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AMERICAN LEGACY II
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
annuity contract (contract or variable annuity contract) issued by Lincoln
National Life Insurance Co. (Lincoln Life). It is for use with the following
retirement plans qualified for special tax treatment (qualified plans) under
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 IRA plans. Consult your investment dealer as to the
availability of this contract for these plans.
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
mentioned plans (nonqualified contracts).
The contract offers you the accumulation of contract value and payment of
periodic annuity benefits. These benefits may be paid on a variable or fixed
basis or a combination of both. Benefits start at an annuity commencement date
which you select. If the annuitant dies before the annuity commencement date,
the greater of: (1) the contract value; or (2) the guaranteed minimum death
benefit (GMDB) or, if it is then in effect, the enhanced guaranteed minimum
death benefit (EGMDB) will be paid to the beneficiary. You may elect the EGMDB
when you apply for the contract. (See Death benefit before annuity commencement
date)
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 subsequent purchase payment for the contract is $25 per payment,
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 shares of a class of one or more specified funds of the
American Variable Insurance Series (series): Global Growth Fund, Growth Fund,
International Fund, Growth-Income Fund, Asset Allocation Fund, High-Yield Bond
Fund, Bond Fund, U.S. Government/AAA-Rated Securities Fund, 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
Prospectus 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
series. Both should be read carefully before investing and kept for future
reference.
A statement of additional information (SAI), dated April 1, 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 1, 1997.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ----------------------------------------------------------------------
<S> <C>
Special terms 3
- ----------------------------------------------------------------------
Expense tables 4
- ----------------------------------------------------------------------
Synopsis 6
- ----------------------------------------------------------------------
Condensed financial information for the variable annuity account 8
- ----------------------------------------------------------------------
Investment results 9
- ----------------------------------------------------------------------
Financial statements 9
- ----------------------------------------------------------------------
Lincoln National Life Insurance Co. 9
- ----------------------------------------------------------------------
Variable annuity account (VAA) 9
- ----------------------------------------------------------------------
Investments of the variable annuity account 9
- ----------------------------------------------------------------------
Charges and other deductions 11
- ----------------------------------------------------------------------
The contracts 12
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
- ------------------------------------------------------------------------
<S> <C>
Annuity payouts 16
- ------------------------------------------------------------------------
Federal tax status 18
- ------------------------------------------------------------------------
Voting rights 19
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Distribution of the contracts 19
- ------------------------------------------------------------------------
Return privilege 20
- ------------------------------------------------------------------------
State regulation 20
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Restrictions under the Texas Optional Retirement Program 20
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Records and reports 20
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Other information 20
- ------------------------------------------------------------------------
Statement of Additional Information table of contents for Separate
Account H 21
- ------------------------------------------------------------------------
</TABLE>
2
<PAGE>
SPECIAL TERMS
(Throughout this Prospectus, in order to make the following documents more
understandable to you, we have italicized the special terms.)
Account or variable annuity account (VAA) -- The segregated investment account,
Account H, into which Lincoln Life sets aside and invests the assets for the
variable side of the contract offered in this Prospectus.
Accumulation unit -- A measure used to calculate contract value for the
variable side of the contract before the annuity commencement date. See The
contracts.
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 after
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
annuity commencement date is deemed to begin at close of business on the
valuation 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
commencement 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 after
the annuity commencement date. See Annuity payouts.
Beneficiary -- The person whom you designate to receive the death benefit, if
any, in case of the annuitant'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
providing 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
annuitant 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 payment
of a death benefit claim; or (2) the highest contract value on any policy
anniversary date (including the inception date) between the time the EGMDB
takes effect up to and including the annuitant'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,
effected 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
purchase payment, allowing additional purchase payments to be made, and with
annuity 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 plus any attributable gain, minus any withdrawals, partial
annuitizations and premium taxes incurred. We determine the attributable gain
separately for each contract year on its seventh anniversary (once its
surrender charge period has expired). See Death benefit before the annuity
commencement date.
Home office -- The headquarters of Lincoln National Life Insurance Co., located
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
purchase 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
variable annuity contract.
Subaccount or American Legacy II subaccount -- That portion of the VAA that
reflects investments in accumulation and annuity units of a class of a
particular 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 (valuation
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
respect to that 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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ANNUAL CONTRACT FEE: $35
This is a single charge assessed against the contract value on the last
valuation date of each contract year and upon full surrender; it is not a
separate charge for each subaccount.
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT H ANNUAL EXPENSES FOR AMERICAN LEGACY II SUBACCOUNTS:*
(as a percentage of average account value for each subaccount):
<TABLE>
<CAPTION>
Contracts with EGMDB Contracts without EGMDB
<S> <C> <C>
Mortality and expense risk fees 1.25% 1.25%
EGMDB Charge .15% --
Account fees and expenses .10% .10%
----- -----
Total Account H annual expenses
for American Legacy II
subaccounts 1.50% 1.35%
</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 Other Total
fees + expenses = expenses
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Global Growth** .69% .06% .75%
- ------------------------------------------------------------------------
2. Growth .42 .02 .44
- ------------------------------------------------------------------------
3. International .61 .08 .69
- ------------------------------------------------------------------------
4. Growth-Income .39 .02 .41
- ------------------------------------------------------------------------
5. Asset Allocation .47 .02 .49
- ------------------------------------------------------------------------
6. High-Yield Bond .50 .03 .53
- ------------------------------------------------------------------------
7. Bond .51 .01 .52
- ------------------------------------------------------------------------
8. U.S. Govt./AAA-Rated Securities .51 .02 .53
- ------------------------------------------------------------------------
9. Cash Management .45 .02 .47
- ------------------------------------------------------------------------
</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 amounts for the current fiscal year.
4
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EXAMPLES
(reflecting expenses both of the American Legacy II 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 5 years 10 years
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Global Growth** $81 $116 $143 $242
- --------------------------------------------------------------------
2. Growth 78 106 127 210
- --------------------------------------------------------------------
3. International 81 114 140 236
- --------------------------------------------------------------------
4. Growth-Income 78 105 125 207
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5. Asset Allocation 79 108 129 215
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6. High-Yield Bond 79 109 131 219
- --------------------------------------------------------------------
7. Bond 79 109 131 218
- --------------------------------------------------------------------
8. U.S. Gov't./AAA-Rated Securities 79 109 131 219
- --------------------------------------------------------------------
9. Cash Management 78 107 128 213
- --------------------------------------------------------------------
</TABLE>
If you do not surrender your contract, you would pay the following expenses*
on a $1,000 investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Global Growth** $21 $66 $113 $242
- -------------------------------------------------------------------
2. Growth 18 56 97 210
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3. International 21 64 110 236
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4. Growth-Income 18 55 95 207
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5. Asset Allocation 19 58 99 215
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6. High-Yield Bond 19 59 101 219
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7. Bond 19 59 101 218
- -------------------------------------------------------------------
8. U.S. Govt./AAA-Rated Securities 19 59 101 219
- -------------------------------------------------------------------
9. Cash Management 18 57 98 213
- -------------------------------------------------------------------
</TABLE>
* These expenses, calculated as mandated by the SEC, reflect the annual
contract fee as the ratio of the total contract fees collected in the most
recent fiscal year to the total average net assets of the account.
** 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
underwriter, 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. These examples reflect
expenses both of the VAA and of the nine funds. These examples reflect expenses
assuming that the EGMDB is NOT in effect. If the EGMDB is in effect, these
expenses will be higher.
For more complete descriptions of the various costs and expenses involved, see
Charges and other deductions in this Prospectus, and Fund Organization and
Management in the Prospectus for the series. Premium taxes may also be
applicable, although they do not appear in the table. THE 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
<PAGE>
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
portion 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
chargeable 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 policy.
See Investments of the variable annuity account and Description of the series.
WHO INVESTS MY MONEY? The investment advisor for the series is CRMC, Los
Angeles, California. CRMC is a long-established investment management
organization, 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
issued 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 decided to
annuitize and the value of each unit on the valuation date. See The contracts.
WHAT CHARGES ARE ASSOCIATED WITH THIS CONTRACT? At the end of each contract
year and at the time of surrender, we will deduct $35 from your contract value
as a maintenance charge.
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 payments have been in the contract. (Note: This sales
charge is not assessed upon: the first withdrawal of contract value during a
contract year to the extent the withdrawal does not exceed 10% of the purchase
payments (this 10% withdrawal exception does not apply to a surrender of the
contract); automatic withdrawals, not in excess of 10% of the purchase payments
during a contract year, made by non contractowners who are at least 59 1/2; a
surrender of a contract or withdrawal of contract value as a result of the
annuitant's permanent and total disability [as defined in Section 22(e)(3) of
the code], after the effective date of the contract and before the annuitant's
65th birthday; a surrender of the contract as a result of the death of the
annuitant; or electing an annuity payout option available within the contract.
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 charges in the aggregate annual amount of 1.35% against the daily net
asset value of the VAA, including that portion of the account attributable to
your purchase payments. These charges consist of a 0.10% administrative charge
and 1.25% mortality and expense risk charge. If the EGMDB is in effect, the
aggregate charge against the VAA is 1.50% consisting of a 0.10% administrative
charge, a 1.25% mortality and expense risk charge and a 0.15% charge for the
EGMDB. 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
variable annuity account--Investment advisor. 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 payments
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 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 you are the annuitant and also the
contractowner, then the beneficiary whom you designate will receive either the
GMDB, or the then current value of the contract, whichever is greater. If the
EGMDB is in effect, the
6
<PAGE>
beneficiary will receive either the EGMDB or the then current value of the
contract, whichever is greater. Your beneficiary will have certain options for
how the money is to be paid out. If a contractowner is not also the annuitant,
certain special rules apply. See The contracts--Death benefit before the
annuity commencement date and Death of contractowner.
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 after the
annuity commencement date.
MAY I TRANSFER CONTRACT VALUE FROM THE FIXED TO THE VARIABLE SIDE OF THE
CONTRACT, 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
requirements and to restrictions imposed under certain qualified retirement
plans, for which the contract is purchased. See The contracts-- Surrenders and
withdrawals.
If you surrender the contract or make a withdrawal, certain charges may be
assessed, as discussed previously and under Charges and other deductions. In
addition, the Internal Revenue Service (IRS) may assess a 10% premature
withdrawal penalty 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
period 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 variable side of the contract. See Return privilege.
7
<PAGE>
CONDENSED FINANCIAL INFORMATION FOR THE VARIABLE ANNUITY ACCOUNT
ACCUMULATION UNIT VALUES in the period ended December 31, 1996
comes from the VAA's financial
statements. It should be read in
conjunction with the VAA's financial
statements and notes which are all
included in the SAI.
The following information relating to
accumulation unit values and number
of accumulation units for the
American Legacy II subaccounts for
each of the eight years
<TABLE>
<CAPTION>
1989* 1990 1991 1992 1993 1994 1995 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.009 .952 1.252 1.369 1.571 1.558 2.049
. End of period......... $ 1.009 .952 1.252 1.369 1.571 1.558 2.049 2.292
Number of accumulation
units
. End of period (000's
omitted)............... 48,888 298,367 486,812 752,797 980,310 1,133,151 1,335,028 1,446,260
- ----------------------------------------------------------------------------------------------------
International
subaccount**
Accumulation unit value
. Beginning of period .. $ 1.000 .947 1.044 1.021 1.354 1.361 1.514
. End of period ........ $ .947 1.044 1.021 1.354 1.361 1.514 1.755
Number of accumulation
units
. End of period (000's
omitted)............... 78,763 200,309 360,734 697,520 984,460 1,078,152 1,293,784
- ----------------------------------------------------------------------------------------------------
Growth-Income subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.021 .982 1.202 1.280 1.418 1.428 1.875
. End of period ........ $ 1.021 .982 1.202 1.280 1.418 1.428 1.875 2.196
Number of accumulation
units
. End of period (000's
omitted)............... 88,723 340,270 703,495 1,122,418 1,500,824 1,680,732 1,877,129 2,097,592
- ----------------------------------------------------------------------------------------------------
Asset Allocation
subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.022 .998 1.200 1.284 1.399 1.377 1.760
. End of period ........ $ 1.022 .998 1.200 1.284 1.399 1.377 1.760 2.011
Number of accumulation
units
. End of period (000's
omitted)............... 41,276 110,929 174,468 285,119 410,464 448,248 480,392 534,903
- ----------------------------------------------------------------------------------------------------
High-Yield Bond
subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.006 1.031 1.287 1.429 1.641 1.513 1.818
. End of period ........ $ 1.006 1.031 1.287 1.429 1.641 1.513 1.818 2.031
Number of accumulation
units
. End of period (000's
omitted)............... 5,671 17,624 47,739 101,884 191,433 216,546 256,041 294,401
- ----------------------------------------------------------------------------------------------------
Bond subaccount***
Accumulation unit value
. Beginning of period... $ 1.000
. End of period......... $ 1.044
Number of accumulation
units
. End of period (000's
omitted)............... 72,747
- ----------------------------------------------------------------------------------------------------
U.S. Government/AAA-
Rated subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.018 1.089 1.246 1.323 1.451 1.369 1.559
. End of period......... $ 1.018 1.089 1.246 1.323 1.451 1.369 1.559 1.586
Number of accumulation
units
. End of period (000's
omitted)............... 13,695 59,506 139,710 212,716 282,851 282,879 296,349 274,674
- ----------------------------------------------------------------------------------------------------
Cash Management
subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.029 1.095 1.140 1.161 1.177 1.206 1.256
. End of period ........ $ 1.029 1.095 1.140 1.161 1.177 1.206 1.256 1.302
Number of accumulation
units
. End of period (000's
omitted)............... 23,046 96,578 106,259 133,763 106,323 141,512 130,252 168,072
- ----------------------------------------------------------------------------------------------------
</TABLE>
*The VAA began operations on August 1, 1989, so the figures for 1989 represent
experience of less than one year.
**The International subaccount began operations on May 1, 1990, so the figures
for 1990 represent experience of less than one year.
***The Bond subaccount began operations on January 2, 1996 so the figures for
1996 represent experience of less than one year.
There is a Global Growth subaccount but it is not in the chart because it did
not begin activity until 1997.
8
<PAGE>
INVESTMENT RESULTS
At times, the VAA may compare its investment results to various unmanaged
indices 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
and contract fees. Results calculated without contingent deferred sales charges
or contract fees will be higher. Total returns 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 the VAA and Lincoln Life are located in the SAI.
If you would like a free copy, 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 liabilities
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
accordance 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 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 INVESTMENT 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 a class of each fund in the series.
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
Angeles, California 90071. CRMC is one of the nation's largest and oldest
investment management organizations. As compensation for its services to the
series, 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
series.
DESCRIPTION OF THE SERIES
The series was organized as a Massachusetts business trust in 1983 and is
registered as a diversified, open-end management investment company under the
1940 Act. Diversified means not owning too great a percentage of the securities
of any one company. An open-end company is one which, in this case, permits
Lincoln Life to sell its shares back to the series when you make a withdrawal,
surrender the contract or transfer from one fund to another. Management
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. 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. Fund assets are segregated and a shareholder's
interest is limited to those funds in which the shareholder owns shares.
Under the multi-class system adopted by the series, shares of each multi-class
fund represent an equal pro rata interest in that fund and, generally, have
identical voting, dividend, liquidation and other rights, preferences, powers,
restrictions, limitations, qualifications and terms and conditions, except
that: (1) each class has a different designation; (2) each class of shares
bears its class expenses; (3) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its distribution
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arrangement; and (4) each class has separate voting rights on any matter
submitted to its shareholders in which the interests of one class differ from
the interests of any other class. Expenses currently designated as class
expenses by the series' Board of Trustees under the plan pursuant to Rule 18f-
3 include, for example, service fees paid under a 12b-1 plan to cover
servicing fees paid to dealers selling the contracts.
Each fund has two classes of shares, designated as Class 1 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 1 shares are available under the
contracts.
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 securities such as preferred stock, debt securities and securities
convertible into common stock. PLEASE NOTE: THE GLOBAL GROWTH FUND WILL NOT
BE MADE AVAILABLE UNDER THE CONTRACTS UNTIL APRIL 30, 1997. IN ADDITION,
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
securities 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
income. 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
common 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,
diversified bond portfolio. It seeks high current income and secondarily
seeks capital appreciation. This fund will generally be invested
substantially in intermediate and long-term corporate obligations, with
emphasis on higher yielding, higher risk, lower rated or unrated
securities.
7. Bond Fund--The Bond 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 participations, 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
preserving capital by investing in a diversified selection of money market
instruments.
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
appropriate funds to pay annuity payouts, death benefits, surrender/withdrawal
proceeds or for other purposes described in the contract. If you want to
transfer all or part of your investment from one subaccount to another, we may
redeem 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 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 companies, it is said to engage in shared
funding.
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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
conflicts, 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
reinvested 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
substitutions for the series and/or any funds within the series in which the
VAA participates. (We may substitute shares of other funds for shares already
purchased, 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 management, 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 contract. We incur certain costs
and expenses for the distribution and administration of the contracts and for
providing the benefits payable thereunder. Our administrative services include:
processing applications for and issuing the contracts, processing purchases and
redemptions of fund shares as required (including dollar cost averaging, cross-
reinvestment, 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 contract confirmations,
providing toll-free inquiry services and furnishing telephone fund transfer
services. The benefits we provide include: death benefits, annuity payout
benefits and cash surrender value benefits. 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 benefits paid under the EGMDB or GMDB, will exceed actual
contract value; the risk that more owners than expected will qualify for
waivers of the contingent deferred sales charge; 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 providing the services or benefits indicated by
the designation of the charge or associated with a particular contract. For
example, the contingent deferred sales charge collected may not fully cover all
of the sales and distribution expenses actually incurred by us.
MAINTENANCE CHARGE
We will deduct a contract maintenance charge of $35 per contract year. This
charge will be deducted from the contract value on the last valuation date of
each contract year. This charge will also be deducted from the contract value
upon surrender.
CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge does apply (except as described below) to
surrenders 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 withdrawal of contract value during a contract year to the extent
the withdrawal does not exceed 10% of the purchase payments (this 10%
withdrawal exception does not apply to a surrender of a contract);
3. Automatic withdrawals, not in excess of 10% of the purchase payments during
a contract year, made by nontrustee contractowners who are at least 59 1/2;
4. A surrender of a contract or withdrawal of contract value as a result of the
annuitant's permanent and total disability [as defined in Section 22(e)(3)
of the code], after the effective date of the contract and before the
annuitant's 65th birthday;
5. A surrender of a contract or withdrawal of contract value of a contract
issued to employees and registered representatives of any member of the
selling group and their spouses and minor children, or to officers,
directors, trustees or bona-fide full-time employees of
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Lincoln National Corp. or The Capital Group, Inc. or their affiliated or man-
aged companies (based upon the contractowner's status at the time the contract
was purchased); and
6. A surrender of the contract as a result of the death of the annuitant.
However, the contingent deferred sales charge is not waived as a result of the
death of a contractowner who is not the annuitant.
The contingent deferred sales charge is calculated separately for each contract
year's purchase payments to which a charge applies. (FOR PURPOSES OF
CALCULATING 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 EARNINGS ARE WITHDRAWN.) The contingent deferred sales charges associated
with surrender 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 FROM THE VAA
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 1.35% (1.50% for contracts with the EGMDB) of the daily net asset
value. The charge consists of a 0.10% administrative charge and a 1.25%
mortality and expense risk charge. For those contracts which include the EGMDB,
there is an additional risk charge of 0.15% of the daily net asset value.
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
generally 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 described in the Prospectus for 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
distribution and/or administrative expenses, or that we perform fewer sales or
administrative services than those originally contemplated in establishing the
level of those charges. Lower distribution and administrative expenses may be
the result 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 information related to deposits on behalf of its employees or (4)
any other circumstances which reduce distribution or administrative expenses.
The exact amount of administrative and contingent deferred sales charges
applicable to a particular 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
representative 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
contract 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
completed within those five days, you will be informed of the reasons, and the
purchase payment will be returned immediately (unless you specifically
authorize 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.
WHO CAN INVEST
To apply for a contract, you must be of legal age in a state where the
contracts 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
annuitant cannot be older than age 85 (or older than age 80 in Pennsylvania).
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
nonqualified contracts and Section 403(b) transfers/rollovers; and $300 for
qualified contracts. The minimum annual amount for subsequent purchase payments
is $300 for nonqualified and qualified contracts, with a minimum of $25 per
payment. Purchase payments in total may not exceed $1 million for each
annuitant.
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If you stop making purchase payments, the contract will remain in force as a
paid-up contract as long as the total contract value is at least $300. Payments
may be resumed at any time until the annuity commencement date, the surrender
of the contract, the maturity date, the death of the contractowner or the
payment of any death benefit, whichever comes first.
VALUATION DATE
Accumulation and annuity units will be valued once daily at the close of
trading (currently 4:00 p.m., New York time) on each day the NYSE 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 corresponding fund of the series, according 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
received 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 determined in this way shall not be 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 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
multiplied by the net investment factor of that subaccount for the current
valuation period.
The net investment factor is an index used to measure the investment
performance 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 period 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
another. 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 as of the
valuation date we receive the request if received by 4 p.m. New York time. If
it is received after 4 p.m. New York time, the transfer will be done using the
accumulation unit values as of the next valuation date.
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 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.
A transfer may be made by writing to our home office or, if a Telephone
Exchange Authorization form (available from us) is on file with us, by a toll-
free telephone call. 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 Identification Number (PIN) to serve as
identification. We will not be liable for following telephone instructions we
reasonably believe are genuine. Telephone transfer requests 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 4:00 P.M. New York time.
When thinking about a transfer of contract value, you should consider the
inherent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time.
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<PAGE>
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
restrictions: (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.
TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment in one subaccount to
another subaccount or to the fixed side of the contract. Those transfers will
be limited to three times per contract year. HOWEVER, 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 the life of the annuitant 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 annuitant dies before the annuity commencement date, a death benefit
equal to the greater of: (1) the GMDB or, if elected, the EGMDB; or (2) the
current value of the contract, will be paid to your designated beneficiary.
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 annuitant; (2) Written
authorization for payment; and (3) Our receipt of all required claim forms,
fully completed.
The GMDB is equal to the sum of all purchase payments plus any attributable
gain, minus any withdrawals, partial annuitizations and premium taxes incurred.
We determine the attributable gain separately for each contract year on its
seventh anniversary (once its surrender charge period has expired). The
attributable gain consists of the earnings on a contract year's net purchase
payment(s) [purchase payment(s) minus any withdrawals and partial
annuitizations, applied on a first-in first-out basis] as of the valuation date
just before its seventh anniversary. This amount will then be included in the
GMDB calculation.
If contract conditions are met, the GMDB will be increased automatically by us
according to the prescribed formula based upon the contract's internal rate of
return. For this to occur, the annuitant, as of the seventh anniversary of each
eligible contract year, must still be living and must be less than 81 years of
age. For more information about GMDB calculations, please refer to the SAI.
The EGMDB is an alternative to the GMDB for owners of nonqualified contracts or
contracts used under an IRA plan. Under the EGMDB, the death benefit payable is
the amount equal to the greater of: (1) 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) from the time the EGMDB takes effect up to and including the
annuitant'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, effected or incurred subsequent to
the anniversary date on which the highest contract value is obtained.
You can only elect the EGMDB at purchase by completing the EGMDB election form
available from us. If the EGMDB is elected at purchase, the benefit will take
effect on the inception date but we will not begin deducting the charge for the
EGMDB until the first policy anniversary date.
If you purchased a contract before January 1, 1997, you can elect the EGMDB
during a limited period ending six months after the benefit is approved in your
state or ending December 31, 1997, whichever is later. Please see your
investment dealer for assistance. If you elect the EGMDB during this limited
period, the benefit will take effect as of the valuation time on the next
policy anniversary date following our receipt of the election of this benefit,
and we will begin deducting the charge for the EGMDB as of that date. If we
receive an election of this benefit on a policy anniversary date, the EGMDB
will take effect and we will begin deducting the charge for the benefit at the
valuation time on that date.
If you elect the EGMDB, you may discontinue the benefit at any time by sending
a written request to
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Lincoln Life. The benefit will be discontinued effective at the valuation time
on the next policy anniversary date after we receive the request, and we will
cease deducting the charge for the benefit as of that date. If the benefit is
discontinued on the policy anniversary date, the benefit and the charge will
terminate at the valuation time on that date. If you discontinue the benefit,
it cannot be reinstated. If you do not elect the EGMDB or you discontinue the
benefit after electing it, the GMDB will apply instead and will determine what
death benefit is payable.
If the death benefit becomes payable, the beneficiary may elect to receive
payment either in the form of a lump sum settlement or an annuity payout.
Federal tax law requires 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
settlement will be made to the beneficiary at that time. This payment may be
postponed as permitted by the 1940 Act.
Payment will be made in accordance with applicable laws and regulations
governing 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 annuitant, that beneficiary's interest
will go to any other beneficiaries named, according to their respective
interests (There are no restrictions on the beneficiary's use of the
proceeds.); and/or
2. If no beneficiary survives the annuitant, the proceeds will be paid to the
contractowner or to the contractowner's estate, as applicable.
JOINT/CONTINGENT 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,
independently of the other, may exercise any ownership rights in this contract.
A contingent owner may exercise ownership rights in this contract only after
the contractowner dies.
DEATH OF CONTRACTOWNER
If the contractowner of a nonqualified contract dies before the annuity
commencement date, then, in compliance with the code, the cash surrender value
of the contract will be paid as follows:
1. Upon the death of a nonannuitant contractowner, the cash surrender value
shall be paid to any surviving joint or contingent owner(s). If no joint or
contingent owner has been named, then the cash surrender value shall be paid
to the annuitant named in the contract; and
2. Upon the death of a contractowner, who is also the annuitant, the death will
be treated as death of the annuitant and the provisions of this contract
regarding death of annuitant will control. If the beneficiary is the
surviving spouse of the contractowner, the contract may be continued in the
name of that spouse as the new contractowner. If the surviving spouse elects
to continue the contract, the contract will continue as though no death
benefit had been payable.
The code requires that any distribution be paid within five years of the death
of the contractowner unless the beneficiary begins receiving, within one year
of the contractowner's death, the distribution in the form of a life annuity or
an annuity for a designated period not exceeding the beneficiary's life
expectancy.
SURRENDERS AND WITHDRAWALS
Before the annuity commencement date, we will allow the surrender of the
contract 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
purchased as part of a retirement plan of a public school system or 501(c)(3)
organization under Section 403(b) of the code. Beginning January 1, 1989, in
order 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) separates from service, (c) dies, (d) becomes totally and permanently
disabled and/or (e) experiences financial hardship (in which event the income
attributable 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/
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withdrawal is received at the home office. Unless a request for withdrawal
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
contract value. You may specify whether 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
Restrictions under the Texas Optional Retirement Program, later in this
Prospectus booklet.
If the total contract value is less than $300, and if no purchase payments have
been made for at least two years, we reserve the right to terminate the
contract.
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
reinvestment 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
notified in writing of any changes, modifications or waivers.
COMMISSIONS
The commissions paid to dealers are a maximum of 4.70% of each purchase
payment; plus an annual continuing commission equal to 0.25% of the value of
contract purchase payments invested for at least 15 months; plus an annual
persistency bonus equal to 0.50% of each contract year's increased GMDB
(regardless of whether or not the EGMDB is in effect), paid over a period of
eight years. At times, additional sales incentives (up to 0.25% of purchase
payments and up to 0.05% annually of the variable account value while the EGMDB
is in effect) may be provided to dealers maintaining certain sales volume
levels. In addition, the equivalent of 4.70% of contract value can be paid to
dealers upon annuitization. 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
permitted by the Employee Retirement Income Security Act (ERISA) of 1974 and
upon written notification to us. We assume no responsibility for the validity
or effect 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
annuity 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. 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
installments. If the payouts from
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<PAGE>
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
minimum number of payouts or provision for a death benefit for beneficiaries.
HOWEVER, THERE IS THE RISK UNDER THIS OPTION THAT THE ANNUITANT WOULD RECEIVE
NO PAYOUTS IF HE/SHE 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
guarantees periodic payouts during a designated period, usually 10 or 20 years,
and then continues throughout 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
lifetime 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
during 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
lifetime 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
office.
GENERAL INFORMATION
None of the options listed above currently provide withdrawal features,
permitting the contractowner to withdraw commuted values as a lump sum payment.
Other options, with or without withdrawal features, may be made available by
us. Options are only available to the extent they are consistent with the
requirements 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
administrative 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 annuitant's 85th
birthday. You may change the annuity commencement date, change the annuity
option 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
allocations at the time of annuitization) except when a joint life payout is
required by law. Under any option providing for guaranteed payouts, the number
of payouts which remain unpaid at the date of the annuitant's death (or
surviving annuitant's death in the case of a joint life annuity) will be paid
to your beneficiary 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.
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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
implications with respect to the contracts, you should consult a tax advisor.
The following 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.
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
contract, 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
ordinary income. For purchase payments made after February 28, 1986, a
contractowner who is not a natural person (for example, a corporation), subject
to limited exceptions, will be taxed on any increase 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
contract which is not excluded from the individual's gross income.
Even though the tax consequences may vary depending on the form of annuity
payout selected under the contract, the contractowner of an annuity payout
generally is taxed on the portion of the annuity payout that exceeds the
investment in the contract. For variable annuity payouts, the taxable portion
is determined 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 annuity 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 total expected value of payouts for the term of the annuity; the
remainder of each payout is taxable. For individuals whose annuity starting
date is after December 31, 1986, the entire distribution (whether fixed or
variable) will be fully taxable once the recipient is deemed to have recovered
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
circumstances, which generally are distributions:
1. Received on or after the contractowner attaining 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
retirement 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) and SIMPLE IRA plans.
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<PAGE>
The tax rules applicable to these plans, including restrictions on
contributions and benefits, taxation of distributions and any tax penalties,
vary according 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
insurance company (or its affiliates) to the same contractowner during any
calendar 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 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 regulations that the Treasury
Department has adopted require that assets underlying a variable annuity
contract be adequately diversified. The regulations provide that a variable
annuity contract which does not satisfy the diversification standards will not
be treated as an annuity contract, unless the failure to satisfy the
regulations was inadvertent, the failure is corrected, and the contractowner or
we pay an amount to the IRS. 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
contract will be deemed to be 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 contract 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,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Under the Unemployment Compensation Amendments of 1992 (UCA),
20% income tax withholding may apply to eligible rollover distributions. All
taxable distributions from qualified plans (except IRAs) and Section 403(b)
annuities 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
qualified plan, Section 403(b) annuity or individual retirement account.
Distributions 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
instructions of contractowners who have interests in any subaccounts which
invest in 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
result 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
applying 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
instructions 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
persons 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
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<PAGE>
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
contract 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
contract value as of the date of receipt of the cancellation, plus any contract
maintenance and administrative fees and any premium taxes which had been
deducted. No contingent deferred sales charge will be assessed. 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).
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
Insurance Department at all times. A full examination of our operations is
conducted 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
participants 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
responsible 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
information required by that 1940 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
information about the VAA, Lincoln Life and the contracts offered. Statements
in this Prospectus about the content of contracts and other legal instruments
are summaries. 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
Accounts 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.
20
<PAGE>
STATEMENT OF ADDITIONAL
INFORMATION TABLE OF
CONTENTS FOR SEPARATE
ACCOUNT H
<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.
21
<PAGE>
AMERICAN LEGACY II
LINCOLN NATIONAL
VARIABLE ANNUITY ACCOUNT H (REGISTRANT)
LINCOLN NATIONAL
LIFE INSURANCE CO. (DEPOSITOR)
STATEMENT OF ADDITIONAL INFORMATION (SAI)
This SAI should be read in conjunction with the
Prospectus of Lincoln National Variable Annuity Account H dated April 1, 1997.
You may
obtain a copy of the American Legacy II Account H Prospectus on request and
without charge. Please write
American Legacy Customer Service, The Lincoln National Life Insurance Co.
P.O. Box 2348, Fort Wayne, Indiana 46801 or call 1-800-942-5500.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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
- ------------------------------------------
CALCULATION OF INVESTMENT RESULTS B-3
- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
-
<S> <C>
ANNUITY PAYOUTS B- 6
-
FEDERAL TAX STATUS B- 6
-
AUTOMATIC INCREASE IN THE GUARANTEED
MINIMUM DEATH BENEFIT B- 9
-
ADVERTISING AND SALES LITERATURE B-10
-
FINANCIAL STATEMENTS B-11
-
</TABLE>
SPECIAL NOTICE TO CONTRACTOWNERS ABOUT THIS YEAR'S LINCOLN LIFE FINANCIAL
STATEMENTS. Each year Lincoln Life is required by law to prepare financial
statements for different purposes. Two of the most important purposes are for
filing with state insurance departments and for inclusion in the securities
registration statements for our variable products, like this one. In the past
we have interpreted the prevailing regulations as requiring presentation of
these statements according to two different sets of accounting principles--one
for the insurance regulators (known as Statutory Accounting Principles, or
STAP) and one for the SEC (known as Generally Accepted Accounting Principles,
or GAAP).
When we create two sets of financial statements for the same insurer it
requires nearly double the time commitment of our internal accounting staff,
and two separate audits by our independent auditors. In an effort to control
costs and eliminate duplication of efforts, we have reviewed the SEC's
requirements fo r the mode of presentation of the insurer's financial
THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is April 1, 1997.
statements in this registration statement, and we have discussed these
requirements with the SEC staff. As a result of these discussions and on
advice of counsel, we shall now begin to use the STAP-basis statements (which
we call Statutory Statements) exclusively, both for the insurance regulators
and for our securities registration statements. This is consistent with the
current practice of many other insurers.
We believe that both Statutory and GAAP statements fairly present the
financial position of Lincoln Life for the periods indicated, in accordance
with those respective accounting principles. However, between the two there
are some important differences in accounting theory and financial statement
presentation. FOR THAT REASON, IN THIS TRANSITION YEAR WE INCLUDE HERE BOTH
STATUTORY AND GAAP STATEMENTS. This should permit you to evaluate the
financial position of Lincoln Life from both points of view, and should help
you understand the differences between Statutory and GAAP statements.
BEGINNING NEXT YEAR WE SHALL PRESENT ONLY THE STATUTORY STATEMENTS.
<PAGE>
GENERAL INFORMATION AND
HISTORY OF
LINCOLN NATIONAL LIFE
INSURANCE CO. (LINCOLN LIFE)
The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905,
is an Indiana stock insurance corporation, engaged primarily in the direct
insurance of life and health insurance contracts and annuities, and is also a
professional reinsurer. Lincoln Life is wholly owned by Lincoln National
Corporation (LNC), a publicly held insurance and financial services holding
company domiciled in Indiana.
SPECIAL TERMS
The special terms used in this SAI are the ones defined in the Prospectus. In
connection with the term, valuation date, the New York Stock Exchange (NYSE) is
currently closed on weekends and on these holidays: New Year's Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. If any of these holidays occurs on a weekend day, the NYSE
may also be closed on the business day occurring just before or just after the
holiday.
SERVICES
INDEPENDENT AUDITORS
The financial statements of the VAA and the financial statements and schedules
of Lincoln Life appearing in this SAI and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports which also appear elsewhere in this document and in the Registration
Statement. The financial statements and schedules audited 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
responsible to Lincoln Life. We have entered into an agreement with the
Delaware Management Company, 2005 Market Street, Philadelphia, PA 19203, to
provide accounting 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 St., 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
contract value will be waived for officers, directors or bona fide full time
employees of LNC, The Capital Group, Inc., their affiliated or managed
companies, and certain other persons. See Contingent deferred sales charges in
the Prospectus.
Both before and after the annuity commencement date, there are exchange
privileges between 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 that follow show, for the various subaccounts of the VAA, an
average annual total return as of the stated periods, based upon a hypothetical
initial purchase payment of $1,000, calculated according to the formula
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 enhanced guaranteed minimum death benefit (EGMDB) and without it.
Although the VAA commenced activity in 1989 and the EGMDB did not become
available until 1997, these figures are calculated as if the subaccounts had
commenced activity at the same time as the underlying funds.
B-2
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
Period Ending December 31, 1996
<TABLE>
<CAPTION>
10-
1-year period 5-year period year period
Without With Without With Without With
EGMDB EGMDB EGMDB EGMDB EGMDB EGMDB
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth subaccount 5.80% 5.63% 12.53% 12.35% 13.42% 13.25%
(as if commenced activity 2/8/84)
International subaccount 9.91 9.74 10.62 10.45 8.63* 8.47*
(commenced activity 5/1/90)
Growth-Income subaccount 11.09 10.91 12.49 12.32 11.48 11.31
(as if commenced activity 2/8/84)
Asset Allocation subaccount 8.18 8.01 10.54 10.37 9.80* 9.63*
(commenced activity 8/1/89)
High-Yield Bond subaccount 5.64 5.47 9.20 9.03 9.85 9.68
(as if commenced activity 2/8/84)
Bond subaccount (1.63)* (1.78)* N/A N/A N/A N/A
(commenced activity 1/2/96)
U.S. Gov't./AAA subaccount (4.33) (4.49) 4.54 4.38 5.77 5.61
(as if commenced activity 12/1/85)
Cash Management subaccount (2.38) (2.54) 2.25 2.09 4.08 3.92
(as if commenced activity 2/8/84)
</TABLE>
*The lifetime of this 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
table are set
out in the table heading and in the footnotes above. The average annual total
return
for each period was determined by finding the average annual compounded rate of
return over each period that would equate the initial amount invested to the
ending
redeemable value for that period, according to the following formula--
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
hypothetical $1,000 purchase payment made at the beginning of the 1-
year, 5-year or 10-year period in question (or fractional portion
thereof)
The formula assumes that: 1) all recurring fees have been charged to
contractowner
accounts; 2) all applicable nonrecurring 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. NONSTANDARDIZED INVESTMENT RESULTS:
The VAA may illustrate its results over various periods and compare its results
to indices and other variable annuities in sales materials including
advertisements, brochures and reports. Such results may be computed on a
cumulative and/or annualized basis.
Cumulative quotations are arrived at by calculating the change in the accumula-
tion 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.
NONSTANDARDIZED INVESTMENT RESULTS
SUBACCOUNTS OF ACCOUNT H*
$10,000 INVESTED IN
THIS FUND THROUGH
AMERICAN LEGACY II
THIS MANY YEARS AGO...
...WOULD HAVE GROWN TO THIS AMOUNT ON DECEMBER 31,
1996**
<TABLE>
<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 $11,186 11.86% $11,715 17.15% $11,170 11.70% $10,368 3.68%
2 12/31/94-12/31/96 14,711 21.29 15,376 24.00 13,421 15.85 10,797 3.91
3 12/31/93-12/31/96 14,587 13.41 15,484 15.69 12,374 7.36 11,065 3.43
4 12/31/92-12/31/96 16,742 13.75 17,158 14.45 14,214 9.19 11,207 2.89
5 12/31/91-12/31/96 18,302 12.85 18,270 12.81 15,778 9.55 11,414 2.68
Lifetime of fund 02/08/84-12/31/96 54,531 14.06 52,591 13.74 40,958 11.55 17,832 4.59
<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 $11,169 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 VAA commenced activity in 1989, these figures are calculated as
if its subaccounts had commenced activity at the same time as the underlying
funds.
**For purposes of determining these investment results, American Legacy II's
1.35% annual asset charge and administrative fee (1.50% for contracts with the
EGMDB) have been taken into account. However, the annual maintenance fee of $35
is not reflected and these examples do not assume redemption at the end of the
period.
B-4
<PAGE>
<TABLE>
<CAPTION>
Without EGMDB With EGMDB
---------------- ----------------
U.S. Govt/AAA U.S. Govt/AAA
---------------- ----------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/95-
1 12/31/96 $10,173 1.73% $10,157 1.57%
12/31/94-
2 12/31/96 11,582 7.62 11,548 7.46
12/31/93-
3 12/31/96 10,930 3.01 10,880 2.85
12/31/92-
4 12/31/96 11,989 4.64 11,916 4.48
12/31/91-
5 12/31/96 12,726 4.94 12,636 4.79
12/01/85-
Lifetime of fund 12/31/96 20,771 6.82 20,428 6.66
<CAPTION>
Asset Allocation Asset Allocation
---------------- ----------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/95-
1 12/31/96 $11,425 14.25% $11,407 14.07%
12/31/94-
2 12/31/96 14,607 20.86 14,564 20.68
12/31/93-
3 12/31/96 14,372 12.85 14,307 12.68
12/31/92-
4 12/31/96 15,657 11.86 15,562 11.69
12/31/91-
5 12/31/96 16,760 10.88 16,632 10.71
08/01/89-
Lifetime of fund 12/31/96 20,109 9.88 19,886 9.71
<CAPTION>
International International
---------------- ----------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/95-
1 12/31/96 $11,597 15.97% $11,580 15.80%
12/31/94-
2 12/31/96 12,894 13.55 12,855 13.38
12/31/93-
3 12/31/96 12,965 9.04 12,908 8.88
12/31/92-
4 12/31/96 17,188 14.50 17,086 14.33
12/31/91-
5 12/31/96 16,813 10.95 16,692 10.79
05/01/89-
Lifetime of fund 12/31/96 17,553 8.80 17,378 8.64
<CAPTION>
Bond Bond
---------------- ----------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
01/02/96-
Lifetime of fund 12/31/96 $10,445 4.45% $10,429 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 before 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
calculation: 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
contract valued as of the annuity commencement date (less any premium taxes) to
the annuity tables contained in the contract. The variable annuity payout 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 1971 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 benefit per $1,000 of
value shown in the contract tables by the number of thousands of dollars of
contract value. These annuity tables vary according to the form of annuity
selected and the age of the annuitant at the annuity commencement date. The 4%
interest rate stated above is the measuring point for subsequent annuity
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.
We may use sex distinct annuity tables in contracts that are not associated
with employer sponsored plans and where not prohibited by law.
At an annuity commencement date, the annuitant 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
appropriate annuity unit value for the valuation date ending 14 days before 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 immediately
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
before the payout 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
We may require proof of age, sex or survival of any payee upon whose age, sex
or survival payouts 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).
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 contract. Under
existing federal income tax law, we believe that the VAA investment income and
realized net capital gain are not taxed to the extent they are retained as part
of the reserves under the contract. Accordingly, we do 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 we may
impose a charge against the VAA (with respect to some or all contracts) in
order to make provision for payment of such taxes.
B-6
<PAGE>
TAX STATUS OF NONQUALIFIED CONTRACTS
Section 817(h) of the code provides that separate account investments (or the
investments of a mutual fund the shares of which are owned by separate accounts
of insurance companies) underlying the contract be adequately diversified in
accordance with Treasury regulations in order for the contract to qualify as an
annuity contract under Section 72 of the code. The 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, we believe 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
guidance concerning the extent to which contractowners may direct their
investments to particular subaccounts of a separate account. When guidance is
provided, the contract may need to be modified to comply with that guidance.
For these reasons, we reserve the right to modify the contract as necessary to
prevent the contractowner from being considered the owner of the assets 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 Section
72 unless the contract provides that (1) if any contractowner dies on or after
the annuity starting date before 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
before the annuity starting date, the entire interest must be distributed
within five years after the death of the contractowner. These requirements are
considered satisfied if any portion of the contractowner's interest that is
payable to or for the benefit of a designated beneficiary is distributed over
that designated beneficiary's life, or a period not extending beyond the
designated beneficiary's life expectancy, and if that distribution begins
within one year of the contractowner's death. The designated beneficiary must
be a natural person. No regulations interpreting these requirements have yet
been issued. Thus, no assurance can be given that the provisions contained in
contracts satisfy all such code requirements. However, we believe that such
provisions in such contracts meet these requirements. We intend to review such
provisions and modify them as necessary to
assure that they comply with the requirements of Section 72(s) when clarified
by regulations or otherwise.
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
regulations, are complex and subject to change. These rules also vary according
to the type of plan and the terms and conditions of the plan itself. Therefore,
no attempt is made herein to provide more than general information about the
use of contracts with the various types of plans, based on Lincoln Life's
understanding of the current federal tax laws as interpreted by the IRS.
Purchasers of contracts for use with such a plan and plan participants and
beneficiaries should consult counsel and other competent advisors as to the
suitability of the plan and the contract to their specific needs, and as to
applicable code limitations and tax consequences. Participants under such
plans, as well as contractowners, annuitants and beneficiaries, should also be
aware that the rights of any person to any benefits under such plans may be
subject to the terms and conditions of the plans themselves regardless of the
terms and conditions of the contract.
Following are brief descriptions of the various types of plans and of the use
of contracts in connection therewith.
PUBLIC SCHOOL SYSTEMS AND 501(C)(3) ORGANIZATIONS [SECTION 403(B) PLANS]
Payments made to purchase annuity contracts by public school systems or code
Section 501(c)(3) organizations for their employees are excludable from the
gross income of the employee to the extent that aggregate payments for the
employee do not exceed the exclusion allowance provided by Section 403(b) of
the code, the over-all limits for excludable contributions of Section 415 of
the code or the limit on elective contributions. Furthermore, the investment
results of the fund credited to the account are not taxable until benefits are
received either in the form of annuity payouts, in a single sum, or a
withdrawal.
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
distributed. However, the employee may be required to include these amounts in
gross income before
B-7
<PAGE>
distribution if the qualified plan or trust loses its qualification. Corporate
plans qualified under Sections 401(a) or 403(a) of the code are subject to
extensive rules, including limitations on maximum contributions or benefits.
For plan years beginning after December 31, 1996, tax exempt organizations,
except state and local governments, may have 401(k) plans.
Distributions of amounts in excess of nondeductible employee contributions are
generally taxable as ordinary income. If an employee or beneficiary receives a
lump-sum distribution, that is, if the employee or beneficiary receives in a
single tax year the total amounts payable with respect to that employee, and
the benefits are paid as a result of the employee's death or separation from
service or after the employee attains 59 1/2, taxable gain may be eligible for
special lump sum averaging treatment. These special tax rules are not available
in all cases.
SELF-EMPLOYED INDIVIDUALS
(H.R. 10 OR KEOGH)
Under code provisions, self-employed individuals may establish plans commonly
known as H.R. 10 or Keogh plans for themselves and their employees. The tax
consequences to participants under such plans depend upon the plan itself. Such
plans are subject to special rules in addition to those applicable to qualified
corporate plans; therefore, purchasers of the contracts for use with H.R. 10
plans should seek competent advice as to suitability of plan documents and the
funding contracts.
INDIVIDUAL RETIREMENT ANNUITIES (IRA)
Under Section 408 of the code, individuals may participate in a retirement
program known as Individual Retirement Annuity (IRA). An individual may make an
annual IRA contribution of up to the lesser of $2,000 (or $4,000 if IRAs are
maintained for both the individual and his nonworking spouse) or 100% of
compensation. However, IRA contributions may be nondeductible in whole or in
part if (1) the individual or his spouse is an active participant in certain
other retirement programs and (2) the income of the individual (or of the
individual and his spouse) exceeds a specified amount. Distributions from
certain other IRA plans or qualified plans may be rolled over to an IRA on a
tax deferred basis without regard to the limit on contributions, provided
certain requirements are met. Distributions from IRA's are subject to certain
restrictions. Deductible IRA contributions and all IRA earnings will be taxed
as ordinary income when distributed. The failure to satisfy certain code
requirements with respect to an IRA may result in adverse tax consequences.
DEFERRED COMPENSATION PLANS (457 PLANS)
Under the code provisions, employees and independent contractors (participants)
performing services for state and local governments and certain tax-exempt
organizations may establish deferred compensation plans. While participants in
such plans may be permitted to specify the form of investment in which their
plan accounts will participate, all such investments are owned by the
sponsoring employer and are subject to the claims of its creditors. Plans of
state or local governments established on August 20, 1996, or later, must hold
all assets 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 requirements of Section 457 of the code are not taxable as income to the
participant until paid or otherwise made available to the participant or
beneficiary. Deferrals are taxed as compensation from the employer when they
are actually or constructively received by the employee. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of $7,500 or
33 1/3% of the participant's includable compensation. However, in limited
circumstances, up to $15,000 may be deferred in each of the last three years
before retirement.
SIMPLIFIED EMPLOYEE PENSION PLANS [SECTION 408(K)]
An employer may make contributions on behalf of employees to a simplified
employee pension plan (SEP) 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. However, SAR/SEPs in existence
before 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
preceding 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
contributions to an IRA, stated as a percentage of the employees compensation,
but not to exceed $6,000.00 annually as indexed. Such deferrals are not subject
to
B-8
<PAGE>
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 to no more than $6,000.00 annually.
Employer contributions are usually required 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 previously, other than 457 plans.
The portion, if any, of any contribution under a contract made by or on behalf
of an individual which is not excluded from the employee's gross income
(generally, the employee's own nondeductible contributions) constitutes his
investment in the contract. If a distribution is made in the form of annuity
payouts, the employee's investment in the contract (adjusted for certain refund
provisions) divided by his life expectancy (or other period for which annuity
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 employee's
annuity starting date was on or before July 1, 1986 and if his investment in
the contract will be recovered within three years of his annuity starting date,
no amount is included in income until he has fully recovered such investment.
Rules generally provide that all distributions which are not received as an
annuity will be taxed as a pro rata distribution of taxable and nontaxable
amounts (rather than as a distribution first of nontaxable amounts).
If a surrender of or withdrawal from the contract is effected and a
distribution is made in a single payment, the proceeds may qualify for special
lump-sum distribution treatment under certain qualified plans, as discussed
previously. Otherwise, the amount by which the payment exceeds the investment
in the contract (adjusted for any prior withdrawals) allocated to that payout,
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
unless 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 minimum distribution requirements for the above plans, as well as for
Section 457 plans, will result in a 50% excise tax. Various other adverse tax
consequences may also be potentially applicable in certain circumstances to
these types of plans.
Upon an annuitant's death, the taxation of benefits payable to his beneficiary
generally follow these same principles, subject to a variety of special rules.
OTHER CONSIDERATIONS
It should be understood that the foregoing comments about the federal tax
consequences under these contracts are not exhaustive and that special rules
are provided with respect to other tax situations not discussed herein.
Further, the foregoing discussion does not address any applicable state, local
or foreign tax laws. In recent years, numerous changes have been made in the
federal income tax treatment of contracts and retirement plans, which are not
fully discussed previously. Before an investment is made in any of the above
plans, a tax advisor should be consulted.
AUTOMATIC INCREASE IN THE GUARANTEED MINIMUM DEATH BENEFIT
Subject to the following terms and conditions, once a contract has been in
force for a certain period, Lincoln National Life Insurance Co. (Lincoln Life)
will automatically increase the guaranteed minimum death benefit (GMDB):
We will automatically increase the GMDB, separately for each contract year's
purchase payment(s), effective upon the seventh anniversary of each eligible
contract year in which those payments were made (as the contingent deferred
sales charge expires on those payments).
The attributable gain (AG), used to increase the GMDB, will be calculated based
on the contract value at the close of business on the last valuation date
preceding the seventh anniversary of the contract year for which the increase
is made. The AG will be the amount which results from allocating the total
appreciation in the contract to each contract year's purchase payments adjusted
by withdrawals on a first-in-first out (FIFO) basis based on Lincoln Life's
internal rate of return (IRR) calculation (as described below).
If a single purchase payment was deposited or multiple deposits were made in
the first contract year only, then, upon adjustment, the increased GMDB will be
the contract value on the seventh contract anniversary.
If on the seventh contract anniversary, the contract value is less than net
purchase payments, the GMDB will not be adjusted.
B-9
<PAGE>
If purchase payments have been deposited in multiple contract years, then, upon
adjustment, the increased GMDB will be the sum of all purchase payments plus
any AG, as calculated for each contract year which has reached its seventh
anniversary, minus any withdrawals, partial annuitizations and premium taxes
incurred.
The IRR is the level compound rate of return, calculated by Lincoln Life, at
which purchase payments less withdrawals will accumulate to the contract value
on the contract anniversary beginning with the seventh anniversary. The
application of the IRR methodology to any particular contract year could
allocate gain, if any, in a manner which does not precisely correlate with the
contract's actual investment experience for a particular contract year or
subaccount. The calculation of the IRR assumes all purchase payments and
withdrawals occur at the beginning of the year in which they were made. Once
the IRR has been determined, the gain attributable to each contract year is
calculated by applying the IRR to the purchase payments, less any withdrawals
applied on a FIFO basis.
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, Lincoln Life may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors affecting
the overall performance of an insurance company in order to provide an opinion
as to an insurance company's relative financial strength and ability to meet
its contractual obligations. The procedure includes both a quantitative and
qualitative review of each company. A.M. Best also provides certain rankings,
to which Lincoln Life intends to refer.
DUFF & PHELPS insurance company claims-paying ability (CPA) service provides
purchasers of insurance company policies and contracts with analytical and
statistical information on the solvency and liquidity of major U.S. licensed
insurance companies, both mutual and stock.
EAFE INDEX is prepared by Morgan Stanley Capital International (MSCI). It
measures performance of securities in Europe, Australia and the Far East. The
index reflects the movements of world stock markets by representing the
evolution of an unmanaged portfolio. The EAFE Index offers international
diversification with over 1000 companies across 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,
including reports on performance and portfolio analysis, fee and expense
analysis.
MOODY'S insurance claims-paying rating is a system of rating insurance
company's financial strength, market leadership and ability to meet financial
obligations. The purpose of Moody's ratings is to provide investors with a
simple system of gradation by which the relative quality of insurance companies
may be noted.
MORNINGSTAR is an independent financial publisher offering comprehensive
statistical and analytical coverage of open-end and closed-end funds and
variable annuities.
STANDARD & POOR'S insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. The likelihood of a timely flow
of funds from the insurer to the trustee for the bondholders is a key element
in the rating determination for such debt issues.
VARDS (VARIABLE ANNUITY RESEARCH DATA SERVICE) provides a comprehensive guide
to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable
contracts.
STANDARD & POOR'S INDEX -- broad-based measurement of changes in stock-market
conditions based on the average performance of 500 widely held common stocks;
commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks,
their relative weightings to reflect differences in the number of outstanding
shares, and publication of the index itself are services of Standard & Poor's
Corp., 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.
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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 VAA over the fixed account; and the compounding
effect when a client makes regular deposits to his contract.
INTERNET. An electronic communications network which may be used to provide
information regarding Lincoln Life, performance of the subaccounts and
advertising and sales literature.
DOLLAR COST AVERAGING (DCA). You may systematically transfer on a monthly basis
amounts from certain subaccounts or from the fixed side of the contract 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 completing 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 commencement 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 telephone 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
required 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.
Notwithstanding 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 nonqualified 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 Contingent 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.
CROSS-REINVESTMENT SERVICE. Under this option, account value in a designated
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
terminate 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 clients
which Lincoln Life serves. As of the date of this SAI, we were serving over
9,500 employers and had more than 750,000 annuity clients.
LINCOLN LIFE'S ASSETS, SIZE. Sales literature for the VAA may discuss Lincoln
Life's 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. For more information about the financial statements for Lincoln Life
provided in this SAI, please see the cover page of this SAI.
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