<PAGE>
American Legacy III C-Share
Lincoln National Variable Annuity Account H
individual variable annuity contracts
Home Office:
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46802
www.lincolnlife.com
This Prospectus describes the individual flexible premium deferred variable
annuity contract that is issued by The Lincoln National Life Insurance Company
(Lincoln Life). It is primarily for use with nonqualified plans and retirement
plans under Section 408 (IRAs) and 408A (Roth IRAs) of the tax code. Non-ERISA
403(b) contracts will only be issued for purchase payments that are either
lump sum transfers or rollovers. Generally, you do not pay federal income tax
on the contract's growth until it is paid out. The contract is designed to ac-
cumulate contract value and to provide retirement income that you cannot out-
live or for an agreed upon time. These benefits may be a variable or fixed
amount or a combination of both. If you die before the annuity commencement
date, we will pay your beneficiary a death benefit. In the alternative, you
may choose to receive a death benefit upon the death of the annuitant.
The minimum initial purchase payment for the contract is $25,000. Additional
purchase payments may be made to the contract and must be at least $100 per
payment ($25 if transmitted electronically), and at least $300 annually.
You choose whether your contract value accumulates on a variable or a fixed
(guaranteed) basis or both. If you put all your purchase payments into the
fixed account, we guarantee your principal and a minimum interest rate. We
limit withdrawals and transfers from the fixed side of the contract.
All purchase payments for benefits on a variable basis will be placed in Lin-
coln National Variable Annuity Account H (variable annuity account [VAA]). The
VAA is a segregated investment account of Lincoln Life. You take all the in-
vestment risk on the contract value and the retirement income for amounts
placed into one or more of the contract's variable options. If the subaccounts
you select make money, your contract value goes up; if they lose money, it
goes down. How much it goes up or down depends on the performance of the
subaccounts you select. We do not guarantee how any of the variable options or
their funds will perform. Also, neither the U.S. Government nor any federal
agency insures or guarantees your investment in the contract.
The available funds, listed below, are each part of American Funds Insurance
Series (series) Class 2 Shares, also known as American Variable Insurance Se-
ries:
Global Growth
Global Small Capitalization
Growth
International
New World
Growth-Income
Asset Allocation
Bond
High-Yield Bond
U.S. Government/AAA-Rated Securities
Cash Management
This Prospectus gives you information about the contracts that you should know
before you decide to buy a contract and make purchase payments. You should
also review the prospectus for the funds that is attached, and keep both pro-
spectuses for reference.
Neither the SEC nor any state securities commission has approved this contract
or determined that this Prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
You can obtain a current Statement of Additional Information (SAI), dated the
same date as this Prospectus, about the contracts which has more information.
Its terms are made part of this Prospectus. For a free copy, write: Lincoln
National Life Insurance Company, P.O. Box 2348, Fort Wayne, Indiana 46801, or
call 1-800-942-5500. The SAI and other information about Lincoln Life and Ac-
count H are also available on the SEC's web site (http://www.sec.gov). There
is a table of contents for the SAI on the last page of this Prospectus.
July 21, 2000
1
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Table of contents
<TABLE>
<CAPTION>
Page
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<S> <C>
Special terms 2
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Expense tables 3
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Summary 5
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Condensed financial information 6
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Investment results 6
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Financial statements 6
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The Lincoln National Life Insurance Co. 6
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DCA fixed account 6
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Variable annuity account (VAA) 6
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Investments of the variable annuity account 7
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Charges and other deductions 9
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The contracts 9
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</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Annuity payouts 14
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Federal tax matters 15
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Voting rights 18
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Distribution of the contracts 19
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Return privilege 19
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State regulation 19
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Restrictions under the Texas Optional Retirement Program 19
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Records and reports 19
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Other information 19
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Statement of additional information table of contents for Variable
Annuity Account H American Legacy III C-Share 21
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</TABLE>
Special terms
(We have italicized the terms that have special meaning throughout the Pro-
spectus)
Account or variable annuity account (VAA) -- The segregated investment ac-
count, Account H, into which Lincoln Life sets aside and invests the assets
for the variable side of the contract offered in this Prospectus.
Accumulation unit -- A measure used to calculate contract value for the vari-
able side of the contract before the annuity commencement date.
Annuitant -- The person on whose life the annuity benefit payments are based
and upon whose death a death benefit may be paid.
Annuity commencement date -- The valuation date when funds are withdrawn or
converted into annuity units or fixed dollar payout for payment of retirement
income benefits under the annuity payout option you select.
Annuity payout -- An amount paid at regular intervals after the annuity com-
mencement date under one of several options available to the annuitant and/or
any other payee. This amount may be paid on a variable or fixed basis, or a
combination of both.
Annuity unit -- A measure used to calculate the amount of annuity payouts for
the variable side of the contract after the annuity commencement date.
Beneficiary -- The person you choose to receive the death benefit that is paid
if you die before the annuity commencement date.
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 the annuitant.
Contract value -- At a given time before the annuity commencement date, the
total value of all accumulation units for a contract plus the value of the DCA
fixed account 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.
DCA fixed account -- An account established to accept purchase payments or
transfers of contract value, that may only be used for dollar cost averaging
purposes. The DCA fixed account is part of the general account of Lincoln
Life.
Death benefit -- The amount payable to your designated beneficiary if the
owner dies before the annuity commencement date or, if selected, to the owner
if the annuitant dies.
Lincoln Life (we, us, our) -- The Lincoln National Life Insurance Company.
Purchase payments -- Amounts paid into the contract.
Series -- American Funds Insurance Series (series), the funds to which you di-
rect purchase payments.
Subaccount or American Legacy III C-Share subaccount -- The 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.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period -- The period starting at the close of trading (currently
4:00 p.m. New York time) on each day that the NYSE is open for trading (valua-
tion date) and ending at the close of such trading on the next valuation date.
2
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Expense tables
Account H annual expenses for American Legacy III C-Share subaccounts:*
(as a percentage of average account value):
<TABLE>
<CAPTION>
Enhanced
Guaranteed Guarantee of
Minimum Principal
Death Benefit Death
(EGMDB) Benefit
<S> <C> <C>
Mortality and expense risk charge 1.55% 1.45%
Administrative charge .10% .10%
----- -----
Total annual charge for each American Legacy
subaccount 1.65% 1.55%
</TABLE>
Annual expenses of the funds for the year ended December 31, 1999:
(as a percentage of each fund's average net assets):
<TABLE>
<CAPTION>
Management 12b-1 Other Total
fees + fees + expenses = expenses
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Global Growth .68% .25% .03% .96%
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2. Global Small Capitalization .78 .25 .03 1.06
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3. Growth .38 .25 .01 .64
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4. International .55 .25 .05 .85
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5. New World** .89 .25 .06 1.20
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6. Growth-Income .34 .25 .01 .60
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7. Asset Allocation .43 .25 .01 .69
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8. Bond .51 .25 .02 .78
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9. High-Yield Bond .50 .25 .01 .76
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10. U.S. Govt./AAA-Rated
Securities .51 .25 .01 .77
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11. Cash Management .44 .25 .01 .70
-------------------------------------------------------------------------------
</TABLE>
*The VAA is divided into separately-named subaccounts, eleven of which are
available under the contracts. Each subaccount, in turn, invests purchase pay-
ments in shares of a class of its respective fund.
**These expenses are annualized. The fund began operations on June 17, 1999.
3
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Example
(expenses of the subaccounts and of the funds):
If you surrender your contract at the end of the time period shown, you would
pay the following expenses on a $1,000 investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 year 3 years
------------------------------------------------------------------------------------------
<S> <C> <C>
1. Global Growth $26 $81
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2. Global Small Capitalization 27 84
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3. Growth 23 72
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4. International 25 78
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5. New World 29 88
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6. Growth-Income 23 70
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7. Asset Allocation 24 73
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8. Bond 25 76
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9. High-Yield Bond 24 75
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10. U.S. Govt./AAA-Rated Securities 25 75
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11. Cash Management 24 73
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</TABLE>
We provide this example to help you understand the direct and indirect costs
and expenses of the contract. The example assumes that an EGMDB is in effect.
Without this benefit, expenses would be lower.
For more information, see Charges and other deductions in this Prospectus, and
Management and Organization in the prospectus for the funds. Premium taxes may
also apply, although they do not appear in the examples. This example should
not be considered a representation of past or future expenses. Actual expenses
may be more or less than those shown.
4
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Summary
What kind of contract am I buying? It is an individual variable annuity con-
tract between you and Lincoln Life. See The contracts.
What is the variable annuity account (VAA)? It is a separate account we estab-
lished under Indiana insurance law, and registered with the SEC as a unit in-
vestment trust. VAA assets are allocated to one or more subaccounts, according
to your investment choices. VAA 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? Based upon your instruction, the VAA applies
your purchase payments to buy series shares in one or more of the investment
funds of the series: Global Growth, Global Small Capitalization, Growth, In-
ternational, New World, Growth-Income, Asset Allocation, Bond, High-Yield
Bond, U.S. Government/AAA-Rated Securities and Cash Management. In turn, each
fund holds a portfolio of securities consistent with its investment policy.
See Investments of the variable annuity account--Description of the series.
Who invests my money? The investment advisor for the series is Capital Re-
search and Management Company (CRMC), Los Angeles, California. CRMC is regis-
tered as an investment advisor with the SEC. See Investments of the variable
annuity account--Investment advisor.
How does the contract work? If we approve your application, we will send you a
contract. When you make purchase payments during the accumulation phase, you
buy accumulation units. If you decide to receive retirement income payments,
your accumulation units are converted to annuity units. Your retirement income
payments will be based on the number of annuity units you received and the
value of each annuity unit on payout days. See The contracts.
What charges do I pay under the contract? We
will deduct any applicable premium tax from purchase payments or contract
value at the time the tax is incurred or at another time we choose.
We apply an annual charge totaling 1.65% to the daily net asset value of the
VAA. This charge includes 0.10% as an administrative charge and 1.55% as a
mortality and expense risk charge. If the enhanced death benefit is not in ef-
fect, the mortality and expense risk charge is 1.45%, for an annual charge to-
taling 1.55%. See Charges and other deductions.
The series pays a management fee to CRMC based on the average daily net asset
value of each fund. See Investments of the variable annuity account--Invest-
ment advisor. Each fund also has a 12b-1 fee and additional operating ex-
penses. These are described in the prospectus for the series.
What purchase payments do I make, and how often? Subject to the minimum and
maximum payment amounts, your payments are completely flexible. See The con-
tracts--Purchase payments.
How will my annuity payouts be calculated? If you decide to annuitize, you may
select an annuity option and start receiving retirement income payments from
your contract as a fixed option or variable option or a combination of both.
See Annuity payouts--Annuity options. Remember that participants in the VAA
benefit from any gain, and take a risk of any loss, in the value of the secu-
rities in the funds' portfolios.
What happens if I die before I annuitize? The enhanced death benefit, if in
effect, will be paid to your beneficiary. If the enhanced death benefit is not
in effect, your beneficiary will receive the guarantee of principal. Your ben-
eficiary has options as to how the death benefit is paid. In the alternative,
you may choose to receive a death benefit upon the death of the annuitant. See
The contracts--Death benefit before the annuity commencement date.
May I transfer contract value between variable options? Yes, with certain lim-
its. See The contracts--Transfers between subaccounts on or before the annuity
commencement date and Transfers after the annuity commencement date.
May I surrender the contract or make a withdrawal? Yes, subject to contract
requirements and to the restrictions of any qualified retirement plan for
which the contract was purchased. A portion of surrender/withdrawal proceeds
may be taxable. In addition, if you decide to take a distribution before age
59 1/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A surren-
der or a withdrawal also may be subject to 20% withholding. See Federal tax
mat- ters.
Do I get a free look at this contract? Yes. You can cancel the contract within
ten days (in some states longer) of the date you first receive the contract.
You need to return the contract, postage prepaid, to our home office. In most
states you assume the risk of any market drop on purchase payments you allo-
cate to the variable side of the contract. See Return privilege.
5
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Condensed financial information for the variable annuity account
Because the subaccounts which are available under the contracts did not begin
operation before the date of this Prospectus, financial information for the
subaccounts is not included in this Prospectus or in the SAI.
Investment results
At times, the VAA may compare its investment results to various unmanaged in-
dices or other variable annuities in reports to shareholders, sales literature
and advertisements. The results will be calculated on a total return basis for
various periods. Total returns include the reinvestment of all distributions,
which are reflected in changes in unit value. See the SAI for further informa-
tion.
Financial statements
The financial statements of the VAA and the statutory-basis financial state-
ments of Lincoln Life are located in the SAI. If you would like a free copy of
the SAI, complete and mail the enclosed card, or call 1-800-942-5500.
The 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.
DCA fixed account
Purchase payments allocated to the DCA fixed account of the contract become
part of Lincoln Life's general account, and do not participate in the invest-
ment experience of the VAA. The general account is subject to regulation and
supervision by the Indiana Insurance Department as well as the insurance laws
and regulations of the jurisdictions in which the contracts are distributed.
In reliance on certain exemptions, exclusions and rules, Lincoln Life has not
registered interests in the general account as a security under the Securities
Act of 1933 and has not registered the general account as an investment com-
pany under the Investment Company Act of 1940. Accordingly, neither the gen-
eral account nor any interests in it are regulated under the 1933 Act or the
1940 Act. Lincoln Life has been advised that the staff of the SEC has not made
a review of the disclosures which are included in this Prospectus which relate
to our general account and to the DCA fixed account under the contract. These
disclosures, however, may be subject to certain provisions of the federal se-
curities laws relating to the accuracy and completeness of statements made in
prospectuses. This Prospectus is generally intended to serve as a disclosure
document only for aspects of the contract involving the VAA, and therefore
contains only selected information regarding the DCA fixed account of the con-
tract. Complete details regarding the DCA fixed account of the contract are in
the contract.
Purchase payments allocated to the DCA fixed account of the contract are guar-
anteed to be credited with a minimum interest rate, specified in the contract,
of at least 3.0%. A purchase payment allocated to the DCA fixed account of the
contract is credited with interest beginning on the next calendar day follow-
ing the date of receipt if all data is complete. Lincoln Life may vary the way
in which it credits interest to the DCA fixed account of the contract from
time to time.
ANY INTEREST IN EXCESS OF 3.0% WILL BE DECLARED IN ADVANCE IN LINCOLN LIFE'S
SOLE DISCRETION, CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF
3.0% WILL BE DECLARED.
Variable annuity account (VAA)
On February 7, 1989, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the Investment Company Act of 1940 (1940 Act).
The SEC does not supervise the VAA or Lincoln Life. The VAA is a segregated
investment account, meaning that its assets may not be charged with liabili-
ties resulting from any other business that we may conduct. Income, gains and
losses, whether realized or not, from assets allocated to the VAA are, in ac-
cordance with the applicable annuity contracts, credited to or charged against
the VAA. They are credited or charged without regard to any other income,
gains or losses of Lincoln Life. The VAA satisfies the definition of a sepa-
rate account under the federal securities laws. We do not guarantee the in-
vestment 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.
The VAA is used to support other annuity contracts offered by Lincoln Life in
addition to the contracts described in this Prospectus. The other annuity con-
tracts supported by the VAA invest in the same portfolios of the series as the
contracts described in this Prospectus. These other annuity contracts may have
different charges that could affect performance of the subaccount.
6
<PAGE>
Investments of the variable annuity account
You decide the subaccount(s) to which you allocate purchase payments. There is
a separate subaccount which corresponds to each class of each fund of the se-
ries. You may change your allocation without penalty or charges. Shares of the
funds will be sold at net asset value with no initial sales charge to the VAA
in order to fund the contracts. The series is required to redeem fund shares
at net asset value upon our request. We reserve the right to add, delete or
substitute funds.
Investment advisor
The investment advisor for the series is Capital Research and Management Com-
pany (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.
With respect to the series, the advisor and/or distributor, or an affiliate
thereof, may compensate Lincoln Life (or an affiliate) for administrative,
distribution, or other services. It is anticipated that such compensation will
be based on assets of the particular series attributable to the contracts
along with certain other variable contracts issued or administered by Lincoln
Life (or an affiliate).
Description of the series
The series was organized as a Massachusetts business trust in 1983 and is reg-
istered as a diversified, open-end management investment company under the
1940 Act. Diversified means not owning too great a percentage of the securi-
ties of any one company. An open-end company is one which, in this case, per-
mits Lincoln Life to sell its shares back to the series when you make a with-
drawal, surrender the contract or transfer from one fund to another. Manage-
ment investment company is the legal term for a mutual fund. These definitions
are very general. The precise legal definitions for these terms are contained
in the 1940 Act.
The series has eleven separate portfolios of funds. Fund assets are segregated
and a shareholder's interest is limited to those funds in which the share-
holder owns shares. The series has adopted a plan pursuant to Rule 18f-3 under
the 1940 Act to permit the series to establish a multiple class distribution
system for all of its portfolios. The series' Board of Trustees may at any
time establish additional funds or classes, which may or may not be available
to the VAA.
Under the multi-class system adopted by the series, shares of each multi-class
fund represent an equal pro rata interest in that fund and, generally, have
identical voting, dividend, liquidation, and other rights, preferences, pow-
ers, restrictions, limitations, qualifications and terms and conditions, ex-
cept 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
arrangement; and (4) each class has separate voting rights on any matter sub-
mitted to shareholders in which the interests of one class differ from the in-
terests 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 as well as related expenses incurred by Lin-
coln Life.
Each fund has two classes of shares, designated as Class 1 shares and Class 2
shares. Class 1 and 2 differ primarily in that Class 2 (but not Class 1)
shares are subject to a 12b-1 plan. Only Class 2 shares are available under
the contracts.
Certain funds offered as part of this contract have similar investment objec-
tives and policies to other portfolios managed by the advisor. The investment
results of the funds, however, may be higher or lower than the other portfo-
lios that are managed by the advisor. There can be no assurance, and no repre-
sentation is made, that the investment results of any of the funds will be
comparable to the investment results of any other portfolio managed by the ad-
visor.
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 fund seeks to make your investment grow over time
by investing primarily in common stocks of companies located around the
world. The fund is designed for investors seeking capital appreciation
through stocks. Investors in the fund should have a long-term perspective
and be able to tolerate potentially wide price fluctuations.
2. Global Small Capitalization Fund--The fund seeks to make your investment
grow over time by investing primarily in stocks of smaller companies lo-
cated around the world that typically have market capitalizations of $50
million to $1.5 billion. The fund is designed for investors seeking capital
appreciation through stocks. Investors in the fund should have a long-term
perspective and be able to tolerate potentially wide price fluctuations.
7
<PAGE>
3. Growth Fund--The fund seeks to make your investment grow by investing pri-
marily in common stocks of companies that appear to offer superior opportu-
nities for growth of capital. The fund is designed for investors seeking
capital appreciation through stocks. Investors in the fund should have a
long-term perspective and be able to tolerate potentially wide price fluc-
tuations.
4. International Fund--The fund seeks to make your investment grow over time
by investing primarily in common stocks of companies located outside the
United States. The fund is designed for investors seeking capital apprecia-
tion through stocks. Investors in the fund should have a long-term perspec-
tive and be able to tolerate potentially wide price fluctuations.
5. New World Fund--The fund seeks to make your investment grow over time by
investing primarily in stocks of companies with significant exposure to
countries which have developing economies and/or markets. The fund may also
invest in debt securities of issuers, including issuers of high-yield,
high-risk bonds, in these countries. Investors in the fund should have a
long-term perspective and be able to tolerate potentially wide price fluc-
tuations.
6. Growth-Income Fund--The fund seeks to make your investment grow and provide
you with income over time by investing primarily in common stocks or other
securities which demonstrate the potential for appreciation and/or divi-
dends. The fund is designed for investors seeking both capital appreciation
and income. Investors in the fund should have a long-term perspective and
be able to tolerate potentially wide price fluctuations.
7. Asset Allocation Fund--The fund seeks to provide you with high total return
(including income and capital gains) consistent with preservation of capi-
tal over the long-term by investing in a diversified portfolio of common
stocks and other equity securities; bonds and other intermediate and long-
term debt securities, and money market instruments (debt securities matur-
ing in one year or less). Investors in the fund should have a long-term
perspective and be able to tolerate potentially wide price fluctuations.
8. Bond Fund--The fund seeks to maximize your level of current income and pre-
serve your capital by investing primarily in bonds. The fund is designed
for investors seeking income and more price stability than stocks, and cap-
ital preservation over the long-term. Investors in the fund should have a
long-term perspective and be able to tolerate potentially wide price fluc-
tuations.
9. High-Yield Bond Fund--The fund seeks to provide you with a high level of
current income and secondarily capital appreciation by investing primarily
in lower quality debt securities (rated Ba or BB or below by Moody's In-
vestors Services, Inc. or Standard & Poor's Corporation), including those
of non-U.S. issuers. The fund may also invest in equity securities that
provide an opportunity for capital appreciation. Investors in the fund
should have a long-term perspective and be able to tolerate potentially
wide price fluctuations.
10. U.S. Government/AAA-Rated Securities Fund--The fund seeks to provide you
with a high level of current income, as well as preserve your investment.
The fund invests primarily in securities that are guaranteed by the "full
faith and credit" pledge of the U.S. Government and securities that are
rated AAA or Aaa by Moody's Investor's Services, Inc. or Standard & Poor's
Corporation or unrated but determined to be of equivalent quality.
11. Cash Management Fund--The fund seeks to provide you an opportunity to earn
income on your cash reserves while preserving the value of your investment
and maintaining liquidity by investing in a diversified selection of high
quality money market instruments.
Sale of fund shares
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. Redeemed
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 fund-
ing.
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 pro-
spectus for the series.
Reinvestment of dividends and capital gain distributions
All dividend and capital gain distributions of the funds are automatically re-
invested in shares of the distribut-
8
<PAGE>
ing funds at their net asset value on the date of distribution. Dividends are
not paid out to contractowners as additional units, but are reflected as
changes in unit values.
Addition, deletion or substitution of investments
We reserve the right, within the law, to make additions, deletions and substi-
tutions for the series and/or any funds within the series in which the VAA
participates. (We may substitute shares of other funds for shares already pur-
chased, or to be purchased in the future, under the contract. This substitu-
tion might occur if shares of a fund should no longer be available, or if in-
vestment in any fund's shares should become inappropriate, in the judgment of
our management, for the purposes of the contract.) We cannot substitute shares
of one fund for another without approval by the SEC. We will also notify you.
Charges and other
deductions
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the contracts. We incur certain
costs and expenses for the distribution and administration of the contracts
and for providing the benefits payable thereunder. More particularly, our ad-
ministrative services include: processing applications for and issuing the
contracts, processing purchases and redemptions of fund shares as required
(including dollar cost averaging, cross-reinvestment, portfolio rebalancing,
and automatic withdrawal services--See Additional services and the SAI for
more information about these programs), maintaining records, administering an-
nuity payouts, furnishing accounting and valuation services (including the
calculation and monitoring of daily subaccount values), reconciling and depos-
iting cash receipts, providing contract confirmations, providing toll-free in-
quiry services and furnishing telephone fund transfer services. The risks we
assume include: the risk that annuitants receiving annuity payouts under con-
tract live longer than we assumed when we calculated our guaranteed rates
(these rates are incorporated in the contract and cannot be changed); the risk
that death benefits paid will exceed the actual contract value; and the risk
that our costs in providing the services will exceed our revenues from con-
tract charges (which we cannot change). The amount of a charge may not neces-
sarily correspond to the costs associated with providing the services or bene-
fits indicated by the description of the charge.
Deductions from the VAA for American Legacy
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 1.65% (1.55% for contracts without the EGMDB) of the daily net asset
value. The charge consists of a 0.10% administrative charge and a 1.55% (1.45%
for contracts without the EGMDB) mortality and expense risk charge.
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 gen-
erally depend upon the law of your state of residence. The tax ranges from
zero to 5.0%.
Other charges and deductions
There are deductions from and expenses paid out of the assets of the under-
lying series that are more fully described in the prospectus for the series.
Among these deductions and expenses are 12b-1 fees which reimburse Lincoln
Life for certain expenses incurred in connection with certain administrative
and distribution support services provided to the series.
Additional information
The administrative charge 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 ex-
penses, or that we perform fewer sales or administrative services than those
originally contemplated in establishing the level of those charges. Lower dis-
tribution and administrative expenses may be the result of economies associ-
ated 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 de-
posits on behalf of its employees or (4) any other circumstances which reduce
distribution or administrative expenses. The exact amount of administrative
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 rep-
resentative authorized by us. The completed application is sent to us and we
decide whether to accept or reject it. If the application is accepted, a con-
tract is prepared and executed by our legally authorized officers. The con-
tract is then sent to you through your sales representative. See Distribution
of the contracts.
When a completed application and all other information necessary for process-
ing a purchase order is 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
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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. 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 con-
tracts may be lawfully sold and also be eligible to participate in any of the
qualified or nonqualified plans for which the contracts are designed. The
contractowner, joint owner, and annuitant cannot be older than age 90.
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 $25,000.
For any contract issued to employees and registered representatives of any
member of the selling group and their spouses and minor children, or to offi-
cers, directors, trustees or bona-fide full-time employees and their spouses
and minor children, of Lincoln Financial Group or The Capital Group, Inc. or
their affiliated or managed companies (based upon the contractowner's status
at the time the contract was purchased), the minimum initial purchase payment
is $10,000. The minimum annual amount for additional purchase payments is
$300. The minimum payment to the contract at any one time must be at least
$100 ($25 if transmitted electronically). Purchase payments in total may not
exceed $2 million for an owner or $1 million for each joint owner without Lin-
coln Life approval. If you stop making purchase payments, the contract will
remain in force as a paid-up contract. However, we may terminate the contract
as allowed by your state's non-forfeiture law for individual deferred annui-
ties. Purchase payments may be made or, if stopped, resumed at any time until
the annuity commencement date, the surrender of the contract, maturity date or
the payment of any death benefit, whichever comes first. Lincoln Life reserves
the right to limit purchase payments made to the contract.
Valuation date
Accumulation and annuity units will be valued once daily at the close of
trading (currently, normally, 4:00 p.m., New York time) on each day the New
York Stock Exchange 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. Upon allocation to a subaccount, purchase payments are con-
verted 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 valua-
tion date. The number of accumulation units determined in this way is not
changed by any subsequent change in the value of an accumulation unit. Howev-
er, the dollar value of an accumulation unit will vary depending not only upon
how well the underlying fund's investments perform, but also upon the expenses
of the VAA and the underlying funds.
Valuation of accumulation units
Purchase payments allocated to the VAA are converted into accumulation units.
This is done by dividing each purchase payment by the value of an accumulation
unit for the valuation period during which the purchase payment is allocated
to the VAA. The accumulation unit value for each subaccount was or will be es-
tablished at the inception of the subaccount. It may increase or decrease from
valuation period to valuation period. The accumulation unit value for a
subaccount for a later valuation period is determined as follows:
(1) The total value of the fund shares held in the subaccount is calculated by
multiplying the number of fund shares owned by the subaccount at the be-
ginning of the valuation period by the net asset value per share of the
fund at the end of the valuation period, and adding any dividend or other
distribution of the fund if an ex-dividend date occurs during the valua-
tion period; minus
(2) The liabilities of the subaccount at the end of the valuation period;
these liabilities include daily charges imposed on the subaccount, and may
include a charge or credit with respect to any taxes paid or reserved for
by us that we determine result from the operations of the VAA; and
(3) The result of (2) is divided by the number of subaccount units outstanding
at the beginning of the valuation period.
The daily charges imposed on a subaccount for any valuation period are equal
to the daily mortality and expense risk charge and the daily administrative
charge multiplied by the number of calendar days in the valuation period. Be-
cause a different daily charge is made for contracts with the EGMDB than for
those without, each of the two types of contracts will have different corre-
sponding accumulation unit values on any given day.
Transfers between subaccounts on or before the annuity commencement date
After the first thirty days from the effective date of your contract, you may
transfer all or a portion of your
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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 accumu-
lation unit values determined at the end of the valuation date on which the
transfer request is received.
Transfers are limited to twelve (12) per contract year unless otherwise autho-
rized by Lincoln Life. This limit does not apply to transfers made under the
automatic transfer programs of dollar cost averaging, portfolio rebalancing,
or cross-reinvestment elected on forms available from us. (See Additional
services and the SAI for more information about these programs.) The minimum
amount which may be transferred between subaccounts is $300 (or the entire
amount in the subaccount, if less than $300). If the transfer from a
subaccount would leave you with less than $300 in the subaccount, we may
transfer the total balance of the subaccount.
A transfer may be made by writing to our home office or, if a Telephone Ex-
change Authorization form (available from us) is on file with us, by a toll-
free telephone call or by the Lincoln Life internet site. In order to prevent
unauthorized or fraudulent telephone transfers, we may require the caller to
provide certain identifying information before we will act upon his or her in-
structions. 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 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 p.m. New York time.
When thinking about a transfer of contract value, you should consider the in-
herent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time. This
contract is not designed for professional market timing organizations or other
entities using programmed and frequent transfers.
Repeated patterns of frequent transfers are disruptive to the operation of the
subaccounts, and should Lincoln Life become aware of such disruptive practic-
es, Lincoln Life may refuse to permit such transfers.
Payment or transfer may be delayed as permitted by the 1940 Act.
Transfers after the annuity commencement date
You may transfer all or a portion of your investment in one subaccount to an-
other subaccount of the contract. Those transfers will be limited to three
times per contract year. You may also transfer from a variable annuity payout
to a fixed annuity payout. No transfers are allowed from the fixed side of the
contract to the subaccounts.
Additional Services
There are four additional services available to you under your contract: dol-
lar-cost averaging (DCA), automatic withdrawal service (AWS), cross-reinvest-
ment service and portfolio rebalancing. In order to take advantage of one of
these services, you will need to complete the election form for the service
that is available from us. For further detailed information on these services,
please see Advertising and sales literature in the SAI.
Dollar-cost averaging allows you to transfer amounts from the DCA fixed ac-
count or certain variable subaccounts into the variable subaccounts on a
monthly basis. The minimum amount that can be dollar cost averaged is $1,500.
The automatic withdrawal service (AWS) provides for an automatic periodic
withdrawal of your contract value. The minimum contract value required to es-
tablish an AWS is $10,000.
The cross-reinvestment service allows you to automatically transfer the ac-
count value in a designated variable subaccount that exceeds a baseline amount
to another specific variable subaccount at specific intervals. The minimum
contract value required for this service is $10,000.
Portfolio rebalancing is an option that restores to a pre-determined level the
percentage of contract value allocated to each variable account subaccount.
The rebalancing may take place monthly, quarterly, semi-annually or annually.
Death benefit before the annuity commencement date
You may designate a beneficiary during your lifetime and change the benefi-
ciary by filing a written request with our home office. Each change of benefi-
ciary revokes any previous designation. We reserve the right to request that
you send us the contract for endorsement of a change of beneficiary.
Upon the death of the contractowner, a death benefit will be paid to the bene-
ficiary. Upon the death of a joint owner, the death benefit will be paid to
the surviving joint owner. Upon the death of an annuitant who is not the
contractowner or joint owner, a death benefit may be paid to the contractowner
(and joint owner, if applicable, in equal shares). If the contractowner is a
corporation or other non-individual (non-natural person), the death of the an-
nuitant will be treated as death of the contractowner. Death benefits are tax-
able. See Federal tax matters.
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If the death occurs before the annuity commencement date and the enhanced
guaranteed minimum death benefit (EGMDB) is in effect, the death benefit paid
will be the greater of: (1) the contract value as of the day on which Lincoln
Life approves the payment of the claim; or (2) the highest contract value
which the contract attains on any contract anniversary date (including the in-
ception date) for ages up to, and including, the deceased's age 80. The high-
est contract value is increased by purchase payments and is decreased by par-
tial withdrawals, partial annuitizations, and any premium taxes incurred sub-
sequent to the anniversary date on which the highest contract value is ob-
tained.
If the EGMDB is not in effect, the death benefit will be equal to the guaran-
tee of principal death benefit, which is the greater of contract value as of
the day Lincoln Life approved the payment of the claim or the sum of all pur-
chase payments, minus all withdrawals, partial annuitizations and premium tax
incurred.
If the beneficiary is the spouse of the contractowner, then the spouse may
elect to continue the contract as owner.
If there are joint owners, upon the death of the first contractowner, Lincoln
Life will pay a death benefit to the surviving joint owner. The surviving
joint owner will be treated as the primary, designated beneficiary. Any other
beneficiary designation on record at the time of death will be treated as a
contingent beneficiary. If the surviving joint owner is the spouse of the de-
ceased joint owner he/she may continue the contract as sole contractowner.
Upon the death of the spouse who continues the contract, Lincoln Life will pay
a death benefit to the designated beneficiary(s).
Upon the death of a contractowner, joint owner or annuitant, if the surviving
spouse continues the contract, any portion of the death benefit that would
have been payable (if the contract had not been continued) that exceeds the
current contract value will be credited to the contract. This provision ap-
plies only one time for each contract.
If an annuitant who is not the contractowner or joint owner dies, then the
contingent annuitant, if named, becomes the annuitant and no death benefit is
payable on the death of the annuitant. If no contingent annuitant is named,
the contractowner (or younger of joint owners) becomes the annuitant. Alterna-
tively, the contractowner may elect a death benefit payable to the
contractowner (and joint owner, if applicable, in equal shares) if the annui-
tant named on this contract has not been changed, unless the change occurred
because of the death of a prior annuitant.
Notification of the election of this death benefit must be received by Lincoln
Life within 75 days of the death of the annuitant. If no contractowner is liv-
ing on the date of death of the annuitant, the death benefit will be available
to the beneficiary. The contract terminates when any death benefit is paid due
to the death of the annuitant. A death benefit payable on the death of the an-
nuitant will not be paid if the annuitant has been changed subsequent to the
effective date of this contract unless the change occurred because of the
death of a prior annuitant.
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 (e.g. an original certified death certificate), or any other proof
of death satisfactory to us, of the death; (2) written authorization for pay-
ment; and (3) our receipt of all required claim forms, fully completed. If the
beneficiary is a minor, court documents appointing the guardian/custodian must
be submitted.
When applying for a contract, an applicant can request a contract without the
EGMDB. The EGMDB is not available under contracts used for qualified plans
(other than IRAs) or contracts issued to a contractowner, joint owner or annu-
itant who is age 80 or older at the time of issuance.
After a contract is issued, the contractowner may discontinue the EGMDB at any
time by completing the Enhanced Guaranteed Minimum Death Benefit Discontinu-
ance form and sending it to Lincoln Life. The benefit will be discontinued as
of the valuation date we receive the request, and we will stop deducting the
charge for the benefit as of that date. See Charges and other deductions. If
you discontinue the benefit, it cannot be reinstated.
If a lump sum settlement is elected, the proceeds will be mailed within seven
days of approval by us of the claim subject to the laws, regulations and tax
code governing payment of death benefits. This payment may be postponed as
permitted by the Investment Company Act of 1940.
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of a beneficiary:
1. If any beneficiary dies before the contractowner, that beneficiary's inter-
est will go to any other beneficiaries named, according to their respective
interests; and/or
2. If no beneficiary survives the contractowner, the proceeds will be paid to
the contractowner's estate.
Unless the contractowner has already selected a settlement option, the benefi-
ciary may choose the method of payment of the death benefit. The death benefit
payable to the beneficiary or joint owner must be distributed within five
years of the contractowner's date of death unless the beneficiary begins re-
ceiving within one year of the contractowner's death the distribution in the
form of a life annuity or an annuity for a designated period not extending be-
yond the beneficiary's life expectancy.
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The death benefit payable on the death of the annuitant will be distributed in
either a lump sum settlement or under an annuity payout. The annuity payout
must be selected within 60 days after Lincoln Life has approved the death
claim.
Joint ownership
If the contract has joint owners, 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. Not more than two
owners (an owner and joint owner) may be named and contingent owners are not
permitted.
Surrenders and withdrawals
Before the annuity commencement date, we will allow the surrender of the con-
tract or a withdrawal of the contract value upon your written request, subject
to the rules discussed below. Surrender or withdrawal rights after the annuity
commencement date are not available at this time, but may be available in the
future.
The amount available upon surrender/withdrawal is the contract value less any
applicable fees and taxes at the end of the valuation period during which the
written request for surrender/withdrawal is received at the home office. The
minimum amount which can be withdrawn is $300. Unless a request for withdrawal
specifies otherwise, withdrawals will be made from all subaccounts within the
VAA and from the DCA fixed account in the same proportion that the amount of
withdrawal bears to the total contract value. Unless prohibited,
surrender/withdrawal payments will be mailed within seven days after we re-
ceive a valid written request at the home office. The payment may be postponed
as permitted by the 1940 Act.
The tax consequences of a surrender/withdrawal are discussed later in this
booklet. See Federal tax matters.
Special restrictions on surrenders/withdrawals apply if your contract is pur-
chased as part of a retirement plan of a public school system or 501(c)(3) or-
ganization under Section 403(b) of the tax code. Beginning January 1, 1989, in
order for a contract to retain its tax-qualified status, Section 403(b) pro-
hibits 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 contribu-
tions and earnings through December 31, 1988, are not subject to the previ-
ously stated restriction. Funds transferred to the contract from a 403(b)(7)
custodial account will also be subject to the restrictions.
Lincoln Life reserves the right to surrender this contract if any withdrawal
reduces the total contract value to a level at which this contract may be sur-
rendered in accordance with applicable law for individual deferred annuities.
Participants in the Texas Optional Retirement Program should refer to the Re-
strictions under the Texas Optional Retirement Program, later in this Prospec-
tus.
Delay of payments
Contract proceeds from the VAA will be paid within seven days, except (i) when
the NYSE is closed (other than weekends and holidays); (ii) times when market
trading is restricted or the SEC declares an emergency, and we cannot value
units or the funds cannot redeem shares; or (iii) when the SEC so orders to
protect contractowners.
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
Commissions are paid to dealers under different commission options. The maxi-
mum commission paid as a percentage of each purchase payment is 2.50% plus on-
going annual compensation of up to 1.00%. Alternate commission schedules are
available with lower initial commission amounts based on purchase payments. At
times, additional sales incentives (up to an annual continuing 0.10% of con-
tract value) may be provided to dealers maintaining certain sales volume lev-
els. Upon annuitization, the commissions paid to dealers are a maximum of
6.00% of account annuitized and/or an annual continuing commission of up to
1.00% (or up to 1.10% for dealers maintaining certain sales volume levels) of
statutory reserves. 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; and 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. Non-qual-
ified contracts may not be collaterally assigned. 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.
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Annuity payouts
When you apply for a contract, you may select any annuity commencement date
permitted by law. The contract provides optional forms of payouts of annuities
(annuity options), each of which is payable on a variable basis, a fixed basis
or a combination of both as you specify. The contract provides that all or
part of the contract value may be used to purchase an annuity.
You may elect annuity payouts in monthly, quarterly, semiannual or annual in-
stallments. If the payouts from any subaccount would be or become less than
$50, we have the right to reduce their frequency until the payouts are at
least $50 each. Following are explanations of the variable 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 beneficia-
ries. However, there is the risk under this option that the recipient would
receive no payouts if the annuitant dies before the date set for the first
payout; only one payout if death occurs before the second scheduled payout,
and so on.
Life Income with Payouts Guaranteed for Designated Period. This option guaran-
tees periodic payouts 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 con-
tinue during the lifetime of the survivor.
Joint Life Annuity with Guaranteed Period. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues dur-
ing the joint lifetime of the annuitant and a designated joint annuitant. The
payouts continue during the lifetime of the survivor. The designated period is
selected by the contractowner.
Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic
payout during the joint lifetime of the annuitant and a designated joint annu-
itant. When one of the joint annuitants dies, the survivor receives two thirds
of the periodic payout made when both were alive.
Joint Life and Two-Thirds Survivor Annuity with Guaranteed Period. This option
provides a periodic payout during the joint lifetime of the annuitant and a
joint annuitant. When one of the joint annuitants dies, the survivor receives
two-thirds of the periodic payout made when both were alive. This option fur-
ther provides that should one or both of the annuitants dies during the
elected guaranteed period, usually 10 or 20 years, full benefit payment will
continue for the rest of the guaranteed period.
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 minus
(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
Under the annuity options listed above, you may not make withdrawals. Other
options, with or without withdrawal features, may be made available by us. You
may pre-select an annuity payout option as a method of paying the death bene-
fit to a beneficiary. If you do, the beneficiary cannot change this payout op-
tion. At death, 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 tax code, if applicable. The mortality and expense risk charge of 1.30%
and the charge for administrative services of .10% will be assessed on all
variable annuity payouts, including options that may be offered that do not
have a life contingency and therefore no mortality risk.
The annuity commencement date is usually on or before the contractowner's 90th
birthday. You may change the annuity commencement date, change the annuity op-
tion or change the allocation of the investment among subaccounts up to 30
days before the scheduled annuity commencement date, upon written notice to
the home office. You must give us at least 30 days notice before the date on
which you want payouts to begin. If proceeds become available to a beneficiary
in a lump sum, the beneficiary may choose any annuity payout option.
Unless you select another option, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, vari-
able or combination fixed and variable basis, in proportion to the account al-
locations at the time of annuitization) except when a joint life payout is re-
quired by law. Under any option providing for guaranteed period payouts, the
number of payouts which remain unpaid at the date of the annuitant's death (or
surviving annuitant's death in case of joint life annuity) will be paid to
your beneficiary as payouts become due.
Variable annuity payouts
Variable annuity payouts will be determined using:
1. The contract value on the annuity commencement date, less any applicable
premium taxes;
2. The annuity tables contained in the contract;
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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.
Annuity payouts assume an investment return of 3%, 4%, 5% or 6% per year, as
applied to the applicable mortality table. The higher the assumed interest
rate you choose, the higher your initial annuity payment will be. The amount
of each payout after the initial payout will depend upon how the underlying
fund(s) perform, relative to the assumed rate. If the actual net investment
rate (annualized) exceeds the assumed rate, the payment will increase at a
rate proportional to the amount of such excess. Conversely, if the actual rate
is less than the assumed rate, annuity payments will decrease. The higher the
assumed interest rate, the less likely future annuity payments are to in-
crease, or the payments will increase more slowly than if a lower assumed rate
was used. There is a more complete explanation of this calculation in the SAI.
Federal tax matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes un-
certain. The Federal income tax rules may vary with your particular circum-
stances. This discussion does not include all the Federal income tax rules
that may affect you and your contract. This discussion also does not address
other Federal tax consequences, or state or local tax consequences, associated
with the contract. As a result, you should always consult a tax advisor about
the application of tax rules to your individual situation.
Taxation of nonqualified annuities
This part of the discussion describes some of the Federal income tax rules ap-
plicable to nonqualified annuities. A nonqualified annuity is a contract not
issued in connection with a qualified retirement plan receiving special tax
treatment under the tax code, such as an IRA or a section 403(b) plan.
Tax deferral on earnings
The Federal income tax law generally does not tax any increase in your con-
tract value until you receive a contract distribution. However, for this gen-
eral rule to apply, certain requirements must be satisfied:
. An individual must own the contract (or the tax law must treat the contract
as owned by the individual).
. The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
. Your right to choose particular investments for a contract must be limited.
. The annuity commencement date must not occur near the end of the annuitant's
life expectancy.
Contracts not owned by the individual
If a contract is owned by an entity (rather than an individual) the tax code
generally does not treat it as an annuity contract for Federal income tax pur-
poses. This means that the entity owning the contract pays tax currently on
the excess of the contract value over the purchase payments for the contract.
Examples of contracts where the owner pays current tax on the contract's earn-
ings are contracts issued to a corporation or a trust. Exceptions to this rule
exist. For example, the tax code treats a contract as owned by an individual
if the named owner is a trust or other entity that holds the contract as an
agent for an individual. However, this exception does not apply in the case of
any employer that owns a contract to provide deferred compensation for its em-
ployees.
Investments in the VAA must be diversified
For a contact to be treated as an annuity for Federal income tax purposes, the
investments of the VAA must be "adequately diversified." IRS regulations de-
fine standards for determining whether the investments of the VAA are ade-
quately diversified. If the VAA fails to comply with these diversification
standards, you could be required to pay tax currently on the excess of the
contract value over the contract purchase payments. Although we do not control
the investments of the underlying investment options, we expect that the un-
derlying investment options will comply with the IRS regulations so that the
VAA will be considered "adequately diversified."
Restrictions
Federal income tax law limits your right to choose particular investments for
the contract. Because the IRS has not issued guidance specifying those limits,
the limits are uncertain and your right to allocate contract value among
subaccounts may exceed those limits. If so, you would be treated as the owner
of the assets of the VAA and thus subject to current taxation on the income
and gains from those assets. We do not know what limits may be set by the IRS
in any guidance that it may issue and whether any such limits will apply to
existing contracts. We reserve the right to modify the contract without your
consent to try to prevent the tax law from considering you as the owner of the
assets of the VAA.
15
<PAGE>
Age at which annuity payouts begin
Federal income tax rules do not expressly identify a particular age by which
annuity payouts must begin. However, those rules do require that an annuity
contract provide for amortization, through annuity payouts, of the contract's
purchase payments and earnings. If annuity payouts under the contract begin or
are scheduled to begin on a date past the annuitant's 85th birthday, it is pos-
sible that the tax law will not treat the contract as an annuity for Federal
income tax purposes. In that event, you would be currently taxable on the ex-
cess of the contract value over the purchase payments of the contract.
Tax treatment of payments
We make no guarantees regarding the tax treatment of any contract or of any
transaction involving a contract. However, the rest of this discussion assumes
that your contract will be treated as an annuity for Federal income tax pur-
poses and that the tax law will not tax any increase in your contract value un-
til there is a distribution from your contract.
Taxation of withdrawals and surrenders
You will pay tax on withdrawals to the extent your contract value exceeds your
purchase payments in the contract. This income (and all other income from your
contract) is considered ordinary income. A higher rate of tax is paid on ordi-
nary income than on capital gains. You will pay tax on a surrender to the ex-
tent the amount you receive exceeds your purchase payments. In certain circum-
stances, your purchase payments are reduced by amounts received from your con-
tract that were not included in income.
Taxation of annuity payouts
The tax code imposes tax on a portion of each annuity payout (at ordinary in-
come tax rates) and treats a portion as a nontaxable return of your purchase
payments in the contract. We will notify you annually of the taxable amount of
your annuity payout. Once you have recovered the total amount of the purchase
payment in the contract, you will pay tax on the full amount of your annuity
payouts. If annuity payouts end because of the annuitant's death and before the
total amount of the purchase payments in the contract has been received, the
amount not received generally will be deductible.
Taxation of death benefits
We may distribute amounts from your contract because of the death of a
contractowner or an annuitant. The tax treatment of these amounts depends on
whether you or the annuitant dies before or after the annuity commencement
date.
. Death prior to the annuity commencement date--
. If the beneficiary receives death benefits under an annuity payout option,
they are taxed in the same manner as annuity payouts.
. If the beneficiary does not receive death benefits under an annuity payout
option, they are taxed in the same manner as withdrawal.
. Death after the annuity commencement date--
. If death benefits are received in accordance with the existing annuity
payout option, they are excludible from income if they do not exceed the
purchase payments not yet distributed from the contract. All annuity
payouts in excess of the purchase payments not previously received are
includible in income.
. If death benefits are received in a lump sum, the tax law imposes tax on
the amount of death benefits which exceeds the amount of purchase payments
not previously received.
Penalty taxes payable on withdrawals, surrenders, or annuity payouts
The tax code may impose a 10% penalty tax on any distribution from your con-
tract which you must include in your gross income. The 10% penalty tax does not
apply if one of several exceptions exists. These exceptions include withdraw-
als, surrenders or annuity payouts that:
. you receive on or after you reach age 59 1/2,
. you receive because you became disabled (as defined in the tax law),
. a beneficiary receives on or after your death, or
. you receive as a series of substantially equal periodic payments for your
life (or life expectancy).
Special rules if you own more than one annuity contract
In certain circumstances, you must combine some or all of the nonqualified an-
nuity contracts you own in order to determine the amount of an annuity payout,
a surrender or a withdrawal that you must include in income. For example, if
you purchase two or more deferred annuity contracts from the same life insur-
ance company (or its affiliates) during any calendar year, the tax code treats
all such contracts as one contract. Treating two or more contracts as one con-
tract could affect the amount of a surrender, withdrawal or an annuity payout
that you must include in income and the amount that might be subject to the
penalty tax described above.
Loans and assignments
Except for certain qualified contracts, the tax code treats any amount received
as a loan under a contract, and any assignment or pledge (or agreement to as-
sign or pledge) any portion of your contract value, as a withdrawal of such
amount or portion.
Gifting a contract
If you transfer ownership of your contract to a person other than your spouse
(or to your former spouse inci-
16
<PAGE>
dent to divorce), and receive a payment less than your contract's value, you
will pay tax on your contract value to the extent it exceeds your purchase
payments not previously received. The new owner's purchase payments in the
contract would then be increased to reflect the amount included in income.
Charges for a contract's death benefit
Your contract may have an EGMDB, for which you pay an annual charge, computed
daily. It is possible that the tax law may treat all or a portion of the EGMDB
charge as a contract withdrawal.
Loss of interest deduction
After June 8, 1997, if a contract is issued to a taxpayer that is not an indi-
vidual, or if a contract is held for the benefit of an entity, the entity will
lose a portion of its deduction for otherwise deductible interest expenses.
This disallowance does not apply if you pay tax on the annual increase in the
contract value. Entities that are considering purchasing a contract, or enti-
ties that will benefit from someone else's ownership of a contract, should
consult a tax advisor.
Qualified retirement plans
We also designed the contracts for use in connection with certain types of re-
tirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called "quali-
fied contracts." We issue contracts for use with different types of qualified
plans. The Federal income tax rules applicable to those plans are complex and
varied. As a result, this Prospectus does not attempt to provide more than
general information about use of the contract with various types of qualified
plans. Persons planning to use the contract in connection with a qualified
plan should obtain advice from a competent tax advisor.
Types of qualified contracts and terms of contracts
Currently, we may issue contracts in connection with the following types of
qualified plans:
. Individual Retirement Accounts and Annuities ("Traditional IRAs")
. Roth IRAs
. Simplified Employee Pensions ("SEPs")
. Savings Incentive Matched Plan for Employees ("SIMPLE 401(k) plans")
. Public school system and tax-exempt organization annuity plans ("403(b)
plans")
. Qualified corporate employee pension and profit sharing plans ("401(a)
plans") and qualified annuity plans ("403(a) plans")
. Self-employed individual plans ("H.R. 10 plans" or "Keogh Plans")
. Deferred compensation plans of state and local governments and tax-exempt
organizations ("457 plans").
Section 403(b) business will normally be accepted only for purchase payments
qualifying as a 403(b) lump sum transfer or rollover. We may issue a contract
for use with other types of qualified plans in the future.
We will amend contracts to be used with a qualified plan as generally neces-
sary to conform to tax law requirements for the type of plan. However, the
rights of a person to any qualified plan benefits may be subject to the plan's
terms and conditions, regardless of the contract's terms and conditions. In
addition, we are not bound by the terms and conditions of qualified plans to
the extent such terms and conditions contradict the contract, unless we con-
sent.
Tax treatment of qualified contracts
The Federal income tax rules applicable to qualified plans and qualified con-
tracts vary with the type of plan and contract. For example,
. Federal tax rules limit the amount of purchase payments that can be made,
and the tax deduction or exclusion that may be allowed for the purchase pay-
ments. These limits vary depending on the type of qualified plan and the
plan participant's specific circumstances, e.g., the participant's compensa-
tion.
. Under most qualified plans, e.g., 403(b) plans and Traditional IRAs, the an-
nuitant must begin receiving payments from the contract in certain minimum
amounts by a certain age, typically age 70 1/2. However, these "minimum dis-
tribution rules" do not apply to a Roth IRA.
. Loans are allowed under certain types of qualified plans, but Federal income
tax rules prohibit loans under other types of qualified plans. For example,
Federal income tax rules permit loans under some section 403(b) plans, but
prohibit loans under Traditional and Roth IRAs. If allowed, loans are sub-
ject to a variety of limitations, including restrictions as to the loan
amount, the loan's duration, and the manner of repayment. Your contract or
plan may or may not permit loans.
Tax treatment of payments
Federal income tax rules generally include distributions from a qualified con-
tract in the recipient's income as ordinary income. These taxable distribu-
tions will include purchase payments that were deductible or excludible from
income. Thus, under many qualified contracts the total amount received is in-
cluded in income since a deduction or exclusion from income was taken for pur-
chase payments. There are exceptions. For example, you do not include amounts
received from a Roth IRA in income if certain conditions are satisfied.
17
<PAGE>
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax generally equals 50% of the amount by which a min-
imum required distribution exceeds the actual distribution from the qualified
plan.
Federal penalty taxes payable on distributions
The tax code may impose a 10% penalty tax on the amount received from the
qualified contract that must be included in income. The tax code does not im-
pose the penalty tax if one of several exceptions applies. The exceptions vary
depending on the type of qualified contract you purchase. For example, in the
case of an IRA, exceptions provide that the penalty tax does not apply to a
withdrawal, surrender or annuity payout:
. received on or after the annuitant reaches age 59 1/2,
. received on or after the annuitant's death or because of the annuitant's
disability (as defined in the tax law),
. received as a series of substantially equal periodic payments for the
annuitant's life (or life expectancy), or
. received as reimbursement for certain amounts paid for medical care.
These exceptions, as well as certain others not described here, generally ap-
ply to taxable distributions from other qualified plans. However, the specific
requirements of the exception may vary.
Transfers and direct rollovers
In many circumstances, money may be moved between qualified contracts and
qualified plans by means of a rollover or transfer. Special rules apply to
such rollovers and transfers. If the applicable rules are not followed, you
may suffer adverse Federal income tax consequences, including paying taxes
which might not otherwise have had to be paid. A qualified advisor should al-
ways be consulted before you move or attempt to move funds between any quali-
fied plan or contract and another qualified plan or contract.
The direct rollover rules apply to certain payments (called "eligible rollover
distributions") from section 401(a) plans, section 403(a) or (b) plans, H.R.
10 plans and contracts used in connection with these types of plans. (The di-
rect rollover rules do not apply to distributions from IRAs or section 457
plans.) The direct rollover rules require that we withhold Federal income tax
equal to 20% of the eligible rollover distribution from the distribution
amount, unless you elect to have the amount directly transferred to certain
qualified plans or contracts. Before we send a rollover distribution, we will
provide the recipient with a notice explaining these requirements and how the
20% withholding can be avoided by electing a direct rollover.
The EGMDB and IRAs
Pursuant to IRS regulations, IRAs may not invest in life insurance contracts.
We do not believe that these regulations prohibit the EGMDB from being pro-
vided under the contracts when we issue the contract as Traditional IRAs or
Roth IRAs. However, the law is unclear and it is possible that the presence of
the EGMDB under a contract issued as a Traditional IRA or Roth IRA could re-
sult in increased taxes to you.
Federal income tax withholding
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under a contract unless the distributee notifies us at or
before the time of the distribution that tax is not to be withheld. In certain
circumstances, Federal income tax rules may require us to withhold tax. At the
time a withdrawal, surrender or annuity payout is requested, we will give the
recipient an explanation of the withholding requirements.
Tax status of Lincoln Life
Under existing Federal income tax laws, Lincoln Life does not pay tax on in-
vestment income and realized capital gains of the VAA. Lincoln Life does not
expect that it will incur any Federal income tax liability on the income and
gains earned by the VAA. We, therefore, do not impose a charge for Federal in-
come taxes. If Federal income tax law changes and we must pay tax on some or
all of the income and gains earned by the VAA, we may impose a charge against
the VAA to pay the taxes.
Changes in law
The above discussion is based on the tax code, IRS regulations and interpreta-
tions existing on the date of this Prospectus. However, Congress, The IRS and
the courts may modify these authorities, sometimes retroactively.
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 in-
vest in classes of funds of the series. If the 1940 Act or any regulation un-
der 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 ap-
plying your percentage interest in a subaccount to the total number of votes
attributable to the subaccount. In determining the number of votes, fractional
shares will be recognized.
Series shares of a class held in a subaccount for which no timely instructions
are received will be voted by us in
18
<PAGE>
proportion to the voting instructions which are received for all contracts par-
ticipating 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 eli-
gible to be cast.
Whenever a shareholders meeting is called, each person having a voting interest
in a subaccount will receive proxy voting material, reports and other materials
relating to the series. Since the series engages in shared funding, other per-
sons or entities besides Lincoln Life may vote series shares. See Investments
of the variable annuity account--Sale of fund shares.
Distribution of the contracts
American Funds Distributors, Inc. (AFD), 333 South Hope Street, Los Angeles, CA
90071, is the distributor and principal underwriter of the contracts. They will
be sold by properly licensed registered representatives of independent broker-
dealers which in turn have selling agreements with AFD and have been licensed
by state insurance departments to represent us. AFD is registered with the SEC
under the Securities Exchange Act of 1934 as a broker-dealer and is a member of
the National Association of Securities Dealers (NASD). Lincoln Life will offer
contracts in all states where it is licensed to do business.
Return privilege
Within the free-look period after you receive the contract, you may cancel it
for any reason by delivering or mailing it postage prepaid, to the home office
at P.O. Box 2348, 1300 South Clinton Street, Fort Wayne, Indiana, 46801. A con-
tract canceled under this provision will be void. We will return the contract
value as of the date of receipt of the cancellation, plus any premium taxes
which had been deducted. 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 In-
surance Department at all times. A full examination of our operations is con-
ducted by that Department at least every five years.
Restrictions under the Texas Optional Retirement Program
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits partici-
pants in the Texas Optional Retirement Program (ORP) to redeem their interest
in a variable annuity contract issued under the ORP only upon:
1. Termination of employment in all institutions of higher education as defined
in Texas law;
2. Retirement; or
3. Death.
Accordingly, a participant in the ORP will be required to obtain a certificate
of termination from their employer before accounts can be redeemed.
Records and reports
As presently required by the 1940 Act and applicable regulations, we are re-
sponsible for maintaining all records and accounts relating to the VAA. We have
entered into an agreement with the Delaware Management Company, 2005 Market
Street, Philadelphia, PA 19203, to provide accounting services to the VAA. We
will mail to you, at your last known address of record at the home office, at
least semiannually after the first contract year, reports containing informa-
tion required by that Act or any other applicable law or regulation.
Other information
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered here. This Prospectus does
not contain all the information in the Registration Statement, its amendments
and exhibits. Please refer to the Registration Statement for further informa-
tion about the VAA, Lincoln Life and the contracts offered. Statements in this
Prospectus about the content of contracts and other legal instruments are sum-
maries. For the complete text of those contracts and instruments, please refer
to those documents as filed with the SEC.
We are a member of the Insurance Marketplace Standards Association ("IMSA") and
may include the IMSA logo and information about IMSA membership in our adver-
tisements. Companies that belong to IMSA subscribe to a set of ethical stan-
dards covering the various aspects of sales and services for individually sold
life insurance and annuities.
19
<PAGE>
Legal proceedings
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of those proceedings are rou-
tine and in the ordinary course of business. In some instances they include
claims for unspecified or substantial punitive damages and similar types of
relief in addition to amounts for equitable relief. After consultation with
legal counsel and a review of available facts, it is management's opinion that
the ultimate liability, if any, under these suits will not have a material ad-
verse effect on the financial position of Lincoln Life.
With the recent filing of a lawsuit alleging fraud in the sale of interest-
sensitive universal and whole life policies, Lincoln Life now has three such
actions pending. As of the date of this Prospectus, the courts have not certi-
fied a class in any of the suits. In each of these lawsuits, plaintiffs seek
unspecified damages and penalties for themselves and on behalf of the putative
class. Although the relief sought in these cases is substantial, the cases are
in the discovery stages of litigation, and it is premature to make assessments
about potential loss, if any. Management is defending these suits vigorously.
The amount of liability, if any, which may arise as a result of these lawsuits
cannot be reasonably estimated at this time. In a fourth lawsuit, a settlement
has been preliminarily approved by the court, and a class has been condition-
ally certified for settlement purposes. Two similar lawsuits were previously
resolved and dismissed.
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 B-2
----------------------------------------------------
Special terms B-2
----------------------------------------------------
Services B-2
----------------------------------------------------
Principal underwriter B-2
----------------------------------------------------
Purchase of securities being offered B-2
</TABLE>
For a free copy of the SAI please see page one of this booklet.
<TABLE>
<CAPTION>
Item
--------------------------------------
<S> <C>
Calculation of investment results B-2
--------------------------------------
Annuity payouts B-5
--------------------------------------
Advertising and sales literature B-5
--------------------------------------
Financial statements B-7
</TABLE>
21
<PAGE>
================================================================================
-----------------
PLACE
STAMP
HERE
POSTAL SERVICES
WILL NOT
DELIVER
UNLESS STAMPED
-----------------
The Lincoln National Life Insurance Company
Attn: American Legacy Customer Service
P. O. Box 2348
Fort Wayne, IN 46802
<PAGE>
================================================================================
STATEMENT OF ADDITIONAL INFORMATION REQUEST CARD
AMERICAN LEGACY III C-Share
(LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H)
AMERICAN VARIABLE INSURANCE SERIES
Please send me a copy of the current Statement of Additional Information
for AMERICAN LEGACY III C-Share and American Variable Insurance Series.
(Please print)
Name: ____________________________________________________________________
Address: _________________________________________________________________
City: _______________________________ State: _____________ Zip: _________
<PAGE>
The American Legacy III C-Share
Lincoln NationalVariable Annuity Account H (Registrant)
The Lincoln NationalLife Insurance Company (Depositor)
Statement of Additional Information (SAI)
This Statement of Additional Information should be read in conjunction with the
American
Legacy III C-Share Prospectus of Lincoln National Variable Annuity Account H
dated July 21, 2000.
You may obtain a copy of the American Legacy III C-Share Prospectus on request
and without charge.
Please write American Legacy Customer Service, The Lincoln National Life Insur-
ance Company,
P.O. Box 2348, Fort Wayne, Indiana 46801 or call 1-800-942-5500.
Table of Contents
<TABLE>
<CAPTION>
Item Page
------------------------------------------
<S> <C>
General information and history
of Lincoln Life B-2
------------------------------------------
Special terms B-2
------------------------------------------
Services B-2
------------------------------------------
Principal underwriter B-2
------------------------------------------
Purchase of securities being offered B-2
------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Item Page
<S> <C>
Calculation of investment results B-2
Annuity payouts B-5
Advertising and sales literature B-5
Financial statements B-7
</TABLE>
This SAI is not a Prospectus.
The date of this SAI is July 21, 2000.
<PAGE>
General information and
history of The
Lincoln National Life
Insurance Company (Lincoln Life)
The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905,
is an Indiana stock insurance corporation, engaged primarily in the direct in-
surance of life and health insurance contracts and annuities, and is also a
professional reinsurer. Lincoln Life is wholly owned by Lincoln National Cor-
poration (LNC), a publicly held insurance and financial services holding com-
pany domiciled in Indiana.
Special terms
The special terms used in this SAI are the ones defined in the Prospectus. In
connection with the term, valuation date, the New York Stock Exchange (Ex-
change) is currently closed on weekends and on these holidays: New Year's Day,
Martin Luther King's Birthday, President's Day, Good Friday, Memorial Day, In-
dependence Day, Labor Day, Thanksgiving Day, and Christmas Day. If any of
these holidays occurs on a weekend day, the Exchange may also be closed on the
business day occurring just before or just after the holiday.
Services
Independent auditors
The VAA financial statements and the statutory-basis financial statements of
Lincoln Life appearing in this SAI and Registration Statement have been au-
dited by Ernst & Young LLP, independent auditors, as set forth in their re-
ports also appearing elsewhere in this document and in the Registration State-
ment. The financial statements audited by Ernst & Young LLP have been included
in this document in reliance on their reports given on their authority as ex-
perts in accounting and auditing.
Keeper of records
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life or by third parties re-
sponsible to Lincoln Life. We have entered into an agreement with the Delaware
Management Company, 2005 Market Street, Philadelphia, PA 19203, to provide ac-
counting services to the VAA. No separate charge against the assets of the VAA
is made by Lincoln Life for this service.
Principal underwriter
Lincoln Life has contracted with American Funds Distributors, Inc. (AFD), 333
South Hope Street, Los Angeles, California 90071, a licensed broker-dealer, to
be the principal underwriter and to distribute the contracts through certain
legally authorized sales persons and organizations (brokers). AFD and its bro-
kers 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. There are no spe-
cial purchase plans for any class of prospective buyers.
Both before and after the annuity commencement date, there are exchange privi-
leges between subaccounts, and from the VAA to the general account subject to
restrictions set out in the Prospectus. See The contracts, in the Prospectus.
No exchanges are permitted between the VAA and other separate accounts.
The offering of the contracts is continuous.
Calculation of investment results
The seven-day yield is determined by calculating the change in unit value for
the base period (the 7-day period ended December 31, 1999); then dividing this
figure by the account value at the beginning of the period; then annualizing
this result by the factor of 365/7. This yield includes all deductions charged
to the contractowner's account, and excludes any realized gains and losses
from the sale of securities.
Standard investment results:
Standard performance is based on a formula to calculate performance that is
prescribed by the SEC. Under rules issued by the SEC, standard performance
must be included in any marketing material that discusses the performance of
the VAA and the subaccounts. This information represents past performance and
does not indicate or represent future performance.
Average annual return for each period is determined by finding the average an-
nual compounded rate of return over each period that would equate the initial
B-2
<PAGE>
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 = ending 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
period thereof)
The formula assumes that: (1) all recurring fees have been charged to the
contractowner accounts; and (2) there will be a complete redemption upon the
anniversary of the 1-year, 5-year, or 10-year period in question.
In accordance with SEC guidelines, we will report standard performance back to
the first date that the fund became available in the VAA. Because standard
performance reporting periods of less than one year could be misleading, we
may report "N/A's" for standard performance until one year after the option
became available in the separate account.
Standard Performance Data:
Period Ending December 31, 1999
<TABLE>
<CAPTION>
10 Years
1- 5- or Since
Year Years Inception
With With With
EGMDB EGMDB EGMDB
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Growth Subaccount 66.90% N/A 35.80%
(commenced activity 4/30/97)
Global Small Capitalization 88.24% N/A 47.00%
Subaccount
(commenced activity 4/30/98)
Growth Subaccount 54.70% 30.77% 19.10%
(commenced activity 8/1/89)
International Subaccount 73.09% 22.96% 14.58%
(commenced activity 5/1/90)
New World Subaccount N/A N/A 17.14%
(commenced activity 6/17/99)
Growth-Income Subaccount 9.38% 19.00% 12.50%
(commenced activity 8/1/89)
Asset Allocation Subaccount 5.17% 14.81% 10.09%
(commenced activity 8/1/89)
Bond Subaccount 0.88% N/A 3.78%
(commenced activity 1/2/96)
High-Yield Bond Subaccount 3.81% 8.42% 8.17%
(commenced activity 8/1/89)
U.S. Gov't./AAA Subaccount -2.40% 4.79% 5.16%
(commenced activity 8/1/89)
Cash Management Subaccount 2.86% 3.19% 2.93%
(commenced activity 8/1/89)
</TABLE>
The performance figures shown reflect the cost of the EGMDB option. If
contractowners had chosen to eliminate the EGMDB, their returns would have
been higher.
B-3
<PAGE>
Non-standard investment results:
The VAA may report its results over various periods -- daily, monthly, three-
month, six-month, year-to-date, yearly (fiscal year), three, five, ten years
or more and lifetime -- and compare its results to indices and other variable
annuities in sales materials including advertisements, brochures and reports.
Performance information for the periods prior to the date that a fund became
available in the VAA will be calculated based on (1) the performance of the
fund adjusted for contract charges (ie: mortality and expense risk fees, any
applicable administrative charges, and the management and other expenses of
the fund) and (2) the assumption that the subaccounts were in existence for
the same periods as indicated for the fund. It may or may not reflect charges
for any options (ie: EGMDB) that were in effect during the time periods shown.
This performance is referred to as non-standardized performance data. Such re-
sults may be computed on a cumulative and/or annualized basis. We may also re-
port performance assuming that you deposited $10,000 into a subaccount at in-
ception of the underlying fund or 10 years ago (whichever is less). This non-
standard performance may be shown as a graph illustrating how that deposit
would have increased or decreased in value over time based on the performance
of the underlying fund adjusted for contract charges. This information repre-
sents past performance and does not indicate or represent future performance.
The investment return and value of a contract will fluctuate so that
contractowner's investment may be worth more or less than the original invest-
ment. Cumulative quotations are arrived at by calculating the change in accu-
mulation unit value between the first and last day of the base period being
measured, and expressing the difference as a percentage of the unit value at
the beginning of the base period. Annualized quotations are arrived at by ap-
plying a formula which reflects the level rate of return, which if earned over
the entire base period, would produce the cumulative return.
Non-Standard Performance Data (adjusted for contract expense charges):
Period Ending December 31, 1999
<TABLE>
<CAPTION>
1- 3- 5- 10- Since
YTD year year year year Inception
With With With With With With
EGMDB EGMDB EGMDB EGMDB EGMDB EGMDB
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Growth Subaccount 66.90% 66.90% N/A N/A N/A 35.80%
(commenced activity 4/30/97)
Global Small Capitalization 88.24% 88.24% N/A N/A N/A 47.00%
Subaccount
(commenced activity 4/30/98)
Growth Subaccount 54.70% 54.70% 37.99% 30.77% 19.10% 17.70%
(as if commenced activity 2/8/84)
International Subaccount 73.09% 73.09% 30.13% 22.96% N/A 14.58%
(as if commenced activity 5/1/90)
New World Subaccount N/A N/A N/A N/A N/A 17.14%
(as if commenced activity 6/17/99)
Growth-Income Subaccount 9.38% 9.38% 16.20% 19.00% 12.50% 13.68%
(as if commenced activity 2/8/84)
Asset Allocation Subaccount 5.17% 5.17% 11.35% 14.81% 10.09% 9.87%
(as if commenced activity 8/1/89)
Bond Subaccount 0.88% 0.88% 3.74% N/A N/A 3.78%
(as if commenced activity 1/2/96)
High-Yield Bond Subaccount 3.81% 3.81% 4.12% 8.42% 8.17% 9.62%
(as if commenced activity 2/8/84)
U.S. Gov't./AAA Subaccount -2.40% -2.40% 3.32% 4.79% 5.16% 5.61%
(as if commenced activity 12/1/85)
Cash Management Subaccount 2.86% 2.86% 3.08% 3.19% 2.93% 3.84%
(as if commenced activity 2/8/84)
</TABLE>
The performance figures shown reflect the cost of the EGMDB option. If
contractowners had chosen to eliminate the EGMDB, their returns would have
been higher.
B-4
<PAGE>
Annuity payouts
Variable annuity payouts
Variable annuity payouts will be determined on the basis of: (1) the dollar
value of the contract on the annuity commencement date; (2) the annuity tables
contained in the contract; (3) the type of annuity option selected; and (4)
the investment results of the fund(s) selected. In order to determine the
amount of variable annuity payouts, Lincoln Life makes the following calcula-
tion: first, it determines the dollar amount of the first payout; second, it
credits the contract with a fixed number of annuity units based on the amount
of the first payout; and third, it calculates the value of the annuity units
each period thereafter. These steps are explained below.
The dollar amount of the first periodic variable annuity payout is determined
by applying the total value of the accumulation units credited under the con-
tract valued as of the annuity commencement date (less any premium taxes) to
the annuity tables contained in the contract. The first variable annuity pay-
out will be paid 14 days after the annuity commencement date. This day of the
month will become the day on which all future annuity payouts will be paid.
Amounts shown in the tables are based on the 1983 Table "a" Individual Annuity
Mortality Tables, modified, with an assumed investment return at the rate of
3%, 4%, 5% or 6% per annum. The first annuity payout is determined by multi-
plying the benefit per $1,000 of value shown in the contract tables by the
number of thousands of dollars of value accumulated under the contract. These
annuity tables vary according to the form of annuity selected and the age of
the annuitant at the annuity commencement date. The assumed interest rate is
the measuring point for subsequent annuity payouts. If the actual net invest-
ment rate (annualized) exceeds the assumed rate, the payout will increase at a
rate equal to the amount of such excess. Conversely, if the actual rate is
less than the assumed rate, annuity payouts will decrease. If the assumed rate
of interest were to be increased, annuity payouts would start at a higher
level but would decrease more rapidly or increase more slowly.
Lincoln Life may use sex distinct annuity tables in contracts that are not as-
sociated with employer sponsored plans and where not prohibited by law.
At an annuity commencement date, the contract is credited with annuity units
for each subaccount on which variable annuity payouts are based. The number of
annuity units to be credited is determined by dividing the amount of the first
periodic payout by the value of an annuity unit in each subaccount selected.
Although the number of annuity units is fixed by this process, the value of
such units will vary with the value of the underlying fund. The amount of the
second and subsequent periodic payouts is determined by multiplying the
contractowner's fixed number of annuity units in each subaccount by the appro-
priate annuity unit value for the valuation date ending 14 days prior to the
date that payout is due.
The value of each subaccount's annuity unit will be set initially at $1.00.
The annuity unit value for each subaccount at the end of any valuation date is
determined by multiplying the subaccount annuity unit value for the immedi-
ately preceding valuation date by the product of:
(a) The net investment factor of the subaccount for the valuation period for
which the annuity unit value is being determined, and
(b) A factor to neutralize the assumed investment return in the annuity table.
The value of the annuity units is determined as of a valuation date 14 days
prior to the payment date in order to permit calculation of amounts of annuity
payouts and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
Proof of age, sex and survival
Lincoln Life may require proof of age, sex, or survival of any payee upon
whose age, sex, or survival payments depend.
Advertising and sales
literature
As set forth in the Prospectus, Lincoln Life may refer to the following orga-
nizations (and others) in its marketing materials:
A.M. Best's Rating System is designed to evaluate the various factors affect-
ing the overall performance of an insurance company in order to provide an
opinion as to an insurance company's relative financial strength and ability
to meet its contractual obligations. The procedure includes both a quantita-
tive and qualitative review of each company. A.M. Best also provides certain
rankings, to which Lincoln Life intends to refer.
Duff & Phelps insurance company claims paying ability (CPA) service provides
purchasers of insurance company policies and contracts with analytical and
statistical information on the solvency and liquidity of major U.S. licensed
insurance companies, both mutual and stock.
EAFE Index is prepared by Morgan Stanley Capital International (MSCI). It mea-
sures performance of equity 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 di-
versification representing over 1,000 companies across 20 different countries.
B-5
<PAGE>
Lipper Variable Insurance Products Performance Analysis Service is a publisher
of statistical data covering the investment company industry in the United
States and overseas. Lipper is recognized as the leading source of data on
open-end and closed-end funds. Lipper currently tracks the performance of over
5,000 investment companies and publishes numerous specialized reports, includ-
ing reports on performance and portfolio analysis, fee and expense analysis.
Moody's insurance financial strength rating is an opinion of an insurance
company's financial strength 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 sta-
tistical and analytical coverage of open-end and closed-end funds and variable
annuities.
Standard & Poor's insurance claims-paying ability rating is an opinion 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 and Data Service) provides a comprehensive
guide to variable annuity contract features and historical fund performance.
The service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable con-
tracts.
Standard & Poor's 500 Index -- A broad-based measurement of U.S. stock-market
performance based on the weighted average performance of 500 common stocks of
leading company's and leading industries; commonly known as the Standard &
Poor's 500 (S&P 500). The selection of stocks, their relative weightings to
reflect differences in the number of outstanding shares, and publication of
the index itself are services of Standard & Poor's Corporation, a financial
advisory, securities rating, and publishing firm.
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 currently including Ameri-
can Express Company and American Telephone and Telegraph Company. Prepared and
published by Dow Jones & Company, it is the oldest and most widely quoted of
all the market indicators. The average is quoted in points, not dollars.
In its advertisements and other sales literature for the VAA and the series
funds, Lincoln Life intends to illustrate the advantages of the contracts in a
number of ways:
Compound Interest Illustrations. These will emphasize several advantages of
the variable annuity contract. For example, but not by way of illustration,
the literature may emphasize the potential tax savings through tax deferral;
the potential advantage of the variable annuity account over the fixed ac-
count; and the compounding effect when a client makes regular deposits to his
or her contract.
Internet. An electronic communications network which may be used to provide
information regarding Lincoln Life, performance of the subaccounts and adver-
tisement literature.
Dollar-Cost Averaging. (DCA) -- You may systematically transfer on a monthly
basis amounts from the DCA fixed account or certain variable subaccounts into
the variable subaccounts. 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 $1,500 over any period between six and 60 months. Once elect-
ed, 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 tel-
ephone authorization on file. If you have cancelled the DCA program prior to
the end of the selected DCA period, any remaining contract value in the DCA
holding account within the fixed account, will automatically be transferred to
the variable subaccounts selected by you. A transfer under this program is not
considered a transfer for purposes of limiting the number of transfers that
may be made. We reserve the right to discontinue this program at any time. DCA
does not assure a profit or protect against loss.
Automatic Withdrawal Service. (AWS) -- AWS provides an automatic, periodic
withdrawal of contract value to you. You may elect to participate in AWS at
the time of application or at any time before the annuity commencement date by
sending a written request to our home office. The minimum contract value re-
quired to establish AWS is $10,000. You may cancel or make changes to your AWS
program at any time by sending a written request to our home office. If tele-
phone authorization has been elected, certain changes may be made by tele-
phone. Notwithstanding the requirements
B-6
<PAGE>
of the program, any withdrawal must be permitted by Section 401(a)(9) of the
code for qualified plans or permitted under Section 72 for non-qualified con-
tracts. We reserve the right to discontinue this service at any time.
Cross-Reinvestment Service. -- Under this option, account value in a desig-
nated variable subaccount of the contract that exceeds a certain baseline
amount is automatically transferred to another specific variable subaccount(s)
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 com-
mencement 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 ac-
count, 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. A transfer under this program is not considered a transfer for pur-
poses of limiting the number of transfers that may be made. We reserve the
right to discontinue this service at any time.
Portfolio Rebalancing. -- Portfolio rebalancing is an option which, if elected
by the contractowner, restores to a pre-determined level the percentage of
contract value allocated to each variable account subaccount (e.g., 20% Money
Market, 50% Growth, 30% International). This pre-determined level will be the
allocation initially selected when the contract was purchased, unless subse-
quently changed. The portfolio rebalancing allocation may be changed at any
time by submitting a written request to Lincoln Life or by telephone if we
have your telephone authorization on file.
If portfolio rebalancing is elected, all purchase payments allocated to the
variable account subaccounts must be subject to portfolio rebalancing.
Portfolio rebalancing may take place on either a monthly, quarterly, semi-an-
nual or annual basis, as selected by the contractowner. Once the portfolio
rebalancing option is activated, any variable account subaccount transfers ex-
ecuted outside of the portfolio rebalancing option will terminate the portfo-
lio rebalancing option. Any subsequent purchase payment or withdrawal that
modifies the account balance within each variable account subaccount may also
cause termination of the portfolio rebalancing option. Any such termination
will be confirmed to the contractowner. The contractowner may terminate the
portfolio rebalancing option or re-enroll at any time by writing Lincoln Life,
or by calling, if we have your telephone authorization on file.
The portfolio rebalancing program is not available following the annuity com-
mencement date.
Lincoln Financial Group. Lincoln Financial Group is the marketing name for
Lincoln National Corporation (NYSE:LNC) and its affiliates. With headquarters
in Philadelphia, Lincoln Financial Group has consolidated assets of over $103
billion and annual consolidated revenues of $6.8 billion. Through its wealth
accumulation and protection businesses, the company provides annuities, life
insurance, 401(k) plans, life-health reinsurance, mutual funds, institutional
investment management and financial planning and advisory services.
Lincoln Life's customers. Sales literature for the VAA and the series' funds
may refer to the number of employers and the number of individual annuity cli-
ents which Lincoln Life serves. As of the date of this SAI, Lincoln Life was
serving over 15,000 employers and more than 1.5 million individuals.
Lincoln Life's assets, size. Lincoln Life may discuss its general financial
condition (see, for example, the reference to A.M. Best Company, above); it
may refer to its assets; it may also discuss its relative size and/or ranking
among companies in the industry or among any sub-classification of those com-
panies, based upon recognized evaluation criteria (see reference to A.M. Best
Company above). For example, at year-end 1999 Lincoln Life had statutory ad-
mitted assets of over $79 billion.
Financial statements
Financial statements of the VAA and the statutory-basis financial statements
of Lincoln Life appear on the following pages.
B-7
