<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 2000
REGISTRATION NO. 33-22740
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 15 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:
Elizabeth Frederick, Esquire Jeffrey A. Brine, Esquire
The Lincoln National 350 Church Street
Life Insurance Company Hartford, CT
1300 South Clinton Street 06103
P.O. Box 1110
Fort Wayne, Indiana 46801
------------------------
INDEFINITE NUMBER OF UNITS OF INTEREST IN VARIABLE LIFE INSURANCE CONTRACTS
(TITLE OF SECURITIES BEING REGISTERED)
Approximate date of proposed public offering: Continuous.
An indefinite amount of the securities being offered by the Registration
Statement has been registered pursuant to Rule 24f-2 under the Investment
Company Act of 1940. Form 24f-2 for Registrant, for the fiscal year ending
December 31, 1999 was filed March 24, 2000.
It is proposed that this filing will become effective:
/ / immediately upon filing pursuant to paragraph (b)
/X/ on May 1, 2000 pursuant to paragraph (b) of rule 485
/ / 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
- --------------------- ------------------------------------------------------------
<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>
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: 1-800-454-6265
This prospectus describes a flexible premium variable life insurance contract
(the "policy"), offered by The Lincoln National Life Insurance Company ("Lincoln
Life", "we", the "company").
The policy features: flexible premium payments, a choice of two death benefit
options, and a choice of underlying investment options.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance contract with this policy.
This Separate Account prospectus is being furnished along with the prospectuses
for the funds. Both should be read carefully to understand the policy being
offered.
You may allocate net premiums to subaccounts which invest in the following
funds:
- American Funds Insurance Series (also known as American Variable
Insurance Series:)
-- Asset Allocation Fund
-- Bond Fund
-- Cash Management Fund
-- Global Growth Fund
-- Global Small Capitalization Fund
-- Growth Fund
-- Growth-Income Fund
-- High-Yield Bond Fund
-- International Fund
-- U.S. Government/AAA-Rated Securities Fund
- Lincoln National Growth and Income Fund, Inc.
- Lincoln National Special Opportunities Fund, Inc.
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. If
your plan already benefits from favorable tax treatment be sure your policy
meets your other financial goals before purchasing.
TO BE VALID, THIS PROSPECTUS MUST HAVE THE CURRENT MUTUAL FUNDS' PROSPECTUSES
WITH IT. KEEP ALL FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS A
CRIMINAL OFFENSE TO STATE OTHERWISE.
THIS POLICY MAY NOT BE AVAILABLE IN ALL STATES, AND THIS PROSPECTUS ONLY OFFERS
THE POLICY FOR SALE IN JURISDICTIONS WHERE SUCH OFFER AND SALE ARE LAWFUL.
Prospectus Dated May 1, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
- ----------------------------------------
SUMMARY OF THE POLICY 1
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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 8
Dollar cost averaging program 9
Effective date 10
Right to examine policy 10
Policy termination 10
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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 14
Other charges 14
Reduction of charges 15
Term conversion credits 15
- ----------------------------------------
POLICY BENEFITS
Death benefit and death benefit
types 15
Death benefit guarantee 17
Policy changes 17
Policy value 18
Transfer between subaccounts 19
Transfer to and from the General
Account 19
Loans 20
Withdrawals 20
Policy lapse and reinstatement 21
</TABLE>
<TABLE>
- ----------------------------------------
<CAPTION>
PAGE
<S> <C>
Surrender of the policy 22
Proceeds and payment options 22
- ----------------------------------------
GENERAL PROVISIONS
The contract 23
Suicide 23
Representations and contestability 23
Incorrect age or sex 23
Change of owner or beneficiary 24
Assignment 24
Reports and records 24
Projection of benefits and values 24
Postponement of payments 25
Riders 25
- ----------------------------------------
DISTRIBUTION OF THE POLICY 26
ADVERTISING 27
- ----------------------------------------
TAX ISSUES
Taxation of Life Insurance
Contracts in General 27
Policies which are MECS 29
Policies which are not MECS 29
Other Considerations 30
Tax Status of Lincoln Life 30
- ----------------------------------------
VOTING RIGHTS 31
- ----------------------------------------
STATE REGULATION OF LINCOLN LIFE
AND THE SEPARATE ACCOUNT 31
- ----------------------------------------
SAFEKEEPING OF THE SEPARATE
ACCOUNT'S ASSETS 31
- ----------------------------------------
LEGAL PROCEEDINGS 32
- ----------------------------------------
EXPERTS 32
- ----------------------------------------
OFFICERS & DIRECTORS OF THE
LINCOLN NATIONAL LIFE INSURANCE
COMPANY 32
- ----------------------------------------
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 Financial
Statements G-1
Company Financial Statements 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 Riders, page 25.)
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 Death benefit, 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 Death benefit, 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. (See Premium payments, page
8.) If your policy lapses because your monthly premium deduction is larger than
the total accumulation value, you may reinstate your policy. (See Policy lapse
and reinstatement, page 21.)
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 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 Right to examine policy, page 10.)
1
<PAGE>
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.
Each portfolio described below is an investment vehicle for one or more
insurance company separate accounts. A given portfolio may have a similar
investment objective and principal investment strategy to those for another
mutual fund managed by the same investment advisor or subadvisor. However,
because of timing of investments and other variables we cannot guarantee there
will be any correlation between the two investments. Even though the management,
strategies and objectives of the funds are similar, the investment results may
vary.
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 see the General Account on 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. Below is a brief description of the investment objective
and principal strategy of each fund. There can be no assurance that any of the
stated investment objectives will be achieved.
AMERICAN FUNDS INSURANCE SERIES:
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).
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.
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.
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.
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.
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
2
<PAGE>
designed for investors seeking capital appreciation through stocks. Investors in
the fund should have a long-term perspective and be able to tolerate potentially
wide price fluctuations.
GROWTH-INCOME FUND -- The fund seeks to make your investment grow and provide
you with income over time by investing primarily in common stocks or other
securities which demonstrate the potential for appreciation and/or dividends.
The fund is designed for investors seeking both capital appreciation and income.
HIGH-YIELD BOND FUND -- The fund seeks to provide you with a high level of
current income and secondarily capital appreciation by investing primarily in
lower quality debt securities (rated Ba or BB or below by Moody's Investors
Service, Inc. or Standard & Poor's Corporation), including those of non-U.S.
issuers. The fund may also invest in equity securities that provide an
opportunity for capital appreciation.
INTERNATIONAL FUND -- The fund seeks to make your investment grow over time by
investing primarily in common stocks of companies located outside the United
States. The fund is designed for investors seeking capital appreciation through
stocks. Investors in the fund should have a long-term perspective and be able to
tolerate potentially wide price fluctuations.
U.S. GOVERNMENT/AAA-RATED SECURITIES FUND -- The fund seeks to provide you with
a high level of current income, as well as preserve your investment. The fund
invests primarily in securities that are guaranteed by the "full faith and
credit" pledge of the U.S. Government and securities that are rated AAA or Aaa
by Moody's Investors Service, Inc. or Standard & Poor's Corporation or unrated
but determined to be of equivalent quality.
LINCOLN NATIONAL FUNDS:
LINCOLN NATIONAL GROWTH AND INCOME FUND, INC. -- The investment objective is
long-term capital appreciation. The fund buys stocks of established companies.
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.
Lincoln Investment Management Inc. (Lincoln Investment) has informed the funds
to which it provides advisory services that it intends to merge into a newly
created series of its affiliate, Delaware Management Business Trust, during the
second or third quarter of 2000. Lincoln Investment does not expect the merger
to result in any change in the level of advisory services that it currently
provides to these funds, although there may be some changes in, and additions
to, personnel. See the prospectuses for these funds for more information.
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 Fund charges and expenses
table on page 14 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 Transfer between subaccounts, page 19.)
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 Charges and
deductions, page 10.)
3
<PAGE>
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 Loans, page 20.)
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.
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 Policies which are MECS, page 29), 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, 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 table under Policy benefits, 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, which decrease over time, and premium taxes may be applicable to your
policy. These charges are explained in more detail beginning on page 22. A
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 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
2005 Market Street, Philadelphia, PA 19103. 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 Lincoln Life Flexible Premium Variable Life Account G ("Account
G") 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 of Lincoln Life.
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. Eastern 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 Securities and Exchange Commission.
The Separate Account is divided into twelve subaccounts. Each subaccount invests
exclusively in shares of one of the following funds: One of ten portfolios of
the American Funds Insurance Series, the Lincoln National Growth and Income
Fund, Inc. or the Lincoln National Special Opportunities Fund, Inc. The ten
portfolios available in the American Funds Insurance Series are: Asset
Allocation Fund, Bond Fund, Cash Management Fund, Global Growth Fund, Global
Small Capitalization Fund, Growth Fund, Growth-Income Fund, High-Yield Bond
Fund, International Fund, U.S. Government/ AAA-Rated Securities Fund.
5
<PAGE>
Income and both realized and unrealized gains or losses from the assets of the
Separate Account are credited to or charged against the Separate Account without
regard to the income, gains or losses arising out of any other business we may
conduct. The funds are also invested in by variable annuity contract holders.
Should we become aware of any material irreconcilable conflict, either potential
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., an affiliate, 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 and prior
approval of the Securities and Exchange Commission, 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. A substituted fund may have higher charges than the one it
replaces. 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.
6
<PAGE>
Lincoln Life also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new fund or series of a fund,
or in shares of another investment company, with a specified investment
objective. 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.
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.
7
<PAGE>
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
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
8
<PAGE>
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 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.
9
<PAGE>
EFFECTIVE DATE
For all coverage provided in the original application, the effective date will
be the policy date, provided the policy has been delivered and the initial
premium has been paid prior to death and prior to any change in health or any
other factor affecting insurability of the insured as shown in the application.
The policy date is ordinarily the earlier of the date the full initial premium
is received or the date on which the policy is approved for issue by Lincoln
Life. 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
10
<PAGE>
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 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
11
<PAGE>
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 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. Surrender charges are higher in the
earlier years of the policy reducing its net cash surrender value. Thus if you
surrender the policy in the early years there may be little or no money to
return to you.
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,
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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 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
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fund's net assets, will range from .35% to .81%. These charges and other fund
expenses have the effect of reducing the investment results credited to the
subaccounts.
<TABLE>
TOTAL ANNUAL
FUND OPERATING TOTAL FUND
EXPENSES TOTAL OPERATING
WITHOUT WAIVERS EXPENSES
ASSET MANAGEMENT OTHER WAIVERS OR AND WITH WAIVERS OR
FUND FEE* EXPENSES* REDUCTIONS* REDUCTIONS* REDUCTIONS*
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AMERICAN FUNDS INSURANCE SERIES:
Asset Allocation .43% .01% .44% 0.0 .44%
Bond .51% .02% .53% 0.0 .53%
Cash Management .44% .01% .45% 0.0 .45%
Global Growth .68% .03% .71% 0.0 .71%
Global Small Capitalization .78% .03% .81% 0.0 .81%
Growth .38% .01% .39% 0.0 .39%
Growth-Income .34% .01% .35% 0.0 .35%
High-Yield Bond .50% .01% .51% 0.0 .51%
International .55% .05% .60% 0.0 .60%
U.S. Gov't/AAA-Rated .51% .01% .52% 0.0 .52%
LINCOLN NATIONAL FUNDS:
Growth and Income .31% .05% .36% 0.0 .36%
Special Opportunities .37% .07% .44% 0.0 .44%
</TABLE>
*Expressed as an annual percentage of each fund's average daily net assets.
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.
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.
14
<PAGE>
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.
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 (a minimum of $200,000 as of the date of this prospectus) 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 (a
minimum of $200,000 as of the date of this prospectus) plus the policy value of
the policy or a specified percentage of the
15
<PAGE>
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>
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 or under the age of
40 and that there is no outstanding policy loan.
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
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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 taking into consideration loans or partial withdrawals.
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.
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
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<PAGE>
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.
Changes in the initial specified amount, partial withdrawals, and/or death
benefit option during the first two policy years may affect the death benefit
guarantee monthly premium. These events and loans may also affect the policy's
ability to remain in force.
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;
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.
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<PAGE>
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 the Charges
and deductions section beginning on page 10.
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.
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
19
<PAGE>
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. Unless we agree otherwise 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 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
20
<PAGE>
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 keep the policy in force for two
months as well as the repayment of any indebtedness. 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. The above will not apply if
the policy had been previously surrendered.
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<PAGE>
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. However, if you have money due from the
General Account, payment from the General Account may be deferred up to six
months at Lincoln Life's option. If Lincoln Life exercises its right to defer
any payment from the General Account interest will be paid as required by law
from the date the recipient would otherwise have been entitled to receive the
payment. The tax treatment of a surrender policy is discussed under Tax Issues.
All coverage under the policy will automatically terminate and may not be
reinstated if the owner makes a full surrender. The surrender of the policy may
have tax consequences.
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
22
<PAGE>
payment options, proceeds may be withdrawn under such payment option if provided
for in the payment contract. The amount to be withdrawn varies by the payment
option.
GENERAL PROVISIONS
THE CONTRACT
The entire contract consists of the policy plus the application and any
supplemental application, plus any riders, plus any amendments. The policy is
issued in consideration of the application and payment of the Initial premium.
Only statements in the application and any supplemental applications can be used
to contest the validity of the policy or defend a claim. These statements are,
in the absence of fraud, considered representations and not warranties. A change
in the policy will be binding on us only if the change is in writing and the
change is made by the President, Vice President, Secretary, or Assistant
Secretary of Lincoln Life.
The policy is nonparticipating; it will not share in our profit or surplus
earnings.
SUICIDE
If the insured commits suicide, while sane or insane, within two years from the
policy date, our total liability under the policy will be the premiums paid,
minus any policy loan, 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.
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<PAGE>
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 while the insured is living. The request must be in writing on a form
suitable to us and received at our administrative address. Once recorded, the
change will be effective as of the date signed. The change will be effective the
day that the request is received at our administrative mailing address. We will
not be responsible for any payment or other action taken before having recorded
the transfer. A change of ownership will not, in and of itself, affect the
interest of any beneficiary. A change of ownership may have tax consequences.
The beneficiary is identified in the application for the policy, and will
receive the proceeds when the insured dies. The beneficiary may be changed by
the owner while the insured is alive, and provided that any prior designation
does not prohibit such a change. The change request must be in writing on a form
suitable to us and received at our administrative address. Once recorded, the
change will be effective as of the date signed. 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.
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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.
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. There may be separate charges for riders that become part of the
policy.
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.
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<PAGE>
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 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.
26
<PAGE>
The policy will be sold by registered representatives of broker dealers
(including Lincoln Financial Advisors Corp., a registered broker-dealer
affiliated with 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.
ADVERTISING
We are also ranked and rated by independent financial rating services, including
Moody's, Standard & Poor's, Duff & Phelps and A.M. Best Company. The purpose of
these ratings is to reflect our financial strength or claims-paying ability. The
ratings are not intended to reflect the investment experience or financial
strength of the Separate Account. We may advertise these ratings from time to
time. In addition, we may include in certain advertisements, endorsements in the
form of a list of organizations, individuals or other parties which recommend
Lincoln Life or the Policies. Furthermore, we may occasionally include in
advertisements comparisons of currently taxable and tax deferred investment
programs, based on selected tax brackets, or discussions of alternative
investment vehicles and general economic conditions.
We are a member of the Insurance Marketplace Standards Association ("IMSA") and
may include the IMSA logo and information about IMSA membership in our
advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services for individually
sold life insurance and annuities.
TAX ISSUES
INTRODUCTION. The Federal income tax treatment of the policy is complex and
sometimes uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion does not include all the Federal income tax rules
that may affect you and your policy, and is not intended as tax advice. This
discussion also does not address other Federal tax consequences, or state or
local tax consequences, associated with the policy. As a result, you should
always consult a tax adviser about the application of tax rules to your
individual situation.
TAXATION OF LIFE INSURANCE CONTRACTS IN GENERAL
TAX STATUS OF THE POLICY. Section 7702 of the Code establishes a statutory
definition of life insurance for Federal tax purposes. We believe that the
policy will meet the statutory definition of life insurance, which places
limitations on the amount of premium payments that may be made and the contract
values that can accumulate relative to the death benefit. As a result, the death
benefit payable under the policy will generally be excludable from the
beneficiary's gross income, and interest and other income credited under the
policy will not be taxable unless certain withdrawals are made (or are deemed to
be made) from the policy prior to the insured's death, as discussed below. This
tax treatment will only apply, however, if (1) the investments of the Separate
Account are "adequately
27
<PAGE>
diversified" in accordance with Treasury Department regulations, and (2) we,
rather than the you, are considered the owner of the assets of the Separate
Account for Federal income tax purposes.
INVESTMENTS IN THE SEPARATE ACCOUNT MUST BE DIVERSIFIED. For a policy to be
treated as a life insurance contract for Federal income tax purposes, the
investments of the Separate Account must be "adequately diversified." IRS
regulations define standards for determining whether the investments of the
Separate Account are adequately diversified. If the Separate Account fails to
comply with these diversification standards, you could be required to pay tax
currently on the excess of the contract value over the contract premium
payments. Although we do not control the investments of the subaccounts, we
expect that the subaccounts will comply with the IRS regulations so that the
Separate Account will be considered "adequately diversified."
RESTRICTION ON INVESTMENT OPTIONS. Federal income tax law limits your right to
choose particular investments for the policy. Because the IRS has not issued
guidance specifying those limits, the limits are uncertain and your right to
allocate contract values among the subaccounts may exceed those limits. If so,
you would be treated as the owner of the assets of the Separate Account and thus
subject to current taxation on the income and gains from those assets. We do not
know what limits may be set by the IRS in any guidance that it may issue and
whether any such limits will apply to existing policies. We reserve the right to
modify the policy without your consent to try to prevent the tax law from
considering you as the owner of the assets of the Separate Account.
NO GUARANTEES REGARDING TAX TREATMENT. We make no guarantee regarding the tax
treatment of any policy or of any transaction involving a policy. However, the
remainder of this discussion assumes that your policy will be treated as a life
insurance contract for Federal income tax purposes and that the tax law will not
impose tax on any increase in your contract value until there is a distribution
from your policy.
TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In general, the amount
of the death benefit payable from a policy because of the death of the insured
is excludable from gross income. Certain transfers of the policy for valuable
consideration, however, may result in a portion of the death benefit being
taxable.
If the death benefit is not received in a lump sum and is, instead, applied
under one of the settlement options, payments generally will be prorated between
amounts attributable to the death benefit which will be excludable from the
beneficiary's income and amounts attributable to interest (accruing after the
insured's death) which will be includible in the beneficiary's income.
TAX DEFERRAL DURING ACCUMULATION PERIOD. Under existing provisions of the Code,
except as described below, any increase in your contract value is generally not
taxable to you unless amounts are received (or are deemed to be received) from
the policy prior to the insured's death. If there is a total withdrawal from the
policy, the surrender value will be includible in the your income to the extent
the amount received exceeds the "investment in the contract." (If there is any
debt at the time of a total withdrawal, such debt will be treated as an amount
received by the owner.) The "investment in the contract" generally is the
aggregate amount of premium payments and other consideration paid for the
policy, less the aggregate amount received under the policy previously to the
extent such amounts received were excludable from gross income. Whether partial
withdrawals (or other amounts deemed to be distributed) from the policy
constitute income to you depends, in part, upon whether the policy is considered
a "modified endowment contract" (a "MEC") for Federal income tax purposes.
28
<PAGE>
POLICIES WHICH ARE MECS
CHARACTERIZATION OF A POLICY AS A MEC. A policy will be classified as a MEC if
premiums are paid more rapidly than allowed by a "7-pay test" under the tax law
or if the policy is received in exchange for another policy that is a MEC. In
general, this policy will constitute a MEC unless (1) it was received in
exchange for another life insurance contract which was not a MEC, and (2) no
premium payments (other than the exchanged contract) are paid into the policy
during the first seven contract years. In addition, even if the policy initially
is not a MEC, it may in certain circumstances become a MEC. These circumstances
would include a later increase in benefits, any other material change of the
policy (within the meaning of the tax law), and a withdrawal or reduction in the
death benefit during the first seven contract years.
TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES UNDER MECS. If the
policy is a MEC, withdrawals from the policy will be treated first as
withdrawals of income and then as a recovery of premium payments. Thus,
withdrawals will be includible in income to the extent the contract value
exceeds the investment in the policy. The Code treats any amount received as a
loan under a policy, and any assignment or pledge (or agreement to assign or
pledge) any portion of your contract value, as a withdrawal of such amount or
portion. Your investment in the policy is increased by the amount includible in
income with respect to such assignment, pledge, or loan.
PENALTY TAXES PAYABLE ON WITHDRAWALS. A 10% penalty tax may be imposed on any
withdrawal (or any deemed distribution) from your MEC which you must include in
your gross income. The 10% penalty tax does not apply if one of several
exceptions exists. These exceptions include withdrawals or surrenders that: you
receive on or after you reach age 59 1/2, you receive because you became
disabled (as defined in the tax law), or you receive as a series of
substantially equal periodic payments for your life (or life expectancy).
SPECIAL RULES IF YOU OWN MORE THAN ONE MEC. In certain circumstances, you must
combine some or all of the life insurance contracts which are MECs that you own
in order to determine the amount of withdrawal (including a deemed withdrawal)
that you must include in income. For example, if you purchase two or more MECs
from the same life insurance company (or its affiliates) during any calendar
year, the Code treats all such policies as one contract. Treating two or more
policies as one contract could affect the amount of a withdrawal (or a deemed
withdrawal) that you must include in income and the amount that might be subject
to the 10% penalty tax described above.
POLICIES WHICH ARE NOT MECS
TAX TREATMENT OF WITHDRAWALS. If the policy is not a MEC, the amount of any
withdrawal from the policy will generally be treated first as a non-taxable
recovery of premium payments and then as income from the policy. Thus, a
withdrawal from a policy that is not a MEC will not be includible in income
except to the extent it exceeds the investment in the policy immediately before
the withdrawal.
CERTAIN DISTRIBUTIONS REQUIRED BY THE TAX LAW IN THE FIRST 15 POLICY
YEARS. Section 7702 places limitations on the amount of premium payments that
may be made and the contract values that can accumulate relative to the death
benefit. Where cash distributions are required under Section 7702 in connection
with a reduction in benefits during the first 15 years after the policy is
issued (or if withdrawals are made in anticipation of a reduction in benefits,
within the meaning of the tax law, during this period), some or all of such
amounts may be includible in income. A reduction in benefits may occur when the
face amount is decreased, withdrawals are made, and in certain other instances.
29
<PAGE>
TAX TREATMENT OF LOANS. If your policy is not a MEC, a loan you receive under
the policy is generally treated as your indebtedness. As a result, no part of
any loan under such a policy constitutes income to you so long as the policy
remains in force. Nevertheless, in those situations where the interest rate
credited to the loan account equals the interest rate charged to you for the
loan, it is possible that some or all of the loan proceeds may be includible in
your income. If a policy lapses (or if all contract value is withdrawn) when a
loan is outstanding, the amount of the loan outstanding will be treated as
withdrawal proceeds for purposes of determining whether any amounts are
includible in the your income.
OTHER CONSIDERATIONS
INSURED LIVES PAST AGE 100. If the insured survives beyond the end of the
mortality table used to measure charges under the policy, which ends at age 100,
we believe the policy will continue to qualify as life insurance for Federal tax
purposes. However, there is some uncertainty regarding this treatment, and it is
possible that you would be viewed as constructively receiving the cash value in
the year the insured attains age 100.
COMPLIANCE WITH THE TAX LAW. We believe that the maximum amount of premium
payments we have determined for the policies will comply with the Federal tax
definition of life insurance. We will monitor the amount of premium payments,
and, if the premium payments during a contract year exceed those permitted by
the tax law, we will refund the excess premiums within 60 days of the end of the
policy year and will pay interest and other earnings (which will be includible
in income subject to tax) as required by law on the amount refunded. We also
reserve the right to increase the death benefit (which may result in larger
charges under a policy) or to take any other action deemed necessary to maintain
compliance of the policy with the Federal tax definition of life insurance.
DISALLOWANCE OF INTEREST DEDUCTIONS. If an entity (such as a corporation or a
trust, not an individual) purchases a policy or is the beneficiary of a policy
issued after June 8, 1997, a portion of the interest on indebtedness unrelated
to the policy may not be deductible by the entity. However, this rule does not
apply to a policy owned by an entity engaged in a trade or business which covers
the life of an individual who is a 20-percent owner of the entity, or an
officer, director, or employee of the trade or business, at the time first
covered by the policy. This rule also does not apply to a policy owned by an
entity engaged in a trade or business which covers the joint lives of the 20%
owner of the entity and the owner's spouse at the time first covered by the
policy.
FEDERAL INCOME TAX WITHHOLDING. We will withhold and remit to the IRS a part of
the taxable portion of each distribution made under a policy unless you notify
us in writing at or before the time of the distribution that tax is not to be
withheld. Regardless of whether you request that no taxes be withheld or whether
the Company withholds a sufficient amount of taxes, you will be responsible for
the payment of any taxes and early distribution penalties that may be due on the
amounts received. You may also be required to pay penalties under the estimated
tax rules, if your withholding and estimated tax payments are insufficient to
satisfy your total tax liability.
CHANGES IN THE POLICY AND CHANGES IN THE LAW. Changing the owner, exchanging the
contract, and other changes under the policy may have tax consequences (in
addition to those discussed herein) depending on the circumstances of such
change. The above discussion is based on the Code, IRS regulations, and
interpretations existing on the date of this Prospectus. However, Congress, the
IRS, and the courts may modify these authorities, sometimes retroactively.
TAX STATUS OF LINCOLN LIFE
Under existing Federal income tax laws, Lincoln Life does not pay tax on
investment income and realized capital gains of the Separate Account. Lincoln
Life does not expect that it will incur any
30
<PAGE>
Federal income tax liability on the income and gains earned by the Separate
Account. We, therefore, do not impose a charge for Federal income taxes. If
Federal income tax law changes and we must pay tax on some or all of the income
and gains earned by the Separate Account, we may impose a charge against the
Separate Account to pay the taxes.
VOTING RIGHTS
To determine how many votes each policy owner is entitled to direct with respect
to a Fund, first we will calculate the dollar amount of your account value
attributable to that Fund. Second, we will divide that amount by $100.00. The
result is the number of votes you may direct.
We will vote the shares of each fund held in the Separate Account at special
meetings of the shareholders of the particular fund in accordance with
instructions received by the Administrative Office in proper written form from
persons having a voting interest in the Separate Account. Lincoln Life will vote
shares for which it has not received instructions in the same proportion as it
votes shares in the Separate Account for which it has received instructions. The
funds do not hold regular meetings of shareholders.
The number of shares which a person has a right to vote will be determined as of
a date to be chosen by the appropriate fund not more than sixty (60) days prior
to the meeting of the particular fund. Voting instructions will be solicited by
written communication at least fourteen (14) days prior to the meeting.
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. There is a primary fidelity bond covering Lincoln Life
directors and employees with a limit in the amount of $25,000,000 for a single
loss and a $50,000,000 aggregate loss limit issued by Fidelity and Deposit
Company of Maryland.
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<PAGE>
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 several 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.
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 OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The following persons are Directors and Officers of Lincoln Life. Except as
indicated, the address of each is 1300 South Clinton Street, Fort Wayne, IN
46802, and each has been employed by Lincoln Life or its affiliates for more
than five years.
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION(S)
WITH REGISTRANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
<S> <C>
- ---------------------------------------------------------------------------------------------------
NANCY J. ALFORD Vice President [4/96-present], formerly; Second Vice
VICE PRESIDENT President [1/90-4/96], The Lincoln National Life Insurance
Company.
- -------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
ROLAND C. BAKER Vice President [1/95-present] The Lincoln National Life
VICE PRESIDENT Insurance Co., President and Director, First Penn Pacific
1801 S. Meyers Rd. Life Insurance Company.
Oakbrook Terrace, IL 60181
- -------------------------------------
JON A. BOSCIA President, Chief Executive Officer and Director, Lincoln
PRESIDENT AND DIRECTOR National Corporation [1/98-present], Formerly: President,
1500 Market Street Chief Executive Officer and Director [10/96-1/98] and
Suite 3900 President and Chief Operating Officer [5/94-10/96], The
Philadelphia, PA 19102 Lincoln National Life Insurance Company.
- -------------------------------------
JOHN H. GOTTA Chief Executive Officer of Life Insurance, Senior Vice
CHIEF EXECUTIVE OFFICER OF LIFE President and Assistant Secretary [12/99-present] The
INSURANCE, SENIOR VICE PRESIDENT AND Lincoln National Life Insurance Company. Formerly: Senior
ASSISTANT SECRETARY Vice President and Assistant Secretary [4/98-12/99]; Senior
350 Church Street Vice President [2/98-4/98]; Vice President and General
Hartford, CT 06103 Manager [1/98-2/98] The Lincoln National Life Insurance Co.
Formerly: Senior Vice President, Connecticut General Life
Insurance Company [3/96-12/97]; Vice President, Connecticut
(Massachusetts Mutual) Mutual Life Insurance Company
[8/94-3/96].
- -------------------------------------
J. MICHAEL HEMP President and Director [7/97-present], Lincoln Financial
SENIOR VICE PRESIDENT Advisors Inc.; Senior Vice President [formerly Vice
350 Church Street President] [10/95-present], The Lincoln National Life
Hartford, CT 06103 Insurance Company.
- -------------------------------------
STEPHEN H. LEWIS Interim Chief Executive Officer of Annuities and Senior Vice
INTERIM CHIEF EXECUTIVE OFFICER OF President, [12/99-present]. Formerly: Senior Vice President,
ANNUITIES AND SENIOR VICE PRESIDENT [5/94-12/99] The Lincoln National Life Insurance Company.
- -------------------------------------
H. THOMAS MCMEEKIN President and Director 5/94-present, Lincoln Investment
DIRECTOR Management, Inc.
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
- -------------------------------------
GARY W. PARKER Senior Vice President [4/00-present], Vice President,
SENIOR VICE PRESIDENT Product Management, [7/98-3/00] The Lincoln National Life
350 Church Street Insurance Company. Formerly: Senior Vice President, Life
Hartford, CT 06103 Products [10/97-6/98]; Vice President, Marketing Services
[9/89-10/97] Life of Virginia.
- -------------------------------------
LAWRENCE T. ROWLAND Executive Vice President [10/96-present] Formerly: Senior
EXECUTIVE VICE PRESIDENT AND DIRECTOR Vice President [1/93-10/96], The Lincoln National Life
One Reinsurance Place Insurance Company. Chairman, Chief Executive Officer,
1700 Magnavox Way President and Director [10/96-present], Formerly: Senior
Fort Wayne, IN 46802 Vice President [10/95-10/96].
- -------------------------------------
KEITH J. RYAN Vice President, Controller and Chief Accounting Officer
VICE PRESIDENT, CONTROLLER AND CHIEF [1/96-present] The Lincoln National Life Insurance Company.
ACCOUNTING OFFICER
- -------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
TODD R. STEPHENSON Senior Vice President, Chief Financial Officer and Assistant
SENIOR VICE PRESIDENT, CHIEF Treasurer [3/99-present] Formerly: Senior Vice President and
FINANCIAL OFFICER AND ASSISTANT Chief Operating Officer [1/98-3/99] Lincoln Life & Annuity
TREASURER Distributors, Inc.; Senior Vice President and Chief
Operating Officer [1/98-3/99] Lincoln Financial Advisors
Corp.; Senior Vice President, Treasurer, Chief Financial
Officer and Director, American States Insurance Co.
[2/95-12/97].
- -------------------------------------
RICHARD C. VAUGHAN Executive Vice President and Chief Financial Officer,
DIRECTOR Lincoln National Corporation [1/95-present].
Centre Square
West Tower
1500 Market Street
Suite 3900
Philadelphia, PA 19102
- -------------------------------------
MICHAEL R. WALKER Senior Vice President [1/98-present], Vice President
SENIOR VICE PRESIDENT [1/96-1/98] The Lincoln National Life Insurance Company.
350 Church Street Formerly: Vice President [3/93-1/96] Employers Health
Hartford, CT 06103 Insurance Co.
- -------------------------------------
ROY V. WASHINGTON Vice President [7/96-present] formerly, Associate Counsel
VICE PRESIDENT [2/95-7/96] The Lincoln National Life Insurance Company.
</TABLE>
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% per year,
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 .48%), 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 10.69% using current charges
and 10.59% using guaranteed charges. Similarly, gross annual returns of 6% and
0% yield net annual returns of 4.69% and -1.31% respectively using current
charges and 4.59% and -1.41% 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>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
-------------------------- -------------------------- --------------------------
ASSUMING ASSUMING ASSUMING
HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
PREMIUMS ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
END ACCUMULATED OF OF OF
OF AT 5% -------------------------- -------------------------- --------------------------
POLICY INTEREST 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR PER YEAR GROSS GROSS GROSS GROSS GROSS GROSS GROSS GROSS 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 2,160 2,362 1,183 1,378 1,580
3 4,386 100,000 100,000 100,000 2,926 3,312 3,730 2,144 2,530 2,948
4 5,996 100,000 100,000 100,000 3,852 4,496 5,221 3,070 3,714 4,439
5 7,688 100,000 100,000 100,000 4,757 5,725 6,860 3,975 4,943 6,078
- -----------------------------------------------------------------------------------------------------
6 9,463 100,000 100,000 100,000 5,642 7,003 8,665 4,899 6,260 7,922
7 11,328 100,000 100,000 100,000 6,494 8,321 10,641 5,790 7,617 9,937
8 13,285 100,000 100,000 100,000 7,327 9,691 12,821 6,662 9,027 12,156
9 15,341 100,000 100,000 100,000 8,129 11,107 15,215 7,503 10,482 14,589
10 17,499 100,000 100,000 100,000 8,901 12,572 17,847 8,354 12,024 17,300
- -----------------------------------------------------------------------------------------------------
15 30,021 100,000 100,000 100,000 12,277 20,668 35,612 12,121 20,511 35,456
20 46,003 100,000 100,000 101,961 14,771 30,291 64,944 14,771 30,291 64,944
25 66,400 100,000 100,000 151,802 16,053 41,726 113,285 16,053 41,726 113,285
30 92,433 100,000 100,000 234,166 15,560 55,459 191,939 15,560 55,459 191,939
</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 .48% 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>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
-------------------------- -------------------------- --------------------------
ASSUMING ASSUMING ASSUMING
HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
PREMIUMS ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
END ACCUMULATED OF OF OF
OF AT 5% -------------------------- -------------------------- --------------------------
POLICY INTEREST 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR PER YEAR GROSS GROSS GROSS GROSS GROSS GROSS GROSS GROSS 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 3,699 2,117 2,501 2,917
4 5,996 100,000 100,000 100,000 3,819 4,459 5,178 3,037 3,677 4,396
5 7,688 100,000 100,000 100,000 4,715 5,676 6,801 3,933 4,894 6,019
- -----------------------------------------------------------------------------------------------------
6 9,463 100,000 100,000 100,000 5,585 6,935 8,581 4,842 6,192 7,838
7 11,328 100,000 100,000 100,000 6,427 8,238 10,534 5,724 7,534 9,830
8 13,285 100,000 100,000 100,000 7,243 9,585 12,679 6,578 8,920 12,014
9 15,341 100,000 100,000 100,000 8,031 10,978 15,035 7,405 10,352 14,409
10 17,499 100,000 100,000 100,000 8,788 12,417 17,625 8,241 11,870 17,077
- -----------------------------------------------------------------------------------------------------
15 30,021 100,000 100,000 100,000 12,082 20,346 35,036 11,926 20,189 34,880
20 46,003 100,000 100,000 100,000 14,312 29,544 63,511 14,312 29,544 63,511
25 66,400 100,000 100,000 147,504 14,870 39,991 110,078 14,870 39,991 110,078
30 92,433 100,000 100,000 225,648 12,703 51,750 184,958 12,703 51,750 184,958
</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 .48% 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>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
-------------------------- -------------------------- --------------------------
ASSUMING ASSUMING ASSUMING
HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
PREMIUMS ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
END ACCUMULATED OF OF OF
OF AT 5% -------------------------- -------------------------- --------------------------
POLICY INTEREST 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR PER YEAR GROSS GROSS GROSS GROSS GROSS GROSS GROSS GROSS 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 2,518 2,767 3,027 1,580 1,829 2,089
3 5,644 100,000 100,000 100,000 3,722 4,217 4,754 2,784 3,279 3,816
4 7,716 100,000 100,000 100,000 4,904 5,727 6,656 3,966 4,789 5,718
5 9,892 100,000 100,000 100,000 6,039 7,278 8,731 5,101 6,340 7,793
- -----------------------------------------------------------------------------------------------------
6 12,177 100,000 100,000 100,000 7,142 8,883 11,009 6,251 7,992 10,118
7 14,576 100,000 100,000 100,000 8,202 10,535 13,503 7,358 9,691 12,659
8 17,095 100,000 100,000 100,000 9,220 12,239 16,240 8,423 11,441 15,442
9 19,740 100,000 100,000 100,000 10,197 13,996 19,246 9,447 13,246 18,496
10 22,518 100,000 100,000 100,000 11,135 15,813 22,556 10,478 15,157 21,899
- -----------------------------------------------------------------------------------------------------
15 38,631 100,000 100,000 100,000 15,137 25,819 44,959 14,949 25,632 44,771
20 59,196 100,000 100,000 128,747 17,922 37,746 82,004 17,922 37,746 82,004
25 85,443 100,000 100,000 190,278 18,983 52,093 141,999 18,983 52,093 141,999
30 118,942 100,000 100,000 291,525 17,545 69,944 238,955 17,545 69,944 238,955
</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 .48% 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>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
-------------------------- -------------------------- --------------------------
ASSUMING ASSUMING ASSUMING
PREMIUMS HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
ACCUMULATED ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
END AT 5% OF OF OF
OF INTEREST -------------------------- -------------------------- --------------------------
POLICY PER 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR YEAR GROSS GROSS GROSS GROSS GROSS GROSS GROSS GROSS 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 2,456 2,701 2,957 1,518 1,763 2,019
3 5,644 100,000 100,000 100,000 3,629 4,116 4,642 2,691 3,178 3,704
4 7,716 100,000 100,000 100,000 4,764 5,572 6,481 3,826 4,634 5,543
5 9,892 100,000 100,000 100,000 5,857 7,069 8,488 4,919 6,131 7,550
- -----------------------------------------------------------------------------------------------------
6 12,177 100,000 100,000 100,000 6,905 8,604 10,678 6,014 7,713 9,787
7 14,576 100,000 100,000 100,000 7,906 10,179 13,069 7,062 9,335 12,225
8 17,095 100,000 100,000 100,000 8,858 11,794 15,683 8,060 10,996 14,885
9 19,740 100,000 100,000 100,000 9,758 13,446 18,542 9,008 12,696 17,791
10 22,518 100,000 100,000 100,000 10,604 15,138 21,672 9,948 14,481 21,015
- -----------------------------------------------------------------------------------------------------
15 38,631 100,000 100,000 100,000 13,962 24,211 42,640 13,774 24,023 42,453
20 59,196 100,000 100,000 120,813 15,436 34,286 76,951 15,436 34,286 76,951
25 85,443 100,000 100,000 176,532 14,022 45,299 131,740 14,022 45,299 131,740
30 118,942 100,000 100,000 266,816 8,035 57,572 218,702 8,035 57,572 218,702
</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 .48% 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 $ 2,344 $ 2,506 $ 2,669 $ 1,021 $ 1,183 $ 1,346
2 7,207 100,000 100,000 100,000 4,617 5,089 5,581 1,971 2,443 2,935
3 11,082 100,000 100,000 100,000 6,823 7,755 8,767 4,177 5,109 6,121
4 15,152 100,000 100,000 100,000 8,954 10,503 12,252 6,308 7,857 9,606
5 19,425 100,000 100,000 100,000 11,014 13,339 16,075 8,368 10,693 13,429
- ----------------------------------------------------------------------------------------------------------------
6 23,911 100,000 100,000 100,000 12,994 16,265 20,271 10,481 13,751 17,758
7 28,622 100,000 100,000 100,000 14,900 19,288 24,893 12,518 16,907 22,511
8 33,569 100,000 100,000 100,000 16,714 22,402 29,979 14,465 20,153 27,730
9 38,763 100,000 100,000 100,000 18,430 25,610 35,589 16,313 23,493 33,473
10 44,216 100,000 100,000 100,000 20,053 28,925 41,801 18,201 27,072 39,949
- ----------------------------------------------------------------------------------------------------------------
15 75,857 100,000 100,000 100,000 26,624 47,448 85,399 26,095 46,919 84,869
20 116,240 100,000 100,000 170,856 30,007 70,797 159,679 30,007 70,797 159,679
25 167,780 100,000 108,031 295,698 27,744 103,088 281,617 27,744 103,088 281,617
30 233,559 100,000 151,477 501,916 14,934 144,578 478,015 14,934 144,578 478,015
</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 .48% 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 6,450 7,351 8,328 3,804 4,705 5,682
4 15,152 100,000 100,000 100,000 8,409 9,898 11,580 5,763 7,252 8,934
5 19,425 100,000 100,000 100,000 10,262 12,489 15,109 7,616 9,843 12,463
- ----------------------------------------------------------------------------------------------------------------
6 23,911 100,000 100,000 100,000 12,005 15,123 18,948 9,491 12,610 16,434
7 28,622 100,000 100,000 100,000 13,629 17,797 23,130 11,247 15,416 20,749
8 33,569 100,000 100,000 100,000 15,119 20,503 27,693 12,870 18,254 25,444
9 38,763 100,000 100,000 100,000 16,466 23,235 32,684 14,349 21,119 30,568
10 44,216 100,000 100,000 100,000 17,654 25,991 38,162 15,802 24,139 36,310
- ----------------------------------------------------------------------------------------------------------------
15 75,857 100,000 100,000 100,000 20,813 40,150 76,103 20,284 39,621 75,574
20 116,240 100,000 100,000 152,433 16,778 54,946 142,460 16,778 54,946 142,460
25 167,780 0 100,000 263,083 0 71,444 250,556 0 71,444 250,556
30 233,559 0 100,000 441,700 0 96,728 420,667 0 96,728 420,667
</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 .48% 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 $ 3,312 $ 822 $ 1,029 $ 1,237
2 9,381 100,000 100,000 100,000 5,700 6,297 6,920 1,550 2,147 2,770
3 14,426 100,000 100,000 100,000 8,403 9,578 10,856 4,253 5,428 6,706
4 19,723 100,000 100,000 100,000 11,022 12,972 15,178 6,872 8,822 11,028
5 25,285 100,000 100,000 100,000 13,552 16,481 19,933 9,402 12,331 15,783
- ----------------------------------------------------------------------------------------------------------------
6 31,125 100,000 100,000 100,000 15,988 20,111 25,174 12,046 16,168 21,232
7 37,257 100,000 100,000 100,000 18,327 23,868 30,967 14,592 20,133 27,232
8 43,696 100,000 100,000 100,000 20,564 27,764 37,388 17,037 24,236 33,861
9 50,456 100,000 100,000 100,000 22,688 31,801 44,522 19,368 28,481 41,202
10 57,555 100,000 100,000 100,000 24,695 35,995 52,481 21,790 33,090 49,576
- ----------------------------------------------------------------------------------------------------------------
15 98,741 100,000 100,000 126,976 33,084 60,301 109,462 32,254 59,471 108,632
20 151,306 100,000 100,493 218,394 38,472 93,918 204,107 38,472 93,918 204,107
25 218,394 100,000 146,015 377,618 39,217 139,061 359,636 39,217 139,061 359,636
30 304,018 100,000 203,645 640,367 32,817 193,948 609,873 32,817 193,948 609,873
</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 .48% 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 $ 2,452 $ 2,645 $ 2,839 $ 377 $ 570 $ 764
2 9,381 100,000 100,000 100,000 4,770 5,312 5,878 620 1,162 1,728
3 14,426 100,000 100,000 100,000 6,953 8,002 9,144 2,803 3,852 4,994
4 19,723 100,000 100,000 100,000 9,000 10,719 12,669 4,850 6,569 8,519
5 25,285 100,000 100,000 100,000 10,906 13,461 16,486 6,756 9,311 12,336
- ----------------------------------------------------------------------------------------------------------------
6 31,125 100,000 100,000 100,000 12,659 16,225 20,631 8,717 12,283 16,689
7 37,257 100,000 100,000 100,000 14,245 19,002 25,145 10,510 15,267 21,410
8 43,696 100,000 100,000 100,000 15,643 21,783 30,076 12,115 18,255 26,549
9 50,456 100,000 100,000 100,000 16,834 24,559 35,488 13,514 21,239 32,168
10 57,555 100,000 100,000 100,000 17,800 27,328 41,464 14,895 24,423 38,559
- ----------------------------------------------------------------------------------------------------------------
15 98,741 100,000 100,000 100,000 18,753 41,297 84,725 17,923 40,467 83,895
20 151,306 100,000 100,000 172,454 9,620 56,083 161,172 9,620 56,083 161,172
25 218,394 0 100,000 299,642 0 74,174 285,374 0 74,174 285,374
30 304,018 0 111,819 503,547 0 106,495 479,568 0 106,495 479,568
</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 .48% 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, 1999
<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
$46,977,862) $ 63,080,905 $40,808,530 $ 22,272,375 $ -- $ --
Investments at Market
-- Unaffiliated
(Cost $282,435,526) 387,744,822 -- -- 271,928 19,373,904
- ------------------------- ------------ ----------- -------------- ----------- -----------
TOTAL ASSETS 450,825,727 40,808,530 22,272,375 271,928 19,373,904
- -------------------------
LIABILITY --
Payable to The Lincoln
National Life Insurance
Company 9,818 894 484 6 425
- ------------------------- ------------ ----------- -------------- ----------- -----------
NET ASSETS $450,815,909 $40,807,636 $ 22,271,891 $ 271,922 $19,373,479
- ------------------------- ============ =========== ============== =========== ===========
PERCENTAGE OF NET ASSETS 100.00% 9.05% 4.94% 0.06% 4.30%
- ------------------------- ============ =========== ============== =========== ===========
NET ASSETS ARE
REPRESENTED BY:
- Units in accumulation
period 7,906,858 5,527,308 218,696 11,971,570
- -------------------------
- Unit values $ 5.161 $ 4.029 $ 1.243 $ 1.618
- ------------------------- =========== ============== =========== ===========
NET ASSETS $40,807,636 $ 22,271,891 $ 271,922 $19,373,479
- ------------------------- =========== ============== =========== ===========
</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
$46,977,862) $ -- $ -- $ -- $ --
Investments at Market
-- Unaffiliated
(Cost $282,435,526) 10,490,484 68,812,625 192,650,380 4,966,751
- ------------------------- ----------- -------------- ------------ -----------
TOTAL ASSETS 10,490,484 68,812,625 192,650,380 4,966,751
- -------------------------
LIABILITY --
Payable to The Lincoln
National Life Insurance
Company 230 1,502 4,183 109
- ------------------------- ----------- -------------- ------------ -----------
NET ASSETS $10,490,254 $ 68,811,123 $192,646,197 $4,966,642
- ------------------------- =========== ============== ============ ===========
PERCENTAGE OF NET ASSETS 2.33% 15.26% 42.73% 1.10%
- ------------------------- =========== ============== ============ ===========
NET ASSETS ARE
REPRESENTED BY:
- Units in accumulation
period 3,914,729 15,418,912 23,675,403 2,439,099
- -------------------------
- Unit values $ 2.680 $ 4.463 $ 8.137 $ 2.036
- ------------------------- =========== ============== ============ ===========
NET ASSETS $10,490,254 $ 68,811,123 $192,646,197 $4,966,642
- ------------------------- =========== ============== ============ ===========
<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
$46,977,862) $ -- $ -- $ -- $ --
Investments at Market
-- Unaffiliated
(Cost $282,435,526) 68,381,344 13,822,180 4,284,811 4,690,415
- ------------------------- -------------- ----------- ------------- -------------------
TOTAL ASSETS 68,381,344 13,822,180 4,284,811 4,690,415
- -------------------------
LIABILITY --
Payable to The Lincoln
National Life Insurance
Company 1,490 301 93 101
- ------------------------- -------------- ----------- ------------- -------------------
NET ASSETS $ 68,379,854 $13,821,879 $ 4,284,718 $ 4,690,314
- ------------------------- ============== =========== ============= ===================
PERCENTAGE OF NET ASSETS 15.17% 3.07% 0.95% 1.04%
- ------------------------- ============== =========== ============= ===================
NET ASSETS ARE
REPRESENTED BY:
- Units in accumulation
period 16,446,584 5,114,581 1,837,401 2,420,492
- -------------------------
- Unit values $ 4.158 $ 2.702 $ 2.332 $ 1.938
- ------------------------- ============== =========== ============= ===================
NET ASSETS $ 68,379,854 $13,821,879 $ 4,284,718 $ 4,690,314
- ------------------------- ============== =========== ============= ===================
</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, 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
- -------------------------------------------------- ============== =========== ============== =========== ===========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income:
- Dividends from investment income $ 5,455,266 $ 394,851 $ 296,457 $ 17,747 $ 472,554
- --------------------------------------------------
- Dividends from net realized gain on
investments 48,765,001 1,570,006 2,734,207 -- --
- --------------------------------------------------
- Mortality and expense risk charge (3,054,575) (312,082) (197,780) (2,045) (60,555)
- -------------------------------------------------- -------------- ----------- -------------- ----------- -----------
NET INVESTMENT INCOME 51,165,692 1,652,775 2,832,884 15,702 411,999
- --------------------------------------------------
Net Realized and Unrealized Gain (Loss) on
Investments:
- Net realized gain (loss) on investments 14,878,976 1,660,589 476,385 (5,354) (11,293)
- --------------------------------------------------
- Net change in unrealized appreciation or
depreciation on investments 51,776,908 2,689,329 (4,726,830) (4,095) (87,206)
- -------------------------------------------------- -------------- ----------- -------------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 66,655,884 4,349,918 (4,250,445) (9,449) (98,499)
- -------------------------------------------------- -------------- ----------- -------------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 117,821,576 $ 6,002,693 $ (1,417,561) $ 6,253 $ 313,500
- -------------------------------------------------- ============== =========== ============== =========== ===========
</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, 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
- -------------------------------------------------- =========== ============== ============ ============
YEAR ENDED DECEMBER 31, 1999
Net Investment Income:
- Dividends from investment income $ 1,046,773 $ 1,232,828 $ 285,018 $ 331,891
- --------------------------------------------------
- Dividends from net realized gain on
investments -- 11,066,329 25,965,255 --
- --------------------------------------------------
- Mortality and expense risk charge (87,066) (574,085) (1,245,871) (42,866)
- -------------------------------------------------- ----------- -------------- ------------ ------------
NET INVESTMENT INCOME 959,707 11,725,072 25,004,402 289,025
- --------------------------------------------------
Net Realized and Unrealized Gain (Loss) on
Investments:
- Net realized gain (loss) on investments (140,916) 2,132,736 8,068,154 (37,458)
- --------------------------------------------------
- Net change in unrealized appreciation or
depreciation on investments (292,642) (6,792,344) 38,782,748 (323,523)
- -------------------------------------------------- ----------- -------------- ------------ ------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (433,558) (4,659,608) 46,850,902 (360,981)
- -------------------------------------------------- ----------- -------------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 526,149 $ 7,065,464 $ 71,855,304 $ (71,956)
- -------------------------------------------------- =========== ============== ============ ============
<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, 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
- -------------------------------------------------- =============== =========== ============= =============
YEAR ENDED DECEMBER 31, 1999
Net Investment Income:
- Dividends from investment income $ 852,839 $ 488,924 $ 31,075 $ 4,309
- --------------------------------------------------
- Dividends from net realized gain on
investments 5,986,166 877,829 168,503 396,706
- --------------------------------------------------
- Mortality and expense risk charge (393,190) (112,911) (15,866) (10,258)
- -------------------------------------------------- --------------- ----------- ------------- -------------
NET INVESTMENT INCOME 6,445,815 1,253,842 183,712 390,757
- --------------------------------------------------
Net Realized and Unrealized Gain (Loss) on
Investments:
- Net realized gain (loss) on investments 2,216,426 338,313 45,414 135,980
- --------------------------------------------------
- Net change in unrealized appreciation or
depreciation on investments 21,507,094 (710,150) 1,154,645 579,882
- -------------------------------------------------- --------------- ----------- ------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 23,723,520 (371,837) 1,200,059 715,862
- -------------------------------------------------- --------------- ----------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 30,169,335 $ 882,005 $ 1,383,771 $ 1,106,619
- -------------------------------------------------- =============== =========== ============= =============
</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, 1997 $ 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
- -------------------------------------------------- ------------- ------------ ------------ --------- ------------
Changes From Operations:
- Net investment income 51,165,692 1,652,775 2,832,884 15,702 411,999
- --------------------------------------------------
- Net realized gain (loss) on investments 14,878,976 1,660,589 476,385 (5,354) (11,293)
- --------------------------------------------------
- Net change in unrealized appreciation or
depreciation on investments 51,776,908 2,689,329 (4,726,830) (4,095) (87,206)
- -------------------------------------------------- ------------- ------------ ------------ --------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 117,821,576 6,002,693 (1,417,561) 6,253 313,500
- --------------------------------------------------
Net Increase (Decrease) From Unit Transactions:
- Contract purchases 94,155,861 5,686,977 4,254,274 183,703 22,189,674
- --------------------------------------------------
- Contract redemptions (106,699,473) (8,922,833) (8,579,502) (254,314) (6,861,286)
- -------------------------------------------------- ------------- ------------ ------------ --------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS (12,543,612) (3,235,856) (4,325,228) (70,611) 15,328,388
- -------------------------------------------------- ------------- ------------ ------------ --------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 105,277,964 2,766,837 (5,742,789) (64,358) 15,641,888
- -------------------------------------------------- ------------- ------------ ------------ --------- ------------
NET ASSETS AT DECEMBER 31, 1999 $ 450,815,909 $ 40,807,636 $ 22,271,891 $ 271,922 $ 19,373,479
- -------------------------------------------------- ============= ============ ============ ========= ============
</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, 1997 $ 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
- -------------------------------------------------- ------------ ------------- ------------- ------------
Changes From Operations:
- Net investment income 959,707 11,725,072 25,004,402 289,025
- --------------------------------------------------
- Net realized gain (loss) on investments (140,916) 2,132,736 8,068,154 (37,458)
- --------------------------------------------------
- Net change in unrealized appreciation or
depreciation on investments (292,642) (6,792,344) 38,782,748 (323,523)
- -------------------------------------------------- ------------ ------------- ------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 526,149 7,065,464 71,855,304 (71,956)
- --------------------------------------------------
Net Increase (Decrease) From Unit Transactions:
- Contract purchases 1,987,317 11,130,111 28,495,510 1,722,178
- --------------------------------------------------
- Contract redemptions (3,316,537) (19,692,894) (37,913,593) (2,443,052)
- -------------------------------------------------- ------------ ------------- ------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS (1,329,220) (8,562,783) (9,418,083) (720,874)
- -------------------------------------------------- ------------ ------------- ------------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (803,071) (1,497,319) 62,437,221 (792,830)
- -------------------------------------------------- ------------ ------------- ------------- ------------
NET ASSETS AT DECEMBER 31, 1999 $ 10,490,254 $ 68,811,123 $ 192,646,197 $ 4,966,642
- -------------------------------------------------- ============ ============= ============= ============
<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, 1997 $ 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
- -------------------------------------------------- ------------ ------------ ----------- ------------
Changes From Operations:
- Net investment income 6,445,815 1,253,842 183,712 390,757
- --------------------------------------------------
- Net realized gain (loss) on investments 2,216,426 338,313 45,414 135,980
- --------------------------------------------------
- Net change in unrealized appreciation or
depreciation on investments 21,507,094 (710,150) 1,154,645 579,882
- -------------------------------------------------- ------------ ------------ ----------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 30,169,335 882,005 1,383,771 1,106,619
- --------------------------------------------------
Net Increase (Decrease) From Unit Transactions:
- Contract purchases 8,431,721 2,625,171 2,816,116 4,633,109
- --------------------------------------------------
- Contract redemptions (12,989,574) (3,862,349) (653,282) (1,210,257)
- -------------------------------------------------- ------------ ------------ ----------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS (4,557,853) (1,237,178) 2,162,834 3,422,852
- -------------------------------------------------- ------------ ------------ ----------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 25,611,482 (355,173) 3,546,605 4,529,471
- -------------------------------------------------- ------------ ------------ ----------- ------------
NET ASSETS AT DECEMBER 31, 1999 $ 68,379,854 $ 13,821,879 $ 4,284,718 $ 4,690,314
- -------------------------------------------------- ============ ============ =========== ============
</TABLE>
G-7
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT G
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ACCOUNTING POLICIES & VARIABLE ACCOUNT INFORMATION
THE VARIABLE ACCOUNT: Lincoln Life Flexible Premium Variable Life Account G (the
Variable Account) was established as a segregated investment account of The
Lincoln National Life Insurance Company (Lincoln Life) on May 25, 1988. The
Variable 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 Variable Account are owned by Lincoln Life. The portion of the
Variable Account's assets supporting the variable life policies may not be used
to satisfy liabilities arising from any other business of Lincoln Life.
BASIS OF PRESENTATION: The accompanying financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for unit investment trusts.
INVESTMENTS: The Variable 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, 1999,
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 Variable Account are automatically reinvested
in shares of the Funds on the payable date. Dividend income is recorded on the
ex-dividend date.
FEDERAL INCOME TAXES: Operations of the Variable Account form a part of and are
taxed with operations of Lincoln Life, which is taxed as a "life insurance
company" under the Internal Revenue Code. The Variable Account will not be taxed
as a regulated investment company under Subchapter M of the Internal Revenue
Code. Under current federal income tax law, no federal income taxes are payable
with respect to the Variable Account's net investment income and the net
realized gain on investments.
2. MORTALITY AND EXPENSE RISK CHARGE & OTHER TRANSACTIONS WITH AFFILIATE
PERCENT OF PREMIUM CHARGE: Prior to allocation of net premiums to the Variable
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 1999, 1998 and 1997 by Lincoln Life for such charges
were $886,948, $2,087,654 and $2,288,120, respectively.
VARIABLE ACCOUNT CHARGES: Amounts are charged daily to the Variable 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 Variable Account.
OTHER CHARGES: Other charges, which are paid to Lincoln Life by redeeming
Variable Account units are for monthly administrative charges, the cost of
insurance, transfer and withdrawal charges, and contingent surrender charges.
These other charges for 1999, 1998 and 1997 amounted to $16,737,970, $18,200,343
and $16,804,729, 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 Variable Account's prospectus.
A transfer charge of $10 is incurred each time a policyowner transfers funds
from one subaccount 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, 1999.
<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 $161,071,114 $15,371,009 $11,017,722 $ 247,498 $18,326,549
- ---------------------------------------
Accumulated net investment income 144,111,649 6,938,989 9,348,340 39,327 1,155,441
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 24,220,807 2,962,275 1,338,149 (5,139) 3,252
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 121,412,339 15,535,363 567,680 (9,764) (111,763)
- --------------------------------------- ------------ ----------- ----------- ---------- -----------
$450,815,909 $40,807,636 $22,271,891 $ 271,922 $19,373,479
============ =========== =========== ========== ===========
</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 $ 6,124,599 $26,151,938 $ 44,833,486 $3,600,700 $22,108,352 $ 6,913,826
- ---------------------------------------
Accumulated net investment income 5,436,827 35,411,989 63,765,595 1,798,153 14,484,251 5,129,051
- ---------------------------------------
Accumulated net realized gain (loss) on
investments (100,250) 3,832,548 12,362,111 (115,597) 3,038,743 722,603
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments (970,922) 3,414,648 71,685,005 (316,614) 28,748,508 1,056,399
- --------------------------------------- ----------- ----------- ------------ ---------- ----------- -----------
$10,490,254 $68,811,123 $192,646,197 $4,966,642 $68,379,854 $13,821,879
=========== =========== ============ ========== =========== ===========
<CAPTION>
AVIS
AVIS GLOBAL
GLOBAL SMALL
GROWTH CAPITALIZATION
SUBACCOUNT SUBACCOUNT
<S> <C> <C>
- ---------------------------------------
Unit transactions $2,799,424 $3,576,011
- ---------------------------------------
Accumulated net investment income 210,483 393,203
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 53,073 129,039
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 1,221,738 592,061
- --------------------------------------- ---------- ----------
$4,284,718 $4,690,314
========== ==========
</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 1999.
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
COST OF PROCEEDS
PURCHASES FROM SALES
<S> <C> <C>
- ------------------------------------------------------------------
Lincoln National Growth and Income Fund $ 3,284,417 $ 4,867,435
- ---------------------------------------
Lincoln National Special Opportunities
Fund 3,718,349 5,210,810
- ---------------------------------------
AVIS Bond Fund 192,821 247,731
- ---------------------------------------
AVIS Cash Management Fund 21,347,863 5,607,133
- ---------------------------------------
AVIS High-Yield Bond Fund 1,708,902 2,078,432
- ---------------------------------------
AVIS Growth-Income Fund 14,777,500 11,615,236
- ---------------------------------------
AVIS Growth Fund 37,233,420 21,645,728
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 1,361,252 1,793,118
- ---------------------------------------
AVIS International Fund 9,179,239 7,290,720
- ---------------------------------------
AVIS Asset Allocation Fund 2,422,327 2,405,671
- ---------------------------------------
AVIS Global Growth Fund 2,734,195 387,572
- ---------------------------------------
AVIS Global Small Capitalization Fund 4,759,682 945,975
- --------------------------------------- ------------ -----------
$102,719,967 $64,095,561
============ ===========
</TABLE>
5. INVESTMENTS
The following is a summary of investments owned at December 31, 1999.
<TABLE>
<CAPTION>
NET
SHARES ASSET VALUE COST
OUTSTANDING VALUE OF SHARES OF SHARES
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Lincoln National Growth and Income Fund 789,182 $51.71 $ 40,808,530 $ 25,273,167
- ---------------------------------------
Lincoln National Special Opportunities
Fund 789,106 28.22 22,272,375 21,704,695
- ---------------------------------------
AVIS Bond Fund 27,919 9.74 271,928 281,692
- ---------------------------------------
AVIS Cash Management Fund 1,753,294 11.05 19,373,904 19,485,667
- ---------------------------------------
AVIS High-Yield Bond Fund 822,783 12.75 10,490,484 11,461,406
- ---------------------------------------
AVIS Growth-Income Fund 2,080,188 33.08 68,812,625 65,397,977
- ---------------------------------------
AVIS Growth Fund 2,727,986 70.62 192,650,380 120,965,375
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 470,336 10.56 4,966,751 5,283,365
- ---------------------------------------
AVIS International Fund 2,557,268 26.74 68,381,344 39,632,836
- ---------------------------------------
AVIS Asset Allocation Fund 917,198 15.07 13,822,180 12,765,781
- ---------------------------------------
AVIS Global Growth Fund 200,038 21.42 4,284,811 3,063,073
- ---------------------------------------
AVIS Global Small Capitalization Fund 270,030 17.37 4,690,415 4,098,354
- --------------------------------------- ------------ ------------
$450,825,727 $329,413,388
============ ============
</TABLE>
G-12
<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 Variable Account contract owners. Effective May 1, 1998,
the AVIS Global Small Capitalization Fund became available as an investment
option for Variable Account contract owners.
G-13
<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, 1999, 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 auditing standards
generally accepted in the United States. 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, 1999, 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, 1999, 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
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 24, 2000
G-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $22,985.0 $23,830.9
- ------------------------------------------------------------
Preferred stocks 253.8 236.0
- ------------------------------------------------------------
Unaffiliated common stocks 166.9 259.3
- ------------------------------------------------------------
Affiliated common stocks 604.7 322.1
- ------------------------------------------------------------
Mortgage loans on real estate 4,211.5 3,932.9
- ------------------------------------------------------------
Real estate 254.0 473.8
- ------------------------------------------------------------
Policy loans 1,652.9 1,606.0
- ------------------------------------------------------------
Other investments 426.6 434.4
- ------------------------------------------------------------
Cash and short-term investments 1,409.2 1,725.4
- ------------------------------------------------------------ --------- ---------
Total cash and investments 31,964.6 32,820.8
- ------------------------------------------------------------
Premiums and fees in course of collection 115.8 33.3
- ------------------------------------------------------------
Accrued investment income 435.3 432.8
- ------------------------------------------------------------
Reinsurance recoverable 199.0 171.6
- ------------------------------------------------------------
Funds withheld by ceding companies 73.5 53.7
- ------------------------------------------------------------
Federal income taxes recoverable from parent company 61.6 64.7
- ------------------------------------------------------------
Goodwill 43.1 49.5
- ------------------------------------------------------------
Other admitted assets 66.7 89.3
- ------------------------------------------------------------
Separate account assets 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total admitted assets $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,184.0 $12,310.6
- ------------------------------------------------------------
Other policyholder funds 16,589.5 16,647.5
- ------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 364.0 897.6
- ------------------------------------------------------------
Funds held under reinsurance treaties 796.9 795.8
- ------------------------------------------------------------
Asset valuation reserve 490.9 484.5
- ------------------------------------------------------------
Interest maintenance reserve 72.3 159.7
- ------------------------------------------------------------
Other liabilities 627.0 504.5
- ------------------------------------------------------------
Short-term loan payable to parent company 205.0 140.0
- ------------------------------------------------------------
Net transfers due from separate accounts (896.5) (789.0)
- ------------------------------------------------------------
Separate account liabilities 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total liabilities 76,538.2 68,058.2
- ------------------------------------------------------------
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 1,250.0
- ------------------------------------------------------------
Paid-in surplus 1,942.6 1,930.1
- ------------------------------------------------------------
Unassigned surplus -- deficit (691.1) (640.6)
- ------------------------------------------------------------ --------- ---------
Total capital and surplus 2,526.5 2,564.5
- ------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- --------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 7,273.6 $12,737.6 $5,589.0
- ------------------------------------------------------------
Net investment income 2,203.2 2,107.2 1,847.1
- ------------------------------------------------------------
Amortization of interest maintenance reserve 29.1 26.4 41.5
- ------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 472.3 179.9 99.7
- ------------------------------------------------------------
Expense charges on deposit funds 146.5 134.6 119.3
- ------------------------------------------------------------
Separate account investment management and administration
service fees 473.9 396.3 325.5
- ------------------------------------------------------------
Other income 88.8 31.3 21.3
- ------------------------------------------------------------ --------- --------- --------
Total revenues 10,687.4 15,613.3 8,043.4
- ------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 8,504.9 13,964.1 4,522.1
- ------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 1,618.3 2,919.4 3,053.9
- ------------------------------------------------------------ --------- --------- --------
Total benefits and expenses 10,123.2 16,883.5 7,576.0
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments 564.2 (1,270.2) 467.4
- ------------------------------------------------------------
Dividends to policyholders 80.3 67.9 27.5
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments 483.9 (1,338.1) 439.9
- ------------------------------------------------------------
Federal income taxes (credit) 85.4 (141.0) 78.3
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before net realized gain on
investments 398.5 (1,197.1) 361.6
- ------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 114.4 46.8 31.3
- ------------------------------------------------------------ --------- --------- --------
Net income (loss) $ 512.9 $(1,150.3) $ 392.9
- ------------------------------------------------------------ ========= ========= ========
</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
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,564.5 $2,968.4 $1,868.0
- ------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) 512.9 (1,150.3) 392.9
- ------------------------------------------------------------
Difference in cost and admitted investment amounts (101.9) (304.8) (36.2)
- ------------------------------------------------------------
Nonadmitted assets (22.9) (17.1) (0.4)
- ------------------------------------------------------------
Regulatory liability for reinsurance 26.0 (35.2) (3.9)
- ------------------------------------------------------------
Gain on reinsurance of disability income business 71.8 -- --
- ------------------------------------------------------------
Life policy reserve valuation basis -- (0.4) (0.9)
- ------------------------------------------------------------
Asset valuation reserve (6.4) (34.5) (36.9)
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 12.5 108.4 938.4
- ------------------------------------------------------------
Separate account receivable due to change in valuation -- -- (2.6)
- ------------------------------------------------------------
Dividends to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,526.5 $2,564.5 $2,968.4
- ------------------------------------------------------------ ======== ======== ========
</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
1999 1998 1997
--------- ---------- ---------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 7,671.1 $ 13,495.2 $ 6,364.3
- ------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (19.9) (632.4) (649.2)
- ------------------------------------------------------------
Investment income received 2,168.6 2,003.9 1,798.8
- ------------------------------------------------------------
Separate account investment management and administration
service fees 470.6 396.3 325.5
- ------------------------------------------------------------
Benefits paid (8,699.4) (7,395.8) (5,345.2)
- ------------------------------------------------------------
Insurance expenses paid (1,734.5) (2,909.7) (3,193.0)
- ------------------------------------------------------------
Proceeds related to sale of disability income business 71.8 -- --
- ------------------------------------------------------------
Federal income taxes recovered (paid) (81.2) 84.2 (87.0)
- ------------------------------------------------------------
Dividends to policyholders (82.8) (12.9) (28.4)
- ------------------------------------------------------------
Other income received and expenses paid, net 252.1 207.0 (8.7)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) operating activities 16.4 5,235.8 (822.9)
- ------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 6,557.7 10,926.5 12,142.6
- ------------------------------------------------------------
Purchase of investments (5,940.8) (16,950.0) (10,345.0)
- ------------------------------------------------------------
Other sources (uses) including reinsured policy loans (497.0) (778.3) 529.1
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) investing activities 119.9 (6,801.8) 2,326.7
- ------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 12.5 108.4 --
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Proceeds from borrowings from shareholder 205.0 140.0 120.0
- ------------------------------------------------------------
Repayment of borrowings from shareholder (140.0) (120.0) (100.0)
- ------------------------------------------------------------
Dividends paid to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) financing activities (452.5) 1,158.4 (130.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net increase (decrease) in cash and short-term investments (316.2) (407.6) 1,373.8
- ------------------------------------------------------------
Cash and short-term investments at beginning of year 1,725.4 2,133.0 759.2
- ------------------------------------------------------------ --------- ---------- ---------
Cash and short-term investments at end of year $ 1,409.2 $ 1,725.4 $ 2,133.0
- ------------------------------------------------------------ ========= ========== =========
</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 (the "Company") is a wholly
owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1999, the Company owned 100% of the outstanding
common stock of four insurance company subsidiaries and four non-insurance
subsidiaries. The Company also owned 85% of the common stock of an Internet
distributor of variable annuities.
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 accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
INVESTMENTS
Bonds and preferred stocks 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 and preferred stocks 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 a 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
writedowns 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
insurance subsidiaries are carried at their statutory-basis net equity and
the non-insurance subsidiaries are carried at their GAAP-basis net equity,
adjusted for certain items which would be non-admitted under statutory
accounting principles. Both insurance subsidiaries and non-insurance
subsidiaries are presented in the balance sheet as investments in affiliated
common stocks.
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred 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 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 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 are accounted
for using deposit accounting under GAAP.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
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
1999 1998 1999 1998 1997
----------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,526.5 $ 2,564.5 $ 512.9 $(1,150.3) $392.9
-----------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
non-admitted goodwill 3,628.2 3,085.2 135.0 48.5 (98.9)
--------------------------------------
Policy and contract reserves (1,943.1) (2,299.9) (97.9) 1,743.4 (48.6)
--------------------------------------
Interest maintenance reserve 72.3 159.7 (86.6) 24.4 58.7
--------------------------------------
Deferred income taxes 244.5 181.6 (117.4) (218.6) 70.3
--------------------------------------
Policyholders' share of earnings and
surplus on participating business (122.7) (132.8) (1.8) 3.2 5.3
--------------------------------------
Asset valuation reserve 490.9 484.5 -- -- --
--------------------------------------
Net realized gain (loss) on investments (186.4) (174.1) (32.4) (116.7) (20.4)
--------------------------------------
Unrealized gain (loss) on investments (555.2) 1,335.1 -- -- --
--------------------------------------
Nonadmitted assets, including
nonadmitted investments 139.6 119.1 -- -- --
--------------------------------------
Investments in subsidiary companies 460.9 490.4 39.1 41.3 (80.5)
--------------------------------------
Surplus notes and related interest (1,250.0) (1,251.5) 1.5 (1.5) --
--------------------------------------
Other, net (61.0) (120.1) 129.8 103.6 (35.0)
-------------------------------------- --------- --------- --------- --------- ------
Net increase (decrease) 918.0 1,877.2 (30.7) 1,627.6 (149.1)
----------------------------------------- --------- --------- --------- --------- ------
Amounts on a GAAP basis $ 3,444.5 $ 4,441.7 $ 482.2 $ 477.3 $243.8
----------------------------------------- ========= ========= ========= ========= ======
</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 or deferred in IMR, where
applicable, and are amortized over the remaining lives of the hedged items
as adjustments to investment income. 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 amortized 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 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 are
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 cash collateral received which is
typically greater than the market value of the related securities loaned. In
other instances, the Company will hold as collateral securities with a
market value at least equal to the securities loaned. Securities held as
collateral are not recorded in the Company's balance sheet in accordance
with accounting guidance for secured borrowings and collateral. 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 reserves released and 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 the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LNC's common stock at the grant date, or other measurement date, over the
amount an employee or agent 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.
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") effective January 1, 2001. 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.
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
1999 1998 1997
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,840.6 $1,714.3 $1,524.4
------------------------------------------------------------
Preferred stocks 20.3 19.7 23.5
------------------------------------------------------------
Unaffiliated common stocks 6.3 10.6 8.3
------------------------------------------------------------
Affiliated common stocks 7.8 5.2 15.0
------------------------------------------------------------
Mortgage loans on real estate 321.0 323.6 257.2
------------------------------------------------------------
Real estate 57.8 81.4 92.2
------------------------------------------------------------
Policy loans 101.7 86.5 37.5
------------------------------------------------------------
Other investments 50.6 26.5 28.2
------------------------------------------------------------
Cash and short-term investments 95.9 104.7 70.3
------------------------------------------------------------ -------- -------- --------
Total investment income 2,502.0 2,372.5 2,056.6
------------------------------------------------------------
Expenses:
Depreciation 14.4 19.3 21.0
------------------------------------------------------------
Other 284.4 246.0 188.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 298.8 265.3 209.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,203.2 $2,107.2 $1,847.1
------------------------------------------------------------ ======== ======== ========
</TABLE>
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, 1999:
Corporate $17,758.4 $ 229.6 $763.0 $17,225.0
------------------------------------------------
U.S. government 316.8 29.6 21.5 324.9
------------------------------------------------
Foreign government 984.5 49.8 39.9 994.4
------------------------------------------------
Mortgage-backed 3,913.7 46.2 139.0 3,820.9
------------------------------------------------
State and municipal 11.6 -- .5 11.1
------------------------------------------------ --------- -------- ------ ---------
$22,985.0 $ 355.2 $963.9 $22,376.3
========= ======== ====== =========
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
========= ======== ====== =========
</TABLE>
The carrying amounts of bonds in the balance sheets at
December 31, 1999 and 1998 reflect adjustments of
$38,900,000 and $11,800,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as in or near default.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1999, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 2000 $ 598.0 $ 599.2
------------------------------------------------------------
In 2001-2004 4,359.8 4,313.4
------------------------------------------------------------
In 2005-2009 6,636.0 6,392.9
------------------------------------------------------------
After 2009 7,477.5 7,249.9
------------------------------------------------------------
Mortgage-backed securities 3,913.7 3,820.9
------------------------------------------------------------ --------- ---------
Total $22,985.0 $22,376.3
------------------------------------------------------------ ========= =========
</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 1999,
1998 and 1997 were $5,351,400,000, $9,395,000,000 and
$9,715,000,000, respectively. Gross gains during 1999, 1998
and 1997 of $95,400,000, $186,300,000 and $218,100,000,
respectively, and gross losses of $195,500,000, $138,000,000
and $78,000,000, respectively, were realized on those sales.
At December 31, 1999 and 1998, investments in bonds, with an
admitted asset value of $116,500,000 and $97,800,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks are reported directly in unassigned surplus
and are not reported in the statutory-basis Statements of
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, 1999:
Preferred stocks $253.8 $ 1.3 $31.5 $223.6
----------------------------------------
Unaffiliated common stocks 150.4 34.2 17.7 166.9
----------------------------------------
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
----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1999 and 1998 reflects adjustments of
$4,100,000 and $5,800,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1999, the minimum and maximum lending rates for
mortgage loans were 6.5% and 11.5%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. 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)
Components of the Company's investments in real estate are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 11.1 9.0
------------------------------------------------------------
Less accumulated depreciation (2.2) (1.7)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 11.4 9.8
------------------------------------------------------------
Other:
Land 46.2 93.2
------------------------------------------------------------
Buildings 226.8 413.0
------------------------------------------------------------
Other 4.7 7.9
------------------------------------------------------------
Less accumulated depreciation (35.1) (50.1)
------------------------------------------------------------ ------ ------
Net other real estate 242.6 464.0
------------------------------------------------------------ ------ ------
Net real estate $254.0 $473.8
------------------------------------------------------------ ====== ======
</TABLE>
Net realized capital gains are reported net of federal
income taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Net realized capital gains $ 20.8 $179.7 $209.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credits) of ($31.4), $27.3 and $54.0 in 1999, 1998 and
1997, respectively) (58.3) 50.8 100.2
------------------------------------------------------------ ------ ------ ------
79.1 128.9 109.1
Less federal income taxes (credits) on realized gains (35.3) 82.1 77.8
------------------------------------------------------------ ------ ------ ------
Net realized capital gains after transfer to IMR and taxes
(credits) $114.4 $ 46.8 $ 31.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
4. SUBSIDIARIES
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 ("LNY"). The Company also owns 100% of
the outstanding common stock of four non-insurance company
subsidiaries: Lincoln National Insurance Associates
("LNIA"), Sagemark Consulting, Inc. ("Sagemark"), Wakefield
Tower Alpha Limited ("Wakefield"), and Lincoln Realty
Capital
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
Corporation ("LRCC"). The Company also owns 85% of one
non-insurance company subsidiary, AnnuityNet, Inc.
(AnnuityNet). Statutory-basis financial information related
to the insurance subsidiaries is summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,318.7 $434.6 $443.6 $1,888.6
---------------------------------------------------------
Other assets 40.6 55.5 492.6 403.1
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,242.2 $394.4 $261.4 $1,802.4
---------------------------------------------------------
Other liabilities 44.3 27.9 614.4 25.6
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 328.8
---------------------------------------------------------
Capital and surplus 72.8 67.8 60.4 134.9
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $332.7 $263.3 $ 88.4 $ 313.3
-----------------------------------------------------------
Expenses 329.0 346.9 75.4 291.4
-----------------------------------------------------------
Net realized gains (losses) -- -- .2 (2.0)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ 3.7 $(83.6) $ 13.2 $ 19.9
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<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>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
FIRST
PENN LNH&C LNRAC LNY
---------------------------------
<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>
AnnuityNet was formed in 1998 for the distribution of
variable annuities over the Internet and is valued on the
equity method (at 85% of GAAP equity) with an admitted asset
value of $2,400,000 at December 31, 1999. LNIA was purchased
in 1998 for $600,000 and is valued on the equity method with
an admitted asset value of $800,000 at December 31, 1999.
Sagemark is a broker dealer and was acquired in connection
with a reinsurance transaction completed in 1998. Sagemark
is valued on the equity method with an admitted asset value
of $6,400,000 at December 31, 1999. Wakefield was formed in
1999 to engage in the ownership and management of
investments and is valued on the equity method with an
admitted asset value of $248,300,000. Wakefield's assets as
of December 31, 1999 consist entirely of investments in
bonds. LRCC was formed in 1999 to engage in the management
of certain real estate investments. It was capitalized with
cash and three real estate investments of $12,700,000 and is
valued on the equity method with an admitted asset value of
$10,900,000.
The carrying value of all affiliated common stocks, was
$604,700,000 and $322,100,000 at December 31, 1999 and 1998,
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, 1999 and 1998 was $970,700,000 and
$631,100,000, respectively.
During 1999, 1998 and 1997 the Company's insurance
subsidiaries paid dividends of $5,200,000, $5,200,000 and
$15,000,000, 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 1999, 1998 and 1997, federal income tax expense (benefit)
incurred totaled $85,400,000, ($141,000,000) and
$78,300,000, respectively. In 1999, capital losses of
$151,700,000 were incurred, and carried back to recover
taxes paid in prior years.
The Company paid $45,300,000, $2,300,000 and $164,500,000 to
LNC in 1999, 1998 and 1997, respectively, in 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
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
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
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 "Reinsurance recoverable" includes
amounts recoverable from other insurers for claims paid by
the Company. The balance sheet caption, "Future policy
benefits and claims," and the balance sheet caption "Other
policyholder funds" have been reduced for insurance ceded as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $5,340.0 $4,081.8
------------------------------------------------------------
Amounts recoverable from other insurers 81.2 79.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
Insurance assumed $2,606.5 $9,018.9 $727.2
------------------------------------------------------------
Insurance ceded 1,675.1 877.1 302.9
------------------------------------------------------------ -------- -------- ------
Net amount included in premiums $ 931.4 $8,141.8 $424.3
------------------------------------------------------------ ======== ======== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,609,000,000, $2,098,800,000 and $1,240,500,000 for 1999,
1998 and 1997, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,208.3 $16,285.2
------------------------------------------------------------
Undistributed earnings on participating business 346.9 348.4
------------------------------------------------------------
Other 34.3 13.9
------------------------------------------------------------ --------- ---------
$16,589.5 $16,647.5
========= =========
</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, 1999
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $10.8 $ 7.3 $ 3.5
------------------------------------------------------------
Ordinary renewal 54.2 6.8 47.4
------------------------------------------------------------
Group life 13.7 .1 13.6
------------------------------------------------------------ ----- ----- -----
$78.7 $14.2 $64.5
===== ===== =====
</TABLE>
<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>
7. ANNUITY RESERVES
At December 31, 1999, 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 $ 2,427.7 4%
------------------------------------------------------------
At book value, less surrender charge 2,237.3 3
------------------------------------------------------------
At market value 44,076.2 68
------------------------------------------------------------ --------- ---
48,741.2 75
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 13,486.5 21
------------------------------------------------------------
Not subject to discretionary withdrawal 2,622.4 4
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund 64,850.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,548.0
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $63,302.1
------------------------------------------------------------ =========
</TABLE>
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
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 Corporation ("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
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, 1999), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna, Inc. ("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, 1999), and subject
to approval by the Indiana Insurance Commissioner.
A summary of the terms of these surplus notes follows (in millions):
<TABLE>
<CAPTION>
PRINCIPAL INCEPTION ACCRUED
OUTSTANDING AT TO DATE INTEREST AT
PRINCIPAL DECEMBER 31, CURRENT YEAR INTEREST DECEMBER 31,
DATE ISSUED AMOUNT OF NOTE 1999 INTEREST PAID PAID 1999
----------- -------------- -------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
January 5, 1998 $ 500.0 $ 500.0 $ 32.8 $ 65.1 $ --
-------------------------------
December 18, 1998 750.0 750.0 46.7 46.7 --
-------------------------------
</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,
1999, 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, 1999 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. The time frame for
unassigned surplus to return to a positive position is dependent upon future
statutory earnings and dividends paid to LNC. 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-19
<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). Effective July 1, 1999, the
agents' postretirement plan was changed to require agents retiring on or
after that date to pay the full premium costs. This change to the plan
resulted in a one-time curtailment gain of $1,400,000 in 1999. 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 Operations 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. Options issued subsequent to 1991
are exercisable in 25% increments on the option issuance anniversary in the
four years following issuance.
As of December 31, 1999, there were 2,072,087 and 1,397,005 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 919,749 and
241,097, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $12.50 to $56.75. During 1999, 1998 and
1997, there were 318,421, 136,469 and 170,789 options exercised,
respectively, and 82,024, 18,288 and 1,846 options 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, 1999 and 1998 is
$221,600,000 and $670,100,000, 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.
PERSONAL ACCIDENT PROGRAMS
In the past, the Company and its wholly owned subsidiary, LNH&C, accepted
personal accident reinsurance programs from other insurance companies. Most
of these programs were presented by independent brokers who represented 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. The liabilities for these
programs, net of related assets recoverable from reinsurers, were
$174,700,000 and $177,400,000 at December 31, 1999 and 1998, respectively.
Settlement activities relating to the Company's participation in workers'
compensation carve-out (i.e., life and health risks associated with workers'
compensation coverage) programs managed by Unicover Managers, Inc. have
allowed the Company to evaluate the possibility of settlements and to
estimate its potential costs to settle Unicover-related exposures. As of
December 31, 1999, a liability of $62,200,000 has been established for the
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement of the Company's exposure to the Unicover programs.
These amounts are based on various estimates that are subject to
considerable uncertainty. Accordingly, the liabilities may prove to be
deficient or excessive. However, it is management's opinion that future
developments in these programs will not materially affect the financial
position of the Company.
HMO EXCESS-OF-LOSS REINSURANCE PROGRAMS
In light of the continued volatility in the HMO excess-of-loss line of
business, LNH&C discontinued writing new HMO excess-of-loss reinsurance
programs in the third quarter of 1999. The liability for HMO claims, net of
the related assets for amounts recoverable from reinsurers, was $101,900,000
and $55,900,000 at December 31, 1999 and 1998, respectively. LNH&C reviews
reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss
ratios fluctuate significantly from the assumptions underlying the reserves,
adjustments to reserves could be required in the future. Accordingly, the
liability may prove to be deficient or excessive. However, it is
management's opinion that such future developments will not materially
affect the financial position of the Company.
MARKETING AND COMPLIANCE MATTERS
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances, companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future development will not materially affect the financial position of the
Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1999, 1998 and 1997 was
$38,900,000, $34,000,000 and $29,300,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
2000 $ 28.7
--------------------------------
2001 28.8
--------------------------------
2002 27.5
--------------------------------
2003 26.2
--------------------------------
2004 26.5
--------------------------------
Thereafter 123.5
-------------------------------- ------
$261.2
======
</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
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
operations. Total costs incurred in 1999 and 1998 were $67,400,000 and
$54,800,000, respectively. 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. The Company limits its maximum coverage that
it retains on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been coinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1999, the
reserves associated with these reinsurance arrangements totaled
$1,422,800,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American States 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 LNY reinsured 100% of a block of individual life
insurance and annuity business from 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 $4,780,300,000 that became
the Company's obligation. The Company also received assets, measured on a
historical statutory-basis, equal to the liabilities.
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.
In 1999, the Company and CIGNA reached an agreement through arbitration on
the final statutory-basis values of the assets and liabilities reinsured. As
a result, the Company's ceding commission for this transaction was reduced
by $58.6 million.
Subsequent to this transaction, the Company and LNY announced that they had
reached an agreement to sell the administration rights to a variable 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 September 1, 1998.
On October 1, 1998, the Company and LNY entered into an indemnity
reinsurance transaction whereby the Company and LNY reinsured 100% of a
block of individual life insurance business from Aetna. 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 $2,813,800,000
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 LNY 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.
On November 1, 1999, the Company closed its previously announced agreement
to transfer a block of disability income business to MetLife. Under this
indemnity reinsurance agreement, the Company transferred $490,800,000 of
cash to MetLife representing the statutory reserves transferred on this
business less $17,800,000 of purchase price consideration. A gain on the
reinsurance transaction of $71,800,000 was recorded directly in unassigned
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
surplus and will be recognized in statutory earnings over the life of the
business.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1999, the Company provided $270,000,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company 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 $17,300,000 and $43,400,000 at December 31, 1999
and 1998, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999, 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, 1999, 29% of such mortgages ($1,212,700,000) 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 $70,000,000.
At December 31, 1999, 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 certain 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
proceedings will not have a material adverse affect on the financial
position of the Company.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, the Company now has
several such actions pending. While each of these lawsuits seeks class
action status, the court has not certified a class in any of them. In each
of these lawsuits, plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While relief sought in these
lawsuits is substantial, they are in the discovery stages of litigation, and
it is premature to make assessments about potential loss, if any. Management
intends to defend these lawsuits vigorously. The amount of liability, if
any, which may arise as a result of these lawsuits cannot be reasonably
estimated at this time. In another lawsuit, a settlement has been
preliminarily approved by the court, and a class has been conditionally
certified for settlement purposes. Two other similar lawsuits previously
have been resolved and dismissed.
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
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
credit exposure. Outstanding guarantees with off-balance-sheet risks at
December 31, 1999 relate to mortgage loan pass-through certificates. The
Company has sold commercial mortgage loans through grantor trusts that
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, 1999 and 1998 were $25,900,000 and $30,900,000, 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, 1999 and 1998.
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 and foreign exchange
risks. In addition, the Company is subject to the risks associated with
changes in the value of its derivatives; however, such changes in value
generally are offset by changes in the value of the items being hedged by
such contracts.
Outstanding derivatives with off-balance-sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values,
are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
---------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-----------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1999 1998 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ .9
---------------------------------
Swaptions 1,837.5 1,899.5 12.2 10.8 16.2 2.5
---------------------------------
Interest rate swaps 630.9 258.3 -- (19.5) -- 9.9
---------------------------------
Put options 21.3 21.3 -- 1.9 -- 2.2
--------------------------------- -------- -------- ----- ------ ----- -----
4,998.5 6,287.9 17.4 (3.6) 25.5 15.5
Foreign currency derivatives:
Forward contracts -- 1.5 -- -- -- --
---------------------------------
Foreign currency swaps 44.2 47.2 -- (.4) -- .3
--------------------------------- -------- -------- ----- ------ ----- -----
44.2 48.7 -- (.4) -- .3
Commodity derivatives:
Commodity swaps -- 8.1 -- -- -- 2.4
--------------------------------- -------- -------- ----- ------ ----- -----
$5,042.7 $6,344.7 $17.4 $ (4.0) $25.5 $18.2
======== ======== ===== ====== ===== =====
</TABLE>
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 SWAPTIONS
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,108.8 $4,900.0 $1,899.5 $1,752.0
-------------------------------------------------------
New contracts -- 708.8 -- 218.3
-------------------------------------------------------
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
------------------------------------------------------- -------- -------- -------- --------
Balance at end of year $2,508.8 $4,108.8 $1,837.5 $1,899.5
------------------------------------------------------- ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Balance at beginning of year $ 258.3 $ 10.0
------------------------------------------------------------
New contracts 482.4 2,226.6
------------------------------------------------------------
Terminations and maturities (109.8) (1,978.3)
------------------------------------------------------------ ------- ---------
Balance at end of year $ 630.9 $ 258.3
------------------------------------------------------------ ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
----------------------------------------
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $21.3 $ -- $ 8.1 $ --
------------------------------------------------------------
New contracts -- 21.3 -- 8.1
------------------------------------------------------------
Terminations and maturities -- -- (8.1) --
------------------------------------------------------------ ----- ----- ----- ----
Balance at end of year $21.3 $21.3 $ -- $8.1
------------------------------------------------------------ ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
(FOREIGN INVESTMENTS)
-------------------------------------------
FOREIGN CURRENCY
SWAPS
FOREIGN EXCHANGE
-------------------------------------------
FORWARD CONTRACTS
1999 1998 1999 1998
-------------------------------------------
(IN MILLIONS)
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1.5 $ 163.1 $47.2 $15.0
------------------------------------------------------------
New contracts 2.7 419.8 -- 39.2
------------------------------------------------------------
Terminations and maturities (4.2) (581.4) (3.0) (7.0)
------------------------------------------------------------ ----- ------- ----- -----
Balance at end of year $ -- $ 1.5 $44.2 $47.2
------------------------------------------------------------ ===== ======= ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 2000 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
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
premium paid for the interest rate caps is included in other investments
(amortized costs of $5.2 million as of December 31, 1999) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2000 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
investments (amortized cost of $12.2 million as of December 31, 1999) 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 security 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. While spreadlocks are
used periodically, there are no spreadlock agreements outstanding at
December 31, 1999.
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 agreement the stream of variable interest
payments based on the coupon payments hedged 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 blocks of business or to extend
the duration of certain portfolios of assets. Once the assets are purchased
the gains (losses) resulting from the termination of the swap agreements
will be applied to the basis of the assets. The gains (losses) will be
recognized in earnings over the life of the assets. The anticipated purchase
of assets related to extending the duration of certain portfolios of assets
is expected to be completed in 2000.
PUT OPTIONS
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed
maturity investments. The risk being hedged is a drop in bond prices due to
credit concerns with international bond issuers. The put options allow the
Company to put the bonds back to the counterparties at original par.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts and
foreign currency swaps, 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. A foreign currency swap is a contractual
agreement to exchange the currencies of two different countries at a fixed
rate of exchange in the future.
COMMODITY SWAPS
The Company used a commodity swap to hedge its exposure to fluctuations in
the price of gold. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a fixed amount of cash. The
Company owned a fixed income security that met its coupon
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 were the
product of the swap notional multiplied by the fixed rate stated in the swap
agreement. The net receipts or payments from commodity swaps were recorded
in net investment income. The fixed income security was called in the third
quarter of 1999 and the commodity swap expired.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,200,000, $10,000,000 and $7,000,000 in 1999, 1998 and 1997, respectively.
Deferred gains of $100,000 as of December 31, 1999, were the result of
terminated interest rate swaps. These gains are included with the related
fixed maturity securities to which the hedge applied or as deferred
liabilities 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 various derivative contracts. However, the Company does
not anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value less collateral held for such agreements with each
counterparty if the net market value is in the Company's favor. At
December 31, 1999, the exposure was $8,500,000.
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.,
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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
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-28
<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
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 22,985.0 $ 22,376.3 $ 23,830.9 $ 25,065.5
-----------------------------------------------
Preferred stocks 253.8 223.6 236.0 242.5
-----------------------------------------------
Unaffiliated common stocks 166.9 166.9 259.3 259.3
-----------------------------------------------
Mortgage loans on real estate 4,211.5 4,104.0 3,932.9 4,100.1
-----------------------------------------------
Policy loans 1,652.9 1,770.5 1,606.0 1,685.9
-----------------------------------------------
Other investments 426.6 426.6 434.4 434.4
-----------------------------------------------
Cash and short-term investments 1,409.2 1,409.2 1,725.4 1,725.4
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,730.4) (17,364.3) (17,845.8) (17,486.4)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (454.7) (465.1) (714.4) (738.2)
--------------------------------------------
Short-term debt (205.0) (205.0) (140.0) (140.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,022.1) (1,250.0) (1,335.1)
-----------------------------------------------
Derivatives 17.4 (4.0) 25.5 18.2
-----------------------------------------------
Investment commitments -- (0.8) -- (.6)
-----------------------------------------------
Separate account assets 46,105.1 46,105.1 36,907.0 36,907.0
-----------------------------------------------
Separate account liabilities (46,105.1) (46,105.1) (36,907.0) (36,907.0)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
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.
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 $60,400,000 and
$76,700,000 in 1999 and 1998, respectively, and override commissions and
operating expense allowances of $61,600,000 in 1997. LLAD incurred expenses
of $113,400,000, $102,400,000 and
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$5,500,000 in 1999, 1998 and 1997, 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, 1999 and 1998 include the
Company's participation in a short-term investment pool with LNC of
$390,300,000 and $383,600,000, respectively. Related investment income
amounted to $16,700,000, $16,800,000 and $15,500,000 in 1999, 1998 and 1997,
respectively. Short-term loan payable to parent company at December 31, 1999
and 1998 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $49,400,000, $92,100,000 and
$48,500,000 in 1999, 1998 and 1997, 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
1999 1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 19.7 $ 13.7 $ 11.9
----------------------
Insurance ceded 777.6 290.1 100.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 413.7 $ 197.3
------------------------
Future policy benefits
and claims ceded 1,680.4 1,125.0
------------------------
Amounts recoverable on
paid and unpaid losses 146.4 84.2
------------------------
Reinsurance payable on
paid losses 8.8 6.0
------------------------
Funds held under
reinsurance treaties --
net liability 2,106.4 1,375.4
------------------------
</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 $917,300,000 and $318,300,000 at December 31, 1999 and 1998,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1999 and 1998, LNC had guaranteed $818,900,000 and $237,000,000,
respectively, of these letters of credit. At December 31, 1999 and 1998, the
Company has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $118,800,000 and $122,400,000,
respectively, 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 none of the separate accounts have
any minimum guarantees and the investment risks associated with market
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$4,572,600,000, $3,953,300,000 and $4,821,800,000 in 1999, 1998 and 1997,
respectively. Reserves for separate accounts with assets at fair value were
$45,198,900,000 and $36,145,900,000 at December 31, 1999 and 1998,
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
1999 1998 1997
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 4,573.2 $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,933.8) (4,069.8) (2,943.8)
------------------------------------------------------------ --------- --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (360.6) $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= ========= =========
</TABLE>
15. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue was complex and affected many aspects of the Company's
business. The Company was particularly concerned with Year 2000 issues that
related to the Company's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners. From 1996
through 1999 the Company and its operating subsidiaries redirected a large
portion of internal Information Technology ("IT") efforts and contracted
with outside consultants to update systems to address Year 2000 issues.
Experts were engaged to assist in developing work plans and cost estimates
and to complete remediation activities.
For the year ended December 31, 1999, the Company identified expenditures of
$39,500,000 to address this issue. This brings the expenditures for 1996
through 1999 to $75,300,000. Because updating systems and procedures is an
integral part of the Company's on-going operations, most of the expenditures
shown above are expected to continue after all Year 2000 issues have been
resolved. All Year 2000 expenditures have been funded from operating cash
flows.
The scope of the overall Year 2000 program included 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 Company
completed these projects prior to year-end.
The Company's businesses have not identified any major problems in their
business processing. Minor problems have been resolved quickly. The
Company's businesses have not experienced any significant interruption in
service to clients or business partners or in reporting to regulators.
S-31
<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 (the "Company"),
a wholly owned subsidiary of Lincoln National Corporation, as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards
generally accepted in the United States. 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 accounting principles
generally accepted in the United States. The variances between
such practices and accounting principles generally accepted in
the United States 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 accounting
principles generally accepted in the United States, the
financial position of The Lincoln National Life Insurance
Company at December 31, 1999 and 1998, or the results of its
operations or its cash flows for each of the three years in the
period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
January 31, 2000
S-32
<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.
(a) Brief description of indemnification provisions.
In general, Article VII of the By-Laws of The Lincoln National Life
Insurance Company (LNL) provides that LNL will indemnify certain persons
against expenses, judgments and certain other specified costs incurred by
any such person if he/she is made a party or is threatened to be made a
party to a suit or proceeding because he/she was a director, officer, or
employee of LNL, as long as he/she acted in good faith and in a manner
he/she reasonably believed to be in the best interests of, or not opposed
to the best interests of, LNL. Certain additional conditions apply to
indemnification in criminal proceedings.
In particular, separate conditions govern indemnification of directors,
officers, and employees of LNL in connection with suits by, or in the right
of, LNL.
Please refer to Article VII of the By-Laws of LNL (Exhibit No. 6(b) hereto)
for the full text of the indemnification provisions. Indemnification is
permitted by, and is subject to the requirements of Indiana law.
(b) Undertaking pursuant to Rule 484 of Regulation C under the Securities
Act of 1933.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense
of any such action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such Issue.
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
<PAGE>
The undertaking to file reports
The representations pursuant to Section 26(e) (2) (A) of the Investment
Company Act of 1940
The signatures
The Powers of Attorney
The written consents of the following persons:
Robert A. Picarello, Esq.
Vaughn W. Robbins, FSA
Ernst & Young LLP (Independent Auditors)
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)Selling Agreement between The Lincoln National Life
Insurance Company and Lincoln Financial Advisors
Corporation.(5)
(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) Fund Participation Agreements
(a) American Variable Insurance Series Participation
Agreement.(6)
(b) Lincoln National Growth and Income Fund, Inc.(3)
(c) Lincoln National Special Opportunities Fund, Inc.(4)
(9)(a) Proposed form of Indemnification Agreement related to
compliance with IRC Section 817(h) and the regulations
thereunder.(6)
(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.
</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.
(3) Lincoln National Growth and Income Fund, Inc., Incorporated by reference to
Post Effective Amendment No. 20 to the Registration Statement on Form N-1A
(File No. 2-80741) filed on April 16, 1999.
(4) Lincoln National Special Opportunities Fund, Inc., incorporated by reference
to Post Effective Amendment No. 20 to the Registration Statement on Form
N-1A (File No. 2-80731) filed on April 16, 1999.
<PAGE>
(5) Incorporated by reference to Post-Effective Amendment No. 1 (File No.
333-82663) filed on April 13, 2000.
(6) Incorporated by reference to Post-Effective Amendment No. 1 (File
No. 333-72875) filed on October 15, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Lincoln Life Flexible Premium Variable Life Account G (File No. 33-22740), has
caused this Post-Effective Amendment No. 15 to be signed on its behalf by the
undersigned duly authorized, in the City of Hartford and State of Connecticut on
the 13th day of April, 2000. 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
(REGISTRANT)
By: /s/ GARY W. PARKER
------------------------------------------
Gary W. Parker
Senior Vice President,
The Lincoln National Life Company
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(DEPOSITOR)
By: /s/ GARY W. PARKER
------------------------------------------
Gary W. Parker
Senior Vice President
</TABLE>
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 15 to this Registration Statement (File No.
33-22740) has been signed below on April 13, 2000 by the following persons, as
officers and directors of the Depositor, in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------- ----------------------------------------------
<S> <C>
/s/ JON A. BOSCIA *
- ------------------------------------------- President and Director
Jon A. Boscia (Principal Executive Officer)
/s/ JOHN H. GOTTA * Chief Executive Officer of Life Insurance,
- ------------------------------------------- Senior Vice President, Assistant Secretary,
John H. Gotta and Director
/s/ STEPHEN H. LEWIS *
- ------------------------------------------- Interim Chief Executive Officer of Annuities,
Stephen H. Lewis Senior Vice President and Director
/s/ LAWRENCE T. ROWLAND *
- ------------------------------------------- Executive Vice President and Director
Lawrence T. Rowland
/s/ TODD R. STEPHENSON * Senior Vice President, Chief Financial Officer
- ------------------------------------------- and Assistant Treasurer (Principal Financial
Todd R. Stephenson Officer)
/s/ KEITH J. RYAN * Vice President, Controller and Chief
- ------------------------------------------- Accounting
Keith J. Ryan Officer (Principal Accounting Officer)
/s/ H. THOMAS MCMEEKIN *
- ------------------------------------------- Director
H. Thomas McMeekin
/s/ RICHARD C. VAUGHAN *
- ------------------------------------------- Director
Richard C. Vaughan
* By /s/ GARY W. PARKER
--------------------------------------------
Gary W. Parker,
pursuant to a Power of Attorney filed with
this Post-Effective Amendment No. 15 to
the Registration Statement
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta, Robert
A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all Registration Statements on
Form S-6, Form N-8B-2 and/or Form N-6, or any successors to these Forms, and
amendments thereto, filed with the Securities and Exchange Commission under the
Securities Act of 1933, on behalf of the Company in its own name or in the name
of one of its Separate Accounts, hereby ratifying and confirming our signatures
as they may be signed by any of our attorneys-in-fact any such Registration
Statement or amendment to said Registration Statement. The execution of this
document by each of the undersigned hereby revokes any and all Powers of
Attorney previously executed by said individual for this specific purpose.
WITNESS our hands and common seal on this 28th day of January, 2000
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JON A. BOSCIA
- -------------------------------------- President and Director
Jon A. Boscia
/s/ JOHN H. GOTTA Chief Executive Officer of Life Insurance, Senior
- -------------------------------------- Vice President, Assistant Secretary, and Director
John H. Gotta
/s/ STEPHEN H. LEWIS * Interim Chief Executive Officer of Annuities,
- -------------------------------------- Senior Vice President and Director
Stephen H. Lewis
/s/ TODD R. STEPHENSON * Senior Vice President, Chief Financial Officer and
- -------------------------------------- Assistant Treasurer
Todd R. Stephenson
/s/ H. THOMAS MCMEEKIN
- -------------------------------------- Director
H. Thomas McMeekin
/s/ RICHARD C. VAUGHAN
- -------------------------------------- Director
Richard C. Vaughan
*For: Stephen H. Lewis and Todd R. Stephenson
</TABLE>
<TABLE>
<C> <S>
STATE OF INDIANA SS:
COUNTY OF ALLEN
</TABLE>
Subscribed and sworn to before me this
28th day of January, 2000
/s/ JANET L. LINDENBERG
--------------------------------------
Janet L. Lindenberg
Notary Public
Commission Expires: 7-10-2001
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta, Robert
A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all Registration Statements on
Form S-6, Form N-8B-2 and/or Form N-6, or any successors to these Forms, and
amendments thereto, filed with the Securities and Exchange Commission under the
Securities Act of 1933, on behalf of the Company in its own name or in the name
of one of its Separate Accounts, hereby ratifying and confirming our signatures
as they may be signed by any of our attorneys-in-fact to any such Registration
Statement or amendment to said Registration Statement. The execution of this
document by each of the undersigned hereby revokes any and all Powers of
Attorney previously executed by said individual for this specific purpose.
WITNESS our hands and common seal on this 31st day of January, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ LAWRENCE T. ROWLAND*
- -------------------------------------- Executive Vice President and Director
Lawrence T. Rowland
/s/ KEITH J. RYAN* Vice President, Controller and Chief Accounting
- -------------------------------------- Officer
Keith J. Ryan
*For: Lawrence T. Rowland and Keith J. Ryan
</TABLE>
<TABLE>
<C> <S>
STATE OF INDIANA SS:
COUNTY OF ALLEN
</TABLE>
Subscribed and sworn to before me this
31st day of January, 2000
/s/ JANET L. LINDENBERG
--------------------------------------
Janet L. Lindenberg
Notary Public
Commission Expires: 7-10-2001
<PAGE>
[GRAPHIC OMITTED]
Robert A. Picarello
Vice President & Chief Counsel
350 Church Street
Hartford, CT 06103-1106
Telephone: (860) 466-1603
Facsimile: (860) 466-1778
April 13, 2000
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0506
Re: Lincoln Life Flexible Premium Variable Life Account G ("Account")
The Lincoln National Life Insurance Company
Post-Effective Amendment Number 15, File No. 33-22740
Dear Sirs:
As Vice President & Chief 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. 15 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
Vice President & Chief Counsel
<PAGE>
[GRAPHIC]
The Lincoln National Life Insurance Company
350 Church Street
Hartford, CT 06103-1106
April 13, 2000
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0506
Re: Lincoln Life Flexible Premium Variable Life Account G ("Account")
The Lincoln National Life Insurance Company
Post-Effective Amendment Number 15, File No. 33-22740
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 Post-Effective
Amendement No. 15 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>
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. 15 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) January 31, 2000,
with respect to the statutory-basis financial statements of The Lincoln
National Life Insurance Company, and (b) March 24, 2000, with respect to the
financial statements of Lincoln Life Flexible Premium Variable Life Account G.
/s/Ernst & Young LLP
Fort Wayne, Indiana
April 10, 2000
