<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
THE AMERICAN LEGACY II
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
(REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(DEPOSITOR)
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln National Variable Annuity Account H dated April 1, 1996.
You may obtain a copy of the Account H Prospectus on request and without charge.
Please write Kim Oakman, The Lincoln National Life Insurance Company, P.O. Box
2348, Fort Wayne, Indiana 46801 or call 1-800-942-5500, Extension 4912.
____________
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
TABLE OF CONTENTS
ITEM PAGE
General Information and History of Lincoln Life B-2
Special Terms B-2
Services B-2
Purchase of Securities Being Offered B-3
Underwriters B-3
Calculation of Investment Results B-3
Annuity Payments B-8
Federal Tax Status B-9
Automatic Increase in the Guaranteed Minimum
Death Benefit B-15
Advertising and Sales Literature B-16
Financial Statements B-9
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 1, 1996.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
GENERAL INFORMATION AND HISTORY OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (Lincoln Life)
The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905,
is an Indiana stock insurance corporation, engaged primarily in the direct
insurance of life and health insurance contracts and annuities, and is also a
professional reinsurer. Lincoln Life is wholly owned by Lincoln National
Corporation (LNC), a publicly held insurance and financial services holding
company domiciled in Indiana.
SPECIAL TERMS
The special terms used in this SAI are the ones defined in the Prospectus. In
connection with the term, "Valuation Date", the New York Stock Exchange is
currently closed on weekends and on these holidays: New Year's Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. If any of these holidays occurs on a weekend day, the
Exchange may also be closed on the business day occurring just before or just
after the holiday.
CUSTODIAN
The custodian for the securities purchased by the Series is State Street Bank
and Trust Company, 225 Franklin Street, Boston, MA 02101. Custodian, as
authorized by the Series, will hold, transfer, exchange, deliver or loan the
Series' securities, and will maintain certain cash accounts in support of those
functions.
INDEPENDENT AUDITORS
The financial statements of the Variable Account and the consolidated financial
statements and schedules of Lincoln Life appearing in this Statement of
Additional Information and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon also
appearing elsewhere herein and in the Registration Statement. Such financial
statements and schedules have been included herein in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the Variable Account are maintained by Lincoln Life or by third
parties responsible to Lincoln Life. No separate charge against the assets of
the Variable Account is made by Lincoln Life for this service.
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc. (AFD), 333 South Hope St., Los Angeles,
California 90071, is the principal underwriter for the Variable Annuity
Contracts.
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PURCHASE OF SECURITIES BEING OFFERED
The Variable Annuity Contracts are offered to the public through certain
securities broker/dealers who have entered into selling agreements with AFD and
whose personnel are legally authorized to sell annuity products. Although there
are no special purchase plans for any class of prospective buyers, the
contingent deferred sales charge normally assessed upon surrender or withdrawal
of contract value will be waived for officers, directors or bona fide full time
employees of LNC, The Capital Group, Inc., their affiliated or managed
companies, and certain other persons. See "Contingent Deferred Sales Charges" in
the Prospectus.
Both before and after the Annuity Commencement Date, there are exchange
privileges between sub-accounts, and from the Variable Account to the General
Account, subject to restrictions set out in the Prospectus. See "The Contracts",
in the Prospectus. No exchanges are permitted between the Variable Account and
other separate accounts.
UNDERWRITERS
Lincoln Life has contracted with AFD, a licensed broker-dealer, to distribute
the Variable Contracts through certain legally authorized sales persons and
organizations (Brokers). AFD and its Brokers are compensated under a standard
Compensation Schedule.
The offering of the Contracts is continuous.
CALCULATION OF INVESTMENT RESULTS
(a) Average Annual Total Return:
The table below shows, for the various Sub-Accounts of the Variable Account, an
Average Annual Total Return as of the stated periods, based upon a hypothetical
initial purchase payment of $1,000, calculated according to the formula set out
after the table. Although the Variable Account commenced activity in 1989, these
figures are calculated as if the Account had commenced activity at the same time
as the underlying Funds.
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1995
<TABLE>
<CAPTION>
1-YEAR PERIOD 5-YEAR PERIOD 10-YEAR PERIOD
<S> <C> <C> <C>
Growth Sub-account 25.45% 16.26% 15.02%
(as if commenced activity 2/8/84)
International Sub-account 5.11 9.49 7.26*
(commenced activity 5/1/90)
Growth-Income Sub-account 25.17 13.50 11.80
(as if commenced activity 2/8/84)
Asset Allocation Sub-account 21.78 11.68 9.03*
(commenced activity 8/1/89)
High-Yield Bond Sub-account 14.08 11.69 10.43
(as if commenced activity 2/8/84
U.S. Gov't./AAA Sub-account 7.78 7.06 6.89
(as if commenced activity 12/1/85)
Cash Management Sub-account 1.93 2.34 4.19
(as if commenced activity 2/8/84)
</TABLE>
*The lifetime of this sub-account is less than the complete period indicated.
See the date the sub-account commenced activity under its name.
<PAGE>
The length of the periods and the last day of each period used in the above
table are set out in the table heading and in the footnotes above. The Average
Annual Total Return for each period was determined by finding the average annual
compounded rate of return over each period that would equate the initial amount
invested to the ending redeemable value for that period, according to the
following formula--
n
P(1 + T) = ERV
Where:P = a hypothetical initial purchase payment of $1,000
T = average annual total return for the period in question
n = number of years
ERV = redeemable value (as of the end of the period in question) of a
hypothetical $1,000 purchase payment made at the beginning of the 1-year, 5-
year, or 10-year period in question (or fractional portion thereof)
The formula assumes that: 1) all recurring fees have been charged to
Contractowner accounts; 2) all applicable non-recurring charges are deducted at
the end of the period in question; and 3) there will be a complete redemption at
the end of the period in question. The results shown in the table above relate
to the contract form containing the highest level of charges.
b) Non-Standardized Investment Results:
The Variable Account may illustrate its results over various periods and compare
its results to indices and other variable annuities in sales materials including
advertisements, brochures and reports. Such results may be computed on a
"cumulative" and/or "annualized" basis.
"Cumulative" quotations are arrived at by calculating the change in the
Accumulation Unit Value between the first and last day of the base period being
measured, and expressing the difference as a percentage of the Unit Value at the
beginning of the base period.
"Annualized" quotations are arrived at by applying a formula which determines
the level rate of return which, if earned over the entire base period, would
produce the cumulative return.
<PAGE>
<TABLE>
<CAPTION>
NON-STANDARDIZED INVESTMENT RESULTS
SUB-ACCOUNTS OF ACCOUNT H*
$10,000 invested in ...would have grown to this amount on
this fund through December 31, 1995**
American Legacy II
this many years ago...
Growth Growth-Income High-Yield Bond Cash Management
------------------ ----------------- ----------------- -----------------
Number Compound Compound Compound Compound
of Growth Growth Growth Growth
Years Periods Amount Rate Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/94-12/31/95 $13,152 31.52% $13,124 31.24% $12,016 20.16% $10,414 4.14%
2 12/31/93-12/31/95 13,040 14.19 13,218 14.97 11,079 5.25 10,673 3.31
3 12/31/92-12/31/95 14,967 14.39 14,646 13.56 12,727 8.37 10,811 2.63
4 12/31/91-12/31/95 16,360 13.09 15,596 11.75 14,124 9.02 11,010 2.43
5 12/31/90-12/31/95 21,515 16.56 19,096 13.81 17,641 12.02 11,467 2.78
6 12/31/89-12/31/95 20,300 12.52 18,360 10.66 18,014 10.37 12,208 3.38
Lifetime of fund 2/8/84-12/31/95 48,740 14.25 44,891 13.46 36,668 11.54 17,199 4.26
</TABLE>
<TABLE>
<CAPTION>
U.S. Govt/AAA
------------------
Compound
Growth
Amount Rate
------------------
<S> <C> <C> <C>
1 12/31/94-12/31/95 $11,385 13.85%
2 12/31/93-12/31/95 10,745 3.56
3 12/31/92-12/31/95 11,786 5.63
4 12/31/91-12/31/95 12,513 5.76
5 12/31/90-12/31/95 14,315 7.44
6 12/31/89-12/31/95 15,314 7.36
Lifetime of fund 12/1/85-12/31/95 20,472 7.34
Asset Allocation
------------------
Compound
Growth
Amount Rate
------------------
1 12/31/94-12/31/95 $12,785 27.85%
2 12/31/93-12/31/95 12,578 12.15
3 12/31/92-12/31/95 13,704 11.07
4 12/31/91-12/31/95 14,671 10.06
5 12/31/90-12/31/95 17,634 12.01
6 12/31/89-12/31/95 17,218 9.48
Lifetime of fund 8/1/89-12/31/95 17,601 9.21
International
------------------
Compound
Growth
Amount Rate
------------------
1 12/31/94-12/31/95 $11,118 11.18%
2 12/31/93-12/31/95 11,180 5.74
3 12/31/92-12/31/95 14,821 14.01
4 12/31/91-12/31/95 14,500 9.73
5 12/31/90-12/31/95 15,990 9.84
Lifetime of fund 5/1/89-12/31/95 15,136 7.59
</TABLE>
<PAGE>
*Although the Variable Account commenced activity in 1989, these figures are
calculated as if the Account had commenced activity at the same time as the
underlying Funds.
**For purposes of determining these investment results, American Legacy II's
1.35% annual asset charge and administrative fee have been taken into account.
However, the annual maintenance fee of $35 is not reflected and these examples
do not assume redemption at the end of the period.
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ANNUITY PAYMENTS
VARIABLE ANNUITY PAYMENTS
Variable annuity payments will be determined on the basis of: (1) the value of
the Contract prior to the Annuity Commencement Date; (2) the annuity tables
contained in the Contract; (3) the type of Annuity Option selected; and (4) the
investment results of the Fund(s) selected. In order to determine the amount of
variable annuity payments, Lincoln Life makes the following calculation: first,
it determines the dollar amount of the first monthly payment; and third, it
calculates the value of the Annuity Units each month thereafter. These steps are
explained below.
The dollar amount of the first monthly variable annuity payment is determined by
applying the total value of the Accumulation Units credited under the Contract
valued as of the fourteenth day prior to the Annuity Commencement Date (less any
premium taxes) to the annuity tables contained in the Contract. Amounts shown in
the tables are based on the 1971 Individual Annuity Mortality Tables, modified,
with an assumed investment return at the rate of 4% per annum. The first annuity
payment is determined by multiplying the benefit per $1,000 of value shown in
the Contract tables by the number of thousands of dollars of value accumulated
under the Contract. These annuity tables vary according to the form of annuity
selected and the age of the Annuitant at the Annuity Commencement Date. The 4%
interest rate stated above is the measuring point for subsequent annuity
payments. If the actual Net Investment Rate (annualized) exceeds 4%, the payment
will increase at a rate equal to the amount of such excess. Conversely, if the
actual rate is less than 4%, annuity payments will decrease. If the assumed rate
of interest were to be increased, annuity payments would start at a higher level
but would decrease more rapidly or increase more slowly.
Lincoln Life may use sex distinct annuity tables in Contracts that are not
associated with employer sponsored plans and not prohibited by law.
At an Annuity Commencement Date, the Annuitant is credited with Annuity Units
for each sub-account on which variable annuity payments are based. The number of
Annuity Units to be credited is determined by dividing the amount of the first
monthly payment by the value of an Annuity Unit in each sub-account selected.
Although the number of Annuity Units is fixed by this process, the value of such
units will vary with the value of the underlying Fund. The amount of the second
and subsequent annuity payments is determined by multiplying the Contractowner's
fixed number of Annuity Units in each sub-account by the appropriate Annuity
Unit value for the
<PAGE>
Valuation Date ending 14 days prior to the date that payment is due.
The value of each sub-account Annuity Unit will be set initially at $1.00. The
Annuity Unit value for each sub-account at the end of any Valuation Date is
determined by multiplying the sub-account Annuity Unit value for the immediately
preceding Valuation Date by the product of:
(a) The net investment factor of the sub-account for the Valuation Period for
which the Annuity Unit value is being determined, and
(b) A factor to neutralize the assumed investment return in the annuity table.
The value of the Annuity Units is determined as of a Valuation Date 14 days
prior to the payment date in order to permit calculation of amounts of annuity
payments and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
PROOF OF AGE, SEX AND SURVIVAL
Lincoln Life may require proof of age, sex, or survival of any payee upon whose
age, sex, or survival payments depend.
FEDERAL TAX STATUS
GENERAL
The operations of the Variable Account form a part of, and are taxed with, the
operations of Lincoln Life under the Internal Revenue Code of 1986, as amended
(the "Code"). Investment income and realized net capital gains on the assets of
the Variable Account are reinvested and taken into account in determining the
accumulation and annuity unit values. As a result, such investment income and
realized net capital gain are automatically retained as part of the reserves
under the Contract. Under existing federal income tax law, Lincoln Life believes
that the Variable Account investment income and realized net capital gain are
not taxed to the extent they are retained as part of the reserves under the
Contract. Accordingly, Lincoln Life does not anticipate that it will incur any
federal income tax liability attributable to the Variable Account, and therefore
it does not intend to make any provision for such taxes. However, if changes in
the federal tax laws or interpretations thereof result in Lincoln Life's being
taxed on income or gain attributable to the Variable Account, then Lincoln Life
may impose a charge against the Variable Account (with respect to some or all
<PAGE>
Contracts) in order to make provision for payment of such taxes.
TAX STATUS OF NON-QUALIFIED CONTRACTS
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund the shares of which are owned by separate accounts
of insurance companies) underlying the Contract be "adequately diversified" in
accordance with Treasury regulations in order for the Contract to qualify as an
annuity contract under Section 72 of the Code. The Variable Account, through
each of the funds, intends to comply with the diversification requirements
prescribed in regulations, which affect how the assets in each of the Funds in
which the Variable Account invests may be invested. Capital Research and
Management Company is not affiliated with Lincoln Life and Lincoln Life does not
have control over the Series, or its investments. However, Lincoln Life believes
that each Fund in which the Variable Account owns shares will meet the
diversification requirements and that therefore the Contracts will be treated as
annuities under the Code.
The regulations relating to diversification requirements do not provide guidance
concerning the extent to which Contractowners may direct their investments to
particular sub-accounts of a separate account. When guidance is provided, the
Contract may need to be modified to comply with that guidance. For these
reasons, Lincoln Life reserves the right to modify the Contract as necessary to
prevent the Contractowner from being considered the owner of the assets of the
Variable Account.
In addition to the requirements of Section 817(h), Code Section 72(s) provides
that Contracts will not be treated as annuity contracts for purposes of Section
72 unless the Contract provides that (1) if any Contractowner dies on or after
the annuity starting date prior to the time the entire interest in the Contract
has been distributed, the remaining portion of such interest must be distributed
at least as rapidly as under the method of distribution in effect at the time of
the Contractowner's death; and (2) if any Contractowner dies prior to the
annuity starting date, the entire interest must be distributed within five years
after the death of the Contractowner. These requirements are considered
satisfied if any portion of the Contractowner's interest that is payable to or
for the benefit of a "designated beneficiary" is distributed over that
designated beneficiary's life, or a period not extending beyond the designated
beneficiary's life expectancy, and if that distribution begins within one year
of the Contractowner's death. The "designated beneficiary" must be a natural
person. No regulations interpreting these
<PAGE>
requirements have yet been issued. Thus, no assurance can be given that the
provisions contained in Contracts satisfy all such Code requirements. However,
Lincoln Life believes that such provisions in such Contracts meet these
requirements. Lincoln Life intends to review such provisions and modify them as
necessary to assure that they comply with the requirements of Section 72(s) when
clarified by Regulations or otherwise.
ANNUITIES FUNDING PLANS GENERALLY
The rules governing the tax treatment of contributions and distributions under
such plans, as set forth in the Code and applicable rulings and regulations, are
complex and subject to change. These rules also vary according to the type of
plan and the terms and conditions of the plan itself. Therefore, no attempt is
made herein to provide more than general information about the use of Contracts
with the various types of plans, based on Lincoln Life's understanding of the
current federal tax laws as interpreted by the Internal Revenue Service.
Purchasers of Contracts for use with such a plan and plan participants and
beneficiaries should consult counsel and other competent advisers as to the
suitability of the plan and the Contract to their specific needs, and as to
applicable Code limitations and tax consequences. Participants under such plans,
as well as Contractowners, annuitants, and beneficiaries, should also be aware
that the rights of any person to any benefits under such plans may be subject to
the terms and conditions of the plans themselves regardless of the terms and
conditions of the Contract.
Following are brief descriptions of the various types of plans and of the use of
Contracts in connection therewith.
PUBLIC SCHOOL SYSTEMS AND 501(C)(3) ORGANIZATIONS (SECTION 403(b) PLANS)
Payments made to purchase annuity contracts by public school systems or Code
Section 501(c)(3) organizations for their employees are excludable from the
gross income of the employee to the extent that aggregate payments for the
employee do not exceed the "exclusion allowance" provided by Section 403(b) of
the Code, the over-all limits for excludable contributions of Section 415 of the
Code or the limit on elective contributions. Furthermore, the investment results
of the Fund credited to the account are not taxable until benefits are received
either in the form of annuity payments or in a single sum.
If an employee's individual account is surrendered, usually the full amount
received would be includable in income for that year at ordinary rates.
<PAGE>
QUALIFIED CORPORATE EMPLOYEE'S PENSION AND PROFIT-SHARING TRUSTS
AND QUALIFIED ANNUITY PLANS (SECTION 401(a) PLANS)
Payments made by a corporate employer and the increments on all payments for
qualified corporate plans are not taxable as income to the employee until
distributed. However, the employee may be required to include these amounts in
gross income prior to distribution if the qualified plan or trust loses its
qualification. Corporate plans qualified under Sections 401(a) or 403(a) of the
Code are subject to extensive rules, including limitations on maximum
contributions or benefits.
Distributions of amounts in excess of non-deductible employee contributions are
generally taxable as ordinary income. If an employee or beneficiary receives a
"lump-sum distribution," that is, if the employee or beneficiary receives in a
single tax year the total amounts payable with respect to that employee, and the
benefits are paid as a result of the employee's death or separation from service
or after the employee attains 59-1/2, taxable gain may be eligible for special
"lump sum averaging" treatment. These special tax rules are not available in all
cases.
SELF-EMPLOYED INDIVIDUALS (H.R. 10 OR KEOGH)
Under Code provisions, self-employed individuals may establish plans commonly
known as "H.R. 10" or "Keogh plans" for themselves and their employees. The tax
consequences to participants under such plans depend upon the plan itself. Such
plans are subject to special rules in addition to those applicable to qualified
corporate plans; therefore, purchasers of the Contracts for use with H.R. 10
plans should seek competent advice as to suitability of plan documents and the
funding contracts.
INDIVIDUAL RETIREMENT ANNUITIES (IRA)
Under Section 408 of the Code, individuals may participate in a retirement
program known as Individual Retirement Annuity (IRA). An individual may make an
annual IRA contribution of up to the lesser of $2,000 (or $2,250 if IRAs are
maintained for both the individual and his nonworking spouse) or 100% of
compensation. However, IRA contributions may be non-deductible in whole or in
part if (1) the individual or his spouse is an active participant in certain
other retirement programs and (2) the income of the individual (or of the
individual and his spouse) exceeds a specified amount. Distributions from
certain other IRA plans or qualified plans may be "rolled over" to an IRA on a
tax deferred basis without regard to the limit on contributions, provided
certain requirements are met. Distributions from IRA's are subject to certain
restrictions. Deductible
<PAGE>
IRA contributions and all IRA earnings will be taxed as ordinary income when
distributed. The failure to satisfy certain Code requirements with respect to an
IRA may result in adverse tax consequences.
DEFERRED COMPENSATION PLANS (457 PLANS)
Under the Code provisions, employees and independent contractors (participants)
performing services for state and local governments and certain tax-exempt
organizations may establish deferred compensation plans. While participants in
such plans may be permitted to specify the form of investment in which their
plan accounts will participate, all such investments are owned by the sponsoring
employer and are subject to the claims of its creditors. The amounts deferred
under a plan which meet the requirements of Section 457 of the Code are not
taxable as income to the participant until paid or otherwise made available to
the participant or beneficiary. Deferrals are taxed as compensation from the
employer when they are actually or constructively received by the employee. As a
general rule, the maximum amount which can be deferred in any one year is the
lesser of $7,500 or 33-1/3% of the participant's includable compensation.
However, in limited circumstances, up to $15,000 may be deferred in each of the
last three years before retirement.
SIMPLIFIED EMPLOYEE PENSION PLANS (SECTION 408(k))
An employer may make contributions on behalf of employees to a simplified
Employee Pension Plan ("SEPP") as provided by Section 408(k) of the Code. The
contributions and distribution dates are limited by the Code provisions. All
distributions from the plan will be taxed as ordinary income. Any distribution
before the employee attains age 59-1/2 (except in the event of death or
disability) or the failure to satisfy certain other Code requirements may result
in adverse tax consequences.
TAX ON DISTRIBUTIONS FROM QUALIFIED CONTRACTS
The following rules generally apply to distributions from Contracts purchased in
connection with the plans discussed above, other than 457 plans.
The portion, if any, of any contribution under a Contract made by or on behalf
of an individual which is not excluded from the employee's gross income
(generally, the employee's own non-deductible contributions) constitutes his
"investment in the Contract." If a distribution is made in the form of annuity
payments, the employee's "investment in the Contract"
<PAGE>
(adjusted for certain refund provisions) divided by his life expectancy (or
other period for which annuity payments are expected to be made) constitutes a
return of capital each year. The dollar amount of annuity payments received in
any year in excess of such return is taxable as ordinary income. However, for
employees whose annuity starting date is after December 31, 1986, all
distributions will be fully taxable once the employee is deemed to have
recovered the dollar amount of his investment in the Contract. Notwithstanding
the above, if the employee's annuity starting date was on or before July 1, 1986
and if his investment in the Contract will be recovered within three years of
his annuity starting date, no amount is included in income until he has fully
recovered such investment. For amounts distributed after 1986, new rules
generally provide that all distributions which are not received as an annuity
will be taxed as a pro rata distribution of taxable and non-taxable amounts
(rather than as a distribution first of non-taxable amounts).
If a surrender of or withdrawal from the Contract is effected and a distribution
is made in a single payment, the proceeds may qualify for special "lump-sum
distribution" treatment under certain qualified plans, as discussed above.
Otherwise, the amount by which the payment exceeds the "investment in the
Contract" (adjusted for any prior withdrawals) allocated to that payment, if
any, will be taxed as ordinary income in the year of receipt.
Distributions from Section 401(a) Plans, Section 403(b) Plans, IRAs, SEPPs and
Keoghs will be subject to (1) a 10% penalty tax if made before age 59-1/2 unless
certain other exceptions apply, and (2) a 15% penalty tax on combined annual
distributions in excess of $150,000, subject to various special rules. Failure
to meet certain minimum distribution requirements for the above plans, as well
as for Section 457 plans, will result in a 50% excise tax. Various other adverse
tax consequences may also be potentially applicable in certain circumstances to
these types of plans.
Upon an Annuitant's death, the taxation of benefits payable to his beneficiary
generally follow these same principles, subject to a variety of special rules.
In particular, tax on death benefits paid as a lump-sum may be deferred if,
within 60 days after the lump-sum becomes payable, the beneficiary instead
elects to receive annuity payments.
OTHER CONSIDERATIONS
It should be understood that the foregoing comments about the federal tax
consequences under these Contracts are not exhaustive and that special rules are
provided with respect to other tax situations not discussed herein. Further, the
foregoing discussion does not address any applicable
<PAGE>
state, local, or foreign tax laws. In recent years, numerous changes have been
made in the federal income tax treatment of Contracts and retirement plans,
which are not fully discussed above. Before an investment is made in any of the
above plans, a tax adviser should be consulted.
AUTOMATIC INCREASE IN THE GUARANTEED MINIMUM DEATH BENEFIT
Subject to the following terms and conditions, once a contract has been in force
for a certain period, Lincoln National Life Insurance Company (Lincoln Life)
will automatically increase the Guaranteed Minimum Death Benefit (GMDB):
Lincoln Life will automatically increase the GMDB, separately for each Contract
Year's Purchase Payment(s), effective upon the seventh anniversary of each
eligible Contract Year in which those payments were made (as the contingent
deferred sales charge expires on those payments).
The Attributable Gain (AG), used to increase the GMDB, will be calculated based
on the Contract Value at the close of business on the last Valuation Date
preceding the seventh anniversary of the Contract Year for which the increase is
made. The AG will be the amount which results from allocating the total
appreciation in the Contract to each Contract Year's Purchase Payments (Adjusted
by withdrawals on a first-in-first out (FIFO) basis based on Lincoln Life's
internal rate of return (IRR) calculation (as described below).
If a single Purchase Payment was deposited or multiple deposits were made in the
first Contract Year only, then, upon adjustment, the increased GMDB will be the
Contract Value on the seventh contract anniversary. If on the seventh contract
anniversary, the Contract Value is less than Net Purchase Payments, the GMDB
will not be adjusted.
If Purchase Payments have been deposited in multiple Contract Years, then, upon
adjustment, the increased GMDB will be the sum of all Purchase Payments plus an
Attributable Gain, as calculated for each Contract Year which has reached its
seventh anniversary, miuus any Withdrawals, partial annuitizations, and premium
taxes incurred.
The IRR is the level compound rate of return, calculated by Lincoln Life, at
which Purchase Payments less withdrawals will accumulate to the Contract Value
on the Contract anniversary beginning with the seventh anniversary. The
application of the IRR methodology to any particular Contract Year could
allocate gain, if any, in a manner which does not precisely correlate with the
Contract's actual investment experience for a particular Contract
<PAGE>
Year or Sub-Account. The calculation of the IRR assumes all Purchase Payments
and withdrawals occur at the beginning of the year in which they were made. Once
the IRR has been determined, the gain attributable to each Contract Year is
calculated by applying the IRR to the Purchase Payments, less any withdrawals
applied on a FIFO basis.
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, Lincoln Life may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors affecting
the overall performance of an insurance company in order to provide an opinion
as to an insurance company's relative financial strength and ability to meet its
contractual obligations. The procedure includes both a quantitative and
qualitative review of each company. A.M. Best also provides certain rankings, to
which Lincoln Life intends to refer.
DUFF & PHELPS insurance company claims paying ability (CPA) service provides
purchasers of insurance company policies and contracts with analytical and
statistical information on the solvency and liquidity of major U.S. licensed
insurance companies, both mutual and stock.
EAFE Index is prepared by Morgan Stanley Capital International (MSCI). It
measures performance of securities in Europe, Australia and the Far East. The
index reflects the movements of world stock markets by representing the
evolution of an unmanaged portfolio. The EAFE Index offers international
diversification with over 1000 companies across 18 different countries.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a publisher
of statistical data covering the investment company industry in the United
States and overseas. Lipper is recognized as the leading source of data on open-
end and closed-end funds. Lipper currently tracks the performance of over 5,000
investment companies and publishes numerous specialized reports, including
reports on performance and portfolio analysis, fee and expense analysis.
MOODY'S insurance claims-paying rating is a system of rating insurance company's
financial strength, market leadership, and ability to meet financial
obligations. The purpose of Moody's ratings is to provide investors with a
simple system of gradation by which the relative quality of insurance companies
may be noted.
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MORNINGSTAR is an independent financial publisher offering comprehensive
statistical and analytical coverage of open-end and closed-end funds and
variable annuities.
STANDARD & POOR's insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. The likelihood of a timely flow
of funds from the insurer to the trustee for the bondholders is a key element in
the rating determination for such debt issues.
VARDS (Variable Annuity Research Data Service) provides a comprehensive guide to
variable annuity contract features and historical fund performance. The service
also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable contracts.
STANDARD & POOR'S INDEX--broad-based measurement of changes in stock-market
conditions based on the average performance of 500 widely held common stocks;
commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks,
their relative weightings to reflect differences in the number of outstanding
shares, and publication of the index itself are services of Standard & Poor's
Corporation, a financial advisory, securities rating, and publishing firm. The
index tracks 400 industrial company stocks, 20 transportation stocks, 40
financial company stocks, and 40 public utilities.
NASDAQ-OTC Price Index--this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA)--price-weighted average of 30 actively
traded blue chip stocks, primarily industrials but including American Express
Company and American Telephone and Telegraph Company. Prepared and Published by
Dow Jones & Company, it is the oldest and most widely quoted of all the market
indicators. The average is quoted in points, not dollars.
In its advertisements and other sales literature for the Variable Account and
the Series Funds, Lincoln Life intends to illustrate the advantages of the
Contracts in a number of ways:
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COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of the
variable annuity contract. For example, but not by way of illustration, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the Variable Account over the fixed account; and the
compounding effect when a client makes regular deposits to its Account.
DOLLAR-COST AVERAGING ILLUSTRATIONS. These illustrations will generally discuss
the price-leveling effect of making regular purchases in the same Sub-Accounts
over a period of time, to take advantage of the trends in market prices of the
portfolio securities purchased for those Sub-Accounts.
AUTOMATIC WITHDRAWAL SERVICE. A service provided by Lincoln Life, through which
a Contractowner may take any distribution allowed by Code Section 401(a)(9) in
the case of qualified contracts, or permitted under Code Section 72 in the case
of non-qualified contracts, by way of an automatically generated payment.
EARNINGS SWEEP. A service provided by Lincoln Life which allows a client to
designate one of the variable Sub-Accounts or the Fixed Account as a holding
account, and to transfer earnings from that account to any other variable Sub-
Account. The Contractowner chooses a specific fund as the holding account. At
specific intervals, account value in the holding account fund that exceeds a
certain designated baseline amount is automatically transferred to another
specific fund(s). The minimum account value required for the Earnings Sweep
feature is 10.000.
Lincoln Life's CUSTOMERS. Sales literature for the Variable Account and the
Series Funds may refer to the number of employers and the number of individual
annuity clients which Lincoln Life serves. As of the date of this Statement of
Additional Information, Lincoln Life was serving over 9,500 employers and had
more than 750,000 annuity clients.
Lincoln Life's ASSETS, SIZE. Lincoln Life may discuss its general financial
condition (see, for example, the reference to A.M. Best Company, above); it may
refer to its assets; it may also discuss its relative size and/or ranking among
companies in the industry or among any sub-classification of those companies,
based upon recognized evaluation criteria (see reference to A.M. Best Company
above). For example, at year-end 1994 Lincoln Life was the tenth largest U.S.
life insurance company based upon overall assets.
