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AMERICAN LEGACY ESTATE BUILDER
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
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Home Office Location and Administrative Mailing Address:
The Lincoln National Life Insurance Co.
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, IN 46801
Telephone Number: 1-800-4LINCOLN
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This prospectus describes a flexible premium variable life insurance contract
(the "policy") offered by The Lincoln National Life Insurance Company ("Lincoln
Life", "we," the "company").
The Class 2 shares of the funds (the "funds") of the American Variable Insurance
Series (the "series") are available through the Lincoln Life Flexible Premium
Variable Life Account F ("Separate Account"). Each fund has its own investment
objective. The policy owner (the "owner" or "you") is the person named in the
policy schedule who has all of the policy ownership rights. You should review
each fund's prospectus, which describes each fund in detail before making your
decision. The funds available through the Separate Account are:
- - 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
This policy is designed to provide life insurance protection. Review your
personal financial objectives and discuss them with a qualified financial
counselor before you buy a variable life insurance policy. This policy may, or
may not, be appropriate for your individual financial goals. The value of the
policy depends on the investment results of the funding options you select.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance contract with the policy. This
prospectus and the prospectuses of the Funds, furnished with this prospectus,
should be read carefully to understand the policy being offered.
TO BE VALID, THIS PROSPECTUS MUST HAVE THE CURRENT MUTUAL FUNDS' PROSPECTUSES
WITH IT. KEEP ALL FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS A
CRIMINAL OFFENSE TO STATE OTHERWISE.
THIS POLICY MAY NOT BE AVAILABLE IN ALL STATES, AND THIS PROSPECTUS ONLY OFFERS
THE POLICY FOR SALE IN JURISDICTIONS WHERE SUCH OFFER AND SALE ARE LAWFUL.
Prospectus Dated: May 1, 1999
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TABLE OF CONTENTS
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SUMMARY OF THE POLICY 1
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LINCOLN LIFE AND THE SEPARATE ACCOUNT
Lincoln Life 6
The General Account 6
The Separate Account 6
Fund participation agreement 7
The American Variable Insurance Series 7
The investment advisor 7
Addition, deletion or substitution of investments 7
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THE POLICY
Requirements for issuance of a policy 8
Units and unit values 8
Premium payment and allocation of premiums 9
Dollar cost averaging program 10
Effective date and record date 10
Right to examine policy 11
Policy termination 11
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CHARGES AND DEDUCTIONS
Surrender charges 12
Cost of insurance charges 12
Policy value charge 13
Other policy charges 13
Charges against the Separate Account 13
Reduction of charges 14
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POLICY BENEFITS
Death benefit 14
Policy changes 16
Policy value 16
Transfer between subaccounts 17
Transfer to and from General Account 17
Withdrawals 17
Loans 18
Policy lapse and reinstatement 19
No lapse benefit 19
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Surrender of the policy 19
Proceeds and payment options 19
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GENERAL PROVISIONS
The contract 20
Suicide 20
Representations and contestability 21
Incorrect age or sex 21
Change of owner or beneficiary 21
Assignment 21
Reports and records 21
Projection of benefits and values 22
Postponement of payments 22
Accelerated Benefit Election Rider 22
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DISTRIBUTION OF THE POLICY 22
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FEDERAL TAX MATTERS
Tax status of the policy 23
Tax treatment of policy benefits 24
Taxation of the Separate Account 26
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VOTING RIGHTS 26
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STATE REGULATION OF LINCOLN LIFE AND THE SEPARATE ACCOUNT 27
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SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS 27
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PREPARING FOR YEAR 2000 27
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LEGAL PROCEEDINGS 29
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EXPERTS 29
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ADDITIONAL INFORMATION 29
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OFFICERS & DIRECTORS OF LINCOLN NATIONAL LIFE INSURANCE CO. 30
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APPENDIX A: Illustrations of policy values 32
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FINANCIAL STATEMENTS
Separate Account Financials F-1
Company Financials S-1
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SUMMARY OF THE POLICY
Your policy is a flexible premium variable life insurance policy, which provides
for the payment of a death benefit to a beneficiary upon the insured's death.
The policy's value will change with the investment performance of the funds you
select. Policy values may be accessed through loans, withdrawals, and
surrenders. Regulations in your state may vary Policy provisions.
Key Policy Features:
- - A death benefit with a "no lapse benefit" that guarantees that your policy
will stay in force even though net investment results and policy charges might
otherwise cause your policy to lapse (see page 19); and
- - Limited flexible premium payments with a minimum initial premium of $10,000
(see page 9);
You may use the net cash surrender value of your policy (what you would get if
you surrendered the policy) to pay the monthly deductions and continue the
policy in force as long as sufficient value is available. Be careful; if the
investment options you choose do not do as well as you expect, there may not be
enough value to continue your policy inforce without more premium payments.
Charges against policy values for the cost of insurance (see page 12) increase
as the insured gets older. Unless the policy is "in the corridor", the death
benefit will be the specified amount regardless of the net cash surrender value
when the insured dies. See page 15.
You may borrow within described limits against your policy. You may surrender
the policy in full or withdraw part of its value. Loans against and surrenders
of a modified endowment contract ("MEC") may have adverse tax effects. The
taxation of life insurance death benefits and distributions is complex; see
"Federal tax matters" on page 23. The taxation of loans, withdrawals and
surrenders from a life insurance policy which is a MEC is generally less
favorable than from a non-MEC. Consult your tax advisor. A surrender charge is
applied if the policy is totally surrendered.
INITIAL CHOICES TO BE MADE
The initial owner of the policy (the "owner" or "you") is named in the "policy
schedule" and has all of the policy ownership rights. If no owner is named, the
insured (the person whose life is insured under the policy) is the owner. If a
policy has been absolutely assigned, the assignee is the owner.
You, as the owner, have three important initial choices to make:
- - your death benefit amount; and
- - the amount of premium you want to pay; and
- - how your premium is allocated among the funding options you select.
DEATH BENEFIT AMOUNT
We pay the death benefit to the beneficiary(ies), calculated on the date the
insured died, less outstanding loan account balances, other outstanding amounts
due, and surrendered amounts.
You designate the beneficiary in the application, and may change the beneficiary
by request in writing to Lincoln Life. If no beneficiary survives the insured,
you or your estate will receive the benefit.
Sometimes, due to poor investment results and to cost of insurance charges,
additional premium payments are needed to keep your policy in force.
Your no lapse benefit guarantees your policy will not lapse for a specific
length of time. Currently, for an insured age 75 or younger on the policy date,
the no lapse benefit expires 10 years after that date (1 year for older ages).
The policy date is the earlier of the date we receive the full initial premium
or
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the date on which we approve the policy for issue. The policy date is set forth
in your policy. We reserve the right to lengthen or shorten this benefit for
future new policies. See page 19.
You may also apply for an Accelerated Benefit Election Rider. See page 22.
AMOUNT OF PREMIUM PAYMENT
When you decide how much premium to pay, you should decide whether you would be
willing to have your policy taxed as a MEC. Premium payments may be changed
within the limits described on page 9. If your policy lapses because your
monthly deductions are larger than the net cash surrender value, you may
reinstate your policy. See page 19.
The initial premium, paid at policy issue, must be at least 80%, and is normally
100%, of the federal maximum premium limitation at issue (as defined in Section
7702 of the Internal Revenue Code of 1986 as amended, the "Code"). 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, in any amount and at any frequency.
In most instances your policy will be a MEC because your initial premium will
exceed the Code's 7-pay limitation on premium payments (the "7-pay limitation")
on the policy. That is, your paid premium will exceed the total premiums paid
for a similar policy having fully funded benefits in the first seven policy
years.
When you first receive your policy you will have 10 days (more in some states)
to look it over. This is called the "right-to-examine" period. During this time
period your initial premium payment will be deposited in our General Account.
See page 11.
HOW ARE MY PREMIUMS PROCESSED?
You determine in the application what portions of net premiums are to be
allocated to the General Account and/or the various subaccounts of the Separate
Account. Your initial net premiums are automatically allocated to the Lincoln
Life General Account. After the record date, the policy value and all subsequent
net premiums will automatically be invested according to your instructions. 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.
SELECTION OF FUNDING VEHICLES
You must choose the fund(s) in which you want to place each net premium payment.
Ten subaccounts make up the Separate Account, the "variable" part of the
contract. Each subaccount invests exclusively in the shares of a specified fund.
If the mutual fund(s) you select goes up in value, the cash value of your policy
(net of charges and expenses) also goes up. If the funds lose value, so does the
cash value of your policy.
You may also choose to place all or part of your premium payment into the
General Account. Premium payments put into the General Account become part of
Lincoln Life's General Account, do not share the investment experience of the
Separate Account and have a guaranteed minimum interest rate of 4% per year. For
additional information on the General Account, see page 6.
WHAT FUNDS ARE AVAILABLE TO SELECT?
You can allocate amounts to one or more subaccounts of the Separate Account.
Your investment amount is the portion of the policy value allocated to the
Separate Account. The Separate Account is Lincoln Life Flexible Premium Variable
Life Account F, established by Lincoln Life to receive and invest net premiums
paid under the policy. Currently you may select from the Class 2 shares of the
American Variable Insurance Series, which consists of ten funds:
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GLOBAL SMALL CAPITALIZATION FUND -- The fund seeks to make your investment grow
over time by investing primarily in stocks of smaller companies located around
the world that typically have market capitalizations of $50 million to $1.2
billion. The fund is designed for investors seeking capital appreciation through
stocks. Investors in the fund should have a long-term perspective and be able to
tolerate potentially wide price fluctuations.
GLOBAL GROWTH FUND -- The fund seeks to make your investment grow over time by
investing primarily in common stocks of companies located around the world. The
fund is designed for investors seeking capital appreciation through stocks.
Investors in the fund should have a long-term perspective and be able to
tolerate potentially wide price fluctuations.
GROWTH FUND -- The fund seeks to make your investment grow by investing
primarily in common stocks of companies that appear to offer superior
opportunities for growth of capital. The fund is designed for investors seeking
capital appreciation through stocks. Investors in the fund should have a
long-term perspective and be able to tolerate potentially wide price
fluctuations.
INTERNATIONAL FUND -- The fund seeks to make your investment grow over time by
investing primarily in common stocks of companies located outside the United
States. The fund is designed for investors seeking capital appreciation through
stocks. Investors in the fund should have a long-term perspective and be able to
tolerate potentially wide price fluctuations.
GROWTH-INCOME FUND -- The fund seeks to make your investment grow and provide
you with income over time by investing primarily in common stocks or other
securities which demonstrate the potential for appreciation and/or dividends.
The fund is designed for investors seeking both capital appreciation and income.
ASSET ALLOCATION FUND -- The fund seeks to provide you with high total return
(including income and capital gains) consistent with preservation of capital
over the long-term by investing in a diversified portfolio of common stocks and
other equity securities; bonds and other intermediate and long-term debt
securities, and money market instruments (debt securities maturing in one year
or less).
HIGH-YIELD BOND FUND -- The fund seeks to provide you with a high level of
current income and secondarily capital appreciation by investing primarily in
lower quality debt securities (rated Ba or BB or below by Moody's Investors
Service, Inc. or Standard & Poor's Corporation), including those of non-U.S.
issuers. The fund may also invest in equity securities that provide an
opportunity for capital appreciation.
BOND FUND -- The fund seeks to maximize your level of current income and
preserve your capital by investing primarily in bonds. The fund is designed for
investors seeking income and more price stability than stocks, and capital
preservation over the long-term.
U.S. GOVERNMENT/AAA-RATED SECURITIES FUND -- The fund seeks to provide you with
a high level of current income, as well as preserve your investment. The fund
invests primarily in securities that are guaranteed by the "full faith and
credit" pledge of the U.S. Government and securities that are rated AAA or Aaa
by Moody's Investors Service, Inc. or Standard & Poor's Corporation or unrated
but determined to be of equivalent quality.
CASH MANAGEMENT FUND -- The fund seeks to provide you an opportunity to earn
income on your cash reserves while preserving the value of your investment and
maintaining liquidity by investing in a diversified selection of high quality
money market instruments.
For more detail, see the prospectus for the American Variable Insurance Series.
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WHAT CHARGES AND DEDUCTIONS ARE MADE FROM MY POLICY?
SURRENDER CHARGE. We deduct surrender charges if you surrender the policy within
the first twelve years. The surrender charge will not exceed $43 per $1000 of
specified amount or 6.5% of premiums paid. For more details on surrender
charges, see page 12.
COST OF INSURANCE CHARGE. Your policy has a cost of insurance charge which
reduces the policy value on each monthly anniversary day. The cost of insurance
charge ceases when the insured attains age 100. See page 12 for more detailed
information.
POLICY VALUE CHARGE. The policy value is the sum of all amounts allocated to the
Separate Account and to the General Account at any time, plus any outstanding
loan. 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. We deduct a $5.00 monthly administrative charge
from the policy value on any monthly anniversary day when the policy value is
less than $50,000.
CHARGES AGAINST THE SEPARATE ACCOUNT. A daily mortality and expense risk charge
currently .0016438% (equivalent to an annual rate of .60%) is imposed on the
daily net assets of the Separate Account. This charge is guaranteed not to
exceed .00246575% (equivalent to an annual rate of .90%).
No deductions are currently made from the Separate Account for federal or state
income taxes, but we reserve the right to do so.
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 investment advisory fees and other 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 .36% to .82%. 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 .25%
annually of each fund's net assets. See page 14 for more detailed information.
DO I HAVE ACCESS TO THE POLICY VALUES?
You may borrow up to 100% of the net cash surrender value. 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 the amount of the withdrawal. Both
loans and withdrawals reduce future policy values and may have adverse federal
income tax consequences.
If you decide to borrow against your policy, annual interest will be charged in
arrears. The loan amount will be deducted proportionately from the funding
vehicles you have at that time. The loan amount, or loan account value, also
earns interest at a current annual rate of 6%, with a minimum of 4%. A loan
reduces the specified amount and voids the no lapse benefit, if applicable,
until the loan is repaid. See page 18.
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 right-to-examine period, you may return
the policy for a refund of all premiums paid. After the right-to-examine period,
you may surrender the policy and receive its net cash surrender value.
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BUYING VARIABLE LIFE INSURANCE
The policies this prospectus offers are variable life insurance policies which
provide death benefit protection. Investors not needing death benefit protection
should consider other forms of investment, as there are extra costs and expenses
of providing the insurance feature. Further, life insurance purchasers who are
risk-averse or want more predictable premium levels of benefits may be more
comfortable buying more traditional, non-variable life insurance. Variable life
insurance is a flexible tool for financial and investment planning for persons
needing death benefit protection, willing to assume risk, and to monitor
investment choices they have made.
A customer may be able to pay a large single premium, using the policy primarily
as a savings and investment vehicle for potential tax advantages. A parent or
grandparent may find a policy on the life of a child or grandchild a useful
gifting opportunity, or the basis of an investment program for the donee.
Sufficient premiums must always be paid to keep a policy inforce, and there is a
risk of lapse if premiums are too low in relation to the insurance amount and if
investment results are less favorable than anticipated. The no lapse provision
may help to assure a death benefit even if investment results are unfavorable.
Flexibility also results from being able to select, monitor and change
investment choices within a policy. With the wide variety of fund options
available, it is possible to fine tune an investment mix and change it to meet
changing personal objectives or investment conditions. Policy owners should
monitor their investment choices on an ongoing basis.
Variable life insurance has significant tax advantages under current tax law. A
transfer of values from one fund to another within the policy generates no
taxable gain or loss. Investment income and realized capital gains within a fund
are automatically reinvested without being taxed to the policy owners. Policy
values accumulate on a tax-deferred basis. These situations would normally
result in immediate tax liabilities in the case of direct investment in mutual
funds.
The ability of policy owners to access policy values is easily achieved with
variable life insurance. Unless a policy has become a "modified endowment
contract" (see page 24), an owner can borrow policy values tax-free, without
surrender charges, and at very low net interest cost. Policy loans can be a
source of retirement income. By contrast, variable annuity withdrawals are
generally taxable to the extent of accumulated income, may be subject to a
charge deducted from the policy value, a surrender charge (see page 12), and
will result in penalty tax if made before age 59 1/2.
Accumulated policy values may under limited circumstances also be part of the
eventual death benefit payable. If a policy is heavily funded and investment
performance is very favorable, the death benefit may increase because of tax law
requirements that the death benefit be a certain multiple of policy value
depending on the Insured's age (see page 15). The death benefit is income-tax
free and may, with proper estate planning, be estate-tax free.
Certain costs and expenses of variable life insurance ownership which are
directly related to policy values (i.e. asset-based costs) are not unlike those
incurred through investment in mutual funds or variable annuities. Surrender
charges and premium taxes may be applicable to your policy; these charges are
explained in more detail beginning on page 12. The significant additional costs
of variable life insurance is the "cost of insurance" charge which is imposed on
the "amount at risk" (approximately the death benefit, less policy loans and
less policy value). This charge increases with age, and varies by underwriting
classification, smoking status, and in most states by gender. The effect of
these costs and expenses can be seen in illustrations in this prospectus (see
Appendix A).
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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. ("LNC"), 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,
collectively Lincoln Financial Group, LNC 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 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 ("1940 Act").
THE SEPARATE ACCOUNT
We established the Separate Account on May 29, 1987 to fund variable life
insurance policies. Although the assets of the Separate Account are our
property, the laws of Indiana under which the Separate Account was established
provide that the Separate Account assets attributable to the policies are not
chargeable with liabilities arising out of any other business which we 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
it supports. 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 Separate Account has been registered as an investment company under the 1940
Act and meets the definition of "separate account" under federal securities
laws. Registration with the Securities and Exchange Commission does not involve
supervision of the management or investment practices or policies of the
Separate Account or Lincoln Life by the Commission.
The Separate Account is divided into ten subaccounts. Each subaccount invests
exclusively in Class 2 shares of one of the funds comprising the American
Variable Insurance Series: the Global Small Capitalization 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 we may
conduct. The funds are also invested in by variable annuity contract holders.
Should we become aware of any material irreconcilable conflict, either potential
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existing, between its variable annuity and variable life insurance contract
owners, we have agreed to notify the series' Board of Trustees and to remedy, at
our own expense, any such conflict.
There is no assurance that any fund of the American Variable Insurance Series
will achieve its stated investment objective.
FUND PARTICIPATION AGREEMENT
Lincoln Life has entered into an agreement with a fund group under which Lincoln
Life makes ten funds available under the policies and performs certain
administrative services.
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
1940 Act.
The series has ten separate portfolios of funds. 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, pursuant to Rule 18f-3 under
the 1940 Act, 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.
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 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 at the annual rate of 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.
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 a 12b-1 plan. 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 ("CRMC"), 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. CRMC is located at
333 South Hope Street, Los Angeles, Calif. 90071 and 135 South State College
Boulevard, Brea, Calif. 92821, and is registered with the Commission as an
investment adviser.
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. We reserve 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
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Account may purchase. We reserve 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 Commission, to the extent
required by the 1940 Act 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.
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. Lincoln Life may eliminate or establish one or more subaccounts when
marketing needs, tax 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.
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 1940 Act, 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
our administrative mailing address. The minimum acceptable premium is $10,000. A
policy will generally be issued only to insureds 80 years of age or younger who
supply evidence of insurability satisfactory to us. Acceptance is subject to our
underwriting rules and, except in California, we reserve the right to reject an
application for any reason.
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 you purchase 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.
8
<PAGE>
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, you have 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. We reserve
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 lapse and
reinstatement.) Subject to the initial premium requirements and the maximum
premium limitations established under section 7702 of the Code, you may make
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.
PREMIUM LIMITATIONS. In no event can the total of all premiums paid 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, we
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. Further premiums will
not 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 MEC. A policy will
become a MEC 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 MEC unless it has been purchased with cash
values transferred from a pre-existing life insurance policy which is not a MEC.
Any such must meet 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". Taxation of loans, withdrawals, and surrenders of a
life insurance policy that becomes a MEC is generally less favorable than such
distributions from a life insurance policy that is not a MEC.
ALLOCATION OF NET PREMIUMS. In the application for a policy, you 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
9
<PAGE>
to the policy on the later of the policy date or the date the premium is
received. The record date is the date the policy is recorded on the books of
Lincoln Life as an in-force policy, and may coincide with the policy date. Net
premiums will continue to be allocated to the 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 your 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 your 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 us.
You can also make arrangements with us 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 4% per year. You
should periodically review your allocations of premiums and values in light of
market conditions, interest rates, and overall estate planning requirements.
DOLLAR COST AVERAGING PROGRAM
You may wish to make 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, at least $5000 is 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.
DCA has the effect, when purchases are made at fluctuating prices, of reducing
the aggregate average cost per unit to less than the average of the unit values
on the same purchase dates. However, participation in the DCA program does not
assure the owner of a greater return on purchases under the program, nor will it
prevent or necessarily alleviate losses in a declining market.
There are no charges associated with the DCA program. In order to participate in
(or terminate participation in) the DCA program, the owner must complete a
written request on a form suitable to us.
EFFECTIVE DATE AND RECORD 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, and is specified in the policy. Policy years, months and anniversaries are
measured from the policy date.
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.
The date the policy is recorded on the books of Lincoln Life as an in-force
policy is the record date. 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.
10
<PAGE>
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 our administrative mailing address or to the 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, we will continue to keep the policy in force
despite insufficient net cash surrender value (See No lapse benefit, page 19).
CHARGES AND DEDUCTIONS
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 pages.
11
<PAGE>
SURRENDER CHARGES
Surrender charges are deducted upon surrender of the policy during the first 12
policy years. The 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>
DURING POLICY YEARS PERCENT OF PREMIUMS PAID
<S> <C>
- --------------------------------------------------------------------------------------------
1 and 2 6.5%
3 and 4 6.0%
5 and 6 5.5%
7 and 8 5.0%
9 and 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 current cost of insurance charges depend currently upon these variables:
1) the amount of the initial premium as a percentage of the federal maximum
premium limitation;
2) the classification of the insured;
3) the amount of policy value; and
4) 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 percentage 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 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.
12
<PAGE>
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 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
We deduct a $5.00 monthly administrative charge 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. We deduct $20 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.
We also reserve the right to deduct from the policy value any amounts charged
for federal or other Governmental income taxes that might result from a change
in the current tax laws. Current tax laws do not charge income taxes on the
policy value.
CHARGES AGAINST THE SEPARATE ACCOUNT
Several charges are made directly or indirectly against the Separate Account and
have the effect of reducing net investment results credited to the subaccounts.
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. 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 .36% to .82%. Each of the funds also deducts a 12b-1 fee
for Class 2 shares equal to .25% annually of each fund's net assets. These
charges and other fund expenses have the effect of reducing the investment
results credited to the subaccounts.
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:
13
<PAGE>
<TABLE>
<CAPTION>
Total Annual Fund
Operating Total Fund
Expenses Without Operating Expenses
Asset Other 12(b)1 Waivers or Total Waivers with Waivers or
Fund Management Fee* Expenses* Fees* Reductions* and Reductions* Reductions*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Small
Capitalization** .79% .03% .25% 1.07% 0.0 1.07%
Global Growth .69% .06% .25% 1.00% 0.0 1.00%
Growth .40% .01% .25% .66% 0.0 .66%
International .57% .09% .25% .91% 0.0 .91%
Growth-Income .35% .01% .25% .61% 0.0 .61%
Asset Allocation .44% .01% .25% .70% 0.0 .70%
High-Yield Bond .50% .01% .25% .76% 0.0 .76%
Bond .51% .02% .25% .78% 0.0 .78%
U.S. Gov't/AAA-Rated .49% .01% .25% .75% 0.0 .75%
Cash Management .44% .01% .25% .70% 0.0 .70%
</TABLE>
*Expressed as an annual percentage of each fund's average daily net assets.
**These expenses are annualized. The fund did not begin operations until April
30, 1998.
See the funds' prospectus for more complete information about the expenses of
the funds.
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, death benefits will be payable sooner than
expected. 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 LNC or CRMC 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
As long as the policy remains in force (see Policy lapse and reinstatement),
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.) 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.
14
<PAGE>
The initial death benefit on your variable life insurance policy is equal to the
specified amount you choose at the time of purchase. The specified amount is the
minimum death benefit payable under the policy so long as the policy remains
inforce. The death benefit proceeds will be reduced by any outstanding loans and
any unpaid charges, and increased by unearned loan interest. We may also impose
certain limitations on the maximum specified amount allowable.
The death benefit is calculated as 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 table below lists the specified percentage applicable to the given attained
age:
<TABLE>
<CAPTION>
ATTAINED SPECIFIED ATTAINED SPECIFIED ATTAINED SPECIFIED
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
40 OR
YOUNGER 250% 59 134% 91 104%
41 243 60 130 92 103
42 236 61 128 93 102
43 229 62 126 94 101
44 222 63 124 95 OR 100
45 215 64 122 OLDER
46 209 65 120
47 203 66 119
48 197 67 118
49 191 68 117
50 185 69 116
51 178 70 115
52 171 71 113
53 164 72 111
54 157 73 109
55 150 74 107
56 146 75 105
57 142 THROUGH
58 138 90
</TABLE>
EXAMPLES. For this example, assume that the insured dies at 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.
15
<PAGE>
POLICY CHANGES
The specified amount may not be voluntarily increased or decreased. 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 4% per year 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;
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 4% per year 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.
16
<PAGE>
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 12
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 accepted accounting practices and applicable laws and
regulations.
The charges listed above are explained further in "Charges against the Separate
Account."
TRANSFER BETWEEN SUBACCOUNTS
Any time after the record date, you 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 us. Transfers may be made by telephone request only if the
owner has previously authorized telephone transfer in writing on a form suitable
to us. We 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, we will not be liable for any loss arising from any
telephone transfer. Transfers will take effect on the date that the request in
writing or by telephone is received at our administrative address. 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, you may also request to transfer amounts from
the Separate Account to the General Account. 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 the General 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, you may make a cash withdrawal from
the policy value. The amount and timing of the withdrawal is subject to certain
limitations. The minimum withdrawal is $1000. Only one withdrawal may be made
during a policy year. During the first 10 policy years, the
17
<PAGE>
maximum withdrawal is 10% of the net cash surrender value at the time of the
withdrawal. 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 from the General Account and
subaccounts in proportion to the values of each.
LOANS
You may, upon written request, borrow against the policy. You must execute a
written loan agreement with us. The policy will be the sole security for the
loan, and the policy must be assigned to us 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 our administrative mailing address. Payments
may be postponed under certain circumstances. (See Postponement of payments.)
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.)
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.) In addition, the presence of any outstanding policy
loan reduces death benefit proceeds and negates the no lapse benefit (if
present) until the loan is repaid.
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 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%. Any interest
not paid when due will be added to the existing loan amount and will also be
charged interest at the same policy loan rate.
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 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.
EFFECT OF LOANS ON POLICY CHARGES. The existence of a policy loan on a monthly
anniversary day does not directly 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.
18
<PAGE>
LOAN REPAYMENTS. Loan repayments will ordinarily be allocated to the General
Account and the subaccounts in accord with the most recent premium allocation.
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 we send 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.
You may reinstate a lapsed policy within five years after the date of lapse by
submitting evidence of insurability satisfactory to us 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 (except in Illinois). The no lapse benefit guarantees that the
policy will not lapse due to insufficient net cash surrender value prior to the
no lapse benefit expiration date 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. We 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.
SURRENDER OF THE POLICY
You 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 us. The request will be effective the date the request is received
at our administrative mailing address, or at a later date if you so request.
Ordinarily, the surrender will be processed within seven days from the date the
request for surrender is received. The tax treatment of a surrendered policy is
discussed under Federal tax matters.
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
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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 us at the
time payment is to be made. Under certain conditions, payment options will only
be available with our consent. 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, our approval 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.
You may elect any payment option while the insured is alive and may change that
election if that right has been reserved. When the proceeds become payable to a
beneficiary, the beneficiary may elect any payment option if the proceeds are
available to the beneficiary in one sum.
The option date is any date the policy terminates under the termination
provision.
Any proceeds payable under the policy may also be settled under any other method
of settlement offered by us on the option date. Additional interest as we may
determine 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 us 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 our profit or surplus
earnings.
SUICIDE
If the insured commits suicide, while sane or insane, within two years from the
policy date, our total liability 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.
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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 us. The change will
be effective the day that the request is received at our administrative mailing
address. We 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, 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 us. We reserve 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. 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 us unless it is in writing
on a form suitable to us and is received at our administrative mailing office.
We will not be responsible for the validity of any assignment, and reserve the
right to require the policy for endorsement of any assignment. An assignment of
the policy may have tax consequences.
REPORTS AND RECORDS
We will maintain all records relating to the Separate Account. We 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, we will
provide to policy owners semi-annually, or otherwise as may be required by
regulations under the 1940 Act, a report containing information about the
operations of the funds.
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We have entered into an agreement with Delaware Management Company, Inc., and
Delaware Service Company, Inc. 2005 Market Street, Philadelphia, PA 19203,
affiliates of Lincoln Life, to provide accounting services to the Separate
Account.
PROJECTION OF BENEFITS AND VALUES
At the owner's request, we will provide a report to the owner which shows
projected future results. The request must be in writing to our administrative
mailing address on a form suitable to us. The report will be comparable in
format to those shown in Appendix A 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 us. 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 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 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. This rider is available to issue ages 0 through 80.
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. The rider 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 offers the policy in all jurisdictions where it is licensed to do
business. The home office address of Lincoln Life is 1300 South Clinton Street,
Fort Wayne, Ind. 46802. American Fund Distributors, Inc. ("AFD"), the principal
underwriter for the policies, is registered with the 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.
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The policy will be sold by individuals who, in addition to being appointed as
life insurance agents, are also our 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
appointed as our agents. 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 situations, 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 our resources.
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 our understanding of the
present federal income tax laws as they are currently interpreted by the
Internal Revenue Service ("IRS"). No representation is made as to the likelihood
of continuation of the present federal income tax laws or of the current
interpretation by the IRS. 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 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.
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, we nonetheless believe 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
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not satisfy section 7702, we 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, we reserve 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. We do not have control over the American Variable
Insurance Series or its investments. Nonetheless, we believe 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, we reserve 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
us to impose limitations on a contract owner's right to control the investment.
It is not known whether any such guidelines would have a retroactive effect.
The following discussion assumes that the policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. We believe 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.
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. 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 MEC under section 7702A of the Code.
2. MODIFIED ENDOWMENT CONTRACTS. A policy may be treated as a MEC 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 MECs. In addition, if a policy is "materially changed," it
may be treated as a MEC depending upon such relationship after such change. The
premium limitation and material change rules for determining whether a policy is
a
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MEC are extremely complex. Moreover, due to the policy's flexibility,
classification of a policy as a MEC will depend upon the circumstances of each
policy. A prospective owner should contact a competent tax advisor before
purchasing a policy to determine the circumstances in which the policy would be
a MEC. 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 MEC.
We will monitor premiums paid into each policy to determine when a premium
payment will exceed the 7-pay limitation and cause the policy to become a MEC.
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 providing for fully funded benefits at the end of the seven
year period. If the owner has given us instructions that the policy should not
be allowed to become a MEC, 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
us instructions to the contrary, however, the premium will be paid into the
policy and a letter of notification of MEC status will be sent to the owner. The
letter of notification will include the available options, if any, for remedying
the MEC status of the policy.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Policies classified as MECs are subject to the following tax rules:
(1) 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.
(2) loans taken from, or secured by, such a policy are treated as distributions
from such a policy and taxed accordingly.
(3) 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 MEC 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 MEC 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 MEC, 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 is not a MEC
are subject to the 10 percent additional income tax.
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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. You should consult a competent tax advisor concerning the rules and
limitations.
6. INVESTMENT IN THE POLICY. Investment in the policy means
(1) the aggregate amount of any premiums or other consideration paid for a
policy, minus
(2) 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 MEC, to the extent such amount is excluded
from gross income, will be disregarded), plus,
(3) the amount of any loan from, or secured by, a policy that is a MEC to the
extent that such amount is included in the gross income of the owner.
7. MULTIPLE POLICIES. All MECs that are issued by us (or our affiliates) to the
same owner during any calendar year are treated as one MEC for purposes of
determining the amount includible in gross income under section 72(e) of the
Code.
8. TAXATION OF ACCELERATED BENEFIT ELECTION RIDER. We believe that any benefits
paid under the Accelerated Benefit Election Rider generally will be excludable
from the recipient's income.
TAXATION OF THE SEPARATE ACCOUNT
We do 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, we determine that we may incur such taxes, we may assess a charge for
those taxes from the policy.
VOTING RIGHTS
To the extent required by law, we will vote shares of the funds held in the
Separate Account at regular and special shareholder meetings of the funds. Votes
will be computed in accordance with instructions received from persons having
voting interests in the Separate Account. If, however, the 1940 Act or any
regulation thereunder should be amended or if the present interpretation thereof
should change, and as a result we determine that we are permitted to vote the
fund shares in our own right, we may elect to do so.
The number of votes which 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 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. We 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.
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DISREGARD OF VOTING INSTRUCTIONS. We 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,
we 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 we
reasonably disapprove 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 we determine that the change would have an adverse effect on our
General Account in that the proposed investment policy for any fund may result
in overly speculative or unsound investments. In the event we do 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.
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, we are 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 our directors and employees. 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, we hold the Separate Account's assets
in an open account in lieu of stock certificates.
PREPARING FOR YEAR 2000
Many existing computer programs use only two digits in the date field to
identify the year. If left uncorrected these programs, which were designed and
developed without considering the impact of the upcoming change in the century,
could fail to operate or could produce erroneous results when processing dates
after December 31, 1999. For example, for a bond with a stated maturity date of
July 1, 2000, a computer program could read and store the maturity date as July
1, 1900. This problem is known by many names, such as the "Year 2000 Problem",
"Y2K" and the "Millenium Bug."
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The Year 2000 Problem affects virtually all computer programs worldwide. It can
cause a computer system to suddenly stop operating. It can also result in a
computer corrupting vital company records, and the program could go undetected
for a long time. For our products, if left unchecked it could cause such
problems as purchase payment, collection and deposit errors; claim payment
difficulties; accounting errors; erroneous unit values; and difficulties or
delays in processing transfers, surrenders and withdrawals. In a worst case
scenario, this could result in a material disruption to the operations both of
Lincoln Life and of Delaware Service Company Inc. (Delaware), the provider of
the accounting and valuation services for the Separate Account.
However, both companies are wholly owned by Lincoln National Corporation (LNC),
which has had Year 2000 processes in place since 1996. LNC projects aggregate
expenditures in excess of $92 million for its Y2K efforts through the year 2000.
Both Lincoln Life and Delaware have dedicated Year 2000 teams and steering
committees that are answerable to their counterparts in LNC.
In light of the potential problems discussed above, Lincoln Life, as part of its
Year 2000 updating process, has assumed responsibility for correcting all
high-priority Information Technology (IT) systems which service the Separate
Account. Delaware is responsible for updating all its high-priority IT systems
to support these vital services. The Year 2000 effort, for both IT and non-IT
systems, is organized into four phases:
- - awareness-raising and inventory of all assets (including third-party agent and
vendor relationships;
- - assessment and high-level planning and strategy;
- - remediation of affected systems and equipment; and
- - testing to verify Year 2000 readiness.
Both companies are currently on schedule to have their high-priority IT systems
remediated and tested to demonstrate readiness by June 30, 1999. During the
third and fourth quarters of 1999 additional testing of the environment will
continue. Both companies are currently on schedule to have their high-priority
non-IT systems (elevators, heating and ventilation, security systems, etc.)
remediated and tested by October 31, 1999.
The work on Year 2000 issues has not suffered significant delays; however, some
uncertainty remains. Specific factors that give rise to this uncertainty include
(but are certainly not limited to) a possible loss of technical resources to
perform the work; failure to identify all susceptible systems; and
non-compliance by third parties whose systems and operations impact Lincoln
Life. In a report dated February 26, 1999, entitled Investigating the Impact of
the Year 2000 Technology Problem, S. Rpt. 106-10, the U.S. Senate Special
Committee on the Year 2000 Technology Problem expressed its concern that
"Financial services firms ... are particularly vulnerable to ... the risk that a
material customer or business partner will fail, as a result of the computer
problems, to meet its obligations."
One important source of uncertainty is the extent to which the key trading
partners of Lincoln Life and of Delaware will be successful in their own
remediation and testing efforts. Lincoln Life and Delaware have been monitoring
the progress of their trading partners; however, the efforts of these partners
are beyond our control.
Lincoln Life and Delaware expect to have completed their necessary remediation
and testing efforts prior to December 31, 1999. However, given the nature and
complexity of the problem, there can be no guarantee by either company that
there will not be significant computer problems after December 31, 1999.
28
<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 they include claims
for unspecified or substantial punitive damages and similar types of relief in
addition to amounts 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.
Lincoln Life is presently defending three lawsuits in which Plaintiffs seek to
represent national classes of policyholders in connection with alleged fraud,
breach of contract and other claims relating to the sale of interest-sensitive
universal and participating whole life insurance policies. As of the date of
this prospectus, the courts have not certified a class in any of the suits.
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 preliminary stages of litigation, and it is premature to
make assessments about potential loss, if any. Management is defending these
suits vigorously. The amount of liability, if any, which may ultimately arise as
a result of these suits cannot be reasonably determined 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 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 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.
Legal matters included in this prospectus have been examined by Robert A.
Picarello, Esq. as stated in the opinion filed as an exhibit to the registration
statement.
Actuarial matters included in this prospectus have been examined by Vaughn W.
Robbins, FSA as stated in the opinion filed as an exhibit to the registration
statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the 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.
29
<PAGE>
OFFICERS AND DIRECTORS OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The following persons are Directors and Officers of Lincoln Life. Except as
indicated, the address of each is 1300 South Clinton Street, Fort Wayne, IN
46802, and each has been employed by Lincoln Life or its affiliates for more
than five years.
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION(S)
WITH REGISTRANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- -------------------------------------------------------------------------------------------
<S> <C>
NANCY J. ALFORD Vice President [4/96-present], (Second Vice President
Vice President [1/90-4/96]), Lincoln National Life Insurance Co.
- -----------------------------
ROLAND C. BAKER President [1/95-present], First Penn-Pacific Life Insurance
Vice President and Director Co. Formerly: Chairman and CFO [7/88-1/95], Baker, Ralish,
1801 S. Meyers Roadpel Shipley & Politzer, Inc.
Oakbrook Terrace, Ill. 60181
- -----------------------------
JON A. BOSCIA President, Chief Executive Officer and Director, Lincoln
Director National Corp. [1/98-present] (Formerly: President and Chief
200 East Berry Street Executive Officer [10/96-1/98]; Chief Operating Officer
Fort Wayne, IN 46802 [5/94-10/96]), Lincoln National Life Insurance Co.,
President [7/91-5/94] Lincoln Investment Management Inc.
- -----------------------------
JOHN GOTTA Senior Vice President and General Manager (formerly Vice
Senior Vice President President) [1/98-present], Lincoln National Life Insurance
350 Church Street Co. Formerly: Senior Vice President, CIGNA [3/96-12/97];
Hartford, CT 06103 Vice President, Connecticut Mutual Life Insurance Company
[8/94-3/96]; Vice President, CIGNA [3/93-8/94]
- -----------------------------
J. MICHAEL HEMP President [11/96-Present], Lincoln Financial Advisors Corp.;
Senior Vice President Senior Vice President (formerly Vice President)
350 Church Street [10/95-Present], Lincoln National Life Insurance Co.
Hartford, CT 06103 Formerly: Regional Chief Executive Officer [11/79-10/95],
Lincoln Dallas RMO.
- -----------------------------
STEPHEN H. LEWIS Senior Vice President, [5/94-present], Lincoln National Life
Senior Vice President Insurance Co. Formerly: President [2/85-5/94], First
Penn-Pacific Life Insurance Co.
- -----------------------------
H. THOMAS MCMEEKIN President [5/94-present], Lincoln Investment Management,
Director Inc. (formerly Executive Vice President [2/92-11/92], Senior
200 East Berry Street Fort Vice President [11/87-2/92]); Executive Vice President
Wayne, Ind. 46802 [5/94-Present], (formerly Senior Vice President
[11/92-5/94]) Lincoln National Corporation
- -----------------------------
ARTHUR S. ROSS Vice President [8/91-present], Lincoln National Life
Vice President Insurance Co.
- -----------------------------
LAWRENCE T. ROWLAND Executive Vice President [10/96-present] (formerly Senior
Executive Vice President and Vice President [1/93-10/96]), Lincoln National Life
Director Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- -----------------------------
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
KEITH J. RYAN Vice President and Controller [4/99-present] Formerly:
Vice President and Controller Senior Vice President [2/98-4/99]; Vice President, Chief
Financial Officer and Assistant Treasurer [1/96-present];
Controller [6/95-12/95], Business Controls Director
[11/90-6/95], Lincoln National Life Insurance Co.
- -----------------------------
GABRIEL L. SHAHEEN President and Chief Executive Officer
President, Chief Executive [1/98-present]Formerly: Chairman and Managing Director,
Officer and 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].
- -----------------------------
TODD R. STEPHENSON Senior Vice President, Chief Financial Officer and Assistant
Senior Vice President, Chief Treasurer [4/99-present] Formerly: Vice President and
Financial Officer and Assistant Secretary [1/98-4/99], Senior Vice President,
Assistant Treasurer Lincoln Financial Advisors Corporation [1/98-4/99], Senior
Vice President, Treasurer and Chief Financial Officer,
American States Insurance Company [2/95-12/97], and Vice
President - Corp. Acct., American States Insurance Company
[5/92-2/95].
- -----------------------------
RICHARD C. VAUGHAN Executive Vice President and Chief Financial Officer
Director [1/95-present] (formerly Senior Vice President [6/92-1/95]),
200 East Berry Street Lincoln National Corp.
Fort Wayne, Ind. 46802
- -----------------------------
MICHAEL R. WALKER Vice President [1/96-present], Lincoln National Life
Vice President Insurance Co. Formerly: Vice President [3/96-1/96],
Employers Health Insurance Co.
- -----------------------------
ROY V. WASHINGTON Vice President [7/96-present], Lincoln National Life
Vice President 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-present], Lincoln National Life
Senior Vice President Insurance Co. Formerly: Executive Vice President and Chief
Operating Officer [11/88-3/95], The Associate Group.
</TABLE>
31
<PAGE>
APPENDIX A
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. The
illustrations assume 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 .52%), 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 .02%) so that the actual numbers in the illustrations are net
of these charges and expenses. Thus, a 12% gross annual return yields a net
annual return of 10.61% using current charges, and 10.31% using guaranteed
charges. Similarly, gross annual returns of 6% and 0% yield net annual returns
of 4.61% and -1.39% respectively using current charges, and 4.31% 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.
32
<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 current charges
<TABLE>
<CAPTION>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
------------------------------- ------------------------------- -------------------------------
PREMIUMS ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL RETURN OF ANNUAL RETURN OF 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 $ 9,569 $10,145 $ 10,720 $ 8,919 $ 9,495 $ 10,070
2 11,025 32,890 32,890 32,890 9,154 10,293 11,497 8,504 9,643 10,847
3 11,576 32,890 32,890 32,890 8,755 10,444 12,334 8,155 9,844 11,734
4 12,155 32,890 32,890 32,890 8,370 10,598 13,237 7,770 9,998 12,637
5 12,763 32,890 32,890 32,890 8,000 10,756 14,211 7,450 10,206 13,661
- ------
6 13,401 32,890 32,890 32,890 7,643 10,916 15,261 7,093 10,366 14,711
7 14,071 32,890 32,890 32,890 7,300 11,080 16,399 6,800 10,580 15,899
8 14,775 32,890 32,890 32,890 6,969 11,248 17,634 6,469 10,748 17,134
9 15,513 32,890 32,890 32,890 6,651 11,418 18,980 6,201 10,968 18,530
10 16,289 32,890 32,890 32,890 6,345 11,593 20,450 5,895 11,143 20,000
- ------
15 20,789 32,890 32,890 42,352 5,238 13,170 31,606 5,238 13,170 31,606
20 26,533 32,890 32,890 60,013 4,276 15,007 49,191 4,276 15,007 49,191
25 33,864 32,890 32,890 89,248 3,439 17,145 76,938 3,439 17,145 76,938
30 43,219 32,890 32,890 129,349 2,711 19,634 120,887 2,711 19,634 120,887
40 70,400 32,890 32,890 317,074 1,528 25,904 301,975 1,528 25,904 301,975
- ------
50 114,674 32,890 35,493 743,267 632 35,142 735,908 632 35,142 735,908
60 186,792 32,890 53,820 1,968,503 252 53,820 1,968,503 252 53,820 1,968,503
70 304,264 32,890 83,901 5,318,535 219 83,901 5,318,534 219 83,901 5,318,534
</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 = .52% (current
average); 12b-1 fees = .25%; mortality and expense risk = .60%; and
miscellaneous expense = .02%. Values illustrated are also net of cost of
insurance charges, monthly administrative charge, and policy value charge.
33
<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>
POLICY VALUE NET CASH SURRENDER VALUE
DEATH BENEFIT -------------------------------- -------------------------------
--------------------------------- ASSUMING ASSUMING
PREMIUMS ASSUMING HYPOTHETICAL GROSS HYPOTHETICAL GROSS
END ACCUMULATED HYPOTHETICAL GROSS ANNUAL RETURN OF ANNUAL RETURN OF
OF AT 5% ANNUAL RETURN OF -------------------------------- -------------------------------
POLICY INTEREST --------------------------------- 0% 0% 6%
YEAR PER YEAR 0% GROSS 6% GROSS 12% GROSS GROSS 6% GROSS 12% GROSS GROSS GROSS 12% GROSS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------
1 $ 10,500 $32,890 $32,890 $ 32,890 $9,507 $10,085 $ 10,663 $8,857 $9,435 $ 10,013
2 11,025 32,890 32,890 32,890 9,011 10,160 11,376 8,361 9,510 10,726
3 11,576 32,890 32,890 32,890 8,512 10,223 12,144 7,912 9,623 11,544
4 12,155 32,890 32,890 32,890 8,006 10,273 12,971 7,406 9,673 12,371
5 12,763 32,890 32,890 32,890 7,492 10,307 13,864 6,942 9,757 13,314
------
6 13,401 32,890 32,890 32,890 6,967 10,325 14,828 6,417 9,775 14,278
7 14,071 32,890 32,890 32,890 6,429 10,321 15,870 5,929 9,821 15,370
8 14,775 32,890 32,890 32,890 5,872 10,293 16,999 5,372 9,793 16,499
9 15,513 32,890 32,890 32,890 5,292 10,237 18,222 4,842 9,787 17,772
10 16,289 32,890 32,890 32,890 4,686 10,148 19,552 4,236 9,698 19,102
------
15 20,789 32,890 32,890 39,794 1,267 9,639 29,697 1,267 9,639 29,697
20 26,533 0 32,890 55,520 0 7,540 45,508 0 7,540 45,508
25 33,864 0 32,890 81,245 0 1,984 70,039 0 1,984 70,039
30 43,219 0 0 116,002 0 0 108,413 0 0 108,413
40 70,400 0 0 275,974 0 0 262,832 0 0 262,832
------
50 114,674 0 0 627,851 0 0 621,635 0 0 621,635
60 186,792 0 0 1,613,811 0 0 1,613,811 0 0 1,613,811
70 304,264 0 0 4,231,684 0 0 4,231,684 0 0 4,231,684
</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 = .52% (current
average); 12b-1 fees = .25%; mortality and expense risk = .90%; and
miscellaneous expense = .02%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
34
<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 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 $ 9,627 $ 10,206 $ 10,785 $ 8,977 $ 9,556 $ 10,135
2 11,025 42,170 42,170 42,170 9,265 10,418 11,637 8,615 9,768 10,987
3 11,576 42,170 42,170 42,170 8,915 10,636 12,560 8,315 10,036 11,960
4 12,155 42,170 42,170 42,170 8,576 10,859 13,562 7,976 10,259 12,962
5 12,763 42,170 42,170 42,170 8,248 11,089 14,649 7,698 10,539 14,099
- ------
6 13,401 42,170 42,170 42,170 7,930 11,324 15,829 7,380 10,774 15,279
7 14,071 42,170 42,170 42,170 7,622 11,566 17,108 7,122 11,066 16,608
8 14,775 42,170 42,170 42,170 7,323 11,814 18,495 6,823 11,314 17,995
9 15,513 42,170 42,170 42,170 7,034 12,069 20,001 6,584 11,619 19,551
10 16,289 42,170 42,170 42,170 6,754 12,331 21,634 6,304 11,881 21,184
- ------
15 20,789 42,170 42,170 45,437 5,770 14,463 33,908 5,770 14,463 33,908
20 26,533 42,170 42,170 65,526 4,887 17,019 53,710 4,887 17,019 53,710
25 33,864 42,170 42,170 98,995 4,096 20,087 85,340 4,096 20,087 85,340
30 43,219 42,170 42,170 145,172 3,387 23,766 135,675 3,387 23,766 135,675
40 70,400 42,170 42,170 360,732 2,182 33,475 343,554 2,182 33,475 343,554
- ------
50 114,674 42,170 48,163 869,792 1,215 47,687 861,180 1,215 47,687 861,180
60 186,792 42,170 73,494 2,303,596 751 73,494 2,303,596 751 73,494 2,303,596
70 304,264 42,170 114,572 6,223,895 653 114,572 6,223,895 653 114,572 6,223,895
</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 = .52% (current
average); 12b-1 fees = .25%; mortality and expense risk = .60%; and
miscellaneous expense = .02%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
35
<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 $ 9,546 $10,124 $ 10,703 $ 8,896 $ 9,474 $ 10,053
2 11,025 42,170 42,170 42,170 9,094 10,244 11,461 8,444 9,594 10,811
3 11,576 42,170 42,170 42,170 8,644 10,358 12,280 8,044 9,758 11,680
4 12,155 42,170 42,170 42,170 8,194 10,465 13,165 7,594 9,865 12,565
5 12,763 42,170 42,170 42,170 7,743 10,564 14,120 7,193 10,014 13,570
- ------
6 13,401 42,170 42,170 42,170 7,288 10,653 15,153 6,738 10,103 14,603
7 14,071 42,170 42,170 42,170 6,828 10,731 16,270 6,328 10,231 15,770
8 14,775 42,170 42,170 42,170 6,360 10,794 17,477 5,860 10,294 16,977
9 15,513 42,170 42,170 42,170 5,880 10,837 18,783 5,430 10,389 18,333
10 16,289 42,170 42,170 42,170 5,386 10,865 20,198 4,936 10,415 19,748
- ------
15 20,789 42,170 42,170 42,170 2,788 11,185 30,919 2,788 11,185 30,919
20 26,533 0 42,170 58,752 0 10,470 48,158 0 10,470 48,158
25 33,864 0 42,170 87,389 0 7,460 75,336 0 7,460 75,336
30 43,219 0 0 126,250 0 0 117,991 0 0 117,991
40 70,400 0 0 304,222 0 0 289,735 0 0 289,735
- ------
50 114,674 0 0 696,168 0 0 689,275 0 0 689,275
60 186,792 0 0 1,789,409 0 0 1,789,409 0 0 1,789,409
70 304,264 0 0 4,692,132 0 0 4,692,132 0 0 4,692,132
</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 = .52% (current
average); 12b-1 fees = .25%; mortality and expense risk = .90%; and
miscellaneous expense = .02%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
36
<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 ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL RETURN OF ANNUAL RETURN OF 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 $24,011 $ 25,454 $ 26,894 $22,386 $ 23,829 $ 25,269
2 27,563 72,400 72,400 72,400 23,059 25,917 28,937 21,434 24,292 27,312
3 28,941 72,400 72,400 72,400 22,142 26,390 31,140 20,642 24,890 29,640
4 30,388 72,400 72,400 72,400 21,259 26,872 33,515 19,759 25,372 32,015
5 31,907 72,400 72,400 72,400 20,409 27,364 36,076 19,034 25,989 34,701
- ------
6 33,502 72,400 72,400 72,400 19,591 27,867 38,844 18,216 26,492 37,469
7 35,178 72,400 72,400 72,400 18,803 28,380 41,862 17,553 27,130 40,612
8 36,936 72,400 72,400 72,400 18,044 28,903 45,165 16,794 27,653 43,915
9 38,783 72,400 72,400 72,400 17,314 29,437 48,785 16,189 28,312 47,660
10 40,722 72,400 72,400 72,400 16,611 29,982 52,805 15,486 28,858 51,680
- ------
15 51,973 72,400 72,400 97,396 14,168 34,578 83,962 14,168 34,578 83,962
20 66,332 72,400 72,400 143,524 12,043 39,928 134,135 12,043 39,928 134,135
25 84,659 72,400 72,400 225,971 10,194 46,156 215,211 10,194 46,156 215,211
30 108,049 72,400 72,400 359,293 8,587 53,545 342,184 8,587 53,545 342,184
40 176,000 72,400 74,025 854,361 5,972 73,292 845,902 5,972 73,292 845,902
- ------
50 286,685 72,400 113,119 2,262,730 4,585 113,119 2,262,730 4,585 113,119 2,262,730
60 466,980 72,400 176,344 6,113,483 3,990 176,344 6,113,483 3,990 176,344 6,113,483
</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 = .52% (current
average); 12b-1 fees = .25%; mortality and expense risk = .60%; and
miscellaneous expense = .02%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
37
<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 ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL RETURN OF ANNUAL RETURN OF 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 $23,770 $ 25,218 $ 26,666 $22,145 $ 23,593 $ 25,041
2 27,563 72,400 72,400 72,400 22,533 25,414 28,465 20,908 23,789 26,840
3 28,941 72,400 72,400 72,400 21,288 25,588 30,417 19,788 24,088 28,917
4 30,388 72,400 72,400 72,400 20,035 25,742 32,538 18,535 24,242 31,038
5 31,907 72,400 72,400 72,400 18,771 25,872 34,847 17,396 24,497 33,472
- ------
6 33,502 72,400 72,400 72,400 17,488 25,973 37,361 16,113 24,598 35,987
7 35,178 72,400 72,400 72,400 16,174 26,033 40,100 14,924 24,783 38,850
8 36,936 72,400 72,400 72,400 14,811 26,039 43,082 13,561 24,789 41,832
9 38,783 72,400 72,400 72,400 13,382 25,975 46,333 12,257 24,850 45,208
10 40,722 72,400 72,400 72,400 11,874 25,830 49,887 10,749 24,705 48,762
- ------
15 51,973 72,400 72,400 90,339 3,271 25,109 77,879 3,271 25,109 77,879
20 66,332 0 72,400 131,148 0 20,527 122,569 0 20,527 122,569
25 84,659 0 72,400 203,420 0 5,182 193,733 0 5,182 193,733
30 108,049 0 0 318,633 0 0 303,460 0 0 303,460
40 176,000 0 0 735,341 0 0 728,060 0 0 728,060
- ------
50 286,685 0 0 1,890,099 0 0 1,890,099 0 0 1,890,099
60 466,980 0 0 4,956,156 0 0 4,956,156 0 0 4,956,156
</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 = .52% (current
average); 12b-1 fees = .25%; mortality and expense risk = .90%; and
miscellaneous expense = .02%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
38
<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 ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL RETURN OF ANNUAL RETURN OF 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 $24,156 $ 25,607 $ 27,057 $22,531 $ 23,982 $ 25,432
2 27,563 81,375 81,375 81,375 23,338 26,231 29,288 21,713 24,606 27,663
3 28,941 81,375 81,375 81,375 22,546 26,872 31,708 21,046 25,372 30,208
4 30,388 81,375 81,375 81,375 21,779 27,529 34,334 20,279 26,029 32,834
5 31,907 81,375 81,375 81,375 21,036 28,204 37,182 19,661 26,829 35,807
- ------
6 33,502 81,375 81,375 81,375 20,316 28,897 40,271 18,941 27,522 38,896
7 35,178 81,375 81,375 81,375 19,619 29,609 43,623 18,369 28,359 42,373
8 36,936 81,375 81,375 81,375 18,944 30,340 47,258 17,694 29,090 46,008
9 38,783 81,375 81,375 81,375 18,290 31,090 51,217 17,165 29,965 50,092
10 40,722 81,375 81,375 81,375 17,656 31,860 55,559 16,531 30,735 54,434
- ------
15 51,973 81,375 81,375 102,868 15,541 37,890 88,679 15,541 37,890 88,679
20 66,332 81,375 81,375 152,214 13,645 45,122 142,256 13,645 45,122 142,256
25 84,659 81,375 81,375 240,239 11,946 53,924 228,800 11,946 53,924 228,800
30 108,049 81,375 81,375 382,997 10,423 64,686 364,759 10,423 64,686 364,759
40 176,000 81,375 94,533 924,126 7,834 93,597 914,977 7,834 93,597 914,977
- ------
50 286,685 81,375 144,459 2,447,499 6,286 144,459 2,447,499 6,286 144,459 2,447,499
60 466,980 81,375 225,200 6,612,695 5,470 225,200 6,612,694 5,470 225,200 6,612,694
</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 = .52% (current
average); 12b-1 fees = .25%; mortality and expense risk = .60%; and
miscellaneous expense = .02%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge and policy value charge.
39
<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 ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL RETURN OF ANNUAL RETURN OF 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 $23,873 $25,321 $ 26,770 $22,248 $23,696 $ 25,145
2 27,563 81,375 81,375 81,375 22,744 25,628 28,682 21,119 24,003 27,057
3 28,941 81,375 81,375 81,375 21,614 25,920 30,752 20,114 24,420 29,252
4 30,388 81,375 81,375 81,375 20,482 26,198 32,998 18,982 24,698 31,498
5 31,907 81,375 81,375 81,375 19,342 26,458 35,435 17,967 25,083 34,060
- ------
6 33,502 81,375 81,375 81,375 18,189 26,695 38,080 16,814 25,320 36,705
7 35,178 81,375 81,375 81,375 17,012 26,899 40,952 15,762 25,649 39,702
8 36,936 81,375 81,375 81,375 15,799 27,061 44,069 14,549 25,811 42,819
9 38,783 81,375 81,375 81,375 14,534 27,167 47,453 13,409 26,042 46,328
10 40,722 81,375 81,375 81,375 13,206 27,207 51,151 12,081 26,082 50,026
- ------
15 51,973 81,375 81,375 92,775 5,826 27,724 79,979 5,826 27,724 79,979
20 66,332 0 81,375 135,241 0 25,004 126,393 0 25,004 126,393
25 84,659 0 81,375 210,281 0 13,199 200,268 0 13,199 200,268
30 108,049 0 0 330,258 0 0 314,531 0 0 314,531
40 176,000 0 0 764,332 0 0 756,764 0 0 756,764
- ------
50 286,685 0 0 1,964,616 0 0 1,964,616 0 0 1,964,616
60 466,980 0 0 5,151,555 0 0 5,151,555 0 0 5,151,555
</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 = .52% (current
average); 12b-1 fees = .25%; mortality and expense risk = .90%; and
miscellaneous expense = .02%. Values illustrated are also net of cost of
insurance charges, monthly administrative charge, and policy value charge.
40
<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 ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL RETURN OF ANNUAL RETURN OF 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 $48,085 $ 51,029 $ 53,914 $44,835 $ 47,779 $ 50,664
2 55,125 85,100 85,100 85,100 46,237 52,080 58,135 42,987 48,830 54,885
3 57,881 85,100 85,100 85,100 44,458 53,152 62,685 41,458 50,152 59,685
4 60,775 85,100 85,100 85,100 42,745 54,246 67,592 39,745 51,246 64,593
5 63,814 85,100 85,100 85,100 41,095 55,362 72,964 38,345 52,612 70,214
- ------
6 67,005 85,100 85,100 90,799 39,507 56,502 78,955 36,757 53,752 76,205
7 70,355 85,100 85,100 96,607 37,978 57,665 85,493 35,478 55,165 82,993
8 73,873 85,100 85,100 102,821 36,506 58,852 92,631 34,006 56,352 90,131
9 77,566 85,100 85,100 109,487 35,089 60,063 100,447 32,839 57,813 98,197
10 81,445 85,100 85,100 116,665 33,724 61,300 109,033 31,474 59,050 106,783
- ------
15 103,946 85,100 85,100 181,889 29,053 71,360 173,228 29,053 71,360 173,228
20 132,665 85,100 87,678 285,980 24,989 83,503 272,362 24,989 83,503 272,362
25 169,318 85,100 103,294 443,543 21,455 98,375 422,422 21,455 98,375 422,422
30 216,097 85,100 118,589 670,379 18,381 117,415 663,741 18,381 117,415 663,741
40 351,999 85,100 181,219 1,775,462 14,653 181,219 1,775,462 14,653 181,219 1,775,462
- ------
50 573,370 85,100 282,505 4,796,974 12,752 282,505 4,796,974 12,752 282,505 4,796,974
</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 = .52% (current
average); 12b-1 fees = .25%; mortality and expense risk = .60%; and
miscellaneous expense = .02%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
41
<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 ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL RETURN OF ANNUAL RETURN OF 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 $47,166 $50,144 $ 53,069 $43,916 $46,894 $ 49,819
2 55,125 85,100 85,100 85,100 44,168 50,177 56,429 40,918 46,927 53,179
3 57,881 85,100 85,100 85,100 40,985 50,086 60,138 37,985 47,086 57,138
4 60,775 85,100 85,100 85,100 37,583 49,820 64,270 34,583 46,820 61,270
5 63,814 85,100 85,100 85,100 33,917 49,359 68,909 31,167 46,609 66,159
- ------
6 67,005 85,100 85,100 85,290 29,929 48,694 74,165 27,179 45,944 71,415
7 70,355 85,100 85,100 90,460 25,543 47,781 80,053 23,043 45,281 77,553
8 73,873 85,100 85,100 95,991 20,660 46,559 86,478 18,160 44,059 83,978
9 77,566 85,100 85,100 101,909 15,164 44,959 93,494 12,914 42,709 91,244
10 81,445 85,100 85,100 108,266 8,912 42,893 100,183 6,662 40,643 98,933
- ------
15 103,946 0 85,100 166,288 0 23,679 158,369 0 23,679 158,369
20 132,665 0 0 257,568 0 0 245,303 0 0 245,303
25 169,318 0 0 393,544 0 0 374,804 0 0 374,804
30 216,097 0 0 585,977 0 0 580,175 0 0 580,175
40 351,999 0 0 1,506,178 0 0 1,506,178 0 0 1,506,178
- ------
50 573,370 0 0 3,949,452 0 0 3,949,452 0 0 3,949,452
</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 = .52% (current
average); 12b-1 fees= .25%; mortality and expense risk = .90%; and miscellaneous
expense = .02%. Values illustrated are also net of cost of insurance charge,
monthly administrative charge, and policy value charge.
42
<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 ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL RETURN OF ANNUAL RETURN OF 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 $48,376 $ 51,337 $ 54,239 $45,126 $ 48,087 $ 50,989
2 55,125 96,100 96,100 96,100 46,797 52,709 58,838 43,547 49,459 55,588
3 57,881 96,100 96,100 96,100 45,268 54,119 63,826 42,268 51,119 60,826
4 60,775 96,100 96,100 96,100 43,788 55,566 69,237 40,788 52,566 66,237
5 63,814 96,100 96,100 96,100 42,353 57,051 75,107 39,603 54,301 72,357
- ------
6 67,005 96,100 96,100 96,100 40,964 58,577 81,475 38,214 55,827 78,725
7 70,355 96,100 96,100 99,921 39,619 60,143 88,426 37,119 57,643 85,926
8 73,873 96,100 96,100 106,602 38,315 61,751 96,038 35,815 59,251 93,538
9 77,566 96,100 96,100 113,744 37,053 63,402 104,353 34,803 61,152 102,103
10 81,445 96,100 96,100 121,400 35,830 65,097 113,458 33,580 62,847 111,208
- ------
15 103,946 96,100 96,100 190,477 31,830 78,090 181,406 31,830 78,090 181,406
20 132,665 96,100 98,360 301,661 28,245 93,677 287,296 28,245 93,677 287,296
25 169,318 96,100 117,993 476,397 25,032 112,374 453,712 25,032 112,374 453,712
30 216,097 96,100 136,842 727,360 22,152 135,487 720,158 22,152 135,487 720,158
40 351,999 96,100 209,112 1,926,374 18,257 209,112 1,926,374 18,257 209,112 1,926,374
- ------
50 573,370 96,100 325,989 5,204,710 15,888 325,989 5,204,710 15,888 325,989 5,204,710
</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 = .52% (current average); 12b-1 fees = .25%;
mortality and expense risk = .60%; and miscellaneous expense = .02%. Values
illustrated are also net of cost of insurance charge, monthly administrative
charge, and policy value charge.
43
<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 ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL RETURN OF ANNUAL RETURN OF 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 $47,488 $50,455 $ 53,368 $44,238 $47,205 $ 50,118
2 55,125 96,100 96,100 96,100 44,870 50,823 57,012 41,620 47,573 53,762
3 57,881 56,100 96,100 96,100 42,131 51,094 60,976 39,131 48,094 57,976
4 60,775 96,100 96,100 96,100 39,245 51,254 65,312 36,245 48,254 62,312
5 63,814 96,100 96,100 96,100 36,177 51,282 70,080 33,427 48,532 67,330
- ------
6 67,005 96,100 96,100 96,100 32,884 51,152 75,355 30,134 48,402 72,605
7 70,355 96,100 96,100 96,100 29,309 50,829 81,233 26,809 48,329 78,733
8 73,873 96,100 96,100 97,494 25,379 50,267 87,833 22,879 47,767 85,333
9 77,566 96,100 96,100 103,714 21,004 49,373 95,150 18,754 47,123 92,900
10 81,445 96,100 96,100 110,363 16,092 48,103 103,143 13,842 45,853 100,893
- ------
15 103,946 0 96,100 170,589 0 36,413 162,466 0 36,413 162,466
20 132,665 0 0 265,940 0 0 253,276 0 0 253,276
25 169,318 0 0 408,245 0 0 388,805 0 0 388,805
30 216,097 0 0 608,565 0 0 602,540 0 0 602,540
40 351,999 0 0 1,564,238 0 0 1,564,238 0 0 1,564,238
- ------
50 573,370 0 0 4,101,695 0 0 4,101,695 0 0 4,101,695
</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 = .52% (current
average); 12b-1 fees = .25%; mortality and expense risk = .90%; and
miscellaneous expense = .02%. Values illustrated are also net of cost of
insurance charge, monthly administrative charge, and policy value charge.
44
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LEGACY
COMBINED LEGACY LIFE ESTATE BUILDER
<S> <C> <C> <C>
- -------------------------------------------------------------------------
ASSETS:
Investments at Market -
Unaffiliated (cost
$73,575,950) $85,534,016 $84,884,070 $649,946
Liability - Payable to The
Lincoln National Life
Insurance Company 2,746 2,736 10
- ------------------------------ ----------- ----------- ---------------
NET ASSETS $85,531,270 $84,881,334 $649,936
- ------------------------------ ----------- ----------- ---------------
----------- ----------- ---------------
</TABLE>
See accompanying notes.
F-1
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
COMBINED
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
NET INVESTMENT INCOME:
- Dividends from Investment Income $ 1,680,962 $ 1,550,226 $1,278,281
- ---------------------------------------
- Dividends from Net Realized Gains
on Investments 8,636,106 5,730,418 2,577,711
- ---------------------------------------
- Mortality and Expense Guarantees:
Legacy Life (857,960) (739,534) (540,498)
Legacy Life (10 Years) (58,975) -- --
Legacy Estate Builder (672) -- --
- --------------------------------------- ----------- ----------- ----------
NET INVESTMENT INCOME 9,399,461 6,541,110 3,315,494
- ---------------------------------------
Net realized and unrealized gain (loss)
on investments:
- Net Realized Gain on Investments 1,703,213 1,463,015 1,163,196
- ---------------------------------------
- Net Change in Unrealized
Appreciation or Depreciation on
Investments 2,432,664 2,258,647 833,877
- --------------------------------------- ----------- ----------- ----------
NET GAIN (LOSS) ON INVESTMENTS 4,135,877 3,721,662 1,997,073
- --------------------------------------- ----------- ----------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $13,535,338 $10,262,772 $5,312,567
- --------------------------------------- ----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying notes.
F-2
<PAGE>
<TABLE>
<CAPTION>
LEGACY LIFE LEGACY ESTATE BUILDER
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------ -------------------------
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME:
- Dividends from Investment Income $ 1,676,051 $ 1,550,226 $1,278,281 $ 4,911 $ -- $ --
- ---------------------------------------
- Dividends from Net Realized Gains
on Investments 8,584,131 5,730,418 2,577,711 51,975 -- --
- ---------------------------------------
- Mortality and Expense Guarantees:
Legacy Life (857,960) (739,534) (540,498) -- -- --
Legacy Life (10 Years) (58,975) -- -- -- -- --
Legacy Estate Builder -- -- -- (672) -- --
- --------------------------------------- ----------- ----------- ---------- ------- ------- -------
NET INVESTMENT INCOME 9,343,247 6,541,110 3,315,494 56,214 -- --
- ---------------------------------------
Net realized and unrealized gain (loss)
on investments:
- Net Realized Gain on Investments 1,692,527 1,463,015 1,163,196 10,686 -- --
- ---------------------------------------
- Net Change in Unrealized
Appreciation or Depreciation on
Investments 2,444,994 2,258,647 833,877 (12,330) -- --
- --------------------------------------- ----------- ----------- ---------- ------- ------- -------
NET GAIN (LOSS) ON INVESTMENTS 4,137,521 3,721,662 1,997,073 (1,644) -- --
- --------------------------------------- ----------- ----------- ---------- ------- ------- -------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $13,480,768 $10,262,772 $5,312,567 $54,570 $ -- $ --
- --------------------------------------- ----------- ----------- ---------- ------- ------- -------
----------- ----------- ---------- ------- ------- -------
</TABLE>
F-3
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
COMBINED
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1 $ 67,938,542 $ 49,781,763 $ 39,546,323
Changes from operations:
- Net Investment Income 9,399,461 6,541,110 3,315,494
- ---------------------------------------
- Net Realized Gain on Investments 1,703,213 1,463,015 1,163,196
- ---------------------------------------
- Net Change in Unrealized
Appreciation or Depreciation on
Investments 2,432,664 2,258,647 833,877
- --------------------------------------- ------------ ------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 13,535,338 10,262,772 5,312,567
- ---------------------------------------
Changes from unit transactions:
Accumulation Units:
- Contract purchases 48,372,978 40,131,156 27,003,328
- ---------------------------------------
- Contract redemptions (44,315,588) (32,237,149) (22,080,455)
- --------------------------------------- ------------ ------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 4,057,390 7,894,007 4,922,873
- --------------------------------------- ------------ ------------ ------------
TOTAL INCREASE IN NET ASSETS 17,592,728 18,156,779 10,235,440
- --------------------------------------- ------------ ------------ ------------
NET ASSETS AT DECEMBER 31 $ 85,531,270 $ 67,938,542 $ 49,781,763
- --------------------------------------- ------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
LEGACY LIFE LEGACY ESTATE BUILDER
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1 $ 67,938,542 $ 49,781,763 $ 39,546,323 $ -- $ -- $ --
Changes from operations:
- Net Investment Income 9,343,247 6,541,110 3,315,494 56,214 -- --
- ---------------------------------------
- Net Realized Gain on Investments 1,692,527 1,463,015 1,163,196 10,686 -- --
- ---------------------------------------
- Net Change in Unrealized
Appreciation or Depreciation on
Investments 2,444,994 2,258,647 833,877 (12,330) -- --
- --------------------------------------- ------------ ------------ ------------ --------- ------- -------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 13,480,768 10,262,772 5,312,567 54,570 -- --
- ---------------------------------------
Changes from unit transactions:
Accumulation Units:
- Contract purchases 47,356,257 40,131,156 27,003,328 1,016,721 -- --
- ---------------------------------------
- Contract redemptions (43,894,233) (32,237,149) (22,080,455) (421,355) -- --
- --------------------------------------- ------------ ------------ ------------ --------- ------- -------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 3,462,024 7,894,007 4,922,873 595,366 -- --
- --------------------------------------- ------------ ------------ ------------ --------- ------- -------
TOTAL INCREASE IN NET ASSETS 16,942,792 18,156,779 10,235,440 649,936 -- --
- --------------------------------------- ------------ ------------ ------------ --------- ------- -------
NET ASSETS AT DECEMBER 31 $ 84,881,334 $ 67,938,542 $ 49,781,763 $ 649,936 $ -- $ --
- --------------------------------------- ------------ ------------ ------------ --------- ------- -------
------------ ------------ ------------ --------- ------- -------
</TABLE>
F-5
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES & ACCOUNT INFORMATION
THE ACCOUNT: Lincoln Life Flexible Premium Variable Life Account F (the
Variable Account) was established as a segregated investment account of
Lincoln National Life Insurance Company (Lincoln Life) on May 29, 1987. The
Variable Account was registered with the Securities and Exchange Commission
on November 24, 1987 under the Investment Company Act of 1940, as amended,
as a unit investment trust, and commenced investment activity on January 4,
1988. The Variable Account consists of two products which are listed below.
- Legacy Life
- Legacy Estate Builder
Effective May 1, 1998, the Legacy Estate Builder policies became available
to clients of Lincoln Life.
The assets of the Variable Account are owned by Lincoln Life. The portion of
the Variable Account's assets supporting the variable life policies may not
be used to satisfy liabilities arising out of any other business of Lincoln
Life.
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles for
unit investment trusts.
INVESTMENTS: The Variable Accounts invests in the American Variable
Insurance Series (AVIS) which consists of ten funds. Growth Income Fund,
Growth Fund, Asset Allocation Fund, High-Yield Bond Fund, U.S.
Government/AAA-Rated Securities Fund, Cash Management Fund, International
Fund, Bond Fund, Global Growth Fund and Global Small Capitalization Fund
(the Funds). AVIS is registered as on open-end investment management
company. Legacy Life and Legacy Estate Builder invest in different classes
of shares of the Funds and these investments are stated at the closing net
asset value per share on December 31, 1998, which approximates fair value.
The difference between cost and fair value is reflected as unrealized
appreciation and depreciation on investments.
Investment transactions are accounted for on a trade date basis. The cost of
investments sold is determined by the average cost method.
DIVIDENDS: Dividends paid to the Variable Account are automatically
reinvested in shares of the Funds on the payable date. Dividend income is
recorded on the ex-dividend date.
FEDERAL INCOME TAXES: Operations of the Variable 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. The Variable Account will
not be taxed as a regulated investment company under Subchapter M of the
Internal Revenue Code. Under current federal income tax law, no federal
income taxes are payable with respect to the Variable Account's net
investment income and the net realized gain on investments.
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
VARIABLE ACCOUNT CHARGES: Amounts are paid to Lincoln Life for mortality and
expense risk charge at a percentage of the current value of the Variable
Account each day. The rates are as follows:
- Legacy Life at a daily rate of .00232876% (.85% on an annual basis)
- Legacy Life (10 year) at a daily rate of .00205479% (.75% on an annual
basis)
- Legacy Estate Builder at a daily rate of .00164383 (.60% on an annual
basis)
For Legacy Life, policies amounts are charged daily to the Variable Account
by Lincoln Life for an administrative charge at
F-6
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
an annual rate of .30% of the average daily net asset value of the Variable
Account for the first ten policy years and .10% for policy years thereafter.
Also, for the first ten policy years, amounts are charged daily to the
Variable Account by Lincoln life for the guaranteed death benefit at annual
rate of .10% of the average daily net asset value of the Variable Account.
For Legacy Estate Builder, Lincoln Life charges a monthly policy value
charge of .10% for the first ten policy years and .01666666% thereafter.
This charge recovers Lincoln Life expenses incurred in the sales and issues
of the policies. In addition Lincoln Life changes a monthly administrative
fee of $5.00 for policy values less than $50,000. Under certain
circumstance, Lincoln Life reserves the right to charge a transfer fee of
$10 for transfers between sub-accounts. Also, a withdrawal charge of $20 is
deducted from the amount of any withdrawal of policy value.
Other charges, which are paid to Lincoln Life by redeeming the Variable
Account units, are for the cost of insurance and contingent surrender
charges. These other charges for 1998, 1997, and 1996 amounted to $711,577,
$627,688, and $521,383, 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 Variable Account Prospectus.
Lincoln Life, upon full surrender of a policy, may charge a surrender
charge. Legacy Life 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. Legacy Estate Builder
surrender charges are deducted if the policy is surrendered during the first
twelve policy years. The maximum rate for surrender charges, which decreases
by policy year, ranges from 6.5% of the total first year premiums paid for
surrenders during the first policy year to 2% for surrenders during the
twelfth policy year.
F-7
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1998:
<TABLE>
<CAPTION>
COMBINED LEGACY LIFE
------------------------ ------------------------
AGGREGATE AGGREGATE AGGREGATE AGGREGATE
COST OF PROCEEDS COST OF PROCEEDS
PURCHASES FROM SALES PURCHASES FROM SALES
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
AVIS Growth Fund $ 7,105,390 $ 3,195,317 $ 6,937,091 $ 3,110,720
- ---------------------------------------
AVIS International Fund 1,523,100 1,200,778 1,510,284 1,200,735
- ---------------------------------------
AVIS Growth Income Fund 8,741,259 3,085,435 8,431,886 2,961,709
- ---------------------------------------
AVIS Asset Allocation Fund 3,928,486 1,973,633 3,615,384 1,853,376
- ---------------------------------------
AVIS Bond Fund 682,207 135,368 676,116 135,353
- ---------------------------------------
AVIS High-Yield Bond Fund 1,179,643 662,278 1,104,860 622,631
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 617,402 702,952 611,339 702,937
- ---------------------------------------
AVIS Cash Management Fund 10,328,154 10,215,336 10,232,622 10,204,859
- ---------------------------------------
AVIS Global Growth Fund 626,475 190,542 541,921 148,266
- ---------------------------------------
AVIS Global Small Capitalization Fund 89,109 2,306 87,072 2,299
- --------------------------------------- ----------- ----------- ----------- -----------
$34,821,225 $21,363,945 $33,748,575 $20,942,885
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
LEGACY ESTATE BUILDER
-----------------------
AGGREGATE AGGREGATE
COST OF PROCEEDS
PURCHASES FROM SALES
<S> <C> <C>
- ----------------------------------------------------------------
AVIS Growth Fund $ 168,299 $ 84,597
- ---------------------------------------
AVIS International Fund 12,816 43
- ---------------------------------------
AVIS Growth Income Fund 309,373 123,726
- ---------------------------------------
AVIS Asset Allocation Fund 313,102 120,257
- ---------------------------------------
AVIS Bond Fund 6,091 15
- ---------------------------------------
AVIS High-Yield Bond Fund 74,783 39,647
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 6,063 15
- ---------------------------------------
AVIS Cash Management Fund 95,532 10,477
- ---------------------------------------
AVIS Global Growth Fund 84,554 42,276
- ---------------------------------------
AVIS Global Small Capitalization Fund 2,037 7
- --------------------------------------- ---------- -----------
$1,072,650 $421,060
---------- -----------
---------- -----------
</TABLE>
F-9
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
LEGACY LIFE
AMOUNT AMOUNT AMOUNT
1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
AVIS GROWTH SUBACCOUNT
Accumulation Units:
Contract purchases $ 7,905,155 $ 99,436 $ 208,586
- ---------------------------------------
Contract redemptions (7,500,912) (13,537) (152,628)
- --------------------------------------- ------------ ------------ ------------
Subaccount Total: 404,243 85,899 55,958
AVIS INTERNATIONAL SUBACCOUNT
Accumulation Units:
Contract purchases 2,533,215 21,069,330 15,041,172
- ---------------------------------------
Contract redemptions (2,378,790) (21,832,104) (13,592,780)
- --------------------------------------- ------------ ------------ ------------
Subaccount Total: 154,425 (762,774) 1,448,392
AVIS GROWTH-INCOME SUBACCOUNT
Accumulation Units:
Contract purchases 10,526,122 1,153,178 1,716,073
- ---------------------------------------
Contract redemptions (9,558,665) (1,424,421) (1,910,485)
- --------------------------------------- ------------ ------------ ------------
Subaccount Total: 967,457 (271,243) (194,412)
AVIS ASSET ALLOCATION SUBACCOUNT
Accumulation Units:
Contract purchases 3,437,421 6,127,582 2,936,929
- ---------------------------------------
Contract redemptions (2,176,911) (2,980,748) (1,719,672)
- --------------------------------------- ------------ ------------ ------------
Subaccount Total: 1,260,510 3,146,834 1,217,257
AVIS BOND SUBACCOUNT
Accumulation Units:
Contract purchases 745,609 4,236,409 3,987,975
- ---------------------------------------
Contract redemptions (233,316) (2,136,064) (2,848,717)
- --------------------------------------- ------------ ------------ ------------
Subaccount Total: 512,293 2,100,345 1,139,258
AVIS HIGH-YIELD BOND SUBACCOUNT
Accumulation Units:
Contract purchases 2,011,701 1,169,963 450,344
- ---------------------------------------
Contract redemptions (1,906,794) (885,837) (1,013,888)
- --------------------------------------- ------------ ------------ ------------
Subaccount Total: 104,907 284,126 (563,544)
AVIS U.S. GOVERNMENT/AAA-RATED
SUBACCOUNT
Accumulation Units:
Contract purchases 1,742,826 3,191,689 2,014,548
- ---------------------------------------
Contract redemptions (2,009,357) (1,563,605) (552,034)
- --------------------------------------- ------------ ------------ ------------
Subaccount Total: (266,531) 1,628,084 1,462,514
AVIS CASH MANAGEMENT SUBACCOUNT
Accumulation Units:
Contract purchases 17,799,948 2,757,294 647,701
- ---------------------------------------
Contract redemptions (17,927,557) (1,371,568) (290,251)
- --------------------------------------- ------------ ------------ ------------
Subaccount Total: (127,609) 1,385,726 357,450
AVIS GLOBAL GROWTH SUBACCOUNT
Accumulation Units:
Contract purchases 565,899 326,275 --
- ---------------------------------------
Contract redemptions (196,994) (29,265) --
- --------------------------------------- ------------ ------------ ------------
Subaccount Total: 368,905 297,010 --
AVIS GLOBAL SMALL CAPITALIZATION
SUBACCOUNT
Accumulation Units:
Contract purchases 88,361 -- --
- ---------------------------------------
Contract redemptions (4,937) -- --
- --------------------------------------- ------------ ------------ ------------
Subaccount Total: 83,424 -- --
- --------------------------------------- ------------ ------------ ------------
Product Total $ 3,462,024 $ 7,894,007 $ 4,922,873
- --------------------------------------- ------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
LEGACY ESTATE BUILDER
AMOUNT AMOUNT AMOUNT
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
AVIS GROWTH SUBACCOUNT
Accumulation Units:
Contract purchases $ 156,661 $ -- $ --
- ---------------------------------------
Contract redemptions (84,680) -- --
- --------------------------------------- --------- ---------- ---------------
Subaccount Total: 71,981 -- --
AVIS INTERNATIONAL SUBACCOUNT
Accumulation Units:
Contract purchases 12,527 -- --
- ---------------------------------------
Contract redemptions (37) -- --
- --------------------------------------- --------- ---------- ---------------
Subaccount Total: 12,490 -- --
AVIS GROWTH-INCOME SUBACCOUNT
Accumulation Units:
Contract purchases 283,611 -- --
- ---------------------------------------
Contract redemptions (123,810) -- --
- --------------------------------------- --------- ---------- ---------------
Subaccount Total: 159,801 -- --
AVIS ASSET ALLOCATION SUBACCOUNT
Accumulation Units:
Contract purchases 299,056 -- --
- ---------------------------------------
Contract redemptions (120,280) -- --
- --------------------------------------- --------- ---------- ---------------
Subaccount Total: 178,776 -- --
AVIS BOND SUBACCOUNT
Accumulation Units:
Contract purchases 5,917 -- --
- ---------------------------------------
Contract redemptions (7) -- --
- --------------------------------------- --------- ---------- ---------------
Subaccount Total: 5,910 -- --
AVIS HIGH-YIELD BOND SUBACCOUNT
Accumulation Units:
Contract purchases 73,460 -- --
- ---------------------------------------
Contract redemptions (39,662) -- --
- --------------------------------------- --------- ---------- ---------------
Subaccount Total: 33,798 -- --
AVIS U.S. GOVERNMENT/AAA-RATED
SUBACCOUNT
Accumulation Units:
Contract purchases 5,924 -- --
- ---------------------------------------
Contract redemptions (7) -- --
- --------------------------------------- --------- ---------- ---------------
Subaccount Total: 5,917 -- --
AVIS CASH MANAGEMENT SUBACCOUNT
Accumulation Units:
Contract purchases 94,497 -- --
- ---------------------------------------
Contract redemptions (10,567) -- --
- --------------------------------------- --------- ---------- ---------------
Subaccount Total: 83,930 -- --
AVIS GLOBAL GROWTH SUBACCOUNT
Accumulation Units:
Contract purchases 83,068 -- --
- ---------------------------------------
Contract redemptions (42,305) -- --
- --------------------------------------- --------- ---------- ---------------
Subaccount Total: 40,763 -- --
AVIS GLOBAL SMALL CAPITALIZATION
SUBACCOUNT
Accumulation Units:
Contract purchases 2,000 -- --
- ---------------------------------------
Contract redemptions -- -- --
- --------------------------------------- --------- ---------- ---------------
Subaccount Total: 2,000 -- --
- --------------------------------------- --------- ---------- ---------------
Product Total $ 595,366 $ -- $ --
- --------------------------------------- --------- ---------- ---------------
--------- ---------- ---------------
</TABLE>
F-11
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SUMMARY OF UNITS OUTSTANDING AT 12/31/98
<TABLE>
<CAPTION>
ACCUMULATION UNIT NET ASSET
LEGACY LIFE INVESTMENTS UNITS VALUE TOTAL
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
LEGACY LIFE
AVIS Growth Subaccount 4,045,125 $ 5.771 $ 23,346,192
AVIS International Subaccount 3,370,533 2.210 7,449,077
AVIS Growth Income Subaccount 5,743,671 4.408 25,320,655
AVIS Asset Allocation Subaccount 2,252,804 2.372 5,343,670
AVIS Bond Subaccount 360,558 1.204 434,138
AVIS High-Yield Bond Subaccount 1,097,257 2.767 3,036,045
AVIS U.S. Government/AAA-Rated
Securities Subaccount 1,154,013 2.098 2,420,814
AVIS Cash Management Subaccount 2,081,445 1.562 3,250,220
AVIS Global Growth Subaccount 556,756 1.372 763,979
AVIS Global Small Capitalization
Subaccount 87,418 1.015 88,767
- --------------------------------------- ------------- ------------
Subtotal 20,749,580 71,453,557
LEGACY LIFE (10 YR.)
AVIS Growth Subaccount 2,713,592 1.369 3,713,898
AVIS International Subaccount 768,626 1.216 934,506
AVIS Growth Income Subaccount 4,717,303 1.191 5,619,403
AVIS Asset Allocation Subaccount 221,386 1.133 250,730
AVIS Bond Subaccount 239,410 1.025 245,479
AVIS High-Yield Bond Subaccount 1,078,541 0.988 1,065,785
AVIS U.S. Government/AAA-Rated
Securities Subaccount 1,255,576 1.062 1,332,876
AVIS Cash Management Subaccount 222,702 1.040 231,626
AVIS Global Growth Subaccount 17,555 1.294 22,722
AVIS Global Small Capitalization
Subaccount 10,560 1.018 10,752
- --------------------------------------- ------------- ------------
Subtotal 11,245,251 13,427,777
- --------------------------------------- ------------- ------------
TOTAL LEGACY LIFE 31,994,831 $ 84,881,334
------------- ------------
------------- ------------
</TABLE>
<TABLE>
<CAPTION>
LEGACY ACCUMULATION UNIT ACCUMULATION
ESTATE BUILDER UNITS VALUE AMOUNT
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
AVIS Growth Subaccount 78,142 $ 1.144 $ 89,384
AVIS International Subaccount 13,808 1.003 13,846
AVIS Growth Income Subaccount 174,735 1.028 179,686
AVIS Asset Allocation Subaccount 184,866 1.006 186,003
AVIS Bond Subaccount 5,890 1.003 5,910
AVIS High-Yield Bond Subaccount 37,655 0.954 35,911
AVIS U.S. Government/AAA-Rated
Securities Subaccount 5,704 1.056 6,024
AVIS Cash Management Subaccount 81,743 1.028 84,032
AVIS Global Growth Subaccount 43,679 1.078 47,099
AVIS Global Small Capitalization
Subaccount 2,000 1.021 2,041
- --------------------------------------- ------------- -------------
TOTAL LEGACY ESTATE BUILDER 628,222 $ 649,936
------------- -------------
------------- -------------
</TABLE>
F-12
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NET ASSETS
The following is a summary of net assets owned at December 31, 1998.
<TABLE>
<CAPTION>
AVIS AVIS
AVIS AVIS GROWTH- ASSET AVIS
GROWTH INTERNATIONAL INCOME ALLOCATION BOND
LEGACY LIFE COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Unit Transactions $39,997,224 $ 9,573,997 $5,649,645 $ 13,256,452 $ 4,059,331 $654,150
Accumulated net investment Income 26,554,582 8,038,941 1,363,505 10,918,183 1,106,084 37,547
Accumulated net realized gain (loss) on
investments 6,359,132 2,939,428 313,195 2,293,250 369,153 2,909
Net unrealized appreciation
(depreciation) on investments: 11,970,396 6,507,724 1,057,238 4,472,173 59,832 (14,989)
- --------------------------------------- ----------- ----------- -------------- ------------- ------------ -----------
$84,881,334 $27,060,090 $8,383,583 $ 30,940,058 $ 5,594,400 $679,617
----------- ----------- -------------- ------------- ------------ -----------
----------- ----------- -------------- ------------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
AVIS AVIS
AVIS U.S. GOVT AVIS AVIS GLOBAL
HIGH-YIELD AAA-RATED CASH GLOBAL SMALL
BOND SECURITIES MANAGEMENT GROWTH CAPITALIZATION
LEGACY LIFE (CONTINUED) SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Unit Transactions $1,749,024 $1,766,451 $2,538,835 $665,915 $83,424
Accumulated net investment Income 2,344,457 1,791,363 927,535 25,621 1,346
Accumulated net realized gain (loss) on
investments 272,470 117,238 37,638 13,934 (83)
Net unrealized appreciation
(depreciation) on investments: (264,121) 78,638 (22,162 ) 81,231 14,832
- --------------------------------------- ---------- ---------- ---------- ----------- -------
$4,101,830 $3,753,690 $3,481,846 $786,701 $99,519
---------- ---------- ---------- ----------- -------
---------- ---------- ---------- ----------- -------
</TABLE>
F-13
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
AVIS AVIS
AVIS AVIS GROWTH- ASSET AVIS
LEGACY GROWTH INTERNATIONAL INCOME ALLOCATION BOND
ESTATE BUILDER COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Unit Transactions $595,366 $71,981 $12,490 $159,801 $178,776 $5,910
Accumulated net investment income 56,214 11,719 282 25,843 14,066 166
Accumulated net realized gain (loss) on
investments 10,686 3,866 2 3,414 1,609 --
Net unrealized appreciation
(depreciation) on investments: (12,330) 1,818 1,072 (9,372) (8,448) (166)
- --------------------------------------- -------- ----------- ------- ----------- ----------- -----------
$649,936 $89,384 $13,846 $179,686 $186,003 $5,910
-------- ----------- ------- ----------- ----------- -----------
-------- ----------- ------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AVIS AVIS
AVIS U.S. GOVT AVIS AVIS GLOBAL
HIGH-YIELD AAA-RATED CASH GLOBAL SMALL
LEGACY BOND SECURITIES MANAGEMENT GROWTH CAPITALIZATION
ESTATE BUILDER (CONTINUED) SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Unit Transactions $33,798 $5,917 $83,930 $40,763 $2,000
Accumulated net investment income 1,338 131 1,124 1,515 30
Accumulated net realized gain (loss) on
investments 462 -- 6 1,328 (1)
Net unrealized appreciation
(depreciation) on investments: 313 (24) (1,028) 3,493 12
- --------------------------------------- ----------- ----------- ----------- ----------- ------
$35,911 $6,024 $84,032 $47,099 $2,041
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
</TABLE>
F-14
<PAGE>
This page was intentionally left blank.
F-15
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENTS
The following is a summary of investments owned at December 31, 1998.
<TABLE>
<CAPTION>
PERCENTAGE SHARES NET ASSET VALUE OF
LEGACY LIFE INVESTMENTS OF NET OUTSTANDING VALUE SHARES
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
AVIS Growth Fund 31.64% 516,135.085 $52.43 $ 27,060,963
- ---------------------------------------
AVIS International Fund 9.80% 492,588.664 17.02 8,383,859
- ---------------------------------------
AVIS Growth Income Fund 36.17% 852,605.343 36.29 30,941,048
- ---------------------------------------
AVIS Asset Allocation Fund 6.54% 359,318.435 15.57 5,594,588
- ---------------------------------------
AVIS Bond Fund 0.79% 66,827.640 10.17 679,637
- ---------------------------------------
AVIS High-Yield Bond Fund 4.80% 308,417.933 13.30 4,101,959
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 4.39% 331,901.357 11.31 3,753,804
- ---------------------------------------
AVIS Cash Management Fund 4.07% 315,967.574 11.02 3,481,963
- ---------------------------------------
AVIS Global Growth Fund 0.92% 59,063.626 13.32 786,727
- ---------------------------------------
AVIS Global Small Capitalization Fund 0.12% 9,922.483 10.03 99,522
- --------------------------------------- ---------- -------------
LEGACY LIFE TOTAL 99.24% 84,884,070
- --------------------------------------- ---------- -------------
LEGACY ESTATE BUILDER INVESTMENTS
- ---------------------------------------
AVIS Growth Fund (class II shares) 0.10% 1,705.184 $52.42 $ 89,386
- ---------------------------------------
AVIS International Fund (class II
shares) 0.02% 813.550 17.02 13,847
- ---------------------------------------
AVIS Growth Income Fund (class II
shares) 0.21% 4,952.839 36.28 179,689
- ---------------------------------------
AVIS Asset Allocation Fund (class II
shares) 0.22% 11,946.465 15.57 186,006
- ---------------------------------------
AVIS Bond Fund (class II shares) 0.01% 581.144 10.17 5,910
- ---------------------------------------
AVIS High-Yield Bond Fund (class II
shares) 0.04% 2,700.078 13.30 35,911
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund (class II shares) 0.01% 532.602 11.31 6,024
- ---------------------------------------
AVIS Cash Management Fund (class II
shares) 0.10% 7,625.503 11.02 84,033
- ---------------------------------------
AVIS Global Growth Fund (class II
shares) 0.05% 3,538.649 13.31 47,099
- ---------------------------------------
AVIS Global Small Capitalizatiion Fund
(class II shares) 0.00% 203.502 10.03 2,041
- --------------------------------------- ---------- -------------
LEGACY ESTATE BUILDER TOTAL 0.76% 649,946
- --------------------------------------- ---------- -------------
VARIABLE ACCOUNT TOTAL 100.00% $ 85,534,016
- --------------------------------------- ---------- -------------
---------- -------------
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
COST OF UNREALIZED
SHARES APPRECIATION
<S> <C> <C>
- ----------------------------------------------------------------------
AVIS Growth Fund $ 20,553,239 $ 6,507,724
- ---------------------------------------
AVIS International Fund 7,326,621 1,057,238
- ---------------------------------------
AVIS Growth Income Fund 26,468,875 4,472,173
- ---------------------------------------
AVIS Asset Allocation Fund 5,534,756 59,832
- ---------------------------------------
AVIS Bond Fund 694,626 (14,989)
- ---------------------------------------
AVIS High-Yield Bond Fund 4,366,080 (264,121)
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 3,675,166 78,638
- ---------------------------------------
AVIS Cash Management Fund 3,504,125 (22,162)
- ---------------------------------------
AVIS Global Growth Fund 705,496 81,231
- ---------------------------------------
AVIS Global Small Capitalization Fund 84,690 14,832
- --------------------------------------- ------------- -------------
LEGACY LIFE TOTAL 72,913,674 11,970,396
- --------------------------------------- ------------- -------------
LEGACY ESTATE BUILDER INVESTMENTS
- ---------------------------------------
AVIS Growth Fund (class II shares) $ 87,568 $ 1,818
- ---------------------------------------
AVIS International Fund (class II
shares) 12,775 1,072
- ---------------------------------------
AVIS Growth Income Fund (class II
shares) 189,061 (9,372)
- ---------------------------------------
AVIS Asset Allocation Fund (class II
shares) 194,454 (8,448)
- ---------------------------------------
AVIS Bond Fund (class II shares) 6,076 (166)
- ---------------------------------------
AVIS High-Yield Bond Fund (class II
shares) 35,598 313
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund (class II shares) 6,048 (24)
- ---------------------------------------
AVIS Cash Management Fund (class II
shares) 85,061 (1,028)
- ---------------------------------------
AVIS Global Growth Fund (class II
shares) 43,606 3,493
- ---------------------------------------
AVIS Global Small Capitalizatiion Fund
(class II shares) 2,029 12
- --------------------------------------- ------------- -------------
LEGACY ESTATE BUILDER TOTAL 662,276 (12,330)
- --------------------------------------- ------------- -------------
VARIABLE ACCOUNT TOTAL $ 73,575,950 $ 11,958,066
- --------------------------------------- ------------- -------------
------------- -------------
</TABLE>
F-17
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. NEW INVESTMENT FUNDS
Effective April 25, 1997, the AVIS Global Growth Fund became available as an
investment option for Variable Account contract owners.
Effective May 1, 1998, the AVIS Global Small Capitalization Fund became availabe
as an investment option for Variable Account contract owners.
F-18
<PAGE>
This page was intentionally left blank.
F-19
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SUMMARY OF OPERATIONS
The following is a summary of operations for the years ended December 31, 1996,
1997 and 1998.
<TABLE>
<CAPTION>
AVIS AVIS
GROWTH INTERNATIONAL
LEGACY LIFE COMBINED SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- -------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Net Investment
Income:
- Dividends from
Investment Income $ 1,278,281 $ 75,047 $ 75,494
- --------------------
- Dividends from
net realized gain
on investments 2,577,711 973,370 192,271
- --------------------
- Mortality and
expense
guarantees:
Legacy Life (540,498) (152,717) (48,336)
- -------------------- ----------- ---------- --------------
NET INVESTMENT
INCOME 3,315,494 895,700 219,429
- --------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments:
- Net realized
gain on
investments 1,163,196 586,803 44,775
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 833,877 (64,090) 320,050
- -------------------- ----------- ---------- --------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS 1,997,073 522,713 364,825
- -------------------- ----------- ---------- --------------
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS $ 5,312,567 $1,418,413 $ 584,254
- -------------------- ----------- ---------- --------------
----------- ---------- --------------
YEAR ENDED DECEMBER 31, 1997
Net Investment
Income:
- Dividends from
investment income $ 1,550,226 $ 95,703 $ 135,843
- --------------------
- Dividends from
net realized gain
on investments 5,730,418 2,359,562 727,603
- --------------------
- Mortality and
expense
guarantees:
Legacy Life (739,534) (205,231) (83,012)
- -------------------- ----------- ---------- --------------
NET INVESTMENT
INCOME 6,541,110 2,250,034 780,434
- --------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments:
- Net realized
gain (loss) on
investments 1,463,015 389,341 158,689
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 2,258,647 1,361,804 (550,676)
- -------------------- ----------- ---------- --------------
NET REALIZED
(DECREASE) AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS 3,721,662 1,751,145 (391,987)
- -------------------- ----------- ---------- --------------
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS $10,262,772 $4,001,179 $ 388,447
- -------------------- ----------- ---------- --------------
----------- ---------- --------------
YEAR ENDED DECEMBER 31, 1998
Net Investment
Income:
- Dividends from
investment income $ 1,676,051 $ 84,630 $ 101,028
- --------------------
- Dividends from
net realized gain
on investments 8,584,131 3,605,937 149,047
- --------------------
- Mortality and
expense
guarantees:
Legacy Life (857,960) (254,155) (91,139)
Legacy Life (10
Year) (58,975) (14,484) (3,842)
- -------------------- ----------- ---------- --------------
NET INVESTMENT
INCOME 9,343,247 3,421,928 155,094
- --------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments:
- Net realized
gain (loss) on
investments 1,692,527 800,646 53,969
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 2,444,994 2,572,876 1,097,536
- -------------------- ----------- ---------- --------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS 4,137,521 3,373,522 1,151,505
- -------------------- ----------- ---------- --------------
NET INCREASE
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS $13,480,768 $6,795,450 $1,306,599
- -------------------- ----------- ---------- --------------
----------- ---------- --------------
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
AVIS AVIS
AVIS AVIS AVIS U.S. GOVT AVIS AVIS GLOBAL
GROWTH ASSET AVIS HIGH-YIELD AAA-RATED CASH GLOBAL SMALL
INCOME ALLOCATION BOND BOND SECURITIES MANAGEMENT GROWTH CAPITALIZATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Net Investment
Income:
- Dividends from
Investment Income $ 344,882 $ 63,438 $ 1,617 $305,128 $254,325 $158,350 $ -- $ --
- --------------------
- Dividends from
net realized gain
on investments 1,285,259 126,811 -- -- -- -- -- --
- --------------------
- Mortality and
expense
guarantees:
Legacy Life (194,093) (20,709) (257) (42,312) (42,257) (39,817) -- --
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
NET INVESTMENT
INCOME 1,436,048 169,540 1,360 262,816 212,068 118,533 -- --
- --------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments:
- Net realized
gain on
investments 389,876 40,605 1,419 79,255 9,685 10,778 -- --
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 673,953 16,621 (2) 60,180 (161,672) (11,163) -- --
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS 1,063,829 57,226 1,417 139,435 (151,987) (385) -- --
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS $2,499,877 $226,766 $ 2,777 $402,251 $ 60,081 $118,148 $ -- $ --
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
YEAR ENDED DECEMBER 31, 1997
Net Investment
Income:
- Dividends from
investment income $ 429,919 $109,245 $ 7,378 $331,279 $229,241 $210,279 $ 1,339 $ --
- --------------------
- Dividends from
net realized gain
on investments 2,394,172 204,654 1,765 42,064 -- -- 598 --
- --------------------
- Mortality and
expense
guarantees:
Legacy Life (270,306) (37,650) (1,411) (47,419) (41,537) (51,918) (1,050) --
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
NET INVESTMENT
INCOME 2,553,785 276,249 7,732 325,924 187,704 158,361 887 --
- --------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments:
- Net realized
gain (loss) on
investments 675,984 167,622 222 66,410 (2,010) 6,491 266 --
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 1,384,066 25,853 2,266 (2,082) 47,345 (7,991) (1,938) --
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
NET REALIZED
(DECREASE) AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS 2,060,050 193,475 2,488 64,328 45,335 (1,500) (1,672) --
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS $4,613,835 $469,724 $10,220 $390,252 $233,039 $156,861 $ (785) $ --
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
YEAR ENDED DECEMBER 31, 1998
Net Investment
Income:
- Dividends from
investment income $ 476,520 $183,914 $30,142 $371,625 $217,996 $204,237 $ 5,536 $ 423
- --------------------
- Dividends from
net realized gain
on investments 4,362,394 380,514 3,145 56,690 -- -- 25,115 1,289
- --------------------
- Mortality and
expense
guarantees:
Legacy Life (310,608) (61,991) (3,990) (45,754) (36,439) (47,772) (5,797) (315)
Legacy Life (10
Year) (25,710) (996) (842) (5,229) (6,609) (1,092) (120) (51)
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
NET INVESTMENT
INCOME 4,502,596 501,441 28,455 377,332 174,948 155,373 24,734 1,346
- --------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments:
- Net realized
gain (loss) on
investments 692,243 151,243 1,268 (22,680) 14,475 (12,222) 13,668 (83)
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments (805,397) (146,002) (17,253) (416,233) 53,797 7,669 83,169 14,832
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS (113,154) 5,241 (15,985) (438,913) 68,272 (4,553) 96,837 14,749
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
NET INCREASE
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS $4,389,442 $506,682 $12,470 $(61,581) $243,220 $150,820 $121,571 $16,095
- -------------------- ---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
---------- ----------- ---------- ---------- ----------- ----------- ----------- -------
</TABLE>
F-21
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SUMMARY OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
AVIS AVIS
LEGACY ESTATE GROWTH INTERNATIONAL
BUILDER COMBINED SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- ---------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Net Investment
Income:
- Dividends from
Investment Income $ 4,911 $ 62 $ 55
- --------------------
- Dividends from
net realized gain
on investments 51,975 11,757 247
- --------------------
- Mortality and
expense
guarantees: (672) (100) (20)
- -------------------- ---------- ----------- ------
NET INVESTMENT
INCOME 56,214 11,719 282
- --------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments:
- Net realized
gain (loss) on
investments 10,686 3,866 2
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments (12,330) 1,818 1,072
- -------------------- ---------- ----------- ------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS (1,644) 5,684 1,074
- -------------------- ---------- ----------- ------
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS $ 54,570 $17,403 $1,356
- -------------------- ---------- ----------- ------
---------- ----------- ------
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
AVIS AVIS
AVIS AVIS AVIS U.S. GOVT AVIS AVIS GLOBAL
GROWTH ASSET AVIS HIGH-YIELD AAA-RATED CASH GLOBAL SMALL
INCOME ALLOCATION BOND BOND SECURITIES MANAGEMENT GROWTH CAPITALIZATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Net Investment
Income:
- Dividends from
Investment Income $ 810 $ 1,571 $ 148 $ 881 $140 $ 1,143 $ 90 $11
- --------------------
- Dividends from
net realized gain
on investments 25,289 12,648 27 497 -- -- 1,484 26
- --------------------
- Mortality and
expense
guarantees: (256) (153) (9) (40) (9) (19) (59) (7)
- -------------------- ---------- ---------- ---------- ---------- ----- ---------- ---------- ---
NET INVESTMENT
INCOME 25,843 14,066 166 1,338 131 1,124 1,515 30
- --------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments:
- Net realized
gain (loss) on
investments 3,414 1,609 -- 462 -- 6 1,328 (1)
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments (9,372) (8,448) (166) 313 (24) (1,028) 3,493 12
- -------------------- ---------- ---------- ---------- ---------- ----- ---------- ---------- ---
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS (5,958) (6,839) (166) 775 (24) (1,022) 4,821 11
- -------------------- ---------- ---------- ---------- ---------- ----- ---------- ---------- ---
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS $19,885 $ 7,227 $ -- $2,113 $107 $ 102 $6,336 $41
- -------------------- ---------- ---------- ---------- ---------- ----- ---------- ---------- ---
---------- ---------- ---------- ---------- ----- ---------- ---------- ---
</TABLE>
F-23
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors of The Lincoln National Life Insurance
Company and Contract Owners of Lincoln Life Flexible Premium
Variable Life Account F
We have audited the accompanying statement of assets and
liability of Lincoln Life Flexible Premium Variable Life
Account F ("Variable Account") (comprised of the AVIS Growth,
AVIS International, AVIS Growth Income, AVIS Asset
Allocation, AVIS Bond, AVIS High-Yield Bond, AVIS US
Government/AAA-Rated Securities, AVIS Cash Management, AVIS
Global Growth and AVIS Global Small Capitalization
subaccounts), as of December 31, 1998, 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 Variable Account's
management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
investments owned as of December 31, 1998, by correspondence
with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Lincoln Life Flexible Premium Variable Life
Account F at December 31, 1998, and the results of its
operations and 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 30, 1999
F-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $23,830.9 $18,560.7
- ------------------------------------------------------------------------------------
Preferred stocks 236.0 257.3
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 259.3 436.0
- ------------------------------------------------------------------------------------
Affiliated common stocks 322.1 412.1
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,932.9 3,012.7
- ------------------------------------------------------------------------------------
Real estate 473.8 584.4
- ------------------------------------------------------------------------------------
Policy loans 1,606.0 660.5
- ------------------------------------------------------------------------------------
Other investments 434.4 335.5
- ------------------------------------------------------------------------------------
Cash and short-term investments 1,725.4 2,133.0
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 32,820.8 26,392.2
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 33.3 42.4
- ------------------------------------------------------------------------------------
Accrued investment income 432.8 343.5
- ------------------------------------------------------------------------------------
Reinsurance recoverable 171.6 71.1
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 53.7 44.1
- ------------------------------------------------------------------------------------
Federal income taxes recoverable from parent company 64.7 6.9
- ------------------------------------------------------------------------------------
Goodwill 49.5 52.4
- ------------------------------------------------------------------------------------
Other admitted assets 89.3 85.6
- ------------------------------------------------------------------------------------
Separate account assets 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,310.6 $ 5,872.9
- ------------------------------------------------------------------------------------
Other policyholder funds 16,647.5 16,360.1
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 897.6 878.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 795.8 720.4
- ------------------------------------------------------------------------------------
Asset valuation reserve 484.5 450.0
- ------------------------------------------------------------------------------------
Interest maintenance reserve 159.7 135.4
- ------------------------------------------------------------------------------------
Other liabilities 504.5 294.7
- ------------------------------------------------------------------------------------
Short-term loan payable to parent company 140.0 120.0
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (789.0) (761.9)
- ------------------------------------------------------------------------------------
Separate account liabilities 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 68,058.2 55,400.7
- ------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 --
- ------------------------------------------------------------------------------------
Paid-in surplus 1,930.1 1,821.8
- ------------------------------------------------------------------------------------
Unassigned surplus (deficit) (640.6) 1,121.6
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,564.5 2,968.4
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $12,737.6 $ 5,589.0 $ 7,268.5
- ----------------------------------------------------------------------------
Net investment income 2,107.2 1,847.1 1,756.3
- ----------------------------------------------------------------------------
Amortization of interest maintenance reserve 26.4 41.5 27.2
- ----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 179.9 99.7 90.9
- ----------------------------------------------------------------------------
Expense charges on deposit funds 134.6 119.3 100.7
- ----------------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- ----------------------------------------------------------------------------
Other income 31.3 21.3 16.8
- ---------------------------------------------------------------------------- --------- --------- ---------
Total revenues 15,613.3 8,043.4 9,505.0
- ----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 13,964.1 4,522.1 5,989.9
- ----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,919.4 3,053.9 3,123.1
- ---------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 16,883.5 7,576.0 9,113.0
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before dividends to policyholders, income taxes
and net realized gain on investments (1,270.2) 467.4 392.0
- ----------------------------------------------------------------------------
Dividends to policyholders 67.9 27.5 27.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before federal income taxes and net realized
gain on investments (1,338.1) 439.9 364.7
- ----------------------------------------------------------------------------
Federal income taxes (credit) (141.0) 78.3 83.6
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before net realized gain on investments (1,197.1) 361.6 281.1
- ----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding
net transfers to the interest maintenance reserve 46.8 31.3 53.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Net income (loss) $(1,150.3) $ 392.9 $ 334.4
- ---------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</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
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- -----------------------------------------------------------------------------
Correction of prior year's asset valuation reserve -- (37.6) --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets -- (57.0) --
- ----------------------------------------------------------------------------- --------- --------- ---------
2,968.4 1,868.0 1,732.9
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) (1,150.3) 392.9 334.4
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (304.8) (36.2) 38.6
- -----------------------------------------------------------------------------
Nonadmitted assets (17.1) (0.4) (3.0)
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (35.2) (3.9) 0.6
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.4) (0.9) (0.4)
- -----------------------------------------------------------------------------
Asset valuation reserve (34.5) (36.9) (105.5)
- -----------------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 108.4 938.4 100.0
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation -- (2.6) --
- -----------------------------------------------------------------------------
Dividends to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,564.5 $ 2,968.4 $ 1,962.6
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</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
1998 1997 1996
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 13,495.2 $ 6,364.3 $ 8,059.4
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (632.4) (649.2) (767.5)
- -----------------------------------------------------------------------
Investment income received 2,003.9 1,798.8 1,700.6
- -----------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- -----------------------------------------------------------------------
Benefits paid (7,395.8) (5,345.2) (4,050.4)
- -----------------------------------------------------------------------
Insurance expenses paid (2,909.7) (3,193.0) (3,216.8)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) 84.2 (87.0) (72.3)
- -----------------------------------------------------------------------
Dividends to policyholders (12.9) (28.4) (27.7)
- -----------------------------------------------------------------------
Other income received and expenses paid, net 207.0 (8.7) 117.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities 5,235.8 (822.9) 1,986.9
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 10,926.5 12,142.6 12,542.0
- -----------------------------------------------------------------------
Purchase of investments (16,950.0) (10,345.0) (14,175.4)
- -----------------------------------------------------------------------
Other sources (uses) including reinsured policy loans (778.3) 529.1 (377.2)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities (6,801.8) 2,326.7 (2,010.6)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 108.4 -- 100.0
- -----------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 140.0 120.0 100.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (120.0) (100.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 1,158.4 (130.0) 2.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (407.6) 1,373.8 (21.7)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 2,133.0 759.2 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 1,725.4 $ 2,133.0 $ 759.2
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</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, 1998, 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 ("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. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. 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 in which 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
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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 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
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to 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 Insurance 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. Business
assumed under 100% indemnity and assumption reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of
the transaction and the excess of the purchase price over the sum of the
amounts assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
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.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner whereas under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
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.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1998 1997 1998 1997 1996
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,564.5 $ 2,968.4 $(1,150.3) $ 392.9 $ 334.4
- -------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
goodwill 3,085.2 958.3 48.5 (98.9) 66.7
----------------------------------------
Policy and contract reserves (2,299.9) (1,672.9) 1,743.4 (48.6) (57.1)
----------------------------------------
Interest maintenance reserve 159.7 135.4 24.4 58.7 (39.7)
----------------------------------------
Deferred income taxes 181.6 (13.0) (218.6) 70.3 1.8
----------------------------------------
Policyholders' share of earnings and
surplus on participating business (132.8) (79.8) 3.2 5.3 (.3)
----------------------------------------
Asset valuation reserve 484.5 450.0 -- -- --
----------------------------------------
Net realized gain (loss) on investments (174.1) (91.5) (116.7) (20.4) 78.7
----------------------------------------
Unrealized gain on investments 1,335.1 1,245.5 -- -- --
----------------------------------------
Nonadmitted assets, including nonadmitted
investments 119.1 61.0 -- -- --
----------------------------------------
Investments in subsidiary companies 490.4 188.8 41.3 (80.5) 29.9
----------------------------------------
Surplus notes and related interest (1,251.5) -- (1.5) -- --
----------------------------------------
Other, net (120.1) (162.5) 103.6 (35.0) (82.6)
---------------------------------------- --------- --------- --------- --------- ---------
Net increase (decrease) 1,877.2 1,019.3 1,627.6 (149.1) (2.6)
- ------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 4,441.7 $ 3,987.7 $ 477.3 $ 243.8 $ 331.8
- ------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
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 repurchase price. It is the Company's
policy to take possession of securities with a market value at least equal
to 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, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
under an assumption reinsurance agreement, is amortized on a straight-line
basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
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
Insurance 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, benefits 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
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
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 and certain LNC subsidiaries.
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
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
unassigned surplus or net income previously reported.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
Accounting Practices and Procedures Manual and a variety of other NAIC
publications. "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.
In 1998, the NAIC adopted codified statutory accounting principles
("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 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 Insurance
Department. At this time, it is anticipated that Indiana will adopt
Codification, however, based on current 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 Insurance 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
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,714.3 $ 1,524.4 $ 1,442.2
----------------------------------------------------------------
Preferred stocks 19.7 23.5 9.6
----------------------------------------------------------------
Unaffiliated common stocks 10.6 8.3 6.5
----------------------------------------------------------------
Affiliated common stocks 5.2 15.0 9.5
----------------------------------------------------------------
Mortgage loans on real estate 323.6 257.2 269.3
----------------------------------------------------------------
Real estate 81.4 92.2 114.4
----------------------------------------------------------------
Policy loans 86.5 37.5 35.0
----------------------------------------------------------------
Other investments 26.5 28.2 22.4
----------------------------------------------------------------
Cash and short-term investments 104.7 70.3 48.9
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,372.5 2,056.6 1,957.8
- -------------------------------------------------------------------
Expenses:
Depreciation 19.3 21.0 25.0
----------------------------------------------------------------
Other 246.0 188.5 176.5
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 265.3 209.5 201.5
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 2,107.2 $ 1,847.1 $ 1,756.3
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
amounted to $2,600,000, consisting principally of interest
on bonds in default and mortgage loans. No accrued
investment income was nonadmitted at December 31, 1998.
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, 1998:
Corporate $17,658.4 $ 1,159.8 $ 148.2 $18,670.0
------------------------------------------------
U.S. government 900.7 88.8 3.4 986.1
------------------------------------------------
Foreign government 947.8 59.9 61.2 946.5
------------------------------------------------
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
------------------------------------------------
State and municipal 11.9 .7 -- 12.6
------------------------------------------------ --------- ----------- ----------- ---------
$23,830.9 $ 1,480.8 $ 246.2 $25,065.5
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
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
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1998 and 1997 reflects adjustments of
$11,800,000 and $5,500,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as low or lower quality.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1998, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1999 $ 705.6 $ 712.6
--------------------------------------------------------------------------
In 2000-2003 4,041.9 4,142.8
--------------------------------------------------------------------------
In 2004-2008 6,652.0 6,860.1
--------------------------------------------------------------------------
After 2008 8,119.3 8,899.7
--------------------------------------------------------------------------
Mortgage-backed securities 4,312.1 4,450.3
-------------------------------------------------------------------------- --------- ---------
Total $23,830.9 $25,065.5
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
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.
Proceeds from sales of investments in bonds during 1998,
1997 and 1996 were $9,395,000,000, $9,715,000,000 and
$10,996,900,000, respectively. Gross gains during 1998, 1997
and 1996 of $186,300,000, $218,100,000 and $169,700,000,
respectively, and gross losses of $138,000,000, $78,000,000
and $177,000,000, respectively, were realized on those
sales.
At December 31, 1998 and 1997, investments in bonds, with an
admitted asset value of $97,800,000 and $76,200,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks and preferred stocks are reported directly in
unassigned surplus and do not affect operations. 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, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
- ----------------------------------------
Unaffiliated common stocks 223.3 62.0 26.0 259.3
- ----------------------------------------
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1998 and 1997 reflects adjustments of
$5,800,000 and $4,000,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1998, the minimum and maximum lending rates for
mortgage loans were 6.41% and 8.08%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1998, 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.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The components of the Company's real estate are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
--------------------------------------------------------------------------------
Buildings 9.0 8.4
--------------------------------------------------------------------------------
Less accumulated depreciation (1.7) (1.2)
-------------------------------------------------------------------------------- --------- ---------
Net real estate occupied by the Company 9.8 9.7
- -----------------------------------------------------------------------------------
Other:
Land 93.2 124.1
--------------------------------------------------------------------------------
Buildings 413.0 491.6
--------------------------------------------------------------------------------
Other 7.9 8.1
--------------------------------------------------------------------------------
Less accumulated depreciation (50.1) (49.1)
-------------------------------------------------------------------------------- --------- ---------
Net other real estate 464.0 574.7
- ----------------------------------------------------------------------------------- --------- ---------
Net real estate $ 473.8 $ 584.4
- ----------------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 179.7 $ 209.3 $ 69.3
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $27.3,
$54.0 and $(6.7) in 1998, 1997 and 1996, respectively) 50.8 100.2 (12.4)
- ------------------------------------------------------------------------ --------- --------- ---------
128.9 109.1 81.7
Less federal income taxes on realized gains 82.1 77.8 28.4
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 46.8 $ 31.3 $ 53.3
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly owned insurance subsidiaries is
summarized as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,221.1 $ 333.9 $ 403.6 $ 1,938.0
- ---------------------------------------------------------
Other assets 40.3 31.3 490.0 270.2
- --------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,149.8 $ 266.3 $ 281.8 $ 1,814.5
- ---------------------------------------------------------
Other liabilities 42.0 24.0 553.7 45.1
- ---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 236.9
- ---------------------------------------------------------
Capital and surplus 69.6 74.9 58.1 111.7
- --------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 310.4 $ 165.0 $ 150.3 $ 1,402.6
- -----------------------------------------------------------
Expenses 310.6 164.4 139.5 1,656.1
- -----------------------------------------------------------
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
- ----------------------------------------------------------- --------- ----------- --------- ---------
Net income (loss) $ (0.5) $ 1.5 $ 10.7 $ (254.2)
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<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>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<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 (loss) $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------- --------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The Company also owns three non-insurance subsidiaries, all
of which were formed or acquired in 1998. AnnuityNet, Inc.
was formed for the distribution of variable annuities over
the internet and is valued on the equity method with an
admitted asset value of $1,500,000 at December 31, 1998.
Lincoln National Insurance Associates was purchased for
$600,000 and is valued on the equity method with an admitted
asset value of $600,000 at December 31, 1998. Sagemark
Consulting, Inc. ("Sagemark") was purchased in 1998 and is a
broker dealer acquired in connection with a reinsurance
transaction completed in 1998. Sagemark is valued on the
equity method with an admitted asset value of $5,700,000 at
December 31, 1998.
The carrying value of all affiliated common stocks, was
$322,100,000 and $412,100,000 at December 31, 1998 and 1997,
respectively. The insurance affiliates are carried at
statutory-basis net equity while other affiliates are
recorded at GAAP basis net equity, adjusted for certain
items which would be non-admitted under statutory accounting
principles. The cost basis of investments in subsidiaries as
of December 31, 1998 and 1997 was $631,100,000 and
$466,200,000, respectively.
During 1998, 1997 and 1996 the Company's insurance
subsidiaries paid dividends of $5,200,000, $15,000,000 and
$10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying
statements of operations differs from the prevailing
statutory tax rate principally due to tax-exempt investment
income, dividends received tax deductions and differences
between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract
liabilities and reinsurance ceding commissions.
In 1997 and 1996, federal income taxes incurred totaled
$78,300,000 and $83,600,000, respectively. In 1998, a
federal income tax net operating loss of $103,800,000 and
tax credits of $19,300,000 were incurred and carried back to
recover taxes paid in prior years.
The Company paid $2,300,000, $164,500,000 and $100,400,000
to LNC in 1998, 1997 and 1996, respectively, for federal
income taxes.
Under prior income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a
special tax account designated as "Policyholders' Surplus."
The Company has approximately $187,000,000 of untaxed
"Policyholders' Surplus" on which no payment of federal
income taxes will be required unless it is distributed as a
dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not
believe that any significant portion of the account will be
taxed in the foreseeable future and no related tax liability
has been recognized. If the entire balance of the account
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
became taxable under the current federal income tax rate,
the tax would be approximately $65,500,000.
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
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 4,081.8 $ 1,431.0
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 79.9 35.9
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 9,018.9 $ 727.2 $ 241.3
- ----------------------------------------------------------------------
Insurance ceded 877.1 302.9 193.3
- ---------------------------------------------------------------------- --------- --------- ---------
Net amount included in premiums $ 8,141.8 $ 424.3 $ 48.0
- ---------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,098,800,000, $1,240,500,000 and $787,900,000 for 1998,
1997 and 1996, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Premium deposit funds $16,285.2 $16,201.8
- -----------------------------------------------------------------------------
Undistributed earnings on participating business 348.4 142.0
- -----------------------------------------------------------------------------
Other 13.9 16.3
- ----------------------------------------------------------------------------- --------- ---------
$16,647.5 $16,360.1
--------- ---------
--------- ---------
</TABLE>
S-17
<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, 1998
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
- -----------------------------------------------------------------------
Ordinary renewal (13.7) 11.3 (25.0)
- -----------------------------------------------------------------------
Group life 14.2 .2 14.0
- ----------------------------------------------------------------------- --------- ----- -----------
$ 10.0 $ 14.9 $ (4.9)
--------- ----- -----------
--------- ----- -----------
</TABLE>
<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>
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 $11,900,000 and $13,400,000 in 1998 and 1997,
respectively. During 1996, LNC Administrative Services
Corporation, an affiliate, entered into a similar agreement
with the Company with direct premiums written amounting to
$7,000,000 and $7,200,000 in 1998 and 1997, respectively.
Authority granted by the managing general agents agreements
include underwriting, claims adjustment and claims payment
services.
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES
At December 31, 1998, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,659.5 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 2,959.2 5
-----------------------------------------------------------------------------
At market value 35,472.0 63
----------------------------------------------------------------------------- --------- ---
41,090.7 73
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 12,747.3 22
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,625.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 56,463.1 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,683.8
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $54,779.3
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
A reconciliation of the total net annuity reserves and
deposit fund liabilities to the amounts reported in the
Company's 1998 Annual Statement and the Company's Separate
Accounts Annual Statement is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
(IN MILLIONS)
-------------
<S> <C>
Per 1998 Annual Statement:
Exhibit 8, Section B -- Total (net) $ 2,554.6
- ----------------------------------------------------------------
Exhibit 8, Section C -- Total (net) 26.0
- ----------------------------------------------------------------
Exhibit 10, Column 1, Line 19 16,579.6
- ---------------------------------------------------------------- -------------
19,160.2
- ---------------------------------------------------------------- -------------
Per Separate Accounts Annual Statement
Exhibit 6, Column 2, Line 0299999 146.4
- ----------------------------------------------------------------
Page 3, Line 3 35,472.7
- ---------------------------------------------------------------- -------------
35,619.1
- ---------------------------------------------------------------- -------------
Total net annuity reserves and deposit fund liabilities $54,779.3
- ---------------------------------------------------------------- -------------
-------------
</TABLE>
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA indemnity reinsurance transaction on January 5,
1998. This note calls for the Company to pay the principal amount of the
notes on or before March 31, 2028 and interest to be paid quarterly at an
annual rate of 6.56%. Subject to approval by the Indiana Insurance
Commissioner, LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the anniversary date of the
note, but not before January 5, 2003. Any payment of interest or
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS (CONTINUED)
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1998), and subject to approval by the Indiana Insurance
Commissioner. No interest payments were approved by the Indiana Insurance
Commissioner as of December 31, 1998 and, thus, no amounts were accrued at
that date.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna indemnity reinsurance transaction. This note calls
for the Company to pay the principal amount of the notes on or before
December 31, 2028 and interest to be paid quarterly at an annual rate of
6.03%. Subject to approval by the Indiana Insurance Commissioner, LNC also
has a right to redeem the note for immediate repayment in total or in part
once per year on the anniversary date of the note, but not before December
18, 2003. Any payment of interest or repayment of principal may be paid only
out of the Company's earnings, only if the Company's surplus exceeds
specified levels ($2,379,600,000 at December 31, 1998), and subject to
approval by the Indiana Insurance Commissioner. No interest payments were
approved by the Indiana Insurance Commissioner as of December 31, 1998 and,
thus, no amounts were accrued at that date.
A summary of the terms of these surplus notes follows:
<TABLE>
<CAPTION>
CURRENT YEAR
PRINCIPAL PRINCIPAL INTEREST
DATE ISSUED AMOUNT OF NOTE OUTSTANDING PAID
------------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
January 5, 1998 $500,000,000 $ 500,000,000 $ 32,300,000
-------------------------------
December 18, 1998 750,000,000 750,000,000 --
-------------------------------
</TABLE>
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,
1998, 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 January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in October
1998, the Company assumed a block of individual life insurance business from
Aetna (see Note 10). The statutory accounting regulations do not allow
goodwill to be recognized on indemnity reinsurance transactions and
therefore, the related ceding commission was expensed in the accompanying
Statement of Operations and resulted in the reduction of unassigned surplus.
As a result of these transactions, the Company's statutory-basis unassigned
surplus is negative as of December 31, 1998 and it will be necessary for the
Company to obtain prior approval of the Indiana Insurance Commissioner
before paying any dividends to LNC until such time as statutory-basis
unassigned surplus is positive. It is expected that statutory-basis
unassigned surplus will return to a positive position within two to three
years from the closing of the Aetna transaction assuming a level of
statutory-basis earnings coinciding with recent earnings patterns. If
statutory-basis earnings are less then recent patterns due to adverse
operating conditions or further indemnity reinsurance transactions of this
nature or other factors, or if dividends are approved and paid at amounts
higher than recent history, the statutory-basis unassigned surplus may not
return to a positive position as soon as expected. Although no assurance can
be given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
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, 1998, 885,252 and 504,369 shares of LNC common stock were
subject to options granted to Company employees and agents, respectively,
under the stock option incentive plans of which 430,053 and 87,160,
respectively, were exercisable on that date. The exercise prices of the
outstanding options range from $23.50 to $96.41. During 1998, 1997 and 1996,
136,469, 170,789 and 72,405 options were exercised, respectively, and
18,288, 1,846 and 10,950 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, 1998 and 1997 is a net
liability of $670,100,000 and $516,900,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels and/or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves could be required in the future. Accordingly, this liability may
prove to be deficient or excessive. The Company reviews reserve levels on an
ongoing basis. However, it is management's opinion that such future
development will not materially affect the financial position of the
Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. 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 reserves by $80,000,000 in
1997.
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
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 1998, 1997 and 1996 was
$34,000,000, $29,300,000 and $26,400,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1999 $ 18.9
- --------------------------------------
2000 18.4
- --------------------------------------
2001 18.7
- --------------------------------------
2002 18.7
- --------------------------------------
2003 18.6
- --------------------------------------
Thereafter 116.6
- -------------------------------------- ---------
$ 209.9
---------
---------
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne operations.
Total costs incurred in 1998 were $54,800,000. Future minimum annual costs
range from $33,600,000 to $56,800,000, however future costs are dependent on
usage and could exceed these amounts.
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. 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 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, 1998, the reserves associated with
these reinsurance arrangements totaled $1,608,500,000. 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 accompanying statutory-basis financial statements reflect
premiums, benefits and policy acquisition expenses net of reinsurance ceded.
The Company remains liable if its reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American Statements Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LLANY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA Corporation ("CIGNA"). The Company
paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$1,127,700,000 in 1998, which is included in the Statement of Operations
line item "Underwriting, acquisition, insurance and other expenses." 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.
Pursuant to the terms of the reinsurance agreement, the Company, LLANY and
CIGNA are in the final stages of agreeing to the statutory-basis values of
these assets and liabilities. Any changes to these values that may occur in
future periods will not be material to the Company's financial position.
Subsequent to this transaction, the Company and LLANY announced that they
had reached an agreement to sell the administration rights to a variable
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
annuity portfolio that had been acquired as part of the block of business
assumed on January 2, 1998. This sale closed on October 12, 1998 with an
effective date of August 1, 1998.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
On October 1, 1998, the Company and LLANY entered into an indemnity
reinsurance transaction whereby the Company and LLANY reinsured 100% of a
block of individual life insurance business from Aetna, Inc. The Company
paid $856,300,000 to Aetna on October 1, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$815,300,000 in 1998, which is included in the Statement of Operations line
item "Underwriting, acquisition, insurance and other expenses." At the time
of closing, this block of business had statutory liabilities of
$2,813,300,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities. The Company financed this reinsurance transaction with proceeds
from short-term debt borrowings from LNC until the December 18, 1998 surplus
note was approved by the Insurance Department. Subsequent to the Aetna
transaction, the Company and LLANY announced that they had reached an
agreement to retrocede the sponsored life business assumed for $87,600,000.
The retrocession agreement closed on October 14, 1998 with an effective date
of October 1, 1998.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1998, the Company has provided $44,900,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company has retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. 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 $43,400,000 and $8,200,000 at December 31, 1998
and 1997, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1998, 25% of such mortgages ($980,500,000) involved properties
located in Texas and California. Such investments consist of first mortgage
liens on completed income-producing properties and the mortgage outstanding
on any individual property does not exceed $58,200,000.
At December 31, 1998, 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 will depend 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 not have a material adverse affect on the financial position of the
Company.
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Four lawsuits involving alleged fraud in the sale of interest sensitive
universal life and whole life insurance have been filed as class actions
against the Company, although the court has not certified a class in any of
these cases. Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While the relief sought in
these cases is substantial, it is premature to make assessments about the
potential loss, if any, because the status of the cases ranges from the
early states of litigation to the dismissal and appeals stage. 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 at December 31, 1998 relate to mortgage loan
pass-through certificates. 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. The
outstanding guarantees as of December 31, 1998 and 1997 were $30,900,000 and
$41,600,000, respectively. 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, 1998 and 1997.
The Company's wholly owned subsidiary, LNH&C, accepts personal accident
reinsurance programs from other insurance companies. Most of these programs
are presented to LNH&C by independent brokers who represent the ceding
companies. Certain excess of loss personal accident reinsurance programs
created in the London market during 1993 through 1996 have produced and have
potential to produce significant losses. At December 31, 1998 and 1997,
liabilities of $177,400,000 and $186,300,000, respectively, have been
established for such programs. These reserves are based on various estimates
that are subject to considerable uncertainty. Accordingly, this reserve 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 and LNH&C continue to investigate the personal accident
reinsurance programs to determine if there are additional programs including
certain workers compensation programs, which may produce losses. At this
time, the Company and LNH&C do not have sufficient information to determine
whether or not it is probable that additional losses have been incurred nor
can the Company and LNH&C accurately estimate the ultimate cost or timing of
the outcome on these programs.
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, commodity risk, credit risk, 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
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
NOTIONAL OR -----------------------------------
(IN MILLIONS) CARRYING FAIR CARRYING FAIR
-------------------------------------------------------
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1998 1998 1997 1997
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,108.8 $4,900.0 $ 9.3 $ .9 $13.9 $ .9
---------------------------------
Swaptions 1,899.5 1,752.0 16.2 2.5 6.9 6.9
---------------------------------
Interest rate swaps 258.3 10.0 -- 9.9 -- (1.8)
---------------------------------
Put options 21.3 -- -- 2.2 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,287.9 6,662.0 25.5 15.5 20.8 6.0
Foreign currency derivatives:
Forward contracts 1.5 163.1 -- -- 5.4 5.4
---------------------------------
Foreign currency swaps 47.2 15.0 -- .3 -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
48.7 178.1 -- .3 5.4 3.3
Commodity derivatives:
Commodity swaps 8.1 -- -- 2.4 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
$6,344.7 $6,840.1 $25.5 $18.2 $26.2 $ 9.3
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ------------------------------------
New contracts 708.8 -- -- 50.0 218.3 1,080.0
- ------------------------------------
Terminations and maturities (1,500.0) (600.0) -- (50.0) (70.8) --
- ------------------------------------ --------- --------- --- --------- --------- ---------
Balance at end of year $ 4,108.8 $ 4,900.0 $ -- $ -- $ 1,899.5 $ 1,752.0
- ------------------------------------ --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES
CONTRACTS INTEREST RATE SWAPS
--------------------------------------------
1998 1997 1998 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ 147.7 $ 10.0 $ --
- -------------------------------------------------------------
New contracts -- 88.3 2,226.6 10.0
- -------------------------------------------------------------
Terminations and maturities -- (236.0) (1,978.3) --
- ------------------------------------------------------------- --- --------- --------- ---------
Balance at end of year $ -- $ -- $ 258.3 $ 10.0
- ------------------------------------------------------------- --- --------- --------- ---------
--- --------- --------- ---------
</TABLE>
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
PUT OPTIONS COMMODITY SWAPS
------------------------------------------------
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ -- $ --
- --------------------------------------------------------------------
New contracts 21.3 -- 8.1 --
- --------------------------------------------------------------------
Terminations and maturities -- -- -- --
- -------------------------------------------------------------------- --------- --- --- ---
Balance at end of year $ 21.3 $ -- $ 8.1 $ --
- -------------------------------------------------------------------- --------- --- --- ---
--------- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
------------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------------
New contracts 419.8 833.1 -- -- 39.2 --
- -------------------------------------------
Terminations and maturities (581.4) (921.6) -- (43.9) (7.0) --
- ------------------------------------------- --------- --------- --- --------- --------- ---------
Balance at end of year $ 1.5 $ 163.0 $ -- $ -- $ 47.2 $ 15.0
- ------------------------------------------- --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 1999 through 2006, 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 ($9,300,000 as of December 31, 1998) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 1999 through 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 rising
interest rates. The premium paid for the swaptions is included in other
assets ($16,200,000 as of December 31, 1998) and is being amortized over the
terms of the agreements. This amortization is included in net investment
income.
SPREAD LOCK AGREEMENTS
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 FUTURE CONTRACTS
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 SWAP AGREEMENTS
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 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.
The Company also uses interest rate swap agreements to hedge its exposure to
interest rate fluctuations related to the anticipated purchase of assets to
support newly acquired or assumed blocks of business. Once the assets are
purchased, the gains resulting from the termination of the swap agreements
are applied to the basis of the assets purchased. The gains are recognized
in earnings over the life of the assets.
PUT OPTION
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate a fixed income, fixed
maturity investment. The put options give the Company the right, but not the
obligation, to sell to the counterparty of the agreement the specified
securities on a specified date at a fixed price.
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
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.
COMMODITY SWAP
The Company uses a commodity swap to hedge its exposure to fluctuations in
the price of gold, which is the underlying variable in determining the
periodic interest payments associated with a fixed income security. A
commodity swap is a contractual agreement to exchange a certain amount of a
particular commodity for a fixed amount of cash. The Company owns a fixed
income security that meets its coupon payment obligations in gold bullion.
The Company is obligated to pay to the counterparty the gold bullion, and in
return, receives from the counterparty a stream of fixed income payments.
The fixed income payments are the product of the swap notional multiplied by
the fixed rate stated in the swap agreement. The net receipts/payments from
commodity swaps are recorded in net investment income.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$10,000,000, $7,000,000 and $6,900,000 in 1998, 1997 and 1996, respectively.
Deferred losses of $48,200,000 as of December 31, 1998, were the result of:
1) terminated and expired spread-lock agreements and; 2) terminated interest
rate swaps. 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, financial futures, interest rate swaps, put options and foreign
currency derivatives. However, the Company does not anticipate
nonperformance
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1998, the exposure was $21,100,000.
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.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market prices, where
available. For preferred stock not actively traded, fair values are based on
values of issues of comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income. The ratings 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.
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
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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
For short-term debt, the carrying value approximates fair value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for
similar types of borrowing arrangements.
GUARANTEES
The Company's guarantees include guarantees related to 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 zero.
DERIVATIVES
The Company employs several different methods for determining the fair value
of its derivative instruments. Fair values for these contracts are based on
current settlement values. These values are based on quoted market prices
for the foreign currency exchange contracts and financial future contracts
and; 2) industry standard models that are commercially available for
interest rate cap agreements, swaptions, spread lock agreements, interest
rate swaps, commodity swaps and put options.
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.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the accompanying
statutory-basis balance sheets at fair value. The related liabilities are
also reported at fair value in amounts equal to the separate account assets.
S-29
<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
----------------------------------------------
1998 1997
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 23,830.9 $ 25,065.5 $ 18,560.7 $ 19,798.6
- -----------------------------------------------
Preferred stocks 236.0 242.5 257.3 268.7
- -----------------------------------------------
Unaffiliated common stocks 259.3 259.3 436.0 436.0
- -----------------------------------------------
Mortgage loans on real estate 3,932.9 4,100.1 3,012.7 3,179.2
- -----------------------------------------------
Policy loans 1,606.0 1,685.9 660.5 648.3
- -----------------------------------------------
Other investments 434.4 434.4 335.5 335.5
- -----------------------------------------------
Cash and short-term investments 1,725.4 1,725.4 2,133.0 2,133.0
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,845.8) (17,486.4) (17,324.2) (16,887.6)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (714.4) (738.2) (1,267.0) (1,294.6)
--------------------------------------------
Short-term debt (140.0) (140.0) (120.0) (120.0)
- -----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,335.1) -- --
- -----------------------------------------------
Derivatives 25.5 18.2 26.2 9.3
- -----------------------------------------------
Investment commitments -- (0.6) -- (0.5)
- -----------------------------------------------
Separate account assets 36,907.0 36,907.0 31,330.9 31,330.9
- -----------------------------------------------
Separate account liabilities (36,907.0) (36,907.0) (31,330.9) (31,330.9)
- -----------------------------------------------
</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 affiliates. The bulk of
the transaction was completed in the form of an assumption reinsurance
transaction, which resulted in a ceding commission of $71,800,000. The
ceding commission resulted in admissible goodwill of $62,300,000, which is
being 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 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 the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity Distributors,
Inc. ("LLAD"), has a nearly exclusive general agent's 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 LLAD override commissions of $76,700,000 in 1998 and override
commissions and operating expense allowances of $61,600,000 and $56,300,000
in 1997 and 1996, respectively. LLAD incurred expenses of $102,400,000,
$5,500,000 and $15,700,000 in 1998, 1997 and 1996, 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 LLAD agreed to increase the override
commission expense and eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1998 and 1997 include the
Company's participation in a short-term investment pool with LNC of
$383,600,000 and $325,600,000, respectively. Related investment income
amounted to $16,800,000, $15,500,000 and $15,300,000 in 1998, 1997 and 1996,
respectively. Short-term loan payable to parent company at December 31, 1998
and 1997 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $92,100,000, $48,500,000 and
$34,100,000 in 1998, 1997 and 1996, 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
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 13.7 $ 11.9 $ 17.9
- ----------------------
Insurance ceded 290.1 100.3 302.8
- ----------------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 197.3 $ 245.5
- ------------------------
Future policy benefits
and claims ceded 1,125.0 997.2
- ------------------------
Amounts recoverable on
paid and unpaid losses 84.2 30.4
- ------------------------
Reinsurance payable on
paid losses 6.0 5.3
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,375.4 1,115.4
- ------------------------
</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 $318,300,000 and $280,900,000 at December 31, 1998 and 1997,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1998 and 1997, LNC had guaranteed $237,000,000 and $229,100,000,
respectively, of these letters of credit. At December 31, 1998, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $122,400,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially all of the separate accounts do not
have any minimum guarantees and the investment risks associated with market
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$3,953,300,000, $4,821,800,000 and $4,148,700,000 in 1998, 1997
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
and 1996, respectively. Reserves for separate accounts with assets at fair
value were $36,145,900,000 and $30,560,700,000 at December 31, 1998 and
1997, respectively. All reserves are subject to discretionary withdrawal at
market value.
A reconciliation of transfers to (from) separate accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 3,954.9 $ 4,824.0
- ------------------------------------------------------------
Transfers from separate accounts (4,069.8) (2,943.8)
- ------------------------------------------------------------ --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (114.9) $ 1,880.2
- ------------------------------------------------------------ --------- ---------
--------- ---------
</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 $1,962.6
- ----------------------------------------
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>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (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 Company has been
redirecting a large portion of internal Information Technology efforts and
contracting with outside consultants to update systems to address Year 2000
issues. Experts have been engaged to assist in developing work plans and
cost estimates and to complete remediation activities.
For the year ended December 31, 1998, the Company identified expenditures of
$26,300,000 to address this issue. This brings the expenditures for 1996
through 1998 to $34,200,000 million. The Company's financial plans for 1999
and 2000 include expected expenditures of an additional $38,300,000 bringing
estimated overall Year 2000 expenditures to $72,500,000. Because updating
systems and procedures is an integral part of the Company's on-going
operations, approximately 50% of expenditures shown above are expected to
continue after all Year 2000 issues have been resolved. Actual Year 2000
expenditures through December 31, 1998 and future Year 2000 expenditures are
expected to be funded from operating cash flows. The anticipated cost of
addressing Year 2000 issues is based on management'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. Such costs will be closely monitored
by management. Nevertheless, there can be no guarantee that actual costs
will not be higher than these estimated costs. 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. The total
expenditures identified represent only the Company's portion of LNC's larger
expenditures to address the Year 2000 issue.
The current scope of the overall Year 2000 program includes the following
four major project areas: 1) addressing the readiness of business
applications, operating systems and hardware on mainframe, personal computer
and Local Area Network platforms (IT); 2) addressing the readiness of non-IT
embedded software and equipment (non-IT); 3) addressing the readiness of key
business partners and 4) establishing Year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases.
Phase one involves raising awareness and creating an inventory of all IT and
non-IT assets. The second phase consists of assessing all items inventoried
to initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
The Company has completed those four phases for over two-thirds of its high
priority IT systems, including those provided by software vendors. While the
Company's year 2000 program for nearly all high priority IT systems is
expected to be completed in the first quarter 1999, phase four, for a small
but important subset of these systems, will continue through the end of the
second quarter 1999. As of December 31, 1998, the status of projects
addressing readiness of IT assets is: 100% of IT assets have been
inventoried (Phase 1) and assessed (Phase 2); 94% of IT projects have been
through the remediation phase (Phase 3) with the last project scheduled for
completion by the end of March 1999; and 69% of IT projects have completed
the testing phase (Phase 4) with the last project scheduled to finish
testing by the end of June 1999. A portion of the effort that extends into
1999 is dependent on outside third parties and is behind the original
schedule. The Company is working with these parties to modify the completion
schedule.
As of December 31, 1998, the status of projects that address readiness of
high priority non-IT assets is: 100% of non-IT assets have been inventoried
(Phase 1) and assessed (Phase 2); 79% of non-IT projects addressing
remediation (Phase 3) have been completed and 21% of non-IT projects have
completed the testing phase (Phase 4). The Company expects to have all
phases related to high priority non-IT completed by the end of October 1999.
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED) (CONTINUED)
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being
developed. The most significant categories of key business partners are
financial institutions, software vendors and utility providers (gas,
electric and telecommunications). Surveys have been mailed to these key
business partners. Based on responses received, current levels of readiness
are being assessed, follow-up contacts are underway, alternative strategies
are being developed and testing is being scheduled where feasible. This
effort is expected to continue well into 1999. As noted above, software
vendor assessments are considered part of the IT projects and, therefore,
would follow the schedule shown above for such projects.
While the Company is working to meet the schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact the Company and other similar uncertainties.
A worst case scenario might include the Company's inability to achieve Year
2000 readiness with respect to one or more of the Company's significant
policyholder systems resulting in a material disruption to the Company's
operations. Specifically, the Company could experience an interruption in
its ability to collect and process premiums or deposits, process claim
payments, accurately maintain policyholder information, accurately maintain
accounting records and/or perform adequate customer service. Should the
worst case scenario occur, it could, depending on its duration, have a
material impact on the Company's results of operations and financial
position. Simple failures can be repaired and returned to production within
a matter of hours with no material impact. Unanticipated failures with a
longer service disruption period would have a more serious impact. For this
reason, the Company is placing significant emphasis on risk management and
Year 2000 contingency planning. The Company is in the process of modifying
its contingency plans to address potential Year 2000 issues. Where these
efforts identify high risks due either to unacceptable work around
procedures or significant readiness risks, appropriate risk management
techniques are being developed. These techniques, such as resource shifting
or use of alternate providers, will be employed to provide stronger
assurances of readiness. The Company has gone through exercises to identify
worst case scenario failures. At this time, the Company believes its plans
are sufficient to mitigate identified worst case scenarios.
S-34
<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,
1998 and 1997, and the related statutory-basis statements of
operations, changes in capital and surplus and cash flows for
each of the three years in the period ended December 31, 1998.
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, 1998 and
1997, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
February 1, 1999
S-35
