
U.S. Gov't/AAA-Rated .51% .25% .02% .78%
Cash Managemen .45% .25% .02% .72%
</TABLE>
*Expressed as an annual percentage of each fund's average daily net assets.
**New fund, with no prior fiscal year experience.
***Annualized figures based on operations for the period April 30, 1997 to No
vember 30, 1997.
8
<PAGE>
See the funds' prospectus for more complete information about the expenses of
the funds.
<PAGE>
MORTALITY AND EXPENSE RISK CHARGE. A daily mortality and expense risk charge
currently equal to .0016438% (equivalent to an annual rate of .60%) of the daily
net assets of the Separate Account is imposed. This charge is guaranteed not to
exceed .00246575% (equivalent to an annual rate of .90%).
The mortality risk assumed is that insureds may live for a shorter period of
time than estimated and, therefore, a greater amount of death benefits will be
payable. The expense risk assumed is that expenses incurred in issuing and
administering the policies will be greater than estimated.
REDUCTION OF CHARGES
The surrender charge, the policy value charge, and the monthly administrative
charge set forth in this prospectus may be reduced because of special
circumstances that result in lower sales or administrative expenses. In
particular, these charges will be reduced 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 Company, Inc. or their
affiliated or managed companies (based on the owner's status at the time the
policy was purchased). The amounts of any reductions will reflect the reduced
sales and administrative expenses resulting from the special circumstances.
Reductions will not be unfairly discriminatory against any person, including the
affected policy owners 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 owner.
Lincoln Life may also impose certain limitations on the maximum specified amount
allowable.
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 beneficiaries. The proceeds may be paid in
cash or under one or more of the payment options set forth in the policy. (See
Proceeds and payment options, 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 12.)
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>
<PAGE>
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 benefits. 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 entitled to a life
insurance death benefit of $500,000 (250% x $200,000); a policy 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 exceeds
$100,000, each dollar withdrawn from the policy value will reduce the life
insurance 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
performance. In addition, the applicable percentage of 250% that is used is for
ages 40 or younger. Because the applicable percentage decreases as the attained
age increases, the impact of the applicable percentage on the death benefit
payment levels will be lessened as the attained age progresses beyond age 40.
<PAGE>
9
<PAGE>
POLICY CHANGES
The specified amount may not be voluntarily increased or decreased. However,
withdrawals reduce the specified amount by an amount proportionate to the amount
of policy value withdrawn. For example, if 10% of the policy value is withdrawn,
the specified amount will be reduced by 10% of the specified amount.
POLICY VALUE
The policy provides for the accumulation of policy value. 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 withdrawals, and any charges and
deductions assessed the policy. The policy has no guaranteed minimum policy
value or net cash surrender value.
On the policy date, the policy value will be the initial premium, minus the sum
of the following: the cost of insurance for the first month, the monthly
administrative charge (if any), and the policy value charge 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
amounts allocated to the General Account;
d. Interest at not less than the rate shown on the policy schedule on any
outstanding loan amount; and
e. Any premiums received since the preceding day.
Minus the sum of the following:
f. Any decrease due to net investment results in the value of the
subaccounts to which the investment amount is allocated;
g. Any withdrawals;
h. Any amount charged against the investment amount for federal or other
governmental income taxes;
<PAGE>
i. The cost of insurance for the following month;
j. The monthly administrative charge, if any, for the following month;
k. The policy value charge for the following month; and
l. Any charges for extra benefits.
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
amounts allocated to the General Account;
d. Interest at not less than the rate shown on the policy schedule on any
outstanding loan amount; and
e. Any net premiums received since the preceding day.
Minus the sum of the following:
f. Any decrease due to net investment results in the value of the
subaccounts to which the investment amount is allocated;
g. Any withdrawals; and
h. Any amount charged against the investment amount for federal or other
governmental income taxes.
The charges and deductions described above are further discussed in Charges and
deductions, page 7.
NET INVESTMENT RESULTS. The net investment results are the changes in the unit
values of the subaccounts from the previous valuation day to the current day.
The net investment results are equal to the per unit change in the market value
of each fund's assets, reduced by the per unit share of the asset management
charge, the 12b-1 fee, any miscellaneous expenses incurred by the fund, and the
mortality and expense risk charge for the period, and increased by the per unit
share of any dividends credited by the fund to the subaccount during the period.
The value of the assets in the funds will be taken at their fair market value in
accordance with
<PAGE>
accepted accounting practices and applicable laws and regulations.
The charges listed above are explained further in Charges against the separate
account, page 8.
TRANSFER BETWEEN SUBACCOUNTS
Any time after the record date, the owner may request to transfer an amount from
one subaccount to another. The request to transfer funds must be in writing on a
form suitable to Lincoln Life. Transfers may be made by telephone request only
if the owner has previously authorized telephone transfer in writing on a form
suitable to Lincoln Life. Lincoln Life will follow reasonable procedures to
determine that the telephone requester is authorized to request such transfer,
including requiring certain identifying information contained in the written
authorization. If such procedures are followed, Lincoln Life will not be liable
for any loss arising from any telephone transfer. Transfers will take effect on
the date
10
<PAGE>
that the request in writing or by telephone is received at the Home Office of
Lincoln Life. The minimum amount which may be transferred between subaccounts is
$100. The maximum number of transfers allowed in a policy year is twelve. A
transfer charge of $10 is made for each transfer and may be deducted from the
amount transferred; however, the transfer charge is currently being waived for
all transfers.
TRANSFER TO AND FROM THE GENERAL ACCOUNT
Any time after the record date, the owner may also request to transfer amounts
from the Separate Account to the General Account. However, transfers from the
General Account to the Separate Account are subject to some restrictions. A
maximum of 20% of the policy value allocated to the General Account may be
transferred to the Separate Account in any period of 12 consecutive months.
However, as a current practice, the 20% maximum transfer limitation does not
apply for the first six policy months. There is no minimum transfer amount;
however, if the amount allocated to theGeneral Account is $500 or less, the
owner may transfer the entire allocated amount out of the General Account. A
transfer charge of $10 is made for each transfer and may be deducted from the
amount transferred; however, the transfer charge is currently being waived for
all transfers.
WITHDRAWALS
Anytime during the lifetime of the insured, a cash withdrawal may be made from
the policy value. The amount and timing of the withdrawal is subject to certain
limitations. The minimum withdrawal is $1000 and only one withdrawal may be made
during a policy year. During the first 10 policy years, the maximum withdrawal
is 10% of the net cash surrender value at the time of the withdrawal. The owner
should be aware that withdrawals may result in tax liability. Withdrawals other
than full surrender of the policy incur a $20 withdrawal charge.
Withdrawals reduce the specified amount by an amount proportionate to the amount
of policy value withdrawn. For example, if 10% of the policy value is withdrawn,
the specified amount will be reduced by 10% of the specified amount. Ordinarily,
the amount of any withdrawal will be deducted
<PAGE>
from the General Account and subaccounts in proportion to the values of each.
LOANS
At any time while the policy is in force the owner may make written request for
a loan against the policy. A written loan agreement will be executed between the
owner and Lincoln Life. The policy will be the sole security for the loan, and
the policy must be assigned to Lincoln Life as part of the loan agreement.
Ordinarily, the loan will be processed within seven days from the date the
request for a loan is received at the Home Office of Lincoln Life. Payments may
be postponed under certain circumstances. (See Postponement of payments, page
13.)
A loan taken from, or secured by, a policy may have federal income tax
consequences. In particular, adverse tax consequences may occur if the policy
lapses with outstanding loans. (See Federal tax matters, pages 15-17.)
LOAN AMOUNT. The amount of all outstanding loans with interest may not exceed
the policy value less surrender charge as of the date of the policy loan. If at
any time the total of policy loans plus loan interest equals or exceeds the
policy value less surrender charge, notice will be sent to the last known
address of the owner, and any assignee of record, and the policy will enter into
the grace period. If sufficient payment is not received within 61 days after
notice is mailed, the policy will lapse and terminate without value. (See Policy
lapse and reinstatement, page 12.) In addition, the presence of any outstanding
policy loan negates the no lapse benefit (if present) until the loan is repaid.
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 will be deducted
from the General Account and the subaccounts at the time the loan is taken. The
amount of any unpaid loan interest will be added to the loan and deducted from
the General Account and the subaccounts at the end of the policy year in which
the loan interest was earned. Ordinarily, the amount of any loan or unpaid loan
interest will be deducted from the General Account and the subaccounts in
proportion to the values of each. The deduction may be made by some other method
if the owner requests it, and if such method is acceptable to Lincoln Life.
The amount of any loan (including any unpaid loan interest added to the loan)
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%. Such amounts
will remain a part of the policy value, but will not be increased or decreased
by investment results in the Separate Account. Therefore, the policy value could
be more or less than what it would have been if the policy loan had not been
made, depending on the investment results in the Separate Account compared to
the interest credited on the loan. In
<PAGE>
this way, a loan may have a permanent effect upon both the policy value and the
death benefit and may increase or decrease the potential for policy lapse. In
addition, outstanding loans reduce the death benefit proceeds and negate any No
Lapse Benefit applicable to the policy.
EFFECT OF LOANS ON POLICY CHARGES. The existence of a policy loan on a monthly
anniversary day does not di-
11
<PAGE>
rectly affect the calculation of the policy value charge, the cost of insurance
charge, or the monthly administrative charge; these charges are currently
determined by the policy value, which includes any policy loan. The mortality
and expense risk charge, asset management expenses, 12b-1 fees, and
miscellaneous funds expenses are not incurred on any policy loan.
LOAN REPAYMENTS. Loan repayments will ordinarily be allocated to the General
Account and the subaccounts 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 or death of the insured will be deducted from the amount
otherwise payable.
POLICY LAPSE AND REINSTATEMENT
Except during the period of any no lapse benefit, insurance coverage under the
policy will be continued in force until the net cash surrender value is
insufficient to cover the monthly deductions. Lapse will only occur when the
policy value less surrender charges and less outstanding policy loans is
insufficient to cover the cost of insurance deductions and a grace period
expires without a sufficient payment. Insurance coverage will continue during
the grace period, but the policy will be deemed to have no policy value for
purposes of policy loans and surrenders.
A grace period of 61 days will begin on the date Lincoln Life sends a notice of
any shortfall to the last known address of the owner or any assignee. The owner
must, during the grace period, make a payment sufficient to cover the monthly
deductions and any other charges due under the policy until the end of the grace
period. Failure to make a sufficient payment during the grace period will cause
the policy to lapse. Any net cash surrender value will be returned to the owner.
If the insured dies during the grace period, any due and unpaid monthly
deductions will be deducted from the death benefit.
A lapsed policy may be reinstated at any time within five years after the date
of lapse by submitting evidence of insurability satisfactory to Lincoln Life and
a premium sufficient to keep the policy in force for two months. The effective
date of a reinstatement will be the first monthly anniversary day on or next
following the day the application for reinstatement is approved.
NO LAPSE BENEFIT
Provided no outstanding loan existing on the policy, the policy provides a no
lapse benefit. The no lapse benefit guarantees that the policy will not lapse
prior to the no lapse benefit expiration date
<PAGE>
shown on the policy schedule. Currently, the no lapse benefit expires 10 years
from the policy date if the issue age of the insured is age 75 or younger. For
issue ages 76 and older, the no lapse benefit expires 1 year from the policy
date. Lincoln Life may at any time lengthen or shorten the no lapse benefit for
future new policies, but will not unfairly discriminate among policy owners in
determining the length of the no lapse benefit. The no lapse benefit is not
available in Illinois.
SURRENDER OF THE POLICY
The owner may surrender the policy at any time during the lifetime of the
insured and receive the net cash surrender value. The net cash surrender value
is equal to the policy value minus any surrender charge, minus any outstanding
loan and minus any unpaid loan interest. The request must be made in writing on
a form suitable to Lincoln Life. The request will be effective the date the
request is received in the Home Office of Lincoln Life, or at a later date if so
requested by the owner. Ordinarily, the surrender will be processed within seven
days from the date the request for surrender is received at the Home Office of
Lincoln Life. The tax treatment of a surrendered policy is discussed under
Federal tax matters, pages 15-17.
PROCEEDS AND PAYMENT OPTIONS
PROCEEDS. The amount payable under the policy on the surrender of the policy,
or upon the death of any insured person, is called the proceeds of the policy.
The proceeds to be paid on the death of the insured will be the death benefit
minus any outstanding policy loan, and minus any unpaid loan interest. The
proceeds to be paid on the surrender of the policy 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 to date of payment at a specified rate,
not less than that required by law. All or part of the sum of this amount and
such interest credited to date of payment will be applied to any payment option.
To the extent allowed by law, proceeds are not to be subject to any claims of a
beneficiary's creditors.
PAYMENT OPTIONS. Upon written request, all or part of the proceeds and interest
credited thereon may be applied to any payment option available from Lincoln
Life at the time payment is to be made. Under certain conditions, payment
options will only be available with the consent of Lincoln Life. Such conditions
will exist if the proceeds to be settled under any option are $2,500 or less, or
if any installment or interest payment is $25 or less. In addition, if any payee
is a corporation, partnership, association, trustee, or assignee, approval by
Lincoln Life is needed before any proceeds can be applied to a payment option.
The payment option selected, as well as the time the election is made, may have
tax consequences.
The owner may elect any payment option while the insured is alive and may change
that election if that right
12
<PAGE>
has been reserved. When the proceeds become payable to a beneficiary, the
beneficiary may elect any payment option if the proceeds are available to the
beneficiary in one sum.
The option date is any date the policy terminates under the termination
provision.
Any proceeds payable under the policy may also be settled under any other method
of settlement offered by Lincoln Life on the option date. Additional interest as
determined by Lincoln Life may be paid or credited from time to time in addition
to the payments guaranteed under a payment option.
When proceeds become payable under a payment option, a payment contract will be
issued to the payee in exchange for the policy. Such payment contract may not be
assigned. Any change in payment option may be made only if it is provided for in
the payment contract. Under some of the payment options, proceeds may be
withdrawn under such payment option if provided for in the payment contract. The
amount to be withdrawn varies by the payment option.
GENERAL PROVISIONS
THE CONTRACT
The entire contract consists of the policy plus the application and any
supplemental application, plus any riders, plus any amendments. The policy is
issued in consideration of the application and payment of the initial premium.
Only statements in the application and any supplemental applications can be used
to contest the validity of the policy or defend a claim. These statements are,
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 Assistant
Secretary of Lincoln Life.
The policy is nonparticipating; it will not share in the profit or surplus
earnings of Lincoln Life.
SUICIDE
If the insured commits suicide, while sane or insane, within two years from the
policy date, the total liability of Lincoln Life under the policy will be the
premiums paid, minus any policy loan, and minus any loan interest due.
If the insured commits suicide, while sane or insane, within two years from the
effective date of any reinstatement, our total liability with respect to such
reinstatement will be the premiums paid, minus any withdrawals, since the
effective date of the reinstatement, minus any policy loan plus loan interest
thereon.
REPRESENTATIONS AND CONTESTABILITY
All statements made in an application by, or on behalf of, the insured will, in
the absence of fraud, be deemed representations and not warranties. Statements
may be used to contest a claim or validity of the policy only if these
statements are contained in the application for issue, reissue, or
reinstatement, or in any supplemental application, and a copy of that
application or supplemental application is attached to the policy. The policy
will not be contestable after it has been in force for two years during the
lifetime of the insured. Also, any reinstatement will not be contestable after
that 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 reinstatement and will be subject to the same conditions as
for contest of the policy.
INCORRECT AGE OR SEX
If there is an error in the age or sex of the insured, the excess of the death
benefit over the policy value will be adjusted as necessary to that which would
be purchased by the most recent cost of insurance charge at the correct age and
sex.
CHANGE OF OWNER OR BENEFICIARY
The owner of the policy is the owner identified in the application, or a
successor. All rights of the owner belong to the owner while the insured is
alive. The rights pass to the estate of the owner if the owner dies before the
insured. The owner may transfer all ownership rights and privileges to a new
owner. The request must be in writing on a form suitable to Lincoln Life. The
change will be effective the day that the request is received in the Home Office
of Lincoln Life. Lincoln Life will not be responsible for any payment or other
action taken before having recorded the transfer. A change of ownership will
not, in and of itself, affect the interest of any beneficiary. A change of
ownership may have tax consequences.
The beneficiary is identified in the application for the policy, and will
receive the proceeds when the insured dies. The beneficiary may be changed by
the owner while the insured is alive, and provided that any prior designation
does not prohibit such a change. A change will revoke any prior designation of
the beneficiary. The request to change beneficiary must be in writing on a form
suitable to Lincoln Life. Lincoln Life reserves the right to require the policy
for endorsement of the change of beneficiary designation.
If not otherwise provided, the interest of any beneficiary who dies before the
insured will pass to any other beneficiaries according to their interest.
Furthermore, if no beneficiary survives the insured, the proceeds will be paid
in one sum to the owner, if living. If the owner is not living, the proceeds
will be paid to the owner's estate.
ASSIGNMENT
Any assignment of the policy will not be binding on Lincoln Life unless it is
in writing on a form suitable to Lincoln Life and is received at the Home
Office. Lincoln Life will not be responsible for the validity of any
assignment, and reserves the right to require the policy for endorsement of any
assignment. An assignment of the policy may have tax consequences.
REPORTS AND RECORDS
Lincoln Life will maintain all records relating to the Separate Account. Lincoln
Life will mail to the owner at least once each year a report, without charge,
which will show the current policy value, the current net cash surrender value,
the current death benefit, any current policy loans, any premiums paid, any
policy charges deducted, and any withdrawals made. The report will also include
any other data that may be required where the contract is delivered. In
addition, Lincoln Life will provide to policy owners semi-annually, or otherwise
as may be required by regulations under the Investment Company Act of 1940, a
report containing information about the operations of the funds.
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Lincoln Life has entered into an agreement with Delaware Management Holdings,
Inc., 2005 Market Street, Philadelphia, PA 19203, an affiliate of Lincoln Life,
to provide accounting services 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
suitable to Lincoln Life. The report will be comparable in format to those shown
in Appendix B and will be based on assumptions in regard to the death benefit as
may be specified by the owner, planned premium payments as may be specified by
the owner, and such other assumptions as are necessary and specified either by
the owner or Lincoln Life. A reasonable fee may be charged for this projection.
POSTPONEMENT OF PAYMENTS
Payments of any amount payable on surrender, loan, withdrawal, or benefits
payable at death may be postponed whenever: (i) the New York Stock Exchange is
closed other than customary week-end and holiday closings, or trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission; (ii) the Commission by order permits postponement for the protection
of owners; or (iii) an emergency exists, as determined by the Commission, as a
result of which disposal of securities is not reasonably practical or it is not
reasonably practical to determine the value of the Separate Account's net
assets. Transfers may also be postponed under such circumstances.
Requests for surrender, policy loan, or withdrawal 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 subsequent
accelerated benefit is also available to pay premiums and interest charges
required on the policy. The amount of all advanced accelerated benefits creates
an interest-bearing lien against the death benefit otherwise payable at death.
There is no cost of insurance for this rider, but an administrative expense
charge is payable upon application for benefits.
The availability of this rider is subject to approval by the State Insurance
Department of the State in which the policy is issued, and is also subject to
the current underwriting and issue procedures in place at the time of the
application. The underwriting and issue procedures are subject to change without
notice.
DISTRIBUTION OF THE POLICY
Lincoln Life intends to offer the policy in all jurisdictions where it is
licensed to do business. The principal business address of Lincoln Life is 1300
South Clinton Street, Fort Wayne, Ind. 46802.
<PAGE>
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 policy will be sold by individuals who, in addition to being licensed as
life insurance agents for Lincoln Life, are also its registered representatives.
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
5.25% 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 eligible for
bonuses and non-cash compensation if certain production levels are reached. All
compensation is paid from Lincoln Life's resources.
14
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FEDERAL TAX MATTERS
The following discussion is intended to provide a general description of the
federal income tax considerations associated with the policy. It does not
purport either to be complete or to cover all situations; this discussion is not
intended to be taken as tax advice. Consult a qualified tax advisor for more
complete information. This discussion is based upon Lincoln Life's understanding
of the present federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of
continuation of the present federal income tax laws or of the current
interpretation by the Internal Revenue Service. Federal tax laws may change
without notice and as a result the taxable consequences to the insured, policy
owner, or beneficiary may be altered.
TAX STATUS OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the Code)
includes a definition of a life insurance contract for Federal tax purposes.
This definition can be satisfied by complying with either of two tests set forth
in section 7702. Although the Secretary of the Treasury (the Treasury) is
authorized to prescribe regulations interpreting the manner in which the tests
under section 7702 are to be applied, such regulations have not been issued. In
addition, section 7702 of the Code was amended by imposing certain modified
requirements with respect to the mortality (i.e., cost of insurance) and other
expense charges that are to be used in determining compliance of such contracts
with section 7702. Guidance as to how these modified requirements are to be
applied is extremely limited. If a policy were 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 contract. It is
unclear, for example, whether increases in policy value occurring after the
insured's attaining age 100 would result in taxable income.
<PAGE>
The exchange of an existing life insurance policy entered into before October
21, 1988, might cause such a policy to be treated as entered into after October
20, 1988, and in such circumstances, the policy would be subject to modified
mortality and other expense charge requirements. Accordingly, the owner of a
policy entered into before October 21, 1988, should contact a competent tax
advisor before exchanging or making any other change, to such a policy to
determine whether the exchange or change would cause the policy to be treated as
entered into after October 20, 1988.
For a policy that is issued on the basis of a select rate class, while there is
some uncertainty due to the limited guidance on the modified section 7702
requirement, Lincoln Life nonetheless believes that such a policy should meet
the section 7702 definition of a life insurance contract. For a policy that is
issued on a substandard basis (i.e., rate class involving higher than select
mortality risk), there is even more uncertainty, in particular as to how the
modified requirements are to be applied in determining whether such a policy
meets the section 7702 definition of a life insurance contract. Thus, it is not
clear whether or not such a policy would satisfy section 7702, particularly if
the owner pays the full amount of premiums permitted under the policy. If it is
subsequently determined that a policy does not satisfy section 7702, Lincoln
Life will take whatever steps are appropriate and necessary to cause such a
policy to comply with section 7702, including possibly refunding any premiums
paid that exceed the limitations allowable under section 7702 (together with
interest or other earnings on any such premiums refunded as required by law).
For these reasons, Lincoln Life reserves the right to modify the policy as
necessary to qualify it as a life insurance contract under section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of the Separate Account to be
"adequately diversified" in order for the policy to be treated as a life
insurance contract for federal tax purposes. The Separate Account, through the
various funds in which it invests, intends to comply with the diversification
requirements prescribed in Treasury Regulations, which affect how each fund's
assets may be invested. Lincoln Life does not have control over the American
Variable Insurance Series or its investments. Nonetheless, Lincoln Life believes
that the funds will be operated in compliance with the requirements prescribed
by the Treasury.
The regulations relating to diversification requirements do not provide guidance
concerning the extent to which policy owners may direct their investments to the
subaccounts of a Separate Account. When additional guidance is provided, the
policy may need to be modified to comply with such guidance. As of the date of
this prospectus, the Treasury Department has issued no guidelines on this
subject, although it has indicated informally that guidelines could limit the
number of underlying funds or the frequency of transfers among those funds. Such
guidelines may apply prospectively only, although retroactive effect is possible
if the guidelines are considered not to embody a new position. For these
reasons, Lincoln Life reserves the right to modify the policy as necessary to
prevent the owner from being considered the owner of the assets of the Separate
Account or otherwise to qualify the policy for favorable tax treatment.
The Treasury Department has indicated that guidelines may be forthcoming under
which a variable life contract will not be treated as a life insurance contract
for tax purposes if the owner of the contract has excessive control over the
investments underlying the contract. The issuance of such guidelines may
require the company to impose limitations on a contract owner's
right to control the investment. It is not known whether any such guidelines
would have a retroactive effect.
15
<PAGE>
The following discussion assumes that the policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. Lincoln Life believes that the proceeds and cash value increases
of a policy should be treated in a manner consistent with a fixed benefit life
insurance policy for federal income tax purposes. Thus, the death benefit under
the policy should be excludable from the gross income of the beneficiary under
Section 101(a)(1) of the Code.
The addition of additional insurance, a policy loan, a withdrawal, a lapse with
outstanding indebtedness, exchange of a policy, or a surrender may have tax
consequences depending upon the circumstances. In addition, federal estate and
generation skipping transfer, and state and local estate inheritance, and other
tax consequences of ownership or receipt of policy proceeds depend upon the
circumstances of each owner or beneficiary. A competent tax advisor should be
consulted for further information. Generally, the owner will not be deemed to be
in constructive receipt of the cash value, including increments thereof, under
the policy until there is a distribution. The tax consequences of distributions
from, and loans taken from or secured by, a policy depend on whether the policy
is classified as a "Modified Endowment Contract" under section 7702A of the
Code.
2. MODIFIED ENDOWMENT CONTRACTS. A policy may be treated as a Modified Endowment
Contract depending upon the amount of premiums paid in relation to the death
benefit provided under such policy. Because of the premium level contemplated
under the policies, all policies may become modified endowment contracts. In
addition, if a policy is "materially changed," it may be treated as a Modified
Endowment Contract depending upon such relationship after such change. The
premium limitation and material change rules for determining whether a policy is
a Modified Endowment Contract are extremely complex. Moreover, due to the
policy's flexibility, classification of a policy as a Modified Endowment
Contract will depend upon the circumstances of each policy. Accordingly, a
prospective owner should contact a competent tax advisor before purchasing a
policy to determine the circumstances in which the policy would be a Modified
Endowment Contract. In addition, an owner should contact a competent tax advisor
before paying any additional premium or making any other change to, including an
exchange of, a policy to determine whether such premium payment or change would
cause the policy to be treated as a Modified Endowment Contract.
Lincoln Life will monitor premiums paid into each policy after the date of this
prospectus to determine when a premium payment will exceed the 7-pay limitation
and cause the policy to become a Modified Endowment Contract. In simplified
terms, the 7-pay limitation is satisfied only if the accumulated premiums 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
<PAGE>
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 premiums in excess of the 7-pay
limitation will first be applied to reduce any outstanding loan on the policy,
and any further excess will be refunded to the owner within 7 days. If the owner
has not given Lincoln Life instructions to the contrary, however, the premium
will be paid into the policy and a letter of notification of Modified Endowment
Contract status will be sent to the owner. The letter of notification will
include the available options, if any, for remedying the Modified Endowment
Contract status of the policy.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Policies classified as modified endowment contracts are subject to the following
tax rules: First, all distributions, including withdrawals and distributions
upon surrender, 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 (described below) at
such time. Second, loans taken from, or secured by, such a policy are treated as
distributions from such a policy and taxed accordingly. Third, a 10 percent
additional income tax is imposed on the portion of any distribution from, or
loan taken from or secured by, such a policy that is included in income except
where the distribution or loan is made on or after the owner attains age 59 1/2,
is attributable to the owner's becoming disabled, or is part of a series of
substantially equal periodic payments for the life of the owner or the joint
lives of the owner and the owner's beneficiary.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Distributions from a policy that is not classified as a Modified Endowment
Contract are generally treated as first recovering the investment in the policy
(described below) and then, only after the return of all such investment in the
policy, as distributing taxable income. An exception to this general rule occurs
in the case of a decrease in the specified amount, or any other change that
reduces benefits under the policy in the first 15-years after the policy is
issued and that results in a cash distribution to the owner in order for the
policy to continue complying with the section 7702 definitional limits. In that
case, such distribution will be taxed in whole or in part as ordinary income (to
the extent of any gain in the policy) under rules prescribed in section 7702.
Loans from, or secured by, a policy that is not a Modified Endowment Contract
are not treated as distributions. Instead, such loans are treated as
indebtedness of the owner.
Upon a complete surrender or lapse of a policy that is not a Modified Endowment
Contract, 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 withdrawals
and distributions upon surrender or lapse) nor loans from, or secured by, a
policy that
<PAGE>
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. In addition, interest on any
loan under a policy owned by a taxpayer and covering the life of any individual
who is an officer of or is financially interested in the business carried on by
that taxpayer will not be tax deductible to the extent the aggregate amount of
such loans with respect to contracts covering such individual exceeds $50,000.
No amount of policy loan interest is, however, deductible if the policy was
deemed for federal tax purposes to be a single premium life insurance contract.
For interest paid or accrued after October 13, 1996, and policies issued after
June 8, 1997, additional rules apply which may reduce or eliminate any interest
deduction. The owner should consult a competent tax advisor concerning the rules
and limitations.
6. INVESTMENT IN THE POLICY. Investment in the policy means (i) the aggregate
amount of any premiums or other consideration paid for a policy, minus (ii) the
aggregate amount received under the policy which is excluded from the gross
income of the owner (except that the amount of any loan from, or secured by, a
policy that is a Modified Endowment Contract, to the extent such amount is
excluded from gross income, will be disregarded), plus, (iii) the amount of any
loan from, or secured by, a policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the owner.
7. MULTIPLE POLICIES. All Modified Endowment Contracts that are issued by
Lincoln Life (or its affiliates) to the same owner during any calendar year are
treated as one Modified Endowment Contract for purposes of determining the
amount includible in gross income under section 72(e) of the Code.
8. TAXATION OF ACCELERATED BENEFIT ELECTION RIDER. 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 earnings
or the realized capital gains attributable to the Separate Account. Based upon
these expectations, no charge is being made currently to the Separate Account
for federal income taxes which may be attributable to the Separate Account. If,
however, Lincoln Life determines that it may incur such taxes, it may assess a
charge for those taxes from the 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 interests in
the Separate Account. If, however, the Investment Company Act of 1940 or any
regulation thereunder should be amended or if the present interpretation thereof
should change, and as a result Lincoln Life determines that it is permitted to
vote the fund shares in its own right, it may elect to do so.
<PAGE>
The number of votes which each policy owner has the right to instruct will be
determined as one vote for each $100 of policy value in each subaccount.
Fractional shares will be allocated for amounts less than $100. The number of
votes which the policy owner has the right to instruct will be determined as of
the date coincident with the date established by the various series for
determining shareholders eligible to vote at the meetings of the funds. Voting
instructions will be solicited by written communications prior to such meeting
in accordance with procedures established by the funds. Lincoln Life will vote
shares of each fund as to which no timely instructions are received in
proportion to the voting instructions which are received with respect to all
policies participating in that fund. Each person having a voting interest will
receive proxy material, reports and other materials relating to the appropriate
portfolio.
DISREGARD OF VOTING INSTRUCTIONS. Lincoln Life may, when required by state
insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
subclassification or investment objective of any of the series of a fund or to
approve or disapprove an investment advisory contract for a fund. In addition,
Lincoln Life itself may disregard voting instructions in favor of changes
initiated by a policy owner in the investment policy or the investment advisor
of a fund if Lincoln Life reasonably disapproves of such changes. A change would
be disapproved only if the proposed change is contrary to state law or
prohibited by state regulatory authorities or Lincoln Life determined that the
change would have an adverse effect on its General Account in that the proposed
investment policy for any fund may result in overly speculative or unsound
investments. In the event Lincoln Life does disregard voting instructions, a
summary of that action and the reasons for such action will be included in the
next semiannual report to policy owners.
17
<PAGE>
STATE REGULATION OF
LINCOLN LIFE AND THE
SEPARATE ACCOUNT
Lincoln Life, a stock life insurance company organized under the laws of
Indiana, is subject to regulation by the Insurance Department of the State of
Indiana. An annual statement is filed with the Indiana 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
liabilities and reserves of Lincoln Life and the Separate Account and certifies
their adequacy, and a full examination of Lincoln Life's operations is conducted
by the 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 Account
assets. Records are maintained of all purchases and redemptions of fund shares
held by each subaccount. Additional protection is provided in the form of a
blanket fidelity bond which covers directors and employees of Lincoln Life. The
bond, which was issued by Fidelity and Deposit Company of Maryland covers up to
$25,000,000.
The funds do not issue certificates. Thus, Lincoln Life holds the Separate
Account's assets in an open account in lieu of stock certificates.
PREPARING FOR YEAR 2000
Lincoln Life, as part of its year 2000 updating process, is responsible for the
updating of the Separate Account related computer systems. Many existing
computer programs use only two digits to identify a year in the date field.
These programs were designed and developed without considering the impact of the
upcoming change in the century. If not connected, many computer applications
could fail or create erroneous results by or at the year 2000. The year 2000
issue affects virtually all companies and organizations. An affiliate of Lincoln
Life, Delaware Service Company (Delaware), provides substantially all of the
necessary accounting and valuation services for the Separate Account. Delaware,
for its part, is responsible for updating all of its computer systems, including
those which service the Separate Account to accommodate the year 2000. Lincoln
Life and Delaware have begun formal discussions with each other to assess the
requirements for their respective systems to interface properly in order to
facilitate the accurate and orderly operation of the Separate Account beginning
in the year 2000.
The year 2000 issue is pervasive and complex and affects virtually every aspect
of the businesses of both Lincoln Life and Delaware (the Companies). The
computer systems of the Companies and their interfaces with the computer systems
of vendors, suppliers, customers and other business partners are particularly
vulnerable. The inability to properly recognize date-sensitive electronic
information and to transfer data between systems could cause errors or even
complete failure of systems, which would result in a temporary inability to
process transactions correctly and engage in normal business activities for the
Separate Account. The Companies respectively are redirecting significant
portions of their internal information technology efforts and are contracting,
as needed, with outside consultants to help update their systems to accommodate
the year 2000. Also, in addition to the discussions with each other noted above,
the Companies have respectively initiated formal discussions with other critical
parties that interface with their systems to gain an understanding of the
progress by those parties in addressing year 2000 issues. While the Companies
are making substantial efforts to address their own systems and the systems with
which they interface, it is not possible to provide assurance that operational
problems will not occur. The Companies presently believe that, assuming the
modification of existing computer systems, updates by vendors and conversion to
new software and hardware, the year 2000 issue will not pose significant
operations problems for their respective computer systems. In addition, the
Companies are incorporating potential issues surrounding year 2000 into their
contingency planning process, in the event that, despite these substantial
efforts, there are unresolved year 2000 problems. If the remediation efforts
noted above are not completed timely or properly, the year 2000 issue could have
a material adverse impact on the operation of the businesses of Lincoln Life or
Delaware, or both.
The cost of addressing year 2000 issues and the timeliness of completion will be
closely monitored by management of the respective Companies. Nevertheless, there
can be no guarantee either by Lincoln Life or by Delaware that estimated costs
will be achieved, and actual results could differ significantly from those
anticipated. Specific factors that might cause such differences include, but are
not limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer problems, and other
uncertainties.
18
<PAGE>
LEGAL PROCEEDINGS
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of these proceedings are routine
and in the ordinary course of business. In some instances 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 the ultimate liability, if any,
under these suits will not have a material adverse effect on the financial
position of Lincoln Life.
During the 1990's class action lawsuits alleging sales practices fraud have been
filed against many life insurance companies, and Lincoln Life has not been
immune. Three lawsuits alleging fraud in the sale of interest-sensitive
universal and whole life insurance policies have been filed against Lincoln
Life. These three suits have been filed as class actions, although as of the
date of this Prospectus the court had not certified a class in either case.
Plaintiffs seek unspecified damages and penalties for themselves and on behalf
of the putative class. Although the relief sought in these cases is substantial,
the cases are in the early stages of litigation, and it is premature to make
assessments about potential loss, if any. Management denies the allegations and
intends to defend these suits vigorously. The amount of liability, if any, which
may arise as a result of these suits (exclusive of any indemnification from
professional liability insurers) cannot be reasonably estimated at this time.
The principal underwriter, AFD, is not engaged in any material litigation of any
nature.
EXPERTS
The financial statements of the Separate Account and the statutory-basis
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 reports 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.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of l933, as amended, with respect to the
policy offered hereby. This prospectus does not contain all the information set
forth in the registration statement and the amendments and exhibits to the
registration statement, to all of which reference is made for further
information concerning the Separate Account, Lincoln Life and the policy offered
hereby. Statements contained in this prospectus as to the contents of the policy
and other legal instruments are summaries. For a complete statement of the terms
thereof reference is made to such instruments as filed.
19
<PAGE>
APPENDIX A
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and position(s)
with registrant* Principal occupations last five
years
- ------------------------------------------------------------------------------
<S> <C>
NANCY J. ALFORD Vice President [4/96-present], (formerly
Vice President Second Vice President [1/90-4/96]), Lincoln
National Life Insurance Co.
- ------------------------------------------------------------------------------
ROLAND C. BAKER President [1/95-present], First Penn-Pacific
Vice President and Director Life Insurance Co. Formerly: Chairman and
1801 S. Meyers Road CFO [7/88-1/95], Baker, Ralish, Shipley &
Oakbrook Terrace, Ill. 60181 Politzer, Inc.
- ------------------------------------------------------------------------------
JON A. BOSCIA President and Director, Lincoln National
Director Corp. [1/98-present] (Formerly: President
and Chief Executive Officer
[10/96-1/98]; Chief
Operating Officer
5/94-10/96]), Lincoln
National Life Insurance
Co., President [7/91-5/94]
Lincoln Investment
Management Inc.
- ------------------------------------------------------------------------------
JOHN GOTTA Vice President and General Manager [1/98-
Vice President present] Formerly: Senior Vice President,
900 Cottage Grove Rd. CIGNA [3/96-12/97]; Vice President,
Bloomfield, CT 06152-2321 Connecticut Mutual Life Insurance Company
[8/94-3/96]; Vice President, CIGNA [3/93-
8/94]; Regional Director of Agencies,
Phoenix-Home Life Mutual Insurance Company
[3/90-2/93]
- -------------------------------------------------------------------------------
MELANIE T. HALL Vice President [1/96-Present] (formerly
Vice President Second Vice President [6/95-1/96]), Lincoln
National Life Insurance Co. Formerly:
Assistant Vice President [1/95-6/95], LNC
Equity Sales Corporation, Assistant Vice
President [12/93-1/95], Lincoln Investment
Management, Inc.; Assistant Vice President
[12/92-12/93], Lincoln National Life
Insurance Co.
- -------------------------------------------------------------------------------
J. MICHAEL HEMP President [11/96-Present], Lincoln Financial
Vice President Advisors Corp.; Vice President [10/95-
Present], Lincoln National Life Insurance
Co. Formerly: Regional Chief Executive
Officer [11/79-10/95], Lincoln Dallas RMO.
- -------------------------------------------------------------------------------
JACK D. HUNTER Executive Vice President [5/86-Present] and
Executive Vice President, General General Counsel [3/75-Present], Lincoln
Counsel and Director National Corporation and Executive Vice
200 East Berry Street President [8/86-Present] and General Counsel
Fort Wayne, Ind. 46802 [3/75-Present], The Lincoln National Life
Insurance Company
- -------------------------------------------------------------------------------
STEPHEN H. LEWIS Senior Vice President, [5/94-present]
Vice President Lincoln National Life Insurance Co.
Formerly: President [2/85-5/94], First Penn-
Pacific Life Insurance Co.
- -------------------------------------------------------------------------------
H. THOMAS MCMEEKIN President [5/94-present], Lincoln Investment
Director Management, Inc. (formerly Executive Vice
200 East Berry Street President [2/92-11/92], Senior Vice
Fort Wayne, Ind. 46802 President [11/87-2/92]; Executive Vice
President [5/94-Present], Lincoln National
Corporation (formerly Senior Vice President
[11/92-5/94])
- -------------------------------------------------------------------------------
IAN M. ROLLAND Chairman [1/92-present], Chief Executive
Director Officer [5/77-present] and President [12/75-
200 East Berry Street 1/92], Lincoln National Corp. Formerly:
Fort Wayne, Ind. 46802 Chairman [1/92-5/94], Chief Executive
Officer [7/77-5/94] and President [3/83-
1/93], Lincoln National Life Insurance Co.
- -------------------------------------------------------------------------------
ARTHUR S. ROSS Vice President [8/91-present], Lincoln
Vice President National Life Insurance Co.
- -------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
APPENDIX A CONTINUED
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and position(s) Principal occupations last five
with applicant* years
- -------------------------------------------------------------------------------
<C> <S>
LAWRENCE T. ROWLAND Executive Vice President
Executive Vice President and [10/96-present] (formerly
Director Senior Vice President [1/93-
One Reinsurance Place 10/96], Vice President [10/91-
1700 Magnavox Way 1/93]), Lincoln National Life
Fort Wayne, Ind. 46804 Insurance Co.
- -------------------------------------------------------------------------------
KEITH J. RYAN Senior Vice President (formerly
Senior Vice President, Chief Financial Officer Vice President), Chief
and Assistant Treasurer Financial Officer and Assistant
Treasurer [1/96-present].
Formerly: Controller [6/95-
12/95], Business Controls
Director [11/90-6/95], Lincoln
National Life Insurance Co.
- -------------------------------------------------------------------------------
GABRIEL L. SHAHEEN President and Chief Executive
President, Chief Executive Officer [1/98-present]
Officer and Director Formerly: Chairman and Managing
Director, Lincoln National (UK)
PLC [12/96-1/98]; President,
Lincoln National Reassurance
Company [7/95-12/96]; Senior
Vice President, Lincoln
National Life Reinsurance
Company [1/93-7/95]; Senior
Vice President, Lincoln
National Life Insurance Company
[5/91-1/93]
- -------------------------------------------------------------------------------
RICHARD C. VAUGHAN Executive Vice President and
Director Chief Financial Officer [1/95-
200 East Berry Street present] (formerly Senior Vice
Fort Wayne, Ind. 46802 President [6/92-1/95]), Lincoln
National Corp.
- -------------------------------------------------------------------------------
MICHAEL R. WALKER Vice President [1/96-present],
Vice President Lincoln National Life Insurance
Co. Formerly: Vice President
[3/96-1/96], Employers Health
Insurance Co.; Vice President
[7/85-3/93], Baker Hughes, Inc.
- -------------------------------------------------------------------------------
ROY V. WASHINGTON Vice President [7/96-present],
Vice President Lincoln National Life Insurance
Co. (formerly, Associate
Counsel [2/95-7/96]). Formerly:
Director of Compliance [8/94-
2/95], Lincoln Investment
Management, Inc.; Compliance
Consultant [8/89-8/94], Lincoln
National Corp.
- -------------------------------------------------------------------------------
MICHAEL L. WRIGHT Senior Vice President [3/95-
Senior Vice President present], Lincoln National Life
Insurance Co. Formerly:
Executive Vice President and
Chief Operating Officer [11/88-
3/95], The Associate Group.
- -------------------------------------------------------------------------------
</TABLE>
*Unless otherwise indicated, the principal business address is 1300 South
Clinton Street, Fort Wayne, Indiana 46801.
21
<PAGE>
APPENDIX B
Illustrations of policy values
The following tables have been prepared to help show how values under the policy
change with investment performance. The tables show death benefits, policy
values, and net cash surrender values for each of the first 10 policy years, and
for every five year period thereafter through the thirtieth policy year,
assuming that the return on the assets invested in the account were a uniform,
gross, after tax, annual rate of 0%, 6%, and 12%. The actual death benefits and
net cash surrender values would be different from those shown if a different
classification was used or if the gross annual returns averaged 0%, 6%, and 12%
but fluctuated over and under those averages throughout the years.
The death benefits and net cash surrender values shown on pages using current
charges are approximately those likely to be provided under the policy for the
investment returns indicated, assuming that the current cost of insurance
charges are deducted. Although the contract allows for maximum cost of insurance
charges specified in the 1980 Commissioners Standard Ordinary Mortality Table,
Lincoln Life expects that it will continue to charge the current cost of
insurance charges for the indefinite future. The figures shown on pages using
guaranteed maximum charges show the death benefits and net cash surrender values
which would result if the guaranteed maximum cost of insurance charges were
deducted. However, these are primarily of interest only to show by comparison
the benefits of the lower current cost of insurance charges.
In each of the illustrations an assumed gross annual return is indicated. The
gross annual return used in the illustrations are then reduced by the asset
management charge (current average .53%), the mortality and expense risk charge
(.60% current, .90% guaranteed maximum), 12b-1 fees (.25%), and other expenses
incurred by the funds including printing, mailing, Directors' fees, etc.
(current average .03%) so that the actual numbers in the illustrations are net
of these charges and expenses. As a result of these charges, a 12% gross annual
return yields a net annual return of 10.44% using current charges, and 10.11%
using guaranteed charges. Similarly, gross annual returns of 6% and 0% yield net
annual returns of 4.53% and (1.39)% respectively using current charges, and
4.21% and (1.69)% respectively using guaranteed charges.
All illustrated policy values and net cash surrender values reflect all fees and
charges made under the policies, including the monthly administrative charge,
the policy value charge, and the cost of insurance charges.
22
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
<PAGE>
Male issue age 45, Select Tobacco
$32,890 specified amount
$10,000 initial premium using current charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums ----------------------------- ----------------------------- ----------------------------
accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $10,500 $32,890 $32,890 $32,890 $9,567 $10,143 $ 10,718 $8,917 $ 9,493 $10,068
2 11,025 32,890 32,890 32,890 9,150 10,289 11,493 8,500 9,639 10,843
3 11,576 32,890 32,890 32,890 8,749 10,438 12,327 8,149 9,838 11,727
4 12,155 32,890 32,890 32,890 8,363 10,590 13,227 7,763 9,990 12,627
5 12,763 32,890 32,890 32,890 7,991 10,745 14,198 7,441 10,195 13,648
- ------------------------------------------------------------------------------------------------------------
6 13,401 32,890 32,890 32,890 7,633 10,904 15,244 7,083 10,354 14,694
7 14,071 32,890 32,890 32,890 7,289 11,065 16,377 6,789 10,565 15,877
8 14,775 32,890 32,890 32,890 6,957 11,230 17,607 6,457 10,730 17,107
9 15,513 32,890 32,890 32,890 6,638 11,398 18,946 6,188 10,948 18,496
10 16,289 32,890 32,890 32,890 6,331 11,570 20,409 5,881 11,120 19,959
- ------------------------------------------------------------------------------------------------------------
15 20,789 32,890 32,890 42,227 5,221 13,131 31,513 5,221 13,131 31,513
20 26,533 32,890 32,890 59,779 4,257 14,947 49,000 4,257 14,947 49,000
25 33,864 32,890 32,890 88,820 3,419 17,058 76,569 3,419 17,058 76,569
30 43,219 32,890 32,890 128,613 2,691 19,514 120,199 2,691 19,514 120,199
40 70,400 32,890 32,890 314,699 1,508 25,692 299,713 1,508 25,692 299,713
- ------------------------------------------------------------------------------------------------------------
50 114,674 32,890 35,067 736,366 616 34,720 729,075 616 34,720 729,075
60 186,792 32,890 53,067 1,946,701 238 53,067 1,946,701 238 53,067 1,946,701
70 304,264 32,890 82,569 5,250,124 207 82,569 5,250,124 207 82,569 5,250,124
</TABLE>
The hypothetical gross annual returns shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future gross annual returns. Actual gross annual returns 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 annual returns averaged 0.00%,
6.00% and 12.00% over a period of years, but also fluctuated above or below
those averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical gross annual returns
can be achieved for any one year or sustained over any period of time. All
values are net of the following charges: asset management = .53% (current
average); 12b-1 fees = .25%; mortality and expense risk = .60%; and
miscellaneous expense = .03%. Values illustrated are also net of cost of
insurance charges, monthly administrative charge, and policy value charge.
23
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 45, Select Tobacco
$32,890 specified amount
$10,000 initial premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums ---------------------------- ---------------------------- ---------------------------
accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $10,500 $32,890 $32,890 $32,890 $9,505 $10,083 $10,661 $8,855 $9,433 $ 10,011
2 11,025 32,890 32,890 32,890 9,008 10,156 11,372 8,358 9,506 10,722
3 11,576 32,890 32,890 32,890 8,506 10,217 12,137 7,906 9,617 11,537
4 12,155 32,890 32,890 32,890 7,999 10,264 12,961 7,399 9,664 12,361
5 12,763 32,890 32,890 32,890 7,484 10,297 13,850 6,934 9,747 13,300
- --------------------------------------------------------------------------------------------------------
6 13,401 32,890 32,890 32,890 6,958 10,311 14,810 6,408 9,761 14,260
7 14,071 32,890 32,890 32,890 6,418 10,305 15,848 5,918 9,805 15,348
8 14,775 32,890 32,890 32,890 5,860 10,275 16,971 5,360 9,775 16,471
9 15,513 32,890 32,890 32,890 5,279 10,216 18,188 4,829 9,766 17,738
10 16,289 32,890 32,890 32,890 4,672 10,124 19,511 4,222 9,674 19,061
- ---------------------------------------------------------------------------------------------------------
15 20,789 32,890 32,890 39,670 1,250 9,596 29,604 1,250 9,596 29,604
20 26,533 0 32,890 55,295 0 7,469 45,324 0 7,469 45,324
25 33,864 0 32,890 80,842 0 1,870 69,691 0 1,870 69,691
30 43,219 0 0 115,322 0 0 107,778 0 0 107,778
40 70,400 0 0 273,860 0 0 260,819 0 0 260,819
- --------------------------------------------------------------------------------------------------------
50 114,674 0 0 621,916 0 0 615,758 0 0 615,758
60 186,792 0 01,595,665 0 01,595,665 0 0 1,595,665
70 304,264 0 04,176,539 0 04,176,539 0 0 4,176,539
</TABLE>
The hypothetical gross annual returns shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future gross annual returns. Actual gross annual returns 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 annual returns averaged 0.00%,
6.00% and 12.00% over a period of years, but also fluctuated above or below
those averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical gross annual returns
can be achieved for any one year or sustained over any period of time. All
values are net of the following charges: asset management = .53% (current
average); 12b-1 fees = .25%; mortality and expense risk = .90%; and
miscellaneous expense = .03%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
24
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 45, Non-Tobacco
$42,170 specified amount
$10,000 initial premium using current charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums ---------------------------- ---------------------------- ----------------------------
accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $10,500 $42,170 $42,170 $ 42,170 $9,625 $10,204 $ 10,783 $8,975 $ 9,554 $ 10,133
2 11,025 42,170 42,170 42,170 9,262 10,414 11,632 8,612 9,764 10,982
3 11,576 42,170 42,170 42,170 8,910 10,630 12,553 8,310 10,030 11,953
4 12,155 42,170 42,170 42,170 8,569 10,851 13,552 7,969 10,251 12,952
5 12,763 42,170 42,170 42,170 8,239 11,078 14,636 7,689 10,528 14,086
- ---------------------------------------------------------------------------------------------------------
6 13,401 42,170 42,170 42,170 7,920 11,311 15,811 7,370 10,761 15,261
7 14,071 42,170 42,170 42,170 7,611 11,550 17,086 7,111 11,050 16,586
8 14,775 42,170 42,170 42,170 7,311 11,796 18,468 6,811 11,296 17,968
9 15,513 42,170 42,170 42,170 7,021 12,048 19,968 6,571 11,598 19,518
10 16,289 42,170 42,170 42,170 6,740 12,307 21,594 6,290 11,857 21,144
- ----------------------------------------------------------------------------------------------------------
15 20,789 42,170 42,170 45,308 5,751 14,420 33,812 5,751 14,420 33,812
20 26,533 42,170 42,170 65,273 4,865 16,951 53,502 4,865 16,951 53,502
25 33,864 42,170 42,170 98,523 4,072 19,986 84,933 4,072 19,986 84,933
30 43,219 42,170 42,170 144,349 3,362 23,622 134,906 3,362 23,622 134,906
40 70,400 42,170 42,170 358,038 2,157 33,204 340,989 2,157 33,204 340,989
- ----------------------------------------------------------------------------------------------------------
50 114,674 42,170 47,676 861,736 1,191 47,204 853,204 1,191 47,204 853,204
60 186,792 42,170 72,588 2,278,137 730 72,588 2,278,137 730 72,588 2,278,137
70 304,264 42,170 112,943 6,143,986 634 112,943 6,143,986 634 112,943 6,143,986
</TABLE>
The hypothetical gross annual returns shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future gross annual returns. Actual gross annual returns 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 annual return averaged 0.00%,
6.00% and 12.00% over a period of years, but also fluctuated above or below
those averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical gross annual returns
can be achieved for any one year or sustained over any period of time. All
values are net of the following charges: asset management = .53% (current
average); 12b-1 fees = .25%; mortality and expenses risk = .60%; and
miscellaneous expense = .03%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
25
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 45, Select Non-Tobacco
$42,170 specified amount
$10,000 initial premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums --------------------------- --------------------------- ---------------------------
accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $ 10,500 $42,170 $42,170 $42,170 $9,544 $10,122 $10,701 $8,894 $ 9,472 $10,051
2 11,025 42,170 42,170 42,170 9,090 10,240 11,457 8,440 9,590 10,807
3 11,576 42,170 42,170 42,170 8,639 10,351 12,273 8,039 9,751 11,673
4 12,155 42,170 42,170 42,170 8,187 10,456 13,155 7,587 9,856 12,555
5 12,763 42,170 42,170 42,170 7,734 10,553 14,107 7,184 10,003 13,557
- ------------------------------------------------------------------------------------------------------
6 13,401 42,170 42,170 42,170 7,278 10,640 15,136 6,728 10,090 14,586
7 14,071 42,170 42,170 42,170 6,817 10,715 16,248 6,317 10,215 15,748
8 14,775 42,170 42,170 42,170 6,348 10,775 17,450 5,848 10,275 16,950
9 15,513 42,170 42,170 42,170 5,867 10,818 18,750 5,417 10,368 18,300
10 16,289 42,170 42,170 42,170 5,372 10,841 20,158 4,922 10,391 19,708
- -------------------------------------------------------------------------------------------------------
15 20,789 42,170 42,170 42,170 2,770 11,143 30,822 2,770 11,143 30,822
20 26,533 0 42,170 58,511 0 10,401 47,960 0 10,401 47,960
25 33,864 0 42,170 86,952 0 7,354 74,959 0 7,354 74,959
30 43,219 0 0 125,505 0 0 117,294 0 0 117,294
40 70,400 0 0 301,879 0 0 287,504 0 0 287,504
- -------------------------------------------------------------------------------------------------------
50 114,674 0 0 689,558 0 0 682,730 0 0 682,730
60 186,792 0 01,769,215 0 0 1,769,215 0 01,769,215
70 304,264 0 04,630,793 0 0 4,630,793 0 04,630,793
</TABLE>
The hypothetical gross annual returns shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future gross annual returns. Actual gross annual returns 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 annual returns average 0.00%,
6.00% and 12.00% over a period of years, but also fluctuated above or below
those averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical gross annual returns
can be achieved for any one year or sustained over any period of time. All
values are net of the following charges: asset management = .53% (current
average); 12b-1 fees = .25%; mortality and expense risk = .90%; and
miscellaneous expense = .03%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
26
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Female issue age 55, Select Tobacco
$72,400 specified amount
$25,000 initial premium using current charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums ---------------------------- ---------------------------- ---------------------------
accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $72,400 $72,400 $72,400 $24,006 $25,449 $26,890 $22,381 $23,824 $25,265
2 27,563 72,400 72,400 72,400 23,049 25,907 28,927 21,424 24,282 27,302
3 28,941 72,400 72,400 72,400 22,128 26,374 31,123 20,628 24,874 29,623
4 30,388 72,400 72,400 72,400 21,241 26,851 33,490 19,741 25,351 31,990
5 31,907 72,400 72,400 72,400 20,388 27,338 36,043 19,013 25,963 34,668
- ---------------------------------------------------------------------------------------------------------
6 33,502 72,400 72,400 72,400 19,567 27,835 38,802 18,192 26,460 37,427
7 35,178 72,400 72,400 72,400 18,776 28,342 41,807 17,526 27,092 40,557
8 36,936 72,400 72,400 72,400 18,015 28,859 45,096 16,765 27,609 43,846
9 38,783 72,400 72,400 72,400 17,282 29,386 48,699 16,157 28,261 47,574
10 40,722 72,400 72,400 72,400 16,576 29,925 52,695 15,451 28,800 51,570
- ---------------------------------------------------------------------------------------------------------
15 51,973 72,400 72,400 97,096 14,123 34,478 83,703 14,123 34,478 83,703
20 66,332 72,400 72,400 142,952 11,992 39,773 133,600 11,992 39,773 133,600
25 84,659 72,400 72,400 224,867 10,140 45,931 214,159 10,140 45,931 214,159
30 108,049 72,400 72,400 357,214 8,530 53,217 340,204 8,530 53,217 340,204
40 176,000 72,400 73,217 847,883 5,917 72,492 839,488 5,917 72,492 839,488
- ---------------------------------------------------------------------------------------------------------
50 286,685 72,400 111,671 2,241,515 4,531 111,6712,241,515 4,531 111,6712,241,515
60 466,980 72,400 173,754 6,045,217 3,935 173,7546,045,217 3,935 173,7546,045,217
</TABLE>
The hypothetical gross annual returns shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future gross annual returns. Actual gross annual returns 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 annual returns averaged 0.00%,
6.00% and 12.00% over a period of years, but also fluctuated above or below
those averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical gross annual returns
can be achieved for any one year or sustained over any period of time. All
values are net of the following charges: asset management = .53% (current
average); 12b-1 fees = .25%; mortality and expense risk = .60%; and
miscellaneous expense = .03%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value
charge.
27
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Female issue age 55, Select Tobacco
$72,400 specified amount
$25,000 initial premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums ---------------------------- ---------------------------- ----------------------------
accumulated aassuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $72,400 $72,400 $72,400 $23,765 $25,213 $26,661 $22,140 $23,588 $25,036
2 27,563 72,400 72,400 72,400 22,524 25,403 28,455 20,899 23,778 26,830
3 28,941 72,400 72,400 72,400 21,275 25,573 30,399 19,775 24,073 28,899
4 30,388 72,400 72,400 72,400 20,018 25,721 32,513 18,518 24,221 31,013
5 31,907 72,400 72,400 72,400 18,750 25,845 34,813 17,375 24,470 33,438
- ----------------------------------------------------------------------------------------------------------
6 33,502 72,400 72,400 72,400 17,464 25,939 37,317 16,089 24,564 35,942
7 35,178 72,400 72,400 72,400 16,146 25,993 40,044 14,896 24,743 38,794
8 36,936 72,400 72,400 72,400 14,781 25,992 43,012 13,531 24,742 41,762
9 38,783 72,400 72,400 72,400 13,350 25,921 46,247 12,225 24,796 45,122
10 40,722 72,400 72,400 72,400 11,839 25,769 49,783 10,714 24,644 48,658
- ----------------------------------------------------------------------------------------------------------
15 51,973 72,400 72,400 90,055 3,228 24,996 77,634 3,228 24,996 77,634
20 66,332 0 72,400 130,617 0 20,335 122,072 0 20,335 122,072
25 84,659 0 72,400 202,413 0 4,847 192,774 0 4,847 192,774
30 108,049 0 0 316,770 0 0 301,685 0 0 301,685
40 176,000 0 0 729,718 0 0 722,493 0 0 722,493
- ----------------------------------------------------------------------------------------------------------
50 286,685 0 01,872,255 0 01,872,255 0 01,872,255
60 466,980 0 04,900,493 0 04,900,493 0 04,900,493
</TABLE>
The hypothetical gross annual returns shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future gross annual returns. Actual gross annual returns 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 annual returns averaged 0.00%,
6.00% and 12.00% over a period of years, but also fluctuated above or below
those averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical gross annual returns
can be achieved for any one year or sustained over any period of time. All
values are net of the following charges asset management = .53% (current
average); 12b-1 fees = .25%; mortality and expense risk = .90%; and
miscellaneous expense = .03%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
28
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Female issue age 55, Select Non-Tobacco
$81,375 specified amount
$25,000 initial premium using current charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums --------------------------------------------------------- ---------------------------
Accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $81,375 $81,375 $81,375 $24,151 $25,603 $27,052 $22,526 $23,978 $25,427
2 27,563 81,375 81,375 81,375 23,329 26,221 29,277 21,704 24,596 27,652
3 28,941 81,375 81,375 81,375 22,532 26,856 31,691 21,032 25,356 30,191
4 30,388 81,375 81,375 81,375 21,761 27,508 34,309 20,261 26,008 32,809
5 31,907 81,375 81,375 81,375 21,014 28,177 37,148 19,639 26,802 35,773
- -----------------------------------------------------------------------------------------------------------
6 33,502 81,375 81,375 81,375 20,291 28,864 40,227 18,916 27,489 38,852
7 35,178 81,375 81,375 81,375 19,591 29,569 43,567 18,341 28,319 42,317
8 36,936 81,375 81,375 81,375 18,913 30,293 47,189 17,663 29,043 45,939
9 38,783 81,375 81,375 81,375 18,256 31,036 51,133 17,131 29,911 50,008
10 40,722 81,375 81,375 81,375 17,620 31,799 55,458 16,495 30,674 54,333
- -----------------------------------------------------------------------------------------------------------
15 51,973 81,375 81,375 102,579 15,493 37,779 88,430 15,493 37,779 88,430
20 66,332 81,375 81,375 151,649 13,588 44,947 141,728 13,588 44,947 141,728
25 84,659 81,375 81,375 239,132 11,882 53,657 227,745 11,882 53,657 227,745
30 108,049 81,375 81,375 380,886 10,355 64,305 362,749 10,355 64,305 362,749
40 176,000 81,375 93,796 917,373 7,764 92,867 908,290 7,764 92,867 908,290
- -----------------------------------------------------------------------------------------------------------
50 286,685 81,375 143,058 2,425,223 6,214 143,0582,425,223 6,214 143,0582,425,223
60 466,980 81,375 222,590 6,540,666 5,397 222,5906,540,666 5,397 222,5906,540,666
</TABLE>
The hypothetical gross annual returns shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future gross annual returns. Actual gross annual returns 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 annual returns averaged 0.00%,
6.00% and 12.00% over a period of years, but also fluctuated above or below
those averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical gross annual returns
can be achieved for any one year or sustained over any period of time. All
values are net of the following charges: asset management = .53% (current
average); 12b-1 fees = .25%; mortality and expense risk = .60%; and
miscellaneous expense = .03%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge and policy value charge.
29
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Female issue age 55, Select Non-Tobacco
$81,375 specified amount
$25,000 initial premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums ----------------------------- ----------------------------- ----------------------------
accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $81,375 $81,375 $81,375 $23,868 $25,316 $26,765 $22,243 $23,691 $25,140
2 27,563 81,375 81,375 81,375 22,735 25,618 28,671 21,110 23,993 27,046
3 28,941 81,375 81,375 81,375 21,600 25,905 30,735 20,100 24,405 29,235
4 30,388 81,375 81,375 81,375 20,464 26,177 32,973 18,964 24,677 31,473
5 31,907 81,375 81,375 81,375 19,321 26,431 35,401 17,946 25,056 34,026
- ------------------------------------------------------------------------------------------------------------
6 33,502 81,375 81,375 81,375 18,164 26,661 38,036 16,789 25,286 36,661
7 35,178 81,375 81,375 81,375 16,985 26,860 40,896 15,735 25,610 39,646
8 36,936 81,375 81,375 81,375 15,769 27,015 43,999 14,519 25,765 42,749
9 38,783 81,375 81,375 81,375 14,501 27,113 47,368 13,376 25,988 46,243
10 40,722 81,375 81,375 81,375 13,171 27,146 51,048 12,046 26,021 49,923
- ------------------------------------------------------------------------------------------------------------
15 51,973 81,375 81,375 92,487 5,781 27,612 79,730 5,781 27,612 79,730
20 66,332 0 81,375 134,699 0 24,816 125,887 0 24,816 125,887
25 84,659 0 81,375 209,249 0 12,881 199,285 0 12,881 199,285
30 108,049 0 0 328,340 0 0 312,705 0 0 312,705
40 176,000 0 0 758,520 0 0 751,010 0 0 751,010
- ------------------------------------------------------------------------------------------------------------
50 286,685 0 01,946,154 0 01,946,154 0 01,946,154
60 466,980 0 05,093,916 0 05,093,916 0 05,093,916
</TABLE>
The hypothetical gross annual returns shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future gross annual returns. Actual gross annual returns 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 annual returns averaged 0.00%,
6.00% and 12.00% over a period of years, but also fluctuated above or below
those averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical gross annual returns
can be achieved for any one year or sustained over any period of time. All
values are net of the following charges: asset management = .53% (current
average); 12b-1 fees = .25%; mortality and expense risk = .90%; and
miscellaneous expense = .03%. Values illustrated are also net of cost of
insurance charges, monthly administrative charge, and policy value charge.
30
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 65, Select Tobacco
$85,100 specified amount
$50,000 initial premium using current charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums ------------------------------------------------------------------------------------
accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $ 52,500 $85,100 $ 85,100 $ 85,100 $48,076 $ 51,019 $ 53,904 $44,826 $ 47,769 $ 50,654
2 55,125 85,100 85,100 85,100 46,218 52,060 58,114 42,968 48,810 54,864
3 57,881 85,100 85,100 85,100 44,431 53,121 62,651 41,431 50,121 59,651
4 60,775 85,100 85,100 85,100 42,710 54,204 67,544 39,710 51,204 64,544
5 63,814 85,100 85,100 85,100 41,053 55,309 72,895 38,303 52,559 70,145
- ---------------------------------------------------------------------------------------------------------
6 67,005 85,100 85,100 90,695 39,459 56,437 78,866 36,709 53,687 76,116
7 70,355 85,100 85,100 96,480 37,924 57,588 85,380 35,424 55,088 82,880
8 73,873 85,100 85,100 102,667 36,447 58,762 92,492 33,947 56,262 89,992
9 77,566 85,100 85,100 109,303 35,024 59,960 100,278 32,774 57,710 98,028
10 81,445 85,100 85,100 116,448 33,655 61,183 108,830 31,405 58,933 106,580
- ----------------------------------------------------------------------------------------------------------
15 103,946 85,100 85,100 181,387 28,963 71,155 172,750 28,963 71,155 172,750
20 132,665 85,100 87,294 284,933 24,886 83,137 271,364 24,886 83,137 271,364
25 169,318 85,100 102,744 441,519 21,343 97,851 420,494 21,343 97,851 420,494
30 216,097 85,100 117,844 666,716 18,265 116,677 660,115 18,265 116,677 660,115
40 351,999 85,100 179,736 1,762,570 14,530 179,736 1,762,570 14,530 179,736 1,762,570
- ----------------------------------------------------------------------------------------------------------
50 573,370 85,100 279,659 4,753,535 12,619 279,659 4,753,535 12,619 279,659 4,753,535
</TABLE>
The hypothetical gross annual returns shown above and
elsewhere in this prospectus are illustrative only and should not be deemed a
representation of past or future gross annual returns. Actual gross annual
returns 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 annual
returns averaged 0.00%, 6.00% and 12.00% over a period of years, but also
fluctuated above or below those averages for individual contract years. No
representations can be made by Lincoln Life or any of the funds that these
hypothetical gross annual returns can be achieved for any one year of sustained
over any period of time. All values are net of the following charges: asset
management = .53% (current average); 12b-1 fees = .25%; mortality and expense
risk = .60%; and miscellaneous expense = .03%. Values illustrated are also net
of cost of insurance charge, monthly administrative charge, and policy value
charge.
31
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 65, Select Tobacco
$85,100 specified amount
$50,000 initial premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums ---------------------------------------------------------------------------------
accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $ 52,500 $85,100 $85,100 $ 85,100 $47,156 $50,134 $ 53,059 $43,906 $46,884 $ 49,809
2 55,125 85,100 85,100 85,100 44,149 50,156 56,407 40,899 46,906 53,157
3 57,881 85,100 85,100 85,100 40,957 50,054 60,103 37,957 47,054 57,103
4 60,775 85,100 85,100 85,100 37,546 49,765 64,217 34,546 46,765 61,217
5 63,814 85,100 85,100 85,100 33,872 49,289 68,836 31,122 46,539 66,086
- -------------------------------------------------------------------------------------------------------
6 67,005 85,100 85,100 85,176 29,876 48,609 74,066 27,126 45,859 71,316
7 70,355 85,100 85,100 90,322 25,483 47,677 79,931 22,983 45,177 77,431
8 73,873 85,100 85,100 95,826 20,593 46,436 86,330 18,093 43,936 83,830
9 77,566 85,100 85,100 101,716 15,090 44,813 93,317 12,840 42,563 91,067
10 81,445 85,100 85,100 108,041 8,832 42,721 100,973 6,582 40,471 98,723
- --------------------------------------------------------------------------------------------------------
15 103,946 0 85,100 165,792 0 23,280 157,898 0 23,280 157,898
20 132,665 0 0 256,568 0 0 244,351 0 0 244,351
25 169,318 0 0 391,663 0 0 373,012 0 0 373,012
30 216,097 0 0 582,648 0 0 576,879 0 0 576,879
40 351,999 0 0 1,494,914 0 0 1,494,914 0 0 1,494,914
- --------------------------------------------------------------------------------------------------------
50 573,370 0 0 3,912,829 0 0 3,912,829 0 0 3,912,829
</TABLE>
The hypothetical gross annual returns shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future gross annual returns. Actual gross annual returns 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 annual returns averaged 0.00%,
6.00% and 12.00% over a period of years, but also fluctuated above or below
those averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical gross annual returns
can be achieved for any one year or sustained over any period of time. All
values are net of the following charges: asset management = .53% (current
average); 12b-1 fees= .25%; mortality and expense risk = .90%; and miscellaneous
expense = .03%. Values illustrated are also net of cost of insurance charge,
monthly administrative charge, and policy value charge.
32
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 65, Select Non-Tobacco
$96,100 specified amount
$50,000 initial premium using current charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums ------------------------------------------------------------------------------------
accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $ 52,500 $96,100 $ 96,100 $ 96,100 $48,366 $ 51,327 $ 54,229 $45,116 $ 48,077 $ 50,979
2 55,125 96,100 96,100 96,100 46,778 52,689 58,816 43,528 49,439 55,566
3 57,881 96,100 96,100 96,100 45,241 54,088 63,791 42,241 51,088 60,791
4 60,775 96,100 96,100 96,100 43,752 55,523 69,187 40,752 52,523 66,187
5 63,814 96,100 96,100 96,100 42,310 56,997 75,039 39,560 54,247 72,289
- ----------------------------------------------------------------------------------------------------------
6 67,005 96,100 96,100 96,100 40,914 58,510 81,387 38,164 55,760 78,637
7 70,355 96,100 96,100 99,793 39,562 60,062 88,313 37,062 57,562 85,813
8 73,873 96,100 96,100 106,447 38,253 61,657 95,898 35,753 59,157 93,398
9 77,566 96,100 96,100 113,558 36,985 63,293 104,181 34,735 61,043 101,931
10 81,445 96,100 96,100 121,179 35,757 64,973 113,251 33,507 62,723 111,001
- ----------------------------------------------------------------------------------------------------------
15 103,946 96,100 96,100 189,958 31,732 77,866 180,912 31,732 77,866 180,912
20 132,665 96,100 97,985 300,567 28,128 93,319 286,255 28,128 93,319 286,255
25 169,318 96,100 117,430 474,241 24,902 111,838 451,658 24,902 111,838 451,658
30 216,097 96,100 136,059 723,414 22,013 134,712 716,251 22,013 134,712 716,251
40 351,999 96,100 207,518 1,912,459 18,103 207,518 1,912,459 18,103 207,5181,912,459
- ----------------------------------------------------------------------------------------------------------
50 573,370 96,100 322,885 5,157,776 15,723 322,885 5,157,776 15,723 322,8855,157,776
</TABLE>
The hypothetical gross annual returns shown above and
elsewhere in this prospectus are illustrative only and should not be deemed a
representation of past or future gross annual returns. Actual gross annual
returns 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 returns
averaged 0.00%, 6.00% and 12.00% over a period of years, but also fluctuated
above or below those averages for individual contract years. No representations
can be made by Lincoln Life or any of the funds that these hypothetical gross
annual returns can be achieved for any one year or sustained over any period of
time. All values are net of the following charges: asset management = .53%
(current average); 12b-1 fees = .25%; mortality and expense risk = .60%; and
miscellaneous expense = .03%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
33
<PAGE>
AMERICAN LEGACY ESTATE BUILDER
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 65, Select Non-Tobacco
$96,100 specified amount
$50,000 initial premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Premiums ---------------------------------------------------------------------------------
accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual return of gross annual return of gross annual 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 $ 52,500 $96,100 $96,100 $ 96,100 $47,478 $50,445 $ 53,358 $44,228 $47,195 $ 50,108
2 55,125 96,100 96,100 96,100 44,851 50,803 56,991 41,601 47,553 53,741
3 57,881 56,100 96,100 96,100 42,103 51,063 60,941 39,103 48,063 57,941
4 60,775 96,100 96,100 96,100 39,209 51,210 65,260 36,209 48,211 62,260
5 63,814 96,100 96,100 96,100 36,133 51,226 70,009 33,383 48,476 67,259
- -------------------------------------------------------------------------------------------------------
6 67,005 96,100 96,100 96,100 32,833 51,081 75,261 30,083 48,331 72,511
7 70,355 96,100 96,100 96,100 29,251 50,743 81,112 26,751 48,243 78,612
8 73,873 96,100 96,100 97,324 25,314 50,165 87,679 22,814 47,665 85,179
9 77,566 96,100 96,100 103,513 20,933 49,247 94,966 18,683 46,997 92,716
10 81,445 96,100 96,100 110,130 16,015 47,957 102,925 13,765 45,707 100,675
- -------------------------------------------------------------------------------------------------------
15 103,946 0 96,100 170,074 0 36,096 161,975 0 36,096 161,975
20 132,665 0 0 264,897 0 0 252,283 0 0 252,283
25 169,318 0 0 406,277 0 0 386,930 0 0 386,930
30 216,097 0 0 605,083 0 0 599,092 0 0 599,092
40 351,999 0 0 1,552,476 0 0 1,552,476 0 0 1,552,476
- -------------------------------------------------------------------------------------------------------
50 573,370 0 0 4,063,493 0 0 4,063,493 0 0 4,063,493
</TABLE>
The hypothetical gross annual returns shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future gross annual returns. Actual gross annual returns 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 annual returns averaged 0.00%,
6.00% and 12.00% over a period of years, but also fluctuated above or below
those averages for individual contract years. No representations can be made by
Lincoln Life or any of the funds that these hypothetical gross annual returns
can be achieved for any one year or sustained over any period of time. All
values are net of the following charges: asset management = .53% (current
average); 12b-1 fees = .25%; mortality and expense risk = .90%; and
miscellaneous expense = .03%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
34
<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 Lincoln
Life. If no beneficiary survives the insured, the owner or the owner's estate
will receive the benefit.
Free look period -- The period of time in which the owner may cancel the policy
and receive a refund. The owner may cancel the policy within 10 days of receipt,
or 45 days after Part 1 of the application is signed, or within 10 days after
mailing or personal delivery of the Notice of Withdrawal Right.
Fund -- Any of the funds in which the Separate Account may invest; currently,
the American Variable Insurance Series is available.
General account -- The assets of Lincoln Life other than those allocated to the
Separate Account or any other Separate Account.
Initial premium -- The premium which is paid at the issue of the policy to place
the policy in force.
The initial premium must be at least equal to 80% of the federal maximum premium
limitation at issue.
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 allocated to the Separate
Account.
Lincoln Life (we, our, us)--Lincoln National Life Insurance Co.
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 net investment results are the changes in the unit
values of the subaccounts from the previous valuation day to the current day.
The net investment results are equal to the per unit change in the market value
of each fund's assets, reduced by the per unit share of the asset management
charge, 12b-1 fee, any miscellaneous expenses incurred by the fund, and the
mortality and expense risk charge for the period, and increased by the per unit
share of any dividends credited by the fund to the subaccount during the period.
No Lapse Benefit -- The guarantee that the policy will not lapse due to
insufficient net cash surrender value before the no lapse benefit expiration
date shown on the policy schedule. The no lapse benefit period currently expires
on the 10th policy anniversary for issue ages 75 and younger, and on the 1st
policy anniversary for issue ages above age 75.
Option date -- Any date the policy terminates under the termination provision.
Owner (you, your) -- The person so designated in the application or as
subsequently changed. If a policy has been absolutely assigned, the assignee is
the owner. A collateral assignee is not the owner.
Policy -- The Flexible Premium Variable Life Insurance policy offered by Lincoln
Life and described in this prospectus.
Policy date -- The date set forth in the policy that is used to determine policy
years and policy months. Policy anniversaries are measured from the policy date.
The policy date is ordinarily the earlier of the date the full initial premium
is received from the owner or the date on which the policy is approved for
issue.
Policy value -- The sum of all amounts allocated to the Separate Account and to
the General Account at any time, plus any outstanding loan.
Proceeds -- The amount payable on surrender of the policy, or after the death of
any insured person. The proceeds will be different on each of these events.
Record date -- The date the policy is recorded on the books of Lincoln Life as
an in-force policy. Ordinarily, the policy will be recorded as in-force within
three business days after the later of the date we receive the last outstanding
requirement or the date of underwriting approval. The record date controls the
timing of the transfer of initial assets from the General Account to the various
subaccounts.
Separate Account -- The Lincoln Life Flexible Premium Variable Life Account F, a
Separate Account established by Lincoln Life to receive and invest net premiums
paid under the policy.
Series -- Any of the series in which the Separate Account may invest; currently,
the sole series is American Variable Insurance Series.
Specified amount -- The minimum death benefit payable under the policy so long
as the policy remains in force. The death benefit proceeds will be reduced by
any outstanding loan and any due and unpaid charges, and increased by any
unearned loan interest.
Subaccount -- A subdivision of the Separate Account. Each subaccount invests
exclusively in the shares of a specified fund.
Surrender charge -- A charge deducted from policy value upon surrender of the
policy.
35
<PAGE>
Unit -- An accounting unit of measure used to calculate the value of an
investment in a specified subaccount.
Unit value -- The dollar value of a unit in a specified subaccount on a
specified valuation date.
36
<PAGE>
This page was intentionally left blank.
37
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Percent Cash
of Net Bond Management
Assets Combined Account Account
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in American Variable
Insurance Series at net asset value:
. Bond Fund
14,847 shares at $10.43 per share
(cost-$152,595) 0.2% $ 154,859 $ 154,859
- --------------------------------------
. Cash Management Fund
314,146 shares at $11.01 per share
(cost-$3,488,584) 5.1 3,458,753 $3,458,753
--------------------------------------
. High-Yield Bond Fund
276,851 shares at $14.66 per share
(cost-$3,906,531) 6.0 4,058,643
--------------------------------------
. Growth-Income Fund
702,472 shares at $36.42 per share
(cost-$20,306,455) 37.7 25,584,025
--------------------------------------
. Growth Fund
441,553 shares at $44.98 per share
(cost-$15,926,222) 29.2 19,861,070
--------------------------------------
. U.S. Government/AAA-Rated Securities
Fund
340,282 shares at $11.10 per share
(cost-$3,752,289) 5.6 3,777,130
--------------------------------------
. International Fund
478,094 shares at $14.43 per share
(cost-$6,963,103) 10.2 6,922,805
--------------------------------------
. Asset Allocation Fund
249,826 shares at $15.32 per share
(cost-$3,621,505) 5.6 3,827,339
--------------------------------------
. Global Growth Fund
27,480 shares at $10.78 per share
(cost-$298,173) 0.4 296,235
-------------------------------------- ----- ----------- -------- ----------
TOTAL ASSETS
(Cost-$58,415,457) 100.0 67,940,859 154,859 3,458,753
--------------------------------------
LIABILITY--
Payable to Lincoln National Life
Insurance Company 0.0 2,317 5 118
- --------------------------------------- ----- ----------- -------- ----------
NET ASSETS 100.0% $67,938,542 $154,854 $3,458,635
- --------------------------------------- ===== =========== ======== ==========
UNITS OUTSTANDING 132,562 2,300,083
- --------------------------------------- ======== ==========
NET ASSET VALUE PER UNIT $1.168 $1.504
- --------------------------------------- ======== ==========
</TABLE>
See accompanying notes to financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
High-Yield Growth- AAA-Rated Asset Global
Bond Income Growth Securities International Allocation Growth
Account Account Account Account Account Account Account
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$4,058,643
$25,584,025
$19,861,070
$3,777,130
$6,922,805
$3,827,339
<PAGE>
$296,235
- ---------- ----------- ----------- ---------- ---------- ---------- --------
4,058,643 25,584,025 19,861,070 3,777,130 6,922,805 3,827,339 296,235
139 866 673 129 246 131 10
- ---------- ----------- ----------- ---------- ---------- ---------- --------
$4,058,504 $25,583,159 $19,860,397 $3,777,001 $6,922,559 $3,827,208 $296,225
========== =========== =========== ========== ========== ========== ========
1,455,005 6,784,360 4,606,675 1,923,768 3,749,845 1,802,720 275,099
========== =========== =========== ========== ========== ========== ========
$2.789 $3.771 $4.311 $1.963 $1.846 $2.123 $1.077
========== =========== =========== ========== ========== ========== ========
</TABLE>
39
<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, 1995
Net investment income:
.Dividends from investment income $ 1,252,832 -- $125,603
-----------------------------------------
.Dividends from net realized gain on
investments 1,586,142 -- 0
-----------------------------------------
.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 (loss) 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 0 0
-----------------------------------------
.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
- ------------------------------------------ =========== ======= ========
YEAR ENDED DECEMBER 31, 1997 Net investment income:
.Dividends from investment income $ 1,550,226 $ 7,378 $210,279
-----------------------------------------
.Dividends from net realized gain on
investments 5,730,418 1,765 0
-----------------------------------------
.Mortality and expense risk charge (739,534) (1,411) (51,918)
----------------------------------------- ----------- ------- --------
NET INVESTMENT INCOME 6,541,110 7,732 158,361
- ------------------------------------------
Net realized and unrealized gain (loss) on investments:
.Net realized gain (loss) on investments 1,463,015 222 6,491
-----------------------------------------
.Net change in unrealized appreciation or
depreciation on investments 2,258,647 2,266 (7,991)
- ----------------------------------------- ----------- ------- --------
NET GAIN (LOSS) ON INVESTMENTS 3,721,662 2,488 (1,500)
- ------------------------------------------ ----------- ------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $10,262,772 $10,220 $156,861
- ------------------------------------------ =========== ======= ========
</TABLE>
See accompanying Notes to financial statements.
40
<PAGE>
<TABLE>
<CAPTION>
High-Yield Growth- Growth U.S. Global Growth
Bond Income Account Governme Internation Allocation Account
Account Account nt/AAA- al Account Account
Rated
Asset
Securities
Account
<S> <C> <C> <C> <C> <C> <C>
$332,900 $ 318,849 $ 84,892 $ 277,020 $ 66,376 $ 47,192 --
0 559,151 919,940 0 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 --
0 1,285,259 973,370 0 192,271 126,811 --
(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 --
================= ================= ================ ================ ================ ================= ================
$331,279 $ 429,919 $ 95,703 $ 229,241 $ 135,843 $109,245 $ 1,339
42,064 2,394,172 2,359,562 0 727,603 204,654 598
(47,419) (270,306) (205,231) (41,537) (83,012) (37,650) (1,050)
- ----------------- ----------------- ---------------- ---------------- ---------------- ----------------- ----------------
325,924 2,553,785 2,250,034 187,704 780,434 276,249 887
66,410 675,984 389,341 (2,010) 158,689 167,822 266
(2,082) 1,384,066 1,361,804 47,345 (550,676) 25,853 (1,938)
- ----------------- ----------------- ---------------- ---------------- ---------------- ----------------- ----------------
64,328 2,060,050 1,751,145 45,335 (391,987) 193,475 (1,672)
- ----------------- ----------------- ---------------- ---------------- ---------------- ----------------- ----------------
$390,252 $4,613,835 $4,001,179 $ 233,039 $ 388,447 $469,724 $ (785)
</TABLE>
41
<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, 1995 $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
- ------------------------------------------- ----------- -------- ----------
Changes from operations:
. Net investment income 6,541,110 7,732 158,361
------------------------------------------
. Net realized gain (loss) on investments 1,463,015 222 6,491
------------------------------------------
. Net change in unrealized appreciation or
depreciation on investments 2,258,647 2,266 (7,991)
- ------------------------------------------- ----------- -------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 10,262,772 10,220 156,861
- -------------------------------------------
Net increase (decrease) from unit
transactions 7,894,007 85,899 (762,774)
- ------------------------------------------- ----------- -------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 18,156,779 96,119 (605,913)
- ------------------------------------------- ----------- -------- ----------
NET ASSETS AT DECEMBER 31, 1997 $67,938,542 $154,854 $3,458,635
- ------------------------------------------- =========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
High-Yield Growth- AAA-Rated Asset Global
Bond Income Growth Securities International Allocation Growth
Account Account Account Account Account Account Account
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$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 14,231 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 81,151 465,942 --
---------- ----------- ----------- ---------- ---------- ---------- --------
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 --
---------- ----------- ----------- ---------- ---------- ---------- --------
325,924 2,553,785 2,250,034 187,704 780,434 276,249 $ 887
66,410 675,984 389,341 (2,010) 158,689 167,622 266
(2,082) 1,384,066 1,361,804 47,345 (550,676) 25,853 (1,938)
---------- ----------- ----------- ---------- ---------- ---------- --------
390,252 4,613,835 4,001,179 233,039 388,447 469,724 (785)
(271,243) 3,146,834 2,100,345 284,126 1,628,084 1,385,726 297,010
---------- ----------- ----------- ---------- ---------- ---------- --------
119,009 7,760,669 6,101,524 517,165 2,016,531 1,855,450 296,225
---------- ----------- ----------- ---------- ---------- ---------- --------
$4,058,504 $25,583,159 $19,860,397 $3,777,001 $6,922,559 $3,827,208 $ 296,225
========== =========== =========== ========== ========== ========== ===========
</TABLE>
43
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ACCOUNTING POLICIES
The Separate Account: Lincoln Life Flexible Premium Variable Life Account F
(Separate Account) was established as a segregated investment account of Lincoln
National Life Insurance Company (Lincoln Life) on May 29, 1987. The Separate
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 nine funds: Bond Fund, Cash
Management Fund, High-Yield Bond Fund, Growth-Income Fund, Growth Fund, U.S.
Government/AAA- Rated Securities Fund, International Fund, Asset Allocation Fund
and Global Growth Fund (Funds). Investments in the Funds are stated at the
closing net asset values per share on December 31, 1997. AVIS is registered as
an open-end management investment company. Investment transactions are accounted
for on a trade-date basis and dividend income is recorded on the ex-dividend
date. The cost of investments sold is determined by the average-cost method.
Dividends: Dividends paid to the Separate Account are automatically reinvested
in shares of the Funds on the payable date. Federal Income Taxes: Operations of
the Separate Account form a part of and are taxed with operations of Lincoln
Life, which is taxed as a "life insurance company" under the Internal Revenue
Code. Using current law, no federal income taxes are payable with respect to the
Separate Account's net investment income and the net realized gain on
investments.
2. MORTALITY AND EXPENSE RISK CHARGE AND OTHER TRANSACTIONS WITH AFFILIATE
Separate Account Charges: Amounts are charged daily to the Separate Account by
Lincoln Life for a mortality and expense risk charge at an annual rate of .85%
of the average daily net asset value of the Separate Account for the first ten
policy years, and .75% for policy years thereafter. For the first ten policy
years, amounts are charged daily to the Separate Account by Lincoln Life for the
guaranteed death benefit at an annual rate of .10% of the average daily net
asset value of the Separate Account. Amounts are charged daily to the Separate
Account by Lincoln Life for an administrative charge at an annual rate of .30%
of the average daily net asset value of the Separate Account for the first ten
policy years and .10% for policy years thereafter. Other Charges: Other charges,
which are paid to Lincoln Life by redeeming Separate Account units, are for the
cost of insurance and contingent surrender charges. These other charges for
1997, 1996 and 1995 amounted to $627,688, $521,383 and $436,723, respectively.
Lincoln Life assumes the responsibility for providing the insurance benefits
included in the policy. The cost of insurance is determined each month based
upon the applicable insurance rate and the current death benefit. The cost of
insurance can vary from month to month since the determination of both the
insurance rate and the current death benefit depends upon a number of variables
as described in the Separate Account's prospectus. Surrender charges are
deducted if the policy is surrendered during the first 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 surrenders during the first policy
year to 1% for surrenders during the tenth policy year.
44
<PAGE>
This page was intentionally left blank.
45
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS CONTINUED
3. NET ASSETS
Net Assets at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
Cash High-Yield Growth-
Bond Management Bond Income
Combined Account Account Account Account
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit transactions $36,535,200 $141,857 $2,666,444 $1,644,117 $12,288,995
- ------------------------
Accumulated net
investment income 17,211,335 9,092 772,162 1,967,125 6,415,587
- ------------------------
Accumulated net realized
gain on investments 4,666,605 1,641 49,860 295,150 1,601,007
- ------------------------
Net unrealized
appreciation
(depreciation) on
investments 9,525,402 2,264 (29,831) 52,112 5,277,570
- ------------------------ ----------- -------- ---------- ---------- -----------
$67,938,542 $154,854 $3,458,635 $4,058,504 $25,583,159
=========== ======== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
U.S.
Government/
AAA-Rated Asset Global
Growth Securities International Allocation Growth
Account Account Account Account Account
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
$ 9,169,754 $2,032,982 $5,495,220 $2,798,821 $297,010
4,617,013 1,616,415 1,208,411 604,643 887
2,138,782 102,763 259,226 217,910 266
3,934,848 24,841 (40,298) 205,834 (1,938)
- ----------- ---------- ---------- ---------- --------
$19,860,397 $3,777,001 $6,922,559 $3,827,208 $296,225
=========== ========== ========== ========== ========
</TABLE>
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
Units Amount Units Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Bond Account:
Purchases 90,000 $ 99,436 201,450 $ 208,586
- ---------------------------------------------
Redemptions (12,123) (13,537) (146,765) (152,628)
- --------------------------------------------- ------------ ------------ ------------ ------------
77,877 85,899 54,685 55,958
Cash Management Account:
Purchases 14,280,121 21,069,330 10,549,495 15,041,172
- ---------------------------------------------
Redemptions (14,787,164) (21,832,104) (9,532,862) (13,592,780)
- --------------------------------------------- ------------ ------------ ------------ ------------
(507,043) (762,774) 1,016,633 1,448,392
High-Yield Bond Account:
Purchases 434,944 1,153,178 718,336 1,716,073
- ---------------------------------------------
Redemptions (547,819) (1,424,421) (811,050) (1,910,485)
- --------------------------------------------- ------------ ------------ ------------ ------------
(112,875) (271,243) (92,714) (194,412)
Growth-Income Account:
Purchases 1,780,296 6,127,582 1,044,112 2,936,929
- ---------------------------------------------
Redemptions (869,750) (2,980,748) (621,723) (1,719,672)
- --------------------------------------------- ------------ ------------ ------------ ------------
910,546 3,146,834 422,389 1,217,257
Growth Account:
Purchases 1,087,136 4,236,409 1,276,020 3,987,975
- ---------------------------------------------
Redemptions (581,119) (2,136,064) (913,240) (2,848,717)
- --------------------------------------------- ------------ ------------ ------------ ------------
506,017 2,100,345 362,780 1,139,258
U.S. Government/AAA-Rated
Securities Account:
Purchases 618,910 1,169,963 256,101 450,344
- ---------------------------------------------
Redemptions (473,455) (885,837) (568,288) (1,013,888)
- --------------------------------------------- ------------ ------------ ------------ ------------
145,455 284,126 (312,187) (563,544)
International Account:
Purchases 1,718,428 3,191,689 1,277,676 2,014,548
- ---------------------------------------------
Redemptions (830,858) (1,563,605) (351,916) (552,034)
- --------------------------------------------- ------------ ------------ ------------ ------------
887,570 1,628,084 925,760 1,462,514
Asset Allocation Account:
Purchases 1,366,832 2,757,294 387,503 647,701
- ---------------------------------------------
Redemptions (669,283) (1,371,568) (171,729) (290,251)
- --------------------------------------------- ------------ ------------ ------------ ------------
697,549 1,385,726 215,774 357,450
Global Growth Account:
Purchases 301,971 326,275 -- --
- ---------------------------------------------
Redemptions (26,872) (29,265) -- --
- --------------------------------------------- ------------- ------------ ------------ ------------
275,099 297,010 0 0
------------ ------------
NET INCREASE FROM UNIT
TRANSACTIONS $ 7,894,007 $ 4,922,873
============ ============
</TABLE>
46
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
Units Amount
- ------------------------
<S> <C>
-- --
-- --
- ----------- ----------
0 0
3,219,898 $4,417,577
(3,375,836) (4,617,070)
- ----------- ----------
(155,938) (199,493)
194,024 397,517
(125,874) (264,898)
- ----------- ----------
68,150 132,619
523,394 1,210,343
(392,334) (890,316)
- ----------- ----------
131,060 320,027
839,058 2,292,591
(485,162 (1,345,519)
- ----------- ----------
353,896 947,072
183,394 306,584
(408,679) (698,922)
- ----------- ----------
(225,285) (392,338)
413,293 577,192
(269,256) (372,515)
- ----------- ----------
144,037 204,677
151,510 206,365
(18,134) (25,025)
- ----------- ----------
133,376 181,340
-- --
-- --
- ----------- ----------
0 0
---------
$1,193,904
==========
</TABLE>
47
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS CONTINUED
5. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1997.
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
- ---------------------------------------------------------------------
<S> <C> <C>
Bond Account $ 104,812 $ 11,238
- -----------------------------------------------------------
Cash Management Account 11,738,185 12,346,768
- -----------------------------------------------------------
High-Yield Bond Account 1,430,027 1,379,300
- -----------------------------------------------------------
Growth-Income Account 8,124,651 2,442,070
- -----------------------------------------------------------
Growth Account 6,036,769 1,700,562
- -----------------------------------------------------------
U.S. Government/AAA-Rated Securities Account 1,357,554 889,062
- -----------------------------------------------------------
International Account 3,808,704 1,404,944
- -----------------------------------------------------------
Asset Allocation Account 3,006,711 1,346,680
- -----------------------------------------------------------
Global Growth Account 319,015 21,108
----------- -------------
$35,926,428 $ 21,541,732
=========== ===========
</TABLE>
6. NEW INVESTMENT FUNDS
Effective January 1, 1996, the AVIS Bond Fund became available as an investment
option for Separate Account contract owners. Effective April 25, 1997, the AVIS
Global Growth Fund became available as an investment option for Separate Account
contract owners.
48
<PAGE>
REPORT OF ERNST & YOUNG LLP,INDEPENDENT AUDITORS
Board of Directors of Lincoln National Life Insurance Company and
Policyowners of Lincoln National Flexible Premium Variable Life Account F We
have audited the accompanying statement of net assets of Lincoln National
Flexible Premium Variable Life Account F (Separate Account) as of December 31,
1997, and the related statements of operations and changes in net assets for
each of the three years in the period then ended. These financial statements are
the responsibility of the Separate Account's management. Our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial
position of Lincoln National Flexible Premium Variable Life Account F at
December 31, 1997, and the results of its operations and the changes in its net
assets for each of the three years in the period then ended in conformity with
generally accepted accounting principles.
LOGO
Fort Wayne, Indiana
March 20, 1998
49
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $18,560.7 $19,389.6
- ------------------------------------------------------------------------------------
Preferred stocks 257.3 239.7
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 436.0 358.3
- ------------------------------------------------------------------------------------
Affiliated common stocks 412.1 241.5
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,012.7 2,976.7
- ------------------------------------------------------------------------------------
Real estate 584.4 621.3
- ------------------------------------------------------------------------------------
Policy loans 660.5 626.5
- ------------------------------------------------------------------------------------
Other investments 335.5 282.7
- ------------------------------------------------------------------------------------
Cash and short-term investments 2,133.0 759.2
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 26,392.2 25,495.5
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 42.4 60.9
- ------------------------------------------------------------------------------------
Accrued investment income 343.5 343.6
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 44.1 25.8
- ------------------------------------------------------------------------------------
Other admitted assets 216.0 355.7
- ------------------------------------------------------------------------------------
Separate account assets 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,872.9 $ 5,954.0
- ------------------------------------------------------------------------------------
Other policyholder funds 16,360.1 17,262.4
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 878.2 250.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 720.4 564.6
- ------------------------------------------------------------------------------------
Asset valuation reserve 450.0 375.5
- ------------------------------------------------------------------------------------
Interest maintenance reserve 135.4 76.7
- ------------------------------------------------------------------------------------
Other liabilities 413.9 490.9
- ------------------------------------------------------------------------------------
Federal income taxes 0.8 4.3
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (761.9) (659.7)
- ------------------------------------------------------------------------------------
Separate account liabilities 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 55,400.7 48,054.0
- ------------------------------------------------------------------------------------
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 1,821.8 883.4
- ------------------------------------------------------------------------------------
Unassigned surplus 1,121.6 1,054.2
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,968.4 1,962.6
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 5,589.0 $ 7,268.5 $ 4,899.1
- -----------------------------------------------------------------------------
Net investment income 1,847.1 1,756.3 1,772.2
- -----------------------------------------------------------------------------
Amortization of interest maintenance reserve 41.5 27.2 34.0
- -----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 99.7 90.9 98.3
- -----------------------------------------------------------------------------
Expense charges on deposit funds 119.3 100.7 83.2
- -----------------------------------------------------------------------------
Other income 21.3 16.8 14.5
- ----------------------------------------------------------------------------- --------- --------- ---------
Total revenues 7,717.9 9,260.4 6,901.3
- -----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 4,522.1 5,989.9 4,184.0
- -----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,728.4 2,878.5 2,345.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 7,250.5 8,868.4 6,529.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before dividends to policyholders, income taxes and net
realized gain on investments 467.4 392.0 371.6
- -----------------------------------------------------------------------------
Dividends to policyholders 27.5 27.3 27.3
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before federal income taxes and net realized gain on
investments 439.9 364.7 344.3
- -----------------------------------------------------------------------------
Federal income taxes 78.3 83.6 103.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before net realized gain on investments 361.6 281.1 240.6
- -----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding net
transfers to the interest maintenance reserve 31.3 53.3 43.9
- ----------------------------------------------------------------------------- --------- --------- ---------
Net income $ 392.9 $ 334.4 $ 284.5
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 1,962.6 $ 1,732.9 $ 1,679.6
- -----------------------------------------------------------------------------
Correction of prior years' asset valuation reserve (Note 15) (37.6) -- --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets (Note 15) (57.0) -- --
- ----------------------------------------------------------------------------- --------- --------- ---------
1,868.0 1,732.9 1,679.6
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 392.9 334.4 284.5
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (36.2) 38.6 143.2
- -----------------------------------------------------------------------------
Nonadmitted assets (0.4) (3.0) 2.9
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (3.9) 0.6 (2.0)
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.9) (0.4) 2.9
- -----------------------------------------------------------------------------
Asset valuation reserve (36.9) (105.5) (112.5)
- -----------------------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- -- 2.2
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 938.4 100.0 15.1
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation (2.6) -- 27.0
- -----------------------------------------------------------------------------
Dividends to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 6,364.3 $ 8,059.4 $ 5,430.9
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (649.2) (767.5) (383.6)
- -----------------------------------------------------------------------
Investment income received 1,798.8 1,700.6 1,713.2
- -----------------------------------------------------------------------
Benefits paid (5,345.2) (4,050.4) (3,239.6)
- -----------------------------------------------------------------------
Insurance expenses paid (2,867.5) (2,972.2) (2,513.5)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) (87.0) (72.3) 38.4
- -----------------------------------------------------------------------
Dividends to policyholders (28.4) (27.7) (16.5)
- -----------------------------------------------------------------------
Other income received and expenses paid, net (42.7) 6.3 14.4
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (856.9) 1,876.2 1,043.7
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,142.6 12,542.0 13,183.9
- -----------------------------------------------------------------------
Purchase of investments (10,345.0) (14,175.4) (14,049.6)
- -----------------------------------------------------------------------
Other sources (uses) 563.1 (266.5) (64.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities 2,360.7 (1,899.9) (929.7)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in -- 100.0 15.1
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 120.0 100.0 63.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (100.0) (63.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities (130.0) 2.0 (294.9)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments 1,373.8 (21.7) (180.9)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 759.2 780.9 961.8
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 2,133.0 $ 759.2 $ 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1997, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Department"), which practices differ from generally accepted
accounting principles ("GAAP"). The more significant variances from GAAP are
as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period 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
consolidated 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 and presented
in the balance sheet as affiliated common stocks.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
policy acquisition costs, to the extent recoverable from future gross
profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
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.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits 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
authorized by the Department to assume such business. Changes to those
amounts are credited or charged directly to unassigned surplus. Under GAAP,
an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
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.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
S-6
<PAGE>
THE 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
determined on a statutory accounting basis with amounts determined in
accordance with GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1997 1996 1997 1996 1995
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory basis $ 2,968.4 $ 1,962.6 $ 392.9 $ 334.4 $ 284.5
- ---------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs and
present value of future profits 958.3 1,119.1 (98.9) 66.7 (63.0)
------------------------------------------
Policy and contract reserves (1,672.9) (1,405.3) (48.6) (57.1) (55.3)
------------------------------------------
Interest maintenance reserve 135.4 76.7 58.7 (39.7) 60.9
------------------------------------------
Deferred income taxes (13.0) (27.4) 70.3 1.8 38.3
------------------------------------------
Policyholders' share of earnings and
surplus on participating business (79.8) (81.9) 5.3 (.3) .2
------------------------------------------
Asset valuation reserve 450.0 375.5 -- -- --
------------------------------------------
Net realized gain (loss) on investments (91.5) (72.0) (20.4) 78.7 30.0
------------------------------------------
Unrealized gain on investments 1,245.5 825.2 -- -- --
------------------------------------------
Nonadmitted assets, including nonadmitted
investments 61.0 (7.1) -- -- --
------------------------------------------
Investments in subsidiary companies 188.8 156.6 (80.5) 29.9 34.3
------------------------------------------
Other, net (162.5) (99.0) (35.0) (82.6) (7.3)
------------------------------------------ --------- --------- --------- --------- ---------
Net increase (decrease) 1,019.3 860.4 (149.1) (2.6) 38.1
- --------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 3,987.7 $ 2,823.0 $ 243.8 $ 331.8 $ 322.6
- --------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
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
actual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. Government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between changes in the value of the derivatives and the
items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the amount to be paid to reacquire the
security. It is the Company's policy to take possession of securities with a
market value at least equal to the value of the securities loaned.
Securities loaned are recorded at amortized cost as long as the value of the
related collateral is sufficient. The Company's agreements with third
parties generally contain contractual provisions to allow for additional
collateral to be obtained when necessary. The Company values collateral
daily and obtains additional collateral when deemed appropriate.
GOODWILL
Goodwill, which represents the excess of the ceding commission over
statutory-basis net assets of business purchased under an assumption
reinsurance agreement, is amortized on a straight-line basis over ten years.
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Department. The Company waives deduction of deferred fractional premiums on
the death of life and annuity policy insureds and returns any premium beyond
the date of death, except for policies issued prior to March 1977. Surrender
values on policies do not exceed the corresponding benefit reserves.
Additional reserves are established when the results of cash flow testing
under various interest rate scenerios indicate the need for such reserves.
If net premiums exceed the gross premiums on any insurance in-force,
additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual 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
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations and
statistical analyses. Those estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is
inherent in such estimates, management believes that the reserves for claims
and claim adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the
extent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
measurement 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 the Company for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by the Company for
administrative and contractholder maintenance services performed for these
separate accounts are included in the Company's statements of income.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by 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 accounting practices
encompass all accounting practices that are not prescribed; such practices
may differ from state to state, may differ from company to company within a
state and may change in the future. The NAIC currently is in the process of
recodifying statutory accounting practices ("Codification"). Codification
will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Codification, which is expected to be approved by the NAIC in 1998, will
require adoption by the various states before it becomes the prescribed
statutory-basis of accounting for insurance companies domesticated within
those states. Accordingly, before Codification becomes effective for the
Company, the state of Indiana must adopt Codification as the prescribed
basis of accounting on which domestic insurers must report their
statutory-basis results to the Department. At this time, it is unclear
whether Indiana will adopt Codification. However, based on the current draft
guidance, management believes that the impact of Codification will not be
material to the Company's statutory-basis financial statements.
The Company has received written approval from the Department to record
surrender charges applicable to separate account liabilities for variable
life and annuity products as a liability in the separate account financial
statements payable to the Company's general account. In the accompanying
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.
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,524.4 $ 1,442.2 $ 1,457.4
----------------------------------------------------------------
Preferred stocks 23.5 9.6 6.4
----------------------------------------------------------------
Unaffiliated common stocks 8.3 6.5 5.2
----------------------------------------------------------------
Affiliated common stocks 15.0 9.5 12.6
----------------------------------------------------------------
Mortgage loans on real estate 257.2 269.3 252.0
----------------------------------------------------------------
Real estate 92.2 114.4 110.0
----------------------------------------------------------------
Policy loans 37.5 35.0 32.1
----------------------------------------------------------------
Other investments 28.2 22.4 62.6
----------------------------------------------------------------
Cash and short-term investments 70.3 48.9 53.2
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,056.6 1,957.8 1,991.5
- -------------------------------------------------------------------
Expenses:
Depreciation 21.0 25.0 25.9
----------------------------------------------------------------
Other 188.5 176.5 193.4
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 209.5 201.5 219.3
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 1,847.1 $ 1,756.3 $ 1,772.2
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
and 1996 amounted to $2,600,000 and $2,500,000,
respectively, consisting principally of interest on bonds in
default and mortgage loans.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
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
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1997 and 1996 reflects NAIC adjustments of
$5,500,000 and $2,700,000, respectively, to decrease
amortized cost.
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
estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit
quality and maturity of the investments.
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1997, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1998 $ 490.1 $ 494.9
--------------------------------------------------------------------------
In 1999-2002 3,088.7 3,185.4
--------------------------------------------------------------------------
In 2003-2007 4,762.7 4,971.0
--------------------------------------------------------------------------
After 2007 6,344.9 7,084.9
--------------------------------------------------------------------------
Mortgage-backed securities 3,874.3 4,062.4
-------------------------------------------------------------------------- --------- ---------
Total $18,560.7 $19,798.6
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1997, 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 1997,
1996 and 1995 were $9,715,000,000, $10,996,900,000 and
$12,234,100,000, respectively. Gross gains during 1997, 1996
and 1995 of $218,100,000, $169,700,000 and $225,600,000,
respectively, and gross losses of $78,000,000, $177,000,000
and $83,100,000, respectively, were realized on those sales.
At December 31, 1997 and 1996, investments in bonds, with an
admitted asset value of $76,200,000 and $70,700,000,
respectively, 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
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
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
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1997 and 1996 reflects NAIC
adjustments of $4,000,000 and $700,000, respectively, to
decrease amortized cost.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
During 1997, the minimum and maximum lending rates for
mortgage loans were 7.09% and 9.25%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1997, the
Company did not hold any mortgages with interest overdue
beyond one year. 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.
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 209.3 $ 69.3 $ 186.8
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $54.0,
$(6.7) and $51.1 in 1997, 1996 and 1995, respectively) 100.2 (12.4) 94.8
- ------------------------------------------------------------------------ --------- --------- ---------
109.1 81.7 92.0
Less federal income taxes on realized gains 77.8 28.4 48.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 31.3 $ 53.3 $ 43.9
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly-owned subsidiaries is summarized as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
- -----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
- -----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
- -----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
- -----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
- ------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
- ------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
- ------------------------------------------------------------ --------- --------- --------- ---------
Net income $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,090.7 $ 146.4 $ 406.7 $ 664.3
- -----------------------------------------------------------
Other assets 31.8 17.7 503.1 9.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total admitted assets $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Insurance reserves $ 1,013.5 $ 72.7 $ 261.8 $ 601.1
- -----------------------------------------------------------
Other liabilities 41.3 18.7 597.2 22.1
- -----------------------------------------------------------
Capital and surplus 67.7 72.7 50.8 50.2
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total liabilities and capital and surplus $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 246.5 $ 104.9 $ 120.8 $ 642.7
- -------------------------------------------------------------
Expenses 247.1 97.1 114.1 661.3
- -------------------------------------------------------------
Net realized gains (losses) (.6) -- -- --
- ------------------------------------------------------------- --------- ----------- ----------- -----------
Net income (loss) $ (1.2) $ 7.8 $ 6.7 $ (18.6)
- ------------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $412,100,000 and
$241,500,000 at December 31, 1997 and 1996, respectively.
The cost basis of investments in subsidiaries as of December
31, 1997 and 1996 was $466,200,000 and $194,000,000,
respectively.
During 1997 and 1996, the Company's insurance subsidiaries
paid dividends of $15,000,000 and $10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate for financial
reporting 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 $78,300,000, $83,600,000
and $103,700,000 in 1997, 1996 and 1995, 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
"policyholders' 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
income 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, 1997 memorandum account balance for
"shareholder's surplus"
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
was $1,905,000,000. Should dividends to the shareholder
exceed 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.
6. 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
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 1,431.0 $ 1,154.5
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 35.9 16.0
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 727.2 $ 241.3 $ 667.7
- ------------------------------------------------------------------------
Insurance ceded 302.9 193.3 453.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net amount included in premiums $ 424.3 $ 48.0 $ 214.6
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and Settlement
Expenses," is net of reinsurance recoveries of
$1,240,500,000, $787,900,000 and $1,407,000,000 for 1997,
1996 and 1995, respectively.
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $ 2.4 $ .8
- ------------------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
- ------------------------------------------------------------------------
Group life 10.6 .2 10.4
- ------------------------------------------------------------------------ --------- --- -----
$ 31.6 $ 5.8 $ 25.8
--------- --- -----
--------- --- -----
</TABLE>
<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
- ------------------------------------------------------------------------ --------- --- -----
$ 48.4 $ 4.8 $ 43.6
--------- --- -----
--------- --- -----
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $2,000,000, $2,600,000 and $8,800,000 in 1997 and
$26,200,000, $3,800,000 and $8,600,000 in 1996,
respectively. During 1996, LNC Administrative Services
Corporation entered into a similar agreement with the
Company with direct premiums written amounting to $7,200,000
and 6,200,000 in 1997 and 1996, respectively. Authority
granted by the managing general agents agreements include
underwriting, claims adjustment and claims payment services.
7. ANNUITY RESERVES
At December 31, 1997, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES (CONTINUED)
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,426.3 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 4,225.8 8
-----------------------------------------------------------------------------
At market value 30,064.7 59
----------------------------------------------------------------------------- --------- ---
36,716.8 72
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 11,657.7 23
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,531.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 50,905.6 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,797.5
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $49,108.1
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
8. 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 maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1997, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In 1998, the Company can pay dividends of
$361,600,000 without prior approval of the Indiana Insurance Commissioner.
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1997, 716,211 shares of LNC common stock were subject to
options granted to Company employees and agents under the stock option
incentive plans of which 370,239 were exercisable on that date. The exercise
prices of the outstanding options range from $23.50 to $75.66. During 1997,
1996 and 1995, 170,789, 72,405 and
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
117,806 options were exercised, respectively, and 1,846, 10,950 and 11,473
options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1997 and 1996 is a net
liability of $516,900,000 and $572,000,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves may be required in the future. 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 reviews reserve levels on an ongoing basis.
During 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 strengthening the disability income
reserve.
Because of continuing adverse experience and worsening projections of future
experience, the Company conducted an additional in-depth review of loss
experience on its disability income business during 1997. As a result of
this study, the reserve level was deemed to be inadequate to meet future
obligations if current incident levels were to continue in the future. In
order to address this situation, the Company strengthened its disability
income reserve by $80,000,000 (pre-tax).
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 policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio.
Accordingly, these liabilities may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1997, 1996 and 1995 was
$29,300,000, $26,400,000 and
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
$22,500,000, respectively. Future minimum rental commitments are as follows
(in millions):
<TABLE>
<S> <C>
1998 $ 18.5
- --------------------------------------
1999 18.9
- --------------------------------------
2000 20.1
- --------------------------------------
2001 20.4
- --------------------------------------
2002 20.7
- --------------------------------------
Thereafter 152.2
- -------------------------------------- ---------
$ 250.8
---------
---------
</TABLE>
The future commitments include amounts for space and equipment to be used by
the personnel that were added on January 2, 1998 as a result of the purchase
of a block of individual life and annuity business (see NOTE 12).
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for providing information technology services for the Fort Wayne
operations. Annual costs are estimated to range from $33,600,000 to
$56,800,000.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Industry regulations prescribe the maximum
coverage that the Company can retain on an individual insured. Prior to
December 31, 1997, the Company limited its maximum coverage that it retained
on an individual to $3,000,000. Based on a review of the capital and
business in-force (including the addition of the block of business described
in NOTE 12), effective in January 1998, the Company changed the amount it
will retain on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been reinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1997, the
reserves associated with these reinsurance arrangements totaled
$1,760,000,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1997, the Company has provided $12,400,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding
receivables from the ceding company, which are secured by future profits on
the reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $8,200,000 and $4,300,000 at December 31, 1997
and 1996, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1997, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage depends on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
not have a material adverse affect on the financial position or results of
operations of the Company.
Two lawsuits involve alleged fraud in the sale of interest sensitive
universal life and whole life insurance policies. These two suits have been
filed as class actions against the Company, although the court has not
certified a class in either case. Plaintiffs seek unspecified damages and
penalties for themselves and on behalf of the putative class while the
relief sought in these cases in substantial, the cases are in the early
stages of litigation, and it is premature to make assessments about
potential loss, if any. Management intends to defend these suits vigorously.
The amount of liability, if any, which may arise as a result of these suits
cannot be reasonably estimated at this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent 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
--------------------
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Mortgage loan pass-through
certificates $ 41.6 $ 50.3
- ------------------------------
Real estate partnerships -- .5
- ------------------------------ --------- ---------
$ 41.6 $ 50.8
--------- ---------
--------- ---------
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans to finance their projects. In some cases, the terms of these
arrangements involve guarantees by each of the partners to indemnify the
mortgagor in the event a partner is unable to pay its principal and interest
payments. In addition, the Company has sold commercial mortgage loans
through grantor trusts which issued pass-through certificates. The Company
has agreed to repurchase any mortgage loans which remain delinquent for 90
days at a repurchase price substantially equal to the outstanding principal
balance plus accrued interest thereon to the date of repurchase. It is
management's opinion that the value of the properties underlying these
commitments is sufficient that in the event of default the impact would not
be material to the Company. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1997 and 1996.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
Government obligations, increased liabilities associated with reinsurance
agreements and foreign exchange risks. In addition, the Company is subject
to the risks associated with changes in the value of its derivatives;
however, such changes in value generally are offset by changes in the value
of the items being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1996 1997 1997 1996 1996
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,900.0 $5,500.0 $13.9 $ .9 $20.8 $ 8.2
---------------------------------
Swaptions 1,752.0 672.0 6.9 6.9 11.0 10.6
---------------------------------
Financial futures contracts -- 147.7 -- -- (2.4) (2.4)
---------------------------------
Interest rate swaps 10.0 -- -- (1.8) -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,662.0 6,319.7 20.8 6.0 29.4 16.4
Foreign currency derivatives:
Forward contracts 163.1 251.5 5.4 5.4 .2 (.2)
---------------------------------
Foreign currency options -- 43.9 -- -- .6 .4
---------------------------------
Foreign currency swaps 15.0 15.0 -- (2.1) -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
178.1 310.4 5.4 3.3 .8 (1.9)
-------- -------- -------- ----- -------- ------
$6,840.1 $6,630.1 $26.2 $ 9.3 $30.2 $ 14.5
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements and contracts at December
31 is a follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
- -----------------------------------
New contracts -- 390.0 50.0 15.0 1,080.0 672.0
- -----------------------------------
Terminations and maturities (600.0) -- (50.0) (615.0) -- --
- ----------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ----------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES INTEREST RATE SWAPS
CONTRACTS
------------------------------------------
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 147.7 $ -- $ -- $ 5.0
- ------------------------------------------------------------
New contracts 88.3 7,918.8 10.0 --
- ------------------------------------------------------------
Terminations and maturities (236.0) (7,771.1) -- (5.0)
- ------------------------------------------------------------ --------- --------- --------- ---------
Balance at end of year $ -- $ 147.7 $ 10.0 $ --
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
----------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
- --------------------------------------
New contracts 833.1 406.9 -- 1,168.8 -- --
- --------------------------------------
Terminations and maturities (921.6) (171.1) (43.9) (1,224.1) -- --
- -------------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1998 through 2003, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($13,900,000 as of December 31, 1997) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2002 and 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of
fluctuating interest rates. The premium paid for the swaptions is included
in other assets ($6,900,000 as of December 31, 1997) 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
Government 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 Government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts 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.
INTEREST RATE SWAPS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreements the stream of variable coupon payments generated from the bonds,
and in turn, receives a fixed payment from the counterparty at a
predetermined interest rate. The net receipts/payments from interest rate
swaps are recorded in net investment income.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts,
foreign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$7,000,000, $6,900,000 and $5,600,000 in 1997, 1996 and 1995, respectively.
Deferred losses of $2,600,000 as of December 31, 1997, 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 securities.
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, foreign
currency options and foreign currency swaps. However, the Company does not
anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value for such agreements with each counterparty if the net market
value is in the Company's favor. At December 31, 1997, the exposure was
$11,700,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair values of mortgage loans on real estate are established
using a discounted cash flow method based on credit rating, maturity and
future income. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for
the deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted
cash flow calculations. These calculations are based on interest rates
currently offered on similar contracts with maturities that are consistent
with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other companies in the insurance industry are monitoring the related actions
of the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate
partnerships and mortgage loan pass-through certificates. Based on
historical performance where repurchases have been negligible and the
current status, which indicates none of the loans are delinquent, the fair
value liability for the guarantees related to the mortgage loan pass-through
certificates is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, interest rate swaps, foreign currency options and foreign
currency swaps. Fair values for these contracts are based on current
settlement values. These values are based on: 1) quoted market prices for
the foreign currency exchange contracts and financial future contracts and;
2) brokerage quotes that utilize pricing models or formulas using current
assumptions for all other swaps and agreements.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1997 1996
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 18,560.7 $ 19,798.6 $ 19,389.6 $ 20,194.4
- -----------------------------------------------
Preferred stock 257.3 268.7 239.7 248.5
- -----------------------------------------------
Unaffiliated common stock 436.0 436.0 358.3 358.3
- -----------------------------------------------
Mortgage loans on real estate 3,012.7 3,179.2 2,976.7 3,070.9
- -----------------------------------------------
Policy loans 660.5 648.3 626.5 612.7
- -----------------------------------------------
Other investments 335.5 335.5 282.7 282.7
- -----------------------------------------------
Cash and short-term investments 2,133.0 2,133.0 759.2 759.2
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,324.2) (16,887.6) (17,871.6) (17,333.0)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (1,267.0) (1,294.6) (1,799.7) (1,835.4)
--------------------------------------------
Short-term debt (120.0) (120.0) (100.0) (100.0)
- -----------------------------------------------
Derivatives 26.2 9.3 26.5 13.8
- -----------------------------------------------
Investment commitments -- (.5) -- (.6)
- -----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation's affiliate. The
transaction was completed in the form of a reinsurance transaction, which
resulted in a ceding 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. LLANY was required by the
New York Department 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 1997, LNC contributed 25,000,000 shares of common stock of American
States Financial Corporation ("American States") to the Company. American
States is a property casualty insurance holding company of which LNC owned
83.3%. The contributed common stock was accounted for as a capital
contribution equal to the fair value of the common stock received by the
Company. Subsequently, the American States common stock owned by the
Company, along with all other American States common stock owned by LNC and
its affiliates, was sold. The Company received proceeds from the sale in the
amount of $1,175,000,000. The Company recognized no gain or loss on the sale
of its portion of the common stock due to the receipt of such stock at fair
value.
On January 2, 1998, the Company issued a surplus note to LNC in return for
$500,000,000 in cash. The note calls for the Company to pay, on or before
March 31, 2028, the principal amount of the note and interest quarterly at a
6.56% annual rate. LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
12. ACQUISITIONS AND SALES OF SUBSIDIARIES (CONTINUED)
anniversary date of the note, but not before January 2, 2003. Any payment of
interest or repayment of principal may be paid only out of excess surplus
(as defined in the note) and is subject to the approval of the Commissioner
of the Indiana Department of Insurance.
Proceeds from the sale of the Company's American States common stock, as
well as proceeds from the surplus note, were used to finance an indemnity
reinsurance transaction whereby the Company reinsured 100% of a block of
individual life insurance and annuity business from CIGNA Corporation. The
Company paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of
the reinsurance agreement, which will result in a decrease to surplus in
1998 of approximately $1,000,000,000. Operating results generated by this
block of business after the closing date will be included in the Company
financial statements from the closing date. At the time of closing, this
block of business had statutory liabilities of $4,658,200,000 that became
the Company's obligation. The company also received assets, measured on a
historical statutory basis, equal to the liabilities. During 1997, this
block produced premiums, fees and deposits of $1,051,000,000 and earnings of
$87,200,000 on a statutory basis. The Company also expects to pay
$30,000,000 to cover expenses associated with the reinsurance agreement and
to record a charge of approximately $12,000,000 during 1998 to cover certain
costs of integrating the existing operations with the new block of business.
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional
offices. For providing these selling and marketing services, the Company
paid LFGI override commissions and operating expense allowances of
$61,600,000, $56,300,000 and $43,300,000 in 1997, 1996 and 1995,
respectively. LFGI incurred expenses of $5,500,000, $15,700,000 and
$10,400,000 in 1997, 1996 and 1995, respectively, in excess of the override
commissions and operating expense allowances received from the Company,
which the Company is not required to reimburse. Effective in January 1998,
the Company and LFGI agreed to increase the override commission expense and
eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1997 and 1996 include the
Company's participation in a short-term investment pool with LNC of
$325,600,000 and $175,100,000, respectively. Related investment income
amounted to $15,500,000, $15,300,000 and $21,100,000 in 1997, 1996 and 1995,
respectively. Other liabilities at December 31, 1997 and 1996 include
$120,000,000 and $100,000,000, respectively, of notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $48,500,000, $34,100,000 and
$24,900,000 in 1997, 1996 and 1995, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 11.9 $ 17.9 $ 17.6
- ----------------------
Insurance ceded 100.3 302.8 214.4
- ----------------------
</TABLE>
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 245.5 $ 312.7
- ------------------------
Future policy benefits
and claims ceded 997.2 891.8
- ------------------------
Amounts recoverable on
paid and unpaid losses 30.4 31.2
- ------------------------
Reinsurance payable on
paid losses 5.3 2.7
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,115.4 1,062.4
- ------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $280,900,000 and $314,200,000 at December 31, 1997 and 1996,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1997 and 1996, LNC had guaranteed $229,100,000 and $239,200,000,
respectively, of these letters of credit. At December 31, 1997, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $130,700,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
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 detailed
operations of the separate accounts are not included in the accompanying
financial statements. Fees charged on separate account policyholder deposits
are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,821,800,000, $4,148,700,000 and $3,068,200,000 in 1997, 1996 and 1995,
respectively. Reserves for separate accounts with assets at fair value were
$30,560,700,000 and $23,047,800,000 at December 31, 1997 and 1996,
respectively. All reserves are subject to discretionary withdrawal at market
value. Substantially all of the Company's separate accounts are
nonguaranteed.
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of
various Separate Accounts:
Transfers to separate accounts $ 4,824.0 $ 4,149.6
- ------------------------------------------------------------
Transfers from separate accounts (2,943.8) (2,058.5)
- ------------------------------------------------------------ --------- ---------
Net transfer to separate accounts as reported in the
Company's NAIC Annual Statement -- Summary of Operations $ 1,880.2 $ 2,091.1
- ------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $ 1962.6
- ----------------------------------------
Effect of AVR errors -- 37.6 (37.6)
- ----------------------------------------
Effect of change in investment
limitations (57.0) -- (57.0)
- ---------------------------------------- --------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
- ---------------------------------------- --------- ----------- --------
--------- ----------- --------
</TABLE>
16. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The inability to properly
recognize date sensitive electronic information and transfer data between
systems could cause errors or even a complete systems failure which would
result in a temporary inability to process transactions correctly and engage
in normal business
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
activities. The Company is redirecting a large portion of its internal
information technology efforts and contracting with outside consultants to
update its systems to accommodate the year 2000. Also, the Company has
initiated formal communications with critical parties that interface with
the Company's systems to gain an understanding of their progress in
addressing Year 2000 Issues. While the Company is making every effort to
address its own systems and the systems with which it interfaces, it is not
possible to provide assurance that operational problems will not occur. The
Company presently believes that with the modification of existing computer
systems, updates by vendors and conversion to new software and hardware, the
Year 2000 Issue will not pose significant operational problems for its
computer systems. In addition, the Company is developing contingency plans
in the event that, despite its best efforts, there are unresolved year 2000
problems. If the remediation efforts noted above are not completed timely or
properly, the Year 2000 Issue could have a material adverse impact on the
operation of the Company's business.
During 1997 and 1996, the Company incurred expenditures of approximately
$5,500,000 ($3,600,000 after-tax) to address this issue. The Company's
financial plans for 1998 through 2000 include expected expenditures of an
additional $20,000,000 ($13,000,000 after-tax) on this issue. The cost of
addressing Year 2000 Issues and the timeliness of completion will be closely
monitored by management and are based on managements's current best
estimates which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. Nevertheless, there can be no
guarantee that these estimated costs will be achieved and actual results
could differ significantly from those anticipated. Specific factors that
might cause such differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer problems and other uncertainties.
S-30
<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,
1997 and 1996, 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, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally 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 position of The
Lincoln National Life Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1997.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
February 5, 1998
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C> <C>
Investment income earned:
Government bonds $ 52.8
-----------------------------------------------------------------------------------------
Other bonds (unaffiliated) 1,471.6
-----------------------------------------------------------------------------------------
Preferred stocks (unaffiliated) 23.5
-----------------------------------------------------------------------------------------
Common stocks (unaffiliated) 8.3
-----------------------------------------------------------------------------------------
Common stocks of affiliates 15.0
-----------------------------------------------------------------------------------------
Mortgage loans 257.2
-----------------------------------------------------------------------------------------
Real estate 92.2
-----------------------------------------------------------------------------------------
Premium notes, policy loans and liens 37.5
-----------------------------------------------------------------------------------------
Cash on hand and on deposit 1.0
-----------------------------------------------------------------------------------------
Short-term investments 69.3
-----------------------------------------------------------------------------------------
Other invested assets 21.9
-----------------------------------------------------------------------------------------
Derivative instruments (10.0)
-----------------------------------------------------------------------------------------
Aggregate write-ins for investment income 16.3
----------------------------------------------------------------------------------------- ---------
Gross investment income $ 2,056.6
- ---------------------------------------------------------------------------------------------------- ---------
---------
Real estate owned (cost, less encumbrances) $ 585.2
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans (unpaid balance):
Farm mortgages $ 0.1
-----------------------------------------------------------------------------------------
Residential mortgages 3.1
-----------------------------------------------------------------------------------------
Commercial mortgages 3,009.5
----------------------------------------------------------------------------------------- ---------
Total mortgage loans $ 3,012.7
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans by standing (unpaid balance):
Good standing $ 2,974.1
----------------------------------------------------------------------------------------- ---------
---------
Good standing with restructured terms $ 38.5
----------------------------------------------------------------------------------------- ---------
---------
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------------------------------------- ---------
---------
Foreclosure in process $ 0.1
----------------------------------------------------------------------------------------- ---------
---------
Other long-term assets (statement value) $ 281.5
- ---------------------------------------------------------------------------------------------------- ---------
---------
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks of subsidiaries $ 466.2
- ----------------------------------------------------------------------------------------------- ---------
---------
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 3,140.1
------------------------------------------------------------------------------------------
Over 1 year through 5 years 5,182.8
------------------------------------------------------------------------------------------
Over 5 years through 10 years 5,772.8
------------------------------------------------------------------------------------------
Over 10 years through 20 years 3,275.3
------------------------------------------------------------------------------------------
Over 20 years 3,270.6
------------------------------------------------------------------------------------------ ---------
Total by maturity $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Bonds by class (statement value):
Class 1 $13,879.0
------------------------------------------------------------------------------------------
Class 2 5,215.6
------------------------------------------------------------------------------------------
Class 3 848.0
------------------------------------------------------------------------------------------
Class 4 668.8
------------------------------------------------------------------------------------------
Class 5 23.6
------------------------------------------------------------------------------------------
Class 6 6.6
------------------------------------------------------------------------------------------ ---------
Total by class $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Total bonds publicly traded $16,457.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Total bonds privately placed $ 4,184.5
- ----------------------------------------------------------------------------------------------- ---------
---------
Preferred stocks (statement value) $ 257.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Unaffiliated common stocks (market value) $ 436.0
- ----------------------------------------------------------------------------------------------- ---------
---------
Short-term investments (cost or amortized cost) $ 2,080.9
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps owned (statement value) $ 20.8
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps written (statement value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Swap and forward agreements open (statement value) $ 5.4
- ----------------------------------------------------------------------------------------------- ---------
---------
Futures contracts open (current value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Cash on deposit $ 52.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance in-force:
Ordinary $ 108.6
------------------------------------------------------------------------------------------ ---------
---------
Group life $ 31.2
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 5.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance policies with disability provisions in-force:
Ordinary $ 5.5
------------------------------------------------------------------------------------------ ---------
---------
Group life $ --
------------------------------------------------------------------------------------------ ---------
---------
Supplementary contracts in-force:
Ordinary -- not involving life contingencies:
Amount on deposit $ --
------------------------------------------------------------------------------------------ ---------
---------
Income payable $ 0.8
------------------------------------------------------------------------------------------ ---------
---------
Ordinary -- involving life contingencies:
Income payable $ 3.0
------------------------------------------------------------------------------------------ ---------
---------
Group -- not involving life contingencies:
Income payable $ 1.1
------------------------------------------------------------------------------------------ ---------
---------
Group -- involving life contingencies:
Income payable $ --
------------------------------------------------------------------------------------------ ---------
---------
Annuities:
Ordinary:
Immediate -- amount of income payable $ 71.8
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- fully paid account balance $ 0.7
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- not fully paid account balance $ 264.0
------------------------------------------------------------------------------------------ ---------
---------
Group:
Amount of income payable $ 0.3
------------------------------------------------------------------------------------------ ---------
---------
Fully paid account balance $ 0.1
------------------------------------------------------------------------------------------ ---------
---------
Not fully paid account balance $ 72.3
------------------------------------------------------------------------------------------ ---------
---------
Accident and health insurance -- premiums in-force:
Ordinary $ 166.0
------------------------------------------------------------------------------------------ ---------
---------
Group $ 77.7
------------------------------------------------------------------------------------------ ---------
---------
Deposit funds and dividend accumulations:
Deposit funds account balance $16,507.3
------------------------------------------------------------------------------------------ ---------
---------
Dividend accumulations -- account balance $ 114.4
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-34
<PAGE>
THE 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, 1997 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
Instructions and agrees to or is included in the amounts
reported in The Lincoln National Life Insurance Company's 1997
Statutory Annual Statement as filed with the Indiana Department
of Insurance.
S-35
<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 audit of the statutory-basis
financial statements and, in our opinion, is fairly stated in
all material respects in relation to the statutory-basis
financial statements taken as a whole.
February 5, 1998
S-36
