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AMERICAN LEGACY III
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
issued by:
Lincoln National Life Insurance Co.
1300 South Clinton Street
Fort Wayne, Indiana 46802
This Prospectus describes the individual flexible premium deferred variable an-
nuity contract (contract or variable annuity contract) issued by The Lincoln
National Life Insurance Company (Lincoln Life). It is for use with the follow-
ing retirement plans qualified for special tax treatment (qualified plans) un-
der the Internal Revenue Code of 1986, as amended (the code):
1. Public school systems and certain tax-exempt organizations [403(b)];
2. Qualified corporate employee pension and profit-sharing trusts and qualified
annuity plans;
3. Corresponding plans of self-employed individuals (H.R. 10 or Keogh);
4. Individual retirement annuities (IRA);
5. Government deferred compensation plans (457);
6. Simplified employee pension plans (SEP); and
7. SIMPLE 401(k) and SIMPLE IRA plans. Consult your investment dealer as to the
availability of this contract for SIMPLE IRA's.
Section 403(b) business under number (1.) will normally be accepted only for
purchase payments qualifying as 403(b) lump sum transfers or rollovers.
The contract described in this Prospectus is also offered to plans established
by persons who are not entitled to participate in one of the previously men-
tioned plans (nonqualified contracts). A nonqualified contract can be owned
jointly only by spouses.
The contract offers you the accumulation of contract value and payment of peri-
odic annuity benefits. These benefits may be paid on a variable or fixed basis
or a combination of both. Annuity benefits start at an annuity commencement
date which you select. If the contractowner dies before the annuity commence-
ment date, the greater of: (1) the contract value; or (2) the enhanced guaran-
teed minimum death benefit (EGMDB) or, if the EGMDB is not then in effect, the
guaranteed minimum death benefit (GMDB), will be paid to the beneficiary. (See
Death benefit before annuity commencement date.) The EGMDB is not available un-
der contracts used for qualified plans (other than IRAs) or if the
contractowner's issue age is 75 or more.
The minimum initial purchase payment for the contract is:
1. $1,500 for a nonqualified plan and a 403(b) transfer/rollover or
2. $300 for a qualified plan.
The minimum payment to the contract is $100 per payment ($25 if transmitted
electronically), subject to a $300 annual minimum.
All investments (purchase payments) for benefits on a variable basis will be
placed in Lincoln National Variable Annuity Account H (variable annuity account
[VAA]). The VAA is a segregated investment account of Lincoln Life, which is
the depositor. Based upon your instructions, the VAA invests purchase payments
(at net asset value) in Class 2 shares of one or more specified funds of the
American Variable Insurance Series (series): Global Growth Fund, Growth Fund,
Growth-Income Fund, International Fund, Asset Allocation Fund, High-Yield Bond
Fund, Bond Fund, U.S. Government/AAA-Rated Securities Fund, and Cash Management
Fund. Both the value of a contract before the annuity commencement date and the
amount of payouts afterward will depend upon the investment performance of the
fund(s) selected. Investments in these funds are neither insured nor guaranteed
by the U.S. Government or by any other person or entity.
Purchase payments for benefits on a fixed basis will be placed in the fixed
side of the contract, which is part of our General Account. However, this Pro-
spectus deals only with those elements of the contracts relating to the VAA,
except where reference to the fixed side is made.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus details the information regarding the VAA that you should know
before investing. This booklet also includes a current Prospectus of the se-
ries. Both should be read carefully before investing and kept for future refer-
ence.
A statement of additional information (SAI), dated April 30, 1997, concerning
the VAA has been filed with the SEC and is incorporated by this reference into
this Prospectus. If you would like a free copy, complete and mail the enclosed
card, or call 1-800-942-5500. A table of contents for the SAI appears on the
last page of this Prospectus.
This Prospectus is dated April 30, 1997.
1
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Special terms 3
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Expense tables 4
- -------------------------------------------------
Synopsis 6
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Condensed financial information 8
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Investment results 8
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Financial statements 8
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Lincoln National Life Insurance Co. 8
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Variable annuity account (VAA) 8
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Investments of the variable annuity account 8
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Charges and other deductions 10
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The contracts 11
- -------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Annuity payouts 15
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Federal tax status 16
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Voting rights 18
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Distribution of the contracts 18
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Return privilege 18
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State regulation 19
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Restrictions under the Texas Optional Retirement Program 19
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Records and reports 19
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Other information 19
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Statement of additional information table of contents for Variable
Annuity Account H American Legacy III 19
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</TABLE>
2
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SPECIAL TERMS
(Throughout this Prospectus, in order to make the following documents more un-
derstandable to you, we have italicized the special terms.)
Account or variable annuity account (VAA) -- The segregated investment ac-
count, Account H, into which Lincoln Life sets aside and invests the assets
for the variable side of contract offered in this Prospectus.
Accumulation unit -- A measure used to calculate contract value for the vari-
able side of the contract before the annuity commencement date. See The con-
tracts.
Advisor or investment advisor -- Capital Research and Management Co. (CRMC),
which provides investment management services to the series. See Investment
advisor.
Annuitant -- The person upon whose life the annuity benefit payments made af-
ter the annuity commencement date will be based.
Annuity commencement date -- The valuation date when the funds are withdrawn
or converted into annuity units or fixed dollar payout for payment of annuity
benefits under the annuity payout option selected. For purposes of determining
whether an event occurs before or after the annuity commencement date, the an-
nuity commencement date is deemed to begin at close of business on the valua-
tion date.
Annuity payout option -- An optional form of payout of the annuity available
within the contract. See Annuity payouts.
Annuity payout -- An amount paid at regular intervals after the annuity com-
mencement date under one of several options available to the annuitant and/or
any other payee. This amount may be paid on a variable or fixed basis, or a
combination of both.
Annuity unit -- A measure used to calculate the amount of annuity payouts af-
ter the annuity commencement date. See Annuity payouts.
Beneficiary -- The person whom you designate to receive the death benefit, if
any, in case of the contractowner's death.
Cash surrender value -- Upon surrender, the contract value less any applicable
charges, fees and taxes.
Code -- The Internal Revenue Code of 1986, as amended.
Contract (variable annuity contract) -- The agreement between you and us pro-
viding a variable annuity.
Contractowner (you, your, owner) -- The person who has the ability to exercise
the rights within the contract (decides on investment allocations, transfers,
payout option, designates the beneficiary, etc.). Usually, but not always, the
owner is also the annuitant.
Contract value -- At a given time, the total value of all accumulation units
for a contract plus the value of the fixed side of the contract.
Contract year -- Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
Death benefit -- The amount payable to your designated beneficiary if the
owner dies before the annuity commencement date. See The contracts.
Depositor -- Lincoln National Life Insurance Co.
Enhanced guaranteed minimum death benefit (EGMDB) -- The EGMDB is the greater
of: (1) contract value as of the day on which Lincoln Life approves the pay-
ment of a death benefit claim; or (2) the highest contract value on any policy
anniversary date (including the inception date) from the time the EGMDB takes
effect up to and including the contractowner's age 75. The highest contract
value so determined is then increased by purchase payments and decreased by
partial withdrawals, partial annuitizations, and any premium taxes made, ef-
fected or incurred subsequent to the anniversary date on which the highest
contract value is obtained.
Flexible premium deferred contract -- An annuity contract with an initial pur-
chase payment, allowing additional purchase payments to be made, and with an-
nuity payouts beginning at a future date.
Fund -- Any of the underlying investment options available in the series in
which your purchase payments are invested.
Guaranteed minimum death benefit (GMDB) -- The GMDB is equal to the sum of all
purchase payments minus any withdrawals, partial annuitizations and premium
taxes incurred. See Death benefit before the annuity commencement date.
Home office -- The headquarters of Lincoln National Life Insurance Co., lo-
cated at 1300 South Clinton Street, Fort Wayne, Indiana 46802.
Lincoln Life (we, us, our) -- Lincoln National Life Insurance Co.
Purchase payments -- Amounts paid into the contract.
Series -- American Variable Insurance Series (series), the funds in which pur-
chase payments are invested.
Statement of additional information (SAI) -- A document required by the SEC to
be provided upon request to a prospective purchaser of a contract, you. This
free document gives more information about Lincoln Life, the VAA and the vari-
able annuity contract.
Subaccount or American Legacy III subaccount -- That portion of the VAA that
reflects investments in accumulation and annuity units of a class of a partic-
ular fund available under the contracts. There is a separate subaccount which
corresponds to each class of a fund.
Surrender -- A contract right that allows you to terminate your contract and
receive your cash surrender value. See The contracts.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period -- The period starting at the close of trading (currently
4:00 p.m. New York time) on each day that the NYSE is open for trading (valua-
tion date) and ending at the close of such trading on the next valuation date.
Withdrawal -- A contract right that allows you to obtain a portion of your
cash surrender value.
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EXPENSE TABLES
CONTRACTOWNER TRANSACTION EXPENSES:
The maximum contingent deferred sales charge
(as a percentage of purchase payments surrendered/withdrawn): 6%
The contingent deferred sales charge percentage is reduced over time. The later
a redemption occurs, the lower the contingent deferred sales charge with re-
spect tothat surrender or withdrawal. See Contingent deferred sales charges.
(Note: This charge may be waived in certain cases. See Contingent deferred
sales charges.)
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VARIABLE ANNUITY ACCOUNT H ANNUAL EXPENSES FOR AMERICAN LEGACY III SUBACCOUNTS:
(as a percentage of average account value for each subaccount):
<TABLE>
<CAPTION>
For each subaccount* For each subaccount*
with EGMDB without EGMDB
<S> <C> <C>
Mortality and expense risk fees 1.30% 1.15%
Administrative charge .10% .10%
----- -----
Total annual expenses for American
Legacy III subaccounts 1.40% 1.25%
</TABLE>
ANNUAL EXPENSES OF THE FUNDS FOR THE YEAR ENDED NOVEMBER 30, 1996:
(as a percentage of each fund's average net assets):
<TABLE>
<CAPTION>
Management 12b-1 Other Total
fees + fees + expenses = expenses
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Global Growth** .69% .25% .06% 1.00%
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2. Growth .42 .25 .02 .69
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3. International .61 .25 .08 .94
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4. Growth-Income .39 .25 .02 .66
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5. Asset Allocation .47 .25 .02 .74
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6. High-Yield Bond .50 .25 .03 .78
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7. Bond .51 .25 .01 .77
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8. U.S. Govt./AAA-Rated
Securities .51 .25 .02 .78
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9. Cash Management .45 .25 .02 .72
- -----------------------------------------------------------------------
</TABLE>
*The VAA is divided into separately-named subaccounts, nine of which are
available under the contracts. Each subaccount, in turn, invests purchase
payments in shares of a class of its respective fund.
**These expenses are estimated for the current fiscal year.
4
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EXAMPLES
(reflecting expenses both of the American Legacy III subaccounts and of the
funds)
If you surrender your contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming a 5% annual
return:
<TABLE>
<CAPTION>
1 year 3 years
- --------------------------------------------------------------------------------------------
<S> <C> <C>
1. Global Growth* $84 $125
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2. Growth 81 115
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3. International 84 123
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4. Growth-Income 81 115
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5. Asset Allocation 82 117
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6. High-Yield Bond 82 117
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7. Bond 82 118
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8. U.S. Govt./AAA-Rated Securities 82 118
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9. Cash Management 82 116
- --------------------------------------------------------------------------------------------
If you do not surrender your contract, you would pay the following expenses on a
$1,000 investment, assuming a 5% annual return:
<CAPTION>
1 year 3 years
- --------------------------------------------------------------------------------------------
<S> <C> <C>
1. Global Growth* $24 $75
- --------------------------------------------------------------------------------------------
2. Growth 21 65
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3. International 24 73
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4. Growth-Income 21 65
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5. Asset Allocation 22 67
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6. High-Yield Bond 22 67
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7. Bond 22 68
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8. U.S. Govt./AAA-Rate Securities 22 68
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9. Cash Management 22 66
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</TABLE>
* These expenses are estimated amounts for the current fiscal year.
All of the figures provided under the subheading Annual expenses of the funds
and part of the data used to produce the figures in the examples were supplied
by the underlying portfolio company (series) through the VAA's principal under-
writer, American Funds Distributors, Inc. We have not independently verified
this information.
These examples are provided to assist you in understanding the various costs
and expenses that you will bear directly or indirectly depending on whether or
not the EGMDB is in effect. These examples reflect expenses both of the VAA for
the American Legacy III subaccounts and of the nine funds. These examples re-
flect expenses assuming that the EGMDB is in effect. If the EGMDB is NOT in ef-
fect, these expenses will be lower.
For more complete descriptions of the various costs and expenses involved, see
Charges and other deductions in this Prospectus, and Fund Organization and Man-
agement in the Prospectus for the series. Premium taxes may also be applicable,
although they do not appear in the examples. In addition, we reserve the right
to impose a charge on transfers between subaccounts as well as to and from the
fixed account, although we do not currently do so. THESE EXAMPLES SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
MORE OR LESS THAN THOSE SHOWN. These examples are unaudited.
5
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SYNOPSIS
WHAT TYPE OF CONTRACT AM I BUYING? It is an individual annuity contract issued
by Lincoln Life. It may provide for a fixed annuity and/or a variable annuity.
This Prospectus is intended to provide disclosure only about the variable por-
tion of the contract. See The contracts.
WHAT IS THE VARIABLE ANNUITY ACCOUNT (VAA)? It is a segregated asset account
established under Indiana insurance law, and registered with the SEC as a unit
investment trust. The assets of the VAA are allocated to one or more
subaccounts, according to your investment choice. Those assets are not charge-
able with liabilities arising out of any other business which Lincoln Life may
conduct. See Variable annuity account.
WHAT ARE MY INVESTMENT CHOICES? Through its various subaccounts, the VAA uses
your purchase payments to purchase series shares, at your direction, in one or
more of the following investment funds of the series: Global Growth, Growth,
International, Growth-Income, Asset Allocation, High-Yield Bond, Bond, U.S.
Government/AAA-Rated Securities, and Cash Management. In turn, each fund holds
a portfolio of securities consistent with its own particular investment poli-
cy. See Investments of the variable annuity account and Description of the se-
ries.
WHO INVESTS MY MONEY? The investment advisor for the series is CRMC, Los Ange-
les, California. CRMC is a long-established investment management organiza-
tion, and is registered as an investment advisor with the SEC. See Investments
of the variable annuity account and Investment advisor.
HOW DOES THE CONTRACT WORK? Once we approve your application, you will be is-
sued your individual annuity contract. During the accumulation period, while
you are paying in, your purchase payments will buy accumulation units under
the contract. Should you decide to annuitize (that is, change your contract to
a payout mode rather than an accumulation mode), your accumulation units will
be converted to annuity units. Your periodic annuity payout will be based upon
the number of annuity units to which you became entitled at the time you de-
cided to annuitize and the value of each unit on the valuation date. See The
contracts.
WHAT CHARGES ARE ASSOCIATED WITH THIS CONTRACT? Should you decide to withdraw
contract value before your purchase payments have been in your contract for a
certain minimum period, you will incur a contingent deferred sales charge of
anywhere from 1% to 6%, depending upon how many full contract years those pay-
ments have been in the contract. (Note: This sales charge is not assessed up-
on: (1) the first four withdrawals of contract value during a contract year to
the extent that the sum of the percentages of the contract value withdrawn by
the withdrawals does not exceed 10% (for this purpose, the percentages are
based on the contract value at the time of the current withdrawal; also, this
10% withdrawal exception does not apply to a surrender of a contract); (2) au-
tomatic withdrawals in total not in excess of 10% of the contract value during
a contract year, made by non-trustee contractowners who are at least 59 1/2;
(3) electing an annuity payout option available within this contract; (4) upon
the death of the owner; (5) 90 days of continuous confinement of the owner af-
ter the contract effective date in an accredited nursing home or equivalent
health care facility; (6) the occurrence after the contract effective date of
a terminal illness of the owner that results in a life expectancy of less than
one year as determined by a qualified professional medical practitioner; (7)
where total and permanent disability occurs after the contract effective date
and before the contractowner's 65th birthday; or (8) when the surviving spouse
assumes ownership of the contract as a result of the death of the original
owner (in such case, the CDSC would be waived on the contract value as of the
date which the surviving spouse assumed contract ownership); however, this
does not apply if the spouses were joint owners. If a joint owner exists on a
contract, both the owner and joint owner must meet one of the exceptions for
waiver of the contingent deferred sales charge.)
If your state assesses a premium tax with respect to your contract, then at
the time the tax is incurred (or at such other time as we may choose), we will
deduct those amounts from purchase payments or contract value, as applicable.
We assess annual charges in the aggregate amount of 1.40% against the daily
net asset value of the VAA, including that portion of the account attributable
to your purchase payments. These charges consist of 0.10% as an administrative
charge and 1.30% as a mortality and expense risk charge. If the EGMDB is not
in effect, the mortality and expense risk charge is 1.15%, resulting in an ag-
gregate charge against the VAA of 1.25%. For a complete discussion of the
charges associated with the contract, see Charges and other deductions.
The series pays a fee to its investment advisor, CRMC, based upon the average
daily net asset value of each fund in the series. See Investments of the vari-
able annuity account--Investment advisor. The class of shares of each series
available under the contracts also bears expenses pursuant to a 12b-1 plan. In
addition, there are other expenses associated with the daily operation of the
series. These are more fully described in the Prospectus for the series.
HOW MUCH MUST I PAY, AND HOW OFTEN? Subject to the minimum and maximum pay-
ments stated on the first page of the Prospectus, the amount and frequency of
your payments are completely flexible. See The contracts--Purchase payments.
HOW WILL MY ANNUITY PAYOUTS BE CALCULATED? If you decide to annuitize, you
elect an annuity payout option. Once you have done so, your periodic payout
will be based upon a number of factors. If you participate in the VAA, the
changing values of the funds in which
6
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you have invested will be one factor. See Annuity
payouts. REMEMBER THAT PARTICIPANTS IN THE VAA BENEFIT FROM ANY GAIN, AND TAKE
A RISK OF ANY DROP, IN THE VALUE OF THE SECURITIES IN THE FUNDS' PORTFOLIOS.
WHAT HAPPENS IF I DIE BEFORE I ANNUITIZE? If the EGMDB is in effect, the bene-
ficiary whom you designate will receive either the EGMDB or the then current
value of the contract, whichever is greater. If the EGMDB is not in effect, the
beneficiary will receive either the GMDB or the then current value of the con-
tract, whichever is greater. Your beneficiary will have certain options for how
the money is to be paid out. See Death benefit before the annuity commencement
date.
MAY I TRANSFER CONTRACT VALUE BETWEEN FUNDS IN THE SERIES? Yes; however, there
are limits on how often you may do so. See The contracts-Transfers between
subaccounts on or before the annuity commencement date and Transfers following
the annuity commencement date.
MAY I TRANSFER CONTRACT VALUE FROM THE FIXED TO THE VARIABLE SIDE OF THE CON-
TRACT, AND VICE-VERSA? Yes, subject once again to specific restrictions in the
contract. See The contracts--Transfers to and from the General Account on or
before the annuity commencement date.
MAY I SURRENDER THE CONTRACT OR MAKE A WITHDRAWAL? Yes, subject to contract re-
quirements and to restrictions imposed under certain qualified retirement plans
for which the contract is purchased. See Surrenders and withdrawals.
If you surrender the contract or make a withdrawal, certain charges may be as-
sessed, as discussed above and under Charges and other deductions. In addition,
the Internal Revenue Service (IRS) may assess a 10% premature withdrawal pen-
alty tax. A surrender or a withdrawal may be subject to 20% withholding. See
Federal tax status and withholding.
DO I GET A FREE LOOK AT THIS CONTRACT? Yes. If within ten days (or a longer pe-
riod if required by law) of the date you first receive the contract you return
it, postage prepaid to the home office of Lincoln Life, it will be canceled.
However, except in some states, during this period, you assume the risk of a
market drop with respect to purchase payments which you allocate to the vari-
able side of the contract. See Return privilege.
7
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CONDENSED FINANCIAL INFORMATION
Because the subaccounts which are available under the contracts did not begin
operation before the date of this Prospectus, financial information for the
subaccounts is not included in this Prospectus or in the SAI.
INVESTMENT RESULTS
At times, the VAA may compare its investment results to various unmanaged in-
dices or other variable annuities in reports to shareholders, sales literature
and advertisements. The results will be calculated on a total return basis for
various periods, with or without contingent deferred sales charges. Results
calculated without contingent deferred sales charges will be higher. Total re-
turns include the reinvestment of all distributions, which are reflected in
changes in unit value. See the SAI for further information.
FINANCIAL STATEMENTS
The financial statements for Lincoln Life are located in the SAI. If you would
like a free copy of the SAI, complete and mail the enclosed card, or call 1-
800-942-5500.
LINCOLN NATIONAL LIFE INSURANCE CO.
Lincoln Life was founded in 1905 and is organized under Indiana law. We are
one of the largest stock life insurance companies in the United States. We are
owned by Lincoln National Corp. (LNC) which is also organized under Indiana
law. LNC's primary businesses are insurance and financial services.
VARIABLE ANNUITY ACCOUNT (VAA)
On February 7, 1989, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the Investment Company Act of 1940 (1940 Act).
The SEC does not supervise the VAA or Lincoln Life. The VAA is a segregated
investment account, meaning that its assets may not be charged with liabili-
ties resulting from any other business that we may conduct. Income, gains and
losses, whether realized or not, from assets allocated to the VAA are, in ac-
cordance with the applicable annuity contracts, credited to or charged against
the VAA. They are credited or charged without regard to any other income,
gains or losses of Lincoln Life. The VAA is used to support annuity contracts
other than the contract described in this Prospectus. The VAA satisfies the
definition of separate account under the federal securities laws. We do not
guarantee the investment performance of the VAA. Any investment gain or loss
depends on the investment performance of the funds. You assume the full in-
vestment risk for all amounts placed in the VAA.
INVESTMENTS OF THE VARIABLE ANNUITY ACCOUNT
You decide the subaccount(s) to which you allocate purchase payments. There is
a separate subaccount which corresponds to each class of each fund of the se-
ries. You may change your allocation without penalty or charges. Shares of the
funds will be sold at net asset value with no initial sales charge to the VAA
in order to fund the contracts. The series is required to redeem fund shares
at net asset value upon our request. We reserve the right to add, delete or
substitute funds.
INVESTMENT ADVISOR
The investment advisor for the series is CRMC, 333 South Hope Street, Los An-
geles, California 90071. CRMC is one of the nation's largest and oldest in-
vestment management organizations. As compensation for its services to the se-
ries, the investment advisor receives a fee from the series which is accrued
daily and paid monthly. This fee is based on the net assets of each fund, as
defined under Purchase and Redemption of Shares, in the Prospectus for the se-
ries.
DESCRIPTION OF THE SERIES
The series was organized as a Massachusetts business trust in 1983 and is reg-
istered as a diversified, open-end management investment company under the
1940 Act. Diversified means not owning too great a percentage of the securi-
ties of any one company. An open-end company is one which, in this case, per-
mits Lincoln Life to sell its shares back to the series when you make a with-
drawal, surrender the contract or transfer from one fund to another. Manage-
ment investment company is the legal term for a mutual fund. These definitions
are very general. The precise legal definitions for these terms are contained
in the 1940 Act.
The series has nine separate portfolios of funds. Fund as sets are segregated
and a shareholder's interest is limited to those funds in which the share-
holder owns shares. The series has adopted a plan pursuant to Rule 18f-3 under
the 1940 Act to permit the series to establish a multiple class distribution
system for all of its portfolios. The series' Board of Trustees may at any
time establish additional funds or classes, which may or may not be available
to the VAA.
Under the multi-class system adopted by the series, shares of each multi-class
fund represent an equal pro
8
<PAGE>
rata interest in that fund and, generally, have identical voting, dividend,
liquidation, and other rights, preferences, powers, restrictions, limitations,
qualifications and terms and conditions, except that: (1) each class has a dif-
ferent designation; (2) each class of shares bears its class expenses; (3) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its distribution arrangement; and (4) each class has separate
voting rights on any matter submitted to shareholders in which the interests of
one class differ from the interests of any other class. Expenses currently des-
ignated as class expenses by the series' Board of Trustees under the plan pur-
suant to Rule 18f-3 include, for example, service fees paid under a 12b-1 plan
to cover servicing fees paid to dealers selling the contracts as well as re-
lated expenses incurred by Lincoln Life.
Each fund has two classes of shares, designated as Class 1 shares and Class 2
shares. Class 1 and 2 differ primarily in that Class 2 (but not Class 1) shares
are subject to a 12b-1 plan. Only Class 2 shares are available under the con-
tracts.
Following are brief summaries of the investment objectives and policies of the
funds. Each fund is subject to certain investment policies and restrictions
which may not be changed without a majority vote of shareholders of that fund.
More detailed information may be obtained from the current Prospectus for the
series which is included in this booklet. PLEASE BE ADVISED THAT THERE IS NO
ASSURANCE THAT ANY OF THE FUNDS WILL ACHIEVE THEIR STATED OBJECTIVES.
1. Global Growth Fund--The investment objective is to achieve long-term growth
of capital by investing in securities of issuers domiciled around the world.
The fund will invest primarily in common stocks but may invest in other se-
curities such as preferred stock, debt securities and securities convertible
into common stock. PLEASE NOTE: THIS FUND IS NOT YET AVAILABLE IN ALL
STATES. PLEASE CONSULT YOUR INVESTMENT DEALER FOR CURRENT INFORMATION ABOUT
THE GLOBAL GROWTH FUND'S AVAILABILITY.
2. Growth Fund--This fund seeks to provide growth of capital. Whatever current
income is generated by the fund is likely to be incidental to the objective
of capital growth. Ordinarily, accomplishment of the fund's objective of
capital growth will be sought by investing primarily in common stocks or se-
curities with common stock characteristics.
3. International Fund--The investment objective is long-term growth of capital
by investing primarily in securities of issuers domiciled outside the United
States.
4. Growth-Income Fund--The investment objective is growth of capital and in-
come. In the selection of securities for investment, the possibilities of
appreciation and potential dividends are given more weight than current
yield. Ordinarily, the assets of the Growth-Income Fund consist principally
of a diversified group of common stocks, but other types of securities may
be held when deemed advisable including preferred stocks and corporate
bonds, including convertible bonds.
5. Asset Allocation Fund--This fund seeks total return (including income and
capital gains) and preservation of capital over the long-term by investing
in a diversified portfolio of securities. These securities can include com-
mon stocks and other equity-type securities (such as convertible bonds and
preferred stocks), bonds and other intermediate and long-term fixed-income
securities and money market instruments (debt securities maturing in one
year or less).
6. High-Yield Bond Fund--The investment objective is a fully managed, diversi-
fied bond portfolio. It seeks high current income and secondarily seeks cap-
ital appreciation. This fund will generally be invested substantially in in-
termediate and long-term corporate obligations, with emphasis on higher
yielding, higher risk, lower rated or unrated securities.
7. Bond Fund--This fund seeks a high level of current income as is consistent
with the preservation of capital by investing in a broad variety of fixed
income securities including: marketable corporate debt securities, loan par-
ticipations, U.S. Government Securities, mortgage-related securities, other
asset-backed securities and cash or money market instruments.
8. U.S. Government/AAA-Rated Securities Fund--This fund seeks a high level of
current income consistent with prudent investment risk and preservation of
capital by investing primarily in a combination of securities guaranteed by
the U.S. Government and other debt securities rated AAA or Aaa.
9. Cash Management Fund--The investment objective is high yield while preserv-
ing capital by investing in a diversified selection of money market instru-
ments.
SALE OF FUND SHARES BY THE SERIES
We will purchase shares of the funds at net asset value and direct them to the
appropriate subaccounts of the VAA. We will redeem sufficient shares of the ap-
propriate funds to pay annuity payouts, death benefits, surrender/ withdrawal
proceeds or for other purposes described in the contract. If you want to trans-
fer all or part of your investment from one subaccount to another, we may re-
deem shares held in the first and purchase shares of the other. The shares are
retired, but they may be reissued later.
Shares of the funds are not sold directly to the general public. They are sold
to Lincoln Life, and may be sold to other insurance companies, for investment
of the assets of the subaccounts established by those insurance companies to
fund variable annuity and variable life insurance contracts.
When the series sells shares in any of its funds both to variable annuity and
to variable life insurance separate
9
<PAGE>
accounts, it is said to engage in mixed funding. When the series sells shares
in any of its funds to separate accounts of unaffiliated life insurance compa-
nies, it is said to engage in shared funding.
The series currently engages in mixed and shared funding. Therefore, due to
differences in redemption rates or tax treatment, or other considerations, the
interests of various contractowners participating in a fund could conflict. The
series' Board of Trustees will monitor for the existence of any material con-
flicts, and determine what action, if any, should be taken. See the Prospectus
for the series.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
All dividend and capital gain distributions of the funds are automatically re-
invested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to contractowners as
additional units, but are reflected as changes in unit values.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, within the law, to make additions, deletions and substi-
tutions for the series and/or any funds within the series in which the VAA par-
ticipates. (We may substitute shares of other funds for shares already pur-
chased, or to be purchased in the future, under the contract. This substitution
might occur if shares of a fund should no longer be available, or if investment
in any fund's shares should become inappropriate, in the judgment of our man-
agement, for the purposes of the contract.) No substitution of the shares
attributable to your account may take place without notice to you and before
approval of the SEC, in accordance with the 1940 Act.
CHARGES AND OTHER DEDUCTIONS
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the contracts. We incur certain costs
and expenses for the distribution and administration of the contracts and for
providing the benefits payable thereunder. More particularly, our administra-
tive services include: processing applications for and issuing the contracts,
processing purchases and redemptions of fund shares as required (including dol-
lar cost averaging, cross-reinvestment, and automatic withdrawal services),
maintaining records, administering annuity payouts, furnishing accounting and
valuation services (including the calculation and monitoring of daily
subaccount values), reconciling and depositing cash receipts, providing con-
tract confirmations, providing toll-free inquiry services and furnishing tele-
phone fund transfer services. The risks we assume include: the risk that the
actual life-span of persons receiving annuity payouts under contract guarantees
will exceed the assumptions reflected in our guaranteed rates (these rates are
incorporated in the contract and cannot be changed); the risk that death bene-
fits paid under the EGMDB, will exceed the actual contract value; the risk that
more owners than expected will qualify for waivers of the contingent deferred
sales charge; and the risk that our costs in providing the services will exceed
our revenues from contract charges (which cannot be changed by us). The amount
of a charge may not necessarily correspond to the costs associated with provid-
ing the services or benefits indicated by the designation of the charge. For
example, the contingent deferred sales load collected may not fully cover all
of the sales and distribution expenses actually incurred by us.
DEDUCTIONS FROM THE VAA FOR AMERICAN LEGACY III
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 1.40% (1.25% for contracts without the EGMDB) of the daily net asset
value. The charge consists of a 0.10% administrative charge and a 1.30% (1.15%
for contracts without the EGMDB) mortality and expense risk charge.
CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge applies (except as described below) to sur-
renders and withdrawals of other purchase payments that have been invested for
the periods indicated as follows:
<TABLE>
<CAPTION>
Number of complete contract years
that a purchase payment has been
invested
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less than At least
2 years 2 3 4 5 6 7+
Contingent deferred
sales charge as a
percentage of the
surrendered or
withdrawn purchase
payments 6% 5 4 3 2 1 0
</TABLE>
A contingent deferred sales charge does not apply to:
1. A surrender or withdrawal of purchase payments that have been invested at
least seven full contract years.
2. The first four withdrawals of contract value during a contract year to the
extent that the sum of the percentages of the contract value withdrawn by
the withdrawals does not exceed 10% of contract value (for this purpose, the
percentages are based on the contract value at the time of the current with-
drawal; also, this 10% withdrawal exception does not apply to a surrender of
a contract);
3. Automatic withdrawals in total not in excess of 10% of the contract value
during a contract year, made by non-trustee contractowners who are at least
59 1/2;
4. Electing an annuity payment option available within the contract;
5. A surrender of a contract or withdrawal of contract value as a result of the
permanent and total disabil-
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<PAGE>
ity of the owner as defined in Section 22(e)(3) of the code, subsequent to
the effective date of the contract and before the 65th birthday of the owner;
6. When the surviving spouse assumes ownership of the contract as a result of
the death of the original owner (in such case, the contingent deferred sales
charge would be waived on the value of the contract as of the date which the
surviving spouse assumed the contract ownership); however, this does not ap-
ply if the spouses were joint owners;
7. A surrender of a contract as a result of 90 days of continuous confinement
of the contractowner in an accredited nursing home or equivalent health care
facility;
8. A surrender of a contract as a result of terminal illness of the
contractowner that results in a life expectancy of less than one year as de-
termined by a qualified professional medical practitioner;
9. A surrender of the contract as a result of the death of the contractowner.
However, the contingent deferred sales charge are not waived as a result of
the death of an annuitant who is not the contractowner; and
10. A surrender of a contract or withdrawal of contract value of a contract is-
sued to employees and registered representatives of any member of the sell-
ing group and their spouses and minor children, or to officers, directors,
trustees or bona-fide full-time employees of Lincoln National Corp. or The
Capital Group, Inc. or their affiliated or managed companies (based upon
the contractowner's status at the time the contract was purchased).
If a joint owner exists on a contract, both the owner and joint owner must meet
one of the exceptions for waiver of the contingent deferred sales charge.
The contingent deferred sales charge is calculated separately for each contract
year's purchase payments to which a charge applies. (FOR PURPOSES OF CALCULAT-
ING THIS CHARGE, WE ASSUME THAT PURCHASE PAYMENTS ARE WITHDRAWN ON A FIRST IN-
FIRST OUT BASIS, AND THAT ALL PURCHASE PAYMENTS ARE WITHDRAWN BEFORE ANY EARN-
INGS ARE WITHDRAWN.) The contingent deferred sales charges associated with sur-
render or withdrawal are paid to us to compensate us for the loss we experience
on contract distribution costs when contractowners surrender or withdraw before
distribution costs have been recovered.
DEDUCTIONS FOR PREMIUM TAXES
Any premium tax or other tax levied by any governmental entity as a result of
the existence of the contracts or the VAA will be deducted from the contract
value when incurred, or at another time of our choosing.
The applicable premium tax rates that states and other governmental entities
impose on the purchase of an annuity are subject to change by legislation, by
administrative interpretation or by judicial action. These premium taxes gener-
ally depend upon the law of your state of residence. The tax ranges from 0.5%
to 4.0%.
OTHER CHARGES AND DEDUCTIONS
There are deductions from and expenses paid out of the assets of the underlying
series that are more fully described in the Prospectus for the series. Among
these deductions and expenses are 12b-1 fees which reimburse Lincoln Life for
certain expenses incurred in connection with certain administrative and distri-
bution support services provided to the series.
ADDITIONAL INFORMATION
The administrative and contingent deferred sales charges described previously
may be reduced or eliminated for any particular contract. However, these
charges will be reduced only to the extent that we anticipate lower distribu-
tion and/or administrative expenses, or that we perform fewer sales or adminis-
trative services than those originally contemplated in establishing the level
of those charges. Lower distribution and administrative expenses may be the re-
sult of economies associated with (1) the use of mass enrollment procedures,
(2) the performance of administrative or sales functions by the employer, (3)
the use by an employer of automated techniques in submitting deposits or infor-
mation related to deposits on behalf of its employees or (4) any other circum-
stances which reduce distribution or administrative expenses. The exact amount
of administrative and contingent deferred sales charges applicable to a partic-
ular contract will be stated in that contract.
THE CONTRACTS
PURCHASE OF CONTRACTS
If you wish to purchase a contract, you must apply for it through a sales rep-
resentative authorized by us. The completed application is sent to us and we
decide whether to accept or reject it. If the application is accepted, a con-
tract is prepared and executed by our legally authorized officers. The contract
is then sent to you through your sales representative. See Distribution of the
contracts.
If a completed application and all other information necessary for processing a
purchase order are received, an initial purchase payment will be priced no
later than two business days after we receive the order. While attempting to
finish an incomplete application, we may hold the initial purchase payment for
no more than five business days. If the incomplete application cannot be com-
pleted within those five days, you will be informed of the reasons, and the
purchase payment will be returned immediately (unless you specifically autho-
rize us to keep it until the application is complete). Once the application is
complete, the initial purchase payment must be priced within two business days.
11
<PAGE>
WHO CAN INVEST
To apply for a contract, you must be of legal age in a state where the con-
tracts may be lawfully sold and also be eligible to participate in any of the
qualified or nonqualified plans for which the contracts are designed. The
contractowner cannot be older than age 85 (or older than age 80 in Pennsylva-
nia).
PURCHASE PAYMENTS
Purchase payments are payable to us at a frequency and in an amount selected by
you in the application. The minimum initial purchase payment is $1,500 for non-
qualified contracts and Section 403(b) transfers/rollovers; and $300 for quali-
fied contracts. The minimum annual amount for subsequent purchase payments is
$300 for nonqualified and qualified contracts. The minimum payment to the con-
tract at any one time must be at least $100 ($25 if transmitted electronical-
ly). Purchase payments in total may not exceed $1 million for an owner or
$500,000 for each joint owner. If you stop making purchase payments, the con-
tract will remain in force as a paid-up contract subject to our right to termi-
nate the contract in accordance with the terms set forth in your state's non-
forfeiture law for individual deferred annuities. Payments may be made or, if
stopped, resumed at any time until the annuity commencement date, the surrender
of the contract, maturity date or the death of the contractowner (or joint own-
er, if applicable), whichever comes first.
VALUATION DATE
Accumulation and annuity units will be valued once daily at the close of trad-
ing (currently 4:00 p.m., New York time) on each day the New York Stock Ex-
change is open (valuation date). On any date other than a valuation date, the
accumulation unit value and the annuity unit value will not change.
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments are placed into the VAA's subaccounts, each of which invests
in shares of the class of its corre-
sponding fund of the series, accord-
ing to your instructions.
The minimum amount of any purchase payment which can be put into any one
subaccount is $20 under the contract. Upon allocation to the appropriate
subaccount, purchase payments are converted into accumulation units. The number
of accumulation units credited is determined by dividing the amount allocated
to each subaccount by the value of an accumulation unit for that subaccount on
the valuation date on which the purchase payment is received at our home office
if received before 4:00 p.m., New York time. If the purchase payment is re-
ceived at or after 4:00 p.m., New York time, we will use the accumulation unit
value computed on the next valuation date. The number of accumulation units de-
termined in this way is not changed by any subsequent change in the value of an
accumulation unit. However, the dollar value of an accumulation unit will vary
depending not only upon how well the underlying fund's investments perform, but
also upon the expenses of the VAA and the underlying funds.
VALUATION OF ACCUMULATION UNITS
Accumulation units for each subaccount are valued separately. Initially, the
value of each accumulation unit was set at $1.00. Thereafter, the value of an
accumulation unit in any subaccount on any valuation date equals the value of
an accumulation unit in that subaccount as of the preceding valuation date mul-
tiplied by the net investment factor of that subaccount for the current valua-
tion period.
The net investment factor is an index used to measure the investment perfor-
mance of a subaccount from one valuation date to the next. The net investment
factor for any subaccount for any valuation date reflects the change in the net
asset value per share of the fund held in the subaccount from one valuation Pe-
riod to the next, adjusted for the daily deduction of the administrative and
mortality and expense risk charges from assets in the subaccount. If any ex-
dividend date occurs during the valuation period, the per share amount of any
dividend or capital gain distribution is taken into account. Also, if any taxes
need to be reserved, a per share charge or credit for any taxes reserved for,
which is determined by us to have resulted from the operations of the
subaccount, is taken into account.
Because a different daily charge is made for contracts with the EGMDB than for
those without, a different net investment factor is calculated for each of the
two types of contracts, resulting in different corresponding accumulation unit
values on any given day.
TRANSFERS BETWEEN SUBACCOUNTS ON OR BEFORE THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment from one subaccount to an-
other. A transfer involves the surrender of accumulation units in one
subaccount and the purchase of accumulation units in the other subaccount. A
transfer will be done using the respective accumulation unit values determined
at the end of the valuation date on which the transfer request is received.
Currently, there is no charge for a transfer. However, we reserve the right to
impose a charge in the future for transfers.
Transfers between subaccounts are restricted to six times every contract year.
We reserve the right to waive this six-time limit. This limit does not apply to
transfers made under a dollar cost averaging or cross-reinvestment program
elected on forms available from us. (The SAI contains more information about
these programs.) The minimum amount which may be transferred between
subaccounts is $300 (or the entire amount in the subaccount, if less than
$300). If the transfer from a subaccount would leave you with less than $300 in
the subaccount, we may transfer the total balance of the subaccount.
12
<PAGE>
A transfer may be made by writing to our home office or, if a Telephone Ex-
change Authorization form (available from us) is on file with us, by a toll-
free telephone call. Currently, there is no charge to you for a transfer. In
order to prevent unauthorized or fraudulent telephone transfers, we may require
the caller to provide certain identifying information before we will act upon
their instructions. We may also assign the contractowner a Personal Identifica-
tion Number (PIN) to serve as identification. We will not be liable for follow-
ing telephone instructions we reasonably believe are genuine. Telephone re-
quests may be recorded and written confirmation of all transfer requests will
be mailed to the contractowner on the next valuation date. Telephone transfers
will be processed on the valuation date that they are received when they are
received at our customer service center before 4 p.m. New York time.
When thinking about a transfer of contract value, you should consider the in-
herent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time.
TRANSFERS TO AND FROM THE
GENERAL ACCOUNT ON OR BEFORE THE
ANNUITY COMMENCEMENT DATE
You may transfer all or any part of the contract value from the subaccount(s)
to the fixed side of the contract. The minimum amount which can be transferred
to the fixed side is $300 or the total amount in the subaccount, if less than
$300. However, if a transfer from a subaccount would leave you with less than
$300 in the subaccount, we may transfer the total amount to the fixed side.
You may also transfer all or any part of the contract value from the fixed side
of your contract to the various subaccount(s) subject to the following restric-
tions: (1) the sum of the percentages of fixed value transferred is limited to
25% of the value of the fixed side in any 12 month period; (2) the minimum
amount which can be transferred is $300 or the amount in the fixed account; and
(3) a transfer cannot be made during the first 30 days after the issue date of
the contract.
These transfers cannot be elected more than six times every contract year. We
reserve the right to waive these restrictions. These restrictions do not apply
to transfers made under a dollar cost averaging or cross-reinvestment program
elected on forms available from us. Currently, there is no charge to you for a
transfer. However, we reserve the right to impose a charge in the future for
any transfers to and from the General Account.
TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment in one subaccount to an-
other subaccount or to the fixed side of the contract. Those transfers will be
limited to three times per contract year. Currently, there is no charge for
these transfers. However, we reserve the right to impose a charge. No transfers
are allowed from the fixed side of the contract to the subaccounts.
DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE
You may designate a beneficiary during your lifetime and change the beneficiary
by filing a written request with our home office. Each change of beneficiary
revokes any previous designation. We reserve the right to request that you send
us the contract for endorsement of a change of beneficiary.
If the contractowner dies before the annuity commencement date and the EGMDB is
in effect, the death benefit paid to your designated beneficiary will be the
greater of: (1) the contract value as of the day on which Lincoln Life approves
the payment of the claim; or (2) the highest contract value which the contract
attains on any policy anniversary date (including the inception date) on ages
up to, and including, the contractowner's age 75. The highest contract value is
increased by purchase payments and is decreased by partial withdrawals, partial
annuitizations, and any premium taxes made, effected or incurred subsequent to
the anniversary date on which the highest contract value is obtained. If the
EGMDB is not in effect, the death benefit will be equal to the greater of con-
tract value or the GMDB. The GMDB is equal to the sum of all purchase payments
minus any withdrawals, partial annuitizations or premium taxes incurred.
If there are joint owners, upon the death of the first owner, the surviving
owner may continue the contract (subject to federal tax rules) or surrender the
contract. Any applicable contingent deferred sales charge will not be waived on
a surrender. The provisions above regarding death benefit on the death of the
contractowner will apply upon the subsequent death of the surviving joint own-
er.
The value of the death benefit will be determined as of the date on which the
death claim is approved for payment. This payment will occur upon receipt of:
(1) proof, satisfactory to us, of the death of the owner; (2) written authori-
zation for payment; and (3) our receipt of all required claim forms, fully com-
pleted.
When applying for a contract, an applicant can request a contract without the
EGMDB. The EGMDB is not available under contracts used for qualified plans
(other than IRAs) or contracts issued to a contractowner who is age 75 or older
at the time of issuance.
After a contract is issued, the contractowner may discontinue the EGMDB at any
time by sending a written request to Lincoln Life. The benefit will be discon-
tinued effective as of the valuation date we receive the request, and we will
cease deducting the charge for the benefit as of that date. See Charges and
other deductions. If you discontinue the benefit, it cannot be reinstated.
If the death benefit becomes payable, the beneficiary may elect to receive pay-
ment of the death benefit either in
13
<PAGE>
the form of a lump sum settlement or an annuity payout. Federal tax law re-
quires that an annuity election be made no later than 60 days after we receive
satisfactory notice of death as discussed previously.
If a lump sum settlement is requested, the proceeds will be mailed within seven
days of receipt of satisfactory claim documentation as discussed previously,
subject to the laws and regulations governing payment of death benefits. If an
election has not been made by the end of the 60-day period, a lump sum settle-
ment will be made to the beneficiary at that time. This payment may be post-
poned as permitted by the 1940 Act.
Payment will be made in accordance with applicable laws and regulations gov-
erning payment of death benefits.
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of a beneficiary:
1. If any beneficiary dies before the contractowner, that beneficiary's inter-
est will go to any other beneficiaries named, according to their respective
interests (There are no restrictions on the beneficiary's use of the pro-
ceeds.); and/or
2. If no beneficiary survives the contractowner, the proceeds will be paid to
the contractowner's estate.
The death benefit payable to the beneficiary must be distributed within five
years of the contractowner's date of death unless the beneficiary begins re-
ceiving within one year of the contractowner's death substantially equal in-
stallments over a period not extending beyond the beneficiary's life expectan-
cy. If a lump sum settlement is elected, the proceeds will be mailed within
seven days of approval by us of the claim, subject to the laws and regulations
governing payment of death benefits. This payment may be postponed as permitted
by the Investment Company Act of 1940.
If the beneficiary is the spouse of the contractowner, then the spouse may
elect to continue the contract as owner. If the contractowner is a corporation
or other non-individual (non-natural person), the death of the annuitant will
be treated as death of the contractowner and the above distribution rules ap-
ply.
If there are joint owners, upon the death of the first joint owner, the surviv-
ing joint owner will receive the death benefit. The surviving joint owner will
be treated as the primary, designated beneficiary. Any other beneficiary desig-
nation on record at the time of death will be treated as a contingent benefi-
ciary.
If the surviving joint owner, as spouse of the decreased joint owner, continues
the contract as the sole owner in lieu of receiving the death benefit, then the
designated beneficiary(s) will receive the death benefit upon the death of the
surviving spouse.
JOINT OWNERSHIP
If a joint owner is named in the application, the joint owners shall be treated
as having equal undivided interests in the contract. Either owner, indepen-
dently of the other, may exercise any ownership rights in this contract. Only
spouses may be joint owners.
DEATH OF ANNUITANT
If the annuitant is also the contractowner or a joint owner, then the death
benefit provided will be the death benefit subject to the provisions of this
contract regarding death of the contractowner. If the surviving spouse assumes
the contract, the contingent annuitant becomes the annuitant. If no contingent
annuitant is named, the surviving spouse becomes the annuitant.
If an annuitant who is not the contractowner or joint owner dies, then the con-
tingent annuitant, if any, becomes the annuitant. If no contingent annuitant is
named, the contractowner (or joint owner if younger) becomes the annuitant.
SURRENDERS AND WITHDRAWALS
Before the annuity commencement date, we will allow the surrender of the con-
tract or a withdrawal of the contract value upon your written request, subject
to the rules discussed below. Surrender or withdrawal rights after the annuity
commencement date depend upon the annuity option you select.
Special restrictions on surrenders/withdrawals apply if your contract is pur-
chased as part of a retirement plan of a public school system or 501(c)(3) or-
ganization under Section 403(b) of the code. Beginning January 1, 1989, in or-
der for a contract to retain its tax-qualified status, Section 403(b) prohibits
a withdrawal from a 403(b) contract of post-1988 contributions (and earnings on
those contributions) pursuant to a salary reduction agreement. However, this
restriction does not apply if the annuitant (a) attains age 59 1/2, (b) sepa-
rates from service, (c) dies, (d) becomes totally and permanently disabled
and/or (e) experiences financial hardship (in which event the income attribut-
able to those contributions may not be withdrawn).
Pre-1989 contributions and earnings through December 31, 1988, are not subject
to the previously stated restriction. Funds transferred to the contract from a
403(b)(7) custodial account will be subject to the restrictions.
The contract value available upon surrender/withdrawal is the cash surrender
value at the end of the valuation period during which the written request for
surrender/withdrawal is received at the home office. Unless a request for with-
drawal specifies otherwise, withdrawals will be made from all subaccounts
within the VAA and from the General Account in the same proportion that the
amount of withdrawal bears to the total contract value. The minimum amount
which can be withdrawn is $300, and the remaining contract value must be at
least $300. Unless prohibited, surrender/withdrawal payments will be mailed
within seven days after we receive a valid written request at the home office.
The payment may be postponed as permitted by the 1940 Act.
There are charges associated with surrender of a contract or withdrawal of con-
tract value. You may specify whether
14
<PAGE>
these charges are deducted from the amount you request to be withdrawn or from
the remaining contract value. See Charges and other deductions.
The tax consequences of a surrender/withdrawal are discussed later in this
booklet. See Federal tax status.
Participants in the Texas Optional Retirement Program should refer to the Re-
strictions under the Texas Optional Retirement Program, later in this Prospec-
tus booklet.
We reserve the right to terminate the contract, if your contract fails to meet
minimum contract value or payment frequencies as set forth in your state's non-
forfeiture law for individual deferred annuities.
REINVESTMENT PRIVILEGE
You may elect to make a reinvestment purchase with any part of the proceeds of
a surrender/withdrawal, and we will recredit the surrender/withdrawal charges
previously deducted. This election must be made within 30 days of the date of
the surrender/withdrawal, and the repurchase must be of a contract covered by
this Prospectus. A representation must be made that the proceeds being used to
make the purchase have retained their tax-favored status under an arrangement
for which the contracts offered by this Prospectus are designed. The number of
accumulation units which will be credited when the proceeds are reinvested will
be based on the value of the accumulation unit(s) on the next valuation date.
This computation will occur following receipt of the proceeds and request for
reinvestment at the home office. You may utilize the reinvestment privilege
only once. For tax reporting purposes, we will treat a surrender/withdrawal and
a subsequent reinvestment purchase as separate transactions. You should consult
a tax advisor before you request a surrender/withdrawal or subsequent reinvest-
ment purchase.
AMENDMENT OF CONTRACT
We reserve the right to amend the contract to meet the requirements of the 1940
Act or other applicable federal or state laws or regulations. You will be noti-
fied in writing of any changes, modifications or waivers.
COMMISSIONS
The commissions paid to dealers are a maximum of 4.75% of each purchase pay-
ment; plus an annual continuing commission of up to 0.40% of contract value. At
times, additional sales incentives (up to 0.25% of purchase payments and an an-
nual continuing 0.10% of contract value) may be provided to dealers maintaining
certain sales volume levels. Upon annuitization, an annual continuing commis-
sion of up to 0.80% (or up to 0.90% for dealers maintaining certain sales vol-
ume levels) of statutory reserves can be paid to dealers. These commissions are
not deducted from purchase payments or contract value; they are paid by us.
OWNERSHIP
As contractowner, you have all rights under the contract. According to Indiana
law, the assets of the VAA are held for the exclusive benefit of all
contractowners and their designated beneficiaries. The assets of the VAA are
not chargeable with liabilities arising from any other business that we may
conduct. Qualified contracts may not be assigned or transferred except as per-
mitted by the Employee Retirement Income Security Act (ERISA) of 1974 and upon
written notification to us. We assume no responsibility for the validity or ef-
fect of any assignment. Consult your tax advisor about the tax consequences of
an assignment.
CONTRACTOWNER QUESTIONS
The obligations to purchasers under the contracts are those of Lincoln Life.
Questions about your contract should be directed to us at 1-800-942-5500.
ANNUITY PAYOUTS
When you apply for a contract, you may select any annuity commencement date
permitted by law. (PLEASE NOTE THE FOLLOWING EXCEPTION: Contracts issued under
qualified employee pension and profit-sharing trusts [described in Section
401(a) and tax exempt under Section 501(a) of the code] and qualified annuity
plans [described in Section 403(a) of the code], including H.R.10 trusts and
plans covering self-employed individuals and their employees, provide for annu-
ity payouts to start at the date and under the option specified in the plan.)
The contract provides optional forms of payouts of annuities (annuity options),
each of which is payable on a variable basis, a fixed basis or a combination of
both as you specify. The contract provides that all or part of the contract
value may be used to purchase an annuity.
You may elect annuity payouts in monthly, quarterly, semiannual or annual in-
stallments. If the payouts from any subaccount would be or become less than
$50, we have the right to reduce their frequency until the payouts are at least
$50 each. Following are explanations of the annuity options available.
ANNUITY OPTIONS
LIFE ANNUITY. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant. This
option offers the highest periodic payout since there is no guarantee of a min-
imum number of payouts or provision for a death benefit for beneficiaries. HOW-
EVER, THERE IS THE RISK UNDER THIS OPTION THAT THE RECIPIENT WOULD RECEIVE NO
PAYOUTS IF THE ANNUITANT DIES BEFORE THE DATE SET FOR THE FIRST PAYOUT; ONLY
ONE PAYOUT IF DEATH OCCURS BEFORE THE SECOND SCHEDULED PAYOUT, AND SO ON.
LIFE INCOME WITH PAYOUTS GUARANTEED FOR DESIGNATED PERIOD. This option guaran-
tees periodic payouts
15
<PAGE>
during a designated period, usually 10 or 20 years, and then continues through-
out the lifetime of the annuitant. The designated period is selected by the
contractowner.
JOINT LIFE ANNUITY. This option offers a periodic payout during the joint life-
time of the annuitant and a designated joint annuitant. The payouts continue
during the lifetime of the survivor.
JOINT LIFE ANNUITY WITH GUARANTEED PERIOD. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues dur-
ing the joint lifetime of the annuitant and a designated joint annuitant. The
payouts continue during the lifetime of the survivor. The designated period is
selected by the contractowner.
JOINT-AND-TWO-THIRDS SURVIVOR ANNUITY. This option provides a periodic payout
during the joint lifetime of the annuitant and a designated joint annuitant.
When one of the joint annuitants dies, the survivor receives two thirds of the
periodic payout made when both were alive.
UNIT REFUND LIFE ANNUITY. This option offers a periodic payout during the life-
time of the annuitant with the guarantee that upon death a payout will be made
of the value of the number of annuity units (see Variable annuity payouts)
equal to the excess, if any, of: (a) the total amount applied under this option
divided by the annuity unit value for the date payouts begin, divided by (b)
the annuity units represented by each payout to the annuitant multiplied by the
number of payouts paid before death. The value of the number of annuity units
is computed on the date the death claim is approved for payment by the home of-
fice.
GENERAL INFORMATION
None of the options listed above currently provide withdrawal features, permit-
ting the contractowner to withdraw commuted values as a lump sum payment. Other
options, with or without withdrawal features, may be made available by us. Op-
tions are only available to the extent they are consistent with the require-
ments of the contract as well as Sections 72(s) and 401(a)(9) of the code, if
applicable. The mortality and expense risk charge and the charge for adminis-
trative services will be assessed on all variable annuity payouts, including
options that may be offered that do not have a life contingency and therefore
no mortality risk.
The annuity commencement date is usually on or before the contractowner's 85th
birthday. You may change the annuity commencement date, change the annuity op-
tion or change the allocation of the investment among subaccounts up to 30 days
before the scheduled annuity commencement date, upon written notice to the home
office. You must give us at least 30 days notice before the date on which you
want payouts to begin. If proceeds become available to a beneficiary in a lump
sum, the beneficiary may choose any annuity payout option.
Unless you select another option, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, variable
or combination fixed and variable basis, in proportion to the account alloca-
tions at the time of annuitization) except when a joint life payout is required
by law. Under any option providing for guaranteed period payouts, the number of
payouts which remain unpaid at the date of the annuitant's death (or surviving
annuitant's death in case of joint life annuity) will be paid to your benefi-
ciary as payouts become due.
VARIABLE ANNUITY PAYOUTS
Variable annuity payouts will be determined using:
1. The contract value on the annuity commencement date;
2. The annuity tables contained in the contract;
3. The annuity option selected; and
4. The investment performance of the fund(s) selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
2. Credit the contract with a fixed number of annuity units equal to the first
periodic payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each period thereafter.
We assume an investment return of 4% per year, as applied to the applicable
mortality table. The amount of each payout after the initial payout will depend
upon how the underlying fund(s) perform, relative to the 4% assumed rate. There
is a more complete explanation of this calculation in the SAI.
FEDERAL TAX STATUS
This section is a discussion of the Federal income tax rules applicable to the
contracts as of the date of this Prospectus. More information is provided in
the SAI. THESE DISCUSSIONS AND THOSE IN THE SAI ARE NOT INTENDED AS TAX ADVICE.
This section does not discuss the Federal tax consequences resulting from every
possible situation. No attempt has been made to consider any applicable state,
local, or foreign tax law, other than the imposition of any state premium taxes
(See Deductions for premium taxes). If you are concerned about the tax implica-
tions with respect to the contracts, you should consult a tax advisor. The fol-
lowing discussion is based upon our understanding of the present Federal income
tax laws as they are currently interpreted by the IRS. No representation is
made about the likelihood of continuation of the present Federal income tax
laws or their current interpretations by the IRS.
16
<PAGE>
TAXATION OF NONQUALIFIED CONTRACTS
You are generally not taxed on increases in the value of your contract until a
distribution occurs. This distribution can be in the form of a lump sum payout
received by requesting all or part of the cash surrender value (i.e.
surrenders/withdrawals) or as annuity payouts. For this purpose, the assignment
or pledge of, or the agreement to assign or pledge, any portion of the value of
a contract will be treated as a distribution. A transfer of ownership of a con-
tract, or designation of an annuitant (or other beneficiary) who is not also
the contractowner, may also result in tax consequences. The taxable portion of
a distribution (in the form of a lump sum payout or an annuity) is taxed as or-
dinary income. In general, a contractowner who is not a natural person (for ex-
ample, a corporation), subject to limited exceptions, will be taxed on any in-
crease in the contract's cash value over the investment in the contract during
the taxable year, even if no distribution occurs. [See Section 72(u) of the
code.] The next discussion applies to contracts owned by natural persons.
In the case of a surrender under the contract or withdrawal of contract value,
generally amounts received are first treated as taxable income to the extent
that the cash value of the contract immediately before the surrender exceeds
the investment in the contract at that time. Any additional amount withdrawn is
not taxable. The investment in the contract generally equals the portion, if
any, of any purchase payment made by or on behalf of an individual under a con-
tract which is not excluded from the individual's gross income.
Even though the tax consequences may vary depending on the form of annuity pay-
out selected under the contract, the contractowner of an annuity payout gener-
ally is taxed on the portion of the annuity payout that exceeds the investment
in the contract. For variable annuity payouts, the taxable portion is deter-
mined by a formula that establishes a specific dollar amount of each payout
that is not taxed. The dollar amount is determined by dividing the investment
in the contract by the total number of expected periodic payouts. For fixed an-
nuity payouts, there generally is no tax on the portion of each payout that
represents the same ratio that the investment in the contract bears to the to-
tal expected value of payouts for the term of the annuity; the remainder of
each payout is taxable. For individuals, the entire distribution (whether fixed
or variable) will be fully taxable once the recipient is deemed to have recov-
ered the dollar amount of the investment in the contract.
There may be imposed a penalty tax on distributions equal to 10% of the amount
treated as taxable income. The penalty tax is not imposed in certain circum-
stances, which generally are distributions:
1. Received on or after the contractowner attains age 59 1/2;
2. Made as a result of death or disability of the contractowner;
3. Received in substantially equal periodic payments such as a life annuity
(subject to special recapture rules if the series of payouts is subsequently
modified);
4. Under a qualified funding asset in a structured settlement;
5. Under an immediate annuity contract as defined in the code; and/or
6. Under a contract purchased in connection with the termination of certain re-
tirement plans.
TAXATION OF QUALIFIED CONTRACTS
The contracts may be purchased in connection with the following types of tax-
favored retirement plans:
1. Contracts purchased for employees of public school systems and certain tax-
exempt organizations, qualified under Section 403(b) of the code (normally
for transfers or rollovers only);
2. Pension and profit-sharing plans of self-employed individuals (H.R. 10 or
Keogh plans) or corporations, qualified under Section 401(a) or 403(a) of
the code;
3. IRAs, qualified under Section 408 of the Code;
4. Deferred compensation plans of state or local governments, qualified under
Section 457 of the code;
5. SEPs, qualified under Section 408(k) of the code; and/or
6. Simple retirement accounts, qualified under Section 401(k)(11) of the code,
commonly referred to as SIMPLE or SIMPLE 401(k) plans and SIMPLE IRA plans.
The tax rules applicable to these plans, including restrictions on contribu-
tions and benefits, taxation of distributions and any tax penalties, vary ac-
cording to the type of plan and its terms and conditions. Participants under
such plans, as well as contractowners, annuitants and beneficiaries, should 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 contracts. Purchasers of contracts for use with any
qualified plan, as well as plan participants, should consult counsel and other
advisors as to the suitability of the contracts to their specific needs, and as
to applicable code limitations and tax consequences.
MULTIPLE CONTRACTS
All contracts entered into after October 21, 1988, and issued by the same in-
surance company (or its affiliates) to the same contractowner during any calen-
dar year will be treated as a single contract for tax purposes.
INVESTOR CONTROL
The Treasury Department has indicated that guidelines may be issued under which
a variable annuity contract will not be treated as an annuity contract for tax
purposes if the contractowner has excessive control over the
17
<PAGE>
investments underlying the contract. They may consider the number of investment
options or the number of transfer opportunities available between options as
relevant when determining excessive control. The issuance of those guidelines
may require us to impose limitations on your right to control the investment.
We do not know whether any such guidelines would have a retroactive effect.
Section 817(h) of the code and the related regulation that the Treasury Depart-
ment has adopted require that assets underlying a variable annuity contract be
adequately diversified. The regulations provide that a variable annuity con-
tract which does not satisfy the diversification standards will not be treated
as an annuity contract, unless the failure to satisfy the regulations was inad-
vertent, the failure is corrected, and the contractowner or we pay an amount to
the Internal Revenue Service. The amount will be based on the tax that would
have been paid by the contractowner if the income, for the period the contract
was not diversified, had been received by the contractowner. If the failure to
diversify is not corrected in this manner, the contractowner of an annuity con-
tract will be deemed the owner of the underlying securities and will be taxed
on the earnings of his or her account. We believe, under our interpretation of
the code and regulations thereunder, that the investments underlying this con-
tract meet these diversification standards.
WITHHOLDING
Generally, pension and annuity distributions are subject to withholding for the
recipient's Federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however, gen-
erally are provided the opportunity to elect not to have tax withheld from dis-
tributions. Under the Unemployment Compensation Amendments of 1992 (UCA), 20%
income tax withholding may apply to eligible rollover distributions. All tax-
able distributions from qualified plans (except IRAs) and Section 403(b) annui-
ties are eligible rollover distributions, except (1) annuities paid out over
life or life expectancy, (2) installments paid for a period spanning 10 years
or more, and (3) required minimum distributions. The UCA imposes a mandatory
20% income tax withholding on any eligible rollover distribution that the
contractowner does not elect to have paid in a direct rollover to another qual-
ified plan, Section 403(b) annuity or individual retirement account. Distribu-
tions from Section 457 plans are subject to the general wage withholding rules.
VOTING RIGHTS
As required by law, we will vote the series shares held in the VAA at meetings
of the shareholders of the series. The voting will be done according to the in-
structions of contractowners who have interests in any subaccounts which invest
in classes of funds of the series. If the 1940 Act or any regulation under it
should be amended or if present interpretations should change, and if as a re-
sult we determine that we are permitted to vote the series shares in our own
right, we may elect to do so.
The number of votes which you have the right to cast will be determined by ap-
plying your percentage interest in a subaccount to the total number of votes
attributable to the subaccount. In determining the number of votes, fractional
shares will be recognized.
Series shares of a class held in a subaccount for which no timely instructions
are received will be voted by us in proportion to the voting instructions which
are received for all contracts participating in that subaccount. Voting in-
structions to abstain on any item to be voted on will be applied on a pro-rata
basis to reduce the number of votes eligible to be cast.
Whenever a shareholders meeting is called, each person having a voting interest
in a subaccount will receive proxy voting material, reports and other materials
relating to the series. Since the series engages in shared funding, other per-
sons or entities besides Lincoln Life may vote series shares. See Sale of fund
shares by the series.
DISTRIBUTION OF THE CONTRACTS
American Funds Distributors, Inc. (AFD), 333 South Hope Street, Los Angeles, CA
90071, is the distributor and principal underwriter of the contracts. They will
be sold by properly licensed registered representatives of independent broker-
dealers which in turn have selling agreements with AFD and have been licensed
by state insurance departments to represent us. AFD is registered with the SEC
under the Securities Exchange Act of 1934 as a broker-dealer and is a member of
the National Association of Securities Dealers (NASD). Lincoln Life will offer
contracts in all states where it is licensed to do business.
RETURN PRIVILEGE
Within the free-look period after you receive the contract, you may cancel it
for any reason by delivering or mailing it postage prepaid, to the home office
at P.O. Box 2348, 1300 South Clinton Street, Fort Wayne, Indiana, 46801. A con-
tract canceled under this provision will be void. With respect to the fixed
portion of a contract, we will return purchase payments. With respect to the
VAA, except as explained in the following paragraph, we will return the con-
tract value as of the date of receipt of the cancellation, plus any premium
taxes which had been deducted. No contingent deferred sales charge will be as-
sessed. A PURCHASER WHO PARTICIPATES IN THE VAA IS SUBJECT TO THE RISK OF A
MARKET LOSS DURING THE FREE-LOOK PERIOD.
For contracts written in those states whose laws require that we assume this
market risk during the free-look period, a contract may be canceled, subject to
the conditions explained before, except that we will return only the purchase
payment(s).
18
<PAGE>
STATE REGULATION
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance.
Our books and accounts are subject to review and examination by the Indiana In-
surance Department at all times. A full examination of our operations is con-
ducted by that Department at least every five years.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits partici-
pants in the Texas Optional Retirement Program (ORP) to redeem their interest
in a variable annuity contract issued under the ORP only upon:
1. Termination of employment in all institutions of higher education as defined
in Texas law;
2. Retirement; or
3. Death.
Accordingly, a participant in the ORP will be required to obtain a certificate
of termination from their employer before accounts can be redeemed.
RECORDS AND REPORTS
As presently required by the 1940 Act and applicable regulations, we are re-
sponsible for maintaining all records and accounts relating to the VAA. We have
entered into an agreement with the Delaware Management Company, 2005 Market
Street, Philadelphia, PA 19203, to provide accounting services to the VAA. We
will mail to you, at your last known address of record at the home office, at
least semiannually after the first contract year, reports containing informa-
tion required by that Act or any other applicable law or regulation.
OTHER INFORMATION
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered here. This Prospectus does
not contain all the information in the Registration Statement, its amendments
and exhibits. Please refer to the Registration Statement for further informa-
tion about the VAA, Lincoln Life and the contracts offered. Statements in this
Prospectus about the content of contracts and other legal instruments are sum-
maries. For the complete text of those contracts and instruments, please refer
to those documents as filed with the SEC.
Lincoln National Variable Annuity Account E and Lincoln Life Flexible Premium
Variable Life Accounts F, G and J (all registered as investment companies under
the 1940 Act) and Lincoln National Flexible Premium Group Variable Annuity Ac-
counts 50, 51 and 52 are all segregated investment accounts of Lincoln National
Life Insurance Co. (Lincoln Life) which also invest in the series. The series
also offers shares of the funds to other segregated investment accounts.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS FOR VARIABLE
ANNUITY ACCOUNT H AMERICAN LEGACY III
<TABLE>
<CAPTION>
Item
- -----------------------------------------
<S> <C>
General information and history of
Lincoln Life
- -----------------------------------------
Special terms
- -----------------------------------------
Services
- -----------------------------------------
Principal underwriter
- -----------------------------------------
Purchase of securities being offered
</TABLE>
<TABLE>
<CAPTION>
Item
----------------------------------
<S> <C>
Calculation of investment results
----------------------------------
Annuity payouts
----------------------------------
Federal tax status
----------------------------------
Automatic increase in the guaranteed
minimum death benefit
----------------------------------
Advertising and sales literature
----------------------------------
Financial statements
</TABLE>
For a free copy of the SAI please see page one of this booklet.
19
<PAGE>
THE AMERICAN LEGACY III
LINCOLN NATIONALVARIABLE ANNUITY ACCOUNT H (REGISTRANT)
THE LINCOLN NATIONALLIFE INSURANCE COMPANY (DEPOSITOR)
STATEMENT OF ADDITIONAL INFORMATION (SAI)
This Statement of Additional Information should be read in conjunction with the
American Legacy III Prospectus of Lincoln National Variable Annuity Account H
dated April 30, 1997.
You may obtain a copy of the American Legacy III Prospectus on request and
without charge.
Please write American Legacy Customer Service, The Lincoln National Life Insur-
ance Company,
P.O. Box 2348, Fort Wayne, Indiana 46801 or call 1-800-942-5500.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
- ------------------------------------------
<S> <C>
GENERAL INFORMATION AND HISTORY
OF LINCOLN LIFE B-2
- ------------------------------------------
SPECIAL TERMS B-2
- ------------------------------------------
SERVICES B-2
- ------------------------------------------
PRINCIPAL UNDERWRITER B-2
- ------------------------------------------
PURCHASE OF SECURITIES BEING OFFERED B-2
- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Item Page
<S> <C>
CALCULATION OF INVESTMENT RESULTS B- 2
ANNUITY PAYOUTS B- 6
FEDERAL TAX STATUS B- 6
ADVERTISING AND SALES LITERATURE B- 9
FINANCIAL STATEMENTS B-11
</TABLE>
THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is April 30, 1997.
<PAGE>
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 in-
surance of life and health insurance contracts and annuities, and is also a
professional reinsurer. Lincoln Life is wholly owned by Lincoln National Cor-
poration (LNC), a publicly held insurance and financial services holding com-
pany 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 cur-
rently 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 Ex-
change may also be closed on the business day occurring just before or just
after the holiday.
SERVICES
INDEPENDENT AUDITORS
The financial statements of the variable annuity account (VAA) and the finan-
cial statements and schedules of Lincoln Life appearing in this SAI and Regis-
tration Statement have been audited by Ernst & Young LLP, independent audi-
tors, as set forth in their reports also appearing elsewhere in this document
and in the Registration Statement. The financial statements and schedules au-
dited by Ernst & Young LLP have been included in this document in reliance on
their report given on their authority as experts in accounting and auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life or by third parties re-
sponsible to Lincoln Life. We have entered into an agreement with the Delaware
Management Company, 2005 Market Street, Philadelphia, PA 19203, to provide ac-
counting services to the VAA. No separate charge against the assets of the VAA
is made by Lincoln Life for this service.
PRINCIPAL UNDERWRITER
Lincoln Life has contracted with American Funds Distributors, Inc. (AFD), 333
South Hope Street, Los Angeles, California 90071, a licensed broker-dealer, to
distribute the contracts through certain legally authorized sales persons and
organizations (brokers). AFD and its brokers are compensated under a standard
compensation schedule.
PURCHASE OF SECURITIES BEING OFFERED
The 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 con-
tract value will be waived for officers, directors or bona fide full time em-
ployees of LNC, The Capital Group, Inc., their affiliated or managed compa-
nies, and certain other persons. See Contingent deferred sales charges in the
Prospectus.
Both before and after the annuity commencement date, there are exchange privi-
leges between subaccounts, and from the VAA to the General Account subject to
restrictions set out in the Prospectus. See The contracts, in the Prospectus.
No exchanges are permitted between the VAA and other separate accounts.
The offering of the contracts is continuous.
CALCULATION OF INVESTMENT RESULTS
(A) AVERAGE ANNUAL TOTAL RETURN:
The examples below show, for the various subaccounts of the VAA, an average
annual total return as of the stated periods, based upon a hypothetical ini-
tial purchase payment of $1,000, calculated according to the formula provided
after the examples. The average annual total return has been calculated to
show the average annual total return for a hypothetical contract with the en-
hanced guaranteed minimum death benefit (EGMDB) and without EGMDB. Although
the subaccounts did not commence activity until 1997, these figures are calcu-
lated as if the subaccounts had commenced activity at the same time as the un-
derlying funds.
B-2
<PAGE>
Further, since the class of shares of the funds in which the subaccounts invest
was not created until after December 31, 1996, the figures below are based on
the performance of the class of shares of the funds issued since the funds com-
menced operations in 1989, as adjusted to reflect the fees and expenses charge-
able against assets attributable to shares of Class 2.
AVERAGE ANNUAL TOTAL RETURN
Period Ending December 31, 1996
<TABLE>
<CAPTION>
10-year
1-year period 5-year period period
With Without With Without With Without
EGMDB EGMDB EGMDB EGMDB EGMDB EGMDB
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Subaccount 5.52% 5.69% 12.24% 12.41% 13.14% 13.31%
(as if commenced activity 2/8/84)
International Subaccount 9.62 9.79 10.34 10.50 8.36 8.53
(as if commenced activity 5/1/90)
Growth-Income Subaccount 10.79 10.97 12.21 12.38 11.20 11.37
(as if commenced activity 2/8/84)
Asset Allocation Subaccount 7.90 8.07 10.26 10.43 9.52 9.69
(as if commenced activity 8/1/89)
High-Yield Bond Subaccount 5.36 5.53 8.92 9.09 9.58 9.74
(as if commenced activity 2/8/84)
Bond Subaccount (1.89) (1.73) N/A N/A N/A N/A
(as if commenced activity 1/2/96)
U.S. Gov't./AAA Subaccount (4.59) (4.44) 4.28 4.44 5.50 5.66
(as if commenced activity 12/1/85)
Cash Management Subaccount (2.64) (2.48) 1.99 2.15 3.82 3.97
(as if commenced activity 2/8/84)
</TABLE>
The lifetime of each subaccount is less than the complete period indicated.
See the date the subaccount commenced activity under its name.
There is a Global Growth subaccount but it is not in the chart because it did
not begin activity until 1997.
The length of the periods and the last day of each period used in the above ta-
ble 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 an-
nual 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--
P(1 + T)/n/ = 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 hypothet-
ical $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.
B-3
<PAGE>
(B) NON-STANDARDIZED INVESTMENT RESULTS:
The VAA may illustrate its results over various periods and compare its re-
sults to indices and other variable annuities in sales materials including ad-
vertisements, brochures and reports. Such results may be computed on a cumula-
tive and/or annualized basis.
Cumulative quotations are arrived at by calculating the change in the Accumu-
lation Unit Value between the first and last day of the base period being mea-
sured, 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.
NON-STANDARDIZED INVESTMENT RESULTS
SUBACCOUNTS OF ACCOUNT H*
$10,000 INVESTED IN
THIS FUND THROUGH
AMERICAN LEGACY III
THIS MANY YEARS AGO...
...WOULD HAVE GROWN TO THIS AMOUNT ON DECEMBER 31, 1996**
<TABLE>
<CAPTION>
With EGMDB
-------------------------------------------------------------------
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 12/31/95-12/31/96 $11,152 11.52% $11,680 16.80% $11,136 11.36% $10,337 3.37%
2 12/31/94-12/31/96 14,624 20.93 15,284 23.63 13,340 15.50 10,733 3.60
3 12/31/93-12/31/96 14,456 13.07 15,344 15.34 12,264 7.04 10,966 3.12
4 12/31/92-12/31/96 16,543 13.41 16,955 14.11 14,049 8.87 11,077 2.59
5 12/31/91-12/31/96 18,028 12.51 17,996 12.47 15,542 9.22 11,243 2.37
Lifetime of fund 02/08/84-12/31/96 52,461 13.72 50,594 13.40 39,403 11.22 17,155 4.27%
<CAPTION>
Without EGMDB
-------------------------------------------------------------------
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 12/31/95-12/31/96 $11,169 11.69% $11,697 16.97% $11,153 11.53% $10,352 3.52%
2 12/31/94-12/31/96 14,668 21.11 15,329 23.81 13,382 15.68 10,764 3.75
3 12/31/93-12/31/96 14,521 13.24 15,416 15.52 12,319 7.20 11,017 3.28
4 12/31/92-12/31/96 16,642 13.58 17,056 14.28 14,131 9.03 11,142 2.74
5 12/31/91-12/31/96 18,165 12.68 18,133 12.64 15,656 9.38 11,331 2.53
Lifetime of fund 02/08/84-12/31/96 53,486 13.89 51,583 13.57 40,173 11.39 17,491 4.43%
</TABLE>
*Although the subaccounts for the contracts did not commence activity until
1997, these figures are calculated as if the subaccounts had commenced
activity at the same time as the corresponding underlying funds.
**For purposes of determining these investment results, American Legacy III's
1.40% annual asset charge and administrative fee for those contracts with
EGMDB and 1.25% for those contracts without EGMDB have been taken into
account. However, these examples do not assume redemption at the end of the
period.
There is also a Global Growth subaccount but it is not in the chart because it
did not begin activity until 1997.
B-4
<PAGE>
<TABLE>
<CAPTION>
With EGMDB Without EGMDB
------------------- -------------------
U.S. Govt/AAA U.S. Govt/AAA
- -------------------------------------------------------------------------------
Number Compound Compound
of Growth Growth
Years Periods Amount Rate Amount Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 12/31/95-12/31/96 $10,142 1.42% $10,157 1.57%
2 12/31/94-12/31/96 11,513 7.30 11,548 7.46
3 12/31/93-12/31/96 10,832 2.70 10,880 2.85
4 12/31/92-12/31/96 11,848 4.33 11,916 4.48
5 12/31/91-12/31/96 12,540 4.63 12,636 4.79
Lifetime of fund 12/01/85-12/31/96 20,091 6.50 20,428 6.66
<CAPTION>
Asset Allocation Asset Allocation
------------------- -------------------
Number Compound Compound
of Growth Growth
Years Periods Amount Rate Amount Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 12/31/95-12/31/96 $11,390 13.90% $11,407 14.07%
2 12/31/94-12/31/96 14,520 20.50 14,564 20.68
3 12/31/93-12/31/96 14,242 12.51 14,307 12.68
4 12/31/92-12/31/96 15,467 11.52 15,562 11.69
5 12/31/91-12/31/96 16,512 10.55 16,632 10.71
Lifetime of fund 08/01/89-12/31/96 19,666 9.55 19,886 9.71
<CAPTION>
International International
------------------- -------------------
Number Compound Compound
of Growth Growth
Years Periods Amount Rate Amount Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 12/31/95-12/31/96 $11,562 15.62% $11,580 15.80%
2 12/31/94-12/31/96 12,817 13.21 12,855 13.38
3 12/31/93-12/31/96 12,851 8.72 12,908 8.88
4 12/31/92-12/31/96 16,985 14.16 17,086 14.33
5 12/31/91-12/31/96 16,564 10.62 16,692 10.79
Lifetime of fund 05/01/89-12/31/96 17,205 8.48 17,378 8.64
<CAPTION>
Bond Bond
------------------- -------------------
Number Compound Compound
of Growth Growth
Years Periods Amount Rate Amount Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lifetime of fund 01/02/96-12/31/96 $10,412 4.14% $10,428 4.29%
</TABLE>
B-5
<PAGE>
ANNUITY PAYOUTS
VARIABLE ANNUITY PAYOUTS
Variable annuity payouts will be determined on the basis of: (1) the dollar
value of the contract on 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 payouts, Lincoln Life makes the following calcula-
tion: first, it determines the dollar amount of the first payout; second, it
credits the contract with a fixed number of annuity units based on the amount
of the first payout; and third, it calculates the value of the annuity units
each period thereafter. These steps are explained below.
The dollar amount of the first periodic variable annuity payout is determined
by applying the total value of the accumulation units credited under the con-
tract valued as of the annuity commencement date (less any premium taxes) to
the annuity tables contained in the contract. The first variable annuity pay-
out will be paid 14 days after the annuity commencement date. This day of the
month will become the day on which all future annuity payouts will be paid.
Amounts shown in the tables are based on the 1983 Table "a" Individual Annuity
Mortality Tables, modified, with an assumed investment return at the rate of
4% per annum. The first annuity payout is determined by multiplying the bene-
fit per $1,000 of value shown in the contract tables by the number of thou-
sands 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 mea-
suring point for subsequent annuity payouts. If the actual net investment rate
(annualized) exceeds 4%, the payout will increase at a rate equal to the
amount of such excess. Conversely, if the actual rate is less than 4%, annuity
payouts will decrease. If the assumed rate of interest were to be increased,
annuity payouts 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 as-
sociated with employer sponsored plans and where not prohibited by law.
At an annuity commencement date, the contract is credited with annuity units
for each subaccount on which variable annuity payouts are based. The number of
annuity units to be credited is determined by dividing the amount of the first
periodic payout by the value of an annuity unit in each subaccount 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 periodic payouts is determined by multiplying the
contractowner's fixed number of annuity units in each subaccount by the appro-
priate annuity unit value for the valuation date ending 14 days prior to the
date that payout is due.
The value of each subaccount's annuity unit will be set initially at $1.00.
The annuity unit value for each subaccount at the end of any valuation date is
determined by multiplying the subaccount annuity unit value for the immedi-
ately preceding valuation date by the product of:
(a) The net investment factor of the subaccount 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
payouts 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 VAA form a part of, and are taxed with, the operations
of Lincoln Life under the Internal Revenue Code of 1986, as amended (the
Code). VAA investment income and realized net capital gains on the assets of
the VAA 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 con-
tract. Under existing federal income tax law, Lincoln Life believes that the
VAA investment income and realized net capital gain are not taxed to the ex-
tent they are retained as part of the reserves under the contract. According-
ly, Lincoln Life does not anticipate that it will incur any federal income tax
liability attributable to the VAA, 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 VAA, then Lincoln Life may impose a charge against the VAA
(with respect to some or all (contracts) in order to make provision for pay-
ment of such taxes.
B-6
<PAGE>
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 ac-
counts of insurance companies) underlying the contract be adequately diversi-
fied in accordance with Treasury regulations in order for the contract to
qualify as an annuity contract under Section 72 of the code. The VAA, 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 VAA 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 VAA 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 guid-
ance concerning the extent to which contractowners may direct their invest-
ments to particular subaccounts of a separate account. When guidance is pro-
vided, 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 nec-
essary to prevent the contractowner from being considered the owner of the as-
sets of the VAA.
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 Sec-
tion 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 des-
ignated 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 requirements have yet been
issued. Thus, no assurance can be given that the provisions contained in con-
tracts satisfy all such code requirements. However, Lincoln Life believes that
such provisions in such contracts meet these requirements. Lincoln Life in-
tends to review such provisions and modify them as necessary to assure that
they comply with the requirements of Section 72(s) when clarified by regula-
tions or otherwise.
TAX STATUS OF CONTRACTS USED WITH CERTAIN PLANS
The rules governing the tax treatment of contributions and distributions under
qualified plans, as set forth in the code and applicable rulings and regula-
tions, 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 un-
derstanding 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 ad-
visers as to the suitability of the plan and the contract to their specific
needs, and as to applicable code limitations and tax consequences. Partici-
pants under such plans, as well as contractowners, annuitants, and beneficia-
ries, 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 em-
ployee 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 re-
sults of the fund credited to the account are not taxable until benefits are
received either in the form of annuity payouts, in a single sum or a withdraw-
al.
If an employee's individual account is surrendered, usually the full amount
received would be includable in income for that year at ordinary rates.
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 dis-
tributed. 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 limita-
B-7
<PAGE>
tions on maximum contributions or benefits. For plan years beginning after De-
cember 31, 1996, tax exempt organizations (except state and local governments)
may have 401(k) plans.
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 pro-
gram known as Individual Retirement Annuity (IRA). An individual may make an
annual IRA contribution of up to the lesser of $2,000 (or $4,000 if IRAs are
maintained for both the individual and his nonworking spouse) or 100% of com-
pensation. 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 ba-
sis without regard to the limit on contributions, provided certain requirements
are met. Distributions from IRA's are subject to certain restrictions. Deduct-
ible 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 or-
ganizations 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 sponsor-
ing employer and are subject to the claims of its creditors. Plans of state and
local governments established on August 20, 1996, or later, must hold all as-
sets and income in trust (or custodial accounts or an annuity contract) for the
exclusive benefit of participants and their beneficiaries. Section 457 plans
that were in existence before August 20, 1996 are allowed until January 1, 1999
to meet this requirement. The amounts deferred under a plan which meet the re-
quirements of Section 457 of the code are not taxable as income to the partici-
pant 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, as increased for
cost of living adjustments, or 33 1/3% of the participant's includable compen-
sation. 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 em-
ployee pension plan ("SEP") established prior to January 1, 1997, 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. For tax years
after 1996, salary reduction SEPs (SAR/SEP) may no longer be established. How-
ever, SAR/SEPs in existence prior to January 1, 1997 may continue to receive
contributions.
SAVINGS INCENTIVE MATCHED PLAN FOR EMPLOYEES (SIMPLE)
Employers with 100 or fewer employees, who earned $5,000.00 during the preced-
ing year, may establish SIMPLEs. For tax years beginning after December 31,
1996, SIMPLE plans are available and may be in the form of an IRA or part of a
401(k) plan. Under a SIMPLE IRA, employees are permitted to make elective con-
tributions to an IRA, stated as a percentage of the employee's compensation,
but not to exceed $6,000.00 annually as indexed. Such deferrals are not subject
to income tax until withdrawn. Withdrawals made by an employee in the first two
years of the employee's participation are subject to a 25 percent penalty.
Later withdrawals are subject to penalties applicable to IRAs. Under a SIMPLE
401(k), employee deferrals are limited
B-8
<PAGE>
to no more than $6,000.00 annually. Employer contributions are usually re-
quired for each type of SIMPLE.
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 (gen-
erally, the employee's own non-deductible contributions) constitutes his in-
vestment in the contract. If a distribution is made in the form of annuity
payouts, the employee's investment in the contract (adjusted for certain re-
fund provisions) divided by his life expectancy (or other period for which an-
nuity payouts are expected to be made) constitutes a return of capital each
year. The dollar amount of annuity payouts received in any year in excess of
such return is taxable as ordinary income. However, 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 employ-
ee'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 in-
vestment. Rules generally provide that all distributions which are not re-
ceived 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 distribu-
tion 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 con-
tract (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, SEPs and
Keoghs will be subject to (1) a 10% penalty tax if made before age 59 1/2 un-
less certain other exceptions apply, and (2) except during 1997, 1998 and
1999, a 15% penalty tax on combined annual distributions in excess of $150,000
(as indexed), subject to various special rules. Failure to meet certain mini-
mum 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.
OTHER CONSIDERATIONS
It should be understood that the foregoing comments about the federal tax con-
sequences 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 state, local, or for-
eign 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.
ADVERTISING AND SALES
LITERATURE
As set forth in the Prospectus, Lincoln Life may refer to the following orga-
nizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors affect-
ing 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 quantita-
tive 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 mea-
sures performance of securities in Europe, Australia and the Far East. The in-
dex reflects the movements of world stock markets by representing the evolu-
tion of an unmanaged portfolio. The EAFE Index offers international diversifi-
cation with over 1000 companies across 20 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, includ-
ing reports on performance and portfolio analysis, fee and expense analysis.
B-9
<PAGE>
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 compa-
nies may be noted.
MORNINGSTAR is an independent financial publisher offering comprehensive sta-
tistical 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 el-
ement 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 con-
tracts.
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 out-
standing shares, and publication of the index itself are services of Standard
& Poor's Corporation, a financial advisory, securities rating, and publishing
firm.
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 VAA and the series
funds, Lincoln Life intends to illustrate the advantages of the contracts in a
number of ways:
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 annuity account over the fixed account;
and the compounding effect when a client makes regular deposits to his or her
contract.
INTERNET. An electronic communications network which may be used to provide
information regarding Lincoln Life, performance of the subaccounts and adver-
tisement literature.
DOLLAR-COST AVERAGING. (DCA) -- You may systematically transfer on a monthly
basis amounts from certain subaccounts into the subaccounts or the fixed side
of the contract. You may elect to participate in the DCA program at the time
of application or at anytime before the annuity commencement date by complet-
ing an election form available from us. The minimum amount to be dollar cost
averaged is $10,000 over any period between six and 60 months. Once elected,
the program will remain in effect until the earlier of: (1) the annuity com-
mencement date; (2) the value of the amount being DCA'd is depleted; or (3)
you cancel the program by written request or by telephone if we have your tel-
ephone authorization on file. Currently, there is no charge for this service.
However, we reserve the right to impose one. A transfer under this program is
not considered a transfer for purposes of limiting the number of transfers
that may be made, or assessing any charges which may apply to transfers. We
reserve the right to discontinue this program at any time. DCA does not assure
a profit or protect against loss.
AUTOMATIC WITHDRAWAL SERVICE. (AWS) -- AWS provides an automatic, periodic
withdrawal of contract value to you. You may elect to participate in AWS at
the time of application or at any time before the annuity commencement date by
sending a written request to our home office. The minimum contract value re-
quired to establish AWS is $10,000. You may cancel or make changes to your AWS
program at any time by sending a written request to our home office. Notwith-
standing the requirements of the program, any withdrawal must be permitted by
Section 401(a)(9) of the code for qualified plans or permitted under Section
72 for non-qualified contracts. To the extent that withdrawals under AWS do
not qualify for an exemption from the contingent deferred sales charge, we
will assess any applicable surrender charges on those withdrawals. See Contin-
gent deferred sales charges. Currently, there is no charge for this service.
However, we reserve the right to impose one. If a charge is imposed, it will
not exceed $25 per transaction or 2% of the amount withdrawn, whichever is
less. We reserve the right to discontinue this service at any time.
B-10
<PAGE>
CROSS-REINVESTMENT SERVICE -- Under this option, account value in a designated
variable subaccount or the fixed side of the contract that exceeds a certain
baseline amount is automatically transferred to another specific variable
subaccount(s) or the fixed side of the contract at specific intervals. You may
elect to participate in cross-reinvestment at the time of application or at any
time before the annuity commencement date by sending a written request to our
home office or by telephone if we have your telephone authorization on file.
You designate the holding account, the receiving account(s), and the baseline
amount. Cross-reinvestment will continue until we receive authorization to ter-
minate the program.
The minimum holding account value required to establish cross-reinvestment is
$10,000. Currently, there is no charge for this service. However, we reserve
the right to impose one. A transfer under this program is not considered a
transfer for purposes of limiting the number of transfers that may be made, or
assessing any charges which may apply to transfers. We reserve the right to
discontinue this service at any time.
LINCOLN LIFE'S CUSTOMERS. Sales literature for the VAA and the series' funds
may refer to the number of employers and the number of individual annuity cli-
ents which Lincoln Life serves. As of the date of this SAI, 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 1995 Lincoln Life was one of the ten largest
U.S. stock life insurance companies based upon admitted assets.
FINANCIAL STATEMENTS
Financial statements for the VAA and Lincoln Life appear on the following
pages.
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