<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1999
REGISTRATION NO. 33-22740
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 14 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
------------------------
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
(FORMERLY: LINCOLN NATIONAL FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G)
(EXACT NAME OF TRUST)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(NAME OF DEPOSITOR)
1300 SOUTH CLINTON STREET
P.O. BOX 1110
FORT WAYNE, IN 46801
(COMPLETE ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
Name and complete address of agent for Copy to:
service:
Brian Burke, Esquire George N. Gingold
Counsel 197 King Philip Drive
The Lincoln National West Hartford, CT
Life Insurance Company 06117-1409
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, Indiana 46801
------------------------
Title of securities being registered: Flexible Premium Variable Life
Insurance Policies.
Approximate date of proposed public offering: Continuous.
It is proposed that this filing will become effective (check appropriate
box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on May 1, 1999 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (1)
/ / on (date) pursuant to paragraph (a) (1) of rule 485
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<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
FOR LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
<TABLE>
<CAPTION>
N-8B-2
ITEM CAPTION IN PROSPECTUS
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<C> <S>
1 Cover Page
2 Cover Page
3 Not applicable
4 Lincoln Life
5 Lincoln Life
6 The Separate Account
7 Not Required
8 Not Required
9 Legal Proceedings
10 The Separate Account; Right to Examine Policy; Surrender of the Policy; Withdrawals; Proceeds and payment
options; Addition, Deletion, or Substitution of Investments; Transfer Between Subaccounts; Policy Lapse
and Reinstatement; Voting Rights; Premium Payment and Allocation of Premiums; Death Benefits and Death
Benefit Types; Policy Changes; Policy Value; Proceeds and Payment Options
11 Lincoln Life; The General Account; The Separate Account
12 The Separate Account; Lincoln Life
13 Charges and Deductions
14 Requirements for Issuance of a Policy
15 Premium Payment and Allocation of Premiums
16 Premium Payment and Allocation of Premiums; Percent of Premium Charge; Charges and Deductions
17 Surrender of the Policy
18 The Separate Account
19 Reports and Records
20 Not Applicable
21 Loans
22 Not applicable
23 Safekeeping of the Account's Assets
24 General Provisions
25 Lincoln Life
26 Not Applicable
27 Lincoln Life
28 Executive Officers and Directors of Lincoln National Life Insurance Co.
29 Lincoln Life
30 Not applicable
31 Not applicable
32 Not applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-8B-2
ITEM CAPTION IN PROSPECTUS
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
33 Not applicable
34 Not applicable
35 Distribution of the Policy
36 Not Required
37 Not Applicable
38 Distribution of the Policy
39 Distribution of the Policy
40 Not Applicable
41 Lincoln Life; Distribution of the Policy
42 Not Applicable
43 Not Applicable
44 Not Applicable
45 Not Applicable
46 Not Applicable
47 The Separate Account
48 Not Applicable
49 Not Applicable
50 The Separate Account
51 Lincoln Life; Premium Payment and Allocation of Premiums; Surrender of the Policy; Withdrawals; Proceeds;
Policy Lapse and Reinstatement; Charges and Deductions
52 Addition, Deletion and Substitution of Investments
53 Federal Tax Matters
54 Not Applicable
55 Not Applicable
56 Not Required
57 Not Required
58 Not Required
59 Not Required
</TABLE>
<PAGE>
LINCOLN LIFE
VARIABLE
UNIVERSAL LIFE
PROSPECUTS
Variable Life Account G
April 30, 1998
Form VUL 25106-1 4/98
<PAGE>
VUL III
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
Home Office Location and Administrative Mailing Address:
The Lincoln National Life Insurance Co.
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, Ind. 46801
Telephone Number: 1-800-4LINCOLN
This propectus describes a flexible premium variable life insurance contract
(the "policy"), offered by The Lincoln National Life Insurance Company ("Lincoln
Life", "we", the "company").
The policy features:
- flexible premium payments;
- a choice of one of two death benefit options;
- a choice of underlying investment options.
The mutual funds ("funds") available through Lincoln Life Flexible Premium
Variable Life Account G ("Separate Account") are:
- Lincoln National Growth and Income Fund, Inc.
- Lincoln National Special Opportunities Fund, Inc.
- American Variable Insurance Series:
-- 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.
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.
Propectus Dated May 1, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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SUMMARY OF THE POLICY 1
- --------------------------------------------------
LINCOLN LIFE, THE GENERAL ACCOUNT AND
THE SEPARATE ACCOUNT
Lincoln Life 5
The General Account 5
The Separate Account 5
Fund participation agreements 6
The investment advisors 6
Addition, deletion, or substitution
of investments 6
- --------------------------------------------------
THE POLICY
Requirements for issuance of a policy 7
Units and unit values 7
Premium payment and allocation of
premiums 7
Dollar cost averaging program 9
Effective date 9
Right to examine policy 10
Policy termination 10
- --------------------------------------------------
CHARGES AND DEDUCTIONS
Percent of premium charge 10
Contingent deferred sales charge 10
Contingent deferred administrative
charge 11
Surrender charge 12
Monthly deductions 12
Cost of insurance charges 12
Monthly administrative charge 13
Fund charges and expenses 13
Mortality and expense risk charge 13
Other charges 14
Reduction of charges 14
Term conversion credits 14
- --------------------------------------------------
POLICY BENEFITS
Death benefit and death benefit types 14
Death benefit guarantee 16
Policy changes 16
Policy value 17
Transfer between subaccounts 18
Transfer to and from the General
Account 19
Loans 19
Withdrawals 19
Policy lapse and reinstatement 20
<CAPTION>
PAGE
- --------------------------------------------------
<S> <C>
Surrender of the policy 21
Proceeds and payment options 21
- --------------------------------------------------
GENERAL PROVISIONS
The contract 22
Suicide 22
Representations and contestability 22
Incorrect age or sex 22
Change of owner or beneficiary 22
Assignment 23
Reports and records 23
Projection of benefits and values 23
Postponement of payments 23
Riders 24
- --------------------------------------------------
DISTRIBUTION OF THE POLICY 25
- --------------------------------------------------
FEDERAL TAX MATTERS
Tax status of the policy 26
Tax treatment of policy benefits 27
Taxation of the Separate Account 29
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VOTING RIGHTS 29
- --------------------------------------------------
STATE REGULATION OF LINCOLN LIFE AND
THE SEPARATE ACCOUNT 30
- --------------------------------------------------
SAFEKEEPING OF THE SEPARATE ACCOUNT'S
ASSETS 30
- --------------------------------------------------
LEGAL PROCEEDINGS 30
- --------------------------------------------------
EXPERTS 31
- --------------------------------------------------
OFFICERS & DIRECTORS OF LINCOLN
NATIONAL LIFE INSURANCE CO. 31
- --------------------------------------------------
PREPARING FOR YEAR 2000 33
- --------------------------------------------------
ADDITIONAL INFORMATION 34
- --------------------------------------------------
APPENDIX A: Table of base minimum
premiums 35
- --------------------------------------------------
APPENDIX B: Table of surrender
charges 37
- --------------------------------------------------
APPENDIX C: Illustrations of policy
values 39
- --------------------------------------------------
FINANCIAL STATEMENTS
Separate Account Financials G-1
Company Financials S-1
</TABLE>
<PAGE>
SUMMARY OF THE POLICY
This section is an overview of key policy features and is intended to provide
you with a brief explanation of some of the important features of your policy.
(Regulations in your state may vary the provisions of your own policy.) Its
value may change on a:
1.) fixed basis;
2.) variable basis; or a
3.) combination of both fixed and variable bases.
At all times, your policy must qualify as life insurance under the Internal
Revenue Code of 1986, as amended (the "Code") to receive favorable tax treatment
under federal law. If these requirements are met, you may benefit from favorable
federal tax treatment. Lincoln Life reserves the right to return your premium
payments if they result in your policy's failing to meet federal tax law
requirements.
INITIAL CHOICES TO BE MADE
The initial owner of the policy (the "owner" or "you") is named in the "policy
specifications" 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:
- - one of two death benefit options;
- - the amount of premium you want to pay; and
- - how your premium is allocated among the funding options you select.
Several riders are also available under the policy. See page 24.
LEVEL OR VARYING DEATH BENEFIT
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.
When you purchase your policy, you must choose one of two death benefit options.
If you choose option 1, the death benefit will be the greater of: the specified
amount of the policy or a specified percentage of the policy value on or prior
to the date of the insured's death. If you choose option 2, the death benefit
will be the greater of: the specified amount plus the policy value of the policy
or a specified percentage of the policy value on or prior to the date of death.
See page 15.
For the first two years of your policy, there is a death benefit guarantee
monthly premium. This means that the death benefit will not be lower than the
initial specified amount and regardless of the gains or losses of the funds you
select as long as you pay that premium. Therefore, the initial death benefit
under your policy would be guaranteed for two years even though your policy
value is insufficient to pay current monthly deductions. If you have borrowed
against your policy or surrendered a portion of your policy, your initial death
benefit will be reduced by the loan account balance and any surrendered amount.
See page 15.
AMOUNT OF PREMIUM PAYMENT
When you apply for your policy, you must decide how much premium to pay. Premium
payments may be changed within the limits described on page 8. If your policy
lapses because your monthly premium deduction is larger than the total
accumulation value, you must reinstate your policy. See page 20.
When you first receive your policy you will have 10 days to look it over. This
is called the "right-to-examine" period. Use this time to review your policy and
make sure it meets your needs. During this
1
<PAGE>
time period your initial premium payment will be deposited in the General
Account. If you then decide you do not want your policy, all premium payments
will be returned to you with no interest paid. State laws where you live might
change the number of days in the right-to-examine time period. See page 10.
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.
Twelve 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, 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 5.
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 G, established by Lincoln Life to receive and invest net premiums
paid under the policy. The funds and their investment objectives are:
THE LINCOLN NATIONAL GROWTH AND INCOME FUND, INC. -- The investment objective is
long-term capital appreciation. The fund buys stocks of established companies.
THE LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC. -- The investment
objective is maximum capital appreciation. The fund primarily invests in
mid-size companies whose stock have significant growth potential. Current income
is a secondary consideration.
AMERICAN VARIABLE INSURANCE SERIES:
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
2
<PAGE>
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 Investor's
Services, 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 Investor's Services, 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 funds' prospectuses.
WHAT CHARGES AND DEDUCTIONS ARE MADE FROM MY POLICY?
We deduct a premium charge of 5.95% from each premium payment. We make monthly
deductions for administrative expenses (currently $6 per month) along with the
cost of insurance and any riders that are placed on your policy. We make daily
deductions against the Separate Account for mortality and expense risks. This
charge is currently at an annual rate of .80%, and is guaranteed not to exceed
.90%.
Each fund has its own management fee charge, also deducted daily. Each fund's
expense levels will affect its investment results. The table on page 13 shows
your current expense levels for each fund.
Each policy year you may make 12 transfers between subaccounts or between
subaccounts and the General Account. For each transfer a charge of $10 is
deducted from the amount transferred. This charge is currently being waived. See
page 18.
The surrender charge is the amount retained by us if the policy is surrendered.
This charge is deducted from policy value upon surrender of the policy or upon a
voluntary reduction in specified amount during the first 16 policy years or
during the 16 years following a requested increase in specified amount. The
surrender charge is equal to the combination of the contingent deferred sales
charge and the contingent deferred administrative charge. See page 10.
You may borrow within described limits under your policy. If you borrow interest
will be charged to the loan account. Currently, the interest rate is 6%.
Interest will be credited to the loaned amount. Currently, the interest credited
is at an annual rate of 4.95%. See page 19.
3
<PAGE>
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 27), 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 cost
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, 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 C).
4
<PAGE>
LINCOLN LIFE, THE GENERAL ACCOUNT AND THE SEPARATE ACCOUNT
LINCOLN LIFE
Lincoln Life 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 investment management and mutual
funds.
THE GENERAL ACCOUNT
The General Account of Lincoln Life consists of all assets owned by Lincoln Life
other than those allocated to any of its separate accounts, including the
Separate Account. The General Account supports Lincoln Life's insurance and
annuity obligations. Because of applicable exemptive and exclusionary
provisions, interests in the General Account have not been registered under the
Securities Act of 1933, and the General Account is not registered as an
investment company under the Investment Company Act of 1940 ("1940 Act").
THE SEPARATE ACCOUNT
We established the Separate Account on May 25, 1988. 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 twelve subaccounts. Each subaccount invests
exclusively in shares of one of the following funds: the Lincoln National Growth
and Income Fund, Inc., the Lincoln National Special Opportunities Fund, Inc., or
American Variable Insurance Series. American Variable Insurance Series has ten
funds available for investment by the subaccounts: 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
5
<PAGE>
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 or existing, between its variable
annuity and variable life insurance contract owners, we have agreed to notify
the Series' Board of Trustees and the funds' Board of Directors and to remedy,
at our own expense, any such conflict. Each series within the American Variable
Insurance Series has two classes of shares, designated as class 1 shares and
class 2 shares. Class 1 and class 2 differ in that class 2 (but not class 1)
shares are subject to a 12b-1 plan for the payment by the fund of certain
distribution-related expenses. Only class 1 shares are available under the
policy.
There is no assurance that any of the available funds will achieve its stated
objective.
FUND PARTICIPATION AGREEMENTS
Lincoln Life has entered into agreements with the fund groups under which
Lincoln Life makes the funds available under the policies and performs certain
administrative services. In some cases, the advisors or distributors may
compensate Lincoln Life at annual rates of between .10% and .25% of assets in a
particular fund attributable to the policies.
THE INVESTMENT ADVISORS
Lincoln Investment Management Inc. (Lincoln Investment) is the investment
advisor for the Lincoln National Growth and Income Fund, Inc. and the Lincoln
National Special Opportunities Fund, Inc. Lincoln Investment is a wholly owned
subsidiary of LNC. Lincoln Investment has entered into a subadvisory agreement
with Vantage Global Advisors, Inc., under which the sub-advisor may perform some
or substantially all of the advisory services required by these two funds. No
additional compensation from the assets of these funds will be assessed as a
result of the sub-advisory agreement. Lincoln Investment is headquartered at 200
East Berry Street, Fort Wayne, Indiana 46802, and is registered with the
Securities and Exchange Commission as an investment adviser.
Capital Research and Management Co. ("CRMC"), an investment management
organization founded in 1931, is the investment advisor to American Variable
Insurance 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. It is also registered
with the Commission as an investment adviser.
ADDITION, DELETION, OR
SUBSTITUTION OF INVESTMENTS
Lincoln Life does not have control over the funds and therefore cannot guarantee
that 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 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
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 series or classes of policies, or from
permitting a conversion between series or classes of policies on the basis of
requests made by policyowners.
Lincoln Life also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new fund or series of a fund,
or in shares of another investment company, with a specified investment
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 policyowners on a basis to be determined by
Lincoln Life.
6
<PAGE>
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 specified amount of a policy is
$200,000. A policy will generally be issued only to insureds 80 years of age or
younger (ages 81-85 by exception only) who supply satisfactory evidence of
insurability to us. Acceptance is subject to our underwriting rules and, except
in California, we reserve the right to reject an application for any reason.
Additional insurance on the life of other persons may be applied for by
supplemental application. Approval of the additional insurance will be subject
to evidence of insurability satisfactory to Lincoln Life.
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 repayments, 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 and transfer charges, income tax deductions (if any), cost of
insurance charges or monthly administrative charges), units are redeemed from
that subaccount. The number of units redeemed is determined by dividing the
dollar amount of the transaction by the unit value on the day the transaction is
made.
The unit value is also used to measure the net investment results in a
subaccount. The policy value on any valuation day is the sum of the values in
each subaccount in which policy values are allocated plus any policy value
allocated to the General Account. The value of each subaccount on each valuation
day is determined by multiplying the number of units held by a policy in each
subaccount by the unit value for that subaccount as determined for that
valuation day.
The unit value for a subaccount on a specified valuation date is determined by
dividing the value of all assets owned by that subaccount, net of the
subaccount's liabilities (including any accrued but unpaid daily mortality and
expense risk charges), by the total number of units held by policies in that
subaccount. Net investment results do not increase or decrease the number of
units held by the subaccount.
PREMIUM PAYMENT AND ALLOCATION OF PREMIUMS
Subject to certain limitations, you have considerable flexibility in determining
the frequency and amount of premiums. During the first two policy years, the
policy will lapse unless the total of all premiums paid (minus any partial
withdrawals and minus any outstanding loans) is at all times at least equal to
the death benefit guarantee monthly premium times the number of months since the
7
<PAGE>
initial policy date (including the current month) or the net cash surrender
value of the policy is greater than zero. Payment of the death benefit guarantee
monthly premium during the first two policy years will guarantee that the policy
will remain in force for the first two policy years despite negative net cash
surrender value (see Death benefit guarantee), but continued payment of such
premiums will not guarantee that the policy will remain in force thereafter. The
amount of the death benefit guarantee monthly premium is based on the base
minimum premium per $1,000 of specified amount (determined by the insured's age,
sex, and underwriting class) and includes additional amounts to cover charges
for additional benefits, monthly administrative charges, and extra cost of
insurance charges for substandard risks. A table of base minimum premiums per
$1,000 of specified amount is in Appendix A.
You may designate in the application one of several ways to pay the death
benefit guarantee monthly premium. You may elect to pay the first twelve months
of premiums in full prior to commencement of insurance coverage. Alternatively,
you may elect to pay a level planned periodic premium on a quarterly or
semi-annual basis sufficient to meet the premium requirements. Premiums may also
be paid monthly if paid by a pre-authorized check. Premiums, other than the
initial premium, are payable only at our administrative mailing address.
Each owner will also define a planned periodic premium schedule that provides
for payment of a level premium at fixed intervals for a specified period of
time. You are not required to pay premiums in accord with this schedule.
Furthermore, you have flexibility to alter the amount, frequency, and the time
period over which planned periodic premiums are paid. Failure to pay planned
periodic premiums will not of itself cause the policy to lapse, nor will the
payment of planned periodic premiums equal to or in excess of the required death
benefit guarantee monthly premiums guarantee that the policy will remain in
force beyond the first two policy years. Unless the policy is being continued
under the death benefit guarantee, (see Death benefit guarantee), 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 minimum
premiums required to keep the policy in force 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
until the maturity date. Monies received that are not designated as premium
payments will be assumed to be loan repayments if there is an outstanding loan
on the policy; otherwise, such monies will be assumed to be an unscheduled
premium payment.
PREMIUM LIMITATIONS. In no event can the total of all premiums paid 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. No further premiums will
be accepted until allowed by subsequent maximum premium limitations.
The tax status of a policy and the tax treatment of distributions from a policy
are dependent in part on whether or not the policy becomes a Modified Endowment
Contract ("MEC"). A policy will become a MEC if premiums paid into the policy
cause the policy to fail the 7-pay test set forth under Section 7702A of the
Code. We will monitor premiums paid into each policy after the date of this
prospectus to determine when a premium payment will exceed the 7-pay test and
cause the policy to become a MEC. If you have 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 you within 7 days of receipt.
If you
8
<PAGE>
have 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.
NET PREMIUMS. The net premium equals the premium paid less the percent of
premium charge (see Percent of premium charge.)
ALLOCATION OF NET PREMIUMS. In the application for a policy, you can allocate
all or part of the net premiums to the General Account and the various
subaccounts of the Separate Account. Notwithstanding the allocation in the
application, all net premiums received prior to the record date will initially
be allocated to the General Account. Net premiums received prior to the record
date will be credited to the policy on the later of the policy date or the date
the premium is received. The 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. 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. 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 4.0%. You should
periodically review their allocations of premiums and values in light of market
conditions, interest rates, and overall estate planning requirements.
DOLLAR COST AVERAGING PROGRAM
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 $5,000 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 in 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
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
9
<PAGE>
the date on which the policy is approved for issue by Lincoln Life. It is stated
in the policy specifications, and policy anniversaries are measured from this
date.
For any increase, the effective date will be the first monthly anniversary day
(the same date each month as the policy date) on or next following the day the
application for the increase is approved.
For any insurance that has been reinstated, the effective date will be the first
monthly anniversary day on or next following the day the application for
reinstatement is approved.
RIGHT TO EXAMINE POLICY
The owner may, until a specified period of time has expired, examine the policy
and return it for refund of all premiums paid. The applicable period of time
will depend on the state in which the policy is issued, but will not expire
sooner than the latest of ten days after receipt of the policy, 45 days after
Part 1 of the application is completed, or ten days after the notice of
withdrawal right is mailed or delivered to the owner. Upon cancellation the
policy will be void from the beginning. An owner wanting a refund should return
the policy to either our administrative mailing address or to the registered
agent who sold it.
POLICY TERMINATION
All coverage under the policy will terminate when any one of the following
occurs:
1) the grace period ends without payment of required premium, and the policy
is not being continued under the death benefit guarantee provision,
2) the policy is surrendered,
3) the insured dies, or
4) the policy matures.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the policy to compensate Lincoln
Life for:
1) providing the insurance benefit set forth in the policy and any optional
insurance benefits added by rider;
2) administering the policy;
3) assuming certain risks in connection with the policy;
4) incurring expenses in distributing the policy.
The nature and amount of these charges are described more fully below.
PERCENT OF PREMIUM CHARGE. A sales charge of 5.95% is deducted from each premium
paid.
CONTINGENT DEFERRED SALES CHARGE (CDSC). During the first 16 policy years, the
policy value is subject to a contingent deferred sales charge (CDSC) which is
deducted only if the policy lapses or is surrendered. During the first policy
year, the CDSC is approximately equal to 30% of the required base minimum
premium for the designated specified amount. The base minimum premium required
varies with the age, sex, and rating class of the insured. To determine the
first year CDSC per $1,000 of specified amount, multiply the base minimum found
in the table of base minimum premiums (see Appendix A) times 30%.
During the second policy year, the CDSC is approximately equal to 30% of the
base minimum premium required for the first two policy years for the designated
specified amount. To determine the
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<PAGE>
second year CDSC per $1,000 of specified amount, multiply the base minimum
premium for the first two years times 30%. If the resulting CDSC exceeds $22.00
per $1,000 of specified amount, the CDSC is reduced to $22.00 per $1,000 of
specified amount. Furthermore, upon surrender of the policy at any time during
the first two policy years, the maximum total sales charges actually deducted
(percent of premium charge plus CDSC) will never exceed the following maximum:
30% of premiums paid up to the first 12 death benefit guarantee monthly
premiums, plus 10% of premiums paid up to the next 12 death benefit guarantee
monthly premiums, plus 5.95% of premiums paid in excess of those amounts.
During the third and subsequent policy years, the CDSC will equal the CDSC
during the second policy year times the percent indicated in the table below.
CONTINGENT DEFERRED ADMINISTRATIVE CHARGE (CDAC). During the first 16 policy
years, the policy value is subject to a contingent deferred administrative
charge (CDAC) which is deducted only if the policy lapses or is surrendered.
This charge is to recover costs for underwriting, issue and initial
administration of the policy. During the first policy year, the CDAC is
approximately equal to 30% of the required base minimum premium for the
designated specified amount. To determine the first year CDAC per $1,000 of
specified amount, multiply the base minimum premium found in the table of base
minimum premiums (see Appendix A) times 30%.
During the second policy year, the CDAC is approximately equal to 30% of the
base minimum premium required for the first two policy years for the designated
specified amount. To determine the second year CDAC per $1,000 of specified
amount, multiply the base minimum premium for the first two years times 30%. If
the resulting CDAC exceeds $22.00 per $1,000 of specified amount, the CDAC will
be reduced to $22.00 per $1,000 of specified amount.
During the third and subsequent policy years the CDAC will equal the CDAC during
the second policy year times the percent indicated in the table below.
An additional CDAC will be imposed under the policy in the event of each
requested increase in specified amount. The additional CDAC is an amount per
$1,000 of increased specified amount and will be deducted upon the surrender of
the policy at any time during the 16 years following such increase. The amount
of the CDAC will be equal to the CDAC that would apply to a newly issued policy
at the age of the insured at the time of the increase. The percentage of the
CDAC applicable in any year after the increase is shown in the following table,
where policy year is calculated from the date of the increase.
<TABLE>
<CAPTION>
DURING POLICY YEAR PERCENT OF CDSC AND CDAC
(OR AFTER AN INCREASE) TO BE DEDUCTED
<S> <C>
- --------------------------------------------------------------------------------------------
3, 4 or 5 100%
6 95%
7 90%
8 85%
9 80%
10 70%
11 60%
12 50%
13 40%
14 30%
15 20%
16 10%
</TABLE>
When you request an increase in the specified amount, no additional premium is
required provided that the current net cash surrender value is sufficient to
cover the CDAC associated with the increase, as well as the increase in the cost
of insurance charges which result from the increase in specified amount.
However, if the net cash surrender value is insufficient to cover such costs,
additional
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<PAGE>
premium will be required for the increase to be granted, and the percent of
premium charge will be deducted from that additional premium.
SURRENDER CHARGE. The total of all contingent deferred sales charges and all
contingent deferred administrative charges are collectively referred to as the
surrender charge. The surrender charges for the first 5 years are shown in
Appendix B. For surrender charges during policy years 6 through 16 the values
shown in Appendix B should be multiplied by the percentages given in the table
under Charges and deductions above. For increases in the specified amount,
additional surrender charges apply. During the first year after an increase, the
additional surrender charges are calculated by multiplying the values in
Appendix B by one-fourth. During years 2-5 after an increase, the values in
Appendix B should be multiplied by one-half. During years 6 through 16 after an
increase, the values in Appendix B are multiplied by one-half and by the
percentage given in the table above.
MONTHLY DEDUCTIONS. On the policy date and on each monthly anniversary day
following, deductions will be made from the policy value. These deductions are
of two types: a monthly administrative charge and a monthly cost of insurance
charge. Ordinarily, the monthly deductions are deducted from the policy value in
proportion to the values in the General Account and the subaccounts.
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 General Account and the subaccounts.
The cost of insurance charges depend upon a number of variables, and the cost
for each policy month can vary from month to month. It will depend, among other
things, on the amount for which Lincoln Life is at risk to pay in the event of
the insured's death. On each monthly anniversary day, we will determine the
monthly cost of insurance for the following month as equal to:
a. the death benefit on the monthly anniversary day; divided by
b. 1.0032737 (the monthly interest factor equivalent to an annual interest
rate of 4%); minus,
c. the policy value on the monthly anniversary day without regard to the cost
of insurance; divided by
d. 1,000; the result multiplied by
e. the applicable cost of insurance rate per $1,000 as described below.
The cost of insurance rates are based on the sex, attained age (age of the
insured on a policy anniversary), and rate class of the person insured. 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 are not based on sex. The monthly
cost of insurance rates may be changed by Lincoln Life from time to time. A
change in the cost of insurance rates will apply to all persons of the same
attained age, sex and rate class and whose policies have been in effect for the
same length of time. The cost of insurance rates will not exceed those described
in the table of guaranteed maximum insurance rates shown in the policy. For
attained ages under sixteen, these rates are based on the 1980 Commissioner's
Standard Ordinary Mortality Table, age last birthday; or for attained ages
sixteen and over, depending on the smoking status of the insured, these rates
are based on the 1980 Commissioner's Standard Ordinary Mortality Table, age last
birthday, or the 1980 Commissioner's Standard Ordinary Smoker Mortality Table,
age last birthday. Standard rate classes have guaranteed rates which do not
exceed 100% of the applicable table.
The rate class of an insured will affect the cost of insurance rate. We
currently place insureds into a standard rate class or rate classes involving a
higher mortality risk. In an otherwise identical policy, insureds in the
standard rate class will have a lower cost of insurance than those in the rate
class with the higher mortality risk. The standard rate class is also divided
into four categories: preferred
12
<PAGE>
nonsmoker, standard nonsmoker, preferred smoker, and standard smoker. Insureds
who are standard nonsmoker or preferred nonsmoker will generally incur a lower
cost of insurance than those insureds who are in the smoker rate classes.
Likewise, insureds who are preferred smoker or preferred nonsmoker will
generally incur a lower cost of insurance than similarly situated insureds who
are standard smoker or standard nonsmoker respectively.
MONTHLY ADMINISTRATIVE CHARGE. A monthly administrative charge of $6 is deducted
from the policy value each month the policy is in force to compensate us for
continuing administration of the policy, premium billings, overhead expenses,
and other miscellaneous expenses. We do not anticipate any profits from this
charge. This charge is guaranteed not to increase during the life of the policy.
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 .35% to .83%. These charges and other fund expenses have
the effect of reducing the investment results credited to the subaccounts.
<TABLE>
<CAPTION>
TOTAL ANNUAL
FUND OPERATING TOTAL FUND
EXPENSES WITHOUT TOTAL OPERATING EXPENSES
ASSET MANAGEMENT OTHER WAIVERS OR WAIVERS AND WITH WAIVERS OR
FUND FEE* EXPENSES* REDUCTIONS* REDUCTIONS* REDUCTIONS*
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LINCOLN NATIONAL FUNDS:
Growth and Income .31% .04% .35% 0.0 .35%
Special Opportunities .36% .06% .42% 0.0 .42%
AMERICAN VARIABLE INSURANCE SERIES:
Global Small
Capitalization** .79% .04% .83% 0.0 .83%
Global Growth .69% .06% .75% 0.0 .75%
Growth .40% .01% .41% 0.0 .41%
International .57% .09% .66% 0.0 .66%
Growth-Income .35% .01% .36% 0.0 .36%
Asset Allocation .44% .01% .45% 0.0 .45%
High-Yield Bond .49% .02% .51% 0.0 .51%
Bond .52% .02% .54% 0.0 .54%
U.S. Gov't/AAA-Rated .50% .01% .51% 0.0 .51%
Cash Management .45% .01% .46% 0.0 .46%
</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' prospectuses for more complete information about the expenses of
the funds.
MORTALITY AND EXPENSE RISK CHARGE. Lincoln Life deducts a daily charge as a
percent of the assets of the Separate Account as a mortality and expense risk
charge. This charge has the effect of reducing gross investment results credited
to the subaccounts. The daily rate currently charged is .0021917% (which is
approximately equal to an annual rate of .80%) of the value of the net assets of
the Separate Account. This deduction may increase or decrease, but is guaranteed
not to exceed .90% in any policy year.
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.
13
<PAGE>
OTHER CHARGES. Two other miscellaneous charges are occasionally incurred: a
withdrawal charge and a transfer charge. The withdrawal charge is incurred when
the owner of the policy requests a withdrawal from the policy value; the charge
is deducted from the withdrawn amount and the balance is paid to the owner.
Withdrawals may be made any time after the first policy year, but only one
withdrawal may be made per year. The withdrawal charge is $10 for each
withdrawal.
The transfer charge is incurred when the owner requests that funds be
transferred from one subaccount or the General Account to another subaccount or
the General Account. The transfer charge is $10, and is deducted from the amount
transferred; however, the transfer charge is currently being waived for all
transfers.
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.
REDUCTION OF CHARGES
The percent of premium charge, surrender charge, and the monthly administrative
charge set forth in this prospectus may be reduced because of special
circumstances that result in lower sales, administrative, or mortality expenses.
For example, special circumstances may exist in connection with sales to Lincoln
Life policyowners, or sales to employees of Lincoln Life. The amounts of any
reductions will reflect the reduced sales effort and administrative costs
resulting from, or the differences in expected death claims as a result of, the
special circumstances. Reductions will not be unfairly discriminatory against
any person, including the affected policyowners and owners of all other policies
funded by the Separate Account.
TERM CONVERSION CREDITS
We currently have a term conversion program which gives premium credits to the
policy if the owner is converting from a term insurance policy that meets
certain requirements. Term insurance policies issued by Lincoln Life or by any
other life insurance company may be considered for conversion to the policy
under this program and for possible term conversion credits. Except for
guaranteed term conversion privileges provided under some Lincoln Life term
insurance policies or otherwise provided by special agreement, all term
insurance policy conversions are subject to evidence of insurability
satisfactory to us. All conversion credits are deposited in the policy without
the percent of premium charge. The amount of the term conversion credits and the
requirements for qualification for those credits is subject to change by Lincoln
Life, but such changes will not be unfairly discriminatory against any person,
including the affected policyowners and owners of all other policies funded by
the Separate Account.
POLICY BENEFITS
DEATH BENEFIT AND DEATH BENEFIT TYPES
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 beneficiary in accordance with the
designated death benefit type. 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 under the designated death benefit
type will be increased by any unearned loan interest, and will be reduced by any
outstanding loan and any due and unpaid charges. (See Policy lapse and
reinstatement.) These proceeds will be further increased by any additional
insurance on the insured provided by rider.
14
<PAGE>
The policy offers two death benefit types: Option 1, basic coverage, and Option
2, basic plus policy value coverage. Generally, the owner designates the death
benefit type in the application. The owner may change the death benefit type at
any time. (See Policy changes.)
OPTION 1. 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.
OPTION 2. The death benefit is equal to the greater of the specified amount plus
the policy value 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.
Under a Option 1 basic coverage, the net amount at risk decreases as the policy
value increases. (The net amount at risk is equal to the death benefit less the
policy value.) Under a Option 2 basic plus policy value coverage, the net amount
at risk remains constant, so the cost of insurance deduction will be relatively
higher on a Option 2 basic plus policy value coverage than on a Option 1 basic
coverage. As a result, policy values under a Option 1 basic coverage tend to
increase faster than under a Option 2 basic plus policy value coverage, assuming
favorable investment performance. Because of this, policyowners that are more
interested in achieving higher policy values more quickly (assuming favorable
investment experience) would be more likely to select a Option 1 basic coverage.
In contrast, the death benefit under Option 2 will increase or decrease as the
policy value increases or decreases. Consequently, policyowners who are more
interested in increasing total death benefits (assuming favorable investment
experience) would be more likely to select a Option 2 basic plus policy value
coverage.
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 both examples, assume that the insured dies at under the age of 40
and that there is no outstanding policy loan.
15
<PAGE>
Under Option 1, a policy with a specified amount of $250,000 will generally pay
$250,000 in life insurance death benefits. However, because life insurance death
benefits 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 taken out of 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.
Under Option 2, a policy with a specified amount of $250,000 will generally pay
life insurance death benefits of $250,000 plus policy value. Thus, for example,
a policy with a specified amount of $250,000 and policy value of $50,000 will
yield a life insurance death benefit equal to $300,000 ($250,000 + $50,000); a
policy value of $100,000 will yield a life insurance death benefit of $350,000
($250,000 + $100,000). The life insurance death benefit cannot, however, be less
than 250% (the applicable specified percentage) of policy value. As a result, if
the policy value of the policy exceeds $166,667, the life insurance death
benefit will be greater than the specified amount plus policy value. Each
additional dollar added to policy value above $166,667 will increase the life
insurance death benefit by $2.50. A policy with a policy value of $200,000 will
therefore have a life insurance death benefit of $500,000 (250% X $200,000); a
policy value of $500,000 will yield a life insurance death benefit of $1,250,000
(250% X $500,000); a policy value of $1,000,000 will yield a life insurance
death benefit of $2,500,000 (250% X $1,000,000).
Similarly, any time policy value exceeds $166,667, each dollar withdrawn from
policy value will reduce the life insurance death benefit by $2.50. If at any
time, however, policy value multiplied by the specified percentage is less than
the specified amount plus policy value, then the life insurance death benefit
will be the specified amount plus policy value.
The above examples describe scenarios which include 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.
DEATH BENEFIT GUARANTEE
We expect payment of the required death benefit guarantee monthly premiums will
be sufficient, when combined with net investment results, to pay for all charges
to the policy during the first two policy years, and thereby provide life
insurance protection on the insured for that period. In some situations,
however, the combination of poor net investment results and monthly deductions
could result in the net cash surrender value being reduced to zero. In such
situations, we will continue the policy in force for the first two policy years,
provided the death benefit guarantee monthly premium requirement continues to be
met. Lincoln Life makes no charge for this additional benefit.
POLICY CHANGES
CHANGE IN TYPE OF DEATH BENEFIT. You may also change the type of death benefit
coverage from Option 1 to Option 2 or from Option 2 to Option 1. The request for
such a change must be made in writing on a form suitable to us. The change will
be effective on the first monthly anniversary day on or next following the day
we receive the request. No change in the type of death benefit will be allowed
if the resulting specified amount would be less than the minimum specified
amount of $50,000.
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If the change is from Option 1 to Option 2, the insured's specified amount after
such change will be equal to the insured's specified amount prior to such change
minus the policy value on the date of change.
If the change is from Option 2 to Option 1, the insured's specified amount after
such change will be equal to the insured's specified amount prior to such change
plus the policy value on the date of change.
CHANGES IN AMOUNT OF INSURANCE COVERAGE. In addition to the above changes, you
may request to increase or decrease the specified amount at any time. The
request for such a change must be from you and in writing on a form suitable to
us. Any decrease will become effective on the first monthly anniversary day on
or next following the day the request is received by us. Any such decrease will
reduce insurance first against insurance provided by the most recent increase,
next against the next most recent increases successively, and finally against
insurance provided under the original application. The specified amount after
any requested decrease may not be less than $50,000. Any request for an increase
must be applied for on a supplemental application. Such increase will be subject
to evidence of insurability satisfactory to us and to its issue rules and limits
at the time of increase. Furthermore, such increase will not be allowed unless
the net cash surrender value is sufficient to cover the next monthly deductions
and the surrender charge for the increase. Any increase will become effective on
the first monthly anniversary day on or next following the day the application
for increase is approved.
POLICY VALUE
The policy provides for the accumulation of policy value, which is calculated as
often as the assets of the Separate Account are valued. The policy value varies
with the investment performance of the General Account and of the Separate
Account, as well as other factors. In particular, policy value also depends on
any premiums received, any policy loans, and any charges and deductions assessed
the policy. The policy has no guaranteed minimum policy value.
On the policy date the policy value will be the initial net premium, minus the
sum of the following:
a. The monthly administrative charge;
b. The cost of insurance for the first month;
c. Any charges for extra benefits.
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 an annual rate of 4.0% (the General Account
guaranteed interest rate) on amounts allocated to the General Account;
d. Interest at not less than an annual rate of 4.0% on any outstanding loan
amount;
e. Any net premiums received since the preceding day.
Minus the sum of the following:
f. Any decrease due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
g. Any withdrawals;
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h. Any amount charged against the investment amount for federal or other
governmental income taxes;
i. The monthly administrative charge;
j. The cost of insurance for the following month;
k. 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 an annual rate of 4.0% (the General Account
guaranteed interest rate) on amounts allocated to the General Account;
d. Interest at not less than an annual rate of 4.0% on any outstanding loan
amount;
e. Any net premiums received since the preceding day.
Minus the sum of the following:
f. Any decrease due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
g. Any withdrawals;
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.
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, 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 to the subaccount by the fund 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.
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 transfers in writing on a form
suitable to us. We will follow reasonable procedures to determine that the
telephone requester is authorized to request such transfers, 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 is
received at our administrative mailing address. A transfer charge of $10 is made
for each transfer and is deducted from the amount transferred; however, the
transfer charge is currently being waived for all transfers. The minimum amount
which may be transferred between subaccounts is $100. The maximum number of
transfers allowed in a policy year is twelve.
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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 unloaned policy value in 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 6
policy months. There is no minimum transfer amount; however, if the unloaned
amount in the General Account is $500 or less, the owner may transfer the entire
unloaned 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.
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.)
DEDUCTION OF LOAN AND LOAN INTEREST. Ordinarily the amount of any loan or unpaid
loan interest will be deducted from the General Account and the subaccounts in
proportion to the value in each. Amounts deducted from the Separate Account will
be transferred to the Lincoln Life General Account, where they will earn
interest at an annual rate of not less than 4.0%; currently, loaned amounts earn
interest at an annual rate of 4.95%. 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.
The amount will remain a part of the policy value, but will not be increased or
decreased by investment results in the Separate Account. Therefore, the policy
value could be more or less than what it would have been if the policy loan had
not been made, depending on the investment results in the Separate Account
compared to the interest credited to the assets transferred to the General
Account to secure the loan. In this way, a loan may have a permanent effect upon
both the policy value and the death benefit and may increase the potential for
policy lapse.
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, maturity, or death
of the insured will be deducted from the amount otherwise payable.
WITHDRAWALS
Any time after the first policy year, and 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 $500
and only one withdrawal may be made during a policy
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year. During any year in which the surrender charge is greater than zero, the
amount of the withdrawal may not be more than 20% of the net cash surrender
value (except that we have the current practice of waiving the 20% limitation
after the tenth policy year). During any year in which the surrender charge is
equal to zero, the amount of the withdrawal may not be more than the net cash
surrender value. A charge of $10 is made for each withdrawal and is deducted
from the withdrawn amount; the balance is paid to the owner. You should be aware
that withdrawals may result in the owner incurring a tax liability. (See Federal
tax matters.)
DEDUCTION OF WITHDRAWAL. When a withdrawal is made, the policy value will be
reduced by the amount of the withdrawal. The amount will be deducted from the
General Account and the subaccounts in proportion to the values in the General
Account and the subaccounts. The deduction may be made by some other method if
the owner requests it, and if such method is acceptable to us.
EFFECT OF WITHDRAWALS ON DEATH BENEFIT AND COST OF INSURANCE. A withdrawal may
affect the death benefit amount in one of several ways. First, if the death
benefit type is Type 1, the specified amount will automatically be reduced by
the amount of the withdrawal, and thus will lower the death benefit by the same
amount. If the death benefit is Type 2, this reduction in the specified amount
does not occur, but the death benefit is lowered by the amount the policy value
is decreased by the withdrawal. In addition, since the death benefit is required
to be at least equal to the specified percentage multiplied times the policy
value, a reduction in the policy value will sometimes result in a reduction in
the death benefit equal to the specified percentage times the reduction in
policy value. (See Death benefit and death benefit types.) In such cases, where
the death benefit is reduced by an amount greater than the withdrawal, the
subsequent cost of insurance will be reduced (under either type of death
benefit) to reflect the excess reduction in death benefit.
No withdrawal will be allowed if the resulting insured's specified amount would
be less than $50,000. The request for withdrawal must be in writing on a form
suitable to us.
Ordinarily, withdrawals will be processed within seven days from the date the
request for a withdrawal is received at our administrative mailing address.
Payment of the withdrawal amount may be postponed under certain circumstances.
(See Postponement of payments.)
POLICY LAPSE AND REINSTATEMENT
During the first two policy years, insurance coverage under the policy will be
continued in force as long as the total premiums paid (minus any partial
withdrawals and minus any outstanding loans) equals or exceeds the death benefit
guarantee monthly premium times the number of months since the policy date,
including the current month. Unless coverage is being continued under the death
benefit guarantee (see Death benefit guarantee) lapse will occur when the policy
value less surrender charges and less outstanding loans is insufficient to cover
the monthly deductions and the 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. Regardless of premium payments or current net cash surrender value,
coverage will never be continued beyond the maturity date of the policy.
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. If lapse occurs during the first two policy years, any
excess sales charge will be returned to the owner. If the insured dies during
the grace period, regardless of the cause of the grace period, any due and
unpaid monthly deductions will be deducted from the death benefit.
You may reinstate a lapsed policy at any time within five years after the date
of lapse and before the maturity date by submitting evidence of insurability
satisfactory to us and a premium sufficient to
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keep the policy in force for two months. The effective date of a reinstatement
will be the first monthly anniversary day on or next following the day the
application for reinstatement is approved.
SURRENDER OF THE POLICY
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 plus
any unearned loan interest. If surrender occurs during the first two policy
years, any excess sales charge will be returned to the owner. 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 surrender of
the policy may have tax consequence.
PROCEEDS AND PAYMENT OPTIONS
PROCEEDS. The amount payable under the policy on the maturity date (the policy
anniversary following the insured's 99th birthday), 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 plus any unearned loan interest. The
proceeds to be paid on the surrender of the policy or on the maturity date will
be the net cash surrender value.
Any amount to be paid at the death of the insured or any other termination of
this policy will be paid in one sum unless otherwise provided. Interest will be
paid on this amount from date of death or maturity to date of payment at a
specified rate, not less than that required by law. All or part of the sum of
this amount and such interest credited to date of payment will be applied to any
payment option.
To the extent allowed by law, proceeds are not to be subject to any claims of a
beneficiary's creditors.
PAYMENT OPTIONS. Upon written request, all or part of the proceeds and interest
credited thereon may be applied to any payment option available from 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.
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. The payment option elected, as well as the
time the election is made, may have tax consequences.
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.
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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, plus any unearned loan interest, minus any prior
withdrawals, and minus the cost of any riders.
If the insured commits suicide, while sane or insane, within two years from the
effective date of any increase in insurance, our total liability with respect to
such increase will be its cost of insurance and monthly charges.
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 since the effective date of the
reinstatement, minus any policy loan, plus any loan interest, minus any prior
withdrawals, and minus the cost of any riders.
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 from the policy
date during the lifetime of the insured. Also, any increase in coverage or any
reinstatement will not be contestable after that increase or reinstatement has
been in force two years from its effective date during the lifetime of the
insured. Any contest will then be based only on the application for the increase
or reinstatement and will be subject to the same conditions as for contest of
the policy.
INCORRECT AGE OR SEX
If there is an error in the age or sex of the insured, the excess of the death
benefit over the policy value will be adjusted to that which would be purchased
by the most recent cost of insurance at the correct age and sex. The resulting
death benefit will not be less than the percentage of the policy value required
by the death benefit provision at the insured's correct age.
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
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payment or other action taken before having recorded the transfer. A change of
ownership will not, in and of itself, affect the interest of any beneficiary. A
change of ownership may have tax consequences.
The beneficiary is identified in the application for the policy, and will
receive the proceeds when the insured dies. The beneficiary may be changed by
the owner while the insured is alive, and provided that any prior designation
does not prohibit such a change. A change will revoke any prior designation of
the beneficiary. The request to change beneficiary must be in writing on a form
suitable to 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 address.
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 cost of insurance
charges deducted, and any withdrawals made. The report will also include any
other data that may be required where the contract is delivered.
In addition, we will provide to policyowners semiannually, or otherwise as may
be required by regulations under the 1940 Act, a report containing information
about the operations of the funds.
We have entered into an agreement with Delaware Management Company, Inc., and
Delaware Service Company, Inc. 2005 Market Street, Philadelphia, PA 19203, 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 D 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, or benefits payable at death
or maturity may be postponed whenever:
(i) the New York Stock Exchange is closed other than customary week-end and
holiday closings, or trading on the New York Stock Exchange is
restricted as determined by the Securities and Exchange Commission;
(ii) the Commission by order permits postponement for the protection of
owners; or
(iii) an emergency exists, as determined by the Commission, as a result of
which disposal of securities is not reasonably practical or it is not
reasonably practical to determine the value of the Separate Account's
net assets.
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Transfers may also be postponed under such circumstances.
Requests for surrenders or policy loans of policy values representing premiums
paid by check may be delayed until such time as the check has cleared the
owner's bank.
RIDERS
The availability of the riders listed below is subject to approval by the State
Insurance Department of the State in which the policy is issued, and is also
subject to the current underwriting and issue procedures in place at the time of
the application. The underwriting and issue procedures are subject to change
without notice.
TERM RIDER FOR COVERED INSURED. The spouse and/or children of the Primary
Insured may be added as an Other Insured on the base plan. Likewise, other
individuals can be added as an Other Insured. The Term Rider for Covered Insured
is a term rider available for issue ages 0 to 80 and the cost of insurance is
deducted monthly for this benefit. Up to three such riders may be added to a
base policy. The maximum amount which may be issued on any rider equals the
amount of coverage on the policy multiplied times 19. The minimum amount is
$10,000 for each Other Insured.
CHILDREN'S TERM RIDER. The Children's Term Rider is a term rider available for
children (natural, adopted, or stepchild) of the Primary Insured. Children 15
days to age 24 inclusive are covered. The rider is available in units of $1,000
with a minimum of $2,000 and a maximum of $20,000 per any one family. The cost
of insurance for this rider is deducted monthly.
GUARANTEED INSURABILITY RIDER. This rider is available for issue ages 0 to 40
and it is available for the Primary Insured, and/or those covered under the Term
Rider for Covered Insured. This rider allows the Covered Insured to purchase,
without evidence of insurability, additional insurance on the option dates, or
alternate option dates. It can be purchased in units of $1,000, with a minimum
amount of $10,000 and a maximum amount of $100,000 or the specified amount, if
less. Total amount of options exercised may not exceed five times the option
amount. There are eight regular option dates, beginning at age 25, every three
years thereafter, and the last option is at age 46. An alternate option date
will occur three months after marriage, birth of a child, or adoption of a
child. Exercising an alternate option date reduces the next regular option date.
This rider is not available for substandard risks. The cost of insurance for
this rider is deducted monthly from the policy value.
ACCIDENTAL DEATH BENEFIT RIDER. This rider is available for the Primary Insured,
and/or those covered under the Term Rider for Covered Insured. The Accidental
Death Benefit Rider provides an additional life insurance benefit in the case of
accidental death. It is available for ages 5 through 69. The minimum amount
which can be purchased is $10,000 and the maximum amount is two times the
specified amount on the Covered Insured, not to exceed a total of $350,000 in
all policies, in all companies, for that insured. The cost of insurance for this
rider is deducted monthly from the policy value.
WAIVER OF COST OF INSURANCE RIDER. This rider is available for ages 5 through
64. it waives the total cost of insurance for the policy, the monthly charge,
and the cost of any additional benefit riders, after the Primary Insured has
been totally disabled for six consecutive months and the claim for total
disability has been approved. The cost of insurance for this rider is deducted
monthly from the policy value.
DISABILITY BENEFIT PAYMENT RIDER. This rider is available for ages 5 through 64.
If the Covered Insured (Primary Insured or other insureds) under this rider has
been totally disabled for six consecutive months, and the claim for total
disability has been approved, a disability benefit amount will be paid as a
premium to the policy. The minimum benefit which can be selected is $50 per
month. The
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maximum is two times the planned periodic premium. The cost of insurance for
this rider is deducted monthly from the policy value.
CONVALESCENT CARE BENEFIT RIDER. This rider may be available in several forms
which differ by the amount and duration of benefit payments and also by the
conditions required to receive benefit payments. The rider is available for the
Primary Insured only and its availability may stipulate certain minimum or
maximum policy specified amounts. The rider provides benefit payments when the
health of the insured is such that covered convalescent care services are
necessary. The cost of insurance for this rider is deducted monthly from the
policy value.
CONTINGENT OPTION RIDER. The Contingent Option Rider is a guaranteed
insurability rider that gives the owner the right to purchase an additional
policy without evidence of insurability upon the death of the designated person
(the option life). Available to issue ages 20 through 80. The cost of insurance
for this rider is based on the Contingent Option Amount and is deducted monthly
from the policy value.
RETIREMENT OPTION RIDER. The Retirement Option Rider is a guaranteed
insurability rider that gives the owner the right to purchase an additional
policy without evidence of insurability within 60 days after a specific date
(the option date). The option date, determined at the issue of the rider, may be
the owner's anticipated retirement date or some other date after which
additional insurance may be needed. Available to issue ages 20 through 70. The
cost of insurance for this rider is based on the Retirement Option Amount and is
deducted monthly from the policy value.
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.
DISTRIBUTION OF THE POLICY
Lincoln Life offers the policy in all jurisdictions where it is licensed to do
business. Lincoln Life, the principal underwriter for the policies, is
registered with the Commission under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association of Securities Dealers
("NASD"). The principal business address of Lincoln Life is 1300 South Clinton
Street, Fort Wayne, Ind. 46802.
The policy will be sold by registered representatives of broker dealers
(including Lincoln Life) who are appointed as Lincoln Life's life insurance
agents. These representatives ordinarily receive commissions and service fees up
to 60% of the first year required premium (the death benefit guarantee monthly
premium times 12), plus up to 3% of all other premiums paid, plus .25% of
accumulated policy values in the third policy year and each year thereafter. The
local agency receives additional compensation on the first year required premium
and all additional premiums, plus a small percentage of accumulated policy
values. In some situations, the local agency may elect to share its commission
with the registered representative. Selling representatives are also eligible
for bonuses and non-cash compensation if certain production levels are reached.
All compensation is paid from Lincoln Life's resources, which include sales
charges made under this policy.
25
<PAGE>
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, policyowner, 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 the policies with section 7702. Guidance as to how these modified
requirements are to be applied is extremely limited. If a policy was determined
not to be a life insurance contract for purposes of section 7702, such policy
would not provide most of the tax advantages normally provided by a life
insurance policy.
With respect to a policy (other than a policy in respect of a smoker) issued on
the basis of a standard rate class or a rate class involving a lower mortality
risk (i.e., preferred basis), while there is some uncertainty due to the lack of
regulations and the limited guidance on the modified section 7702 requirements,
Lincoln Life nonetheless believes that such a policy should meet the section
7702 definition of a life insurance contract. With respect to a policy issued on
a substandard basis (i.e., a rate class involving higher than standard mortality
risk), a policy in respect of a smoker issued on a standard rate class or a rate
class with a lower mortality risk, or a policy which has a last survivor of
multiple insureds or first to die of multiple insureds feature, there is even
less guidance in particular as to how the modified requirements are to be
applied in determining whether such a policy meets the section 7702 definition
of a life insurance contract. Thus, it is not clear whether or not such a policy
would satisfy section 7702, particularly if the owner pays the full amount of
premiums permitted under the policy. If it is subsequently determined that a
policy does not satisfy section 7702, Lincoln Life will take whatever steps are
appropriate and necessary to cause such a policy to comply with section 7702,
including possibly refunding any premiums paid that exceed the limitations
allowable under section 7702 (together with interest or other earnings on any
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. Lincoln Life does not have control over the American
Variable Insurance Series or its investments. Nonetheless, Lincoln Life believes
that the funds will be operated in compliance with the requirements prescribed
by the Treasury.
The regulations relating to diversification requirements do not provide guidance
concerning the extent to which policyowners may direct their investments to the
subaccounts of a Separate Account. When
26
<PAGE>
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 Deapartment
has issued no guidelines on this subject, although it has indicated informally
that guidelines could limit the number of underlying funds or the frequency of
transfers among those funds. Such guidelines may apply prospectively only,
although retroactive effect is possible if the guidelines are considered not to
embody a new position. For these reasons, Lincoln Life reserves the right to
modify the policy as necessary to prevent the owner from being considered the
owner of the assets of the Separate Account or otherwise to qualify the policy
for favorable tax treatment.
The following discussion assumes that the policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. Lincoln Life believes that the proceeds and cash value increases
of a policy should be treated in a manner consistent with a fixed benefit life
insurance policy for federal income tax purposes. Thus, the death benefit under
the policy should be excludable from the gross income of the beneficiary under
Section 101(a)(1) of the Code.
A change in a policy's specified amount, a change in death benefit option, the
payment of premiums, the addition of additional insurance, a policy loan, a
partial 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 "Modified Endowment Contract"
under section 7702A.
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. 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 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.
Lincoln Life 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 Lincoln Life 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 Lincoln Life 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.
27
<PAGE>
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Policies classified as Modified Endowment Contracts are subject to
the following tax rules:
(1) all distributions, including distributions upon surrender and benefits
paid at maturity, from such a policy are treated as ordinary income
subject to tax up to the amount equal to the excess (if any) of the cash
value immediately before the distribution over the investment in the
policy (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) the cost of insurance for certain riders which are not "qualified
additional benefits" such as the Convalescent Care Rider may be treated
as distributions from such a policy and taxed accordingly.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACT. 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, a change in death benefits from Type
2 to Type 1, or any other change that reduces benefits under the policy in the
first 15-years after the policy is issued and that results in a cash
distribution to the owner in order for the policy to continue complying with the
section 7702 definitional limits. In that case, such distribution will be taxed
in whole or in part as ordinary income (to the extent of any gain in the policy)
under rules prescribed in section 7702.
Loans from, or secured by, a policy that is not a 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, or when
benefits are paid at such a policy's maturity date, if the amount received plus
the amount of indebtedness exceeds the total investment in the policy, the
excess will generally be treated as ordinary income subject to tax.
Finally, neither distributions (including distributions upon surrender or lapse)
nor loans from, or secured by, a policy that is not a MEC are subject to the 10
percent additional income tax.
5. POLICY LOAN INTEREST. Generally, interest paid on any loan under a policy
which is owned by an individual is not deductible. In addition, interest on any
loan under a policy owned by a taxpayer and covering the life of any individual
who is an officer of or is financially interested in the business carried on by
that taxpayer will not be tax deductible to the extent the aggregate amount of
such loans with respect to contracts covering such individual exceeds $50,000.
No amount of policy loan interest is, however, deductible if the policy was
deemed for Federal tax purposes to be a single premium life insurance contract.
For interest paid or accrued after October 13, 1996, and policies issued after
June 8, 1997, additional rules apply which may reduce or eliminate any interest
deduction. 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.
28
<PAGE>
7. MULTIPLE POLICIES. All MECs that are issued by Lincoln Life (or its
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 CONVALESCENT CARE BENEFIT RIDER AND ACCELERATED BENEFIT ELECTION
RIDER. Lincoln Life believes that any benefits paid under the Accelerated
Benefit Election Rider generally will be excludable from the recipient's income.
It is unclear whether Convalescent Care Benefit Riders issued prior to January
1, 1997, constitute qualified long-term care insurance contracts under the Code.
If a rider is qualified, long-term care benefits generally will be excludable
from income. (Benefits received may be includable in income, however, if other
long-term care insurance contracts or riders cover the insured.) If a rider is
not qualified, benefits may be includable in income. In addition, Convalescent
Care Benefit Riders issued after December 31, 1996, do not constitute qualified
long-term care insurance contracts under the Code. Thus, benefits received from
such riders may be includable in income.
TAXATION OF THE SEPARATE ACCOUNT
Lincoln Life does not initially expect to incur any income tax upon the earnings
or the realized capital gains attributable to the Separate Account. Based upon
these expectations, no charge is being made currently to the Separate Account
for federal income taxes which may be attributable to the Separate Account. If,
however, Lincoln Life determines that it may incur such taxes, it may assess a
charge for those taxes from the policy.
VOTING RIGHTS
To the extent required by law, we will vote shares of the funds held in the
Separate Account at regular and special shareholder meetings of the funds. Votes
will be cast in accordance with instructions received from persons having voting
interests in the Separate Account. If, however, the l940 Act or any regulation
thereunder should be amended or if the present interpretation thereof should
change, and as a result we determine that it is permitted to vote the fund
shares in its own right, it may elect to do so.
The number of votes which each policyowner has the right to instruct will be
determined as one vote for each $100 of policy value in each subaccount.
Fractional shares will be allocated for amounts less than $100. The number of
votes which the policyowner has the right to instruct will be determined as of
the date 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.
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
sub-classification or investment objective of any of the series of a fund or to
approve or disapprove an investment advisory contract for a fund. In addition,
we may disregard voting instructions in favor of changes initiated by a
policyowner 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 policyowners.
29
<PAGE>
STATE REGULATION OF
LINCOLN LIFE AND
THE SEPARATE ACCOUNT
Lincoln Life, a stock life insurance company organized under the laws of
Indiana, is subject to regulation by the Insurance Department of the State of
Indiana. An annual statement is filed with the Indiana Department of Insurance
("Department") on or before March 1st of each year covering the operations and
reporting on the financial condition of Lincoln Life as of December 31 of the
preceding year. Periodically, the Department 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 Co. 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.
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.
30
<PAGE>
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.
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.
Legal matters in connection with the policies described herein are being passed
upon by Robert A. Picarello, Esq., as stated in the opinion filed as an exhibit
to this registration statement.
OFFICERS AND DIRECTORS
LINCOLN NATIONAL LIFE INSURANCE CO.
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S)
WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- ----------------------------------------------------------
<S> <C>
NANCY J. ALFORD Vice President [4/96-present],
VICE PRESIDENT (formerly Second Vice President
[1/90-4/96], Lincoln National Life
Insurance Co.
- ------------------
ROLAND C. BAKER President [1/95-present], First
VICE PRESIDENT AND Penn-Pacific Life Insurance Co.
DIRECTOR Formerly: Chairman and CFO
1801 S. Meyers [7/88-1/95], Baker, Ralish, Shipley &
Road Politzer, Inc.
Oakbrook Terrace,
Ill. 60181
- ------------------
JON A. BOSCIA President, Chief Executive Officer and
DIRECTOR Director, Lincoln National Corp.
200 East Berry [1/98-present] (Formerly: President
Street and Chief Executive Officer
For Wayne, IN [10/96-1/98]); Chief Operating Officer
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
SENIOR VICE Manager (formerly Vice President)
PRESIDENT [1/98-present], Lincoln National Life
350 Church Street Insurance Co. Formerly: Senior Vice
Hartford, CT 06103 President, CIGNA [3/96-12/97]; 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
SENIOR VICE Financial Advisors Corp.; Senior Vice
PRESIDENT President (formerly Vice President)
350 Church Street [10/95-Present], Lincoln National Life
Hartford, CT 06103 Insurance Co. Formerly: Regional Chief
Executive Officer [11/79-10/95],
Lincoln Dallas RMO.
- ------------------
STEPHEN H. LEWIS Senior Vice President, [5/94-present]
SENIOR VICE Lincoln National Life Insurance Co.
PRESIDENT Formerly: President [2/85-5/94], First
Penn-Pacific Life Insurance Co.
- ------------------
H. THOMAS MCMEEKIN President [5/94-present], Lincoln
DIRECTOR Investment Management, Inc. Formerly:
200 East Berry Executive Vice President [2/92-11/92],
Street Senior Vice President [11/87-2/92];
Fort Wayne, Ind. Executive Vice President
46802 [5/94-Present], Lincoln National
Corporation Formerly: Senior Vice
President [11/92-5/94]
- ------------------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION(S)
WITH REGISTRANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
<S> <C>
- -------------------------------------------------------------------------------------------
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 Insurance
DIRECTOR Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- -----------------------------
KEITH J. RYAN Senior Vice President Formerly Vice President, Chief
SENIOR VICE PRESIDENT, CHIEF Financial Officer and Assistant Treasurer [1/96-present]
FINANCIAL OFFICER AND Formerly: Controller [6/95-12/95], Business Controls
ASSISTANT TREASURER Director [11/90-6/95], Lincoln National Life Insurance Co.
- -----------------------------
GABRIEL L. SHAHEEN President and Chief Executive Officer [1/98-present]
PRESIDENT, CHIEF EXECUTIVE Formerly: Chairman and Managing Director, Lincoln National
OFFICER AND DIRECTOR (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].
- -----------------------------
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>
*Unless otherwise indicated, the principal business address is 1300 South
Clinton Street, Fort Wayne, Indiana 46801.
32
<PAGE>
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, 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."
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
33
<PAGE>
no guarantee by either company that there will not be significant computer
problems after December 31, 1999.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, 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 such
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.
34
<PAGE>
APPENDIX A
BASE MINIMUM PREMIUMS
PER $1,000 OF SPECIFIED AMOUNT*
MALE (OR UNISEX), AGE ON POLICY DATE
PRF NS = Preferred nonsmoker
STD NS = Standard nonsmoker
PRF SM = Preferred smoker
STD SM = Standard smoker
<TABLE>
<CAPTION>
AGE PRF NS STD NS PRF SM STD SM AGE PRF NS STD NS PRF SM STD SM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
0 ** 3.62 ** **
- ------------------------------------------------------------------------------------------
1 2.12 41 8.33 8.81 11.82 12.18
2 2.12 42 8.80 9.28 12.88 13.24
3 2.12 43 9.17 9.77 13.81 14.29
4 2.12 44 9.69 10.29 15.17 15.53
5 2.12 45 10.12 10.84 16.46 16.94
- ------------------------------------------------------------------------------------------
6 2.12 46 10.59 11.43 17.58 18.18
7 2.12 47 11.34 12.18 18.69 19.41
8 2.13 48 11.98 13.06 20.10 20.82
9 2.21 49 12.86 13.94 21.52 22.24
10 2.31 50 13.80 15.00 22.98 23.82
- ------------------------------------------------------------------------------------------
11 2.41 51 14.92 16.24 24.75 25.59
12 2.65 52 16.03 17.47 26.57 27.53
13 3.00 53 17.27 18.71 28.74 29.82
14 3.18 54 18.73 20.29 31.04 32.12
15 3.35 55 20.26 22.06 33.39 34.59
- ------------------------------------------------------------------------------------------
16 3.59 3.71 4.29 4.41 56 21.90 23.82 35.66 36.98
17 3.94 4.06 4.64 4.76 57 23.72 25.76 36.62 38.06
18 4.12 4.24 4.82 4.94 58 25.72 27.88 37.59 39.15
19 4.12 4.24 4.82 4.94 59 27.78 30.18 38.68 40.36
20 4.12 4.24 5.00 5.12 60 30.13 32.65 39.90 41.70
- ------------------------------------------------------------------------------------------
21 4.12 4.24 5.05 5.29 61 32.83 35.47 41.25 43.17
22 4.12 4.24 5.05 5.29 62 34.55 37.43 42.79 44.83
23 4.12 4.24 5.23 5.47 63 35.58 38.70 44.46 46.74
24 4.12 4.24 5.41 5.65 64 36.80 40.04 46.01 48.65
25 4.12 4.24 5.41 5.65 65 38.03 41.51 47.93 50.57
- ------------------------------------------------------------------------------------------
26 4.17 4.29 5.41 5.65 66 39.32 43.04 49.73 52.61
27 4.36 4.48 5.41 5.65 67 40.80 44.64 51.53 54.65
28 4.57 4.69 5.41 5.65 68 42.34 46.42 53.46 56.82
29 4.78 4.90 5.60 5.84 69 44.08 48.40 55.58 59.18
30 5.01 5.13 5.94 6.18 70 46.07 50.51 57.83 61.67
- ------------------------------------------------------------------------------------------
31 5.26 5.38 6.18 6.42 71 48.06 52.74 60.20 64.28
32 5.52 5.64 6.50 6.74 72 50.55 55.23 62.77 67.09
33 5.80 5.92 6.84 7.08 73 53.11 58.03 65.66 70.22
34 6.09 6.21 7.20 7.44 74 56.43 61.35 68.93 73.85
35 6.40 6.52 7.58 7.82 75 60.02 65.18 72.89 77.81
- ------------------------------------------------------------------------------------------
36 6.73 6.85 7.99 8.23 76 63.97 69.13 77.15 81.83
37 7.08 7.20 8.42 8.66 77 68.06 73.22 81.16 85.72
38 7.21 7.57 9.11 9.35 78 72.51 77.55 85.35 89.55
39 7.60 7.96 9.88 10.24 79 77.69 82.37 89.73 93.57
40 8.02 8.38 10.76 11.12 80 83.61 87.93 94.48 97.84
- ------------------------------------------------------------------------------------------
</TABLE>
*To determine the death benefit guarantee monthly premium, multiply the
specified amount divided by 1000 times the number shown for the age and
classification of the insured, then add $100 per policy and divide the result
by 12. Additional amounts are required for riders and/or substandards.
**This classification is not available below the age of 16.
35
<PAGE>
APPENDIX A CONTINUED
BASE MINIMUM PREMIUMS
PER $1,000 OF SPECIFIED AMOUNT*
FEMALE, AGE ON POLICY DATE
PRF NS = Preferred nonsmoker
STD NS = Standard nonsmoker
PRF SM = Preferred smoker
STD SM = Standard smoker
<TABLE>
<CAPTION>
AGE PRF NS STD NS PRF SM STD SM AGE PRF NS STD NS PRF SM STD SM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
0 ** 2.98 **
- ------------------------------------------------------------------------------------------
1 1.76 41 7.06 7.42 9.29 9.53
2 1.76 42 7.43 7.79 9.88 10.24
3 1.76 43 7.70 8.18 10.58 10.94
4 1.76 44 7.99 8.59 11.64 12.00
5 1.76 45 8.42 9.02 12.70 13.06
- ------------------------------------------------------------------------------------------
6 1.76 46 8.76 9.48 13.46 13.94
7 1.76 47 9.24 9.96 14.34 14.82
8 1.76 48 9.63 10.47 15.28 15.88
9 1.83 49 10.06 11.02 16.52 17.12
10 1.90 50 10.69 11.65 17.75 18.35
- ------------------------------------------------------------------------------------------
11 1.98 51 11.57 12.53 19.04 19.76
12 2.12 52 12.33 13.41 20.46 21.18
13 2.15 53 13.21 14.29 21.75 22.59
14 2.24 54 14.15 15.35 23.16 24.00
15 2.33 55 14.92 16.24 24.57 25.41
- ------------------------------------------------------------------------------------------
16 2.30 2.42 2.76 2.88 56 15.62 16.94 25.69 26.65
17 2.40 2.52 2.88 3.00 57 16.38 17.82 26.92 27.88
18 2.51 2.63 2.06 3.18 58 17.15 18.71 28.04 29.12
19 2.62 2.74 3.13 3.25 59 18.03 19.59 29.27 30.35
20 2.73 2.85 3.28 3.40 60 19.26 20.82 31.04 32.12
- ------------------------------------------------------------------------------------------
21 2.85 2.97 3.43 3.55 61 20.73 22.41 33.21 34.41
22 2.98 3.10 3.58 3.70 62 22.73 24.53 35.60 36.92
23 3.12 3.24 3.74 3.86 63 25.08 27.00 36.75 38.19
24 3.25 3.37 3.92 4.04 64 27.61 29.65 37.97 39.53
25 3.41 3.53 4.10 4.22 65 30.19 32.47 39.19 40.87
- ------------------------------------------------------------------------------------------
26 3.56 3.68 4.29 4.41 66 32.72 35.12 40.35 42.15
27 3.73 3.85 4.49 4.61 67 34.52 37.04 41.38 43.42
28 3.90 4.02 4.71 4.83 68 35.42 38.06 42.54 44.70
29 4.09 4.21 4.93 5.05 69 36.64 39.28 43.82 46.10
30 4.28 4.40 5.17 5.29 70 37.86 40.74 45.43 47.83
- ------------------------------------------------------------------------------------------
31 4.37 4.61 5.42 5.54 71 39.59 42.47 47.29 49.93
32 4.59 4.83 5.69 5.81 72 41.39 44.51 49.48 52.36
33 4.82 5.06 5.97 6.09 73 43.63 46.87 51.98 55.10
34 5.06 5.30 6.27 6.39 74 46.38 49.74 54.99 58.35
35 5.32 5.56 6.58 6.70 75 49.58 53.18 58.70 62.18
- ------------------------------------------------------------------------------------------
36 5.59 5.83 6.79 7.03 76 53.16 56.88 62.66 66.14
37 5.76 6.12 7.14 7.38 77 57.06 60.78 66.73 70.09
38 6.06 6.42 7.50 7.74 78 61.33 65.05 71.06 74.30
39 6.38 6.74 7.88 8.12 79 66.30 69.90 75.89 78.89
40 6.71 7.07 8.58 8.82 80 71.98 75.58 81.17 83.93
- ------------------------------------------------------------------------------------------
</TABLE>
*To determine the death benefit guarantee monthly premium, multiply the
specified amount divided by 1000 times the number shown for the age and
classification of the insured, then add $100.00 per policy and divide the
result by 12. Additional amounts are required for riders and/or substandards.
**This classification is not available below the age of 16.
36
<PAGE>
APPENDIX B
SURRENDER CHARGES
PER $1,000 OF SPECIFIED AMOUNT
MALE (OR UNISEX), AGE ON POLICY DATE*
PRF NS = Preferred nonsmoker
STD NS = Standard nonsmoker
PRF SM = Preferred smoker
STD SM = Standard smoker
<TABLE>
<CAPTION>
AGE PRF NS STD NS PRF SM STD SM AGE PRF NS STD NS PRF SM STD SM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
0 ** 3.20 ** **
- ------------------------------------------------------------------------------------------
1 2.54 41 9.98 10.56 14.18 14.60
2 2.54 42 10.54 11.12 15.44 15.88
3 2.54 43 11.00 11.72 16.56 17.14
4 2.54 44 11.62 12.34 18.20 18.62
5 2.54 45 12.14 13.00 19.74 20.32
- ------------------------------------------------------------------------------------------
6 2.54 46 12.70 13.72 21.08 21.80
7 2.54 47 13.60 14.60 22.42 23.28
8 2.54 48 14.36 15.66 24.12 24.98
9 2.64 49 15.42 16.72 25.82 26.68
10 2.76 50 16.56 18.00 27.58 28.58
- ------------------------------------------------------------------------------------------
11 2.88 51 17.90 19.48 29.68 30.70
12 3.16 52 19.22 20.96 31.88 33.02
13 3.60 53 20.72 22.44 34.48 35.78
14 3.80 54 22.48 24.34 37.24 38.54
15 4.02 55 24.30 26.46 40.06 41.50
- ------------------------------------------------------------------------------------------
16 4.30 4.44 5.14 5.28 56 26.28 28.58 42.78 44.00
17 4.72 4.86 5.56 5.70 57 28.46 30.90 43.94 44.00
18 4.94 5.08 5.78 5.92 58 30.86 33.46 44.00 44.00
19 4.94 5.08 5.78 5.92 59 33.32 36.20 44.00 44.00
20 4.94 5.08 5.98 6.14 60 36.14 39.16 44.00 44.00
- ------------------------------------------------------------------------------------------
21 4.94 5.08 6.06 6.34 61 39.38 42.56 44.00 44.00
22 4.94 5.08 6.06 6.34 62 41.44 44.00 44.00 44.00
23 4.94 5.08 6.26 6.56 63 42.70 44.00 44.00 44.00
24 4.94 5.08 6.48 6.76 64 44.00 44.00 44.00 44.00
25 4.94 5.08 6.48 6.76 65 44.00 44.00 44.00 44.00
- ------------------------------------------------------------------------------------------
26 5.00 5.14 6.48 6.76 66 44.00 44.00 44.00 44.00
27 5.22 5.38 6.48 6.76 67 44.00 44.00 44.00 44.00
28 5.48 5.62 6.48 6.76 68 44.00 44.00 44.00 44.00
29 5.74 5.88 6.70 7.00 69 44.00 44.00 44.00 44.00
30 6.00 6.16 7.12 7.40 70 44.00 44.00 44.00 44.00
- ------------------------------------------------------------------------------------------
31 6.30 6.44 7.40 7.70 71 44.00 44.00 44.00 44.00
32 6.62 6.76 7.78 8.08 72 44.00 44.00 44.00 44.00
33 6.96 7.10 8.20 8.48 73 44.00 44.00 44.00 44.00
34 7.30 7.44 8.64 8.92 74 44.00 44.00 44.00 44.00
35 7.68 7.82 9.08 9.38 75 44.00 44.00 44.00 44.00
- ------------------------------------------------------------------------------------------
36 8.06 8.22 9.58 9.86 76 44.00 44.00 44.00 44.00
37 8.50 8.64 10.10 10.38 77 44.00 44.00 44.00 44.00
38 8.64 9.08 10.92 11.22 78 44.00 44.00 44.00 44.00
39 9.12 9.54 11.84 12.28 79 44.00 44.00 44.00 44.00
40 9.62 10.04 12.90 13.34 80 44.00 44.00 44.00 44.00
- ------------------------------------------------------------------------------------------
</TABLE>
+In the first policy year, the applicable surrender charge will be one-half of
the surrender charge listed above.
*For requested increases in the specified amount, the applicable surrender
charge is based on the age the increase is effective and in the first year
after the increase will be one-fourth of the corresponding surrender charge
listed above, and in subsequent years will be one-half that of the
corresponding surrender charge listed above.
**This classification is not available below the age of 16.
37
<PAGE>
APPENDIX B CONTINUED
SURRENDER CHARGES
PER $1,000 OF SPECIFIED AMOUNT
FEMALE, AGE ON POLICY DATE*
PRF NS = Preferred nonsmoker
STD NS = Standard nonsmoker
PRF SM = Preferred smoker
STD SM = Standard smoker
<TABLE>
<CAPTION>
AGE PRF NS STD NS PRF SM STD SM AGE PRF NS STD NS PRF SM STD SM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
0 ** 2.64 ** **
- ------------------------------------------------------------------------------------------
1 2.10 41 8.46 8.90 11.14 11.42
2 2.10 42 8.90 9.34 11.84 12.28
3 2.10 43 9.22 9.80 12.68 13.12
4 2.10 44 9.58 10.30 13.96 14.40
5 2.10 45 10.10 10.82 15.24 15.66
- ------------------------------------------------------------------------------------------
6 2.10 46 10.50 11.36 16.14 16.72
7 2.10 47 11.08 11.94 17.20 17.78
8 2.10 48 11.56 12.56 18.34 19.06
9 2.18 49 12.06 13.22 19.82 20.54
10 2.28 50 12.82 13.96 21.30 22.02
- ------------------------------------------------------------------------------------------
11 2.38 51 13.88 15.02 22.84 23.70
12 2.54 52 14.80 16.08 24.54 25.40
13 2.56 53 15.84 17.14 26.08 27.10
14 2.68 54 16.98 18.42 27.78 28.80
15 2.78 55 17.90 19.48 29.48 30.48
- ------------------------------------------------------------------------------------------
16 2.76 2.90 3.30 3.44 56 18.74 20.32 30.82 31.96
17 2.88 3.02 3.44 3.60 57 19.66 21.38 32.30 33.46
18 3.00 3.14 3.66 3.80 58 20.56 22.44 33.64 34.94
19 3.14 3.28 3.76 3.90 59 21.62 23.50 35.12 36.42
20 3.28 3.42 3.92 4.06 60 23.10 24.98 37.24 38.54
- ------------------------------------------------------------------------------------------
21 3.42 3.56 4.10 4.24 61 24.88 26.88 39.84 41.28
22 3.56 3.72 4.28 4.44 62 27.26 29.42 42.70 44.00
23 3.74 3.88 4.48 4.62 63 30.08 32.40 44.00 44.00
24 3.90 4.04 4.70 4.84 64 33.12 35.56 44.00 44.00
25 4.08 4.22 4.90 5.06 65 36.22 38.96 44.00 44.00
- ------------------------------------------------------------------------------------------
26 4.26 4.42 5.14 5.28 66 39.26 42.14 44.00 44.00
27 4.46 4.62 5.38 5.52 67 41.42 44.00 44.00 44.00
28 4.68 4.82 5.64 5.78 68 42.50 44.00 44.00 44.00
29 4.90 5.04 5.92 6.06 69 43.96 44.00 44.00 44.00
30 5.14 5.28 6.20 6.34 70 44.00 44.00 44.00 44.00
- ------------------------------------------------------------------------------------------
31 5.24 5.52 6.50 6.64 71 44.00 44.00 44.00 44.00
32 5.50 5.78 6.82 6.96 72 44.00 44.00 44.00 44.00
33 5.78 6.06 7.16 7.30 73 44.00 44.00 44.00 44.00
34 6.06 6.36 7.52 7.66 74 44.00 44.00 44.00 44.00
35 6.38 6.66 7.90 8.04 75 44.00 44.00 44.00 44.00
- ------------------------------------------------------------------------------------------
36 6.70 7.00 8.14 8.42 76 44.00 44.00 44.00 44.00
37 6.90 7.34 8.56 8.84 77 44.00 44.00 44.00 44.00
38 7.26 7.70 9.00 9.28 78 44.00 44.00 44.00 44.00
39 7.64 8.08 9.46 9.74 79 44.00 44.00 44.00 44.00
40 8.04 8.48 10.30 10.58 80 44.00 44.00 44.00 44.00
- ------------------------------------------------------------------------------------------
</TABLE>
+In the first policy year, the applicable surrender charge will be one-half of
the surrender charge listed above.
*For requested increases in the specified amount, the applicable surrender
charge is based on the age the increase is effective and in the first year
after the increase will be one-fourth of the corresponding surrender charge
listed above, and in subsequent years will be one-half that of the
corresponding surrender charge listed above.
**This classification is not available below the age of 16.
38
<PAGE>
APPENDIX C
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 Type 1 death benefits,
policy values, and net cash surrender values for each of the first 10 policy
years, and for every five year period thereafter through the thirtieth policy
year, assuming that the return on the assets invested in the account were a
uniform, gross, after tax, annual rate of 0%, 6%, and 12%. The actual death
benefits and net cash surrender values would be different from those shown if a
different classification were to be used or if the returns averaged 0%, 6%, and
12% but fluctuated over and under those averages throughout the years.
The death benefits and net cash surrender values shown on pages using current
charges are approximately those likely to be provided under the policy for the
investment returns indicated, assuming that the current Cost of Insurance
Charges are deducted and that the current Mortality and Expense Risk Charge is
deducted. Although the contract allows for maximum Cost of Insurance Charges
specified in the 1980 Commissioners Standard Ordinary Smoker and Nonsmoker
tables and for a Maximum Mortality and Expense Risk Charge of .90%, Lincoln Life
expects that it will continue to charge the current Cost of Insurance Charges
and the illustrated current Mortality and Expense Risk Charge 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 and the guaranteed Maximum
Mortality and Expense Risk Charge were to be deducted. However, these are
primarily of interest only to show by comparison the benefits of the lower
current Cost of Insurance Charges and lower current Mortality and Expense Risk
Charge.
In each of the illustrations an assumed gross annual return is indicated. The
gross annual return used in the illustrations is then reduced by the asset
management charge (current average .49%), the mortality and expense risk charge
(.80% current and .90% guaranteed), and other expenses incurred by the funds
including printing, mailing, Directors' fees, etc. (current average .03%) so
that the actual numbers in the illustrations are net of expenses. Thus, a 12%
gross annual return yields a net annual return of 10.68% using current charges
and 10.58% using guaranteed charges. Similarly, gross annual returns of 6% and
0% yield net annual returns of 4.68% and -1.32% respectively using current
charges and 4.58% and -1.42% respectively using guaranteed charges.
39
<PAGE>
VUL III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35
STANDARD NONSMOKER
$100,000 SPECIFIED AMOUNT
$1,325 ANNUAL 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 INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ----------------------------- ----------------------------- -----------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,391 $100,000 $100,000 $ 100,000 $ 994 $ 1,060 $ 1,127 $ 603 $ 669 $ 736
2 2,852 100,000 100,000 100,000 1,965 2,159 2,362 1,183 1,377 1,580
3 4,386 100,000 100,000 100,000 2,925 3,311 3,729 2,143 2,529 2,947
4 5,996 100,000 100,000 100,000 3,851 4,494 5,219 3,069 3,712 4,437
5 7,688 100,000 100,000 100,000 4,756 5,724 6,858 3,974 4,942 6,076
- ----------------------------------------------------------------------------------------------------------------
6 9,463 100,000 100,000 100,000 5,640 7,001 8,662 4,897 6,258 7,919
7 11,328 100,000 100,000 100,000 6,491 8,317 10,637 5,788 7,613 9,933
8 13,285 100,000 100,000 100,000 7,323 9,687 12,815 6,659 9,022 12,150
9 15,341 100,000 100,000 100,000 8,125 11,101 15,206 7,499 10,476 14,581
10 17,499 100,000 100,000 100,000 8,896 12,564 17,837 8,349 12,017 17,289
- ----------------------------------------------------------------------------------------------------------------
15 30,021 100,000 100,000 100,000 12,266 20,649 35,579 12,110 20,493 35,422
20 46,003 100,000 100,000 101,828 14,754 30,253 64,858 14,754 30,253 64,858
25 66,400 100,000 100,000 151,550 16,028 41,657 113,097 16,028 41,657 113,097
30 92,433 100,000 100,000 233,689 15,526 55,339 191,548 15,526 55,339 191,548
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross 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 rates of return can be
achieved for any one year or sustained over any period of time. Values
illustrated are net of a .49% asset management charge, a .80% current mortality
and expense risk charge and other expenses estimated at .03%. Values illustrated
are also net of any other applicable contract charges.
40
<PAGE>
VUL III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35
STANDARD NONSMOKER
$100,000 SPECIFIED AMOUNT
$1,325 ANNUAL 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 INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ----------------------------- ----------------------------- -----------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,391 $100,000 $100,000 $ 100,000 $ 988 $ 1,054 $ 1,120 $ 597 $ 663 $ 729
2 2,852 100,000 100,000 100,000 1,955 2,149 2,350 1,173 1,367 1,568
3 4,386 100,000 100,000 100,000 2,899 3,283 3,698 2,117 2,501 2,916
4 5,996 100,000 100,000 100,000 3,818 4,458 5,177 3,036 3,676 4,395
5 7,688 100,000 100,000 100,000 4,714 5,674 6,799 3,932 4,892 6,017
- ----------------------------------------------------------------------------------------------------------------
6 9,463 100,000 100,000 100,000 5,583 6,933 8,578 4,840 6,190 7,835
7 11,328 100,000 100,000 100,000 6,425 8,234 10,530 5,721 7,531 9,826
8 13,285 100,000 100,000 100,000 7,240 9,580 12,673 6,575 8,916 12,008
9 15,341 100,000 100,000 100,000 8,026 10,972 15,027 7,401 10,346 14,401
10 17,499 100,000 100,000 100,000 8,783 12,410 17,614 8,236 11,862 17,067
- ----------------------------------------------------------------------------------------------------------------
15 30,021 100,000 100,000 100,000 12,072 20,327 35,003 11,915 20,171 34,847
20 46,003 100,000 100,000 100,000 14,295 29,507 63,427 14,295 29,507 63,427
25 66,400 100,000 100,000 147,258 14,846 39,923 109,894 14,846 39,923 109,894
30 92,433 100,000 100,000 225,187 12,671 51,631 184,580 12,671 51,631 184,580
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefit and cash value for a contract would be
different from those shown if the actual gross annual return averaged 0.00%, and
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 National or any of the funds that these hypothetical rates of return can
be achieved for any one year or sustained over any period of time. Values
illustrated are net of a .49% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .03%. Values
illustrated are also net of any other applicable contract charges.
41
<PAGE>
VUL III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35
STANDARD SMOKER
$100,000 SPECIFIED AMOUNT
$1,705 ANNUAL 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 INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ----------------------------- ----------------------------- -----------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,790 $100,000 $100,000 $ 100,000 $ 1,277 $ 1,362 $ 1,448 $ 808 $ 893 $ 979
2 3,670 100,000 100,000 100,000 2,517 2,767 3,027 1,579 1,829 2,089
3 5,644 100,000 100,000 100,000 3,722 4,217 4,753 2,784 3,279 3,815
4 7,716 100,000 100,000 100,000 4,902 5,726 6,655 3,964 4,788 5,717
5 9,892 100,000 100,000 100,000 6,037 7,276 8,728 5,099 6,338 7,790
- ----------------------------------------------------------------------------------------------------------------
6 12,177 100,000 100,000 100,000 7,140 8,880 11,005 6,249 7,989 10,114
7 14,576 100,000 100,000 100,000 8,199 10,531 13,498 7,354 9,687 12,654
8 17,095 100,000 100,000 100,000 9,216 12,233 16,232 8,418 11,435 15,435
9 19,740 100,000 100,000 100,000 10,192 13,989 19,236 9,441 13,239 18,486
10 22,518 100,000 100,000 100,000 11,128 15,804 22,542 10,471 15,147 21,886
- ----------------------------------------------------------------------------------------------------------------
15 38,631 100,000 100,000 100,000 15,124 25,795 44,916 14,936 25,608 44,729
20 59,196 100,000 100,000 128,581 17,900 37,697 81,899 17,900 37,697 81,899
25 85,443 100,000 100,000 189,967 18,951 52,003 141,767 18,951 52,003 141,767
30 118,942 100,000 100,000 290,939 17,502 69,785 238,475 17,502 69,785 238,475
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross 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 rates of return can be
achieved for any one year or sustained over any period of time. Values
illustrated are net of a .49% asset management charge, a .80% current mortality
and expense risk charge and other expenses estimated at .03%. Values illustrated
are also net of any other applicable contract charges.
42
<PAGE>
VUL III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35
STANDARD SMOKER
$100,000 SPECIFIED AMOUNT
$1,705 ANNUAL PREMIUM USING GUARANTEED CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
----------------------------- ----------------------------- -----------------------------
PREMIUMS
ACCUMULATED ASSUMING ASSUMING ASSUMING
END AT 5% HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY PER ----------------------------- ----------------------------- -----------------------------
YEAR 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 $ 1,790 $100,000 $100,000 $ 100,000 $ 1,244 $ 1,329 $ 1,413 $ 775 $ 860 $ 944
2 3,670 100,000 100,000 100,000 2,455 2,701 2,957 1,517 1,763 2,019
3 5,644 100,000 100,000 100,000 3,629 4,115 4,641 2,691 3,177 3,703
4 7,716 100,000 100,000 100,000 4,763 5,570 6,480 3,825 4,632 5,542
5 9,892 100,000 100,000 100,000 5,855 7,066 8,486 4,917 6,128 7,548
- ----------------------------------------------------------------------------------------------------------------
6 12,177 100,000 100,000 100,000 6,902 8,601 10,674 6,011 7,710 9,783
7 14,576 100,000 100,000 100,000 7,903 10,175 13,064 7,058 9,331 12,220
8 17,095 100,000 100,000 100,000 8,854 11,788 15,675 8,056 10,991 14,878
9 19,740 100,000 100,000 100,000 9,753 13,439 18,532 9,003 12,689 17,781
10 22,518 100,000 100,000 100,000 10,598 15,128 21,658 9,941 14,472 21,002
- ----------------------------------------------------------------------------------------------------------------
15 38,631 100,000 100,000 100,000 13,949 24,188 42,599 13,761 24,000 42,411
20 59,196 100,000 100,000 120,654 15,415 34,239 76,849 15,415 34,239 76,849
25 85,443 100,000 100,000 176,239 13,993 45,212 131,522 13,993 45,212 131,522
30 118,942 100,000 100,000 266,275 7,998 57,417 218,259 7,998 57,417 218,259
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross 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 rates of return can be
achieved for any one year or sustained over any period of time. Values
illustrated are net of a .49% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .03%. Values
illustrated are also net of any other applicable contract charges.
43
<PAGE>
VUL III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 55
STANDARD NONSMOKER
$100,000 SPECIFIED AMOUNT
$3,348 ANNUAL 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 INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ----------------------------- ----------------------------- -----------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
1 $ 3,515 $100,000 $100,000 $ 100,000 $ 2,343 $ 2,506 $ 2,669 $ 1,020 $ 1,183 $ 1,346
2 7,207 100,000 100,000 100,000 4,616 5,088 5,580 1,970 2,442 2,934
3 11,082 100,000 100,000 100,000 6,822 7,754 8,765 4,176 5,108 6,119
4 15,152 100,000 100,000 100,000 8,952 10,500 12,249 6,306 7,854 9,603
5 19,425 100,000 100,000 100,000 11,010 13,335 16,070 8,364 10,689 13,424
- ----------------------------------------------------------------------------------------------------------------
6 23,911 100,000 100,000 100,000 12,989 16,259 20,264 10,476 13,745 17,750
7 28,622 100,000 100,000 100,000 14,893 19,280 24,882 12,512 16,899 22,501
8 33,569 100,000 100,000 100,000 16,705 22,391 29,964 14,456 20,142 27,715
9 38,763 100,000 100,000 100,000 18,420 25,596 35,570 16,303 23,479 33,453
10 44,216 100,000 100,000 100,000 20,041 28,907 41,775 18,189 27,054 39,923
- ----------------------------------------------------------------------------------------------------------------
15 75,857 100,000 100,000 100,000 26,598 47,402 85,313 26,069 46,872 84,784
20 116,240 100,000 100,000 170,635 29,964 70,695 159,472 29,964 70,695 159,472
25 167,780 100,000 108,031 295,213 27,675 102,886 281,155 27,675 102,886 281,155
30 233,559 100,000 151,477 500,905 14,829 144,264 477,053 14,829 144,264 477,053
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown, the death benefit and cash value for a contract would be
different from those shown if the actual gross annual return averaged 0.00%, and
6.00% and 12.00% over a period of years, but also fluctuated above or below
those averages for individual contract years. No representations can be made by
Lincoln Life or any of the FUNDS that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time. Values
illustrated are net of a .49% asset management charge, a .80% current mortality
and expense risk charge and other expenses estimated at .03%. Values illustrated
are also net of any other applicable contract charges.
44
<PAGE>
VUL III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 55
STANDARD NONSMOKER
$100,000 SPECIFIED AMOUNT
$3,348 ANNUAL 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 INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ----------------------------- ----------------------------- -----------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
1 $ 3,515 $100,000 $100,000 $ 100,000 $ 2,242 $ 2,402 $ 2,561 $ 919 $ 1,079 $ 1,238
2 7,207 100,000 100,000 100,000 4,392 4,851 5,329 1,746 2,205 2,683
3 11,082 100,000 100,000 100,000 6,448 7,349 8,326 3,802 4,703 5,680
4 15,152 100,000 100,000 100,000 8,406 9,895 11,577 5,760 7,249 8,931
5 19,425 100,000 100,000 100,000 10,259 12,485 15,105 7,613 9,839 12,459
- ----------------------------------------------------------------------------------------------------------------
6 23,911 100,000 100,000 100,000 12,000 15,118 18,941 9,486 12,604 16,427
7 28,622 100,000 100,000 100,000 13,622 17,789 23,120 11,241 15,408 20,738
8 33,569 100,000 100,000 100,000 15,112 20,492 27,679 12,863 18,243 25,430
9 38,763 100,000 100,000 100,000 16,456 23,222 32,666 14,339 21,105 30,549
10 44,216 100,000 100,000 100,000 17,643 25,974 38,138 15,790 24,122 36,286
- ----------------------------------------------------------------------------------------------------------------
15 75,857 100,000 100,000 100,000 20,790 40,106 76,022 20,260 39,577 75,493
20 116,240 100,000 100,000 152,221 16,739 54,847 142,263 16,739 54,847 142,263
25 167,780 0 100,000 262,633 0 71,223 250,127 0 71,223 250,127
30 233,559 0 100,000 440,786 0 96,190 419,796 0 96,190 419,796
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross 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 rates of return can be
achieved for any one year or sustained over any period of time. Values
illustrated are net of a .49% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .03%. Values
illustrated are also net of any other applicable contract charges.
45
<PAGE>
VUL III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 55
STANDARD SMOKER
$100,000 SPECIFIED AMOUNT
$4,358 ANNUAL 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 INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ----------------------------- ----------------------------- -----------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
1 $ 4,576 $100,000 $100,000 $ 100,000 $ 2,897 $ 3,104 $ 3,311 $ 822 $ 1,029 $ 1,236
2 9,381 100,000 100,000 100,000 5,699 6,296 6,919 1,549 2,146 2,769
3 14,426 100,000 100,000 100,000 8,401 9,576 10,853 4,251 5,426 6,703
4 19,723 100,000 100,000 100,000 11,018 12,968 15,174 6,868 8,818 11,024
5 25,285 100,000 100,000 100,000 13,547 16,476 19,927 9,397 12,326 15,777
- ----------------------------------------------------------------------------------------------------------------
6 31,125 100,000 100,000 100,000 15,982 20,103 25,165 12,039 16,160 21,222
7 37,257 100,000 100,000 100,000 18,319 23,858 30,953 14,584 20,123 27,218
8 43,696 100,000 100,000 100,000 20,554 27,750 37,369 17,026 24,222 33,842
9 50,456 100,000 100,000 100,000 22,675 31,783 44,497 19,355 28,463 41,177
10 57,555 100,000 100,000 100,000 24,679 35,972 52,448 21,774 33,067 49,543
- ----------------------------------------------------------------------------------------------------------------
15 98,741 100,000 100,000 126,854 33,050 60,240 109,357 32,220 59,410 108,527
20 151,306 100,000 100,343 218,118 38,413 93,779 203,848 38,413 93,779 203,848
25 218,394 100,000 145,768 377,010 39,120 138,827 359,058 39,120 138,827 359,058
30 304,018 100,000 203,249 639,098 32,659 193,571 608,664 32,659 193,571 608,664
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross 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 rates of return can be
achieved for any one year or sustained over any period of time. Values
illustrated are net of a .49% asset management charge, a .80% current mortality
and expense risk charge and other expenses estimated at .03%. Values illustrated
are also net of any other applicable contract charges.
46
<PAGE>
VUL III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 55
STANDARD SMOKER
$100,000 SPECIFIED AMOUNT
$4,358 ANNUAL 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 INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ----------------------------- ----------------------------- -----------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
1 $ 4,576 $100,000 $100,000 $ 100,000 $ 2,451 $ 2,645 $ 2,838 $ 376 $ 570 $ 763
2 9,381 100,000 100,000 100,000 4,769 5,311 5,877 619 1,161 1,727
3 14,426 100,000 100,000 100,000 6,952 8,000 9,142 2,802 3,850 4,992
4 19,723 100,000 100,000 100,000 8,997 10,716 12,665 4,847 6,566 8,515
5 25,285 100,000 100,000 100,000 10,902 13,456 16,480 6,752 9,306 12,330
- ----------------------------------------------------------------------------------------------------------------
6 31,125 100,000 100,000 100,000 12,654 16,219 20,623 8,712 12,276 16,680
7 37,257 100,000 100,000 100,000 14,237 18,993 25,133 10,502 15,258 21,398
8 43,696 100,000 100,000 100,000 15,634 21,771 30,060 12,106 18,243 26,533
9 50,456 100,000 100,000 100,000 16,823 24,544 35,467 13,503 21,224 32,147
10 57,555 100,000 100,000 100,000 17,787 27,308 41,435 14,882 24,403 38,530
- ----------------------------------------------------------------------------------------------------------------
15 98,741 100,000 100,000 100,000 18,726 41,245 84,626 17,896 40,415 83,796
20 151,306 100,000 100,000 172,212 9,575 55,959 160,946 9,575 55,959 160,946
25 218,394 0 100,000 299,130 0 73,870 284,886 0 73,870 284,886
30 304,018 0 111,158 502,511 0 105,865 478,582 0 105,865 478,582
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment rates of return. Actual rates of return may be more or less
than those shown. The death benefit 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 rates of return can be
achieved for any one year or sustained over any period of time. Values
illustrated are net of a .49% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .03%. Values
illustrated are also net of any other applicable contract charges.
47
<PAGE>
Lincoln Life Flexible Premium
Variable Life Account G
G-1
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LINCOLN LINCOLN
NATIONAL NATIONAL AVIS
GROWTH AND SPECIAL AVIS CASH
INCOME OPPORTUNITIES BOND MANAGEMENT
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
ASSETS
Investments at Market
--
Affiliated (Cost
$47,916,367) $ 66,056,911 $38,041,630 $ 28,015,281 $ -- $ --
Investments at Market
--
Unaffiliated (Cost
$227,993,639) 279,488,526 -- -- 336,287 3,731,673
- ------------------------- ------------ ----------- -------------- ----------- ----------
TOTAL ASSETS 345,545,437 38,041,630 28,015,281 336,287 3,731,673
- -------------------------
LIABILITY --
Payable to The Lincoln
National Life Insurance
Company 7,492 831 601 7 82
- ------------------------- ------------ ----------- -------------- ----------- ----------
NET ASSETS $345,537,945 $38,040,799 $ 28,014,680 $ 336,280 $3,731,591
- ------------------------- ------------ ----------- -------------- ----------- ----------
------------ ----------- -------------- ----------- ----------
PERCENTAGE OF NET ASSETS 100.00% 11.01% 8.11% 0.10% 1.08%
- ------------------------- ------------ ----------- -------------- ----------- ----------
------------ ----------- -------------- ----------- ----------
NET ASSETS ARE
REPRESENTED BY:
- Units in accumulation
period 8,594,585 6,588,193 275,844 2,398,049
- -------------------------
- Unit values $ 4.426 $ 4.252 $ 1.219 $ 1.556
- ------------------------- ----------- -------------- ----------- ----------
----------- -------------- ----------- ----------
NET ASSETS $38,040,799 $ 28,014,680 $ 336,280 $3,731,591
- ------------------------- ----------- -------------- ----------- ----------
----------- -------------- ----------- ----------
</TABLE>
See accompanying notes.
G-2
<PAGE>
<TABLE>
<CAPTION>
AVIS
U.S.
AVIS GOVERNMENT/
HIGH-YIELD AVIS AVIS AAA-RATED
BOND GROWTH-INCOME GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
ASSETS
Investments at Market
--
Affiliated (Cost
$47,916,367) $ -- $ -- $ -- $ --
Investments at Market
--
Unaffiliated (Cost
$227,993,639) 11,293,572 70,309,969 130,211,786 5,759,598
- ------------------------- ----------- -------------- ------------ -----------
TOTAL ASSETS 11,293,572 70,309,969 130,211,786 5,759,598
- -------------------------
LIABILITY --
Payable to The Lincoln
National Life Insurance
Company 247 1,527 2,810 126
- ------------------------- ----------- -------------- ------------ -----------
NET ASSETS $11,293,325 $ 70,308,442 $130,208,976 $5,759,472
- ------------------------- ----------- -------------- ------------ -----------
----------- -------------- ------------ -----------
PERCENTAGE OF NET ASSETS 3.27% 20.34% 37.68% 1.67%
- ------------------------- ----------- -------------- ------------ -----------
----------- -------------- ------------ -----------
NET ASSETS ARE
REPRESENTED BY:
- Units in accumulation
period 4,423,192 17,422,314 25,022,169 2,791,189
- -------------------------
- Unit values $ 2.553 $ 4.036 $ 5.204 $ 2.063
- ------------------------- ----------- -------------- ------------ -----------
----------- -------------- ------------ -----------
NET ASSETS $11,293,325 $ 70,308,442 $130,208,976 $5,759,472
- ------------------------- ----------- -------------- ------------ -----------
----------- -------------- ------------ -----------
<CAPTION>
AVIS
AVIS AVIS GLOBAL
AVIS ASSET GLOBAL SMALL
INTERNATIONAL ALLOCATION GROWTH CAPITALIZATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- -------------------------
ASSETS
Investments at Market
--
Affiliated (Cost
$47,916,367) $ -- $ -- $ -- $ --
Investments at Market
--
Unaffiliated (Cost
$227,993,639) 42,769,305 14,177,361 738,129 160,846
- ------------------------- -------------- ----------- ----------- --------
TOTAL ASSETS 42,769,305 14,177,361 738,129 160,846
- -------------------------
LIABILITY --
Payable to The Lincoln
National Life Insurance
Company 933 309 16 3
- ------------------------- -------------- ----------- ----------- --------
NET ASSETS $ 42,768,372 $14,177,052 $ 738,113 $ 160,843
- ------------------------- -------------- ----------- ----------- --------
-------------- ----------- ----------- --------
PERCENTAGE OF NET ASSETS 12.38% 4.10% 0.21% 0.05%
- ------------------------- -------------- ----------- ----------- --------
-------------- ----------- ----------- --------
NET ASSETS ARE
REPRESENTED BY:
- Units in accumulation
period 18,004,012 5,581,728 533,869 157,917
- -------------------------
- Unit values $ 2.375 $ 2.540 $ 1.383 $ 1.019
- ------------------------- -------------- ----------- ----------- --------
-------------- ----------- ----------- --------
NET ASSETS $ 42,768,372 $14,177,052 $ 738,113 $ 160,843
- ------------------------- -------------- ----------- ----------- --------
-------------- ----------- ----------- --------
</TABLE>
G-3
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
LINCOLN LINCOLN
NATIONAL NATIONAL AVIS
GROWTH AND SPECIAL AVIS CASH
INCOME OPPORTUNITIES BOND MANAGEMENT
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Net Investment Income:
- Dividends from investment
income $ 3,986,811 $ 350,382 $ 319,892 $ 2,639 $ 126,289
- ------------------------------
- Dividends from net
realized gain on
investments 11,496,725 762,829 992,611 -- --
- ------------------------------
- Mortality and expense risk
charge (1,427,887) (126,693) (129,298) (201) (22,622)
- ------------------------------ ------------ ----------- -------------- ----------- -----------
NET INVESTMENT INCOME 14,055,649 986,518 1,183,205 2,438 103,667
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 1,351,611 108,147 125,457 57 11,983
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 9,399,986 1,683,401 1,141,306 256 2,026
- ------------------------------ ------------ ----------- -------------- ----------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 10,751,597 1,791,548 1,266,763 313 14,009
- ------------------------------ ------------ ----------- -------------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 24,807,246 $ 2,778,066 $ 2,449,968 $ 2,751 $ 117,676
- ------------------------------ ------------ ----------- -------------- ----------- -----------
------------ ----------- -------------- ----------- -----------
YEAR ENDED DECEMBER 31, 1997
Net investment income:
- Dividends from investment
income $ 4,044,470 $ 5 $ (23) $ 4,638 $ 171,084
- ------------------------------
- Dividends from net
realized gain on
investments 23,431,632 705,567 1,383,542 1,420 --
- ------------------------------
- Mortality and expense risk
charge (1,988,506) (206,354) (184,467) (624) (24,180)
- ------------------------------ ------------ ----------- -------------- ----------- -----------
NET INVESTMENT INCOME 25,487,596 499,218 1,199,052 5,434 146,904
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 2,821,673 283,003 232,953 415 (5,933)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 21,699,952 5,716,788 4,027,092 798 (12,961)
- ------------------------------ ------------ ----------- -------------- ----------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 24,521,625 5,999,791 4,260,045 1,213 (18,894)
- ------------------------------ ------------ ----------- -------------- ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 50,009,221 $ 6,499,009 $ 5,459,097 $ 6,647 $ 128,010
- ------------------------------ ------------ ----------- -------------- ----------- -----------
------------ ----------- -------------- ----------- -----------
YEAR ENDED DECEMBER 31, 1998
Net investment income:
- Dividends from investment
income $ 5,604,984 $ 914,327 $ 697,869 $ 16,322 $ 155,064
- ------------------------------
- Dividends from net
realized gain on
investments 33,419,043 1,866,268 2,371,920 1,552 --
- ------------------------------
- Mortality and expense risk
charge (2,468,480) (275,389) (225,338) (2,121) (24,896)
- ------------------------------ ------------ ----------- -------------- ----------- -----------
NET INVESTMENT INCOME 36,555,547 2,505,206 2,844,451 15,753 130,168
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 3,888,716 761,918 450,508 (257) 1,495
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 19,679,780 2,911,821 (1,813,700) (6,723) (958)
- ------------------------------ ------------ ----------- -------------- ----------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 23,568,496 3,673,739 (1,363,192) (6,980) 537
- ------------------------------ ------------ ----------- -------------- ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 60,124,043 $ 6,178,945 $ 1,481,259 $ 8,773 $ 130,705
- ------------------------------ ------------ ----------- -------------- ----------- -----------
------------ ----------- -------------- ----------- -----------
</TABLE>
See accompanying notes.
G-4
<PAGE>
<TABLE>
<CAPTION>
AVIS
U.S.
AVIS GOVERNMENT/
HIGH-YIELD AVIS AVIS AAA-RATED
BOND GROWTH-INCOME GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Net Investment Income:
- Dividends from investment
income $ 875,112 $ 812,649 $ 370,838 $ 347,263
- ------------------------------
- Dividends from net
realized gain on
investments -- 3,079,086 4,902,531 --
- ------------------------------
- Mortality and expense risk
charge (77,097) (288,921) (485,077) (37,510)
- ------------------------------ ----------- -------------- ------------ ------------
NET INVESTMENT INCOME 798,015 3,602,814 4,788,292 309,753
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 17,725 332,471 618,889 (14,584)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 318,611 2,054,284 1,901,460 (196,401)
- ------------------------------ ----------- -------------- ------------ ------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 336,336 2,386,755 2,520,349 (210,985)
- ------------------------------ ----------- -------------- ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,134,351 $ 5,989,569 $ 7,308,641 $ 98,768
- ------------------------------ ----------- -------------- ------------ ------------
----------- -------------- ------------ ------------
YEAR ENDED DECEMBER 31, 1997
Net investment income:
- Dividends from investment
income $ 962,781 $ 1,032,122 $ 479,889 $ 289,099
- ------------------------------
- Dividends from net
realized gain on
investments 119,973 5,606,319 11,206,666 --
- ------------------------------
- Mortality and expense risk
charge (88,415) (417,922) (659,250) (34,397)
- ------------------------------ ----------- -------------- ------------ ------------
NET INVESTMENT INCOME 994,339 6,220,519 11,027,305 254,702
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 69,166 457,245 1,483,014 (28,443)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 141,586 4,645,465 8,245,961 85,423
- ------------------------------ ----------- -------------- ------------ ------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 210,752 5,102,710 9,728,975 56,980
- ------------------------------ ----------- -------------- ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 1,205,091 $ 11,323,229 $ 20,756,280 $ 311,682
- ------------------------------ ----------- -------------- ------------ ------------
----------- -------------- ------------ ------------
YEAR ENDED DECEMBER 31, 1998
Net investment income:
- Dividends from investment
income $ 1,010,730 $ 1,112,500 $ 411,180 $ 286,761
- ------------------------------
- Dividends from net
realized gain on
investments 156,207 9,908,034 17,362,280 --
- ------------------------------
- Mortality and expense risk
charge (93,946) (521,750) (856,151) (38,431)
- ------------------------------ ----------- -------------- ------------ ------------
NET INVESTMENT INCOME 1,072,991 10,498,784 16,917,309 248,330
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments (25,336) 809,914 1,324,176 5,403
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (1,136,564) (976,292) 14,776,261 57,881
- ------------------------------ ----------- -------------- ------------ ------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (1,161,900) (166,378) 16,100,437 63,284
- ------------------------------ ----------- -------------- ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ (88,909) $ 10,332,406 $ 33,017,746 $ 311,614
- ------------------------------ ----------- -------------- ------------ ------------
----------- -------------- ------------ ------------
<CAPTION>
AVIS
AVIS AVIS GLOBAL
AVIS ASSET GLOBAL SMALL
INTERNATIONAL ALLOCATION GROWTH CAPITALIZATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ------------------------------
YEAR ENDED DECEMBER 31, 1996
Net Investment Income:
- Dividends from investment
income $ 485,790 $ 295,957 $ -- $ --
- ------------------------------
- Dividends from net
realized gain on
investments 1,173,494 586,174 -- --
- ------------------------------
- Mortality and expense risk
charge (198,903) (61,565) -- --
- ------------------------------ -------------- ----------- ----------- ------
NET INVESTMENT INCOME 1,460,381 820,566 -- --
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 79,109 72,357 -- --
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 2,298,121 196,922 -- --
- ------------------------------ -------------- ----------- ----------- ------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 2,377,230 269,279 -- --
- ------------------------------ -------------- ----------- ----------- ------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 3,837,611 $ 1,089,845 $ -- $ --
- ------------------------------ -------------- ----------- ----------- ------
-------------- ----------- ----------- ------
YEAR ENDED DECEMBER 31, 1997
Net investment income:
- Dividends from investment
income $ 714,092 $ 389,991 $ 792 $ --
- ------------------------------
- Dividends from net
realized gain on
investments 3,752,397 655,327 421 --
- ------------------------------
- Mortality and expense risk
charge (285,408) (87,066) (423) --
- ------------------------------ -------------- ----------- ----------- ------
NET INVESTMENT INCOME 4,181,081 958,252 790 --
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 232,836 97,444 (27) --
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (1,996,948) 850,297 (3,549) --
- ------------------------------ -------------- ----------- ----------- ------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (1,764,112) 947,741 (3,576) --
- ------------------------------ -------------- ----------- ----------- ------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 2,416,969 $ 1,905,993 ($ 2,786) $ --
- ------------------------------ -------------- ----------- ----------- ------
-------------- ----------- ----------- ------
YEAR ENDED DECEMBER 31, 1998
Net investment income:
- Dividends from investment
income $ 518,358 $ 475,493 $ 5,278 $ 1,102
- ------------------------------
- Dividends from net
realized gain on
investments 761,457 964,835 24,397 2,093
- ------------------------------
- Mortality and expense risk
charge (319,721) (106,294) (3,694) (749)
- ------------------------------ -------------- ----------- ----------- ------
NET INVESTMENT INCOME 960,094 1,334,034 25,981 2,446
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 408,626 151,524 7,686 (6,941)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 5,769,905 15,328 70,642 12,179
- ------------------------------ -------------- ----------- ----------- ------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 6,178,531 166,852 78,328 5,238
- ------------------------------ -------------- ----------- ----------- ------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 7,138,625 $ 1,500,886 $ 104,309 $ 7,684
- ------------------------------ -------------- ----------- ----------- ------
-------------- ----------- ----------- ------
</TABLE>
G-5
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
LINCOLN LINCOLN
NATIONAL NATIONAL AVIS
GROWTH AND SPECIAL AVIS CASH
INCOME OPPORTUNITIES BOND MANAGEMENT
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
NET ASSETS AT
JANUARY 1, 1996 $151,885,932 $12,571,769 $ 13,366,294 $ -- $2,736,268
Changes from
operations:
- Net investment
income 14,055,649 986,518 1,183,205 2,438 103,667
- --------------------
- Net realized
gain (loss) on
investments 1,351,611 108,147 125,457 57 11,983
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 9,399,986 1,683,401 1,141,306 256 2,026
- -------------------- ------------ ----------- -------------- ----------- -----------
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS 24,807,246 2,778,066 2,449,968 2,751 117,676
- --------------------
Net increase
(decrease) from
unit
transactions:
- Contract
purchases 80,441,763 7,940,162 7,958,079 176,558 5,524,308
- --------------------
- Contract
redemptions (48,919,992) (3,339,911) (4,448,792) (4,240) (5,964,977)
- -------------------- ------------ ----------- -------------- ----------- -----------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
UNIT
TRANSACTIONS 31,521,771 4,600,251 3,509,287 172,318 (440,669)
- -------------------- ------------ ----------- -------------- ----------- -----------
TOTAL INCREASE
(DECREASE) IN
NET ASSETS 56,329,017 7,378,317 5,959,255 175,069 (322,993)
- -------------------- ------------ ----------- -------------- ----------- -----------
NET ASSETS AT
DECEMBER 31,
1996 208,214,949 19,950,086 19,325,549 175,069 2,413,275
- -------------------- ------------ ----------- -------------- ----------- -----------
Changes from
operations:
- Net investment
income 25,487,596 499,218 1,199,052 5,434 146,904
- --------------------
- Net realized
gain (loss) on
investments 2,821,673 283,003 232,953 415 (5,933)
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 21,699,952 5,716,788 4,027,092 798 (12,961)
- -------------------- ------------ ----------- -------------- ----------- -----------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
OPERATIONS 50,009,221 6,499,009 5,459,097 6,647 128,010
- --------------------
Net increase
(decrease) from
unit
transactions:
- Contract
purchases 75,923,988 8,543,093 6,635,215 122,434 7,502,173
- --------------------
- Contract
redemptions (55,150,032) (4,455,249) (4,538,728) (129,999) (7,011,080)
- -------------------- ------------ ----------- -------------- ----------- -----------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
UNIT
TRANSACTIONS 20,773,956 4,087,844 2,096,487 (7,565) 491,093
- --------------------
TOTAL INCREASE
(DECREASE) IN
NET ASSETS 70,783,177 10,586,853 7,555,584 (918) 619,103
- -------------------- ------------ ----------- -------------- ----------- -----------
NET ASSETS AT
DECEMBER 31,
1997 278,998,126 30,536,939 26,881,133 174,151 3,032,378
- -------------------- ------------ ----------- -------------- ----------- -----------
Changes from
operations:
- Net investment
income 36,555,547 2,505,206 2,844,451 15,753 130,168
- --------------------
- Net realized
gain (loss) on
investments 3,888,716 761,918 450,508 (257) 1,495
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 19,679,780 2,911,821 (1,813,700) (6,723) (958)
- -------------------- ------------ ----------- -------------- ----------- -----------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
OPERATIONS 60,124,043 6,178,945 1,481,259 8,773 130,705
- --------------------
Net increase
(decrease) from
unit
transactions:
- Contract
purchases 71,055,601 7,772,864 6,326,268 436,517 5,538,461
- --------------------
- Contract
redemptions (64,639,825) (6,447,949) (6,673,980) (283,161) (4,969,953)
- -------------------- ------------ ----------- -------------- ----------- -----------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
UNIT
TRANSACTIONS 6,415,776 1,324,915 (347,712) 153,356 568,508
- -------------------- ------------ ----------- -------------- ----------- -----------
TOTAL INCREASE
(DECREASE) IN
NET ASSETS 66,539,819 7,503,860 1,133,547 162,129 699,213
- -------------------- ------------ ----------- -------------- ----------- -----------
NET ASSETS AT
DECEMBER 31,
1998 $345,537,945 $38,040,799 $ 28,014,680 $ 336,280 $3,731,591
- -------------------- ------------ ----------- -------------- ----------- -----------
------------ ----------- -------------- ----------- -----------
</TABLE>
See accompanying notes.
G-6
<PAGE>
<TABLE>
<CAPTION>
AVIS U.S.
AVIS GOVERNMENT/
HIGH-YIELD AVIS AVIS AAA-RATED
BOND GROWTH-INCOME GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------
NET ASSETS AT
JANUARY 1, 1996 $ 8,804,879 $ 30,076,039 $ 52,753,370 $ 5,002,697
Changes from
operations:
- Net investment
income 798,015 3,602,814 4,788,292 309,753
- --------------------
- Net realized
gain (loss) on
investments 17,725 332,471 618,889 (14,584)
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 318,611 2,054,284 1,901,460 (196,401)
- -------------------- ----------- -------------- ------------- ------------
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS 1,134,351 5,989,569 7,308,641 98,768
- --------------------
Net increase
(decrease) from
unit
transactions:
- Contract
purchases 3,668,219 14,658,398 24,218,575 1,547,206
- --------------------
- Contract
redemptions (3,028,040) (7,925,342) (14,926,065) (2,048,594)
- -------------------- ----------- -------------- ------------- ------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
UNIT
TRANSACTIONS 640,179 6,733,056 9,292,510 (501,388)
- -------------------- ----------- -------------- ------------- ------------
TOTAL INCREASE
(DECREASE) IN
NET ASSETS 1,774,530 12,722,625 16,601,151 (402,620)
- -------------------- ----------- -------------- ------------- ------------
NET ASSETS AT
DECEMBER 31,
1996 10,579,409 42,798,664 69,354,521 4,600,077
- -------------------- ----------- -------------- ------------- ------------
Changes from
operations:
- Net investment
income 994,339 6,220,519 11,027,305 254,702
- --------------------
- Net realized
gain (loss) on
investments 69,166 457,245 1,483,014 (28,443)
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 141,586 4,645,465 8,245,961 85,423
- -------------------- ----------- -------------- ------------- ------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
OPERATIONS 1,205,091 11,323,229 20,756,280 311,682
- --------------------
Net increase
(decrease) from
unit
transactions:
- Contract
purchases 2,763,831 13,972,849 21,208,459 1,070,773
- --------------------
- Contract
redemptions (2,962,891) (8,417,042) (17,376,025) (1,718,591)
- -------------------- ----------- -------------- ------------- ------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
UNIT
TRANSACTIONS (199,060) 5,555,807 3,832,434 (647,818)
- --------------------
TOTAL INCREASE
(DECREASE) IN
NET ASSETS 1,006,031 16,879,036 24,588,714 (336,136)
- -------------------- ----------- -------------- ------------- ------------
NET ASSETS AT
DECEMBER 31,
1997 11,585,440 59,677,700 93,943,235 4,263,941
- -------------------- ----------- -------------- ------------- ------------
Changes from
operations:
- Net investment
income 1,072,991 10,498,784 16,917,309 248,330
- --------------------
- Net realized
gain (loss) on
investments (25,336) 809,914 1,324,176 5,403
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments (1,136,564) (976,292) 14,776,261 57,881
- -------------------- ----------- -------------- ------------- ------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
OPERATIONS (88,909) 10,332,406 33,017,746 311,614
- --------------------
Net increase
(decrease) from
unit
transactions:
- Contract
purchases 2,843,276 11,731,626 20,319,044 3,110,794
- --------------------
- Contract
redemptions (3,046,482) (11,433,290) (17,071,049) (1,926,877)
- -------------------- ----------- -------------- ------------- ------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
UNIT
TRANSACTIONS (203,206) 298,336 3,247,995 1,183,917
- -------------------- ----------- -------------- ------------- ------------
TOTAL INCREASE
(DECREASE) IN
NET ASSETS (292,115) 10,630,742 36,265,741 1,495,531
- -------------------- ----------- -------------- ------------- ------------
NET ASSETS AT
DECEMBER 31,
1998 $11,293,325 $ 70,308,442 $ 130,208,976 $ 5,759,472
- -------------------- ----------- -------------- ------------- ------------
----------- -------------- ------------- ------------
<CAPTION>
AVIS
AVIS AVIS GLOBAL
AVIS ASSET GLOBAL SMALL
INTERNATIONAL ALLOCATION GROWTH CAPITALIZATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- --------------------
NET ASSETS AT
JANUARY 1, 1996 $ 19,918,349 $ 6,656,267 $ -- $ --
Changes from
operations:
- Net investment
income 1,460,381 820,566 -- --
- --------------------
- Net realized
gain (loss) on
investments 79,109 72,357 -- --
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 2,298,121 196,922 -- --
- -------------------- -------------- ----------- ----------- ---------------
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS 3,837,611 1,089,845 -- --
- --------------------
Net increase
(decrease) from
unit
transactions:
- Contract
purchases 11,569,758 3,180,500 -- --
- --------------------
- Contract
redemptions (5,397,061) (1,836,970) -- --
- -------------------- -------------- ----------- ----------- ---------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
UNIT
TRANSACTIONS 6,172,697 1,343,530 -- --
- -------------------- -------------- ----------- ----------- ---------------
TOTAL INCREASE
(DECREASE) IN
NET ASSETS 10,010,308 2,433,375 -- --
- -------------------- -------------- ----------- ----------- ---------------
NET ASSETS AT
DECEMBER 31,
1996 29,928,657 9,089,642 -- --
- -------------------- -------------- ----------- ----------- ---------------
Changes from
operations:
- Net investment
income 4,181,081 958,252 790 --
- --------------------
- Net realized
gain (loss) on
investments 232,836 97,444 (27) --
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments (1,996,948) 850,297 (3,549) --
- -------------------- -------------- ----------- ----------- ---------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
OPERATIONS 2,416,969 1,905,993 (2,786) --
- --------------------
Net increase
(decrease) from
unit
transactions:
- Contract
purchases 10,692,573 3,190,370 222,218 --
- --------------------
- Contract
redemptions (6,505,279) (2,024,590) (10,558) --
- -------------------- -------------- ----------- ----------- ---------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
UNIT
TRANSACTIONS 4,187,294 1,165,780 211,660 --
- --------------------
TOTAL INCREASE
(DECREASE) IN
NET ASSETS 6,604,263 3,071,773 208,874 --
- -------------------- -------------- ----------- ----------- ---------------
NET ASSETS AT
DECEMBER 31,
1997 36,532,920 12,161,415 208,874 --
- -------------------- -------------- ----------- ----------- ---------------
Changes from
operations:
- Net investment
income 960,094 1,334,034 25,981 2,446
- --------------------
- Net realized
gain (loss) on
investments 408,626 151,524 7,686 (6,941)
- --------------------
- Net change in
unrealized
appreciation or
depreciation on
investments 5,769,905 15,328 70,642 12,179
- -------------------- -------------- ----------- ----------- ---------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
OPERATIONS 7,138,625 1,500,886 104,309 7,684
- --------------------
Net increase
(decrease) from
unit
transactions:
- Contract
purchases 8,892,857 3,103,866 723,256 256,772
- --------------------
- Contract
redemptions (9,796,030) (2,589,115) (298,326) (103,613)
- -------------------- -------------- ----------- ----------- ---------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
UNIT
TRANSACTIONS (903,173) 514,751 424,930 153,159
- -------------------- -------------- ----------- ----------- ---------------
TOTAL INCREASE
(DECREASE) IN
NET ASSETS 6,235,452 2,015,637 529,239 160,843
- -------------------- -------------- ----------- ----------- ---------------
NET ASSETS AT
DECEMBER 31,
1998 $ 42,768,372 $14,177,052 $ 738,113 $ 160,843
- -------------------- -------------- ----------- ----------- ---------------
-------------- ----------- ----------- ---------------
</TABLE>
G-7
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ACCOUNTING POLICIES & ACCOUNT INFORMATION
THE SEPARATE ACCOUNT: Lincoln Life Flexible Premium Variable Life Account G
(Separate Account) was established as a segregated investment account of The
Lincoln National Life Insurance Company (Lincoln Life) on May 25, 1988. The
Separate Account was registered with the Securities and Exchange Commission on
January 4, 1989 under the Investment Company Act of 1940, as amended, as a unit
investment trust, and commenced investment activity on January 23, 1989.
The assets of the Separate Account are owned by Lincoln Life. The portion of the
Separate 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 Separate Account invests in Lincoln National Growth and Income
Fund, Inc., Lincoln National Special Opportunities Fund, Inc., and in the
American Variable Insurance Series (AVIS) which consists of ten funds: Bond
Fund, Cash Management Fund, High Yield Fund, Growth-Income Fund, Growth Fund,
U.S. Government/AAA-Rated Securities Fund, International Fund, Asset Allocation
Fund, Global Growth Fund and Global Small Capitalization Fund (Funds). The Funds
are registered as open-ended investment management companies. Investments in the
funds 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 of 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 Separate 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 Separate Account form a part of and are
taxed with operations of Lincoln Life, which is taxed as a "life insurance
company" under the Internal Revenue Code. The Separate 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 Separate Account's net investment income and the net
realized gain on investments.
2. MORTALITY AND EXPENSE RISK CHARGE & OTHER TRANSACTIONS WITH AFFILIATES
PERCENT OF PREMIUM CHARGE: Prior to allocation of net premiums to the Separate
Account, premiums paid are reduced by a percent of premium charge equal to 5.95%
of each premium payment to cover state taxes and federal income tax liabilities.
Amounts retained during 1998, 1997 and 1996 by Lincoln Life for such charges
were $2,087,654, $2,288,120 and $1,613,213, respectively.
SEPARATE ACCOUNT CHARGES: Amounts are charged daily to the Separate Account by
Lincoln Life for a mortality and expense risk charge at an annual rate of .80%
of the average daily net asset value of the Separate Account. These charges are
made in return for Lincoln Life's assumption of risks associated with adverse
mortality experience or excess administrative expenses in connection with
policies issued.
OTHER CHARGES: Other charges, which are paid to Lincoln Life by redeeming
Separate Account units are for monthly administrative charges, the cost of
insurance, transfer and withdrawal charges, and contingent surrender charges.
These other charges for 1998, 1997 and 1996 amounted to $18,200,343, $16,804,729
and $15,234,260, respectively.
The monthly administrative charge amounts to $6 for each policy in force and is
intended to compensate Lincoln Life for continuing administration of the
policies, premium billings, overhead expenses, and other miscellaneous expenses.
G-8
<PAGE>
Lincoln Life assumes the responsibility for providing the insurance benefits
included in the policy. The cost of insurance is determined each month based
upon the applicable insurance rate and the current death benefit. The cost of
insurance can vary from month to month since the determination of both the
insurance rate and the current death benefit depends upon a number of variables
as described in the Separate Account's prospectus.
A transfer charge of $10 is incurred each time a policyowner transfers funds
from one account to another; however, the transfer charge is currently being
waived for all transfers. A withdrawal charge of $10 is incurred for each
withdrawal from the policy value by the policyowner.
Surrender charges are deducted if the policy is surrendered during the first
sixteen policy years. Surrender charges range from approximately 60% of the
required base minimum annual premium for surrenders in the first year to
approximately 120% in years two through five. Surrender charges in years six
through sixteen decrease by policy year to 0% in the seventeenth year. Surrender
charges are assessed separately on the initial specified policy amount and
subsequent increases to the specified policy amount. The amount of the surrender
charge assessed on increases to the specified policy amount would be equal to
the surrender charge that would apply to a new policy.
G-9
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NET ASSETS
The following is a summary of net assets owned at December 31, 1998.
<TABLE>
<CAPTION>
LINCOLN LINCOLN
NATIONAL NATIONAL AVIS
GROWTH AND SPECIAL AVIS CASH
INCOME OPPORTUNITIES BOND MANAGEMENT
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Unit transactions $173,614,726 $18,606,865 $15,342,950 $318,109 $2,998,161
- ---------------------------------------
Accumulated net investment income 92,945,957 5,286,214 6,515,456 23,625 743,442
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 9,341,831 1,301,686 861,764 215 14,545
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 69,635,431 12,846,034 5,294,510 (5,669) (24,557)
- --------------------------------------- ------------ ----------- -------------- ----------- -----------
$345,537,945 $38,040,799 $28,014,680 $336,280 $3,731,591
------------ ----------- -------------- ----------- -----------
------------ ----------- -------------- ----------- -----------
</TABLE>
G-10
<PAGE>
<TABLE>
<CAPTION>
AVIS U.S.
AVIS GOVERNMENT/ AVIS
HIGH-YIELD AVIS AVIS AAA-RATED AVIS ASSET
BOND GROWTH-INCOME GROWTH SECURITIES INTERNATIONAL ALLOCATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Unit transactions $ 7,453,819 $34,714,721 $ 54,251,569 $4,321,574 $ 26,666,205 $ 8,151,004
- ---------------------------------------
Accumulated net investment income 4,477,120 23,686,917 38,761,193 1,509,128 8,038,436 3,875,209
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 40,666 1,699,812 4,293,957 (78,139) 822,317 384,290
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments (678,280) 10,206,992 32,902,257 6,909 7,241,414 1,766,549
- --------------------------------------- ------------ -------------- ------------- ------------ ------------ ------------
$ 11,293,325 $70,308,442 $ 130,208,976 $5,759,472 $ 42,768,372 $ 14,177,052
------------ -------------- ------------- ------------ ------------ ------------
------------ -------------- ------------- ------------ ------------ ------------
<CAPTION>
AVIS
AVIS GLOBAL
GLOBAL SMALL
GROWTH CAPITALIZATION
SUBACCOUNT SUBACCOUNT
<S> <C> <C>
- ---------------------------------------
Unit transactions $636,590 $153,159
- ---------------------------------------
Accumulated net investment income 26,771 2,446
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 7,659 (6,941)
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 67,093 12,179
- --------------------------------------- ----------- ---------------
$738,113 $160,843
----------- ---------------
----------- ---------------
</TABLE>
G-11
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. 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>
AGGREGATE AGGREGATE
COST OF PROCEEDS
PURCHASES FROM SALES
<S> <C> <C>
- -----------------------------------------------------------------
Lincoln National Growth and Income Fund $ 6,503,330 $ 2,673,045
- ---------------------------------------
Lincoln National Special Opportunities
Fund 5,496,115 2,999,360
- ---------------------------------------
AVIS Bond Fund 429,082 259,970
- ---------------------------------------
AVIS Cash Management Fund 4,958,570 4,259,878
- ---------------------------------------
AVIS High-Yield Bond Fund 2,404,036 1,534,258
- ---------------------------------------
AVIS Growth-Income Fund 14,751,114 3,953,765
- ---------------------------------------
AVIS Growth Fund 25,137,602 4,971,535
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 2,844,516 1,412,236
- ---------------------------------------
AVIS International Fund 4,230,174 4,173,129
- ---------------------------------------
AVIS Asset Allocation Fund 2,749,354 900,527
- ---------------------------------------
AVIS Global Growth Fund 713,144 262,222
- ---------------------------------------
AVIS Global Small Capitalization Fund 256,596 100,988
- --------------------------------------- ----------- -----------
$70,473,633 $27,500,913
----------- -----------
----------- -----------
</TABLE>
G-12
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
The following is a summary of investments owned at December 31, 1998.
<TABLE>
<CAPTION>
NET
SHARES ASSET VALUE COST
OUTSTANDING VALUE OF SHARES OF SHARES
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Lincoln National Growth and Income Fund $ 821,842 $ 46.29 $ 38,041,630 $ 25,195,596
- ---------------------------------------
Lincoln National Special Opportunities
Fund 838,378 33.42 28,015,281 22,720,771
- ---------------------------------------
AVIS Bond Fund 33,067 10.17 336,287 341,956
- ---------------------------------------
AVIS Cash Management Fund 338,627 11.02 3,731,673 3,756,230
- ---------------------------------------
AVIS High-Yield Bond Fund 849,141 13.30 11,293,572 11,971,852
- ---------------------------------------
AVIS Growth-Income Fund 1,937,447 36.29 70,309,969 60,102,977
- ---------------------------------------
AVIS Growth Fund 2,483,536 52.43 130,211,786 97,309,529
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 509,248 11.31 5,759,598 5,752,689
- ---------------------------------------
AVIS International Fund 2,512,885 17.02 42,769,305 35,527,891
- ---------------------------------------
AVIS Asset Allocation Fund 910,556 15.57 14,177,361 12,410,812
- ---------------------------------------
AVIS Global Growth Fund 55,415 13.32 738,129 671,036
- ---------------------------------------
AVIS Global Small Capitalization Fund 16,036 10.03 160,846 148,667
- --------------------------------------- ------------ ------------
$345,545,437 $275,910,006
------------ ------------
------------ ------------
</TABLE>
G-13
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NEW INVESTMENT FUND
Effective April 25, 1997, the AVIS Global Growth Fund became available as an
investment option for Separate Account contract owners. Effective May 1, 1998,
the AVIS Global Small Capitalization Fund became available as an investment
option for Separate Account contract owners.
7. DAILY VALUATION CALCULATIONS
Effective October 1996, the daily unit value calculation process was transferred
from Lincoln Life to the Delaware Group, an affiliate of Lincoln Life. Costs
associated with the calculation of the unit value are paid by Lincoln Life.
G-14
<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 G
We have audited the accompanying statement of assets and liability
of Lincoln Life Flexible Premium Variable Life Account G ("Variable
Account") (comprised of the Lincoln National Growth and Income,
Lincoln National Special Opportunities, AVIS Bond, AVIS Cash
Management, AVIS High-Yield Bond, AVIS Growth-Income, AVIS Growth,
AVIS US Government/AAA-Rated Securities, AVIS International, AVIS
Asset Allocation, 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 each of
the respective subaccounts constituting the Lincoln Life Flexible
Premium Variable Life Account G at December 31, 1998, and the
results of their operations and changes in their net assets for
each of the three years in the period then ended in conformity with
generally accepted accounting principles.
[SIGNATURE]
Fort Wayne, Indiana
March 30, 1999
G-15
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
G-16
<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>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1998 1998 1997 1997
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<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
<PAGE>
PART II
This filing is made pursuant to Rule 6e-3(T)
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
REPRESENTATION PURSUANT TO SECTION 26(e) (2) (A) OF THE INVESTMENT COMPANY ACT
OF 1940
Lincoln National Life Insurance Company hereby represents that the fees and
charges deducted under the Policies registered by this registration statement,
in the aggregate, are reasonable in relation to the services rendered, the
expenses expected to be incurred, and the risks assumed by Lincoln National Life
Insurance Company.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet
Reconciliation and Tie-in Sheet
The Prospectus consisting of 98 pages
The undertaking to file reports
The representations pursuant to Section 26(e) (2) (A) of the Investment
Company Act of 1940
The signatures
The written consents of the following persons:
Robert A. Picarello, Esq.
Vaughn W. Robbins, FSA
Ernst & Young LLP (Independent Auditors)
<PAGE>
The following exhibits:
<TABLE>
<C> <S>
1. The following exhibits correspond to those required by paragraph A of the
instructions as to exhibits in Form N-8B-2:
(1) Resolution of the Board of Directors of Lincoln National Life Insurance Co.
and related documents authorizing establishment of the Account.(2)
(2) Not applicable.
(3)(a) Not applicable.
(b) Not applicable.
(c) Commission schedule.(2)
(4) Not applicable.
(5)(a) Application.(2)
(b) Policy.(2)
(6)(a) Articles of Incorporation of The Lincoln National Life Insurance Co.(1)
(b) Bylaws of Lincoln National Life Insurance Company(1)
(7) Not applicable.
(8) Series Participation Agreement.(2)
(9)(a) Proposed form of Indemnification Agreement related to compliance with IRC
Section 817(h) and the regulations thereunder. *
(9)(b) Services Agreement between Lincoln National Life Insurance Company, Delaware
Management Company, Inc. and Delaware Services Company, Inc.(1)
(10) See Exhibit 1(5)(a).
2. See Exhibit 1(5).
3. Opinion and consent of Robert A. Picarello
4. Not applicable.
5. Opinion and consent of Vaughn W. Robbins, F.S.A.
6. Consent of Ernst & Young LLP, Independent Auditors.
7. Not applicable.
8. Power of Attorney.(2)
</TABLE>
* To be filed by amendment.
(1) Incorporated by reference to registration statement filed on Form S-6 (File
No. 333-40745) filed on November 21, 1997.
(2) Incorporated by reference to registration statement Post-Effective Amendment
No. 13 filed on April 20, 1998.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused
this Post-Effective Amendment No. 14 to its Registration Statement on Form S-6
(File No. 033-22740) to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Hartford and State of Connecticut on the 27th
day of April, 1999. Registrant certifies that this amendment meets all of the
requirements for effectiveness pursuant to Rule 485(b) under the Securities Act
of 1933.
<TABLE>
<S> <C> <C>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE
ACCOUNT G
INDIVIDUAL FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY
(REGISTRANT)
By: /s/ JOHN H. GOTTA
------------------------------------------
John H. Gotta
Senior Vice President
The Lincoln National Life Insurance
Company
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(DEPOSITOR)
By: /s/ JOHN H. GOTTA
------------------------------------------
John H. Gotta
Senior Vice President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 14 to this Registration Statement (File No.
033-22740) has been signed below on April 27, 1999 by the following persons, as
officers and directors of the Depositor, in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<S> <C>
President, Chief Executive
/s/ GABRIEL L. SHAHEEN * Officer and Director
- ------------------------------ (Principal Executive
Gabriel L. Shaheen Officer)
/s/ LAWRENCE T. ROWLAND *
- ------------------------------ Executive Vice President
Lawrence T. Rowland and Director
Senior Vice President,
Assistant Treasurer and
/s/ KEITH J. RYAN * Chief Financial Officer
- ------------------------------ (Principal Financial
Keith J. Ryan Officer and Principal
Accounting Officer)
/s/ H. THOMAS MCMEEKIN *
- ------------------------------ Director
H. Thomas McMeekin
/s/ RICHARD C. VAUGHAN *
- ------------------------------ Director
Richard C. Vaughan
/s/ JON A. BOSCIA *
- ------------------------------ Director
Jon A. Boscia
* By /s/ JOHN H. GOTTA
----------------------
John H. Gotta
Attorney-in-Fact
(A Majority of the Directors)
</TABLE>
<PAGE>
[LOGO]
Robert A. Picarello
Associate General Counsel
350 Church Street
Hartford, CT 06103-1106
Telephone: (860)466-1603
Facsimile: (860)466-1778
April 27, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Lincoln Life Flexible Premium Variable Life Account G
individual flexible premium variable life insurance policy (the "Account")
The Lincoln National Life Insurance Company
Post-Effective Amendment Number 14, File No. 033-22740
Dear Sirs:
As Associate General Counsel of The Lincoln National Life Insurance Company
("Company"), I am familiar with the actions of the Board of Directors of the
Company establishing the Account and its method of operation and authorizing
the filing of a Registration Statement under the Securities Act of 1933 (and
amendments thereto) for the securities to be issued by the Account and the
Investment Company Act of 1940 for the Account itself.
In the course of preparing this opinion, I have reviewed the Certificate of
Incorporation and the By-Laws of the Company, the Board actions with respect to
the Account, and such other matters as I deemed necessary or appropriate. Based
on such review, I am of the opinion that the variable life insurance policies
(and interests therein) which are the subject of the Registration Statement
under the Securities Act of 1933, as amended, for the Account will, when issued,
be legally issued and will represent binding obligations of the Company, the
depositor for the Account.
I further consent to the use of this opinion as an Exhibit to Post-Effective
Amendment No. 14 to said Registration Statement and to the reference to me under
the heading "Experts" in said Registration Statement, as amended.
Very truly yours,
/s/ Robert A. Picarello
Robert A. Picarello
<PAGE>
[LOGO]
The Lincoln National Life Insurance Company
350 Church Street
Hartford, CT 06103-1106
April 27, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Lincoln Life Flexible Premium Variable Life Account G
individual flexible premium variable life insurance policy (the "Account")
Post-Effective Amendment Number 14, File No. 033-22740
Dear Sirs:
This opinion is furnished in connection with the filing of the Registration
Statement on Form S-6 by The Lincoln National Life Insurance Company under the
Securities Act of 1933. The Prospectus included in said Registration Statement
describes flexible premium variable universal life insurance policies (the
"Policies"). The forms of Policies were prepared under my direction.
In my opinion, the illustrations of benefits under the Policies included in the
section entitled "Illustrations" in the Prospectus, based on assumptions stated
in illustrations, are consistent with the provisions of the forms of the
Policies. The ages selected in the illustrations are representative of the
manner in which the Policies operate.
I hereby consent to the use of this opinion as an Exhibit to the Registration
Statement and the reference to me under the heading "Experts" in the Prospectus.
Very truly yours,
/s/ Vaughn W. Robbins
Vaughn W. Robbins, FSA, MAAA
<PAGE>
Exhibit 6
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Post-Effective Amendment No. 14 to the Registration Statement (Form S-6 No.
33-22740) pertaining to the Lincoln Life Flexible Premium Variable Life
Account G, and to the use therein of our reports dated (a) February 1, 1999,
with respect to the statutory-basis financial statements of The Lincoln
National Life Insurance Company, and (b) March 30, 1999, with respect to the
financial statements of Lincoln Life Flexible Premium Variable Life Account G.
/s/ Ernst & Young LLP
---------------------
Fort Wayne, Indiana
April 23, 1999
