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Registration No. 33-76432
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
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LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT K
(Exact name of Trust)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Name of depositor)
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, IN 46801
(Complete address of depositor's principal executive offices)
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Name and complete address
of agent for service: Copy to:
Carl L. Baker, Esquire Brian Burke, Esquire
Vice President & Counsel
Deputy General Counsel The Lincoln National
The Lincoln National Life Insurance Company
Life Insurance Company 1300 South Clinton Street
1300 South Clinton Street P.O. Box 1110
P.O. Box 1110 Fort Wayne, Indiana 46801
Fort Wayne, IN 46801
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It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a) (1)
[ ] on (date) pursuant to paragraph (a) (1) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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Title and amount of securities being registered: Flexible Premium Variable Life
Insurance Policies. The Policies are not issued in predetermined units or
amounts.
Proposed maximum aggregate offering price to the public of the securities being
registered: The registrant has elected to register an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940. The
Rule 24f-2 notice on Form 24F-2 for the registrant's fiscal year, ending
December 31, 1996, was filed on February 27, 1997.
Approximate date of proposed public offering: As soon as practicable after May
1, 1997.
[ ] Check box if it is proposed that this filing will become effective on
(date) at (time) pursuant to Rule 487.
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<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
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N-8B-2 ITEM CAPTION IN PROSPECTUS
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1 Cover Page
2 Cover Page
3 Not applicable
4 Distribution of the Policy
5 Lincoln Life, The General Account and The Separate Account
6 The Account
7 Not applicable
8 Not applicable
9 Legal Proceedings
10 Summary of the Policy; The Policy; The Separate Account; The
Investment Advisors; Addition, Deletion or
Substitution of Investments; Charges and Deductions; Policy
Benefits; Voting Rights; General Provisions
11 Summary of the Policy; The Investment Advisors
12 Summary of the Policy; The Investment advisors
13 Summary of the Policy; Charges and Deductions
14 Summary of the Policy; Requirements for Issuance of Policy
15 Premium Payment and Allocation of Premiums
16 Premium Payment and Allocation of Premiums; The Separate Account
17 Summary of the Policy; Charges and Deductions; Policy Benefits
18 Premium Payment and Allocation of Premiums; Policy Benefits
19 General Provisions; Voting Rights
20 Not Applicable
21 Policy Benefits; General Provisions
22 Not applicable
23 Safekeeping of the Account's Assets
24 General Provisions
25 Lincoln Life
26 Not applicable
27 Investment Advisors; Charges and Deductions
28 Executive Officers and Directors of Lincoln National Life
Insurance Co.
29 Lincoln Life, The General Account, and The Separate Account
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 The Policy
</TABLE>
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<TABLE>
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N-8B-2 ITEM CAPTION IN PROSPECTUS
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<S> <C>
36 Not applicable
37 Not applicable
38 Summary of the Policy; Distribution of the Policy
39 Summary of the Policy; Distribution of the Policy
40 Not applicable
41 Distribution of the Policy
42 Not applicable
43 Not applicable
44 Charges and Deductions
45 Not applicable
46 Policy Benefits
47 Not applicable
48 Not applicable
49 Not applicable
50 Not applicable
51 Cover Page; Summary of the Policy; Charges and Deductions; Policy
Benefits; The Policy
52 Addition, Deletion or Substitution of Investments
53 Federal Tax Matters
54 Not applicable
55 Not applicable
56 Not applicable
57 Not applicable
58 Not applicable
59 Not applicable
</TABLE>
<PAGE>
MULTI FUND(R) VARIABLE LIFE
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE
LIFE ACCOUNT K INDIVIDUAL FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE POLICY
issued by:
Lincoln National Life Insurance Co.
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, Ind. 46801
(800) 348-0851
Account K
The flexible premium variable life insurance policy (policy) offered by Lincoln
National Life Insurance Co. (Lincoln Life) and described in this prospectus is
designed to provide life insurance protection. A policy may be issued only to
persons age 80 or younger and only for an initial specified amount of $50,000
or more. Subject to the payment of a minimum premium for the first policy year,
an owner may, subject to certain restrictions, vary the frequency and amount of
premium payments. The level of life insurance benefits payable under the policy
may also be increased or decreased subject to certain restrictions.
An owner may choose to allocate amounts either to the General Account of Lin-
coln Life (General Account) or to the Lincoln Life Flexible Premium Variable
Life Account K (Separate Account). Amounts allocated to the Separate Account
may be invested in any of the following funds or series:
.Lincoln National Aggressive Growth Fund, Inc.
.Lincoln National Bond Fund, Inc.
.Lincoln National Capital Appreciation Fund, Inc.
.Lincoln National Equity-Income Fund, Inc.
.Lincoln National Global Asset Allocation Fund, Inc.
.Lincoln National Growth and Income Fund, Inc.
.Lincoln National International Fund, Inc.
.Lincoln National Managed Fund, Inc.
.Lincoln National Money Market Fund, Inc.
.Lincoln National Social Awareness Fund, Inc.
.Lincoln National Special Opportunities Fund, Inc.
.Delaware Group Premium Fund, Inc.
-Delaware Equity/Income Series
-Delaware Emerging Growth Series
-Delaware Global Bond Series
The amount of the death benefit may, and the policy value will, reflect the in-
vestment experience of the chosen subaccounts of the Separate Account and in-
terest credited to the policy by the General Account, as well as the frequency
and amount of premiums, and the charges assessed in connection with the policy.
As long as the policy remains in force, the death benefit will not be less than
the current specified amount of the policy. The policy will remain in force so
long as net cash surrender value is sufficient to pay the monthly deductions
imposed in connection with the policy. The owner bears the entire investment
risk for all amounts allocated to the Separate Account; no minimum policy value
or net cash surrender value is guaranteed.
The purchase and ownership of the policy involves various charges which are ex-
plained under the heading Charges and deductions on page 8.
It may not be advantageous to purchase a policy:
(1) as a replacement for another type of life insurance; or,
(2) to obtain additional insurance protection if the purchaser already owns an-
other flexible premium variable life insurance policy.
This prospectus is valid only if accompanied or preceded by a current prospec-
tus for the Lincoln funds and the Delaware Group Premium Fund, Inc.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR BY ANY STATE REGULATORY AGENCY, NOR HAS THE COMMISSION,
OR ANY STATE REGULATORY AGENCY, PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Please read this prospectus carefully and retain it for future reference.
The date of this prospectus is May 1, 1997.
<PAGE>
Account K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
SUMMARY OF THE POLICY 1
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LINCOLN LIFE, THE GENERAL ACCOUNT, AND THE SEPARATE ACCOUNT
Lincoln Life 4
The General Account 4
The Separate Account 4
The investment advisors 4
Addition, deletion or substitution of investments 5
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THE POLICY
Requirements for issuance of a policy 5
Units and unit values 5
Premium payment and allocation of premiums 6
Dollar cost averaging program 7
Effective date 7
Right to examine policy 8
Policy termination 8
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CHARGES AND DEDUCTIONS
Percent of premium charge 8
Contingent deferred sales charge 8
Contingent deferred administrative charge 8
Surrender charge 9
Monthly deductions 9
Cost of insurance charges 9
Monthly charge 10
Fund charges and expenses 10
Mortality and expense risk charge 10
Other charges 10
Reduction of charges 11
Exchange of Lincoln Life Universal Life policies 11
Term conversion credits 11
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POLICY BENEFITS
Death benefit and death benefit types 11
Death benefit guarantee 12
Policy changes 13
Policy value 13
Transfer between subaccounts 14
Transfer to and from the General Account 14
Loans 14
Withdrawals 15
Policy lapse and reinstatement 15
Surrender of the policy 16
Proceeds and payment options 16
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<TABLE>
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Page
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<S> <C>
GENERAL PROVISIONS
The contract 16
Suicide 16
Representations and contestability 17
Incorrect age or sex 17
Change of owner or beneficiary 17
Assignment 17
Reports and records 17
Projection of benefits and values 17
Postponement of payments 17
Riders 18
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DISTRIBUTION OF THE POLICY 19
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FEDERAL TAX MATTERS
Tax status of the policy 19
Tax treatment of policy benefits 20
Taxation of the Separate Account 22
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VOTING RIGHTS 22
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STATE REGULATION OF LINCOLN LIFE AND THE SEPARATE ACCOUNT 22
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SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS 23
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LEGAL PROCEEDINGS 23
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EXPERTS 23
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ADDITIONAL INFORMATION 23
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APPENDIX A: Table of base minimum premiums 24
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APPENDIX B: Table of surrender charges 26
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APPENDIX C: Executive Officers & Directors of Lincoln National Life
Insurance Co. 28
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APPENDIX D: Illustrations of policy values 33
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APPENDIX E: Definitions for Separate Account K 42
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FINANCIAL STATEMENTS 44
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i
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Account K
SUMMARY OF THE POLICY
The following summary is intended to give you a brief explanation of the most
important features of your policy. The summary is not comprehensive and is en-
tirely qualified by more specific information contained elsewhere in this pro-
spectus. For the definition of terms used in this prospectus, see Appendix E.
Throughout this prospectus, in order to make the following documents more un-
derstandable, we have italicized the special terms.
WHAT TYPE OF POLICY AM I PURCHASING?
Your policy is a flexible premium variable life insurance policy whose primary
purpose is to provide life insurance protection on the insured. As long as your
policy remains in force, the policy will provide for: (1) the payment of a
death benefit to a beneficiary upon the insured's death; (2) policy loan privi-
leges, withdrawal rights, and surrender privileges; and (3) the payment of the
net cash surrender value to the owner, if living, on the maturity date.
HOW DOES THE LIFE INSURANCE PROTECTION WORK?
The policy provides for the payment of benefits upon the death of the insured.
The policy contains two types of death benefit coverage. If you choose Type 1,
the death benefit is the greater of the specified amount of the policy or a
specified percentage of policy value. If you choose Type 2, the death benefit
is the greater of the specified amount of the policy plus the policy value or a
specified percentage of policy value. So long as your policy remains in force,
the minimum death benefit payable under either option will be the current spec-
ified amount, reduced by any outstanding loan and any due and unpaid charges,
and increased by any unearned loan interest. (See Death benefit and death bene-
fit types, page 11.)
You also have significant flexibility to adjust the death benefit prior to the
maturity date by increasing or decreasing the specified amount of the policy.
Any increase in the specified amount will require additional evidence of insur-
ability satisfactory to us and will result in additional charges. Any voluntary
decrease during the first 16 years of the policy or during the 16 years follow-
ing an increase in the specified amount will result in partial surrender
charges.
HOW ARE THE PREMIUMS FLEXIBLE?
You have considerable flexibility concerning the amount and frequency of pre-
mium payments. During the first three policy years, your policy will lapse un-
less either the total of all premiums paid (minus any partial withdrawals and
minus any outstanding loans) is at all times at least equal to the death bene-
fit guarantee monthly premium times the number of months since the initial pol-
icy date (including the current month) or the net cash surrender value of the
policy is greater than zero. In order to place your policy in force, you must
pay at least the first two death benefit guarantee monthly premiums. In addi-
tion, you will be asked to determine a planned periodic premium schedule, al-
though you will not be required to adhere to that premium schedule. Instead,
after the first policy year, you may, subject to certain restrictions, make
premium payments in any amount and at any frequency. (See Premium payments and
allocation of premiums, page 6.)
WHAT MAKES MY POLICY VARIABLE?
Your policy is described as variable because the death benefit and the policy
value can vary with the investment performance of amounts you have allocated to
the subaccounts you have selected. While you bear the entire investment risk on
such amounts, you also enjoy the opportunity to obtain market rates of return
on those amounts.
WHAT INVESTMENT CHOICES DO I HAVE?
You have the option to allocate amounts to our General Account and to one or
more subaccounts of the Separate Account. Amounts allocated to the General Ac-
count earn a current declared interest rate, subject to the minimum guaranteed
rate shown on the policy schedule. The subaccounts of the Separate Account each
invest in one of the available funds or series listed below.
FUNDS
All of the funds with the exception of the Special Opportunities Fund are di-
versified, open-end management investment companies. The Special Opportunities
Fund is open-end, but is non-diversified.
Aggressive Growth Fund (1994) -- The investment objective is maximum capital
appreciation. The fund invests in stocks of smaller, lesser-known companies
which have a chance to grow significantly in a short time.
Bond Fund (1981) -- The investment objective is maximum current income consis-
tent with prudent investment strategy. The fund invests primarily in medium-
and long-term corporate and government bonds.
Capital Appreciation Fund (1994) -- The investment objective is long-term
growth of capital consistent with preservation of capital. The fund primarily
buys stocks in a large number of companies of all sizes if the companies are
competing well and if their products or services are in high demand. It may
also buy some money market securities and bonds, including junk (high-risk)
bonds.
Equity-Income Fund (1994) -- The investment objective is to achieve reasonable
income by investing primarily in income-producing equity securities. The fund
invests mostly in high-income stocks and some high-yielding bonds (including
junk bonds).
Global Asset Allocation Fund (1987) -- The investment objective is long-term
total return consistent with preservation of capital. The fund allocates its
assets among several categories of equity and fixed-income securities, both of
U.S. and foreign issuers.
1
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Account K
Growth and Income Fund (1981) -- The investment objective is long-term capital
appreciation. The fund buys stocks of established companies.
International Fund (1991) -- The investment objective is maximum long-term cap-
ital appreciation. The fund trades in securities issued outside the United
States -- mostly stocks, with an occasional bond or money market security.
Managed Fund (1983) -- The investment objective is maximum long-term total re-
turn (capital gains plus income) consistent with prudent investment strategy.
The fund invests in a mix of stocks, bonds and money market securities, as de-
termined by an investment committee.
Money Market Fund (1981) -- The investment objective is maximum current income
consistent with the preservation of capital. The fund invests in short term ob-
ligations issued by U.S. corporations; the U.S. Government; and federally-
chartered banks and U.S. branches of foreign banks.
Social Awareness Fund (1988) -- The investment objective is long-term capital
appreciation. The fund buys stocks of established companies which adhere to
certain specific social criteria.
Special Opportunities Fund (1981) -- The investment objective is maximum capi-
tal appreciation. The fund primarily invests in mid-size companies whose stocks
have significant growth potential. Current income is a secondary consideration.
SERIES
Three series are being offered by Delaware Group Premium Fund, Inc.
Equity/Income -- Seeks the highest possible total rate of return by selecting
issues that exhibit the potential for capital appreciation while providing
higher than average dividend income. It invests generally, but not exclusively,
in common stocks and income-producing securities convertible into common
stocks, consistent with the series' objective.
Emerging Growth -- Seeks long-term capital appreciation by investing primarily
in small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be respon-
sive to changes in the market place and to have fundamental characteristics to
support growth. Income is not an objective.
Global Bond -- Seeks current income consistent with preservation of principal
by investing primarily in fixed income securities that may also provide the po-
tential for capital appreciation. This series is a global fund. As such, at
least 65% of the series' assets will be invested in fixed income securities of
issuers organized or having a majority of their assets in or deriving a major-
ity of their operating income in at least three different countries, one of
which may be the United States.
HOW ARE PREMIUMS PROCESSED?
You determine in the application what portions of net premiums are to be allo-
cated to the General Account or the various subaccounts of the Separate Ac-
count. Prior to the record date, net premiums are automatically allocated to
the General Account. After the record date, the policy value and all subsequent
net premiums will automatically be invested in the General Account and the
subaccounts of the Separate Account in accord with your instructions in the ap-
plication. You may change future allocations of net premiums at any time with-
out charge by notifying us in writing. Subject to certain restrictions, you may
transfer amounts among the General Account and the subaccounts of the Separate
Account.
WHEN DOES MY POLICY TERMINATE?
Your policy may terminate due to any one of the following: voluntary return or
surrender of the policy, lapse due to failure to pay required premiums or due
to insufficient net cash surrender value, payment of the death benefit, or ma-
turity. During the free look period, you may return the policy for a refund of
all premiums paid. Anytime after the free look period and before the second
policy anniversary, you may surrender the policy and receive its net cash sur-
render value plus any excess sales load. (See Charges and deductions, page 8.)
After the second policy anniversary, you may surrender the policy and receive
its net cash surrender value.
DO I HAVE ACCESS TO THE POLICY VALUES?
You may access the net cash surrender value through loans or withdrawals. You
may borrow the net cash surrender value at any time. In addition, subject to
some restrictions and charges, you may withdraw portions of the net cash sur-
render value after the first policy year. Loans and withdrawals decrease both
the death benefit and future policy values and may have federal income tax con-
sequences.
WHAT CHARGES AND DEDUCTIONSARE MADE FROM MY POLICY?
Sales charges will be deducted from your policy in two forms (a percent of pre-
mium charge and a contingent deferred sales charge) as compensation for distri-
bution expenses we incur in the sales process. These distribution expenses in-
clude sales commissions, the cost of printing the prospectus and sales litera-
ture, and any advertising costs. To the extent that such distribution expenses
are not recovered through explicit sales charges, we will recover them from our
other assets or surplus, including income from mortality and expense risk
charges and cost of insurance charges.
PERCENT OF PREMIUM CHARGE. A percent of premium charge is currently deducted
from each premium you pay. The total charge currently consists of the sum of
the following:
a. 1.95% for charges deemed to be sales loads as defined by the Investment
Company Act of 1940. This item is guaranteed not to exceed 1.95%.
2
<PAGE>
Account K
b. 2.00% for premium taxes and other taxes not deemed to be sales loads as
defined by the Investment Company Act of 1940. This item is guaranteed not
to exceed 4.00%.
CONTINGENT DEFERRED SALES CHARGE (CDSC). During the first 16 policy years, the
policy value is subject to a contingent deferred sales charge which is deducted
if the policy lapses or is surrendered or if the specified amount is voluntar-
ily reduced. During the first two policy years, the CDSC is no greater than 44%
of the required base minimum premium for the policy. Upon actual surrender or
voluntary reduction of specified amount in the first two years of the policy,
the actual CDSC is subject to certain maximum limits. (See Charges and deduc-
tions, page 8.) During the third and subsequent policy years, the CDSC will
equal the CDSC during the first policy year times the percent indicated in the
table below.
CONTINGENT DEFERRED ADMINISTRATIVE CHARGE (CDAC). During the first 16 policy
years, the policy value is subject to a contingent deferred administrative
charge which is deducted if the policy lapses or is surrendered or if the spec-
ified amount is voluntarily reduced. The CDAC is no greater than 88% of the re-
quired base minimum premium for the policy. During the second and subsequent
policy years, the CDAC will equal the first year CDAC times the percent indi-
cated in the following table.
An additional CDAC will be imposed under the policy in the event of each re-
quested increase in specified amount and applies during the 16 years following
such increase. If a requested increase in specified amount occurs, additional
premium will be required if the current net cash surrender value is not suffi-
cient to cover the CDAC associated with the increase.
<TABLE>
<S> <C>
During policy year Percent of CDSC and CDAC
(or after an increase) to be deducted
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2 100%
3 100%
4 100%
5 100%
6 95%
7 90%
8 85%
9 80%
10 70%
11 60%
12 50%
13 40%
14 30%
15 20%
16 10%
</TABLE>
SURRENDER CHARGE. The total of all contingent deferred sales charges and all
contingent deferred administrative charges is collectively referred to as the
surrender charge. See Surrender charge, on page 9.
OTHER CHARGES AND DEDUCTIONS. The policy value will be reduced by certain
monthly deductions equal to the sum of a monthly cost of insurance charge (in-
cluding the cost of any optional insurance benefits) and a monthly charge equal
to $7.50 per month. Currently, no charge is made for transfers of amounts among
the General Account and the subaccounts, although a maximum of $10 per transfer
may be charged. A withdrawal charge consisting of a processing fee and a possi-
ble early withdrawal penalty is deducted from each withdrawal. The early with-
drawal penalty portion is applicable only at times when the surrender charge is
greater than zero. As a current practice, the withdrawal charge is equal to 3%
of the withdrawn amount during the first 10 policy years, and is equal to $10
at all other times. This charge is guaranteed not to exceed the greater of $25
or 5% of the withdrawn amount at times when the surrender charge is greater
than zero and is guaranteed not to exceed $25 at all other times.
A daily charge equivalent to an annual rate of .68% of the average daily net
assets of the Separate Account is currently imposed for Lincoln Life's assump-
tion of certain mortality and expense risks, although this charge is reduced to
.0017534% (which is equivalent to an annual rate of .64%) until at least May 1,
1998 in order to offset some of the miscellaneous expenses incurred by the un-
derlying funds. This charge is guaranteed not to exceed .90%.
No charges are currently made from the Separate Account for federal or state
income taxes. Should Lincoln Life determine that such taxes may be imposed, the
company reserves the right to make deductions from the policy to pay those tax-
es.
In addition, because the Separate Account purchases shares of the funds or se-
ries involved, the value of the net assets of these subaccounts of the Separate
Account will reflect the fees of the investment advisor and other miscellaneous
expenses incurred by those funds or series. It is estimated that, in the aggre-
gate, such fees and expenses for the funds and series, expressed as an annual
percentage of each entity's net assets, will range from 0.36% to 1.19%. See
page 10 for more detailed information.
HOW ARE MY POLICY BENEFITS TAXED?
The taxation of life insurance death benefits and distributions is complex and
is discussed in detail under Federal tax matters on pages 19-22. You should
note in particular that the taxation of loans, withdrawals and surrenders of a
life insurance policy that becomes a Modified Endowment Contract is generally
less favorable than distributions from a life insurance policy that is not a
Modified Endowment Contract. Your policy will be a Modified Endowment Contract
if the premiums you pay exceed certain limits referred to as the 7-pay limita-
tion.
3
<PAGE>
Account K
LINCOLN LIFE, THE GENERAL ACCOUNT AND THE SEPARATE ACCOUNT
LINCOLN LIFE
Lincoln National Life Insurance Co. is a stock life insurance company incorpo-
rated under the laws of Indiana on June 12, 1905. Lincoln Life is principally
engaged in offering individual life insurance policies and annuity contracts,
and ranks among the largest United States stock life insurance companies in
terms of assets and life insurance in force. Lincoln Life is also one of the
leading life reinsurers in the United States. Lincoln Life is licensed in all
states (except New York) and the District of Columbia, Guam, and the Common-
wealth of the Northern Mariana Islands.
Lincoln Life is wholly owned by Lincoln National Corp., a publicly held insur-
ance holding company incorporated under Indiana law on January 5, 1968. The
principal office of Lincoln Life is located at 1300 South Clinton Street, Fort
Wayne, Ind. 46802. The principal office of Lincoln National Corp. is located at
200 East Berry Street, Fort Wayne, Ind. 46802. Through subsidiaries, Lincoln
National Corp. engages primarily in the issuance of health-life insurance and
annuities, property-casualty insurance, and other financial services.
THE GENERAL ACCOUNT
The General Account refers to the General Account of Lincoln Life. The General
Account consists of all assets owned by Lincoln Life other than those allocated
to any of its separate accounts, including the Separate Account. The General
Account supports Lincoln Life's insurance and annuity obligations. Because of
applicable exemptive and exclusionary provisions, interests in the General Ac-
count have not been registered under the Securities Act of 1933, and the Gen-
eral Account has not been registered as an investment company under the Invest-
ment Company Act of 1940.
THE SEPARATE ACCOUNT
Lincoln Life Flexible Premium Variable Life Account K (Separate Account) was
established by Lincoln Life as a separate account on March 9, 1994. Although
the assets of the Separate Account are the property of Lincoln Life, the laws
of Indiana under which the Separate Account was established provide that the
assets in the Separate Account attributable to the policies are not chargeable
with liabilities arising out of any other business which Lincoln Life may con-
duct. The assets of the Separate Account shall, however, be available to cover
the liabilities of the General Account of Lincoln Life to the extent that the
Separate Account's assets exceed its liabilities arising under the policies
supported by it. The assets of the Separate Account will be valued once daily
at the close of regular trading (currently 4:00 p.m. New York time) on each day
the New York Stock Exchange is open. The New York Stock Exchange is currently
closed on the following holidays: New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Separate Account has been registered as an investment company under the In-
vestment Company Act of 1940 and meets the definition of "separate account" un-
der federal securities laws. Registration with the Securities and Exchange Com-
mission does not involve supervision of the management or investment practices
or policies of the Separate Account or Lincoln Life by the Commission.
The Separate Account is divided into subaccounts. Each subaccount invests ex-
clusively in shares of one of the following funds or series:
Lincoln National Aggressive Growth Fund, Inc.
Lincoln National Bond Fund, Inc.
Lincoln National Capital Appreciation Fund, Inc.
Lincoln National Equity-Income Fund, Inc.
Lincoln National Global Asset Allocation Fund, Inc.
Lincoln National Growth and Income Fund, Inc.
Lincoln National International Fund, Inc.
Lincoln National Managed Fund, Inc.
Lincoln National Money Market Fund, Inc.
Lincoln National Social Awareness Fund, Inc.
Lincoln National Special Opportunities Fund, Inc.
Delaware Equity/Income Series
Delaware Emerging Growth Series
Delaware Global Bond Series
Income and both realized and unrealized gains or losses from the assets of the
Separate Account are credited to or charged against the Separate Account with-
out regard to the income, gains or losses arising out of any other business
Lincoln Life may conduct. The funds or series are also invested in by variable
annuity contract holders. For an explanation of the risk involved with such
mixed and/or shared funding, see the prospectus of the underlying funds or se-
ries.
There is no assurance that any fund or series will achieve its stated objec-
tive. For a complete description of the funds or series, please refer to the
prospectuses for the funds or series which must accompany or precede this pro-
spectus and which should be read carefully.
THE INVESTMENT ADVISORS
Lincoln Investment Management Inc. (Lincoln Investment) is the investment advi-
sor for the funds. Lincoln Investment is a wholly owned subsidiary of Lincoln
National Corp. Lincoln Investment is headquartered at 200 East Berry Street,
Fort Wayne, Indiana 46802, and is registered with the Securities and Exchange
Commission as an investment adviser.
Additionally, Lincoln Investment currently has six sub-advisory agreements in
which the sub-advisor may perform some or substantially all of the investment
advi -
4
<PAGE>
Account K
sory services required by nine of the funds. No additional compensation from
the assets of those funds will be assessed as a result of the sub-advisory
agreements. The following lists the six sub-advisors and the respective funds
for which they act:
Sub-advisor
Fund(s)
Clay Finlay,International
Inc.
Fidelity
ManagementTrust
Co.
Equity-Income
Capital Appreciation
Janus Capital
Corp.
Aggressive Growth
Lynch & Global Asset Allocation
Mayer, Inc.
Growth and Income; Managed (for stock portfolio); Social
Awareness; and Special Opportunities
Putnam
Investment
Management,
Inc.
Vantage
GlobalAdvisors,
Inc.
The Bond and Money Market Funds do not have sub-advisors.
Delaware Management is the investment advisor for the Delaware Equity/Income
Series and the Delaware Emerging Growth Series. Delaware International, an af-
filiate of Delaware Management, is the investment advisor for the Delaware
Global Bond Series. Delaware Management is a wholly-owned, indirect subsidiary
of Delaware Management Holdings, Inc. On April 3, 1995, Delaware Management
Holdings, Inc. merged with Lincoln National Corp., the holding company for Lin-
coln
National Life Insurance Co. As a result of the merger, Delaware Management
Holdings and Delaware Management became indirect, wholly-owned subsidiaries of
and are thus subject to the ultimate control of Lincoln National Corp. Delaware
Management and Delaware International are registered with the Securities and
Exchange Commission as investment advisers. Additional information about Dela-
ware Management may be found in the Delaware Group Premium Fund, Inc. prospec-
tus.
ADDITION, DELETION, ORSUBSTITUTION OF INVESTMENTS
Lincoln Life cannot guarantee that any particular funds will be available for
investment by the subaccounts. Lincoln Life reserves the right, subject to com-
pliance with applicable law, to make additions to, deletions from, or substitu-
tions for the shares that are held by the Separate Account or that the Separate
Account may purchase. Lincoln Life reserves the right to eliminate the shares
of any fund or series and to substitute shares of another open-end, registered
investment company, if the shares are no longer available for investment, or if
in the judgment of Lincoln Life further investment in any fund or series should
become inappropriate in view of the purposes of the Separate Account. Lincoln
Life will not substitute any shares attributable to an owner's interest in a
subaccount of the Separate Account without notice and prior approval of the Se-
curities and Exchange Commission, to the extent required by the Investment Com-
pany Act of 1940 or other applicable law. Nothing contained herein shall pre-
vent the Separate Account from purchasing other securities for other series or
classes of policies, or from permitting a conversion between series or classes
of policies on the basis of requests made by policyowners.
Lincoln Life also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new fund or series of a fund,
or in shares of another investment company, with a specified investment objec-
tive. New subaccounts may be established when, at the sole discretion of Lin-
coln Life, marketing needs or investment conditions warrant, and any new
subaccounts may be made available to existing policyowners on a basis to be de-
termined by Lincoln Life. Lincoln Life may also eliminate one or more
subaccounts if, in its sole discretion, marketing, tax, or investment condi-
tions warrant.
In the event of any such substitution or change, Lincoln Life may by appropri-
ate endorsement make such changes in the policy as may be necessary or appro-
priate to reflect such substitution or change. If deemed by Lincoln Life to be
in the best interests of persons having voting rights under the Policies, the
Separate Account may be operated as a management company under the Investment
Company Act of 1940, it may be deregistered under that Act in the event such
registration is no longer required, or it may be combined with other Lincoln
Life separate accounts.
THE POLICY
REQUIREMENTS FOR ISSUANCE OF A POLICY
Individuals wishing to purchase a policy must send a completed application to
Lincoln Life, 1300 South Clinton Street, Fort Wayne, Ind. 46802. The minimum
specified amount of a policy is $50,000. A policy will generally be issued only
to insureds 80 years of age or under who supply satisfactory evidence of insur-
ability sufficient to Lincoln Life. Acceptance is subject to Lincoln Life's un-
derwriting rules and, except in California, Lincoln Life reserves the right to
reject an application for any reason.
Additional insurance on the life of other persons may be applied for by supple-
mental application. Approval of the additional insurance will be subject to ev-
idence of insurability satisfactory to Lincoln Life.
UNITS AND UNIT VALUES
The value of policy monies invested in each subaccount is accounted for through
the use of units and unit values. A unit is an accounting unit of measure used
to calculate the value of an investment in a specified subaccount. A unit value
is the dollar value of a unit in a specified subaccount on a specified valua-
tion date. Whenever an amount is invested in a subaccount (due to net
5
<PAGE>
Account K
premium payments, loan payments, or transfer of values into a subaccount), the
amount purchases units in that subaccount; the number of units purchased is de-
termined by dividing the dollar amount of the transaction by the unit value on
the day the transaction is made. Similarly, whenever an amount is redeemed from
a subaccount (due to loans and loan interest charges, withdrawals and with-
drawal charges, surrender and surrender charges, transfers of values out of a
subaccount and transfer charges, income tax deductions (if any), cost of insur-
ance charges, or monthly charges), units are redeemed from that subaccount; the
number of units redeemed is determined by dividing the dollar amount of the
transaction by the unit value on the day the transaction is made.
The unit value is also used to measure the net investment results in a
subaccount. The policy value on any valuation day is the sum of the values in
each subaccount in which policy values are allocated plus any policy value al-
located to the General Account. The value of each subaccount on each valuation
day is determined by multiplying the number of units held by a policy in each
subaccount by the unit value for that subaccount as determined for that valua-
tion day.
The unit value for a subaccount on a specified valuation date is determined by
dividing the value of all assets owned by that subaccount, net of the
subaccount's liabilities (including any accrued but unpaid daily mortality and
expense risk charges), by the total number of units held by policies in that
subaccount. Net investment results do not increase or decrease the number of
units held by the subaccount.
PREMIUM PAYMENT ANDALLOCATION OF PREMIUMS
Subject to certain limitations, an owner has considerable flexibility in deter-
mining the frequency and amount of premiums. During the first three policy
years, the policy will lapse unless either the total of all premiums paid (mi-
nus any partial withdrawals and minus any outstanding loans) is at all times at
least equal to the death benefit guarantee monthly premium times the number of
months since the initial policy date (including the current month) or the net
cash surrender value of the policy is greater than zero. Payment of the death
benefit guarantee monthly premium during the first three policy years will
guarantee that the policy will remain in force for the first three policy years
despite negative net cash surrender value (see Death benefit guarantee, page
12), but continued payment of such premiums will not guarantee that the policy
will remain in force thereafter. The amount of the death benefit guarantee
monthly premium is based on the base minimum premium per $1,000 of specified
amount (determined by the insured's age, sex, and underwriting class) and in-
cludes additional amounts to cover charges for additional benefits, monthly
charges, and substandard extra charges. A table of base minimum premiums per
$1,000 of specified amount is in Appendix A, pages 24-25.
The owner may designate in the application one of several ways to pay the death
benefit guarantee monthly premium. The owner may elect to pay the first twelve
months of premiums in full prior to commencement of insurance coverage. Alter-
natively, the owner may elect to pay a level planned periodic premium on a
quarterly or semi-annual basis sufficient to meet the premium requirements.
Premiums may also be paid monthly if paid by a pre-authorized check. Premiums,
other than the initial premium, are payable only at the Home Office of Lincoln
Life.
Each owner will also define a planned periodic premium schedule that provides
for payment of a level premium at fixed intervals for a specified period of
time. The owner is not required to pay premiums in accord with this schedule.
Furthermore, the owner has flexibility to alter the amount, frequency, and the
time period over which planned periodic premiums are paid. Failure to pay
planned periodic premiums will not of itself cause the policy to lapse, nor
will the payment of planned periodic premiums equal to or in excess of the re-
quired death benefit guarantee monthly premiums guarantee that the policy will
remain in force beyond the first three policy years. Unless the policy is being
continued under the death benefit guarantee, (see Death benefit guarantee, page
12), the policy will lapse any time outstanding loans with interest exceed pol-
icy value less surrender charge or policy value less outstanding loans and less
surrender charge is insufficient to pay certain monthly deductions, and a grace
period expires without a sufficient payment. (See Policy lapse and reinstate-
ment, page 15.) Subject to the minimum premiums required to keep the policy in
force and the maximum premium limitations established under section 7702 of the
Internal Revenue Code 1986, as amended (the Code), an owner may make
unscheduled premium payments at any time in any amount during the lifetime of
the insured until the maturity date. Monies received that are not designated as
premium payments will be assumed to be loan repayments if there is an outstand-
ing loan on the policy; otherwise, such monies will be assumed to be an
unscheduled premium payment.
PREMIUM LIMITATIONS. In no event can the total of all premiums paid, both
scheduled and unscheduled, exceed the current maximum premium limitations es-
tablished for life insurance policies to meet the definition of life insurance,
as set forth under Section 7702 of the Code. Those limitations will vary by is-
sue age, sex, classification, benefits provided, and even policy duration. If
at any time a premium is paid which would result in total premiums exceeding
the current maximum premium limitation, Lincoln Life will only accept that por-
tion of the premium which will make total premiums equal that amount. Any part
of the premium in excess of that amount will first be applied to reduce any
outstanding loan on the policy, and any further excess will be refunded to the
owner within 7 days of receipt and
6
<PAGE>
Account K
no further premiums will be accepted until allowed by subsequent maximum pre-
mium limitations.
The tax status of a policy and the tax treatment of distributions from a policy
are dependent in part on whether or not the policy becomes a Modified Endowment
Contract. A policy will become a Modified Endowment Contract if premiums paid
into the policy cause the policy to fail the 7-pay test set forth under Section
7702A of the Code. Lincoln Life will monitor premiums paid into each policy af-
ter the date of this prospectus to determine when a premium payment will exceed
the 7-pay test and cause the policy to become a Modified Endowment Contract. If
the owner has given Lincoln Life instructions that the policy should not be al-
lowed to become a Modified Endowment Contract, any premiums in excess of the 7-
pay limitation will first be applied to reduce any outstanding loan on the pol-
icy, and any further excess will be refunded to the owner within 7 days of re-
ceipt. If the owner has not given Lincoln Life instructions to the contrary,
however, the premium will be paid into the policy and a letter of notification
of Modified Endowment Contract status will be sent to the owner. The letter of
notification will include the available options, if any, for remedying the Mod-
ified Endowment Contract status of the policy.
NET PREMIUMS. The net premium equals the premium paid less the percent of pre-
mium charge (see Percent of premium charge, page 8).
ALLOCATION OF NET PREMIUMS. In the application for a policy, the owner can al-
locate net premiums or portions thereof to the General Account and the various
subaccounts of the Separate Account. Notwithstanding the allocation in the ap-
plication, all net premiums received prior to the record date will initially be
allocated to the General Account. Net premiums received prior to the record
date will be credited to the policy on the later of the policy date or the date
the premium is received. The record date is the date the policy is recorded on
the books of Lincoln Life as an in-force policy, and may coincide with the pol-
icy date. Ordinarily, the policy will be recorded as in-force within three
business days after the later of the date we receive the last outstanding re-
quirement or the date of underwriting approval. Net premiums will continue to
be allocated to the General Account until the record date. When the assets of
the Separate Account are next valued following the record date, the value of
the policy's assets in the General Account will automatically be transferred to
the General Account and the subaccounts of the Separate Account in accord with
the owner's percentage allocation in the application. No charge will be imposed
for this initial transfer. Net premiums paid after the record date will be
credited to the policy on the date they are received and will be allocated in
accord with the owner's instructions in the application. The minimum percentage
of each premium that may be allocated to the General Account or to any
subaccount of the Separate Account is 10%; percentages must be in whole num-
bers. The allocation of future net premiums may be changed without charge at
any time by providing written notification on a form suitable to Lincoln Life,
unless the owner has made previous arrangements with Lincoln Life to allow the
allocation of future net premiums to be changed upon telephone request.
The value of the amount allocated to subaccounts of the Separate Account will
vary with the investment experience of these subaccounts and the owner bears
the entire investment risk. The value of the amount allocated to the General
Account will earn a current interest rate guaranteed to be at least equal to
the General Account guaranteed interest rate shown on the Policy Schedule. Own-
ers should periodically review their allocations of premiums and values in
light of market conditions, interest rates, and overall estate planning re-
quirements.
DOLLAR COST AVERAGING PROGRAM
The owner may wish to make uniform monthly transfers from the General Account
to one or more of the subaccounts over a 12, 24, or 36-month period through the
Dollar Cost Averaging (DCA) program. Under the program, the owner designates
the total amount of policy value ($5,000 minimum) to be transferred from the
General Account to the chosen subaccounts in accord with the most recent pre-
mium allocation. The transfers continue until the end of the DCA period or un-
til the policy value in the General Account has been exhausted, whichever oc-
curs sooner. DCA may also be terminated upon written request by the owner.
The theory of DCA is that transfers of uniform dollar amounts purchase a
greater number of subaccount units when unit values are relatively low than are
purchased when unit values are higher. This has the effect, when purchases are
made at fluctuating prices, of reducing the aggregate average cost per unit to
less than the average of the unit values on the same purchase dates. However,
participation in the DCA program does not assure the owner of a greater return
on purchases under the program, nor will it prevent or necessarily alleviate
losses in a declining market.
There are no charges associated with the DCA program. In order to participate
in (or terminate participation in) the DCA program, the owner must complete a
written request on a form suitable to Lincoln Life.
EFFECTIVE DATE
For all coverage provided in the original application, the effective date will
be the policy date, provided the policy has been delivered and the initial pre-
mium has been paid prior to death and prior to any change in health or any
other factor affecting insurability of the insured as shown in the application.
The policy date is ordinarily the earlier of the date the full initial premium
is received or the date on which the policy is approved for issue by Lincoln
Life.
7
<PAGE>
Account K
For any increase, the effective date will be the first monthly anniversary day
on or next following the day the application for the increase is approved.
For any insurance that has been reinstated, the effective date will be the
first monthly anniversary day on or next following the day the application for
reinstatement is approved.
RIGHT TO EXAMINE POLICY
The owner may, until a specified period of time has expired, examine the policy
and return it for refund of all premiums paid. The applicable period of time
will depend on the state in which the policy is issued, but will not expire
sooner than the latest of ten days after receipt of the policy, 45 days after
Part 1 of the application is completed, or ten days after the notice of with-
drawal right is mailed or delivered to the owner. Upon cancellation the policy
will be void from the beginning. An owner wanting a refund should return the
policy to either Lincoln Life at its Home Office or to the registered agent who
sold it.
POLICY TERMINATION
All coverage under the policy will terminate when any one of the following oc-
curs: 1) the grace period ends without payment of required premium, and the
policy is not being continued under the death benefit guarantee provision, 2)
the policy is surrendered, 3) the insured dies, or 4) the policy matures.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the policy to compensate Lincoln
Life for:
1. Providing the insurance benefit set forth in the policy and any optional
insurance benefits added by rider;
2. Administering the policy;
3. Assuming certain risks in connection with the policy;
4. Incurring expenses in distributing the policy.
The nature and amount of these charges are described more fully below.
PERCENT OF PREMIUM CHARGE. A percent of premium charge is currently deducted
from each premium you pay. The total charge currently consists of the sum of
the following:
a. 1.95% for charges deemed to be sales loads as defined by the Investment
Company Act of 1940. This item is guaranteed not to exceed 1.95%.
b. 2.00% for premium taxes and other taxes not deemed to be sales loads as
defined by the Investment Company Act of 1940. This item is guaranteed not
to exceed 4.00%.
CONTINGENT DEFERRED SALES CHARGE (CDSC). During the first 16 policy years, the
policy value is subject to a contingent deferred sales charge (CDSC) which is
deducted if the policy lapses or is surrendered or upon a voluntary reduction
in specified amount. During the first policy year, the CDSC is approximately
equal to 44% (less at older ages) of the required base minimum premium for the
designated specified amount. The base minimum premium required varies with the
age, sex, and rating class of the insured. To determine the first year CDSC per
$1,000 of specified amount, multiply the surrender charge found in the table of
Surrender Charges (see Appendix B, pages 26-27) times one-third. (For example,
the surrender charge for a male preferred smoker age 35 is $9.99 per $1000 of
specified amount, or $999 for a policy with $100,000 specified amount. One-
third of the surrender charge, or $333, is the CDSC for the policy.) Further-
more, upon lapse or surrender of the policy or voluntary reduction in specified
amount at any time during the first two policy years, the total sales charges
actually deducted (the sales charge component of the percent of premium charge
plus the CDSC) will never exceed the following maximum: 30% of premiums paid up
to the first 12 death benefit guarantee monthly premiums, plus 10% of premiums
paid up to the next 12 death benefit guarantee monthly premiums, plus the sales
charge component of the percent of premium charge on premiums paid in excess of
those amounts.
During the second and subsequent policy years, the CDSC will equal the CDSC
during the first policy year times the percent indicated in the following ta-
ble.
CONTINGENT DEFERRED ADMINISTRATIVE CHARGE (CDAC). During the first 16 policy
years, the policy value is subject to a contingent deferred administrative
charge which is deducted if the policy lapses or is surrendered or upon a vol-
untary reduction in specified amount. During the first policy year, the CDAC is
approximately equal to 88% (less at older ages) of the required base minimum
premium for the designated specified amount. To determine the first year CDAC
per $1,000 of specified amount, multiply the surrender charge found in the ta-
ble of surrender charges (see Appendix B, pages 26-27) times two-thirds. (For
example, the surrender charge for a male preferred smoker age 35 is $9.99 per
$1000 of specified amount, or $999 for a policy with $100,000 specified amount.
Two-thirds of the surrender charge, or $666, is the CDAC for the policy).
During the second and subsequent policy years the CDAC will equal the CDAC dur-
ing the first policy year times the percent indicated in the following table.
An additional CDAC will be imposed under the policy in the event of each re-
quested increase in specified amount. The additional CDAC is an amount per
$1,000 of increased specified amount and will be deducted upon lapse or surren-
der of the policy or upon a voluntary reduction of the increased specified
amount at any time during the 16 years following such increase. The amount
8
<PAGE>
Account K
of the CDAC will be equal to the CDAC that would apply to a newly issued policy
at the age of the insured at the time of the increase. The percentage of the
CDAC applicable in any year after the increase is shown in the table below,
where policy year is calculated from the date of the increase.
<TABLE>
<CAPTION>
During policy year Percent of CDSD and CDAC
(or after an increase) to be deducted
- ------------------------------------------------------------------------------
<S> <C>
2 100%
3 100%
4 100%
5 100%
6 95%
7 90%
8 85%
9 80%
10 70%
11 60%
12 50%
13 40%
14 30%
15 20%
16 10%
</TABLE>
When the owner requests an increase in the specified amount, no additional pre-
mium is required provided that the current net cash surrender value is suffi-
cient to cover the CDAC associated with the increase, as well as the increase
in the cost of insurance charges which result from the increase in specified
amount. However, if the net cash surrender value is insufficient to cover such
costs, additional premium will be required for the increase to be granted, and
the percent of premium charge will be deducted from that additional premium.
SURRENDER CHARGE. The total of all contingent deferred sales charges and all
contingent deferred administrative charges are collectively referred to as the
surrender charge. The surrender charges for the first 5 years are shown in Ap-
pendix B. For surrender charges during policy years 6 through 16 the values
shown in Appendix B should be multiplied by the percentages given in the table
above. For increases in the specified amount, additional surrender charges ap-
ply. During the first 5 years after an increase, the additional surrender
charges are calculated by multiplying the values in Appendix B by two-thirds.
During years 6 through 16 after an increase, the values in Appendix B are mul-
tiplied by two-thirds and times the percentage given in the table above.
MONTHLY DEDUCTIONS. On the policy date and on each monthly anniversary day fol-
lowing, deductions will be made from the policy value. These deductions are of
two types: A monthly charge and a monthly cost of insurance deduction. Ordinar-
ily, the monthly deductions are deducted from the policy value in proportion to
the values in the General Account and the subaccounts. The monthly deductions
may be made by some other method if requested by the owner, and if such method
is acceptable to Lincoln Life.
COST OF INSURANCE CHARGES. On the policy date and on each monthly anniversary
day following, cost of insurance charges will be deducted from the policy val-
ue. Ordinarily, the cost of insurance charges are deducted in proportion to the
values in the General Account and the subaccounts. The cost of insurance
charges may be made by some other method if requested by the owner, and if such
method is acceptable to Lincoln Life.
The cost of insurance charges depend upon a number of variables, and the cost
for each policy month can vary from month to month. It will depend, among other
things, on the amount for which Lincoln Life is at risk to pay in the event of
the insured's death. On each monthly anniversary day, Lincoln Life will deter-
mine the monthly cost of insurance for the following month as equal to:
a. The death benefit on the monthly anniversary day; divided by
b. 1.0032737 (the monthly interest factor equivalent to an annual interest
rate of 4%); minus,
c. The policy value on the monthly anniversary day without regard to the cost
of insurance; divided by
d. 1,000; the result multiplied by
e. The applicable cost of insurance rate per $1,000 as described below.
The cost of insurance rates are based on the sex, attained age, rate class of
the person insured, and specified amount of the policy. In states requiring
unisex rates, in federally qualified pension plan sales, in employer sponsored
situations and in any other situation where unisex rates are required by law,
the cost of insurance rates are not based on sex. The monthly cost of insurance
rates may be changed by Lincoln Life from time to time. A change in the cost of
insurance rates will apply to all persons of the same attained age, sex, rate
class, and specified amount and whose policies have been in effect for the same
length of time. The cost of insurance rates will not exceed those described in
the table of guaranteed maximum insurance rates shown in the policy. These
rates are based on the 1980 Commissioner's Standard Ordinary Mortality Table,
age last birthday, for attained ages under sixteen; on the 1980 Commissioner's
Standard Ordinary Nonsmoker Mortality Table age last birthday, or the 1980 Com-
missioner's Standard Ordinary
Smoker Mortality Table age last birthday, for attained ages sixteen and over,
depending on the smoking status of the insured. Standard rate classes have
guaranteed rates which do not exceed 100% of the applicable table.
The rate class of an insured will affect the cost of insurance rate. Lincoln
Life currently places insureds into a standard rate class or rate classes in-
volving a higher mortality risk. In an otherwise identical policy, insureds
9
<PAGE>
Account K
in the standard rate class will have a lower cost of insurance than those in
the rate class with the higher mortality risk. The standard rate class is also
divided into four categories: preferred nonsmoker, standard nonsmoker, pre-
ferred smoker and standard smoker. Insureds who are standard nonsmoker or pre-
ferred nonsmoker will generally incur a lower cost of insurance than those
insureds who are in the smoker rate classes. Likewise, insureds who are pre-
ferred smoker or preferred nonsmoker will generally incur a lower cost of in-
surance than similarly situated insureds who are standard smoker or standard
nonsmoker respectively.
The specified amount of the policy will affect the cost of insurance rates ap-
plied to a specific policy. In general, policies with a specified amount of
$200,000 or more will have lower current cost of insurance rates than policies
with smaller specified amounts.
MONTHLY CHARGE. A monthly charge of $7.50 is deducted from the policy value
each month the policy is in force to compensate Lincoln Life for continuing ad-
ministration of the policy, premium billings, overhead expenses, and other mis-
cellaneous expenses. Lincoln Life does not anticipate any profits from this
charge. This charge is guaranteed not to increase during the life of the poli-
cy.
FUND CHARGES AND EXPENSES. The investment advisor for each of the funds or se-
ries deducts a daily charge as a percent of the net assets in each fund or se-
ries as an asset management charge. The charge has the effect of reducing the
investment results credited to the subaccounts.
The investment advisor for the Lincoln funds is Lincoln Investment Management
Inc. (Lincoln Investment). As compensation for its services, Lincoln Investment
deducts a daily charge as a percent of the net assets in each particular fund
which is equivalent to the following annual rates:
Because the Separate Account purchases shares of the funds or series involved,
the value of the net assets of the subaccounts of the Separate Account will re-
flect not only the fees of the Investment Advisor, but also other miscellaneous
expenses incurred by those funds or series.
The asset management charges, miscellaneous expenses and total expenses for
each of the funds and series are currently estimated, on the basis of their
most recent fiscal year experience, to be as follows:
<TABLE>
<CAPTION>
Asset Misc.
Mgt. Charge* Expenses* Total*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fund
Aggressive Growth .75% .07% .82%
Bond .46% .05% .51%
Capital Appreciation .80% .13% .93%
Equity-Income .95% .13% 1.08%
Global Asset Allocation .73% .27% 1.00%
Growth and Income .33% .03% .36%
</TABLE>
<TABLE>
<CAPTION>
Asset Misc.
Mgt. Charge* Expenses* Total*
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International .82% .37% 1.19%
Managed .39% .04% .43%
Money Market .48% .09% .57%
Social Awareness .42% .04% .46%
Special Opportunities .40% .04% .44%
Series
Equity/Income .54% .13% .67%
Emerging Growth .70% .10% .80%
Global Bond .36% .44% .80%
</TABLE>
*Expressed as an annual percentage of each entity's average daily net assets.
See the prospectuses of the funds and series for more complete information
about their expenses.
MORTALITY AND EXPENSE RISK CHARGE. Lincoln Life deducts a daily charge as a
percent of the assets of the Separate Account as a mortality and expense risk
charge. This charge has the effect of reducing gross investment results cred-
ited to the subaccounts. The daily rate currently charged is equal to an annual
rate of .68 of 1% of the value of the net assets of the Separate Account, al-
though this charge is reduced to a daily rate of .0017534% (which is equivalent
to an annual rate of .64 of 1%) until at least May 1, 1998 in order to offset
some of the miscellaneous expenses incurred by the underlying funds. This de-
duction may increase or decrease, but is guaranteed not to exceed .90 of 1% in
any policy year.
Lincoln Life will reduce the current mortality and expense risk charge whenever
the previous year's average ratio of fund miscellaneous expenses to average net
assets exceeds .10 of 1%. The reduction for the following 12 months will take
effect each May 1 and will equal the excess, if any, of the average ratio of
fund miscellaneous expenses to average net assets over .10%; however, the re-
duction will never exceed .10 of 1%.
The mortality risk assumed is that insureds may live for a shorter period of
time than estimated and, therefore, a greater amount of death benefits will be
payable. The expense risk assumed is that expenses incurred in issuing and ad-
ministering the policies will be greater than estimated.
OTHER CHARGES. Two other miscellaneous charges are occasionally incurred: a
withdrawal charge and a transfer charge. The withdrawal charge is incurred when
the owner of the policy requests a withdrawal from the policy value; the charge
is deducted from the withdrawn amount and the balance is paid to the owner.
Withdrawals may be made any time after the first policy year, but only one
withdrawal may be made per year. The withdrawal charge is equal to the greater
of (1) a minimum withdrawal charge or processing fee (currently limited volun-
tarily to $10), or (2) at times when the surrender charge is greater than zero,
an amount equal to the amount withdrawn multiplied by the percent of
10
<PAGE>
Account K
withdrawal charge (currently limited voluntarily to 3%, during the first ten
policy years only). The amount, if any, by which the withdrawal charge exceeds
the processing fee first reduces any remaining CDSC; any further excess next
reduces any remaining CDAC; and any remaining excess will be waived. The with-
drawal charge is guaranteed not to exceed the greater of $25 or 5% of the with-
drawn amount at times when the surrender charge is greater than zero and is
guaranteed not to exceed $25 at all other times.
The transfer charge is incurred when the owner requests that funds be trans-
ferred from one subaccount or the General Account to another subaccount or the
General Account. The transfer charge is $10, and is deducted from the amount
transferred; however, the transfer charge is currently being waived for all
transfers. The maximum number of transfers allowed between subaccounts in a
policy year is twelve.
No charges are currently made from the Separate Account for federal or state
income taxes. Should Lincoln Life determine that such taxes may be imposed, the
company may make deductions from the policy to pay those taxes. (See Federal
tax matters, pages 19-22).
REDUCTION OF CHARGES
The percent of premium charge, surrender charge, and the monthly charge set
forth in this prospectus may be reduced because of special circumstances that
result in lower sales, administrative, or mortality expenses. For example, spe-
cial circumstances may exist in connection with sales to Lincoln Life policy-
holders, or sales to employees of Lincoln Life. The amounts of any reductions
will reflect the reduced sales effort and administrative costs resulting from,
or the different mortality experience expected as a result of, the special cir-
cumstances. Reductions will not be unfairly discriminatory against any person,
including the affected policyowners and owners of all other policies funded by
the Separate Account.
EXCHANGE OF LINCOLN LIFE
UNIVERSAL LIFE POLICIES
Existing Lincoln Life Universal Life policies may currently be exchanged for a
policy described in this prospectus. Because Lincoln Life's expenses are re-
duced in such exchanges, as a current practice the percent of premium charge
will be waived on the amount of policy value exchanged. In addition, as a cur-
rent practice the Contingent Deferred Sales Charge and the Contingent Deferred
Administrative Charge will be reduced to 25% of the normal charges for the
specified amount transferred and further reduced by the amount of any surrender
charge collected on the surrendered policy. All additional premiums will be
subject to the percent of premium charge and any increase in specified amount
will be subject to additional surrender charges. Existing Lincoln Life Variable
Life policies may not be exchanged unless or until Lincoln Life receives spe-
cial exemptive relief from the Securities and Exchange Commission to honor such
exchange requests.
TERM CONVERSION CREDITS
Lincoln Life currently has a term conversion program which gives premium cred-
its to the policy if the owner is converting from a term insurance policy. Term
insurance policies issued by Lincoln Life or by most other life insurance com-
panies may be converted to the policy under this program and receive term con-
version credits. Except for guaranteed term conversion privileges provided un-
der some Lincoln Life term insurance policies or otherwise provided by special
agreement, all term insurance policy conversions are subject to evidence of in-
surability satisfactory to Lincoln Life. All conversion credits are deposited
in the policy without the percent of premium charge. The amount of the term
conversion credits and the requirements for qualification for those credits is
subject to change by Lincoln Life, but such changes will not be unfairly dis-
criminatory against any person, including the affected policyowners and owners
of all other policies funded by the Separate Account.
POLICY BENEFITS
DEATH BENEFIT AND DEATH BENEFIT TYPES
As long as the policy remains in force (see Policy lapse and reinstatement,
page 15), Lincoln Life will, upon proof of the insured's death, pay the death
benefit proceeds of the policy to the named beneficiary in accordance with the
designated death benefit type. The proceeds may be paid in cash or under one or
more of the payment options set forth in the policy. (See Proceeds and payment
options, page 16.) The death benefit proceeds payable under the designated
death benefit type will be increased by any unearned loan interest, and will be
reduced by any outstanding loan and any due and unpaid charges. (See Policy
lapse and reinstatement, page 15.) These proceeds will be further increased by
any additional insurance on the insured provided by rider.
The policy provides two death benefit types: Type 1, basic coverage, and Type
2, basic plus policy value coverage. Generally, the owner designates the death
benefit type in the application. The owner may change the death benefit type at
any time. (See Policy changes, page 13.)
TYPE 1. The death benefit is the greater of the specified amount of the policy
or a specified percentage of the policy value on or prior to the date of death.
The specified percentage at anytime is based on the attained age of the insured
as of the beginning of the policy year.
TYPE 2. The death benefit is equal to the greater of the specified amount plus
the policy value of the policy or a specified percentage of the policy value on
or prior to the date of death. The specified percentage at any time
11
<PAGE>
Account K
is based on the attained age of the insured as of the beginning of the policy
year.
Under a Type 1 basic coverage, the net amount at risk decreases as the policy
value increases. (The net amount at risk is equal to the death benefit less the
policy value.) Under a Type 2 basic plus policy value coverage, the net amount
at risk remains constant, so the cost of insurance deduction will be relatively
higher on a Type 2 basic plus policy value coverage than on a Type 1 basic cov-
erage. As a result, policy values under a Type 1 basic coverage tend to in-
crease faster than under a Type 2 basic plus policy value coverage, assuming
favorable investment performance. Because of this, policyowners that are more
interested in achieving higher policy values more quickly (assuming favorable
investment experience) would be more likely to select a Type 1 basic coverage.
In contrast, the death benefit under Type 2 will increase or decrease as the
policy value increases or decreases. Consequently, policyowners who are more
interested in increasing total death benefits (assuming favorable investment
experience) would be more likely to select a Type 2 basic plus policy value
coverage.
* The specified percentages are shown in the table below:
<TABLE>
<CAPTION>
Attained Specified Attained Specified Attained Specified
age percentage age percentage age percentage
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
40 OR
YOUNGER 250% 59 134% 91 104%
41 243 60 130 92 103
42 236 61 128 93 102
43 229 62 126 94 101
44 222 63 124 95 OR 100
45 215 64 122 OLDER
46 209 65 120
47 203 66 119
48 197 67 118
49 191 68 117
50 185 69 116
51 178 70 115
52 171 71 113
53 164 72 111
54 157 73 109
55 150 74 107
56 146 75 105
57 142 THROUGH
58 138 90
</TABLE>
EXAMPLES. For both examples, assume that the insured is under the age of 40 and
that there is no outstanding policy loan.
Under Type 1, a policy with a specified amount of $250,000 will generally pay
$250,000 in life insurance death benefits. However, because life insurance
death benefits cannot be less than 250% (the applicable specified percentage)
of policy value, any time the policy value of this policy exceeds $100,000, the
life insurance death benefit will exceed the $250,000 specified amount. If the
policy value equals or exceeds $100,000, each additional dollar added to the
policy value will increase the life insurance death benefit by $2.50. Thus, for
a policy with a specified amount of $250,000 and a policy value of $200,000,
the beneficiary will be entitled to a life insurance death benefit of $500,000
(250% X $200,000); a policy value of $300,000 will yield a life insurance death
benefit of $750,000 (250% X $300,000); a policy value of $500,000 will yield a
life insurance death benefit of $1,250,000 (250% X $500,000). Similarly, so
long as policy value exceeds $100,000, each dollar taken out of policy value
will reduce the life insurance death benefit by $2.50. If at any time the pol-
icy value multiplied by the specified percentage is less than the specified
amount, the life insurance death benefit will equal the specified amount of the
policy.
Under Type 2, a policy with a specified amount of $250,000 will generally pay
life insurance death benefits of $250,000 plus policy value. Thus, for example,
a policy with a specified amount of $250,000 and policy value of $50,000 will
yield a life insurance death benefit equal to $300,000 ($250,000 + $50,000); a
policy value of $100,000 will yield a life insurance death benefit of $350,000
($250,000 + $100,000). The life insurance death benefit cannot, however, be
less than 250% (the applicable specified percentage) of policy value. As a re-
sult, if the policy value of the policy exceeds $166,667, the life insurance
death benefit will be greater than the specified amount plus policy value. Each
additional dollar added to policy value above $166,667 will increase the life
insurance death benefit by $2.50. A policy with a policy value of $200,000 will
therefore have a life insurance death benefit of $500,000 (250% X $200,000); a
policy value of $500,000 will yield a life insurance death benefit of
$1,250,000 (250% X $500,000); a policy value of $1,000,000 will yield a life
insurance death benefit of $2,500,000 (250% X $1,000,000).
Similarly, any time policy value exceeds $166,667, each dollar withdrawn from
policy value will reduce the life insurance death benefit by $2.50. If at any
time, however, policy value multiplied by the specified percentage is less than
the specified amount plus policy value, then the life insurance death benefit
will be the specified amount plus policy value.
The above examples describe scenarios which include favorable investment per-
formance. In addition, the applicable percentage of 250% that is used is for
ages 40 or younger. Because the applicable percentage decreases as the attained
age increases, the impact of the applicable percentage on the death benefit
payment levels will be lessened as the attained age progresses beyond age 40.
DEATH BENEFIT GUARANTEE
Lincoln Life expects payment of the required death benefit guarantee monthly
premiums will be sufficient, when combined with net investment results, to pay
for all charges to the policy during the first three policy years,
12
<PAGE>
Account K
and thereby provide life insurance protection on the insured for that period.
In some situations, however, the combination of poor net investment results and
monthly deductions could result in the net cash surrender value being reduced
to zero. In such situations, Lincoln Life will continue the policy in force for
the first three policy years, provided the death benefit guarantee monthly pre-
mium requirement continues to be met. Lincoln Life makes no charge for this ad-
ditional benefit.
POLICY CHANGES
CHANGE IN TYPE OF DEATH BENEFIT. The owner may also change the type of death
benefit coverage from Type 1 to Type 2 or from Type 2 to Type 1. The request
for such a change must be made in writing on a form suitable to Lincoln Life.
The change will be effective on the first monthly anniversary day on or next
following the day Lincoln Life receives the request. No change in the type of
death benefit will be allowed if the resulting specified amount would be less
than the minimum specified amount of $50,000.
If the change is from Type 1 to Type 2, the insured's specified amount after
such change will be equal to the insured's specified amount prior to such
change minus the policy value on the date of change.
If the change is from Type 2 to Type 1, the insured's specified amount after
such change will be equal to the insured's specified amount prior to such
change plus the policy value on the date of change.
CHANGES IN AMOUNT OF INSURANCE COVERAGE. In addition to the above changes, the
owner may request to increase or decrease the specified amount at any time. The
request for such a change must be from the owner and in writing on a form suit-
able to Lincoln Life. Any decrease will become effective on the first monthly
anniversary day on or next following the day the request is received by Lincoln
Life. Any such decrease will reduce insurance first against insurance provided
by the most recent increase, next against the next most recent increases suc-
cessively, and finally against insurance provided under the original applica-
tion. The specified amount after any requested decrease may not be less than
$50,000. Any request for an increase must be applied for on a supplemental ap-
plication. Such increase will be subject to evidence of insurability satisfac-
tory to Lincoln Life and to its issue rules and limits at the time of increase.
Furthermore, such increase will not be allowed unless the net cash surrender
value is sufficient to cover the next monthly deductions and the surrender
charge for the increase. Any increase will become effective on the first
monthly anniversary day on or next following the day the application for in-
crease is approved.
POLICY VALUE
The policy provides for the accumulation of policy value, which is calculated
as often as the assets of the Separate Account are valued. The policy value
will vary with the investment performance of the General Account and of the
Separate Account, as well as other factors. In particular, policy value also
depends on any premiums received, any policy loans, and any charges and deduc-
tions assessed the policy. The policy has no guaranteed minimum policy value or
net cash surrender value.
On the policy date, the policy value will be the initial net premium, minus the
sum of the following:
a. The monthly charge;
b. The cost of insurance for the first month;
c. Any charges for extra benefits.
On each monthly anniversary day, the policy value is equal to the sum of the
following:
a. The policy value on the preceding day;
b. Any increase due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
c. Interest at not less than the General Account guaranteed interest rate
shown on the policy schedule on amounts allocated to the General Account;
d. Interest at not less than the rate shown on the policy schedule on any
outstanding loan amount;
e. Any net premiums received since the preceding day.
Minus the sum of the following:
f. Any decrease due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
g. Any withdrawals;
h. Any amount charged against the investment amount for federal or other gov-
ernmental income taxes;
i. All partial surrender charges deducted since the preceding day;
j. The monthly charge;
k. The cost of insurance for the following month;
l. Any charges for extra benefits.
On any day other than a monthly anniversary day, the policy value is equal to
the sum of the following:
a. The policy value on the preceding day;
b. Any increase due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
c. Interest at not less than the General Account guaranteed interest rate
shown on the policy schedule on amounts allocated to the General Account;
d. Interest at not less than the rate shown on the policy schedule on any
outstanding loan amount;
13
<PAGE>
Account K
e. Any net premiums received since the preceding day.
Minus the sum of the following:
f. Any decrease due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
g. Any withdrawals; and
h. Any amount charged against the investment amount for federal or other gov-
ernmental income taxes.
The charges and deductions described above are further discussed in Charges and
deductions, page 8.
GROSS INVESTMENT RESULTS. The gross investment results are equal to the change
in the market value of the assets of a fund or series from the previous valua-
tion day to the current day, plus the investment income on those assets during
the same period.
NET INVESTMENT RESULTS. The net investment results are the gross investment re-
sults of a fund or series minus the asset management charges and any miscella-
neous fund expenses, and minus the mortality and expense risk charge.
The value of the assets in the funds or series will be taken at their fair mar-
ket value in accordance with accepted accounting practices and applicable laws
and regulations.
TRANSFER BETWEEN SUBACCOUNTS
Any time after the record date, the owner may request to transfer an amount
from one subaccount to another. The request to transfer funds must be in writ-
ing on a form suitable to Lincoln Life; transfers may be made by telephone re-
quest only if the owner has previously authorized telephone transfers in writ-
ing on a form suitable to Lincoln Life. Lincoln Life will follow reasonable
procedures to determine that the telephone requester is authorized to request
such transfers, including requiring certain identifying information contained
in the written authorization. If such procedures are followed, Lincoln Life
will not be liable for any loss arising from any telephone transfer. Transfers
will take effect on the date that the request is received at the Home Office at
Lincoln Life. A transfer charge of $10 is made for each transfer and is de-
ducted from the amount transferred; however, the transfer charge is currently
being waived for all transfers. The minimum amount which may be transferred be-
tween subaccounts is $100. The maximum number of transfers allowed in a policy
year is twelve.
TRANSFER TO AND FROM THE GENERAL ACCOUNT
Any time after the record date, the owner may also request to transfer amounts
from the Separate Account to the General Account. However, transfers from the
General Account to the Separate Account are subject to some restrictions. A
maximum of 20% of the unloaned policy value in the General Account may be
transferred to the Separate Account in any period of 12 consecutive months.
However, as a current practice, the 20% maximum transfer limitation does not
apply for the first 6 policy months. There is no minimum transfer amount; how-
ever, if the unloaned amount in the General Account is $500 or less, the owner
may transfer the entire unloaned amount out of the General Account. A transfer
charge of $10 is made for each transfer and may be deducted from the amount
transferred; however, the transfer charge is currently being waived for all
transfers.
LOANS
At any time while the policy is in force the owner may make written request for
a loan against the policy. A written loan agreement will be executed between
the owner and Lincoln Life. The policy will be the sole security for the loan,
and the policy must be assigned to Lincoln Life as part of the loan agreement.
Ordinarily, the loan will be processed within seven days from the date the re-
quest for a loan is received at the Home Office of Lincoln Life. Payments may
be postponed under certain circumstances. (See Postponement of payments, page
17.)
A loan taken from, or secured by, a policy may have federal income tax conse-
quences. In particular, adverse tax consequences may occur if the policy lapses
with outstanding loans. (See Federal tax matters, pages 19-22.)
LOAN AMOUNT. The amount of all outstanding loans with interest may not exceed
the policy value less surrender charge as of the date of the policy loan. If at
any time the total of policy loans plus loan interest equals or exceeds the
policy value less surrender charge, notice will be sent to the last known ad-
dress of the owner, and any assignee of record, and the policy will enter into
the grace period. If sufficient payment is not received within 61 days after
notice is mailed, the policy will lapse and terminate without value. (See Pol-
icy lapse and reinstatement, page 15.)
LOAN INTEREST. Interest on any loan will be payable annually in advance at an
annual rate of 6.0%, which is 6.38% effective annual rate of interest. Any in-
terest not paid when due will be added to the loan amount and will bear inter-
est at the same policy loan rate.
DEDUCTION OF LOAN AND LOAN INTEREST. Ordinarily the amount of any loan or un-
paid loan interest will be deducted from the General Account and the
subaccounts in proportion to the value in each. The deduction may be made by
some other method if the owner requests, and if such method is acceptable to
Lincoln Life. Amounts deducted from the Separate Account will be transferred to
the Lincoln Life General Account, where they will earn interest at an annual
rate of not less than 4.0%;
14
<PAGE>
Account K
currently, loaned amounts earn interest at an annual rate of 5.05%. The amount
will remain a part of the policy value, but will not be increased or decreased
by investment results in the Separate Account. Therefore, the policy value
could be more or less than what it would have been if the policy loan had not
been made, depending on the investment results in the Separate Account compared
to the interest credited to the assets transferred to the General Account to
secure the loan. In this way, a loan may have a permanent effect upon both the
policy value and the death benefit and may increase or decrease the potential
for policy lapse. In addition, outstanding policy loans reduce the death bene-
fit.
LOAN REPAYMENTS. Loan repayments will ordinarily be allocated to the General
Account and the subaccounts in accord with the most recent premium allocation.
They may be allocated by some other method if the owner requests it, and if
such method is acceptable to Lincoln Life. Any loan not repaid at the time of
surrender of the policy, maturity, or death of the insured will be deducted
from the amount otherwise payable.
WITHDRAWALS
Any time after the first policy year, and during the lifetime of the insured, a
cash withdrawal may be made from the policy value. The amount and timing of the
withdrawal is subject to certain limitations. The minimum withdrawal is $500
and only one withdrawal may be made during a policy year. During any year in
which the surrender charge is greater than zero, the amount of the withdrawal
may not be more than 20% of the net cash surrender value (except that Lincoln
Life has the current practice of waiving the 20% limitation after the tenth
policy year). During any year in which the surrender charge is equal to zero,
the amount of the withdrawal may not be more than the net cash surrender value.
As a current practice, the withdrawal charge is equal to 3% of the withdrawn
amount during the first 10 policy years, and is equal to $10 at all other
times. This charge is guaranteed not to exceed the greater of $25 or 5% of the
withdrawn amount at times when the surrender charge is greater than zero and is
guaranteed not to exceed $25 at all other times. The owner should be aware that
withdrawals may result in the owner incurring a tax liability. (See Federal tax
matters, pages 19-22.)
DEDUCTION OF WITHDRAWAL. When a withdrawal is made, the policy value will be
reduced by the amount of the withdrawal. The amount will be deducted from the
General Account and the subaccounts in proportion to the values in the General
Account and the subaccounts. The deduction may be made by some other method if
the owner requests it, and if such method is acceptable to Lincoln Life.
EFFECT OF WITHDRAWALS ON DEATH BENEFIT AND COST OF INSURANCE. A withdrawal may
affect the death benefit amount in one of several ways. First, if the death
benefit type is Type 1, the specified amount will automatically be reduced by
the amount of the withdrawal, and thus will lower the death benefit by the same
amount. If the death benefit is Type 2, this reduction in the specified amount
does not occur, but the death benefit is lowered by the amount the policy value
is decreased by the withdrawal. In addition, since the death benefit is re-
quired to be at least equal to the specified percentage multiplied times the
policy value, a reduction in the policy value will sometimes result in a reduc-
tion in the death benefit equal to the specified percentage times the reduction
in policy value. (See Death benefit and death benefit types, page 11.) In such
cases, where the death benefit is reduced by an amount greater than the with-
drawal, the subsequent cost of insurance will be reduced (under either type of
death benefit) to reflect the excess reduction in death benefit.
No withdrawal will be allowed if the resulting insured's specified amount would
be less than $50,000. The request for withdrawal must be in writing on a form
suitable to Lincoln Life.
Ordinarily, withdrawals will be processed within seven days from the date the
request for a withdrawal is received at the Home Office of Lincoln Life. Pay-
ment of the withdrawal amount may be postponed under certain circumstances.
(See Postponement of payments, page 17.)
POLICY LAPSE AND REINSTATEMENT
During the first three policy years, insurance coverage under the policy will
be continued in force as long as the total premiums paid (minus any partial
withdrawals and minus any outstanding loans) equals or exceeds the death bene-
fit guarantee monthly premium times the number of months since the policy date,
including the current month. Unless coverage is being continued under the death
benefit guarantee (see Death benefit guarantee, page 12) lapse will occur when
the policy value less surrender charges and less outstanding loans is insuffi-
cient to cover the monthly deductions and the grace period expires without a
sufficient payment. Insurance coverage will continue during the grace period,
but the policy will be deemed to have no policy value for purposes of policy
loans and surrenders. Regardless of premium payments or current net cash sur-
render value, coverage will never be continued beyond the maturity date of the
policy.
A grace period of 61 days will begin on the date Lincoln Life sends a notice of
any shortfall to the last known address of the owner or any assignee. The owner
must, during the grace period, make a payment sufficient to cover the monthly
deductions and any other charges due under the policy until the end of the
grace period. Failure to make a sufficient payment during the grace period will
cause the policy to lapse. If lapse occurs during the first two policy years,
any excess sales charge will be returned to the owner. If the insured dies dur-
ing the grace period, regardless of the cause of the
15
<PAGE>
Account K
grace period, any due and unpaid monthly deductions will be deducted from the
death benefit.
A lapsed policy may be re-
instated at any time within
five years after the date
of lapse and before the ma-
turity date by submitting
evidence of insurability
satisfactory to Lincoln
Life and a premium suffi-
cient to keep the policy in
force for two months. The
effective date of a rein-
statement will be the first
monthly anniversary day on
or next following the day
the application for rein-
statement is approved.
SURRENDER OF THE POLICY
The owner may surrender the policy at any time during the lifetime of the in-
sured and receive the net cash surrender value. The net cash surrender value is
equal to the policy value minus any surrender charge, minus any outstanding
loan and plus any unearned loan interest. If surrender occurs during the first
two policy years, any excess sales charge will be returned to the owner. The
request must be made in writing on a form suitable to Lincoln Life. The request
will be effective the date the request is received in the Home Office of Lin-
coln Life, or at a later date if so requested by the owner. Ordinarily, the
surrender will be processed within seven days from the date the request for
surrender is received at the Home Office of Lincoln Life. The surrender of the
policy may have tax consequences.
PROCEEDS AND PAYMENT OPTIONS
PROCEEDS. The amount payable under the policy on the maturity date, on the sur-
render of the policy, or upon the death of any insured person is called the
proceeds of the policy.
The proceeds to be paid on the death of the insured will be the death benefit
minus any outstanding policy loan, and plus any unearned loan interest. The
proceeds to be paid on the surrender of the policy or on the maturity date will
be the net cash surrender value.
Any amount to be paid at the death of the insured or any other termination of
this policy will be paid in one sum unless otherwise provided. Interest will be
paid on this amount from date of death or maturity to date of payment at a
specified rate, not less than that required by law. All or part of the sum of
this amount and such interest credited to date of payment will be applied to
any payment option.
To the extent allowed by law, proceeds are not to be subject to any claims of a
beneficiary's creditors.
PAYMENT OPTIONS. Upon written request, all or part of the proceeds and interest
credited thereon may be applied to any payment option available from Lincoln
Life at the time payment is to be made. Under certain conditions, payment op-
tions will only be available with the consent of Lincoln Life. Such conditions
will exist if the proceeds to be settled under any option are $2,500 or less,
or if any installment or interest payment is $25 or less. In addition, if any
payee is a corporation, partnership, association, trustee, or assignee, ap-
proval by Lincoln Life is needed before any proceeds can be applied to a pay-
ment option.
The owner may elect any payment option while the insured is alive and may
change that election if that right has been reserved. When the proceeds become
payable to a beneficiary, the beneficiary may elect any payment option if the
proceeds are available to the beneficiary in one sum.
The option date is any date the policy terminates under the termination provi-
sion.
Any proceeds payable under the policy may also be settled under any other
method of settlement offered by Lincoln Life on the option date. Additional in-
terest as determined by Lincoln Life may be paid or credited from time to time
in addition to the payments guaranteed under a payment option.
When proceeds become payable under a payment option, a payment contract will be
issued to the payee in exchange for the policy. Such payment contract may not
be assigned. Any change in payment option may be made only if it is provided
for in the payment contract. Under some of the payment options, proceeds may be
withdrawn under such payment option if provided for in the payment contract.
The amount to be withdrawn varies by the payment option.
GENERAL PROVISIONS
THE CONTRACT
The entire contract consists of the policy plus the application and any supple-
mental application, plus any riders, plus any amendments. The policy is issued
in consideration of the application and payment of the initial premium. Only
statements in the application and any supplemental applications can be used to
contest the validity of the policy or defend a claim. These statements are, in
the absence of fraud, considered representations and not warranties. A change
in the policy will be binding on Lincoln Life only if the change is in writing
and the change is made by the President, Vice President, Secretary, or Assis-
tant Secretary of Lincoln Life.
The policy is nonparticipating; it will not share in the profit or surplus
earnings of Lincoln Life.
SUICIDE
If the insured commits suicide, while sane or insane, within two years from the
policy date, the total liability of Lincoln Life under the policy will be the
premiums paid, minus any policy loan, plus any unearned loan interest, minus
any prior withdrawals, and minus the cost of any riders.
If the insured commits suicide, while sane or insane, within two years from the
effective date of any increase in insurance, our total liability with respect
to
16
<PAGE>
Account K
such increase will be its cost of insurance and monthly charges.
If the insured commits suicide, while sane or insane, within two years from the
effective date of any reinstatement, our total liability with respect to such
reinstatement will be the premiums paid since the effective date of the rein-
statement, minus any policy loan, plus any loan interest, minus any prior with-
drawals, and minus the cost of any riders.
REPRESENTATIONS AND CONTESTABILITY
All statements made in an application by, or on behalf of, the insured will, in
the absence of fraud, be deemed representations and not warranties. Statements
may be used to contest a claim or validity of the policy only if these state-
ments are contained in the application for issue, reissue, or reinstatement, or
in any supplemental application, and a copy of that application or supplemental
application is attached to the policy. The policy will not be contestable after
it has been in force for two years during the lifetime of the insured. Also,
any increase in coverage or any reinstatement will not be contestable after
that increase or reinstatement has been in force two years from its effective
date during the lifetime of the insured. Any contest will then be based only on
the application for the increase or reinstatement and will be subject to the
same conditions as for contest of the policy.
INCORRECT AGE OR SEX
If there is an error in the age or sex of the insured, the excess of the death
benefit over the policy value will be adjusted to that which would be purchased
by the most recent cost of insurance at the correct age and sex. The resulting
death benefit will not be less than the percentage of the policy value required
by the death benefit provision at the insured's correct age.
CHANGE OF OWNER OR BENEFICIARY
The owner of the policy is the owner identified in the application, or a suc-
cessor. All rights of the owner belong to the owner while the insured is alive.
The rights pass to the estate of the owner if the owner dies before the in-
sured. The owner may transfer all ownership rights and privileges to a new own-
er. The request must be in writing on a form suitable to Lincoln Life. The
change will be effective the day that the request is received in the Home Of-
fice of Lincoln Life. Lincoln Life will not be responsible for any payment or
other action taken before having recorded the transfer. A change of ownership
will not, in and of itself, affect the interest of any beneficiary. A change of
ownership may have tax consequences.
The beneficiary is identified in the application for the policy, and will re-
ceive the proceeds when the insured dies. The beneficiary may be changed by the
owner while the insured is alive, and provided that any prior designation does
not prohibit such a change. A change will revoke any prior designation of the
beneficiary. The request to change beneficiary must be in writing on a form
suitable to Lincoln Life. Lincoln Life reserves the right to require the policy
for endorsement of the change of beneficiary designation.
If not otherwise provided, the interest of any beneficiary who dies before the
insured will pass to any other Beneficiaries according to their interest. Fur-
thermore, if no beneficiary survives the insured, the proceeds will be paid in
one sum to the owner, if living. If the owner is not living, the proceeds will
be paid to the owner's estate.
ASSIGNMENT
Any assignment of the policy will not be binding on Lincoln Life unless it is
in writing on a form suitable to Lincoln Life and is received at the Home Of-
fice. Lincoln Life will not be responsible for the validity of any assignment,
and reserves the right to require the policy for endorsement of any assignment.
An assignment of the policy may have tax consequences.
REPORTS AND RECORDS
Lincoln Life will maintain all records relating to the Separate Account. Lin-
coln Life will mail to the owner at least once each year a report, without
charge, which will show the current policy value, the current net cash surren-
der value, the current death benefit, any current policy loans, any premiums
paid, any cost of insurance charges deducted, and any withdrawals made. The re-
port will also include any other data that may be required where the contract
is delivered.
In addition, Lincoln Life will provide to policyowners semiannually, or other-
wise as may be required by regulations under the Investment Company Act of
1940, a report containing information about the operations of the funds and se-
ries.
Lincoln Life has entered into an agreement with Delaware Management Holdings,
Inc., 2005 Market Street, Philadelphia, PA 19203, to provide accounting serv-
ices to the Separate Account.
PROJECTION OF BENEFITS AND VALUES
At the owner's request, Lincoln Life will provide a report to the owner which
shows projected future results. The request must be in writing on a form suit-
able to Lincoln Life. The report will be comparable in format to those shown in
Appendix D and will be based on assumptions in regard to the death benefit as
may be specified by the owner, planned premium payments as may be specified by
the owner, and such other assumptions as are necessary and specified either by
the owner or Lincoln Life. A reasonable fee may be charged for this projection.
POSTPONEMENT OF PAYMENTS
Payments of any amount payable on surrender, loan, or benefits payable at death
or maturity may be post-
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Account K
poned whenever: (i) the New York Stock Exchange is closed other than customary
week-end and holiday closings, or trading on the New York Stock Exchange is re-
stricted as determined by the Securities and Exchange Commission; (ii) the Com-
mission by order permits postponement for the protection of owners; or (iii) an
emergency exists, as determined by the Commission, as a result of which dis-
posal of securities is not reasonably practical or it is not reasonably practi-
cal to determine the value of the Separate Account's net assets. Transfers may
also be postponed under such circumstances.
Requests for surrenders or policy loans of policy values representing premiums
paid by check may be delayed until such time as the check has cleared the own-
er's bank.
RIDERS
The availability of the riders listed below is subject to approval by the State
Insurance Department of the State in which the policy is issued, and is also
subject to the current underwriting and issue procedures in place at the time
of the application. The underwriting and issue procedures are subject to change
without notice.
TERM RIDER FOR COVERED INSURED. The spouse and/or children of the Primary In-
sured may be added as an other insured on the base plan. Likewise, other indi-
viduals can be added as an Other Insured. The Term Rider for Covered Insured is
a term rider available for issue ages 0 to 80 and the cost of insurance is de-
ducted monthly for this benefit. Up to three such riders may be added to a base
policy. The maximum amount which may be issued on any rider equals the amount
of coverage on the policy multiplied times 19. The minimum amount is $25,000
for each Other Insured.
CHILDREN'S TERM RIDER. The Children's Term Rider is a term rider available for
children (natural, adopted, or stepchild) of the Primary Insured. Children 15
days to age 24 inclusive are covered. The rider is available in units of $1,000
with a minimum of $2,000 and a maximum of $20,000 per any one family. The cost
of insurance for this rider is deducted monthly.
GUARANTEED INSURABILITY RIDER. This rider is available for issue ages 0 to 40
and it is available for the Primary Insured, and/or those covered under the
Term Rider for Covered Insured. This rider allows the Covered Insured to pur-
chase, without evidence of insurability, additional insurance on the option
dates, or alternate option dates. It can be purchased in units of $1,000, with
a minimum amount of $10,000 and a maximum amount of $100,000 or the specified
amount, if less. Total amount of options exercised may not exceed five times
the option amount. There are eight regular option dates, beginning at age 25,
every three years thereafter, and the last option is at age 46. An alternate
option date will occur three months after marriage, birth of a child, or adop-
tion of a child. Exercising an alternate option date reduces the next regular
option date. This rider is not available for substandard risks. The cost of in-
surance for this rider is deducted monthly from the policy value.
ACCIDENTAL DEATH BENEFIT RIDER. This rider is available for the Primary In-
sured, and/or those covered under the Term Rider for Covered Insured. The Acci-
dental Death Benefit Rider provides an additional life insurance benefit in the
case of accidental death. It is available for ages 5 through 69. The minimum
amount which can be purchased is $10,000 and the maximum amount is two times
the specified amount on the Covered Insured, not to exceed a total of $350,000
in all policies, in all companies, for that insured. The cost of insurance for
this rider is deducted monthly from the policy value.
WAIVER OF COST OF INSURANCE RIDER. This rider is available for ages 5 through
64. It waives the total cost of insurance for the policy, the monthly charge,
and the cost of any additional benefit riders, after the Primary Insured has
been totally disabled for six consecutive months and the claim for total dis-
ability has been approved. The cost of insurance for this rider is deducted
monthly from the policy value.
DISABILITY BENEFIT PAYMENT RIDER. This rider is available for ages 5 through
64. If the Covered Insured (Primary Insured or Other Insureds) under this rider
has been totally disabled for six consecutive months, and the claim for total
disability has been approved, a disability benefit amount will be paid as a
premium to the policy. The minimum benefit which can be selected is $50 per
month. The maximum is two times the death benefit guarantee monthly premium.
The cost of insurance for this rider is deducted monthly from the policy value.
CONVALESCENT CARE BENEFIT RIDER. This rider may be available in several forms
which differ by the amount and duration of benefit payments and also by the
conditions required to receive benefit payments. The rider is available for the
Primary Insured only and its availability may stipulate certain minimum or max-
imum policy specified amounts. The rider provides benefit payments when the
health of the insured is such that covered convalescent care services are nec-
essary. The cost of insurance for this rider is deducted monthly from the pol-
icy value.
CONTINGENT OPTION RIDER. The Contingent Option Rider is a guaranteed insurabil-
ity rider that gives the owner the right to purchase an additional policy with-
out evidence of insurability upon the death of the designated person (the Op-
tion Life). Available to issue ages 0 through 80. The cost of insurance for
this rider is based on the Contingent Option Amount and is deducted monthly
from the policy value.
RETIREMENT OPTION RIDER. The Retirement Option Rider is a guaranteed insurabil-
ity rider that gives the owner the right to purchase an additional policy with-
out
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Account K
evidence of insurability within 60 days after a specific date (the option
date). The option date, determined at the issue of the rider, may be the own-
er's anticipated retirement date or some other date after which additional in-
surance may be needed. Available to issue ages 0 through 70. The cost of insur-
ance for this rider is based on the retirement option amount and is deducted
monthly from the policy value.
ACCELERATED BENEFIT ELECTION RIDER. This rider is available to issue ages 0
through 80 and gives the owner the right to receive a portion of the death ben-
efit prior to death if the insured is diagnosed as having an illness which with
reasonable medical certainty will cause death within 12 months. Upon receipt of
proof of loss, up to one-half of the eligible death benefit (as defined in the
rider) may be advanced to the owner in cash as an initial accelerated benefit.
A limited amount of subsequent accelerated benefit is also available to pay
premiums and interest charges required on the policy. The amount of all ad-
vanced accelerated benefits creates an interest-bearing lien against the death
benefit otherwise payable at death. There is no cost of insurance for this rid-
er, but an administrative expense charge is payable upon application for bene-
fits.
JOINT LIFE TERM RIDER FOR COVERED INSUREDS. This rider is available for issue
ages 20 to 80. This rider provides term insurance for two, three, or four indi-
viduals and pays the Joint Life Term Death Benefit upon the death of the first
to die of the Covered Insureds. The cost of insurance and monthly charges for
this rider are deducted monthly from the policy value.
LAST SURVIVOR TERM RIDER FOR COVERED INSUREDS. This rider is available for is-
sue ages 20 to 85 if the average of the ages does not exceed 80. This rider
provides term insurance for two, three, or four individuals and pays the last
survivor term death benefit upon the death of the last to die of the Covered
Insureds. The cost of insurance and monthly charges for this rider are deducted
monthly from the policy value. The minimum issue amount is $25,000; the maximum
issue amount is equal to 19 times the specified amount of the policy.
LAST SURVIVOR CONTINGENT OPTION INSURABILITY RIDER AND LAST SURVIVOR RETIREMENT
OPTION INSURABILITY RIDER. These riders are only available if a Last Survivor
Term Rider for Covered Insureds is on the policy. The Last Survivor Contingent
Option Rider is a guaranteed insurability rider that gives the owner the right
to purchase an additional last survivor policy without evidence of insurability
upon the death of the designated person (the option life). The Last Survivor
Retirement Option Insurability Rider grants a similar benefit to be exercised
within 60 days of the option date. The option date is chosen at issue and can-
not be later than age 80 of the oldest insured. Available to issue ages 20
through 70 of the oldest insured. The cost of insurance for this rider is based
on the contingent option amount and is deducted monthly from the policy value.
The minimum issue amount is $100,000; the maximum issue amount is 5 times the
specified amount of the last survivor term rider to which it is attached.
DISTRIBUTION OF THE POLICY
Lincoln Life intends to offer the policies in all jurisdictions where it is li-
censed to do business. Lincoln Life, the principal underwriter for the poli-
cies, is registered with the Securities and Exchange Commission under the Secu-
rities Exchange Act of 1934 as a broker-dealer and is a member of the National
Association of Securities Dealers. The principal business address of Lincoln
Life is 1300 South Clinton Street, Fort Wayne, Ind. 46802.
The policy will be sold by individuals who, in addition to being licensed as
life insurance agents for Lincoln Life, are also its registered representa-
tives. These representatives ordinarily receive commissions and service fees up
to 60% of the first year required premium (the death benefit guarantee monthly
premium times 12), plus up to 2% of all other premiums paid, plus 0.25% of ac-
cumulated policy values in the third policy year and each year thereafter. The
local agency receives additional compensation on the first year required pre-
mium and all additional premiums, plus a small percentage of accumulated policy
values. In some situations, the local agency may elect to share its commission
with the registered representative. Selling representatives are also eligible
for bonuses and non-cash compensation if certain production levels are reached.
All compensation is paid from Lincoln Life's resources, which include sales
charges made under the policy.
FEDERAL TAX MATTERS
The following discussion is intended to provide a general description of the
federal income tax considerations associated with the policy. It does not pur-
port either to be complete or to cover all situations; this discussion is not
intended to be taken as tax advice. Consult a qualified tax advisor for more
complete information. This discussion is based upon Lincoln Life's understand-
ing of the present federal income tax laws as they are currently interpreted by
the Internal Revenue Service. No representation is made as to the likelihood of
continuation of the present federal income tax laws or of the current interpre-
tation by the Internal Revenue Service. Federal tax laws may change without no-
tice and as a result the taxable consequences to the insured, policyowner, or
beneficiary may be altered.
TAX STATUS OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the Code), in-
cludes a definition of a life insurance contract for federal tax purposes. This
definition can be satisfied by complying with either of two tests set forth in
section 7702. Although the Secretary
19
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Account K
of the Treasury (the Treasury) is authorized to prescribe regulations inter-
preting the manner in which the tests under section 7702 are to be applied,
such regulations have not been issued. In addition, section 7702 of the Code
was amended by imposing certain modified requirements with respect to the mor-
tality (i.e., cost of insurance) and other expense charges that are to be used
in determining compliance of the policies with section 7702. Guidance as to how
these modified requirements are to be applied is extremely limited. If a policy
were determined not to be a life insurance contract for purposes of section
7702, such policy would not provide most of the tax advantages normally pro-
vided by a life insurance policy.
With respect to a policy (other than a policy in respect of a smoker) issued on
the basis of a standard rate class or a rate class involving a lower mortality
risk (i.e., preferred basis), while there is some uncertainty due to the lack
of regulations and the limited guidance on the modified section 7702 require-
ments, Lincoln Life nonetheless believes that such a policy should meet the
section 7702 definition of a life insurance contract. With respect to a policy
issued on a substandard basis (i.e., a rate class involving higher than stan-
dard mortality risk), a policy in respect of a smoker issued on a standard rate
class or a rate class with a lower mortality risk, or a policy which has a last
survivor of multiple insureds or first to die of multiple insureds feature,
there is even less guidance in particular as to how the modified requirements
are to be applied in determining whether such a policy meets the section 7702
definition of a life insurance contract. Thus, it is not clear whether or not
such a policy would satisfy section 7702, particularly if the owner pays the
full amount of premiums permitted under the policy. If it is subsequently de-
termined that a policy does not satisfy section 7702, Lincoln Life will take
whatever steps are appropriate and necessary to cause such a policy to comply
with section 7702, including possibly refunding any premiums paid that exceed
the limitations allowable under section 7702 (together with interest or other
earnings on any premiums refunded as required by law). For these reasons, Lin-
coln Life reserves the right to modify the policy as necessary to qualify it as
a life insurance contract under section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by regula-
tion or otherwise for the investments of the Separate Account to be "adequately
diversified" in order for the policy to be treated as a life insurance contract
for federal tax purposes. The Separate Account, through the various funds or
series in which it invests, intends to comply with the diversification require-
ments prescribed in Treasury Regulations, which affect how each fund's or se-
ries assets may be invested. Lincoln Life does not have control over the funds
or series or their investments. Nonetheless, Lincoln Life believes that the
funds or series will be operated in compliance with the requirements prescribed
by the Treasury.
The regulations relating to diversification requirements do not provide guid-
ance concerning the extent to which policyowners may direct their investments
to the subaccounts of a Separate Account. When additional guidance is provided,
the policy may need to be modified to comply with such guidance. It is not
clear what this additional guidance will provide nor whether it will be applied
on a prospective basis only. For these reasons, Lincoln Life reserves the right
to modify the policy as necessary to prevent the owner from being considered
the owner of the assets of the Separate Account or otherwise to qualify the
policy for favorable tax treatment.
The Treasury Department has indicated that guidelines may be forthcoming under
which a variable life contract will not be treated as a life insurance contract
for tax purposes if the owner of the contract has excessive control over the
investments underlying the contract. The issuance of such guidelines may re-
quire the company to impose limitations on a contract owner's right to control
the investment. It is not known whether any such guidelines would have a retro-
active effect.
The following discussion assumes that the policy will qualify as a life insur-
ance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. Lincoln Life believes that the proceeds and cash value increases
of a policy should be treated in a manner consistent with a fixed benefit life
insurance policy for federal income tax purposes. Thus, the death benefit under
the policy should be excludable from the gross income of the beneficiary under
Section 101(a)(1) of the Code.
A change in a policy's specified amount, a change in death benefit option, the
payment of premiums, the addition of additional insurance, a policy loan, a
partial withdrawal, a lapse with outstanding indebtedness, exchange of a poli-
cy, or a surrender may have tax consequences depending upon the circumstances.
In addition, federal estate and generation skipping transfer, and state and lo-
cal estate inheritance, and other tax consequences of ownership or receipt of
policy proceeds depend upon the circumstances of each owner or beneficiary. A
competent tax advisor should be consulted for further information. Generally,
the owner will not be deemed to be in constructive receipt of the cash value,
including increments thereof, under the policy until there is a distribution.
The tax consequences of distributions from, and loans taken from or secured by,
a policy depend on whether the policy is classified as a "Modified Endowment
Contract" under section 7702A.
2. MODIFIED ENDOWMENT CONTRACTS. A policy may be treated as a Modified Endow-
ment Contract depending upon the amount of premiums paid in relation to the
death benefit provided under such policy. In addition, if a policy is "materi-
ally changed," it may be treated as a Modified Endowment Contract depending
upon such
20
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Account K
relationship after such change. The premium limitation and material change
rules for determining whether a policy is a Modified Endowment Contract are ex-
tremely complex. Moreover, due to the policy's flexibility, classification of a
policy as a Modified Endowment Contract will depend upon the circumstances of
each policy. Accordingly, a prospective owner should contact a competent tax
advisor before purchasing a policy to determine the circumstances in which the
policy would be a Modified Endowment Contract. In addition, an owner should
contact a competent tax advisor before paying any additional premium or making
any other change to, including an exchange of, a policy to determine whether
such premium payment or change would cause the policy to be treated as a Modi-
fied Endowment Contract.
Lincoln Life will monitor premiums paid into each policy after the date of this
prospectus to determine when a premium payment will exceed the 7-pay limitation
and cause the policy to become a Modified Endowment Contract. In simplified
terms, the 7-pay limitation is satisfied only if the accumulated premiums paid
under a policy do not at any time during the first seven policy years exceed
the sum of the equal annual premiums that would have been paid for a similar
policy providing for fully funded benefits at the end of the seven year period.
If the owner has given Lincoln Life instructions that the policy should not be
allowed to become a Modified Endowment Contract, any premiums in excess of the
7-pay limitation will first be applied to reduce any outstanding loan on the
policy, and any further excess will be refunded to the owner within 7 days. If
the owner has not given Lincoln Life instructions to the contrary, however, the
premium will be paid into the policy and a letter of notification of Modified
Endowment Contract status will be sent to the owner. The letter of notification
will include the available options, if any, for remedying the Modified Endow-
ment Contract status of the policy.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS. Pol-
icies classified as Modified Endowment Contracts are subject to the following
tax rules: First, all distributions, including distributions upon surrender and
benefits paid at maturity, from such a policy are treated as ordinary income
subject to tax up to the amount equal to the excess (if any) of the cash value
immediately before the distribution over the investment in the policy (de-
scribed below) at such time. Second, loans taken from, or secured by, such a
policy are treated as distributions from such a policy and taxed accordingly.
Third, a 10 percent additional income tax is imposed on the portion of any dis-
tribution from, or loan taken from or secured by, such a policy that is in-
cluded in income except where the distribution or loan is made on or after the
owner attains age 59 1/2, is attributable to the owner's becoming disabled, or
is part of a series of substantially equal periodic payments for the life of
the owner or the joint lives of the owner and the owner's beneficiary. Fourth,
the cost of insurance for certain riders which are not "qualified additional
benefits" such as the Convalescent Care Rider may be treated as distributions
from such a policy and taxed accordingly.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Distributions from a policy that is not classified as a Modified Endowment Con-
tract are generally treated as first recovering the investment in the policy
(described below) and then, only after the return of all such investment in the
policy, as distributing taxable income. An exception to this general rule oc-
curs in the case of a decrease in the specified amount, a change in death bene-
fits from Type 2 to Type 1, or any other change that reduces benefits under the
policy in the first 15-years after the policy is issued and that results in a
cash distribution to the owner in order for the policy to continue complying
with the section 7702 definitional limits. In that case, such distribution will
be taxed in whole or in part as ordinary income (to the extent of any gain in
the policy) under rules prescribed in section 7702.
Loans from, or secured by, a policy that is not a Modified Endowment Contract
are not treated as distributions. Instead, such loans are treated as indebted-
ness of the owner.
Upon a complete surrender or lapse of a policy that is not a Modified Endowment
Contract, or when benefits are paid at such a policy's maturity date, if the
amount received plus the amount of indebtedness exceeds the total investment in
the policy, the excess will generally be treated as ordinary income subject to
tax.
Finally, neither distributions (including distributions upon surrender or
lapse) nor loans from, or secured by, a policy that is not a Modified Endowment
Contract are subject to the 10 percent additional income tax.
5. POLICY LOAN INTEREST. Generally, interest paid on any loan under a policy
which is owned by an individual is not deductible. In addition, interest on any
loan under a policy owned by a taxpayer and covering the life of any individual
who is an officer of or is financially interested in the business carried on by
that taxpayer will not be tax deductible to the extent the aggregate amount of
such loans with respect to contracts covering such individual exceeds $50,000.
No amount of policy loan interest is, however, deductible if the policy was
deemed for federal tax purposes to be a single premium life insurance contract.
For interest paid or accrued after October 13, 1996, additional rules apply
which may reduce or eliminate any interest deduction. The owner should consult
a competent tax advisor concerning the rules and limitations.
6. INVESTMENT IN THE POLICY. Investment in the policy means (i) the aggregate
amount of any premiums or other consideration paid for a policy, minus (ii) the
aggregate amount received under the policy which is ex-
21
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Account K
cluded from the gross income of the owner (except that the amount of any loan
from, or secured by, a policy that is a Modified Endowment Contract, to the ex-
tent such amount is excluded from gross income, will be disregarded), plus,
(iii) the amount of any loan from, or secured by, a policy that is a Modified
Endowment Contract to the extent that such amount is included in the gross in-
come of the owner.
7. MULTIPLE POLICIES. All Modified Endowment Contracts that are issued by Lin-
coln Life (or its affiliates) to the same owner during any calendar year are
treated as one Modified Endowment Contract for purposes of determining the
amount includible in gross income under section 72 (e) of the Code.
8. TAXATION OF CONVALESCENT CARE BENEFIT RIDER AND ACCELERATED BENEFIT ELECTION
RIDER. Lincoln Life believes that any benefits paid under the Accelerated Bene-
fit Election Rider generally will be excludable from the recipient's income. It
is unclear whether Convalescent Care Benefit Riders issued prior to January 1,
1997, constitute qualified long-term care insurance contracts under the Code.
If a rider is qualified, long-term care benefits generally will be excludable
from income. (Benefits received may be includable in income, however, if other
long-term care insurance contracts or riders cover the insured). If a rider is
not qualified, benefits may be includable in income. In addition, Convalescent
Care Benefit Riders issued after December 31, 1996, do not constitute qualified
long-term care insurance contracts under the Code. Thus, benefits received from
such riders may be includable in income.
TAXATION OF THE SEPARATE ACCOUNT
Lincoln Life does not initially expect to incur any income tax upon the earn-
ings or the realized capital gains attributable to the Separate Account. Based
upon these expectations, no charge is being made currently to the Separate Ac-
count for federal income taxes which may be attributable to the Separate Ac-
count. If, however, Lincoln Life determines that it may incur such taxes, it
may assess a charge for those taxes from the policy.
VOTING RIGHTS
To the extent required by law, Lincoln Life will vote shares of the funds and
series held in the Separate Account at regular and special shareholder meetings
of the funds and series in accordance with instructions received from persons
having voting interests in the Separate Account. If, however, the Investment
Company Act of l940 or any regulation thereunder should be amended or if the
present interpretation thereof should change, and as a result Lincoln Life de-
termines that it is permitted to vote the fund shares in its own right, it may
elect to do so.
The number of votes which each policyowner has the right to instruct will be
determined as one vote for each $100 of policy value in each subaccount. Frac-
tional shares will be allocated for amounts less than $100. The number of votes
which the policyowner has the right to instruct will be determined as of the
date coincident with the date established by the various series for determining
shareholders eligible to vote at the meetings of the funds and series. Voting
instructions will be solicited by written communications prior to such meeting
in accordance with procedures established by the funds and series. Lincoln Life
will vote shares of each fund and series as to which no timely instructions are
received in proportion to the voting instructions which are received with re-
spect to all policies participating in that fund or series. Each person having
a voting interest will receive proxy material, reports and other materials re-
lating to the appropriate portfolio.
DISREGARD OF VOTING INSTRUCTIONS. Lincoln Life may, when required by state in-
surance regulatory authorities, disregard voting instructions if the instruc-
tions require that the shares be voted so as to cause a change in the sub-clas-
sification or investment objective of any of the funds or series or to approve
or disapprove an investment advisory contract for a fund or series. In addi-
tion, Lincoln Life itself may disregard voting instructions in favor of changes
initiated by a policyowner in the investment policy or the investment advisor
of a fund or series if Lincoln Life reasonably disapproves of such changes. A
change would be disapproved only if the proposed change is contrary to state
law or prohibited by state regulatory authorities or Lincoln Life determined
that the change would have an adverse effect on its General Account in that the
proposed investment policy for any fund or series may result in overly specula-
tive or unsound investments. In the event Lincoln Life does disregard voting
instructions, a summary of that action and the reasons for such action will be
included in the next semiannual report to policyowners.
STATE REGULATION OF LINCOLN LIFE AND THE SEPARATE ACCOUNT
Lincoln Life, a stock life insurance company organized under the laws of Indi-
ana, is subject to regulation by the Insurance Department of the State of Indi-
ana. An annual statement is filed with the Indiana Department of Insurance (De-
partment) on or before March 1st of each year covering the operations and re-
porting on the financial condition of Lincoln Life as of December 31 of the
preceding year. Periodically, the Department examines the liabilities and re-
serves of Lincoln Life and the Separate Account and certifies their adequacy,
and a full examination of Lincoln Life's operations is conducted by the Depart-
ment at least once every five years.
22
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Account K
In addition, Lincoln Life is subject to the insurance laws and regulations of
other states within which it is licensed or may become licensed to operate.
Generally, the Insurance Department of any other state applies the laws of the
state of domicile in determining permissible investments.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
Lincoln Life holds title to the assets of the Separate Account. The assets are
kept physically segregated and held separate and apart from the General Account
assets. Records are maintained of all purchases and redemptions of fund shares
held by each subaccount. Additional protection is provided in the form of a
blanket fidelity bond which covers directors and employees of Lincoln Life. The
bond, which was issued by Fidelity and Deposit Co. of Maryland covers up to
$25,000,000.
The funds and series do not issue certificates. Thus, Lincoln Life holds the
Separate Account's assets in an open account in lieu of stock certificates.
LEGAL PROCEEDINGS
There are no material legal or administrative proceedings pending or known to
be contemplated, other than ordinary routine litigation incidental to the busi-
ness, to which Lincoln Life or the Separate Account are party, or to which any
of their assets are subject.
EXPERTS
The financial statements of the Separate Account and the financial statements
and schedules of Lincoln Life appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports which also appear elsewhere in this document and in the
registration statement. The financial statements and schedules audited by Ernst
& Young LLP have been included in this document in reliance on their reports
given on their authority as experts in accounting and auditing.
Actuarial matters included in this prospectus have been examined by Denis G.
Schwartz, FSA, as stated in the opinion filed as an exhibit to the Registration
Statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange Com-
mission, under the Securities Act of l933, as amended, with respect to the pol-
icy offered hereby. This prospectus does not contain all the information set
forth in such registration statement and the amendments and exhibits to such
registration statement, to all of which reference is made for further informa-
tion concerning the Separate Account, Lincoln Life and the policy offered here-
by. Statements contained in this prospectus as to the contents of the policy
and other legal instruments are summaries. For a complete statement of the
terms thereof reference is made to such instruments as filed.
23
<PAGE>
Appendix A
APPENDIX A
Base minimum premiums Prf NS= Preferred nonsmoker
Per $1,000 of specified amount* Std NS= Standard nonsmoker
Prf SM= Preferred smoker
Male (or unisex), age on policy date
Std SM = Standard smoker
<TABLE>
<CAPTION>
Age Prf NS Std NS Prf SM Std SM Age Prf NS Std NS Prf SM Std SM
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 ** 3.62 ** **
- ---------------------------------------------------------------------------------
1 2.12 41 8.33 8.81 11.82 12.18
2 2.12 42 8.80 9.28 12.88 13.24
3 2.12 43 9.17 9.77 13.81 14.29
4 2.12 44 9.69 10.29 15.17 15.53
5 2.12 45 10.12 10.84 16.46 16.94
- ---------------------------------------------------------------------------------
6 2.12 46 10.59 11.43 17.58 18.18
7 2.12 47 11.34 12.18 18.69 19.41
8 2.13 48 11.98 13.06 20.10 20.82
9 2.21 49 12.86 13.94 21.52 22.24
10 2.31 50 13.80 15.00 22.98 23.82
- ---------------------------------------------------------------------------------
11 2.41 51 14.92 16.24 24.75 25.59
12 2.65 52 16.03 17.47 26.57 27.53
13 3.00 53 17.27 18.71 28.74 29.82
14 3.18 54 18.73 20.29 31.04 32.12
15 3.35 55 20.26 22.06 33.39 34.59
- ---------------------------------------------------------------------------------
16 3.59 3.71 4.29 4.41 56 21.90 23.82 35.66 36.98
17 3.94 4.06 4.64 4.76 57 23.72 25.76 36.62 38.06
18 4.12 4.24 4.82 4.94 58 25.72 27.88 37.59 39.15
19 4.12 4.24 4.82 4.94 59 27.78 30.18 38.68 40.36
20 4.12 4.24 5.00 5.12 60 30.13 32.65 39.90 41.70
- ---------------------------------------------------------------------------------
21 4.12 4.24 5.05 5.29 61 32.83 35.47 41.25 43.17
22 4.12 4.24 5.05 5.29 62 34.55 37.43 42.79 44.83
23 4.12 4.24 5.23 5.47 63 35.58 38.70 44.46 46.74
24 4.12 4.24 5.41 5.65 64 36.80 40.04 46.01 48.65
25 4.12 4.24 5.41 5.65 65 38.03 41.51 47.93 50.57
- ---------------------------------------------------------------------------------
26 4.17 4.29 5.41 5.65 66 38.73 42.39 51.20 52.47
27 4.36 4.48 5.41 5.65 67 39.58 43.30 53.53 54.93
28 4.57 4.69 5.41 5.65 68 41.17 45.11 55.99 57.52
29 4.78 4.90 5.60 5.84 69 43.28 47.35 58.82 60.26
30 5.01 5.13 5.94 6.18 70 45.66 49.78 61.93 63.21
- ---------------------------------------------------------------------------------
31 5.26 5.38 6.18 6.42 71 48.30 52.46 65.39 66.41
32 5.52 5.64 6.50 6.74 72 51.55 55.63 69.24 70.09
33 5.80 5.92 6.84 7.08 73 55.35 59.42 73.74 74.33
34 6.09 6.21 7.20 7.44 74 59.69 63.68 78.52 78.90
35 6.40 6.52 7.58 7.82 75 64.41 68.23 83.30 83.55
- ---------------------------------------------------------------------------------
36 6.73 6.85 7.99 8.23 76 69.46 72.85 87.78 88.03
37 7.08 7.20 8.42 8.66 77 74.84 77.72 92.28 92.54
38 7.21 7.57 9.11 9.35 78 80.70 82.95 96.81 97.06
39 7.60 7.96 9.88 10.24 79 87.32 88.72 101.48 101.74
40 8.02 8.38 10.76 11.12 80 94.43 95.11 106.44 106.69
- ---------------------------------------------------------------------------------
</TABLE>
*To determine the death benefit guarantee monthly premium, multiply the speci-
fied amount divided by 1000 times the number shown for the age and classifica-
tion of the insured, then add $100 per policy and divide the result by 12. Ad-
ditional amounts are required for riders and/or substandards.
**This classification is not available below the age of 16.
24
<PAGE>
Appendix A
APPENDIX A CONTINUED
Base minimum premiums Prf NS= Preferred nonsmoker
Per $1,000 of specified amount* Std NS= Standard nonsmoker
Prf SM= Preferred smoker
Female age on policy date Std SM = Standard smoker
<TABLE>
<CAPTION>
Age Prf NS Std NS Prf SM Std SM Age Prf NS Std NS Prf SM Std SM
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 ** 2.98 ** **
- ---------------------------------------------------------------------------------
1 1.76 41 7.06 7.42 9.29 9.53
2 1.76 42 7.43 7.79 9.88 10.24
3 1.76 43 7.70 8.18 10.58 10.94
4 1.76 44 7.99 8.59 11.64 12.00
5 1.76 45 8.42 9.02 12.70 13.06
- ---------------------------------------------------------------------------------
6 1.76 46 8.76 9.48 13.46 13.94
7 1.76 47 9.24 9.96 14.34 14.82
8 1.76 48 9.63 10.47 15.28 15.88
9 1.83 49 10.06 11.02 16.52 17.12
10 1.90 50 10.69 11.65 17.75 18.35
- ---------------------------------------------------------------------------------
11 1.98 51 11.57 12.53 19.04 19.76
12 2.12 52 12.33 13.41 20.46 21.18
13 2.15 53 13.21 14.29 21.75 22.59
14 2.24 54 14.15 15.35 23.16 24.00
15 2.33 55 14.92 16.24 24.57 25.41
- ---------------------------------------------------------------------------------
16 2.30 2.42 2.76 2.88 56 15.62 16.94 25.69 26.65
17 2.40 2.52 2.88 3.00 57 16.38 17.82 26.92 27.88
18 2.51 2.63 3.06 3.18 58 17.15 18.71 28.04 29.12
19 2.62 2.74 3.13 3.25 59 18.03 19.59 29.27 30.35
20 2.73 2.85 3.28 3.40 60 19.26 20.82 31.04 32.12
- ---------------------------------------------------------------------------------
21 2.85 2.97 3.43 3.55 61 20.73 22.41 33.21 34.41
22 2.98 3.10 3.58 3.70 62 22.73 24.53 35.60 36.92
23 3.12 3.24 3.74 3.86 63 25.08 27.00 36.75 38.19
24 3.25 3.37 3.92 4.04 64 27.61 29.65 37.97 39.53
25 3.41 3.53 4.10 4.22 65 30.19 32.47 39.19 40.87
- ---------------------------------------------------------------------------------
26 3.56 3.68 4.29 4.41 66 32.23 34.59 39.74 41.52
27 3.73 3.85 4.49 4.61 67 33.48 35.93 40.14 42.12
28 3.90 4.02 4.71 4.83 68 33.83 36.35 41.44 42.92
29 4.09 4.21 4.93 5.05 69 34.44 36.92 43.19 44.63
30 4.28 4.40 5.17 5.29 70 35.49 38.12 45.32 46.67
- ---------------------------------------------------------------------------------
31 4.37 4.61 5.42 5.54 71 37.48 40.19 47.97 49.20
32 4.59 4.83 5.69 5.81 72 39.99 42.75 51.10 52.29
33 4.82 5.06 5.97 6.09 73 43.05 45.85 54.79 55.89
34 5.06 5.30 6.27 6.39 74 46.75 49.51 59.11 60.04
35 5.32 5.56 6.58 6.70 75 50.82 53.53 63.83 64.47
- ---------------------------------------------------------------------------------
36 5.59 5.83 6.79 7.03 76 55.39 57.93 68.68 69.06
37 5.76 6.12 7.14 7.38 77 60.51 62.76 73.61 73.86
38 6.06 6.42 7.50 7.74 78 66.49 68.31 79.00 79.26
39 6.38 6.74 7.88 8.12 79 73.50 74.73 84.97 85.22
40 6.71 7.07 8.58 8.82 80 81.21 81.89 91.60 91.86
- ---------------------------------------------------------------------------------
</TABLE>
*To determine the death benefit guarantee monthly premium, multiply the speci-
fied amount divided by 1000 times the number shown for the age and classifica-
tion of the insured, then add $100 per policy and divide the result by 12. Ad-
ditional amounts are required for riders and/or substandards.
**This classification is not available below the age of 16.
25
<PAGE>
Appendix B
APPENDIX B
Surrender charges
Prf NS= Preferred nonsmoker
Per $1,000 of specified amount Std NS= Standard nonsmoker
Male (or unisex), age on policy date*
Prf SM= Preferred smoker
<TABLE>
<CAPTION>
Age Prf NS Std NS Prf SM Std SM Age Prf NS Std NS Prf SM Std SM
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 ** 3.52 ** **
- ---------------------------------------------------------------------------------
1 2.79 41 10.98 11.62 15.60 16.06
2 2.79 42 11.59 12.23 16.98 17.47
3 2.79 43 12.10 12.89 18.22 18.85
4 2.79 44 12.78 13.57 20.02 20.48
5 2.79 45 13.35 14.30 21.71 22.35
- ---------------------------------------------------------------------------------
6 2.79 46 13.97 15.09 23.19 23.98
7 2.79 47 14.96 16.06 24.66 25.61
8 2.79 48 15.80 17.23 26.53 27.48
9 2.90 49 16.96 18.39 28.40 29.35
10 3.04 50 18.22 19.80 30.34 31.44
- ---------------------------------------------------------------------------------
11 3.17 51 19.69 21.43 32.65 33.77
12 3.48 52 21.14 23.06 35.07 36.32
13 3.96 53 22.79 24.68 37.93 39.36
14 4.18 54 24.73 26.77 40.96 42.39
15 4.42 55 26.73 29.11 44.07 45.65
- ---------------------------------------------------------------------------------
16 4.73 4.88 5.65 5.81 56 28.91 31.44 47.06 48.40
17 5.19 5.35 6.12 6.27 57 31.31 33.99 48.33 48.40
18 5.43 5.59 6.36 6.51 58 33.95 36.81 48.40 48.40
19 5.43 5.59 6.36 6.51 59 36.65 39.82 48.40 48.40
20 5.43 5.59 6.58 6.75 60 39.75 43.08 48.40 48.40
- ---------------------------------------------------------------------------------
21 5.43 5.59 6.67 6.97 61 43.32 46.82 48.40 48.40
22 5.43 5.59 6.67 6.97 62 45.58 48.40 48.40 48.40
23 5.43 5.59 6.89 7.22 63 46.97 48.40 48.40 48.40
24 5.43 5.59 7.13 7.44 64 48.40 48.40 48.40 48.40
25 5.43 5.59 7.13 7.44 65 48.40 48.40 48.40 48.40
- ---------------------------------------------------------------------------------
26 5.50 5.65 7.13 7.44 66 48.40 48.40 48.40 48.40
27 5.74 5.92 7.13 7.44 67 48.40 48.40 48.40 48.40
28 6.03 6.18 7.13 7.44 68 48.12 48.12 48.40 48.40
29 6.31 6.47 7.37 7.70 69 47.85 47.85 48.35 48.35
30 6.60 6.78 7.83 8.14 70 47.62 47.62 48.28 48.28
- ---------------------------------------------------------------------------------
31 6.93 7.08 8.14 8.47 71 47.42 47.42 48.21 48.21
32 7.28 7.44 8.56 8.89 72 47.24 47.24 48.18 48.18
33 7.66 7.81 9.02 9.33 73 47.06 47.06 48.17 48.17
34 8.03 8.18 9.50 9.81 74 46.79 46.86 48.14 48.14
35 8.45 8.60 9.99 10.32 75 46.44 46.79 47.85 47.85
- ---------------------------------------------------------------------------------
36 8.87 9.04 10.54 10.85 76 46.06 46.44 46.81 46.81
37 9.35 9.50 11.11 11.42 77 45.38 46.06 45.65 45.65
38 9.50 9.99 12.01 12.34 78 44.08 45.38 44.37 44.37
39 10.03 10.49 13.02 13.51 79 42.67 42.67 42.96 42.96
40 10.58 11.04 14.19 14.67 80 41.12 41.12 41.41 41.41
- ---------------------------------------------------------------------------------
</TABLE>
Std SM = Standard smoker
* For requested increases in the specified amount, the applicable surrender
charge is based on the age the increase is effective and will be two-thirds
that of the corresponding surrender charge listed above.
** This classification is not available below the age of 16.
26
<PAGE>
Appendix B
APPENDIX B CONTINUED
Surrender charges Prf NS = Preferred nonsmoker
Std NS = Standard nonsmoker
Per $1,000 of specified amount Prf SM = Preferred smoker
Female, age on policy date* Std SM = Standard smoker
<TABLE>
<CAPTION>
Age Prf NS Std NS Prf SM Std SM Age Prf NS Std NS Prf SM Std SM
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 ** 2.90 ** **
- ---------------------------------------------------------------------------------
1 2.31 41 9.31 9.79 12.25 12.56
2 2.31 42 9.79 10.27 13.02 13.51
3 2.31 43 10.14 10.78 13.95 14.43
4 2.31 44 10.54 11.33 15.36 15.84
5 2.31 45 11.11 11.90 16.76 17.23
- ---------------------------------------------------------------------------------
6 2.31 46 11.55 12.50 17.75 18.39
7 2.31 47 12.19 13.13 18.92 19.56
8 2.31 48 12.72 13.82 20.17 20.97
9 2.40 49 13.27 14.54 21.80 22.59
10 2.51 50 14.10 15.36 23.43 24.22
- ---------------------------------------------------------------------------------
11 2.62 51 15.27 16.52 25.12 26.07
12 2.79 52 16.28 17.69 26.99 27.94
13 2.82 53 17.42 18.85 28.69 29.81
14 2.95 54 18.68 20.26 30.56 31.68
15 3.06 55 19.69 21.43 32.43 33.53
- ---------------------------------------------------------------------------------
16 3.04 3.19 3.63 3.78 56 20.61 22.35 33.90 35.16
17 3.17 3.32 3.78 3.96 57 21.63 23.52 35.53 36.81
18 3.30 3.45 4.03 4.18 58 22.62 24.68 37.00 38.43
19 3.45 3.61 4.14 4.29 59 23.78 25.85 38.63 40.06
20 3.61 3.76 4.31 4.47 60 25.41 27.48 40.96 42.39
- ---------------------------------------------------------------------------------
21 3.76 3.92 4.51 4.66 61 27.37 29.57 43.82 45.41
22 3.92 4.09 4.71 4.88 62 29.99 32.36 46.97 48.40
23 4.11 4.27 4.93 5.08 63 33.09 35.64 48.40 48.40
24 4.29 4.44 5.17 5.32 64 36.43 39.12 48.40 48.40
25 4.49 4.64 5.39 5.57 65 39.84 42.86 48.40 48.40
- ---------------------------------------------------------------------------------
26 4.69 4.86 5.65 5.81 66 43.19 46.35 48.40 48.40
27 4.91 5.08 5.92 6.07 67 45.56 48.40 48.40 48.40
28 5.15 5.30 6.20 6.36 68 46.75 48.40 48.40 48.40
29 5.39 5.54 6.51 6.67 69 48.17 48.17 48.31 48.31
30 5.65 5.81 6.82 6.97 70 47.78 47.78 47.97 47.97
- ---------------------------------------------------------------------------------
31 5.76 6.07 7.15 7.30 71 47.41 47.41 47.67 47.67
32 6.05 6.36 7.50 7.66 72 46.96 46.96 47.41 47.41
33 6.36 6.67 7.88 8.03 73 46.38 46.38 47.11 47.11
34 6.67 7.00 8.27 8.43 74 45.76 45.76 46.71 46.71
35 7.02 7.33 8.69 8.84 75 45.13 45.13 46.22 46.22
- ---------------------------------------------------------------------------------
36 7.37 7.70 8.95 9.26 76 44.54 44.54 45.73 45.73
37 7.59 8.07 9.42 9.72 77 43.99 43.99 45.30 45.30
38 7.99 8.47 9.90 10.21 78 43.48 43.48 44.06 44.06
39 8.40 8.89 10.41 10.71 79 42.51 42.51 42.65 42.60
40 8.84 9.33 11.33 11.64 80 40.94 40.94 41.07 41.07
- ---------------------------------------------------------------------------------
</TABLE>
* For requested increases in the specified amount, the applicable surrender
charge is based on the age the increase is effective and will be two-thirds
that of the corresponding surrender charge listed above.
** This classification is not available below the age of 16.
27
<PAGE>
Appendix C
APPENDIX C
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and
position(s) with
registrant Principal occupations last five years
- -----------------------------------------------------------------------------------------------------
<S> <C>
NANCY J. ALFORD Vice President, (formerly Second Vice President) Lincoln National Life
Vice President Insurance Company.
- -----------------------------------------------------------------------------------------------------
TIMOTHY J. ALFORD Senior Vice President (formerly Vice President and Second Vice President),
Senior Vice President Lincoln National Life Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- -----------------------------------------------------------------------------------------------------
NEAL E. ARNOLD Vice President (formerly Second Vice President), Lincoln National Life
Vice President Insurance Co.
- -----------------------------------------------------------------------------------------------------
CARL L. BAKER Vice President and Deputy General Counsel (formerly Associate General
Vice President and Counsel); Lincoln National Life Insurance Co.
Deputy General Counsel
- -----------------------------------------------------------------------------------------------------
ROLAND C. BAKER President, First Penn-Pacific Life Insurance Co. Formerly: Chairman and CEO,
Vice President Baker, Ralish, Shipley & Politzer, Inc.
1801 S. Meyers Road
Oakbrook Terrace, Ill.
60181
- -----------------------------------------------------------------------------------------------------
DAVID N. BECKER Vice President, Lincoln National Life Insurance Co.
Vice President,
Appointed Actuary and
Valuation Actuary
- -----------------------------------------------------------------------------------------------------
JOANN E. BECKER Vice President, Lincoln National Life Insurance Co. and Lincoln Investment
Vice President Management Inc.; Formerly: President, The Richard Leahy Corp. and President,
200 East Berry Street LNC Equity Sales Corp.
Fort Wayne, Ind. 46802
- -----------------------------------------------------------------------------------------------------
JOHN M. BEHRENDT Vice President, Lincoln National Life Insurance Co. and Lincoln Financial
Vice President Group, Inc. Formerly: President, LNC Equity Sales Corp.
- -----------------------------------------------------------------------------------------------------
JON A. BOSCIA President and Chief Executive Officer, (formerly Chief Operating Officer)
President, Director and Lincoln National Life Insurance Co. Formerly: President; Executive Vice
Chief Executive Officer President, Lincoln Investment Management Inc.
- -----------------------------------------------------------------------------------------------------
CAROLYN P. BRODY Vice President (formerly Second Vice President), Lincoln National Life
Vice President Insurance Co.
- -----------------------------------------------------------------------------------------------------
STEVEN R. BRODY Senior Vice President (formerly Executive Vice President), Lincoln
Vice President Investment Management Inc.
200 East Berry Street
Fort Wayne, Ind. 46802
- -----------------------------------------------------------------------------------------------------
PRISCILLA S. BROWN Vice President, Lincoln National Life Insurance Co. (formerly President, LNC
Vice President Equity Sales Corporation and Vice President, Lincoln Investment Management,
Inc.)
- -----------------------------------------------------------------------------------------------------
HAROLD B. CARSTENSEN, Vice President, Lincoln National Life Insurance Co.
JR.
Vice President
- -----------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
Appendix C
APPENDIX C CONTINUED
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and
position(s) with
registrant Principal occupations last five years
- ------------------------------------------------------------------------------------------------------
<S> <C>
DONALD C. CHAMBERS, M.D. Senior Vice President and Chief Medical Director (formerly Vice President
Senior Vice President and Chief Medical Director), Lincoln National Life Insurance Co.
and
Chief Medical Director
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------
THOMAS L. CLAGG Vice President and Associate General Counsel, Lincoln National Life
Vice President and Insurance Co.
Associate General
Counsel
- ------------------------------------------------------------------------------------------------------
KENNETH J. CLARK Senior Vice President, Lincoln National Life Insurance Co.
Senior Vice President
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------
KELLY D. CLEVENGER Vice President, Lincoln National Life Insurance Co.
Vice President
- ------------------------------------------------------------------------------------------------------
MARTHA O. D'AMBROSIO Vice President and General Auditor, Lincoln National Corp. and Lincoln
Vice President and National Life Insurance Co. Formerly: Senior Manager, KPMG Peat Marwick.
General Auditor
- ------------------------------------------------------------------------------------------------------
JEFFREY K. DELLINGER Vice President (formerly Second Vice President), Lincoln National Life
Vice President Insurance Co.
- ------------------------------------------------------------------------------------------------------
ARTHUR W. DETORE, M.D. Vice President (formerly Second Vice President), Lincoln National Life
Vice President Insurance Co. Formerly: Vice President, Lincoln National Risk Management,
Inc.
- ------------------------------------------------------------------------------------------------------
C. LAWRENCE EDRIS Vice President (formerly Senior Vice President), Lincoln National Life
Vice President Insurance Co.
- ------------------------------------------------------------------------------------------------------
THOMAS W. FITCH Vice President, First Penn-Pacific Life Insurance Co. and Senior Vice
Senior Vice President President (formerly Vice President), Lincoln National Life Insurance Co.
1801 S. Meyers Road
Oakbrook Terrace, Ill.
60181
- ------------------------------------------------------------------------------------------------------
ELIZABETH A. FREDERICK Vice President (formerly Second Vice President) and Associate General
Vice President and Counsel, Lincoln National Life Insurance Co.
Associate General
counsel
- ------------------------------------------------------------------------------------------------------
LUCY D. GASE Vice President and Assistant Secretary (formerly Second Vice President;
Vice President and Assistant Vice President), Lincoln National Life Insurance Co.
Assistant Secretary
- ------------------------------------------------------------------------------------------------------
MELANIE T. HALL Vice President (formerly Second Vice President; Assistant Vice President),
Vice President Lincoln National Life Insurance Co.
- ------------------------------------------------------------------------------------------------------
PHILLIP A. HARTMAN Vice President, Lincoln National Life Insurance Co. and Lincoln Financial
Vice President Group, Inc.
- ------------------------------------------------------------------------------------------------------
J. MICHAEL HEMP Senior Vice President Lincoln National Life Insurance Co. and President, LNC
Senior Vice President Equity Sales Corporation Formerly: Regional Chief Executive Officer, Lincoln
Dallas RMO.
- ------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Appendix C
APPENDIX C CONTINUED
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and
position(s) with
registrant Principal occupations last five years
- ----------------------------------------------------------------------------------------------------
<S> <C>
MATTHEW P. HENDERSON Vice President, Lincoln National Life Insurance Co. (formerly Vice
Vice President President), Lincoln National Corp.
- ----------------------------------------------------------------------------------------------------
DAVID A. HOPPER Senior Vice President (formerly Vice President), Lincoln National Life
Senior Vice President Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ----------------------------------------------------------------------------------------------------
JACK D. HUNTER Executive Vice President and General Counsel, Lincoln National Corp. and The
Executive Vice Lincoln National Life Insurance Co.
President,
General Counsel and
Director
200 East Berry Street
Fort Wayne, Ind. 46802
- ----------------------------------------------------------------------------------------------------
DONALD E. KELLER Vice President (formerly Second Vice President), Lincoln National Life
Vice President Insurance Co.
- ----------------------------------------------------------------------------------------------------
LAWRENCE T. KISSKO Vice President (formerly Senior Vice President), Lincoln Investment
Vice President Management Inc.
- ----------------------------------------------------------------------------------------------------
MICHAEL C. LA FRENAIS Vice President, Lincoln National Life Insurance Co. Formerly: Assistant Vice
Vice President President, Aurora Life Assurance Co.
- ----------------------------------------------------------------------------------------------------
STEPHEN H. LEWIS Senior Vice President, Lincoln National Life Insurance Co. Formerly
Senior Vice President President, First Penn-Pacific Life Insurance Co.
- ----------------------------------------------------------------------------------------------------
H. THOMAS MCMEEKIN President (formerly Executive Vice President, Senior Vice President),
Director Lincoln Investment Management Inc.; Executive Vice President (formerly
200 East Berry Street Senior Vice President), Lincoln National Corp.
Fort Wayne, Ind. 46802
- ----------------------------------------------------------------------------------------------------
REED P. MILLER Vice President (formerly Senior Vice President), Lincoln National Life
Vice President Insurance Co. Formerly: Senior Vice President; Vice President, Lincoln
National Corp.
- ----------------------------------------------------------------------------------------------------
OLIVER H. G. NICHOLS Vice President, Lincoln Investment Management Inc. Formerly Vice President,
Vice President Aetna Life & Casualty Co.
200 East Berry Street
Fort Wayne, Ind. 46802
- ----------------------------------------------------------------------------------------------------
DAVID M. ONGMAN Vice President, Lincoln National Life Insurance Co. Formerly: Consultant,
Vice President Computer Horizons Group; Vice President, The Associated Group; Consulting
Center Manager, James Martin & Co.
- ----------------------------------------------------------------------------------------------------
ARTHUR L. PAGE Vice President, Lincoln National Life Insurance Co.
Vice President
- ----------------------------------------------------------------------------------------------------
RAYMOND L. PROSSER Vice President and Associate General Counsel, Lincoln National Life
Vice President and Insurance Co. (formerly Second Vice President and Director of Claims),
Associate General Lincoln National Life Insurance Co.; Associate General Counsel, Lincoln
Counsel National Corp. and Lincoln National Life Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ----------------------------------------------------------------------------------------------------
STEPHEN E. RAHN Vice President (formerly Second Vice President), Lincoln National Life
Vice President Insurance Co.
- ----------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Appendix C
APPENDIX C CONTINUED
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and
position(s) with
registrant Principal occupations last five years
- ------------------------------------------------------------------------------------------------------
<S> <C>
IAN M. ROLLAND Chairman, President and Chief Executive Officer, Lincoln National Corp.
Director (formerly Chairman and Chief Executive Officer, President), Lincoln National
200 East Berry Street Life Insurance Co.
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------
ARTHUR S. ROSS Vice President, Lincoln National Life Insurance Co. and Lincoln Financial
Vice President Group Inc.
- ------------------------------------------------------------------------------------------------------
LAWRENCE T. ROWLAND Executive Vice President (formerly Senior Vice President and Vice
Executive Vice President President), Lincoln National Life Insurance Co.
and Director
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------
KEITH J. RYAN Vice President, Chief Financial Officer and Assistant Treasurer (formerly
Vice President, Chief Controller, Business Controls Director), Lincoln National Life Insurance Co.
Financial Officer and
Assistant Treasurer
- ------------------------------------------------------------------------------------------------------
CASEY J. TRUMBLE Vice President, Lincoln National Corp. Formerly: tax partner, KPMG Peat
Vice President Marwick.
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------
WILLIAM K. TYLER Senior Vice President, Lincoln National Life Insurance Co.
Senior Vice President
and Assistant Treasurer
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- ------------------------------------------------------------------------------------------------------
RICHARD C. VAUGHAN Executive Vice President (formerly Senior Vice President) and Chief
Director Financial Officer, Lincoln National Corporation.
- ------------------------------------------------------------------------------------------------------
MICHAEL R. WALKER Vice President, Lincoln National Life Insurance Co. Formerly: Vice
Vice President President, Employers Health Insurance Co; Vice President/HR, Baker Hughes,
Inc.
- ------------------------------------------------------------------------------------------------------
ROY V. WASHINGTON Vice President, (formerly, Associate Counsel) Lincoln National Life
Vice President Insurance Co. Formerly: Director of Compliance, Lincoln Investment
Management, Inc.; Compliance Consultant, Lincoln National Corp.
- ------------------------------------------------------------------------------------------------------
JANET C. WHITNEY Vice President and Treasurer, Lincoln National Life Insurance Co. (formerly
Vice President and Vice President and General Auditor), Lincoln National Corp. and Lincoln
Treasurer National Life Insurance Co.
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------
C. SUZANNE WOMACK Secretary and Assistant Vice President, Lincoln National Corp. and Lincoln
Secretary and National Life Insurance Co.
Assistant Vice President
200 East Berry Street
Fort Wayne, Ind. 46802
- ------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
Appendix C
APPENDIX C CONTINUED
Executive officers and directors
Lincoln National Life Insurance Co.
<TABLE>
<CAPTION>
Name, address and
position(s) with
registrant Principal occupations last five years
- ---------------------------------------------------------------------------------------------------
<S> <C>
O. DOUGLAS WORTHINGTON Vice President, Controller and Assistant Treasurer, Lincoln National Life
Vice President, Insurance Co. Formerly: Vice President, Lincoln Investment Management Inc.
Controller
and Assistant Treasurer
- ---------------------------------------------------------------------------------------------------
MICHAEL L. WRIGHT Senior Vice President, Lincoln National Life Insurance Co. Formerly:
Senior Vice President Executive Vice President & COO; The Associated Group.
- ---------------------------------------------------------------------------------------------------
KATHERINE K. WYSS Vice President (formerly Second Vice President), Lincoln National Life
Vice President Insurance Co.
- ---------------------------------------------------------------------------------------------------
</TABLE>
* The principal business address of each person listed, unless otherwise indi-
cated, is 1300 South Clinton Street, P.O. Box 1110, Fort Wayne, Ind. 46801.
32
<PAGE>
Appendix D
APPENDIX D
Illustrations of policy values
The following tables have been prepared to help show how values under the pol-
icy change with investment performance. The tables show Type 1 death benefits,
policy values, and net cash surrender values for each of the first 10 policy
years, and for every five year period thereafter through the thirtieth policy
year, assuming that the return on the assets invested in the account were a
uniform, gross, after tax, annual rate of 0%, 6%, and 12%. The actual death
benefits and net cash surrender values would be different from those shown if a
different classification was used or if the returns averaged 0%, 6%, and 12%
but fluctuated over and under those averages throughout the years.
The death benefits and net cash surrender values shown on pages using current
charges are approximately those likely to be provided under the policy for the
investment returns indicated, assuming that the current percent of premium
charge is deducted, the current cost of insurance charges are deducted, and the
current mortality and expense risk charge is deducted. Although the contract
allows for a maximum percent of premium charge, maximum cost of insurance
charges specified in the 1980 Commissioners Standard Ordinary Smoker and
Nonsmoker tables, and a maximum mortality and expense risk charge of .90%, Lin-
coln Life expects that it will continue to charge the current percent of pre-
mium charge, the current cost of insurance charges, and the current mortality
and expense risk charge for the indefinite future. The figures shown on pages
using guaranteed maximum charges show the death benefits and net cash surrender
values which would result if the guaranteed maximum percent of premium charge,
the guaranteed maximum cost of insurance charges, and the guaranteed maximum
mortality and expense risk charge were deducted. However, these are primarily
of interest only to show by comparison the benefits of the lower current
charges.
In each of the illustrations an assumed gross investment result is indicated.
The gross investment results used in the illustrations are then reduced by the
asset management charge (current average .58%*), the mortality and expense risk
charge (.64% current**, and .90% guaranteed), and other expenses incurred by
the funds including printing, mailing, Directors' fees, etc. (current average
.14%) so that the actual numbers in the illustrations are net of expenses.
*This average reflects a temporary waiver of charges in regards to the three
series of the Delaware Group Premium Fund, Inc. See the Delaware Group Premium
Fund, Inc. prospectus for details.
**Reflects a reduction of .04% to offset excess miscellaneous fund expenses.
33
<PAGE>
Appendix D
MULTI FUND(R)
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 35
Standard nonsmoker
$100,000 specified amount
$1,300 annual premium using current charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
-------------------------------------------------------------------------------------------
assuming assuming
assuming hypothetical gross hypothetical gross
Premiums hypothetical gross annual investment return annual investment return
accumulated annual investment return of of of
End of at 5% --------------------------- ------------------------- -------------------------
policy interest 12% 6% 12% 6% 12%
year per year 0% gross 6% gross gross 0% gross gross gross 0% gross gross gross
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,365 $100,000 $100,000 $100,000 $ 974 $ 1,040 $ 1,106 $ 114 $ 180 $ 246
2 2,798 100,000 100,000 100,000 1,928 2,120 2,320 1,068 1,260 1,460
3 4,303 100,000 100,000 100,000 2,859 3,240 3,652 1,999 2,380 2,792
4 5,883 100,000 100,000 100,000 3,767 4,400 5,113 2,907 3,540 4,253
5 7,542 100,000 100,000 100,000 4,651 5,602 6,718 3,791 4,742 5,858
- ---------------------------------------------------------------------------------------------------
6 9,285 100,000 100,000 100,000 5,510 6,846 8,478 4,693 6,029 7,661
7 11,114 100,000 100,000 100,000 6,342 8,133 10,411 5,568 7,359 9,637
8 13,035 100,000 100,000 100,000 7,148 9,465 12,534 6,417 8,734 11,803
9 15,051 100,000 100,000 100,000 7,926 10,843 14,867 7,238 10,155 14,179
10 17,169 100,000 100,000 100,000 8,675 12,266 17,433 8,073 11,664 16,831
- ---------------------------------------------------------------------------------------------------
15 29,455 100,000 100,000 100,000 11,929 20,115 34,707 11,757 19,943 34,535
20 45,135 100,000 100,000 100,000 14,126 29,230 63,022 14,126 29,230 63,022
25 65,147 100,000 100,000 146,743 14,718 39,638 109,510 14,718 39,638 109,510
30 90,689 100,000 100,000 225,417 13,144 51,749 184,768 13,144 51,749 184,768
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or fu-
ture investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross annual investment returns aver-
aged 0.00%, 6.00% and 12.00% over a period of years, but also fluctuated above
or below those averages for individual contract years. No representations can
be made by Lincoln Life or any of the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
Values illustrated are net of a .58% asset management charge, a .64% current
mortality and expense risk charge (temporarily reduced from .68% until at least
May 1, 1998) and other expenses estimated at .14%. Values illustrated are also
net of any other applicable contract charges.
34
<PAGE>
Appendix D
MULTI FUND(R)
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 35
Standard nonsmoker
$100,000 specified amount
$1,300 annual premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
-------------------------- ------------------------ ------------------------
assuming hypothetical assuming hypothetical assuming hypothetical
Premiums gross annual investment gross annual investment gross annual investment
accumulated return of return of return of
End of at 5% -------------------------- ------------------------ ------------------------
policy interest 0% 6% 12% 0% 6% 12% 0% 6% 12%
year per year gross gross gross gross gross gross gross gross gross
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,365 $100,000 $100,000 $100,000 $ 945 $ 1,009 $ 1,073 $ 85 $ 149 $ 213
2 2,798 100,000 100,000 100,000 1,867 2,054 2,248 1,007 1,194 1,388
3 4,303 100,000 100,000 100,000 2,765 3,134 3,533 1,905 2,274 2,673
4 5,883 100,000 100,000 100,000 3,637 4,250 4,938 2,777 3,390 4,078
5 7,542 100,000 100,000 100,000 4,484 5,402 6,477 3,624 4,542 5,617
- ------------------------------------------------------------------------------------------------
6 9,285 100,000 100,000 100,000 5,304 6,591 8,160 4,487 5,774 7,343
7 11,114 100,000 100,000 100,000 6,095 7,817 10,002 5,321 7,043 9,228
8 13,035 100,000 100,000 100,000 6,859 9,081 12,019 6,128 8,350 11,288
9 15,051 100,000 100,000 100,000 7,593 10,384 14,229 6,905 9,696 13,541
10 17,169 100,000 100,000 100,000 8,296 11,727 16,651 7,694 11,125 16,049
- ------------------------------------------------------------------------------------------------
15 29,455 100,000 100,000 100,000 11,303 19,041 32,796 11,131 18,869 32,624
20 45,135 100,000 100,000 100,000 13,224 27,343 58,827 13,224 27,343 58,827
25 65,147 100,000 100,000 135,556 13,450 36,471 101,161 13,450 36,471 101,161
30 90,689 100,000 100,000 205,696 10,916 46,220 168,603 10,916 46,220 168,603
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or fu-
ture investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross annual investment returns aver-
aged 0.00%, 6.00% and 12.00% over a period of years, but also fluctuated above
or below those averages for individual contract years. No representations can
be made by Lincoln Life or any of the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
Values illustrated are net of a .58% asset management charge, a .90% guaranteed
maximum mortality and expense risk charge and other expenses estimated at .14%.
Values illustrated are also net of any other applicable contract charges.
35
<PAGE>
Appendix D
MULTI FUND(R)
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 35
Standard smoker
$100,000 specified amount
$1,650 annual premium using current charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
-------------------------- ------------------------ ------------------------
assuming assuming assuming
hypothetical gross hypothetical gross hypothetical gross
Premiums annual investment return annual investment return annual investment return
accumulated of of of
End of at 5% -------------------------- ------------------------ ------------------------
policy interest 12% 0% 6% 12% 0% 6% 12%
year per year 0% gross 6% gross gross gross gross gross gross gross gross
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,733 $100,000 $100,000 $100,000 $ 1,228 $ 1,311 $ 1,395 $ 196 $ 279 $ 363
2 3,552 100,000 100,000 100,000 2,432 2,674 2,928 1,400 1,642 1,896
3 5,462 100,000 100,000 100,000 3,599 4,080 4,601 2,567 3,048 3,569
4 7,467 100,000 100,000 100,000 4,731 5,531 6,432 3,699 4,499 5,400
5 9,573 100,000 100,000 100,000 5,829 7,030 8,439 4,797 5,998 7,407
- -------------------------------------------------------------------------------------------------
6 11,784 100,000 100,000 100,000 6,894 8,580 10,640 5,913 7,600 9,660
7 14,106 100,000 100,000 100,000 7,915 10,174 13,048 6,987 9,245 12,119
8 16,544 100,000 100,000 100,000 8,895 11,815 15,687 8,018 10,938 14,810
9 19,104 100,000 100,000 100,000 9,833 13,507 18,585 9,007 12,681 17,759
10 21,791 100,000 100,000 100,000 10,731 15,252 21,771 10,009 14,530 21,048
- -------------------------------------------------------------------------------------------------
15 37,385 100,000 100,000 100,000 14,431 24,727 43,192 14,225 24,520 42,985
20 57,287 100,000 100,000 122,934 16,453 35,497 78,302 16,453 35,497 78,302
25 82,687 100,000 100,000 180,782 16,366 48,009 134,912 16,366 48,009 134,912
30 115,105 100,000 100,000 275,538 13,184 63,064 225,851 13,184 63,064 225,851
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or fu-
ture investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross annual investment returns aver-
aged 0.00%, 6.00% and 12.00% over a period of years, but also fluctuated above
or below those averages for individual contract years. No representations can
be made by Lincoln Life or any of the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
Values illustrated are net of a .58% asset management charge, a .64% current
mortality and expense risk charge (temporarily reduced from .68% until at least
May 1, 1998) and other expenses estimated at .14%. Values illustrated are also
net of any other applicable contract charges.
36
<PAGE>
Appendix D
MULTI FUND(R)
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 35
Standard smoker
$100,000 specified amount
$1,650 annual premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
-------------------------- ------------------------ ------------------------
assuming assuming assuming
hypothetical gross hypothetical gross hypothetical gross
Premiums annual investment return annual investment return annual investment return
accumulated of of of
End of at 5% -------------------------- ------------------------ ------------------------
policy interest 0% 6% 12% 0% 6% 12% 0% 6% 12%
year per year gross gross gross gross gross gross gross gross gross
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,733 $100,000 $100,000 $100,000 $ 1,173 $ 1,253 $ 1,334 $ 141 $ 221 $ 302
2 3,552 100,000 100,000 100,000 2,310 2,544 2,787 1,278 1,512 1,755
3 5,462 100,000 100,000 100,000 3,409 3,869 4,367 2,377 2,837 3,335
4 7,467 100,000 100,000 100,000 4,467 5,229 6,087 3,435 4,197 5,055
5 9,573 100,000 100,000 100,000 5,482 6,622 7,958 4,450 5,590 6,926
- ------------------------------------------------------------------------------------------------
6 11,784 100,000 100,000 100,000 6,450 8,045 9,992 5,469 7,065 9,012
7 14,106 100,000 100,000 100,000 7,370 9,499 12,206 6,441 8,570 11,278
8 16,544 100,000 100,000 100,000 8,239 10,982 14,618 7,362 10,105 13,740
9 19,104 100,000 100,000 100,000 9,056 12,494 17,246 8,230 11,668 16,420
10 21,791 100,000 100,000 100,000 9,817 14,033 20,113 9,094 13,310 19,390
- ------------------------------------------------------------------------------------------------
15 37,385 100,000 100,000 100,000 12,728 22,147 39,100 12,522 21,941 38,894
20 57,287 100,000 100,000 109,647 13,717 30,810 69,839 13,717 30,810 69,839
25 82,687 100,000 100,000 159,244 11,758 39,666 118,839 11,758 39,666 118,839
30 115,105 100,000 100,000 238,886 5,120 48,437 195,808 5,120 48,437 195,808
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or fu-
ture investment rates of return. Actual rates of return may be more or less
than those shown. the death benefits and cash value for a contract would be
different from those shown if the actual gross annual investment returns aver-
aged 0.00%, 6.00% and 12.00% over a period of years, but also fluctuated above
or below those averages for individual contract years. No representations can
be made by Lincoln Life or any of the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
Values illustrated are net of a .58% asset management charge, a .90% guaranteed
maximum mortality and expense risk charge and other expenses estimated at .14%.
Values illustrated are also net of any other applicable contract charges.
37
<PAGE>
Appendix D
MULTI FUND(R)
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 55
Standard nonsmoker
$100,000 specified amount
$3,250 annual premium using current charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
-------------------------- ------------------------- -------------------------
assuming assuming assuming
hypothetical gross hypothetical gross hypothetical gross
Premiums annual investment return annual investment return annual investment return
accumulated of of of
End of at 5% -------------------------- ------------------------- -------------------------
policy interest 12% 0% 6% 0% 12%
year per year 0% gross 6% gross gross gross gross 12% gross gross 6% gross gross
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,413 $100,000 $100,000 $100,000 $ 2,199 $ 2,356 $ 2,514 $ 0 $ 0 $ 0
2 6,996 100,000 100,000 100,000 4,307 4,758 5,230 1,396 1,847 2,319
3 10,758 100,000 100,000 100,000 6,323 7,210 8,173 3,412 4,299 5,262
4 14,708 100,000 100,000 100,000 8,266 9,731 11,389 5,355 6,820 8,478
5 18,856 100,000 100,000 100,000 10,128 12,320 14,903 7,217 9,409 11,992
- --------------------------------------------------------------------------------------------------
6 23,212 100,000 100,000 100,000 11,893 14,965 18,739 9,127 12,200 15,973
7 27,785 100,000 100,000 100,000 13,564 17,675 22,941 10,944 15,055 20,321
8 32,586 100,000 100,000 100,000 15,134 20,450 27,555 12,660 17,975 25,081
9 37,628 100,000 100,000 100,000 16,599 23,291 32,635 14,270 20,962 30,306
10 42,922 100,000 100,000 100,000 17,950 26,202 38,242 15,913 24,164 36,204
- --------------------------------------------------------------------------------------------------
15 73,637 100,000 100,000 100,000 22,867 42,073 77,471 22,285 41,491 76,889
20 112,838 100,000 100,000 155,868 23,717 61,180 145,671 23,717 61,180 145,671
25 162,869 100,000 100,000 270,290 16,787 86,533 257,419 16,787 86,533 257,419
30 226,723 0 129,116 458,119 0 122,968 436,304 0 122,968 436,304
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or fu-
ture investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross annual investment returns aver-
aged 0.00%, 6.00% and 12.00% over a period of years, but also fluctuated above
or below those averages for individual contract years. No representations can
be made by Lincoln Life or any of the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
Values illustrated are net of a .58% asset management charge, a .64% current
mortality and expense risk charge (temporarily reduced from .68% until at least
May 1, 1998) and other expenses estimated at .14%. Values illustrated are also
net of any other applicable contract charges.
38
<PAGE>
Appendix D
MULTI FUND(R)
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 55
Standard nonsmoker
$100,000 specified amount
$3,250 annual premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
-------------------------- --------------------------- ---------------------------
assuming
hypothetical gross assuming assuming
Premiums annual investment return hypothetical gross annual hypothetical gross annual
accumulated of investment return of investment return of
End of at 5% -------------------------- --------------------------- ---------------------------
policy interest 12%
year per year 0% gross 6% gross gross 0% gross 6% gross 12% gross 0% gross 6% gross 12% gross
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,413 $100,000 $100,000 $100,000 $ 2,127 $ 2,280 $ 2,434 $ 0 $ 0 $ 0
2 6,996 100,000 100,000 100,000 4,159 4,597 5,054 1,248 1,686 2,143
3 10,758 100,000 100,000 100,000 6,093 6,951 7,881 3,182 4,040 4,970
4 14,708 100,000 100,000 100,000 7,925 9,338 10,935 5,014 6,427 8,024
5 18,856 100,000 100,000 100,000 9,648 11,755 14,236 6,737 8,844 11,325
- ------------------------------------------------------------------------------------------------------
6 23,212 100,000 100,000 100,000 11,256 14,198 17,809 8,490 11,433 15,044
7 27,785 100,000 100,000 100,000 12,740 16,663 21,685 10,120 14,043 19,065
8 32,586 100,000 100,000 100,000 14,087 19,139 25,892 11,612 16,665 23,418
9 37,628 100,000 100,000 100,000 15,284 21,620 30,471 12,955 19,291 28,143
10 42,922 100,000 100,000 100,000 16,318 24,099 35,470 14,280 22,061 33,432
- ------------------------------------------------------------------------------------------------------
15 73,637 100,000 100,000 100,000 18,595 36,358 69,476 18,013 35,776 68,894
20 112,838 100,000 100,000 138,184 13,358 47,696 129,144 13,358 47,696 129,144
25 162,869 0 100,000 237,342 0 56,670 226,040 0 56,670 226,040
30 226,723 0 100,000 395,758 0 61,328 376,912 0 61,328 376,912
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or fu-
ture investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross annual investment returns aver-
aged 0.00%, 6.00% and 12.00% over a period of years, but also fluctuated above
or below those averages for individual contract years. No representations can
be made by Lincoln Life or any of the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
Values illustrated are net of a .58% asset management charge, a .90% guaranteed
maximum mortality and expense risk charge and other expenses estimated at .14%.
Values illustrated are also net of any other applicable contract charges.
39
<PAGE>
Appendix D
MULTI FUND(R)
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 55
Standard smoker
$100,000 specified amount
$4,250 annual premium using current charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
-------------------------- ------------------------- -------------------------
assuming assuming assuming
hypothetical gross hypothetical gross hypothetical gross
Premiums annual investment return annual investment return annual investment return
accumulated of of of
End of at 5% -------------------------- ------------------------- -------------------------
policy interest 12% 0% 12% 0% 12%
year per year 0% gross 6% gross gross gross 6% gross gross gross 6% gross gross
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 4,463 $100,000 $100,000 $100,000 $ 2,677 $ 2,876 $ 3,077 $ 0 $ 0 $ 0
2 9,148 100,000 100,000 100,000 5,251 5,820 6,415 686 1,255 1,850
3 14,068 100,000 100,000 100,000 7,718 8,831 10,042 3,153 4,266 5,477
4 19,234 100,000 100,000 100,000 10,084 11,921 14,003 5,519 7,356 9,438
5 24,658 100,000 100,000 100,000 12,343 15,091 18,339 7,778 10,526 13,774
- --------------------------------------------------------------------------------------------------
6 30,354 100,000 100,000 100,000 14,490 18,347 23,098 10,153 14,010 18,761
7 36,334 100,000 100,000 100,000 16,532 21,702 28,349 12,423 17,594 24,241
8 42,613 100,000 100,000 100,000 18,444 25,147 34,146 14,564 21,267 30,266
9 49,206 100,000 100,000 100,000 20,223 28,691 40,574 16,571 25,039 36,922
10 56,129 100,000 100,000 100,000 21,856 32,339 47,729 18,660 29,143 44,533
- --------------------------------------------------------------------------------------------------
15 96,294 100,000 100,000 115,461 27,937 53,055 99,535 27,024 52,142 98,622
20 147,557 100,000 100,000 199,886 29,838 81,077 186,809 29,838 81,077 186,809
25 212,982 100,000 127,789 346,270 24,369 121,704 329,781 24,369 121,704 329,781
30 296,483 100,000 180,082 586,269 5,697 171,507 558,351 5,697 171,507 558,351
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or fu-
ture investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross annual investment returns aver-
aged 0.00%, 6.00% and 12.00% over a period of years, but also fluctuated above
or below those averages for individual contract years. No representations can
be made by Lincoln Life or any of the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
Values illustrated are net of a .58% asset management charge, a .64% current
mortality and expense risk charge (temporarily reduced from .68% until at least
May 1, 1998) and other expenses estimated at .14%. Values illustrated are also
net of any other applicable contract charges.
40
<PAGE>
Appendix D
MULTI FUND(R)
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Male issue age 55
Standard smoker
$100,000 specified amount
$4,250 annual premium using guaranteed charges
<TABLE>
<CAPTION>
Death benefit Policy value Net cash surrender value
Pr------------------------------------------------------------------------------------------------------------------emiums
accumulated assuming hypothetical assuming hypothetical assuming hypothetical
End of at 5% gross annual gross annual gross annual
policy interest investment return of investment return of investment return of
year per year -------------------------- --------------------------- --------------------------
12% 6%
0% gross 6% gross gross 0% gross 6% gross 12% gross 0% gross gross 12% gross
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 4,463 $100,000 $100,000 $100,000 $ 2,325 $2,512 $ 2,698 $ 0 $ 0 $ 0
2 9,148 100,000 100,000 100,000 4,512 5,031 5,573 0 466 1,008
3 14,068 100,000 100,000 100,000 6,558 7,558 8,648 1,993 2,993 4,083
4 19,234 100,000 100,000 100,000 8,462 10,095 11,949 3,897 5,530 7,384
5 24,658 100,000 100,000 100,000 10,219 12,638 15,504 5,654 8,073 10,939
- ----------------------------------------------------------------------------------------------------------------------------------
6 30,354 100,000 100,000 100,000 11,817 15,182 19,344 7,480 10,845 15,007
7 36,334 100,000 100,000 100,000 13,240 17,715 23,499 9,131 13,606 19,390
8 42,613 100,000 100,000 100,000 14,468 20,225 28,009 10,588 16,344 24,129
9 49,206 100,000 100,000 100,000 15,480 22,699 32,925 11,828 19,047 29,273
10 56,129 100,000 100,000 100,000 16,258 25,129 38,314 13,063 21,933 35,118
- ----------------------------------------------------------------------------------------------------------------------------------
15 96,294 100,000 100,000 100,000 16,078 36,641 76,461 15,165 35,728 75,548
20 147,557 100,000 100,000 155,702 5,236 46,458 145,516 5,236 46,458 145,516
25 212,982 0 100,000 269,727 0 52,366 256,883 0 52,366 256,883
30 296,483 0 100,000 450,633 0 49,856 429,174 0 49,856 429,174
</TABLE>
The hypothetical rates of return shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or fu-
ture investment rates of return. Actual rates of return may be more or less
than those shown. The death benefits and cash value for a contract would be
different from those shown if the actual gross annual investment returns aver-
aged 0.00%, 6.00% and 12.00% over a period of years, but also fluctuated above
or below those averages for individual contract years. No representations can
be made by Lincoln Life or any of the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
Values illustrated are net of a .58% asset management charge, a .90% guaranteed
maximum mortality and expense risk charge and other expenses estimated at .14%.
Values illustrated are also net of any other applicable contract charges.
41
<PAGE>
Appendix E
APPENDIX E
Definitions for Separate Account K
Age -- The age at the insured's last birthday on the policy date.
Attained age -- The age of the insured on the policy anniversary on or next
preceding any monthly anniversary day.
Base minimum premium -- A premium per $1,000 of specified amount used in the
calculation of the death benefit guarantee monthly premium. The base minimum
premium is also used in determining the contingent deferred sales charge and
the contingent deferred administrative charge.
Beneficiary -- The beneficiary is designated by the owner in the application.
If changed, the beneficiary is as shown in the latest change filed with Lincoln
Life. If no beneficiary survives the insured, the owner or the owner's estate
will receive the benefit.
Contingent deferred administrative charge (CDAC) -- An administrative charge
for underwriting, issue, and initial administration of the policy, which is im-
posed under the policy and deducted upon lapse or surrender of the policy or
voluntary reduction in the specified amount. The contingent deferred adminis-
trative charge is part of the total surrender charge.
Contingent deferred sales charge (CDSC) -- A sales charge based upon the base
minimum premium required for the first policy year, which is imposed under the
policy and deducted upon lapse or surrender of the policy or voluntary reduc-
tion in the specified amount. The contingent deferred sales charge is part of
the total surrender charge.
Cost of insurance charge -- A charge deducted monthly from the policy value to
provide the life insurance protection for the insured.
Death benefit guarantee -- The guarantee that, provided the death benefit guar-
antee monthly premium requirements are met, the policy will not lapse during
the first three policy years due to negative net cash surrender value.
Death benefit guarantee monthly premium -- The minimum monthly premium which
must be paid each month or in advance during the first policy year and which
must continue to be paid in the second and third policy years if the policy
does not have positive net cash surrender value. Failure to pay this premium
when required will result in the policy lapsing at the end of the grace period.
Delaware Management -- Delaware Management Company Inc.
Free look period -- The period of time in which the owner may cancel the policy
and receive a refund. The owner may cancel the policy within 10 days of re-
ceipt, or 45 days after Part 1 of the application is signed, or within 10 days
after mailing or personal delivery of the notice of withdrawal right.
Fund -- Any of the individual Lincoln National funds in which the Separate Ac-
count may invest.
General Account -- The assets of Lincoln Life other than those allocated to the
Separate Account or any other Separate Account.
Gross investment results -- The gross investment results are equal to the
change in the market value of the assets of a fund from the previous valuation
day to the current day, plus the investment income on those assets during the
same period.
Insured -- The person upon whose life the policy is issued, and who is so named
on the Policy Schedule.
Investment amount -- The portion of the policy value invested in the Separate
Account, and equal in amount to the policy value minus amounts invested in the
General Account (including any outstanding loans).
Lincoln Life (we, our, us) -- Lincoln National Life Insurance Co.
Maturity date -- The policy anniversary following the insured's 99th birthday,
if living. It is the last date insurance coverage can remain in force and the
date any remaining net cash surrender value will be payable.
Monthly anniversary day -- The same date in each month as the policy date.
Net cash surrender value -- The amount payable to the owner upon surrender of
the policy. It is equal to the policy value minus any surrender charge, minus
any outstanding loan and plus any unearned loan interest.
Net investment results -- The gross investment results of a fund minus the as-
set management charges and any miscellaneous fund expenses, and minus the mor-
tality and expense risk charge.
Option date -- Any date the policy terminates under the termination provision.
The term option date may also be used with certain riders.
Owner (you, your) -- The person so designated in the application or as subse-
quently changed. If a policy has been absolutely assigned, the assignee is the
owner. A collateral assignee is not the owner.
Planned periodic premium -- A scheduled premium of a level amount at a fixed
interval over a specified period of time.
Policy -- The Flexible Premium Variable Life Insurance policy offered by Lin-
coln Life and described in this prospectus.
Policy date -- The date set forth in the policy that is used to determine pol-
icy years and policy months. Policy anniversaries are measured from the policy
date. The policy
date is ordinarily the earlier of the date the full initial
42
<PAGE>
Appendix E
premium is received from the owner or the date on which the policy is approved
for issue.
Policy value -- The sum of all values in the Separate Account and in the Gen-
eral Account at any time, irrespective of outstanding loans or surrender
charge.
Proceeds -- The amount payable on the maturity date, or on surrender of the
policy, or after the death of any insured person. The proceeds will be differ-
ent on each of these events.
Record date -- The record date is the date the policy is recorded on the books
of Lincoln Life as an in-force policy. Ordinarily, the policy will be recorded
as in-force within three business days after the later of the date we receive
the last outstanding requirement or the date of underwriting approval. The rec-
ord date controls the timing of the transfer of initial assets from the General
Account to the various subaccounts.
Separate Account -- The Lincoln Life Flexible Premium Variable Life Account K,
a Separate Account established by Lincoln Life to receive and invest net premi-
ums paid under the policy.
Series -- Currently there are three series available under the Delaware Group
Premium Fund, Inc. in which the Separate Account may invest.
Specified amount -- The minimum death benefit payable under the policy so long
as the policy remains in force. The death benefit proceeds will be reduced by
any outstanding loan and any due and unpaid charges, and increased by any un-
earned loan interest.
Subaccount -- A subdivision of the Separate Account. Each subaccount invests
exclusively in the shares of a specified fund.
Surrender charge -- A charge deducted from policy value upon surrender of the
policy or upon a voluntary reduction in specified amount during the first 16
policy years or during the 16 years following a requested increase in specified
amount. The surrender charge is equal to the combination of the contingent
deferred sales charge and the contingent deferred administrative charge.
Unit -- An accounting unit of measure used to calculate the value of an invest-
ment in a specified subaccount.
Unit value -- The dollar value of a unit in a specified subaccount on a speci-
fied valuation date.
43
<PAGE>
Account K Financial Statements
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT K
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Lincoln Lincoln Lincoln
National Lincoln National National
Percent Aggressive National Capital Equity-
of Net Growth Bond Appreciation Income
Assets Combined Account Account Account Account
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at net asset value:
. Lincoln National Aggressive Growth Fund, Inc.
247,648 shares at $13.98 per share (cost -
$3,016,476) 10.0% $ 3,462,124 $3,462,124
-----------------------------------------------------
. Lincoln National Bond Fund, Inc.
76,553 shares at $11.77 per share (cost - $894,538) 2.6 900,702 $900,702
-----------------------------------------------------
. Lincoln National Capital Appreciation Fund, Inc.
302,081 shares at $14.50 per share (cost -
$3,871,410) 12.6 4,381,568 $4,381,568
-----------------------------------------------------
. Lincoln National Equity-Income Fund, Inc. 338,757
shares at $15.78 per share (cost - $4,474,457) 15.4 5,345,450 $5,345,450
-----------------------------------------------------
. Lincoln National Global Asset Allocation Fund, Inc.
86,583 shares at $14.23 per share (cost -
$1,141,115) 3.5 1,231,719
-----------------------------------------------------
. Lincoln National Growth and Income Fund, Inc.
205,395 shares at $33.11 per share (cost -
$6,073,105) 19.6 6,800,518
-----------------------------------------------------
. Lincoln National International Fund, Inc.
248,052 shares at $14.56 per share (cost -
$3,306,328) 10.4 3,610,591
-----------------------------------------------------
. Lincoln National Managed Fund, Inc.
62,938 shares at $16.27 per share (cost - $969,225) 3.0 1,023,731
-----------------------------------------------------
. Lincoln National Money Market Fund, Inc.
65,518 shares at $10.00 per share (cost - $655,181) 1.9 655,181
-----------------------------------------------------
. Lincoln National Social Awareness Fund, Inc.
108,689 shares at $27.32 per share (cost -
$2,626,009) 8.6 2,968,922
-----------------------------------------------------
. Lincoln National Special Opportunities Fund, Inc.
126,717 shares at $29.42 per share (cost -
$3,389,351) 10.7 3,728,277
-----------------------------------------------------
. Delaware Group Premium Fund, Inc.: Equity/Income
Series 6,259 shares at $15.98 per share (cost -
$95,564) 0.3 100,014
-----------------------------------------------------
. Emerging Growth Series
7,027 shares at $14.55 per share (cost - $100,702) 0.3 102,247
-----------------------------------------------------
. Global Bond Series
2,847 shares at $10.96 per share (cost - $29,010) 0.1 31,201
----------------------------------------------------- ----- ----------- ---------- -------- ---------- ----------
TOTAL INVESTMENTS (Cost - $30,642,471) 99.0 34,342,245 3,462,124 900,702 4,381,568 5,345,450
-----------------------------------------------------
Dividends receivable 1.1 385,946 874 44,169 27,316 72,917
----------------------------------------------------- ----- ----------- ---------- -------- ---------- ----------
Total assets 100.1 34,728,191 3,462,998 944,871 4,408,884 5,418,367
- ------------------------------------------------------
LIABILITY-Payable to Lincoln National Life Insurance
Company 0.1 18,179 1,803 511 2,310 2,881
- ------------------------------------------------------ ----- ----------- ---------- -------- ---------- ----------
NET ASSETS 100.0% $34,710,012 $3,461,195 $944,360 $4,406,574 $5,415,486
- ------------------------------------------------------ ===== =========== ========== ======== ========== ==========
UNITS OUTSTANDING 2,170,881 783,021 2,860,830 3,279,637
- ------------------------------------------------------ ========== ======== ========== ==========
NET ASSET VALUE PER UNIT $1.594 $ 1.206 $ 1.540 $ 1.651
- ------------------------------------------------------ ========== ======== ========== ==========
</TABLE>
See accompanying notes.
44
<PAGE>
Account K Financial Statements
<TABLE>
<CAPTION>
Lincoln
National Lincoln Lincoln Lincoln Lincoln
Global National Lincoln Lincoln National National National Delaware Delaware Delaware
Asset Growth and National National Money Social Special Equity/ Emerging Global
Allocation Income International Managed Market Awareness Opportunities Income Growth Bond
Account Account Account Account Account Account Account Account Account Account
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,231,719
$6,800,518
$3,610,591
$1,023,731
$655,181
$2,968,922
$3,728,277
$100,014
102,247
$31,201
- ---------- ---------- ---------- ---------- -------- ---------- ---------- -------- -------- -------
1,231,719 6,800,518 3,610,591 1,023,731 655,181 2,968,922 3,728,277 100,014 102,247 31,201
19,412 94,720 13,950 26,833 16,811 21,248 47,611 -- -- 85
- ---------- ---------- ---------- ---------- -------- ---------- ---------- -------- -------- -------
1,251,131 6,895,238 3,624,541 1,050,564 671,992 2,990,170 3,775,888 100,014 102,247 31,286
650 3,641 1,891 555 304 1,541 1,973 47 55 17
- ---------- ---------- ---------- ---------- -------- ---------- ---------- -------- -------- -------
$1,250,481 $6,891,597 $3,622,650 $1,050,009 $671,688 $2,988,629 $3,773,915 $ 99,967 $102,192 $31,269
========== ========== ========== ========== ======== ========== ========== ======== ======== =======
874,067 4,058,908 3,040,950 720,171 598,107 1,605,610 2,380,833 88,545 102,841 28,092
========== ========== ========== ========== ======== ========== ========== ======== ======== =======
$ 1.431 $ 1.698 $ 1.191 $ 1.458 $ 1.123 $ 1.861 $ 1.585 $ 1.129 $ 0.994 $ 1.113
========== ========== ========== ========== ======== ========== ========== ======== ======== =======
</TABLE>
45
<PAGE>
Account K Financial Statements
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT K
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Lincoln Lincoln Lincoln Lincoln
National Lincoln National National National
Aggressive National Capital Equity- Global Asset
Growth Bond Appreciation Income Allocation
Combined Account Account Account Account Account
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PERIOD FROM MAY 17, 1994
TO DECEMBER 31, 1994
Net Investment Income:
. Dividends from
investment income $ 3,159 $ 38 $ 484 $ 248 $ 614 $ 178
-----------------------
. Mortality and expense
guarantees (823) (84) (41) (93) (131) (34)
- ------------------------ ---------- -------- ------- -------- -------- --------
NET INVESTMENT INCOME
(LOSS) 2,336 (46) 443 155 483 144
- ------------------------
Net realized and
unrealized gain (loss)
on investments:
. Net realized gain
(loss) on investments (174) 1 (13) (2) (5) (21)
-----------------------
. Net change in
unrealized
appreciation or
depreciation on
investments (2,197) 902 (262) 563 (1,391) (67)
- ------------------------ ---------- -------- ------- -------- -------- --------
NET GAIN (LOSS) ON
INVESTMENTS (2,371) 903 (275) 561 (1,396) (88)
- ------------------------ ---------- -------- ------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS $ (35) $ 857 $ 168 $ 716 $ (913) $ 56
- ------------------------ ========== ======== ======= ======== ======== ========
YEAR ENDED DECEMBER 31,
1995
Net Investment Income:
. Dividends from
investment income $ 101,581 $ 234 $13,846 $ 7,021 $ 24,214 $ 5,461
-----------------------
. Dividends from net
realized gain on
investments 38,968 -- -- -- 2,304 --
-----------------------
. Mortality and expense
guarantees (33,482) (3,564) (1,258) (4,913) (6,573) (1,022)
- ------------------------ ---------- -------- ------- -------- -------- --------
NET INVESTMENT INCOME
(LOSS) 107,067 (3,330) 12,588 2,108 19,945 4,439
- ------------------------
Net realized and
unrealized gain on
investments:
. Net realized gain on
investments 38,900 7,569 1,104 3,796 7,164 2,773
-----------------------
. Net change in
unrealized
appreciation or
depreciation on
investments 1,082,468 162,670 20,865 194,245 270,358 27,692
- ------------------------ ---------- -------- ------- -------- -------- --------
NET GAIN ON INVESTMENTS 1,121,368 170,239 21,969 198,041 277,522 30,465
- ------------------------ ---------- -------- ------- -------- -------- --------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS $1,228,435 $166,909 $34,557 $200,149 $297,467 $ 34,904
- ------------------------ ========== ======== ======= ======== ======== ========
YEAR ENDED DECEMBER 31,
1996
Net Investment Income:
. Dividends from
investment income $ 386,777 $ 874 $44,169 $ 27,316 $ 72,917 $ 19,412
-----------------------
. Dividends from net
realized gain on
investments 486,335 27,277 -- 83,521 40,158 22,121
-----------------------
. Mortality and expense
guarantees (137,790) (14,319) (4,377) (17,494) (23,371) (4,225)
- ------------------------ ---------- -------- ------- -------- -------- --------
NET INVESTMENT INCOME
(LOSS) 735,322 13,832 39,792 93,343 89,704 37,308
- ------------------------
Net realized and
unrealized gain on
investments:
. Net realized gain
(loss) on investments 108,526 28,277 (373) 23,484 14,398 2,524
-----------------------
. Net change in
unrealized
appreciation or
depreciation on
investments 2,619,503 282,076 (14,439) 315,350 602,026 62,979
- ------------------------ ---------- -------- ------- -------- -------- --------
NET GAIN (LOSS) ON
INVESTMENTS 2,728,029 310,353 (14,812) 338,834 616,424 65,503
- ------------------------ ---------- -------- ------- -------- -------- --------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS $3,463,351 $324,185 $24,980 $432,177 $706,128 $102,811
- ------------------------ ========== ======== ======= ======== ======== ========
</TABLE>
See accompanying notes.
46
<PAGE>
Account K Financial Statements
<TABLE>
<CAPTION>
Lincoln Lincoln Lincoln Lincoln
National Lincoln Lincoln National National National Delaware Delaware Delaware
Growth and National National Money Social Special Equity/ Emerging Global
Income International Managed Market Awareness Opportunities Income Growth Bond
Account Account Account Account Account Account Account Account Account
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
$ 507 $ (39) $ 219 $ 521 $ 94 $ 295 -- -- --
(94) (160) (28) (69) (21) (68) -- -- --
- -------------- -------- ------- ------- -------- -------- ------ ------ ------
413 (199) 191 452 73 227 -- -- --
(8) (14) (2) -- (63) (47) -- -- --
226 (2,027) (66) -- (211) 136 -- -- --
- -------------- -------- ------- ------- -------- -------- ------ ------ ------
218 (2,041) (68) -- (274) 89 -- -- --
- -------------- -------- ------- ------- -------- -------- ------ ------ ------
$ 631 $ (2,240) $ 123 $ 452 $ (201) $ 316 -- -- --
============== ======== ======= ======= ======== ======== ====== ====== ======
$ 20,504 $ 4,574 $ 4,901 $ 5,094 $ 2,674 $ 13,058 -- -- --
12,785 17,410 78 -- 1,063 5,328 -- -- --
(4,807) (6,019) (718) (551) (755) (3,302) -- -- --
- -------------- -------- ------- ------- -------- -------- ------ ------ ------
28,482 15,965 4,261 4,543 2,982 15,084 -- -- --
5,054 329 2,686 -- 4,943 3,482 -- -- --
178,517 87,906 20,649 -- 30,648 88,918 -- -- --
- -------------- -------- ------- ------- -------- -------- ------ ------ ------
183,571 88,235 23,335 -- 35,591 92,400 -- -- --
- -------------- -------- ------- ------- -------- -------- ------ ------ ------
$ 212,053 $104,200 $27,596 $ 4,543 $ 38,573 $107,484 -- -- --
============== ======== ======= ======= ======== ======== ====== ====== ======
$ 94,720 $ 13,950 $26,833 $16,811 $ 21,248 $ 47,611 $ 391 -- $ 525
144,014 13,451 24,926 -- 28,882 101,985 -- -- --
(26,923) (16,707) (4,027) (2,157) (8,676) (15,054) (129) $ (231) (100)
- -------------- -------- ------- ------- -------- -------- ------ ------ ------
211,811 10,694 47,732 14,654 41,454 134,542 262 (231) 425
10,705 9,573 1,539 -- 9,770 8,159 427 (127) 170
548,670 218,384 33,923 -- 312,476 249,872 4,450 1,545 2,191
- -------------- -------- ------- ------- -------- -------- ------ ------ ------
559,375 227,957 35,462 -- 322,246 258,031 4,877 1,418 2,361
- -------------- -------- ------- ------- -------- -------- ------ ------ ------
$ 771,186 $238,651 $83,194 $14,654 $363,700 $392,573 $5,139 $1,187 $2,786
============== ======== ======= ======= ======== ======== ====== ====== ======
</TABLE>
47
<PAGE>
Account K Financial Statements
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT K
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Lincoln
Lincoln Lincoln Lincoln National
National Lincoln National National Global
Aggressive National Capital Equity- Asset
Growth Bond Appreciation Income Allocation
Combined Account Account Account Account Account
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Changes from operations:
. Net investment income
(loss) $ 2,336 $ (46) $ 443 $ 155 $ 483 $ 144
- ------------------------
. Net realized gain
(loss) on investments (174) 1 (13) (2) (5) (21)
- ------------------------
. Net change in
unrealized
appreciation or
depreciation on
investments (2,197) 902 (262) 563 (1,391) (67)
- ------------------------ ----------- ---------- -------- ---------- ---------- ----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS (35) 857 168 716 (913) 56
- ------------------------
Net increase from unit
transactions 1,203,420 124,935 50,921 160,599 257,703 43,277
- ------------------------ ----------- ---------- -------- ---------- ---------- ----------
TOTAL INCREASE IN NET
ASSETS AND NET ASSETS
AT DECEMBER 31, 1994 1,203,385 125,792 51,089 161,315 256,790 43,333
Changes from operations:
. Net investment income
(loss) 107,067 (3,330) 12,588 2,108 19,945 4,439
- ------------------------
. Net realized gain on
investments 38,900 7,569 1,104 3,796 7,164 2,773
- ------------------------
Net change in unrealized
appreciation or
depreciation on
investments 1,082,468 162,670 20,865 194,245 270,358 27,692
- ------------------------ ----------- ---------- -------- ---------- ---------- ----------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS 1,228,435 166,909 34,557 200,149 297,467 34,904
- ------------------------
Net increase from unit
transactions 9,610,893 1,047,415 360,859 1,265,087 1,698,228 258,459
- ------------------------ ----------- ---------- -------- ---------- ---------- ----------
TOTAL INCREASE IN NET
ASSETS 10,839,328 1,214,324 395,416 1,465,236 1,995,695 293,363
- ------------------------ ----------- ---------- -------- ---------- ---------- ----------
NET ASSETS AT DECEMBER
31, 1995 12,042,713 1,340,116 446,505 1,626,551 2,252,485 336,696
- ------------------------
Changes from operations:
. Net investment income
(loss) 735,322 13,832 39,792 93,343 89,704 37,308
- ------------------------
. Net realized gain
(loss) on investments 108,526 28,277 (373) 23,484 14,398 2,524
- ------------------------
. Net change in
unrealized
appreciation or
depreciation on
investments 2,619,503 282,076 (14,439) 315,350 602,026 62,979
- ------------------------ ----------- ---------- -------- ---------- ---------- ----------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS 3,463,351 324,185 24,980 432,177 706,128 102,811
- ------------------------
Net increase from unit
transactions 19,203,948 1,796,894 472,875 2,347,846 2,456,873 810,974
- ------------------------ ----------- ---------- -------- ---------- ---------- ----------
TOTAL INCREASE IN NET
ASSETS 22,667,299 2,121,079 497,855 2,780,023 3,163,001 913,785
- ------------------------ ----------- ---------- -------- ---------- ---------- ----------
NET ASSETS AT DECEMBER
31, 1996 $34,710,012 $3,461,195 $944,360 $4,406,574 $5,415,486 $1,250,481
- ------------------------ =========== ========== ======== ========== ========== ==========
</TABLE>
See accompanying notes.
48
<PAGE>
Account K Financial Statements
<TABLE>
<CAPTION>
Lincoln Lincoln Lincoln Lincoln
National Lincoln Lincoln National National National Delaware Delaware Delaware
Growth and National National Money Social Special Equity/ Emerging Global
Income International Managed Market Awareness Opportunities Income Growth Bond
Account Account Account Account Account Account Account Account Account
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 413 $ (199) $ 191 $ 452 $ 73 $ 227 -- -- --
(8) (14) (2) -- (63) (47) -- -- --
226 (2,027) (66) -- (211) 136 -- -- --
- ---------- ---------- ---------- -------- ---------- ---------- ------- -------- -------
631 (2,240) 123 452 (201) 316 -- -- --
167,869 260,900 31,730 13,804 18,314 73,368 -- -- --
- ---------- ---------- ---------- -------- ---------- ---------- ------- -------- -------
168,500 258,660 31,853 14,256 18,113 73,684 -- -- --
28,482 15,965 4,261 4,543 2,982 15,084 -- -- --
5,054 329 2,686 -- 4,943 3,482 -- -- --
178,517 87,906 20,649 -- 30,648 88,918 -- -- --
- ---------- ---------- ---------- -------- ---------- ---------- ------- -------- -------
212,053 104,200 27,596 4,543 38,573 107,484 -- -- --
1,674,531 1,459,803 288,488 155,292 333,155 1,069,576 -- -- --
- ---------- ---------- ---------- -------- ---------- ---------- ------- -------- -------
1,886,584 1,564,003 316,084 159,835 371,728 1,177,060 -- -- --
- ---------- ---------- ---------- -------- ---------- ---------- ------- -------- -------
2,055,084 1,822,663 347,937 174,091 389,841 1,250,744 -- -- --
211,811 10,694 47,732 14,654 41,454 134,542 $ 262 $ (231) $ 425
10,705 9,573 1,539 -- 9,770 8,159 427 (127) 170
548,670 218,384 33,923 -- 312,476 249,872 4,450 1,545 2,191
- ---------- ---------- ---------- -------- ---------- ---------- ------- -------- -------
771,186 238,651 83,194 14,654 363,700 392,573 5,139 1,187 2,786
4,065,327 1,561,336 618,878 482,943 2,235,088 2,130,598 94,828 101,005 28,483
- ---------- ---------- ---------- -------- ---------- ---------- ------- -------- -------
4,836,513 1,799,987 702,072 497,597 2,598,788 2,523,171 99,967 102,192 31,269
- ---------- ---------- ---------- -------- ---------- ---------- ------- -------- -------
$6,891,597 $3,622,650 $1,050,009 $671,688 $2,988,629 $3,773,915 $99,967 $102,192 $31,269
========== ========== ========== ======== ========== ========== ======= ======== =======
</TABLE>
49
<PAGE>
This page was intentionally left blank.
50
<PAGE>
Account K Financial Statements
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT K
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The Separate Account: Lincoln Life Flexible Premium Variable Life Account K
(Separate Account) was established as a segregated investment account of The
Lincoln National Life Insurance Company (the Company) on March 9, 1994. The
Separate Account was registered on May 2, 1994, under the Investment Company
Act of 1940, as amended, as a unit investment trust, and commenced investment
activity on May 17, 1994.
Investments: The Separate Account invests in Lincoln National Aggressive Growth
Fund, Inc., Lincoln National Bond Fund, Inc., Lincoln National Capital Appreci-
ation Fund, Inc., Lincoln National Equity-Income Fund, Inc., Lincoln National
Global Asset Allocation Fund, Inc., Lincoln National Growth and Income Fund,
Inc., Lincoln National International Fund, Inc., Lincoln National Managed Fund,
Inc., Lincoln National Money Market Fund, Inc., Lincoln National Social Aware-
ness Fund, Inc., Lincoln National Special Opportunities Fund, Inc., and the
Delaware Group Premium Fund, Inc. which consists of three series: Equity/Income
Series, Emerging Growth Series, and Global Bond Series (Funds). Investments in
the Funds are stated at the closing net asset values per share on December 31,
1996. The Funds are register as open-end management investment companies.
Investment transactions are accounted for on a trade-date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is de-
termined by the average-cost method.
Dividends: Dividends paid to the Separate Account are automatically reinvested
in shares of the Funds on the payable date.
Federal Income Taxes: Operations of the Separate Account form a part of and are
taxed with operations of the Company, which is taxed as a "life insurance com-
pany" under the Internal Revenue Code. Using current law, no federal income
taxes are payable with respect to the Separate Account's net investment income
and the net realized gain on investments.
2. MORTALITY AND EXPENSE RISK CHARGE AND OTHER TRANSACTIONS WITH AFFILIATE
Percent of Premium Charge: Prior to allocation of net premiums to the Separate
Account, premiums paid are reduced by a percent of premium charge equal to
3.95% of the premium. Amounts retained during 1996, 1995 and 1994 by the Com-
pany for such charges were $253,616, $235,219 and $43,097, respectively.
Separate Account Charges: Amounts are charged daily to the Separate Account by
the Company for a mortality and expense risk charge at a current annual rate of
.60% of the average daily net asset value of the Separate Account. These
charges are made in return for the Company's assumption of risks associated
with mortality experience and administrative expenses in connection with poli-
cies issued.
Other Charges: Other charges which are paid to the Company by redeeming Sepa-
rate Account units are for monthly administrative charges, the cost of insur-
ance, transfer and withdrawal charges, and contingent surrender charges. These
other charges for 1996, 1995 and 1994 amounted to $3,471,519, $1,085,945 and
$47,812, respectively.
The monthly administrative charge amounts to $7.50 for each policy in force and
is intended to compensate the Company for continuing administration of the pol-
icies, premium billing, overhead expenses, and other miscellaneous expenses.
The Company assumes the responsibility for providing the insurance benefits in-
cluded in the policy. The cost of insurance is determined each month based upon
the applicable insurance rate and the current death benefit. The cost of insur-
ance can vary from month to month since the determination of both the insurance
rate and the current death benefit depends upon a number of variables as de-
scribed in the Separate Account's prospectus.
The transfer charge amounts to $10 each time a policyowner authorizes a trans-
fer of funds between accounts; however, the transfer charge is currently being
waived for all transfers. The withdrawal charge is currently the greater of $10
or 3% of the amount withdrawn for each withdrawal from the policy value by the
policyowner.
Surrender charges are deducted if the policy is surrendered during the first
sixteen policy years. Surrender charges in the first five years are approxi-
mately 132% of the required base minimum annual premium. Surrender charges in
years six through sixteen decrease by policy year to 0% in the seventeenth
year. Additional surrender charges are deducted upon surrender of increases to
the specified amount.
51
<PAGE>
Account K Financial Statements
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT K
NOTES TO FINANCIAL STATEMENTS CONTINUED
3. NET ASSETS
Net Assets at December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
Lincoln
Lincoln Lincoln Lincoln National Lincoln
National Lincoln National National Global National
Aggressive National Capital Equity- Asset Growth and
Growth Bond Appreciation Income Allocation Income
Combined Account Account Account Account Account Account
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Unit Transactions $30,018,261 $2,969,244 $884,655 $3,773,532 $4,412,804 $1,112,710 $5,907,727
Accumulated net
investment
income (loss) 844,725 10,456 52,823 95,606 110,132 41,891 240,706
- ---------------------------
Accumulated net realized
gain (loss) on
investments 147,252 35,847 718 27,278 21,557 5,276 15,751
- ---------------------------
Net unrealized
appreciation on
investments 3,699,774 445,648 6,164 510,158 870,993 90,604 727,413
- ---------------------------
----------- ---------- -------- ---------- ---------- ---------- ----------
$34,710,012 $3,461,195 $944,360 $4,406,574 $5,415,486 $1,250,481 $6,891,597
=========== ========== ======== ========== ========== ========== ==========
</TABLE>
52
<PAGE>
Account K Financial Statements
<TABLE>
<CAPTION>
Lincoln Lincoln Lincoln
Lincoln Lincoln National National National Delaware Delaware Delaware
National National Money Social Special Equity/ Emerging Global
International Managed Market Awareness Opportunities Income Growth Bond
Account Account Account Account Account Account Account Account
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
$ 3,282,039 $ 939,096 $652,039 $2,586,557 $3,273,542 $94,828 $101,005 $28,483
26,460 52,184 19,649 44,509 149,853 262 (231) 425
9,888 4,223 -- 14,650 11,594 427 (127) 170
304,263 54,506 -- 342,913 338,926 4,450 1,545 2,191
------------- ---------- -------- ---------- ---------- ------- -------- -------
$ 3,622,650 $1,050,009 $671,688 $2,988,629 $3,773,915 $99,967 $102,192 $31,269
============= ========== ======== ========== ========== ======= ======== =======
</TABLE>
53
<PAGE>
Account K Financial Statements
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT K
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
Period from May 17,
Year Ended Year Ended 1994 to December
December 31, 1996 December 31, 1995 31, 1994
- ----------------------------------------------------------------------------------------------------------
Units Amount Units Amount Units Amount
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lincoln National Aggressive Growth
Account:
Purchases 1,986,444 $ 2,987,630 1,159,747 $1,427,495 132,136 $ 134,367
- ------------------------------------
Redemptions (792,146) (1,190,736) (305,953) (380,080) (9,347) (9,432)
- ------------------------------------ ---------- ----------- --------- ---------- -------- ----------
1,194,298 1,796,894 853,794 1,047,415 122,789 124,935
Lincoln National Bond Account:
Purchases 693,235 807,378 424,613 471,334 56,090 55,770
- ------------------------------------
Redemptions (286,906) (334,503) (99,138) (110,475) (4,873) (4,849)
- ------------------------------------ ---------- ----------- --------- ---------- -------- ----------
406,329 472,875 325,475 360,859 51,217 50,921
Lincoln National Capital
Appreciation Account:
Purchases 2,493,097 3,622,132 1,370,722 1,602,221 174,005 177,145
- ------------------------------------
Redemptions (877,059) (1,274,286) (283,683) (337,134) (16,252) (16,546)
- ------------------------------------ ---------- ----------- --------- ---------- -------- ----------
1,616,038 2,347,846 1,087,039 1,265,087 157,753 160,599
Lincoln National Equity-Income
Account:
Purchases 2,536,624 3,788,423 1,894,714 2,316,819 265,500 274,499
- ------------------------------------
Redemptions (894,662) (1,331,550) (506,306) (618,591) (16,233) (16,796)
- ------------------------------------ ---------- ----------- --------- ---------- -------- ----------
1,641,962 2,456,873 1,388,408 1,698,228 249,267 257,703
Lincoln National Global Asset
Allocation Account:
Purchases 817,949 1,094,430 337,111 383,453 47,818 48,241
- ------------------------------------
Redemptions (214,270) (283,456) (109,622) (124,994) (4,919) (4,964)
- ------------------------------------ ---------- ----------- --------- ---------- -------- ----------
603,679 810,974 227,489 258,459 42,899 43,277
Lincoln National Growth and Income
Account:
Purchases 3,852,907 5,990,307 1,673,828 2,191,176 172,419 177,722
- ------------------------------------
Redemptions (1,234,826) (1,924,980) (395,844) (516,645) (9,576) (9,853)
- ------------------------------------ ---------- ----------- --------- ---------- -------- ----------
2,618,081 4,065,327 1,277,984 1,674,531 162,843 167,869
International Account
Purchases 2,367,582 2,701,296 1,898,555 1,960,609 277,792 282,935
- ------------------------------------
Redemptions (997,656) (1,139,960) (483,694) (500,806) (21,629) (22,035)
- ------------------------------------ ---------- ----------- --------- ---------- -------- ----------
1,369,926 1,561,336 1,414,861 1,459,803 256,163 260,900
Lincoln National Managed Account:
Purchases 809,601 1,098,752 304,840 370,882 34,796 35,061
- ------------------------------------
Redemptions (356,357) (479,874) (69,401) (82,394) (3,308) (3,331)
- ------------------------------------ ---------- ----------- --------- ---------- -------- ----------
453,244 618,878 235,439 288,488 31,488 31,730
Lincoln National Money Market
Account:
Purchases 1,041,082 1,150,176 388,505 409,737 481,209 488,017
- ------------------------------------
Redemptions (604,852) (667,233) (240,559) (254,445) (467,278) (474,213)
- ------------------------------------ ---------- ----------- --------- ---------- -------- ----------
436,230 482,943 147,946 155,292 13,931 13,804
Lincoln National Social Awareness
Account:
Purchases 1,848,868 3,083,622 338,743 453,053 23,608 24,224
- ------------------------------------
Redemptions (512,433) (848,534) (87,411) (119,898) (5,765) (5,910)
- ------------------------------------ ---------- ----------- --------- ---------- -------- ----------
1,336,435 2,235,088 251,332 333,155 17,843 18,314
</TABLE>
54
<PAGE>
Account K Financial Statements
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT K
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
Year Ended Year Ended Period from May 17, 1994
December 31, 1996 December 31, 1995 to December 31, 1994
- --------------------------------------------------------------------------------------------------------------
Units Amount Units Amount Units Amount
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lincoln National Special
Opportunities Account:
Purchases 2,301,459 $ 3,348,686 1,097,775 $1,395,688 81,410 $ 84,111
- ------------------------------------
Redemptions (838,052) (1,218,088) (251,286) (326,112) (10,473) (10,743)
- ------------------------------------ --------- ----------- --------- ---------- ---------- -------------
1,463,407 2,130,598 846,489 1,069,576 70,937 73,368
Equity/Income Series:
Purchases 106,501 114,357 -- -- -- --
- ------------------------------------
Redemptions (17,956) (19,529) -- -- -- --
- ------------------------------------ --------- ----------- --------- ---------- ---------- -------------
88,545 94,828 -- -- -- --
Emerging Growth Series:
Purchases 173,113 170,450 -- -- -- --
- ------------------------------------
Redemptions (70,272) (69,445) -- -- -- --
- ------------------------------------ --------- ----------- --------- ---------- ---------- -------------
102,841 101,005 -- -- -- --
Global Bond Series:
Purchases 30,851 31,500 -- -- -- --
- ------------------------------------
Redemptions (2,759) (3,017) -- -- -- --
- ------------------------------------ --------- ----------- --------- ---------- ---------- -------------
28,092 28,483 -- -- -- --
----------- ---------- -------------
NET INCREASE FROM UNIT TRANSACTIONS $19,203,948 $9,610,893 $ 1,203,420
- ------------------------------------ =========== ========== =============
</TABLE>
55
<PAGE>
Account K Financial Statements
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT K
NOTES TO FINANCIAL STATEMENTS CONTINUED
5. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from in-
vestments sold were as follows for 1996:
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
- ---------------------------------------------------------------------
<S> <C> <C>
Lincoln National Aggressive Growth Account $ 2,020,237 $ 208,947
- ------------------------------------------------
Lincoln National Bond Account 570,499 87,858
- ------------------------------------------------
Lincoln National Capital Appreciation Account 2,621,518 199,095
- ------------------------------------------------
Lincoln National Equity-Income Account 2,617,683 117,999
- ------------------------------------------------
Lincoln National Global Asset Allocation Account 886,844 52,025
- ------------------------------------------------
Lincoln National Growth and Income Account 4,377,213 171,590
- ------------------------------------------------
Lincoln National International Account 1,708,563 144,895
- ------------------------------------------------
Lincoln National Managed Account 806,864 161,766
- ------------------------------------------------
Lincoln National Money Market Account 992,873 506,771
- ------------------------------------------------
Lincoln National Social Awareness Account 2,418,058 158,724
- ------------------------------------------------
Lincoln National Special Opportunities Account 2,428,494 196,524
- ------------------------------------------------
Delaware Equity/Income Account 106,098 10,961
- ------------------------------------------------
Delaware Emerging Growth Account 148,633 47,804
- ------------------------------------------------
Delaware Global Bond Account 31,601 2,761
- ------------------------------------------------ ----------- ----------
$21,735,178 $2,067,720
=========== ==========
</TABLE>
6. ADDITIONAL INVESTMENT OPTIONS
Effective May 1996, three investment options were added to the Separate Ac-
count. The options include the Delaware Group Premium Funds, Inc. which consist
of the Equity/Income Series, Emerging Growth Series and the Global Bond Series.
7. DAILY VALUATION CALCULATIONS
Effective October 1996, the daily unit value calculation process was trans-
ferred from the Company to the Delaware Group, an affiliate of the Company.
Costs associated with the calculation of the unit value are paid by the Compa-
ny.
8. CHANGE IN MANAGEMENT
Effective August 29, 1996, Clay Finlay Inc., Subadvisor of the Lincoln National
International Fund Inc., accepted an offer to sell their ownership interest in
the firm to United Asset Management, a New York Stock Exchange ("NYSE") listed
company. In October 1996, variable contractholders, via proxy solicitation, in-
structed the Company to vote to retain Clay Finlay as the Subadvisor of the
Lincoln National International Fund.
The shares were voted as follows:
. 91.56% for retaining Clay Finlay,
. 3.26% against retaining Clay Finlay,
. 5.18% abstained
56
<PAGE>
Account K Financial Statements
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors of Lincoln National Life
Insurance Company
and
Policyowners of Lincoln Life Flexible
Premium Variable Life Account K
We have audited the accompanying statement
of assets and liability of Lincoln Life
Flexible Premium Variable Life Account K
(Separate Account) as of December 31, 1996,
and the related statements of operations and
changes in net assets for each of the two
years in the period then ended and the pe-
riod from May 17, 1994 (commencement of op-
erations) to December 31,1994. These finan-
cial statements are the responsibility of
the Account's management. Our responsibility
is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those
standards require that we plan and perform
the audit to obtain reasonable assurance
about whether the financial statements are
free of material misstatement. An audit in-
cludes examining, on a test basis, evidence
supporting the amounts and disclosures in
the financial statements. Our procedures in-
cluded confirmation of securities owned as
of December 31, 1996, by correspondence with
the custodian. An audit also includes as-
sessing the accounting principles used and
significant estimates made by management, as
well as evaluating the overall financial
statement presentation. We believe that our
audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements re-
ferred to above present fairly, in all mate-
rial respects, the financial position of
Lincoln Life Flexible Premium Variable Life
Account K at December 31, 1996, and the re-
sults of its operations and the changes in
its net assets for each of the two years in
the period then ended and the period from
May 17, 1994 (commencement of operations) to
December 31, 1994, in conformity with gener-
ally accepted accounting principles.
LOGO
Fort Wayne, Indiana
March 27, 1997
57
<PAGE>
Lincoln Life Financial Statements
LINCOLN NATIONAL LIFE INSURANCE CO.
AUDITED FINANCIAL STATEMENTS
Prior to 1996, management of The Lincoln Na-
tional Life Insurance Company (Company) pre-
pared annual financial statements of the
Company using two different types of ac-
counting principles. Pursuant to insurance
regulatory requirements in several states,
management prepared financial statements in
accordance with statutory accounting princi-
ples (STAP), which were subject to audit by
the Company's independent auditors. Addi-
tionally, solely for purposes of inclusion
in the registration statements of separate
account products requiring registration and
periodic reporting to the Securities and Ex-
change Commission (SEC), management also
prepared financial statements of the Company
in accordance with generally accepted ac-
counting principles (GAAP), which were also
subject to audit. In an attempt to reduce
costs associated with the preparation and
audits of both GAAP and STAP-bases financial
statements, commencing with the registra-
tions in 1997, management will prepare and
have audited only STAP-basis financial
statements.
The STAP-basis financial statements included
in this registration statement have been
prepared in conformity with accounting prac-
tices prescribed or permitted by the Indiana
Department of Insurance, which is an "other
comprehensive basis of accounting" as that
term is defined by the American Institute of
Certified Public Accountants (see notes 1
and 2 to the enclosed audited STAP-basis fi-
nancial statements for information on such
prescribed and permitted practices).
Because 1996 is the initial year for which
STAP-basis financial statements are used for
purposes of these separate account product
filings with the SEC, management has in-
cluded the following financial statements of
the Company to allow for comparability be-
tween years:
. Section 1 contains the STAP-basis balance
sheets of the Company as of December 31,
1996 and 1995 and the related STAP-basis
statements of income, changes in capital
and surplus, and cash flows for the three
years in the period ended December 31,
1996.
. Section 2 contains the GAAP-basis balance
sheets of the Company as of December 31,
1995 and 1994 and the related consolidated
statements of income, shareholder's equi-
ty, and cash flows for each of the three
years in the period ended December 31,
1995.
58
<PAGE>
Lincoln Life Financial Statements
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1995 1994
----------- -----------
(000's omitted)
-----------------------
ASSETS
<S> <C> <C>
INVESTMENTS:
Securities available-for-sale, at fair value:
. Fixed maturity (cost: 1995 -- $18,852,837; 1994 --
$18,193,928) $20,414,785 $17,692,214
- ----------------------------------------------------
. Equity (cost: 1995 -- $480,261; 1994 -- $416,351) 598,435 456,333
- ----------------------------------------------------
Mortgage loans on real estate 3,147,783 2,795,914
- ----------------------------------------------------
Real estate 746,023 679,512
- ----------------------------------------------------
Policy loans 565,325 528,731
- ----------------------------------------------------
Other investments 241,219 158,196
- ---------------------------------------------------- ----------- -----------
Total investments 25,713,570 22,310,900
- ----------------------------------------------------
Cash and invested cash 802,743 990,880
- ----------------------------------------------------
Property and equipment 53,830 54,989
- ----------------------------------------------------
Deferred acquisition costs 953,834 1,736,526
- ----------------------------------------------------
Premiums and fees receivable 117,634 123,494
- ----------------------------------------------------
Accrued investment income 352,301 367,370
- ----------------------------------------------------
Assets held in separate accounts 18,461,629 13,000,540
- ----------------------------------------------------
Federal income taxes -- 134,463
- ----------------------------------------------------
Amounts recoverable from reinsurers 2,940,976 2,069,292
- ----------------------------------------------------
Goodwill 5,149 3,385
- ----------------------------------------------------
Other assets 185,398 233,708
- ---------------------------------------------------- ----------- -----------
Total assets $49,587,064 $41,025,547
- ---------------------------------------------------- =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Policy liabilities and accruals:
. Future policy benefits, claims and claims expenses $ 8,435,019 $ 7,540,772
- ----------------------------------------------------
. Unearned premiums 55,174 61,472
- ---------------------------------------------------- ----------- -----------
Total policy liabilities and accruals 8,490,193 7,602,244
- ----------------------------------------------------
Contractholder funds 18,171,822 17,028,628
- ----------------------------------------------------
Liabilities related to separate accounts 18,461,629 13,000,540
- ----------------------------------------------------
Federal income taxes 166,430 --
- ----------------------------------------------------
Short-term debt 124,783 153,656
- ----------------------------------------------------
Long-term debt 40,827 54,794
- ----------------------------------------------------
Other liabilities 1,412,534 1,264,730
- ---------------------------------------------------- ----------- -----------
Total liabilities 46,868,218 39,104,592
- ----------------------------------------------------
SHAREHOLDER'S EQUITY:
Common stock, $2.50 par value:
. Authorized, issued and outstanding shares -- 10
million
(owned by Lincoln National Corp.) 25,000 25,000
- ----------------------------------------------------
Additional paid-in capital 809,557 791,605
- ----------------------------------------------------
Retained earnings 1,440,994 1,428,969
- ----------------------------------------------------
Net unrealized gain (loss) on securities available-
for-sale 443,295 (324,619)
- ---------------------------------------------------- ----------- -----------
Total shareholder's equity 2,718,846 1,920,955
- ---------------------------------------------------- ----------- -----------
Total liabilities and shareholder's equity $49,587,064 $41,025,547
- ---------------------------------------------------- =========== ===========
</TABLE>
See accompanying notes.
59
<PAGE>
Lincoln Life Financial Statements
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
---------------------------------
(000's omitted)
---------------------------------
REVENUE
<S> <C> <C> <C>
Insurance premiums $ 846,873 $1,099,480 $1,972,630
- ------------------------------------------
Insurance fees 450,423 390,384 425,083
- ------------------------------------------
Net investment income 1,899,630 1,673,981 1,823,459
- ------------------------------------------
Realized gain (loss) on investments 136,195 (138,522) 92,150
- ------------------------------------------
Gain (loss) on sale of affiliates -- 68,954 (98,500)
- ------------------------------------------
Other 3,405 20,946 35,781
- ------------------------------------------ ---------- ---------- ----------
Total revenue 3,336,526 3,115,223 4,250,603
- ------------------------------------------
BENEFITS AND EXPENSES
Benefits and settlement expenses 2,122,616 2,194,047 3,033,139
- ------------------------------------------
Underwriting, acquisition, insurance and
other expenses 764,346 660,363 881,703
- ------------------------------------------
Interest expense 67 615 96
- ------------------------------------------ ---------- ---------- ----------
Total benefits and expenses 2,887,029 2,855,025 3,914,938
- ------------------------------------------ ---------- ---------- ----------
Income before federal income taxes
and cumulative effect of accounting change 449,497 260,198 335,665
- ------------------------------------------
Federal income taxes 127,472 40,400 142,544
- ------------------------------------------
Income before cumulative effect of
accounting change 322,025 219,798 193,121
- ------------------------------------------ ---------- ---------- ----------
Cumulative effect of accounting change
(postretirement benefits) -- -- 45,582
- ------------------------------------------ ---------- ---------- ----------
Net income $ 322,025 $ 219,798 $ 147,539
- ------------------------------------------ ========== ========== ==========
EARNINGS PER SHARE
Income before cumulative effect of
accounting change $32.20 $21.98 $19.31
- ------------------------------------------
Cumulative effect of accounting change
(postretirement benefits) -- -- (4.56)
- ------------------------------------------ ---------- ---------- ----------
Net income $32.20 $21.98 $14.75
- ------------------------------------------ ========== ========== ==========
</TABLE>
See accompanying notes.
60
<PAGE>
Lincoln Life Financial Statements
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF
SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------------------------------
(000's omitted)
----------------------------------
<S> <C> <C> <C>
Common stock -- balance at beginning and
end of year $ 25,000 $ 25,000 $ 25,000
- -----------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 791,605 791,444 791,223
- -----------------------------------------
Contribution from Lincoln National Corp. 17,952 161 221
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 809,557 791,605 791,444
- -----------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 1,428,969 1,334,171 1,198,632
- -----------------------------------------
Net income 322,025 219,798 147,539
- -----------------------------------------
Dividends declared (310,000) (125,000) (12,000)
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 1,440,994 1,428,969 1,334,171
- -----------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE:
Balance at beginning of year (324,619) 621,161 47,303
- -----------------------------------------
Cumulative effect of accounting change -- -- 564,153
- -----------------------------------------
Other change during year 767,914 (945,780) 9,705
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 443,295 (324,619) 621,161
- -----------------------------------------
---------- ---------- ----------
Total shareholder's equity at end of year $2,718,846 $1,920,955 $2,771,776
- -----------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
61
<PAGE>
Lincoln Life Financial Statements
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------- ----------- ----------
(000's omitted)
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 322,025 $ 219,798 $ 147,539
- ----------------------------------------
Adjustments to reconcile net income to
net cash
provided by operating activities:
. Deferred acquisition costs 124,526 (171,063) (92,183)
- ----------------------------------------
. Premiums and fees receivable 6,082 10,755 80,582
- ----------------------------------------
. Accrued investment income 15,069 (54,434) (18,827)
- ----------------------------------------
. Policy liabilities and accruals 621,603 114,038 345,142
- ----------------------------------------
. Contractholder funds 1,335,625 1,769,240 1,248,058
- ----------------------------------------
. Amounts recoverable from reinsurers (883,425) (884,388) (700,622)
- ----------------------------------------
. Federal income taxes 95,745 8,364 (130,308)
- ----------------------------------------
. Provisions for depreciation 39,089 38,870 41,516
- ----------------------------------------
. Amortization of discount and premium (86,653) 7,928 (100,274)
- ----------------------------------------
. Realized loss (gain) on investments (244,995) 219,682 (115,881)
- ----------------------------------------
. Loss (gain) on sale of affiliates -- (68,954) 98,500
- ----------------------------------------
. Cumulative effect of accounting change -- -- 45,582
- ----------------------------------------
. Other 458,542 (4,599) 51,369
- ---------------------------------------- ----------- ----------- ----------
Net adjustments 1,481,208 985,439 752,654
- ---------------------------------------- ----------- ----------- ----------
Net cash provided by operating
activities 1,803,233 1,205,237 900,193
- ----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
. Purchases (13,549,807) (12,100,213) (7,171,684)
- ----------------------------------------
. Sales 12,163,673 9,326,809 7,139,781
- ----------------------------------------
. Maturities 929,018 958,065 42,707
- ----------------------------------------
Fixed maturity securities held for
investment:
. Purchases -- -- (5,903,805)
- ----------------------------------------
. Sales -- -- 2,805,980
- ----------------------------------------
. Maturities -- -- 1,639,739
- ----------------------------------------
Purchases of other investments (1,711,427) (1,421,321) (1,936,013)
- ----------------------------------------
Sale or maturity of other investments 1,198,536 1,457,157 1,142,872
- ----------------------------------------
Sale of affiliates -- 520,340 --
- ----------------------------------------
Decrease in cash collateral on loaned
securities (39,681) (163,872) (40,454)
- ----------------------------------------
Other (213,708) (37,606) 83,751
- ---------------------------------------- ----------- ----------- ----------
Net cash used in investing activities (1,223,396) (1,460,641) (2,197,126)
- ----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (13,967) (200) (1,138)
- ----------------------------------------
Issuance of long-term debt -- -- 10,314
- ----------------------------------------
Net increase (decrease) in short-term
debt (28,873) 3,629 13,047
- ----------------------------------------
Universal life and investment contract
deposits 1,716,239 2,381,829 2,418,037
- ----------------------------------------
Universal life and investment contract
withdrawals (2,149,325) (1,604,450) (1,503,105)
- ----------------------------------------
Capital contribution from Lincoln
National Corp. 17,952 161 221
- ----------------------------------------
Dividends paid to shareholder (310,000) (125,000) (12,000)
- ---------------------------------------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities (767,974) 655,969 925,376
- ---------------------------------------- ----------- ----------- ----------
Net increase (decrease) in cash (188,137) 400,565 (371,557)
- ----------------------------------------
Cash at beginning of year 990,880 590,315 961,872
- ---------------------------------------- ----------- ----------- ----------
Cash at end of year $ 802,743 $ 990,880 $ 590,315
- ---------------------------------------- =========== =========== ==========
</TABLE>
See accompanying notes.
62
<PAGE>
Lincoln Life Financial Statements
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1995
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include Lincoln National
Life Insurance Co. ("Lincoln Life") and its majority owned subsidiaries.
Lincoln Life and its subsidiaries operate multiple insurance businesses. Op-
erations are divided into two business segments (see Note 9). These consoli-
dated financial statements have been prepared in conformity with generally
accepted accounting principles.
Use of estimates
The nature of the insurance business requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ
from those estimates.
Investments
Lincoln Life classifies its fixed maturity securities and equity securities
(common and non-redeemable preferred stocks) as available-for-sale and,
accordingly, such securities are carried at fair value. The cost of fixed
maturity securities is adjusted for amortization of premiums and discounts.
The cost of fixed maturity and equity securities is adjusted for declines in
value that are other than temporary.
For the mortgage-backed securities portion of the fixed maturity securities
portfolio, Lincoln Life recognizes income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the se-
curities. When estimates of prepayments change, the effective yield is re-
calculated to reflect actual payments to date and anticipated future pay-
ments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied since the acqui-
sition of the securities. This adjustment is reflected in net investment
income.
Mortgage loans on real estate are carried at outstanding principal balances
less unaccrued discounts and net of reserves for declines that are other
than temporary. Investment real estate is carried at cost less allowances
for depreciation. Such real estate is carried net of reserves for declines
in value that are other than temporary. Real estate acquired through fore-
closure proceedings is recorded at fair value on the settlement date which
establishes a new cost basis. If a subsequent periodic review of a fore-
closed property indicates the fair value, less estimated costs to sell, is
lower than the carrying value at the settlement date, the carrying value is
adjusted to the lower amount. Policy loans are carried at the aggregate un-
paid balances. Any changes to the reserves for mortgage loans on real estate
and real estate are reported as a realized gain (loss) on investments.
Cash and invested cash are carried at cost and include all highly liquid
debt instruments purchased with a maturity of three months or less, includ-
ing participation in a short-term investment pool administered by Lincoln
National Corp. (LNC), the Lincoln Life's parent.
Realized gain (loss) on investments is recognized in net income, net of re-
lated amortization of deferred acquisition costs, using the specific identi-
fication method. Changes in the fair values of securities carried at fair
value are reflected directly in shareholder's equity after deductions for
related adjustments for deferred acquisition costs and amounts required to
satisfy policyholder commitments that would have been recorded if these se-
curities would have been sold at their fair value, and after deferred taxes
or credits to the extent deemed recoverable.
Derivatives
Lincoln Life hedges certain portions of its exposure to interest rate fluc-
tuations, the widening of bond yield spreads over comparable maturity U.S.
Government obligations and foreign exchange risk by entering into derivative
transactions. A description of Lincoln Life's accounting for its hedge of
such risks is discussed in the following two paragraphs.
The premium paid for interest rate caps is deferred and amortized to net in-
vestment income on a straight-line basis over the term of the interest rate
cap. Any settlement received in accordance with the terms of the interest
rate caps is recorded as investment income. Spread-lock agreements, interest
rate swaps and financial futures, which hedge fixed maturity securities
available-for-sale, are carried at fair value with the change in fair value
reflected directly in shareholder's equity. Realized gain (loss) from the
settlement of such derivatives is deferred and amortized over the life of
the hedged assets as an adjustment to the yield. Foreign exchange forward
contracts, foreign currency options and foreign currency swaps, which hedge
some of the foreign exchange risk of investments in fixed maturity securi-
ties denominated in foreign currencies, are carried at fair value with the
change in fair value reflected in earnings. Realized
63
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
gain (loss) from the settlement of such derivatives is also reflected in
earnings.
Hedge accounting is applied as indicated above after Lincoln Life determines
that the items to be hedged expose Lincoln Life to interest rate fluctua-
tions, the widening of bond yield spreads over comparable maturity U.S. Gov-
ernment obligations and foreign exchange risk; and the derivatives used are
designated as a hedge and reduce the indicated risk by having a high corre-
lation of changes in the value of the derivatives and the items being hedged
at both the inception of the hedge and throughout the hedge period. Should
such criteria not be met, the change in value of the derivatives is included
in net income.
Property and equipment
Property and equipment owned for Lincoln Life use is carried at cost less
allowances for depreciation.
Premiums and fees
Revenue for universal life and other interest-sensitive life insurance poli-
cies consists of policy charges for cost of insurance, policy initiation and
administration, and surrender charges that have been assessed. Traditional
individual life-health and annuity premiums are recognized as revenue over
the premium-paying period of the policies. Group health premiums are pro-
rated over the contract term of the policies.
Assets held in separate accounts/ liabilities related to separate accounts
These assets and liabilities represent segregated funds administered and in-
vested by Lincoln Life for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by Lincoln Life for ad-
ministrative and contractholder maintenance services performed for these
separate accounts are included in Lincoln Life's consolidated statements of
income.
Deferred acquisition costs
Commissions and other costs of acquiring universal life insurance, variable
universal life insurance, traditional life insurance, annuities and group
health insurance which vary with and are primarily related to the production
of new business, have been deferred to the extent recoverable. Acquisition
costs for universal and variable universal life insurance policies are being
amortized over the lives of the policies in relation to the incidence of es-
timated gross profits from surrender charges and investment, mortality and
expense margins, and actual realized gain (loss) on investments. That amor-
tization is adjusted retrospectively when estimates of current or future
gross profits to be realized from a group of policies are revised. The tra-
ditional life-health and annuity acquisition costs are amortized over the
premium-paying period of the related policies using assumptions consistent
with those used in computing policy reserves.
Expenses
Expenses for universal and variable universal life insurance policies in-
clude interest credited to policy account balances and benefit claims in-
curred during the period in excess of policy account balances. Interest
crediting rates associated with funds invested in Lincoln Life's general ac-
count during 1993 through 1995 ranged from 6.1% to 8.25%.
Goodwill
The cost of acquired subsidiaries in excess of the fair value of net assets
(goodwill) is amortized using the straight-line method over periods that
generally correspond with the benefits expected to be derived from the ac-
quisitions. Goodwill is amortized over 40 years. The carrying value of good-
will is reviewed periodically for indicators of impairment in value.
Policy liabilities and accruals
The liabilities for future policy benefits and expenses for universal and
variable universal life insurance policies consist of policy account bal-
ances that accrue to the benefit of the policyholders, excluding surrender
charges. The liabilities for future policy benefits and expenses for tradi-
tional life policies and immediate and deferred paid-up annuities are com-
puted using a net level premium method and assumptions for investment
yields, mortality and withdrawals based principally on Lincoln Life experi-
ence projected at the time of policy issue, with provision for possible ad-
verse deviations. Interest assumptions for traditional direct individual
life reserves for all policies range from 2.3% to 11.7% graded to 5.7% after
30 years depending on time of policy issue. Interest rate assumptions for
reinsurance reserves range from 5.0% to 11.0% graded to 8.0% after 20 years.
The interest assumptions for immediate and deferred paid-up annuities range
from 4.5% to 8.0%.
With respect to its policy liabilities and accruals, Lincoln Life carries on
a continuing review of its 1) overall reserve position, 2) reserving tech-
niques
64
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
and 3) reinsurance arrangements, and as experience develops and new informa-
tion becomes known, liabilities are adjusted as deemed necessary. The ef-
fects of changes in estimates are included in the operating results for the
period in which such estimates occur.
Reinsurance
Lincoln Life enters into reinsurance agreements with other companies in the
normal course of their business. Lincoln Life may assume reinsurance from
unaffiliated companies and/or cede reinsurance to such companies.
Assets/liabilities and premiums/benefits from certain reinsurance contracts
which grant statutory surplus to other insurance companies have been netted
on the balance sheets and income statements, respectively, since there is a
right of offset. All other reinsurance agreements are reported on a gross
basis.
Depreciation
Provisions for depreciation of investment real estate and property and
equipment owned for Lincoln Life use are computed principally on the
straight-line method over the estimated useful lives of the assets.
Postretirement medical and life insurance benefits
Lincoln Life accounts for its postretirement medical and life insurance ben-
efits using the full accrual method.
Income taxes
Lincoln Life and eligible subsidiaries have elected to file consolidated
Federal and state income tax returns with their parent, LNC. Pursuant to an
intercompany tax sharing agreement with LNC, Lincoln Life and its eligible
subsidiaries provide for income taxes on a separate return filing basis. The
tax sharing agreement also provides that Lincoln Life and eligible subsidi-
aries will receive benefit for net operating losses, capital losses and tax
credits which are not usable on a separate return basis to the extent such
items may be utilized in the consolidated income tax returns of LNC.
Lincoln Life uses the liability method of accounting for income taxes. De-
ferred income taxes reflect the net tax effects of temporary differences be-
tween the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax return purposes. Lincoln Life
establishes a valuation allowance for any portion of its deferred tax assets
which are unlikely to be realized.
2.CHANGES IN ACCOUNTING PRINCIPLES
AND CHANGES IN ESTIMATES
Postretirement benefits other than pensions
Effective January 1, 1993, Lincoln Life changed its method of accounting for
postretirement medical and life insurance benefits for its eligible employ-
ees and agents from a pay-as-you-go method to a full accrual method in ac-
cordance with Financial Accounting Standards No. 106 entitled "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106").
This full accrual method recognizes the estimated obligation for retired em-
ployees and agents and active employees and agents who are expected to re-
tire in the future. The effect of the change was to increase net periodic
postretirement benefit cost by $7,800,000 and decrease income before cumula-
tive effect of accounting change by $5,100,000 ($0.51 per share). The imple-
mentation of FAS 106 resulted in a one-time charge to the first quarter 1993
net income of $45,600,000 or $4.56 per share ($69,000,000 pre-tax) for the
cumulative effect of the accounting change. See Note 6 for additional dis-
closures regarding postretirement benefits other than pensions.
Accounting by creditors for impairment of a loan
Financial Accounting Standards No. 114 entitled "Accounting by Creditors for
Impairment of a Loan" ("FAS 114") issued in May 1993, was adopted by Lincoln
Life effective January 1, 1993. FAS 114 requires that if an impaired mort-
gage loan's fair value as described in Note 3 is less than the recorded in-
vestment in the loan, the difference is recorded in the mortgage loan allow-
ance for losses account. The adoption of FAS 114 resulted in additions to
the mortgage loan allowance for losses account and reduced first quarter
1993 income before cumulative effect of accounting change and net income by
$37,700,000, or $3.77 per share ($57,200,000 pre-tax). See Note 3 for fur-
ther mortgage loan disclosures. Most of the effect of this change in ac-
counting was within the Life Insurance and Annuities business segment.
Accounting for certain investments in debt
and equity securities
Financial Accounting Standards No. 115 entitled "Accounting for Certain In-
vestments in Debt and Equity Securities" ("FAS 115") issued in May 1993, was
adopted by Lincoln Life as of December 31, 1993. In accordance with the
rules, the prior
65
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
2. CHANGES IN ACCOUNTING PRINCIPLESAND CHANGES IN ESTIMATES CONTINUED
year financial statements have not been restated to reflect the change in
accounting principle. Under FAS 115, securities can be classified as avail-
able-for-sale, trading or held-to-maturity according to the holder's intent.
Lincoln Life classified its entire fixed maturity securities portfolio as
"available-for-sale." Securities classified as available-for-sale are car-
ried at fair value and unrealized gains and losses on such securities are
carried as a separate component of shareholder's equity. The ending balance
of shareholder's equity at December 31, 1993 was increased by $564,200,000
(net of $377,500,000 of related adjustments to deferred acquisition costs,
$50,700,000 of policyholder commitments and $303,700,000 in deferred income
taxes, all of which would have been recognized if those securities would
have been sold at their fair value, net of amounts applicable to Security-
Connecticut Corp.) to reflect the net unrealized gain on fixed maturity se-
curities classified as available-for-sale previously carried at amortized
cost. Prior to the adoption of FAS 115, Lincoln Life carried a portion of
its fixed maturity securities at fair value with unrealized gains and losses
carried as a separate component of shareholder's equity. The remainder of
such securities were carried at amortized cost.
Change in estimate for net investment income related to mortgage-backed
securities
At December 31, 1993, Lincoln Life had $5,942,100,000 invested in mortgage-
backed securities. As indicated in Note 1, Lincoln Life recognizes income on
these securities using a constant effective yield based on anticipated pre-
payments. With the implementation of new investment software in December
1993, Lincoln Life was able to significantly refine its estimate of the ef-
fective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the amorti-
zation of purchase discount on these securities of $58,000,000 and, after
related amortization of deferred acquisition costs ($18,300,000) and income
taxes ($14,300,000), increased 1993's income before cumulative effect of ac-
counting change and net income by $25,500,000 or $2.55 per share. Most of
the effect of this change in estimate was within the Life Insurance and An-
nuities business segment.
Change in estimate for disability income reserves
During the fourth quarter of 1993, income before cumulative effect of ac-
counting change and net income decreased by $15,500,000 or $1.55 per share
as the result of strengthening reinsurance disability income reserves by
$23,900,000. The need for this reserve increase within the Reinsurance seg-
ment was identified as the result of management's assessment of current ex-
pectations for morbidity trends and the impact of lower investment income
due to lower interest rates.
During the fourth quarter of 1995, Lincoln Life completed an in-depth review
of the experience of its disability income business. As a result of this
study, and based on the assumption that recent experience will continue in
the future, income before cumulative effect of accounting change and net in-
come decreased by $33,500,000 or $3.35 per share ($51,500,000 pre-tax) as a
result of strengthening disability income reserves by $15,200,000 and writ-
ing-off deferred acquisition costs of $36,300,000 in the Reinsurance seg-
ment.
66
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
3.INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------------------------
(in millions)
----------------------------
<S> <C> <C> <C>
Fixed maturity securities $1,549.4 $1,357.4 $1,497.6
---------------------------------------------
Equity securities 8.9 7.4 4.3
---------------------------------------------
Mortgage loans on real estate 268.3 271.3 294.2
---------------------------------------------
Real estate 110.0 97.8 75.2
---------------------------------------------
Policy loans 35.4 32.7 36.0
---------------------------------------------
Invested cash 55.4 46.4 24.8
---------------------------------------------
Other investments 15.8 7.3 8.0
--------------------------------------------- -------- -------- --------
Investment revenue 2,043.2 1,820.3 1,940.1
---------------------------------------------
Investment expenses 143.6 146.3 116.6
--------------------------------------------- -------- -------- --------
Net investment income $1,899.6 $1,674.0 $1,823.5
---------------------------------------------
======== ======== ========
The realized gain (loss) on investments is as follows:
<CAPTION>
Year ended December 31
1995 1994 1993
----------------------------
(in millions)
----------------------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
. Gross gain $ 239.6 $ 69.6 $ 91.1
---------------------------------------------
. Gross loss (87.8) (294.1) (8.4)
---------------------------------------------
Equity securities available-for-sale:
. Gross gain 82.3 50.2 88.3
---------------------------------------------
. Gross loss (31.3) (50.5) (33.7)
---------------------------------------------
Fixed maturity securities held for
investment:
. Gross gain -- -- 209.9
---------------------------------------------
. Gross loss -- -- (69.5)
---------------------------------------------
Other investments 42.2 5.1 (161.8)
---------------------------------------------
Related restoration or amortization of
deferred acquisition
costs and provision for policyholder
commitments (108.8) 81.2 (23.7)
--------------------------------------------- -------- -------- --------
$ 136.2 $ (138.5) $ 92.2
======== ======== ========
Provisions (credits) for write-downs and net
changes in provisions for losses, which are
included in realized gain (loss) on invest-
ments shown above, are as follows:
<CAPTION>
Year ended December 31
1995 1994 1993
----------------------------
(in millions)
----------------------------
<S> <C> <C> <C>
Fixed maturity securities $ 10.4 $ 14.2 $ 55.6
---------------------------------------------
Equity securities 3.3 6.8 --
---------------------------------------------
Mortgage loans on real estate 14.7 19.5 136.7
---------------------------------------------
Real estate (7.2) 13.0 21.8
---------------------------------------------
Other long-term investments (1.5) .3 3.9
---------------------------------------------
Guarantees (2.2) 4.3 1.7
---------------------------------------------
-------- -------- --------
$ 17.5 $ 58.1 $ 219.7
======== ======== ========
</TABLE>
67
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
3.INVESTMENTS CONTINUED
The change in unrealized appreciation (de-
preciation) on investments in fixed maturity
and equity securities is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------------------------
(in millions)
----------------------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale $2,063.7 $(1,903.7) $1,387.1
---------------------------------------------
Equity securities available-for-sale 78.1 (26.0) 9.2
---------------------------------------------
Fixed maturity securities held for investment -- -- (959.7)
---------------------------------------------
-------- --------- --------
$2,141.8 $(1,929.7) $ 436.6
======== ========= ========
</TABLE>
The cost, gross unrealized gain and loss and
fair value of securities available-for-sale
are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1995
-----------------------------------
Gross
unrealized
--------------- Fair
Cost Gain Loss value
-----------------------------------
(in millions)
-----------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $12,412.1 $1,141.0 $ 28.7 $13,524.4
-------------------------------------
U.S. Government bonds 569.6 83.9 .1 653.4
-------------------------------------
Foreign government bonds 927.9 70.3 .6 997.6
-------------------------------------
Mortgage-backed securities:
. Mortgage pass-through securities 1,072.5 41.0 3.2 1,110.3
-------------------------------------
. Collateralized mortgage obligations 3,816.3 262.5 7.4 4,071.4
-------------------------------------
. Other mortgage-backed securities 2.8 .3 -- 3.1
-------------------------------------
State and municipal bonds 12.3 .1 -- 12.4
-------------------------------------
Redeemable preferred stocks 39.3 2.9 -- 42.2
-------------------------------------
--------- -------- ------ ---------
Total fixed maturity securities 18,852.8 1,602.0 40.0 20,414.8
-------------------------------------
Equity securities 480.3 123.6 5.5 598.4
-------------------------------------
--------- -------- ------ ---------
$19,333.1 $1,725.6 $ 45.5 $21,013.2
========= ======== ====== =========
<CAPTION>
Year ended December 31, 1994
-----------------------------------
Gross
unrealized
--------------- Fair
Cost Gain Loss value
-----------------------------------
(in millions)
-----------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $11,519.3 $ 143.3 $514.4 $11,148.2
-------------------------------------
U.S. Government bonds 1,048.4 6.9 25.5 1,029.8
-------------------------------------
Foreign governments bonds 541.2 4.7 12.5 533.4
-------------------------------------
Mortgage-backed securities:
. Mortgage pass-through securities 1,176.8 3.0 44.1 1,135.7
-------------------------------------
. Collateralized mortgage obligations 3,835.5 85.8 148.6 3,772.7
-------------------------------------
. Other mortgage-backed securities 5.0 .1 .1 5.0
-------------------------------------
State and municipal bonds 16.3 .4 -- 16.7
-------------------------------------
Redeemable preferred stocks 51.4 .2 .9 50.7
-------------------------------------
--------- -------- ------ ---------
Total fixed maturity securities 18,193.9 244.4 746.1 17,692.2
-------------------------------------
Equity securities 416.3 56.4 16.4 456.3
-------------------------------------
--------- -------- ------ ---------
$18,610.2 $ 300.8 $762.5 $18,148.5
========= ======== ====== =========
</TABLE>
68
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
3.INVESTMENTS CONTINUED
Future maturities of fixed maturity
securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------
Fair
Cost value
--------- ---------
(in millions)
-------------------
<S> <C> <C>
Due in one year or less $ 278.4 $ 282.6
--------------------------------------
Due after one year through five years 2,955.7 3,102.1
--------------------------------------
Due after five years through ten years 4,918.2 5,265.9
--------------------------------------
Due after ten years 5,808.9 6,579.4
-------------------------------------- --------- ---------
13,961.2 15,230.0
Mortgage-backed securities 4,891.6 5,184.8
-------------------------------------- --------- ---------
$18,852.8 $20,414.8
========= =========
</TABLE>
The foregoing data is based on stated
maturities. Actual maturities will differ in
some cases because borrowers may have the
right to call or pre-pay obligations.
At December 31, 1995, the current par,
amortized cost and estimated fair value of
investments in mortgage-backed securities
summarized by interest rates of the
underlying collateral are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------
Current Par Cost Fair value
----------- -------- ----------
(in millions)
-------------------------------
<S> <C> <C> <C>
Below 7% $ 292.6 $ 290.5 $ 293.6
--------
7%-8% 1,302.8 1,276.9 1,318.2
--------
8%-9% 1,607.0 1,564.7 1,669.8
--------
Above 9% 1,810.5 1,759.5 1,903.2
-------- -------- -------- --------
$5,012.9 $4,891.6 $5,184.8
======== ======== ========
</TABLE>
The quality ratings of fixed maturity
securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Treasuries and AAA 34.1%
------------------
AA 8.0
------------------
A 25.9
------------------
BBB 24.5
------------------
BB 3.9
------------------
Less than BB 3.6
------------------ ------
100.0%
======
</TABLE>
Mortgage loans on real estate are considered
impaired when, based on current information
and events, it is probable that the Company
will be unable to collect all amounts due
according to the contractual terms of the
loan agreement. When Lincoln Life determines
that a loan is impaired, a provision for
loss is established for the difference
between the carrying value of the mortgage
loan and the estimated value. Estimated
value is based on either the present value
of expected future cash flows discounted at
the loan's effective interest rate, the
loan's observable market price or the fair
value of the collateral. The provision for
losses is reported as realized gain (loss)
on investments. Mortgage loans deemed to be
uncollectible are charged against the
provision for losses and subsequent
recoveries, if any, are credited to the
provision for losses.
69
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
3.INVESTMENTS CONTINUED
The provision for losses is maintained at a
level believed adequate by management to
absorb estimated probable credit losses.
Management's periodic evaluation of the
adequacy of the provision for losses is
based on the Company's past loan loss
experience, known and inherent risks in the
portfolio, adverse situations that may
affect the borrower's ability to repay
(including the timing of future payments),
the estimated value of the underlying
collateral, composition of the loan
portfolio, current economic conditions and
other relevant factors. This evaluation is
inherently subjective as it requires
estimating the amounts and timing of future
cash flows expected to be received on
impaired loans that may be susceptible to
significant change.
Impaired loans along with the related
allowance for losses are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
--------------
<S> <C> <C>
Impaired loans with allowance for losses $144.7 $246.0
-------------------------------------------
Allowance for losses (28.5) (56.6)
-------------------------------------------
Impaired loans with no allowance for losses 2.1 2.2
-------------------------------------------
------ ------
Net impaired loans $118.3 $191.6
-------------------------------------------
====== ======
</TABLE>
Impaired loans with no allowance for losses
are a result of direct write-downs or for
collateral dependent loans where the fair
value of the collateral is greater than the
recorded investment in such loans.
A reconciliation of the mortgage loan allow-
ance for losses for these impaired mortgage
loans is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------- ------
(in millions)
-----------------------
<S> <C> <C> <C>
Balance at beginning of year $ 56.6 $ 220.7 $129.1
---------------------------------
Provisions for losses 14.7 19.5 79.5
---------------------------------
Provision for adoption of FAS 114 -- -- 57.2
---------------------------------
Releases due to write-downs (12.0) -- --
---------------------------------
Releases due to sales (15.9) (164.7) (12.2)
---------------------------------
Releases due to foreclosures (14.9) (18.9) (32.9)
---------------------------------
------ ------- ------
Balance at end of year $ 28.5 $ 56.6 $220.7
---------------------------------
====== ======= ======
</TABLE>
70
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
3.INVESTMENTS CONTINUED
The average recorded investment in impaired
loans and the interest income recognized on
impaired loans were as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Average recorded investment in impaired loans $181.7 $467.5 $703.6
---------------------------------------------
Interest income recognized on impaired loans 16.6 36.1 47.3
---------------------------------------------
</TABLE>
All interest income on impaired loans was
recognized on the cash basis of income
recognition.
As of December 31, 1995 and 1994, Lincoln
Life had restructured loans of $62,500,000
and $36,200,000, respectively. Lincoln Life
recorded $6,300,000 and $800,000 interest in-
come on these restructured loans in 1995 and
1994, respectively. Interest income in the
amount of $6,600,000 and $3,900,000 would
have been recorded on these loans according
to their original terms in 1995 and 1994, re-
spectively. As of December 31, 1995 and 1994,
Lincoln Life had no outstanding commitments
to lend funds on restructured loans.
As of December 31, 1995, the Company's in-
vestment commitments for fixed maturity se-
curities (primarily private placements),
mortgage loans on real estate and real es-
tate were $543,100,000.
Fixed maturity securities available-for-
sale, mortgage loans on real estate and real
estate with a combined carrying value at De-
cember 31, 1995 of $1,300,000 were non-in-
come producing for the year ended December
31, 1995.
The cost information for mortgage loans on
real estate, real estate and other long-term
investments are net of allowances for loss-
es. The balance sheet account for other lia-
bilities includes a reserve for guarantees
of third-party debt. The amount of allow-
ances and a reserve for such items is as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
----- -----
(in
millions)
-----------
<S> <C> <C>
Mortgage loans on real estate $28.5 $56.6
-----------------------------
Real estate 46.6 65.2
-----------------------------
Other long-term investments 11.8 13.5
-----------------------------
</TABLE>
Details underlying the balance sheet caption
"Net Unrealized Gain (loss) on Securities
Available-for-Sale," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
--------- ---------
(in millions)
--------------------
<S> <C> <C>
Fair value of securities available-for-sale $21,013.2 $18,148.5
----------------------------------------------------
Cost of securities available-for-sale 19,333.1 18,610.2
---------------------------------------------------- --------- ---------
Unrealized gain (loss) 1,680.1 (461.7)
----------------------------------------------------
Adjustments to deferred acquisition costs (492.1) 158.2
----------------------------------------------------
Amounts required to satisfy policyholder commitments (510.1) 8.6
----------------------------------------------------
Deferred income credits (taxes) (234.6) 105.9
----------------------------------------------------
Valuation allowance for deferred tax assets -- (135.6)
----------------------------------------------------
--------- ---------
Net unrealized gain (loss) on securities available-
for-sale $ 443.3 $ (324.6)
----------------------------------------------------
========= =========
</TABLE>
71
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
3.INVESTMENTS CONTINUED
Adjustments to Deferred acquisition costs
and amounts required to satisfy policyholder
commitments are netted against the Deferred
acquisition costs asset account and included
with the Future policy benefits, claims and
claims expense liability on the balance
sheet, respectively.
4.FEDERAL INCOME TAXES
The Federal income tax expense (benefit) be-
fore cumulative effect of accounting change
is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
----------------------
(in millions)
----------------------
<S> <C> <C> <C>
Current $172.5 $(93.4) $261.3
--------
Deferred (45.0) 133.8 (118.8)
-------- ------ ------ ------
$127.5 $ 40.4 $142.5
====== ====== ======
</TABLE>
Cash paid for Federal income taxes in 1995,
1994 and 1993 was $27,500,000, $41,400,000
and $272,600,000, respectively. The cash
paid in 1995 is net of a $146,900,000 cash
refund related to the carryback of 1994 cap-
ital losses to prior years.
The effective tax rate on pre-tax income be-
fore cumulative effect of accounting change
is lower than the prevailing corporate Fed-
eral income tax rate. A reconciliation of
this difference is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
---------------------
(in millions)
---------------------
<S> <C> <C> <C>
Tax rate times pre-tax income $157.3 $91.1 $117.5
------------------------------------
Effect of:
. Tax-exempt investment income (22.0) (21.5) (16.2)
------------------------------------
. Participating policyholders' share 5.4 3.4 4.1
------------------------------------
. Loss (gain) on sale of affiliates -- (24.1) 34.5
------------------------------------
. Other items (13.2) (8.5) 2.6
------------------------------------ ------ ----- ------
Provision for income taxes $127.5 $40.4 $142.5
------------------------------------ ====== ===== ======
Effective tax rate 28.4% 15.5% 42.5%
------------------------------------ ====== ===== ======
</TABLE>
The Federal income tax recoverable
(liability) is as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- ------
(in millions)
---------------
<S> <C> <C>
Current $ (25.0) $118.2
--------
Deferred (141.4) 16.3
-------- ------- ------
$(166.4) $134.5
======= ======
</TABLE>
72
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
4.FEDERAL INCOME TAXES CONTINUED
Significant components of Lincoln Life's net
deferred tax asset (liability) are as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- -------
(in millions)
----------------
<S> <C> <C>
Deferred tax assets:
. Policy liabilities and
accruals and
contractholder funds $ 694.5 $ 430.9
------------------------
. Loss on investments -- 16.8
------------------------
. Net unrealized loss on
securities available-
for-sale -- 161.6
------------------------
. Postretirement
benefits other than
pensions 25.3 24.2
------------------------
. Other 39.5 34.6
------------------------ ------- -------
Total deferred tax
assets 759.3 668.1
------------------------
Valuation allowance for
deferred tax assets -- (135.6)
------------------------ ------- -------
Net deferred tax assets 759.3 532.5
------------------------
Deferred tax
liabilities:
. Deferred acquisition
costs 218.8 475.5
------------------------
. Net unrealized gain on
securities available-
for-sale 579.6 --
------------------------
. Gain on investments 7.7 --
------------------------
. Other 94.6 40.7
------------------------ ------- -------
Total deferred tax
liabilities 900.7 516.2
------------------------ ------- -------
Net deferred tax
(liability) asset $(141.4) $ 16.3
------------------------ ======= =======
</TABLE>
Lincoln Life is required to establish a
"valuation allowance" for any portion of its
deferred tax assets which are unlikely to be
realized. At December 31, 1994, $161,600,000
of deferred tax assets relating to net
unrealized capital losses on fixed maturity
and equity securities available-for-sale
were available to be recorded in sharehold-
er's equity before considering a valuation
allowance. For Federal income tax purposes,
capital losses may only be used to offset
capital gains in the current year or during
a three-year carryback and five-year
carryforward period. Due to these restric-
tions, and the uncertainty at that time of
future capital gains, these deferred tax as-
sets were substantially offset by a valua-
tion allowance of $135,600,000. By December
31, 1995, the fair values of fixed maturity
and equity securities available-for-sale
were greater than the cost basis resulting
in unrealized capital gains. Accordingly, no
valuation allowance was established as of
December 31, 1995 since management believes
it is more likely than not that Lincoln Life
will realize the benefit of its deferred tax
assets.
Prior to 1984, a portion of the life
companies' current income was not subject to
current income tax, but was accumulated for
income tax purposes in a memorandum account
designated as "policyholders' surplus." The
total of the life companies' balances in
their respective "policyholders' surplus"
accounts at December 31, 1983 of
$204,800,000 was "frozen" by the Tax Reform
Act of 1984 and, accordingly, there have
been no additions to the accounts after that
date. That portion of current income on
which income taxes have been paid will
continue to be accumulated in a memorandum
account designated as "shareholder surplus,"
and is available for dividends to the
shareholder without additional payment of
tax. The December 31, 1995 total of the life
companies' account balances for their
"shareholder surplus" was $1,554,000,000.
Should dividends to the shareholder for each
life company exceed its respective
"shareholder surplus," amounts would need to
be transferred from its respective
"policyholders' surplus" and would be
subject to Federal income tax at that time.
In connection with the 1993 sale of a life
insurance affiliate (see Note 10),
$8,800,000 was transferred from
policyholders' surplus
73
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
4.FEDERAL INCOME TAXES CONTINUED
to shareholder surplus and current income
tax of $3,100,000 was paid. Under existing
or foreseeable circumstances, Lincoln Life
neither expects nor intends that
distributions will be made from the
remaining balance in "policyholders'
surplus" of $196,000,000 that will result in
any such tax. Accordingly, no provision for
deferred income taxes has been provided by
Lincoln Life on its "policyholders' surplus"
account. In the event that such excess
distributions are made, it is estimated that
income taxes of approximately $68,600,000
would be due.
5.SUPPLEMENTAL FINANCIAL DATA
The balance sheet captions, "Real estate,"
"Other investments" and "Property and
equipment," are shown net of allowances for
depreciation as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
-------------
<S> <C> <C>
Real estate $ 51.6 $ 37.0
----------------------
Other investments 14.6 12.2
----------------------
Property and equipment 100.7 104.7
----------------------
</TABLE>
Details underlying the balance sheet
caption, "Contractholder funds," are as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
--------- ---------
(in millions)
-------------------
<S> <C> <C>
Premium deposit funds $17,886.9 $16,770.3
------------------------------------------------
Undistributed earnings on participating business 91.9 63.6
------------------------------------------------
Other 193.0 194.7
------------------------------------------------
--------- ---------
$18,171.8 $17,028.6
========= =========
</TABLE>
Details underlying the balance sheet cap-
tions, "Short-term and Long-term Debt," are
as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
-------------
<S> <C> <C>
Short-term debt:
---------------------------------------
. Short-term notes $123.5 $150.8
---------------------------------------
. Current portion of long-term debt 1.3 2.9
---------------------------------------
------ ------
Total short-term debt $124.8 $153.7
---------------------------------------
====== ======
Long-term debt less current portion:
---------------------------------------
. 7% mortgage note payable, due 1996 $ -- $ 4.9
---------------------------------------
. 9.48% mortgage note payable, due 1996 -- 7.7
---------------------------------------
. 12% mortgage note payable, due 1996 -- .2
---------------------------------------
. 8.42% mortgage note payable, due 1997 7.0 7.2
---------------------------------------
. 8.25% mortgage note payable, due 1997 10.1 10.2
---------------------------------------
. 8% mortgage note payable, due 1997 2.1 --
---------------------------------------
. 8.75% mortgage note payable, due 1998 18.4 18.8
---------------------------------------
. 9.75% mortgage note payable, due 2002 3.2 5.8
---------------------------------------
------ ------
Total long-term debt $ 40.8 $ 54.8
---------------------------------------
====== ======
</TABLE>
74
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Fixed maturities of long-term debt are as
follows (in millions):
1996 -- $ 1.31998 -- $18.42000 -- $ --
1997 -- 19.21999 -- --Thereafter -- 3.2
Cash paid for interest for 1995, 1994 and
1993 was $67,000, $615,000 and $96,000,
respectively.
Reinsurance transactions included in the in-
come statement caption, "Insurance
premiums," are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $777.6 $910.8 $807.5
------------------------
Insurance ceded 441.7 716.7 568.6
------------------------
------ ------ ------
Net reinsurance premiums $335.9 $194.1 $238.9
------------------------
====== ====== ======
</TABLE>
The income statement caption, "Benefits and
settlement expenses," is net of reinsurance
recoveries of $456,000, $524,000 and
$438,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
The income statement caption, "Underwriting,
acquisition, insurance and other Expenses,"
includes amortization of deferred acquisi-
tion costs of $399,700,000, $115,200,000 and
$241,000,000 for the years ended December
31, 1995, 1994 and 1993, respectively. An
additional $(85,200,000), $81,200,000 and
($23,700,000) of deferred acquisition costs
was restored (amortized) and netted against
"Realized gain (loss) on investments" for
the years ended December 31, 1995, 1994 and
1993, respectively.
6.EMPLOYEE BENEFIT PLANS
Pension plans
LNC maintains funded defined benefit pension
plans for most of its employees and, prior
to January 1, 1995, full-time agents. The
benefits for employees are based on total
years of service and the highest 60 months
of compensation during the last 10 years of
employment. The benefits for agents were
based on a percentage of each agent's yearly
earnings. The plans are funded by contribu-
tions to tax-exempt trusts. Lincoln Life's
funding policy is consistent with the fund-
ing requirements of Federal laws and regula-
tions. Contributions are intended to provide
not only the benefits attributed to service
to date, but also those expected to be
earned in the future. Plan assets consist
principally of listed equity securities and
corporate obligations and government bonds.
All benefits applicable to the funded de-
fined benefit plan for agents were frozen as
of December 31, 1994. The curtailment of
this plan did not have a significant effect
on net pension cost for 1994. Effective Jan-
uary 1, 1995, pension benefits for agents
have been provided by a new defined contri-
bution plan. Contributions to this plan will
be based on 2.3% of an agent's earnings up
to the social security wage base and 4.6% of
any excess.
LNC also administers two types of unfunded,
nonqualified, defined benefit plans for cer-
tain employees and agents. A supplemental
retirement plan provides defined benefit
pension benefits in excess of limits imposed
by federal tax law. A salary continuation
plan provides certain officers of Lincoln
Life defined pension benefits based on years
of service and final monthly salary upon
death or retirement.
75
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
6.EMPLOYEE BENEFIT PLANS CONTINUED
The status of the funded defined benefit
pension plans and the amounts recognized on
the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- -------
(in millions)
----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
. Vested benefits $(162.1) $(130.5)
------------------------------------------------------
. Nonvested benefits (9.2) (7.3)
------------------------------------------------------ ------- -------
Accumulated benefit obligation (171.3) (137.8)
------------------------------------------------------
Effect of projected future compensation increases (37.2) (24.3)
------------------------------------------------------ ------- -------
Projected benefit obligation (208.5) (162.1)
------------------------------------------------------
Plan assets at fair value 196.4 159.3
------------------------------------------------------ ------- -------
Projected benefit obligations in excess of plan assets (12.1) (2.8)
------------------------------------------------------
Unrecognized net loss (gain) 12.6 (.5)
------------------------------------------------------
Unrecognized prior service cost 1.2 1.1
------------------------------------------------------ ------- -------
Prepaid (accrued) pension cost included in other
liabilities $ 1.7 $ (2.2)
------------------------------------------------------ ======= =======
</TABLE>
The status of the unfunded defined benefit
pension plans and the amounts recognized on
the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ -----
(in
millions)
-------------
<S> <C> <C>
Actuarial present value of benefit obligation:
. Vested benefits $ (7.0) $(5.4)
---------------------------------------------------
. Nonvested benefits (1.5) (1.0)
--------------------------------------------------- ------ -----
Accumulated benefit obligation (8.5) (6.4)
---------------------------------------------------
Effect of projected future compensation increases (2.4) (2.5)
--------------------------------------------------- ------ -----
Projected benefit obligation (10.9) (8.9)
---------------------------------------------------
Unrecognized transition obligation -- --
---------------------------------------------------
Unrecognized net loss (gain) 1.0 (.3)
---------------------------------------------------
Unrecognized prior service cost .8 .8
--------------------------------------------------- ------ -----
Accrued pension costs included in other liabilities $ (9.1) $(8.4)
--------------------------------------------------- ====== =====
</TABLE>
The determination of the projected benefits
obligation for the defined benefit plans was
based on the following assumptions:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 8.0% 7.0%
------------------------------------------------
Rate of increase in compensation:
. Salary continuation plan 6.0 6.5 6.0
------------------------------------------------
. All other plans 5.0 5.0 5.0
------------------------------------------------
Expected long-term rate of return on plan assets 9.0 9.0 9.0
------------------------------------------------
</TABLE>
76
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
6.EMPLOYEE BENEFIT PLANS CONTINUED
The components of net pension cost for the
defined benefit pension plans are as fol-
lows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
----------------------
(in millions)
----------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 5.0 $ 8.9 $ 8.5
---------------------------------------------
Interest cost on projected benefit obligation 13.2 12.9 12.4
---------------------------------------------
Actual return on plan assets (36.3) 4.7 (20.1)
---------------------------------------------
Net amortization (deferral) 22.9 (18.6) 6.1
--------------------------------------------- ------ ------ ------
Net pension cost $ 4.8 $ 7.9 $ 6.9
--------------------------------------------- ====== ====== ======
</TABLE>
401(k)
LNC and Lincoln Life sponsor contributory
defined contribution plans for eligible em-
ployees and agents. Lincoln Life's contribu-
tions to the plans are equal to each partic-
ipant's pre-tax contribution, not to exceed
6% of base pay, multiplied by a percentage,
ranging from 25% to 150%, which varies ac-
cording to certain incentive criteria as de-
termined by LNC's Board of Directors. Ex-
pense for these plans amounted to
$8,000,000, $13,200,000 and $11,800,000 in
1995, 1994 and 1993, respectively.
Postretirement medical and life insurance benefit plans
LNC sponsors unfunded defined benefit plans
that provide postretirement medical and life
insurance benefits to full-time employees
and agents who, depending on the plan, have
worked for Lincoln Life 10 to 15 years and
attained age 55 to 60. Medical benefits are
also available to spouses and other depen-
dents of employees and agents. For medical
benefits, limited contributions are required
from individuals retired prior to November
1, 1988; contributions for later retirees,
which can be adjusted annually, are based on
such items as years of service at retirement
and age at retirement. The life insurance
benefits are noncontributory, although par-
ticipants can elect supplemental contribu-
tory benefits.
The status of the postretirement medical and
life insurance benefit plans and the amounts
recognized on the balance sheets are as fol-
lows:
<TABLE>
<CAPTION>
December 31
1995 1994
--------------
(in millions)
--------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
. Retirees $(39.8) $(34.9)
-----------------------------------------------
. Fully eligible active plan participants (9.9) (7.0)
-----------------------------------------------
. Other active plan participants (20.8) (15.0)
----------------------------------------------- ------ ------
Accumulated postretirement benefit obligation (70.5) (56.9)
-----------------------------------------------
Unrecognized net gain (.8) (5.5)
----------------------------------------------- ------ ------
Accrued plan cost included in other liabilities $(71.3) $(62.4)
----------------------------------------------- ====== ======
</TABLE>
77
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
6.EMPLOYEE BENEFIT PLANS CONTINUED
The components of periodic postretirement
benefit cost are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994 1993
-----------------
(in millions)
-----------------
<S> <C> <C> <C>
Service cost $1.5 $1.7 $2.6
----------------------------------------
Interest cost 4.4 4.2 4.6
----------------------------------------
Amortization cost (credit) (.8) .1 --
---------------------------------------- ---- ---- ----
Net periodic postretirement benefit cost $5.1 $6.0 $7.2
---------------------------------------- ==== ==== ====
</TABLE>
The calculation of the accumulated
postretirement benefit obligation assumes a
weighted-average annual rate of increase in
the per capita cost of covered benefits
(i.e., health care cost trend rate) of 9.5%
for 1996 gradually decreasing to 5.5% by
2004 and remaining at that level thereafter.
The health care cost trend rate assumption
has a significant effect on the amounts re-
ported. For example, increasing the assumed
health care cost trend rates by one percent-
age point each year would increase the accu-
mulated postretirement benefit obligation as
of December 1995 and 1994 by $5,100,000 and
$4,100,000, respectively, and the aggregate
of the estimated service and interest cost
components of net periodic postretirement
benefit cost for the year ended December 31,
1995 by $488,000. The calculation assumes a
long-term rate of increase in compensation
of 5.0% for both December 31, 1995 and 1994.
The weighted-average discount rate used in
determining the accumulated postretirement
benefit obligation was 7.0% and 8.0% at De-
cember 31, 1995 and 1994, respectively.
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
Shareholder's equity restrictions
Net income as determined in accordance with statutory accounting practices
for Lincoln Life and its insurance subsidiaries in 1995, 1994 and 1993 was
$284,500,000, $366,700,000 and $237,000,000, respectively. Lincoln Life's
shareholder's equity as determined in accordance with statutory accounting
practices at December 31, 1995 and 1994 was $1,732,900,000 and
$1,679,700,000, respectively.
Lincoln Life is subject to certain insurance department regulatory restric-
tions as to the transfer of funds and payments of dividends to LNC. In 1996,
Lincoln Life can transfer up to $284,500,000 without seeking prior approval
from the insurance regulators.
Disability income claims
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1995 and 1994 is a net
liability of $602,600,000 and $441,700,000, respectively, excluding deferred
acquisition costs. The bulk of the increase to this liability relates to the
assumption of a large block of disability claim reserves and related assets
during the third quarter of 1995. In addition, as indicated in Note 2, Lin-
coln Life strengthened its disability income reserves and wrote off certain
related deferred acquisition costs in the fourth quarter of 1995. The re-
serves were established on the assumption that the recent experience will
continue in the future. If incidence levels or claim termination rates vary
significantly from these assumptions, further adjustments to reserves may be
required in the future. It is not possible to provide a meaningful estimate
of a range of possible outcomes at this time. Lincoln Life reviews and up-
dates the level of these reserves on an on-going basis.
Compliance of qualified annuity plans
Tax authorities continue to focus on compliance of qualified annuity plans
marketed by insurance companies. If sponsoring employers cannot demonstrate
compliance and the insurance company is held responsible due to its market-
ing efforts, Lincoln Life and other insurers may be subject to potential li-
ability. It is not possible to provide a meaningful estimate of the range of
potential liability at this time. Management continues to monitor this mat-
ter and to take steps to minimize any potential liability.
Group pension annuities
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer be-
78
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
ing sold, are supported by a single portfolio of assets which attempts to
match the duration of these liabilities. Due to the very long-term nature of
group pension annuities and the resulting inability to exactly match cash
flows, a risk exists that future cash flows from investments will not be re-
invested at rates as high as currently earned by the portfolio. This situa-
tion could cause losses which would be recognized at some future time.
Leases
Lincoln Life and certain of its subsidiaries lease their home office proper-
ties through sale-leaseback agreements. The agreements provide for a 25 year
lease period with options to renew for six additional terms of five years
each. The agreements also provide Lincoln Life with the right of first re-
fusal to purchase the properties during the term of the lease, including re-
newal periods, at a price as defined in the agreements. In addition, Lincoln
Life has the option to purchase the leased properties at fair market value
as defined in the agreements on the last day of the initial 25 year lease
period ending in 2009 or the last day of any of the renewal periods.
Total rental expense under operating leases in 1995, 1994 and 1993 was
$24,400,000, $21,700,000 and $27,100,000. Future minimum rental commitments
are as follows (in millions):
<TABLE>
<S> <C>
1996 $ 20.9
----------
1997 19.5
----------
1998 18.3
----------
1999 18.3
----------
2000 17.7
----------
Thereafter 172.4
---------- ------
$267.1
======
</TABLE>
Insurance ceded and assumed
Lincoln Life cedes insurance to other companies, including certain affili-
ates. That portion of risks exceeding each company's retention limit is re-
insured with other insurers. Lincoln Life seeks reinsurance coverage within
the business segment that sells life insurance that limits its liabilities
on an individual insured to $3,000,000. To cover products other than life
insurance, Lincoln Life acquires other insurance coverages with retentions
and limits which management believes are appropriate for the circumstances.
The accompanying financial statements reflect premiums, benefits and settle-
ment expenses and deferred acquisition costs, net of insurance ceded (see
Note 5). Lincoln Life and its subsidiaries remain liable if their reinsurers
are unable to meet their contractual obligations under the applicable rein-
surance agreements.
Lincoln Life assumes insurance from other companies, including certain af-
filiates. At December 31, 1995, Lincoln Life has provided $92,700,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables from the ceding company, which are secured by future profits on the
reinsured business. However, Lincoln Life is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
Vulnerability from concentrations
At December 31, 1995, Lincoln Life did not have
a material concentration of financial instruments in
a single investee, industry or geographic location. Also at December 31,
1995, Lincoln Life did not have a concentration of 1) business transactions
with a particular customer, lender or distributor, 2) revenues from a par-
ticular product or service, 3) sources of supply of labor or services used
in the
business or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to Lincoln Life's financial condition.
Other contingency matters
Lincoln Life and its subsidiaries are involved in various pending or threat-
ened legal proceedings arising from the conduct of their business. In some
instances, these proceedings include claims for punitive damages and similar
types of relief in unspecified or substantial amounts, in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with counsel and a review of available facts, it is man-
agement's opinion that these proceedings ultimately will be resolved without
materially affecting the consolidated financial statements of Lincoln Life.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabili-
tated companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. Lincoln Life has accrued
for expected assessments net of estimated future premium tax deductions.
79
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Guarantees
Lincoln Life has guarantees with off-bal-
ance-sheet risks whose contractual amounts
represent credit exposure. Outstanding guar-
antees with off-balance-sheet risks, shown
in notional or contract amounts, are as fol-
lows:
<TABLE>
<CAPTION>
Notional or
contract
amounts
-----------
December 31
1995 1994
-----------
(in
millions)
-----------
<S> <C> <C>
Real estate partnerships $ 3.3 $17.6
---------------------------------------
Mortgage loan pass-through certificates 63.6 78.2
--------------------------------------- ----- -----
$66.9 $95.8
===== =====
</TABLE>
Lincoln Life has invested in real estate
partnerships that use conventional mortgage
loans. In some cases, the terms of these ar-
rangements involve guarantees by each of the
partners to indemnify the mortgagor in the
event a partner is unable to pay its princi-
pal and interest payments. In addition, Lin-
coln Life has sold commercial mortgage loans
through grantor trusts which issued pass-
through certificates. Lincoln Life has
agreed to repurchase any mortgage loans
which remain delinquent for 90 days at a re-
purchase
price substantially equal to the outstanding
principal balance plus accrued interest
thereon to the date of repurchase. It is
management's opinion that the value of the
properties underlying these commitments is
sufficient that in the event of default the
impact would not be material to Lincoln
Life. Accordingly, both the carrying value
and fair value of these guarantees is zero
at December 31, 1995 and 1994.
80
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Derivatives
Lincoln Life has derivatives with off-bal-
ance-sheet risks whose notional or contract
amounts exceed the credit exposure. Lincoln
Life has entered into derivative transac-
tions to reduce its exposure to fluctuations
in interest rates, the widening of bond
yield spreads over comparable maturity U.S.
Government obligations and foreign exchange
risks. In addition, Lincoln Life is subject
to the risks associated with changes in the
value of its derivatives; however, such
changes in the value generally are offset by
changes in the value of the items being
hedged by such contracts. Outstanding deriv-
atives with off-balance-sheet risks, shown
in notional or contract amounts along with
their carrying value and estimated fair val-
ues, are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
------------------------------
Notional or Carrying Fair Carrying Fair
contract amounts value value value value
----------------- -------- ----- -------- -----
December 31 December 31 December 31
1995 1994 1995 1995 1994 1994
-------- -------- -------- ----- -------- -----
(in millions)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate
derivatives:
Interest rate cap
agreements $5,110.0 $4,400.0 $22.7 $5.3 $23.3 $34.4
------------------------
Spread-lock agreements 600.0 1,300.0 (.9) (.9) 3.2 3.2
------------------------
Financial futures
contracts -- 382.5 -- -- (7.5) (7.5)
------------------------
Interest rate swaps 5.0 5.0 .2 .2 .2 .2
------------------------ -------- -------- ----- ---- ----- -----
5,715.0 6,087.5 22.0 4.6 19.2 30.3
Foreign currency
derivatives:
Foreign exchange forward
contracts 15.7 21.2 (.6) (.6) .2 .2
------------------------
Foreign currency options 99.2 -- 1.9 1.4 -- --
------------------------
Foreign currency swaps 15.0 -- .4 .4 -- --
------------------------ -------- -------- ----- ---- ----- -----
129.9 21.2 1.7 1.2 .2 .2
-------- -------- ----- ---- ----- -----
$5,844.9 $6,108.7 $23.7 $5.8 $19.4 $30.5
======== ======== ===== ==== ===== =====
</TABLE>
A reconciliation and discussion of the
notional or contract amounts for the signif-
icant programs using derivative agreements
and contracts is as follows:
<TABLE>
<CAPTION>
Interest rate
caps Spread locks
----------------- -------------------
December 31 December 31
1995 1994 1995 1994
-------- -------- --------- --------
(in millions)
-------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,400.0 $3,800.0 $ 1,300.0 $1,700.0
----------------------------
New contracts 710.0 600.0 800.0 --
----------------------------
Terminations and maturities -- -- (1,500.0) (400.0)
---------------------------- -------- -------- --------- --------
Balance at end of year $5,110.0 $4,400.0 $ 600.0 $1,300.0
---------------------------- ======== ======== ========= ========
</TABLE>
81
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
<TABLE>
<CAPTION>
Financial futures
-------------------------------------
Contracts Options
1995 1994 1995 1994
--------- -------- ------- -------
(in millions)
-------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 382.5 $ 33.1 $ -- $ --
----------------------------
New contracts 810.5 1,087.7 181.6 308.0
----------------------------
Terminations and maturities (1,193.0) (738.3) (181.6) (308.0)
---------------------------- --------- -------- ------- -------
Balance at end of year $ -- $ 382.5 $ -- $ --
---------------------------- ========= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Foreign currency derivatives
-----------------------------------------
Foreign
exchange Foreign Foreign
forward currency currency
contracts options swaps
1995 1994 1995 1994 1995 1994
------- ------ ------- ---- ----- ----
(in millions)
-----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 21.2 $ -- $ -- $ -- $ -- $ --
----------------------------
New contracts 131.2 38.5 356.6 -- 15.0 --
----------------------------
Terminations and maturities (136.7) (17.3) (257.4) -- -- --
---------------------------- ------- ------ ------- ---- ----- ----
Balance at end of year $ 15.7 $ 21.2 $ 99.2 $ -- $15.0 $ --
---------------------------- ======= ====== ======= ==== ===== ====
</TABLE>
Interest rate caps
The interest rate cap agreements, which ex-
pire in 1997 through 2003, entitle Lincoln
Life to receive payments from the
counterparties on specified future reset
dates, contingent on future interest rates.
For each cap, the amount of such quarterly
payments, if any, is determined by the ex-
cess of a market interest rate over a speci-
fied cap rate times the notional amount di-
vided by four. The purpose of Lincoln Life's
interest rate cap agreement program is to
protect its annuity line of business from
the effect of fluctuating interest rates.
The premium paid for the interest rate caps
is included in other assets ($22,700,000 and
$23,400,000 as of December 31, 1995 and
1994, respectively) and is being amortized
over the terms of the agreements and is in-
cluded in net investment income.
Spread locks
Spread-lock agreements in effect at December
31, 1995 all expire in 2005. Spread-lock
agreements provide for a lump sum payment to
or by Lincoln Life depending on whether the
spread between the swap rate and a specified
U.S. Treasury note is larger or smaller than
a contractually specified spread. Cash pay-
ments are based on the product of the
notional amount, the spread between the swap
rate and the yield of an equivalent maturity
U.S. Treasury security and the price sensi-
tivity of the swap at that time, expressed
in dollars per basis point. The purpose of
Lincoln Life's spread-lock program is to
protect a portion of its fixed maturity se-
curities against widening of spreads.
82
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
Lincoln Life is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, spread-lock agreements, in-
terest rate swaps, foreign exchange forward contracts, foreign currency op-
tions and foreign currency swaps, but Lincoln Life does not anticipate non-
performance by any of these counterparties. The credit risk associated with
such agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount of
such exposure is essentially the net replacement cost or market value for
such agreements with each counterparty if the net market value is in Lincoln
Life's favor. At December 31, 1995, the exposure was $6,900,000.
8.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of Lincoln Life's financial instruments.
Considerable judgment is required to develop these fair values and, accord-
ingly, the estimates shown are not necessarily indicative of the amounts
that would be realized in a one time, current market exchange of all of Lin-
coln Life's financial instruments.
Fixed maturity and equity securities
Fair values for fixed maturity securities are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing services
or, in the case of private placements, are estimated by discounting expected
future cash flows using a current market rate applicable to the coupon rate,
credit quality and maturity of the investments. The fair values for equity
securities are based on quoted market prices.
Mortgage loans on real estate
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and fu-
ture income when compared to the expected yield for mortgages having similar
characteristics. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service cover-
age, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loans are measured based either on the present
value of expected future cash flows discounted at the loan's effective in-
terest rate, at the loan's market price or the fair value of the collateral
if the loan is collateral dependent.
7.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
Financial futures
Lincoln Life uses exchange-traded financial futures contracts and options on
those financial futures to hedge against interest rate risks and to manage
duration of a portion of its fixed maturity securities. Financial futures
contracts obligate Lincoln Life to buy or sell a financial instrument at a
specified future date for a specified price and may be settled in cash or
through delivery of the financial instrument. Cash settlements on the change
in market values of financial futures contracts are made daily. Options on
financial futures give Lincoln Life the right, but not the obligation, to
assume a long or short position in the underlying futures at a specified
price during a specified time period.
Foreign currency derivatives
Lincoln Life uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate Lincoln Life to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give Lincoln Life the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to reex-
change the two currencies at the same rate of exchange at a specified future
date.
Additional derivative information
Expenses for the agreements and contracts described above amounted to
$5,600,000 and $5,400,000 in 1995 and 1994, respectively. Deferred losses of
$21,800,000 as of December 31, 1995, resulting from (1) terminated and ex-
pired spread-lock agreements, (2) financial futures contracts and (3) op-
tions on financial futures, are included with the related fixed maturity se-
curities to which the hedge applied and are being amortized over the life of
such securities.
83
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
Short-term and long-term debt
Fair values for long-term debt issues are estimated using discounted cash
flow analysis based on Lincoln Life's current incremental borrowing rate for
similar types of borrowing arrangements. For short-term debt, the carrying
value approximates fair value.
Guarantees
Lincoln Life's guarantees include guarantees related to real estate partner-
ships and mortgage loan pass-through certificates. Based on historical per-
formance where repurchases have been negligible and the current status,
which indicates none of the loans are delinquent, the fair value liability
for the guarantees related to the mortgage loan pass-through certificates is
insignificant. Fair values for all other guarantees are based on fees that
would be charged currently to enter into similar agreements, taking into
consideration the remaining terms of the agreements and the counterparties'
credit standing.
Derivatives
Lincoln Life's derivatives include interest rate cap agreements, spread-lock
agreements, foreign currency exchange contracts, financial futures con-
tracts, options on financial futures, interest rate swaps, foreign currency
options and foreign currency swaps. Fair values for these contracts are
based on current settlement values. The current settlement values are based
on quoted market prices for the foreign currency exchange contracts, finan-
cial future contracts and options on financial futures and on brokerage
quotes, which utilized pricing models or formulas using current assumptions,
for all other swaps and agreements.
Investment commitments
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real es-
tate are based on the difference between the value of the committed invest-
ments as of the date of the accompanying balance sheets and the commitment
date, which would take into account changes in interest rates, the
counterparties' credit standing and the remaining terms of the commitments.
8.FAIR VALUE OF FINANCIAL
INSTRUMENTS CONTINUED
Policy loans
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on his-
torical experience.
Other investments and cash and invested cash
The carrying value for assets classified as other investments and cash and
invested cash in the accom-
panying balance sheets approximates their fair value.
Investment type insurance contracts
The balance sheet captions, "Future policy benefits, claims and claims ex-
penses" and "Contractholder funds," include investment type insurance con-
tracts (i.e., deposit contracts and guaranteed interest contracts). The fair
values for the deposit contracts and certain guaranteed interest contracts
are based on their approximate surrender values. The fair values for the re-
maining guaranteed interest and similar contracts are estimated using dis-
counted cash flow calculations based on interest rates currently being of-
fered on similar contracts with maturities consistent with those remaining
for the contracts being valued.
The remainder of the balance sheet captions, "Future policy benefits, claims
and claims expenses" and "Contractholder funds," that do not fit the defini-
tion of "investment type insurance contracts" are considered insurance con-
tracts. Fair value disclosures are not required for these insurance con-
tracts and have not been determined by Lincoln Life. It is Lincoln Life's
position that the disclosure of the fair value of these insurance contracts
is important in that readers of these financial statements could draw inap-
propriate conclusions about Lincoln Life's shareholder's equity determined
on a fair value basis if only the fair value of assets and liabilities de-
fined as financial instruments are disclosed. Lincoln Life and other compa-
nies in the insurance industry are monitoring the related actions of the
various rule-making bodies and attempting to determine an appropriate meth-
odology for estimating and disclosing the "fair value" of their insurance
contract liabilities.
84
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
8.FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED
The carrying values and estimated fair val-
ues of Lincoln Life's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
----------------------------------------------
Carrying Fair Carrying Fair
Assets (Liabilities) value value value value
---------------------------------------------------------------------------
(in millions)
----------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 20,414.8 $ 20,414.8 $ 17,692.2 $ 17,692.2
-------------------------
Equity securities 598.4 598.4 456.3 456.3
-------------------------
Mortgage loans on real
estate 3,147.8 3,330.5 2,795.9 2,720.6
-------------------------
Policy loans 565.3 557.4 528.7 508.1
-------------------------
Other investments 241.2 241.2 158.2 158.2
-------------------------
Cash and invested cash 802.7 802.7 990.9 990.9
-------------------------
Investment type insurance
contracts:
-------------------------
. Deposit contracts and
certain guaranteed
interest contracts (15,390.8) (15,179.1) (14,294.7) (14,052.5)
-------------------------
. Remaining guaranteed
interest and similar
contracts (2,470.9) (2,396.5) (2,485.5) (2,423.9)
-------------------------
Short-term debt (124.8) (124.8) (153.7) (153.7)
-------------------------
Long-term debt (40.8) (36.7) (54.8) (57.0)
-------------------------
Derivatives 23.7 5.8 19.4 30.5
-------------------------
Investment commitments -- (.8) -- (.5)
-------------------------
</TABLE>
As of December 31, 1995 and 1994, the carry-
ing values of the deposit contracts and cer-
tain guaranteed contracts is net of deferred
acquisition costs of $333,797,000 and
$399,000,000, respectively, excluding ad-
justments for deferred acquisition costs ap-
plicable to changes in fair value of securi-
ties. The carrying values of these contracts
are stated net of deferred acquisition costs
in order that they be comparable with the
fair value basis.
9.SEGMENT INFORMATION
Lincoln Life has two major business seg-
ments: Life Insurance and Annuities and Re-
insurance. The Life Insurance and Annuities
segment offers universal life, pension prod-
ucts and other individual coverages through
a network of career agents, independent gen-
eral agencies and insurance agencies located
within a variety of financial institutions.
These products are sold throughout the
United States by Lincoln Life. Reinsurance
sells reinsurance products and services to
insurance companies, HMOs, self-funded em-
ployers and other primary risk accepting or-
ganizations in the U.S. and economically at-
tractive international markets. Effective in
the fourth quarter of 1995, operating re-
sults of the direct disability income busi-
ness previously included in the Life Insur-
ance and Annuities segment is now included
in the Reinsurance segment. This direct dis-
ability income business, which is no longer
being sold, is now managed by the Reinsur-
ance segment along with its disability in-
come business. Prior to the sale of 100% of
the ownership of its primary underwriter of
employee life-health benefit coverages in
1994 (see Note 10), the Employee Life-Health
Benefits segment distributed group life and
health insurance, managed health care and
other related coverages through career
agents and independent general agencies. Ac-
tivity which is not included in the major
business segments is shown as "Other Opera-
tions."
"Other Operations" includes operations not
directly related to the business segments
and unallocated corporate items (i.e., cor-
porate investment income, interest expense
on corporate debt and unallocated corporate
overhead expenses).
85
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
9.SEGMENT INFORMATION CONTINUED
The revenue, pre-tax income and assets by
segment for 1993 through 1995 are as fol-
lows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
-----------------------------
(in millions)
-----------------------------
<S> <C> <C> <C>
Revenue:
. Life Insurance and Annuities $ 2,569.2 $ 2,065.3 $ 2,341.9
---------------------------------------
. Reinsurance 751.2 660.4 610.7
---------------------------------------
. Employee Life-Health Benefits -- 314.9 1,326.8
---------------------------------------
. Other Operations 16.1 74.6 (28.8)
--------------------------------------- --------- --------- ---------
$ 3,336.5 $ 3,115.2 $ 4,250.6
========= ========= =========
Income (loss) before income taxes and
cumulative effect of accounting change:
. Life Insurance and Annuities $ 361.0 $ 75.6 $ 265.3
---------------------------------------
. Reinsurance 83.5 93.9 31.6
---------------------------------------
. Employee Life-Health Benefits -- 22.9 83.0
---------------------------------------
. Other Operations 5.0 67.8 (44.2)
--------------------------------------- --------- --------- ---------
$ 449.5 $ 260.2 $ 335.7
========= ========= =========
Assets:
. Life Insurance and Annuities $45,280.0 $37,675.9 $36,021.0
---------------------------------------
. Reinsurance 3,383.5 2,311.5 2,328.9
---------------------------------------
. Employee Life-Health Benefits -- -- 588.5
---------------------------------------
. Other Operations 923.6 1,038.1 770.0
--------------------------------------- --------- --------- ---------
$49,587.1 $41,025.5 $39,708.4
========= ========= =========
</TABLE>
Provisions for depreciation and capital additions were not material.
10.SALE OF AFFILIATES
In December 1993, Lincoln Life recorded a
provision for loss of $98,500,000 (also
$98,500,000 after-tax) in the "Other Opera-
tions" segment for the sale of Security-Con-
necticut Life Insurance Company (Security-
Connecticut). The sale was completed on Feb-
ruary 2, 1994 through an initial public of-
fering and Lincoln Life received cash and
notes, net of related expenses, totaling
$237,700,000. The loss on sale and disposal
expenses did not differ materially from the
estimate recorded in the fourth quarter of
1993. For the year ended December 31, 1993,
Security-Connecticut, which operated in the
Life Insurance and Annuities segment, had
revenue of $274,500,000 and net income of
$24,000,000.
In 1994, Lincoln Life completed the sale of
100% of the common stock of EMPHESYS (parent
company of Employers Health Insurance Compa-
ny, which comprised the Employee Life-Health
Benefits segment) for $348,200,000 of cash,
net of related expenses, and a $50,000,000
promissory note. A gain on sale of
$69,000,000 (also $69,000,000 after-tax) was
recognized in 1994 in "Other Operations".
For the year ended December 31, 1993,
EMPHESYS had revenues of $1,304,700,000 and
net income of $55,300,000. EMPHESYS had rev-
enue and net income of $314,900,000 and
$14,400,000, respectively, during the three
months of ownership in 1994.
86
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life Financial Statements
Lincoln Life provides services to and receives services from affiliated com-
panies which resulted in a net receipt of $7,500,000, $13,900,000 and
$18,900,000 in 1995, 1994 and 1993, respectively.
Lincoln Life both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994
-------------
(in millions)
-------------
<S> <C> <C>
Insurance assumed $ 17.6 $ 19.8
-----------------
Insurance ceded 214.4 481.3
-----------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
---------------
(in millions)
---------------
<S> <C> <C>
Future policy benefits and claims assumed $ 344.8 $341.3
---------------------------------------------------
Future policy benefits and claims ceded 1,344.5 857.7
---------------------------------------------------
Amounts recoverable on paid and unpaid losses 65.9 36.8
---------------------------------------------------
Reinsurance payable on paid losses 5.5 3.5
---------------------------------------------------
Funds held under reinsurance treaties-net liability 712.3 238.4
---------------------------------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with unautho-
rized companies. To take a reserve credit for such reinsurance, Lincoln Life
holds assets from the reinsurer, including funds held under reinsurance
treaties, and is the beneficiary on letters of credit aggregating
$340,800,000 and $308,200,000 at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, LNC had guaranteed $275,300,000 and
$298,200,000, respectively, of these letters of credit. At December 31,
1995, Lincoln Life has a receivable (included in the foregoing amounts) from
affiliated insurance companies in the amount of $241,900,000 for statutory
surplus relief received under financial reinsurance ceded agreements.
11.SUBSEQUENT EVENT
In January 1996, LNC announced that it had signed a definitive agreement to
acquire the group tax-sheltered annuity business of UNUM Corporation's af-
filiates. This purchase is expected to be completed in the form of a rein-
surance transaction with an initial ceding commission of approximately
$70,000,000. This ceding commission represents the present value of business
in-force and, accordingly, will be classified as other intangible assets
upon the close of this transaction. This transaction, which is expected to
close in the third quarter of 1996, will increase LNC's assets and policy
liabilities and accruals by approximately $3,200,000,000.
12.TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with Lincoln Life under which
it sells Lincoln Life's products and provides the service that otherwise
would be provided by a home office marketing department and regional of-
fices. For providing these selling and marketing services, Lincoln Life paid
LFGI override commissions and operating expense allowances of $81,900,000,
$78,500,000 and $74,500,000 in 1995, 1994 and 1993, respectively. LFGI in-
curred expenses of $10,400,000, $10,700,000 and $10,500,000 in 1995, 1994
and 1993, respectively, in excess of the override commission and operating
expense allowances received from Lincoln Life, which Lincoln Life is not re-
quired to reimburse.
Cash and invested cash at December 31, 1995 and 1994 include Lincoln Life's
participation in a short-term investment pool with LNC of $333,800,000 and
$428,300,000, respectively. Related investment income amounted to
$22,500,000, $17,100,000 and $9,100,000 in 1995, 1994 and 1993, respective-
ly. Short-term debt at December 31, 1995 and 1994 includes $67,000,000 and
$68,600,000, respectively, borrowed from LNC. Lincoln Life paid interest to
LNC of $24,000, $8,000 and $137,000 in 1995, 1994 and 1993, respectively.
87
<PAGE>
Lincoln Life Financial Statements
FINANCIAL SCHEDULES
The following consolidated financial state-
ment schedules of Lincoln National Life
Insurance Company and subsidiaries are in-
cluded on pages G-32 through G-36:
I. Summary of Investments--Other than In-
vestments in Related Parties -- December
31, 1995
III. Supplementary Insurance Information
Years ended December 31, 1995, 1994 and
1993
IV. Reinsurance -- Years ended December 31,
1995, 1994 and 1993
V. Valuation and Qualifying Accounts --
Years ended December 31, 1995, 1994 and
1993
All other schedules for which provision is
made in the applicable accounting regulation
of the Securities and Exchange Commission
are not required under the related instruc-
tions, are inapplicable or the required in-
formation is included in the consolidated
financial statements, and therefore have
been omitted.
88
<PAGE>
Lincoln Life Financial Statements
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- ------------------------------------------------------------------------------
Amount at
which shown
in the
balance
Type of Investment Cost Value sheet
- ------------------------------------------------------------------------------
(000's omitted)
-----------------------------------
<S> <C> <C> <C>
Fixed maturity securities available-
for-sale:
Bonds:
. United States Government and
government agencies and authorities $ 569,552 $ 653,444 $ 653,444
--------------------------------------
. States, municipalities and political
subdivisions 12,325 12,375 12,375
--------------------------------------
. Mortgage-backed securities 4,891,521 5,184,751 5,184,751
--------------------------------------
. Foreign governments 927,901 997,567 997,567
--------------------------------------
. Public utilities 2,572,309 2,772,990 2,772,990
--------------------------------------
. Convertibles and bonds with warrants
attached 181,431 199,658 199,658
--------------------------------------
. All other corporate bonds 9,658,371 10,551,770 10,551,770
--------------------------------------
Redeemable preferred stocks 39,427 42,230 42,230
-------------------------------------- ----------- ----------- -----------
Total fixed maturity securities 18,852,837 20,414,785 20,414,785
- ---------------------------------------
Equity securities available-for-sale:
Common stocks:
. Public utilities 8,980 10,989 10,989
--------------------------------------
. Banks, trust and insurance companies 74,897 89,197 89,197
--------------------------------------
. Industrial, miscellaneous and all
other 345,434 436,556 436,556
--------------------------------------
Nonredeemable preferred stocks 50,950 61,693 61,693
-------------------------------------- ----------- ----------- -----------
Total equity securities 480,261 598,435 598,435
- ---------------------------------------
Mortgage loans on real estate 3,176,275 3,147,783(A)
Real estate:
. Investment properties 635,135 635,135
--------------------------------------
. Acquired in satisfaction of debt 157,441 110,888(A)
--------------------------------------
Policy loans 565,325 565,325
- ---------------------------------------
Other investments 253,015 241,219(A)
- --------------------------------------- ----------- -----------
Total investments $24,120,189 $25,713,570
- --------------------------------------- =========== ===========
</TABLE>
(A) Investments which are deemed to have declines in value that are other than
temporary are written down or reserved for to reduce their carrying value
to their estimated realizable value.
89
<PAGE>
Lincoln Life Financial Statements
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------
Future policy
benefits, Other policy
Deferred claims and claims and
acquisition claim Unearned benefits Premium
Segment costs expenses premiums payable revenue (A)
- --------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance and
annuities $ 713,213 $6,530,475 $ 9,145 $-- $ 685,258
----------------------
Reinsurance 247,921 1,855,039 45,951 -- 611,416
----------------------
Other (including
consolidating
adjustments) (7,300) 49,505 78 -- 622
----------------------
---------- ---------- ------- --- ----------
$ 953,834 $8,435,019 $55,174 $-- $1,297,296
========== ========== ======= === ==========
Year ended December 31,
1994:
Life insurance and
annuities $1,427,692 $5,888,581 $11,201 $-- $ 647,416
----------------------
Reinsurance 304,913 1,626,033 51,618 -- 542,034
----------------------
Employee life-health
benefits -- -- -- -- 299,338
----------------------
Other (including
consolidating
adjustments) 3,921 26,158 (1,347) -- 1,076
----------------------
---------- ---------- ------- --- ----------
$1,736,526 $7,540,772 $61,472 $-- $1,489,864
========== ========== ======= === ==========
Year ended December 31,
1993:
Life insurance and
annuities $ 999,126 $6,782,207 $ 5,188 $-- $ 662,353
----------------------
Reinsurance 298,787 1,616,088 54,157 -- 491,397
----------------------
Employee life-health
benefits -- 228,892 -- -- 1,243,576
----------------------
Other (including
consolidating
adjustments) -- 171,043 315 -- 387
----------------------
---------- ---------- ------- --- ----------
$1,297,913 $8,798,230 $59,660 $-- $2,397,713
========== ========== ======= === ==========
</TABLE>
(A) Includes insurance fees on universal life and other interest sensitive
products.
90
<PAGE>
Lincoln Life Financial Statements
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION CONTINUED
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
- -------------------------------------------------------------------------------------------
Amortization
Benefits, claims of deferred Other
Net investment and claim acquisition operating Premium
Segment income (B) expenses costs expenses (B) written
- -------------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance and
annuities $1,741,231 $1,649,119 $298,020 $261,016 $ --
----------------------
Reinsurance 134,000 472,198 101,729 93,750 --
----------------------
Other (including
consolidating
adjustments) 24,399 1,299 -- 9,898 --
---------------------- ---------- ---------- -------- -------- -----
$1,899,630 $2,122,616 $399,749 $364,664 $ --
========== ========== ======== ======== =====
Year ended December 31,
1994:
Life insurance and
annuities $1,542,552 $1,554,479 $ 85,697 $349,529 $ --
----------------------
Reinsurance 116,957 419,266 29,477 117,238 --
----------------------
Employee life-health
benefits (C) 10,838 218,672 -- 73,355 --
----------------------
Other (including
consolidating
adjustments) 3,634 1,630 -- 5,682 --
---------------------- ---------- ---------- -------- -------- -----
$1,673,981 $2,194,047 $115,174 $545,804 $ --
========== ========== ======== ======== =====
Year ended December 31,
1993:
Life insurance and
annuities $1,676,163 $1,615,883 $197,363 $268,066 $ --
----------------------
Reinsurance 115,582 467,824 38,351 72,840 --
----------------------
Employee life-health
benefits 54,513 943,235 -- 300,648 --
----------------------
Other (including
consolidating
adjustments) (22,799) 6,197 5,275 (744) --
---------------------- ---------- ---------- -------- -------- -----
$1,823,459 $3,033,139 $240,989 $640,810 $ --
========== ========== ======== ======== =====
</TABLE>
(B) The allocation of expenses between investments and other operations are
based on a number of assumptions and estimates. Results would change if
different methods were applied.
(C) Includes data through the March 21, 1994 date of sale of the direct writer
of employee life-health coverages.
91
<PAGE>
Lincoln Life Financial Statements
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE (A)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------
Percentage
Ceded Assumed of amount
Gross to other from other assumed to
Segment amount companies companies Net amount net
- --------------------------------------------------------------------------------------
(000's omitted)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance in force $ 51,570,782 $17,612,782 $142,794,000 $176,752,000 80.8%
-----------------------
Premiums:
-----------------------
Health insurance 302,463 299,222 273,572 276,813 98.8
----------------------
Life insurance (B) 658,936 142,523 504,070 1,020,483 49.4
---------------------- ------------ ----------- ------------ ------------
$ 961,399 $ 441,745 $ 777,642 $ 1,297,296
============ =========== ============ ============
Year ended December 31,
1994:
Life insurance in force $ 79,802,000 $45,822,000 $125,640,000 $159,620,000 78.7%
-----------------------
Premiums:
-----------------------
Health insurance 666,609 496,090 359,659 530,178 67.8
----------------------
Life insurance (B) 629,185 220,678 551,179 959,686 57.4
---------------------- ------------ ----------- ------------ ------------
$ 1,295,794 $ 716,768 $ 910,838 $ 1,489,864
============ =========== ============ ============
Year ended December 31,
1993:
Life insurance in force $135,401,000 $61,401,000 $109,257,000 $183,257,000 59.6%
-----------------------
Premiums:
-----------------------
Health insurance 1,387,414 217,705 262,171 1,431,880 18.3
----------------------
Life insurance (B) 771,408 350,907 545,332 965,833 56.5
---------------------- ------------ ----------- ------------ ------------
$ 2,158,822 $ 568,612 $ 807,503 $ 2,397,713
============ =========== ============ ============
</TABLE>
(B) Includes insurance fees on universal life and other interest sensitive
products.
92
<PAGE>
Lincoln Life Financial Statements
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------
Additions
-----------------------
(1) (2)
Charged to
Balance at Charged other Deductions- Balance
beginning to costs and accounts- describe at end of
Description of period expenses (A) describe (B) period
- ---------------------------------------------------------------------------------
(000's omitted)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $ 56,614 $ 2,659 $ -- $ (30,781) $ 28,492
-----------------------
. Reserve for real
estate 65,186 (7,227) -- (11,406) 46,553
-----------------------
. Reserve for other
long-term investments 13,492 (1,541) -- (155) 11,796
-----------------------
Year ended December 31,
1994:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $220,671 $ 19,464 $ -- $(183,521) $ 56,614
-----------------------
. Reserve for real
estate 121,427 13,058 -- (69,299) 65,186
-----------------------
. Reserve for other
long-term investments 26,730 262 -- (13,500) 13,492
-----------------------
Included in other
liabilities:
Investment guarantees 1,804 4,280 -- (6,084) --
-----------------------
Year ended December 31,
1993:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $129,093 $136,717 $ -- $ (45,139) $220,671
-----------------------
. Reserve for real
estate 114,178 21,776 -- (14,527) 121,427
-----------------------
. Reserve for other
long-term investments 31,582 3,905 -- (8,757) 26,730
-----------------------
Included in other
liabilities:
Investment guarantees 12,550 1,674 -- (12,420) 1,804
-----------------------
</TABLE>
(A) Exclude charges for the direct write-off of assets. The negative amounts
represent improvements in the underlying assets for which valuation ac-
counts had previously been established.
(B) Deductions reflect sales or foreclosures of the underlying holdings.
93
<PAGE>
Lincoln Life Financial Statements
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors
Lincoln National Life Insurance Company
We have audited the accompanying consoli-
dated balance sheets of Lincoln National
Life Insurance Co., a wholly owned subsidi-
ary of Lincoln National Corp., as of Decem-
ber 31, 1995 and 1994, and the related con-
solidated statements of income, sharehold-
er's equity and cash flows for each of the
three years in the period ended December 31,
1995. Our audits also included the financial
statement schedules listed on page G-31.
These financial statements and schedules are
the responsibility of the Company's manage-
ment. Our responsibility is to express an
opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those
standards require that we plan and perform
the audit to obtain reasonable assurance
about whether the financial statements are
free of material misstatement. An audit in-
cludes examining, on a test basis, evidence
supporting the amounts and disclosures in
the financial statements. An audit also in-
cludes assessing the accounting principles
used and significant estimates made by man-
agement, as well as evaluating the overall
financial statement presentation. We believe
that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements re-
ferred to above present fairly, in all mate-
rial respects, the consolidated financial
position of Lincoln National Life Insurance
Co. at December 31, 1995 and 1994, and the
consolidated result of its operations and
its cash flows for each of the three years
in the period ended December 31, 1995, in
conformity with generally accepted account-
ing principles. Also, in our opinion, the
related financial statement schedules, when
considered in relation to the basic finan-
cial statements taken as a whole, present
fairly in all material respects the informa-
tion set forth therein.
As discussed in Note 2 to the consolidated
financial statements, in 1993 the Company
changed its method of accounting for
postretirement benefits other than pensions,
accounting for impairment of loans and ac-
counting for certain investments in debt and
equity securities.
LOGO
Fort Wayne, Indiana
February 7, 1996
94
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
AUDITED FINANCIAL STATEMENTS
Prior to 1996, management of The Lincoln National Life Insurance Company
(Company) prepared annual financial statements of the Company using two
different types of accounting principles. Pursuant to insurance regulatory
requirements in several states, management prepared financial statements in
accordance with statutory accounting principles (STAP), which were subject to
audit by the Company's independent auditors. Additionally, solely for purposes
of inclusion in the registration statements of separate account products
requiring registration and periodic reporting to the Securities and Exchange
Commission (SEC), management also prepared financial statements of the Company
in accordance with generally accepted accounting principles (GAAP), which were
also subject to audit. In an attempt to reduce costs associated with the
preparation and audits of both GAAP and STAP-bases financial statements,
commencing with the registrations in 1997, management will prepare and have
audited only STAP-basis financial statements.
The STAP-basis financial statements included in this registration statement
have been prepared in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance, which is an "other
comprehensive basis of accounting" as that term is defined by the American
Institute of Certified Public Accountants (see notes 1 and 2 to the enclosed
audited STAP-basis financial statements for information on such prescribed and
permitted practices).
Because 1996 is the initial year for which STAP-basis financial statements are
used for purposes of these separate account product filings with the SEC,
management has included the following financial statements of the Company to
allow for comparability between years:
. Section 1 contains the STAP-basis balance sheets of the Company as of Decem-
ber 31, 1996 and 1995 and the related STAP-basis statements of income,
changes in capital and surplus, and cash flows for the three years in the pe-
riod ended December 31, 1996.
. Section 2 contains the GAAP-basis balance sheets of the Company as of Decem-
ber 31, 1995 and 1994 and the related consolidated statements of income,
shareholder's equity, and cash flows for each of the three years in the pe-
riod ended December 31, 1995.
G-1
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1995 1994
----------- -----------
(000's omitted)
-----------------------
ASSETS
<S> <C> <C>
INVESTMENTS:
Securities available-for-sale, at fair value:
. Fixed maturity (cost: 1995 -- $18,852,837; 1994 --
$18,193,928) $20,414,785 $17,692,214
- ----------------------------------------------------
. Equity (cost: 1995 -- $480,261; 1994 -- $416,351) 598,435 456,333
- ----------------------------------------------------
Mortgage loans on real estate 3,147,783 2,795,914
- ----------------------------------------------------
Real estate 746,023 679,512
- ----------------------------------------------------
Policy loans 565,325 528,731
- ----------------------------------------------------
Other investments 241,219 158,196
- ---------------------------------------------------- ----------- -----------
Total investments 25,713,570 22,310,900
- ----------------------------------------------------
Cash and invested cash 802,743 990,880
- ----------------------------------------------------
Property and equipment 53,830 54,989
- ----------------------------------------------------
Deferred acquisition costs 953,834 1,736,526
- ----------------------------------------------------
Premiums and fees receivable 117,634 123,494
- ----------------------------------------------------
Accrued investment income 352,301 367,370
- ----------------------------------------------------
Assets held in separate accounts 18,461,629 13,000,540
- ----------------------------------------------------
Federal income taxes -- 134,463
- ----------------------------------------------------
Amounts recoverable from reinsurers 2,940,976 2,069,292
- ----------------------------------------------------
Goodwill 5,149 3,385
- ----------------------------------------------------
Other assets 185,398 233,708
- ---------------------------------------------------- ----------- -----------
Total assets $49,587,064 $41,025,547
- ---------------------------------------------------- =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Policy liabilities and accruals:
. Future policy benefits, claims and claims expenses $ 8,435,019 $ 7,540,772
- ----------------------------------------------------
. Unearned premiums 55,174 61,472
- ---------------------------------------------------- ----------- -----------
Total policy liabilities and accruals 8,490,193 7,602,244
- ----------------------------------------------------
Contractholder funds 18,171,822 17,028,628
- ----------------------------------------------------
Liabilities related to separate accounts 18,461,629 13,000,540
- ----------------------------------------------------
Federal income taxes 166,430 --
- ----------------------------------------------------
Short-term debt 124,783 153,656
- ----------------------------------------------------
Long-term debt 40,827 54,794
- ----------------------------------------------------
Other liabilities 1,412,534 1,264,730
- ---------------------------------------------------- ----------- -----------
Total liabilities 46,868,218 39,104,592
- ----------------------------------------------------
SHAREHOLDER'S EQUITY:
Common stock, $2.50 par value:
. Authorized, issued and outstanding shares -- 10
million
(owned by Lincoln National Corp.) 25,000 25,000
- ----------------------------------------------------
Additional paid-in capital 809,557 791,605
- ----------------------------------------------------
Retained earnings 1,440,994 1,428,969
- ----------------------------------------------------
Net unrealized gain (loss) on securities available-
for-sale 443,295 (324,619)
- ---------------------------------------------------- ----------- -----------
Total shareholder's equity 2,718,846 1,920,955
- ---------------------------------------------------- ----------- -----------
Total liabilities and shareholder's equity $49,587,064 $41,025,547
- ---------------------------------------------------- =========== ===========
</TABLE>
See accompanying notes.
G-2
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
---------------------------------
(000's omitted)
---------------------------------
REVENUE
<S> <C> <C> <C>
Insurance premiums $ 846,873 $1,099,480 $1,972,630
- ------------------------------------------
Insurance fees 450,423 390,384 425,083
- ------------------------------------------
Net investment income 1,899,630 1,673,981 1,823,459
- ------------------------------------------
Realized gain (loss) on investments 136,195 (138,522) 92,150
- ------------------------------------------
Gain (loss) on sale of affiliates -- 68,954 (98,500)
- ------------------------------------------
Other 3,405 20,946 35,781
- ------------------------------------------ ---------- ---------- ----------
Total revenue 3,336,526 3,115,223 4,250,603
- ------------------------------------------
BENEFITS AND EXPENSES
Benefits and settlement expenses 2,122,616 2,194,047 3,033,139
- ------------------------------------------
Underwriting, acquisition, insurance and
other expenses 764,346 660,363 881,703
- ------------------------------------------
Interest expense 67 615 96
- ------------------------------------------ ---------- ---------- ----------
Total benefits and expenses 2,887,029 2,855,025 3,914,938
- ------------------------------------------ ---------- ---------- ----------
Income before federal income taxes
and cumulative effect of accounting change 449,497 260,198 335,665
- ------------------------------------------
Federal income taxes 127,472 40,400 142,544
- ------------------------------------------
Income before cumulative effect of
accounting change 322,025 219,798 193,121
- ------------------------------------------ ---------- ---------- ----------
Cumulative effect of accounting change
(postretirement benefits) -- -- 45,582
- ------------------------------------------ ---------- ---------- ----------
Net income $ 322,025 $ 219,798 $ 147,539
- ------------------------------------------ ========== ========== ==========
EARNINGS PER SHARE
Income before cumulative effect of
accounting change $32.20 $21.98 $19.31
- ------------------------------------------
Cumulative effect of accounting change
(postretirement benefits) -- -- (4.56)
- ------------------------------------------ ---------- ---------- ----------
Net income $32.20 $21.98 $14.75
- ------------------------------------------ ========== ========== ==========
</TABLE>
See accompanying notes.
G-3
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF
SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------
(000's omitted)
----------------------------------
<S> <C> <C> <C>
Common stock -- balance at beginning and
end of year $ 25,000 $ 25,000 $ 25,000
- -----------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 791,605 791,444 791,223
- -----------------------------------------
Contribution from Lincoln National Corp. 17,952 161 221
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 809,557 791,605 791,444
- -----------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 1,428,969 1,334,171 1,198,632
- -----------------------------------------
Net income 322,025 219,798 147,539
- -----------------------------------------
Dividends declared (310,000) (125,000) (12,000)
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 1,440,994 1,428,969 1,334,171
- -----------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE:
Balance at beginning of year (324,619) 621,161 47,303
- -----------------------------------------
Cumulative effect of accounting change -- -- 564,153
- -----------------------------------------
Other change during year 767,914 (945,780) 9,705
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 443,295 (324,619) 621,161
- -----------------------------------------
---------- ---------- ----------
Total shareholder's equity at end of year $2,718,846 $1,920,955 $2,771,776
- -----------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
G-4
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------- ----------- ----------
(000's omitted)
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 322,025 $ 219,798 $ 147,539
- ----------------------------------------
Adjustments to reconcile net income to
net cash
provided by operating activities:
. Deferred acquisition costs 124,526 (171,063) (92,183)
- ----------------------------------------
. Premiums and fees receivable 6,082 10,755 80,582
- ----------------------------------------
. Accrued investment income 15,069 (54,434) (18,827)
- ----------------------------------------
. Policy liabilities and accruals 621,603 114,038 345,142
- ----------------------------------------
. Contractholder funds 1,335,625 1,769,240 1,248,058
- ----------------------------------------
. Amounts recoverable from reinsurers (883,425) (884,388) (700,622)
- ----------------------------------------
. Federal income taxes 95,745 8,364 (130,308)
- ----------------------------------------
. Provisions for depreciation 39,089 38,870 41,516
- ----------------------------------------
. Amortization of discount and premium (86,653) 7,928 (100,274)
- ----------------------------------------
. Realized loss (gain) on investments (244,995) 219,682 (115,881)
- ----------------------------------------
. Loss (gain) on sale of affiliates -- (68,954) 98,500
- ----------------------------------------
. Cumulative effect of accounting change -- -- 45,582
- ----------------------------------------
. Other 458,542 (4,599) 51,369
- ---------------------------------------- ----------- ----------- ----------
Net adjustments 1,481,208 985,439 752,654
- ---------------------------------------- ----------- ----------- ----------
Net cash provided by operating
activities 1,803,233 1,205,237 900,193
- ----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
. Purchases (13,549,807) (12,100,213) (7,171,684)
- ----------------------------------------
. Sales 12,163,673 9,326,809 7,139,781
- ----------------------------------------
. Maturities 929,018 958,065 42,707
- ----------------------------------------
Fixed maturity securities held for
investment:
. Purchases -- -- (5,903,805)
- ----------------------------------------
. Sales -- -- 2,805,980
- ----------------------------------------
. Maturities -- -- 1,639,739
- ----------------------------------------
Purchases of other investments (1,711,427) (1,421,321) (1,936,013)
- ----------------------------------------
Sale or maturity of other investments 1,198,536 1,457,157 1,142,872
- ----------------------------------------
Sale of affiliates -- 520,340 --
- ----------------------------------------
Decrease in cash collateral on loaned
securities (39,681) (163,872) (40,454)
- ----------------------------------------
Other (213,708) (37,606) 83,751
- ---------------------------------------- ----------- ----------- ----------
Net cash used in investing activities (1,223,396) (1,460,641) (2,197,126)
- ----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (13,967) (200) (1,138)
- ----------------------------------------
Issuance of long-term debt -- -- 10,314
- ----------------------------------------
Net increase (decrease) in short-term
debt (28,873) 3,629 13,047
- ----------------------------------------
Universal life and investment contract
deposits 1,716,239 2,381,829 2,418,037
- ----------------------------------------
Universal life and investment contract
withdrawals (2,149,325) (1,604,450) (1,503,105)
- ----------------------------------------
Capital contribution from Lincoln
National Corp. 17,952 161 221
- ----------------------------------------
Dividends paid to shareholder (310,000) (125,000) (12,000)
- ---------------------------------------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities (767,974) 655,969 925,376
- ---------------------------------------- ----------- ----------- ----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Net increase (decrease) in cash (188,137) 400,565 (371,557)
- -------------------------------
Cash at beginning of year 990,880 590,315 961,872
- ------------------------------- -------- -------- --------
Cash at end of year $802,743 $990,880 $590,315
- ------------------------------- ======== ======== ========
</TABLE>
See accompanying notes.
G-5
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1995
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include Lincoln National
Life Insurance Co. ("Lincoln Life") and its majority owned subsidiaries.
Lincoln Life and its subsidiaries operate multiple insurance businesses.
Operations are divided into two business segments (see Note 9). These con-
solidated financial statements have been prepared in conformity with gener-
ally accepted accounting principles.
Use of estimates
The nature of the insurance business requires management to make estimates
and assumptions that affect the amounts reported in the consolidated finan-
cial statements and accompanying notes. Actual results could differ from
those estimates.
Investments
Lincoln Life classifies its fixed maturity securities and equity securities
(common and non-redeemable preferred stocks) as available-for-sale and, ac-
cordingly, such securities are carried at fair value. The cost of fixed ma-
turity securities is adjusted for amortization of premiums and discounts.
The cost of fixed maturity and equity securities is adjusted for declines
in value that are other than temporary.
For the mortgage-backed securities portion of the fixed maturity securities
portfolio, Lincoln Life recognizes income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the se-
curities. When estimates of prepayments change, the effective yield is re-
calculated to reflect actual payments to date and anticipated future pay-
ments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied since the ac-
quisition of the securities. This adjustment is reflected in net investment
income.
Mortgage loans on real estate are carried at outstanding principal balances
less unaccrued discounts and net of reserves for declines that are other
than temporary. Investment real estate is carried at cost less allowances
for depreciation. Such
real estate is carried net of reserves for declines in value that are other
than temporary. Real estate acquired through foreclosure proceedings is re-
corded at fair value on the settlement date which establishes a new cost
basis. If a subsequent periodic review of a foreclosed property indicates
the fair value, less estimated costs to sell, is lower than the carrying
value at the settlement date, the carrying value is adjusted to the lower
amount. Policy loans are carried at the aggregate unpaid balances. Any
changes to the reserves for mortgage loans on real estate and real estate
are reported as a realized gain (loss) on investments.
Cash and invested cash are carried at cost and include all highly liquid
debt instruments purchased with a maturity of three months or less, includ-
ing participation in a short-term investment pool administered by Lincoln
National Corp. (LNC), the Lincoln Life's parent.
Realized gain (loss) on investments is recognized in net income, net of re-
lated amortization of deferred acquisition costs, using the specific iden-
tification method. Changes in the fair values of securities carried at fair
value are reflected directly in shareholder's equity after deductions for
related adjustments for deferred acquisition costs and amounts required to
satisfy policyholder commitments that would have been recorded if these se-
curities would have been sold at their fair value, and after deferred taxes
or credits to the extent deemed recoverable.
Derivatives
Lincoln Life hedges certain portions of its exposure to interest rate fluc-
tuations, the widening of bond yield spreads over comparable maturity U.S.
Government obligations and foreign exchange risk by entering into deriva-
tive transactions. A description of Lincoln Life's accounting for its hedge
of such risks is discussed in the following two paragraphs.
The premium paid for interest rate caps is deferred and amortized to net
investment income on a straight-line basis over the term of the interest
rate cap. Any settlement received in accordance with the terms of the in-
terest rate caps is recorded as investment income. Spread-lock agreements,
interest rate swaps and financial futures, which hedge fixed maturity secu-
rities available-for-sale, are carried at fair value with the change in
fair value reflected directly in shareholder's equity. Realized gain (loss)
from the settlement of such derivatives is deferred and amortized over the
life of the hedged assets as an adjustment to the yield. Foreign exchange
forward contracts, foreign currency options and foreign currency swaps,
which hedge some of the foreign exchange risk of investments in fixed matu-
rity securities denominated in foreign currencies, are carried at fair
value with the
change in fair value reflected in earnings. Realized
G-6
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
gain (loss) from the settlement of such derivatives is also zreflected in
earnings.
Hedge accounting is applied as indicated above after Lincoln Life deter-
mines that the items to be hedged expose Lincoln Life to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. Government obligations and foreign exchange risk; and the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation of changes in the value of the derivatives and the items
being hedged at both the inception of the hedge and throughout the hedge
period. Should such criteria not be met, the change in value of the deriva-
tives is included in net income.
Property and equipment
Property and equipment owned for Lincoln Life use is carried at cost less
allowances for depreciation.
Premiums and fees
Revenue for universal life and other interest-sensitive life insurance pol-
icies consists of policy charges for cost of insurance, policy initiation
and administration, and surrender charges that have been assessed. Tradi-
tional individual life-health and annuity premiums are recognized as reve-
nue over the premium-paying period of the policies. Group health premiums
are prorated over the contract term of the policies.
Assets held in separate accounts/ liabilities related to separate accounts
These assets and liabilities represent segregated funds administered and
invested by Lincoln Life for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by Lincoln Life for ad-
ministrative and contractholder maintenance services performed for these
separate accounts are included in Lincoln Life's consolidated statements of
income.
Deferred acquisition costs
Commissions and other costs of acquiring universal life insurance, variable
universal life insurance, traditional life insurance, annuities and group
health insurance which vary with and are primarily related to the produc-
tion of new business, have been deferred to the extent recoverable. Acqui-
sition costs for universal and variable universal life insurance policies
are being amortized over the lives of the policies in relation to the inci-
dence of estimated gross profits from surrender charges and investment,
mortality and expense margins, and actual realized gain (loss) on invest-
ments. That amortization is adjusted retrospectively when estimates of cur-
rent or future gross profits to be realized from a group of policies are
revised. The traditional life-health and annuity acquisition costs are am-
ortized over the premium-paying period of the related policies using as-
sumptions consistent with those used in computing policy reserves.
Expenses
Expenses for universal and variable universal life insurance policies in-
clude interest credited to policy account balances and benefit claims in-
curred during the period in excess of policy account balances. Interest
crediting rates associated with funds invested in Lincoln Life's general
account during 1993 through 1995 ranged from 6.1% to 8.25%.
Goodwill
The cost of acquired subsidiaries in excess of the fair value of net assets
(goodwill) is amortized using the straight-line method over periods that
generally correspond with the benefits expected to be derived from the ac-
quisitions. Goodwill is amortized over 40 years. The carrying value of
goodwill is reviewed periodically for indicators of impairment in value.
Policy liabilities and accruals
The liabilities for future policy benefits and expenses for universal and
variable universal life insurance policies consist of policy account bal-
ances that accrue to the benefit of the policyholders, excluding surrender
charges. The liabilities for future policy benefits and expenses for tradi-
tional life policies and immediate and deferred paid-up annuities are com-
puted using a net level premium method and assumptions for investment
yields, mortality and withdrawals based principally on Lincoln Life experi-
ence projected at the time of policy issue, with provision for possible ad-
verse deviations. Interest assumptions for traditional direct individual
life reserves for all policies range from 2.3% to 11.7% graded to 5.7% af-
ter 30 years depending on time of policy issue. Interest rate assumptions
for reinsurance reserves range from 5.0% to 11.0% graded to 8.0% after 20
years. The interest assumptions for immediate and deferred paid-up annui-
ties range from 4.5% to 8.0%.
With respect to its policy liabilities and accruals, Lincoln Life carries
on a continuing review of its 1) overall reserve position, 2) reserving
techniques
G-7
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
and 3) reinsurance arrangements, and as experience develops and new infor-
mation becomes known, liabilities are adjusted as deemed necessary. The ef-
fects of changes in estimates are included in the operating results for the
period in which such estimates occur.
Reinsurance
Lincoln Life enters into reinsurance agreements with other companies in the
normal course of their business. Lincoln Life may assume reinsurance from
unaffiliated companies and/or cede reinsurance to such companies.
Assets/liabilities and premiums/benefits from certain reinsurance contracts
which grant statutory surplus to other insurance companies have been netted
on the balance sheets and income statements, respectively, since there is a
right of offset. All other reinsurance agreements are reported on a gross
basis.
Depreciation
Provisions for depreciation of investment real estate and property and
equipment owned for Lincoln Life use are computed principally on the
straight-line method over the estimated useful lives of the assets.
Postretirement medical and life insurance benefits
Lincoln Life accounts for its postretirement medical and life insurance
benefits using the full accrual method.
Income taxes
Lincoln Life and eligible subsidiaries have elected to file consolidated
Federal and state income tax returns with their parent, LNC. Pursuant to an
intercompany tax sharing agreement with LNC, Lincoln Life and its eligible
subsidiaries provide for income taxes on a separate return filing basis.
The tax sharing agreement also provides that Lincoln Life and eligible sub-
sidiaries will receive benefit for net operating losses, capital losses and
tax credits which are not usable on a separate return basis to the extent
such items may be utilized in the consolidated income tax returns of LNC.
Lincoln Life uses the liability method of accounting for income taxes. De-
ferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
used for income tax return purposes. Lincoln Life establishes a valuation
allowance for any portion of its deferred tax assets which are unlikely to
be realized.
2.CHANGES IN ACCOUNTING PRINCIPLES
AND CHANGES IN ESTIMATES
Postretirement benefits other than pensions
Effective January 1, 1993, Lincoln Life changed its method of accounting
for postretirement medical and life insurance benefits for its eligible em-
ployees and agents from a pay-as-you-go method to a full accrual method in
accordance with Financial Accounting Standards No. 106 entitled "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106").
This full accrual method recognizes the estimated obligation for retired
employees and agents and active employees and agents who are expected to
retire in the future. The effect of the change was to increase net periodic
postretirement benefit cost by $7,800,000 and decrease income before cumu-
lative effect of accounting change by $5,100,000 ($0.51 per share). The im-
plementation of FAS 106 resulted in a one-time charge to the first quarter
1993 net income of $45,600,000 or $4.56 per share ($69,000,000 pre-tax) for
the cumulative effect of the accounting change. See Note 6 for additional
disclosures regarding postretirement benefits other than pensions.
Accounting by creditors for impairment of a loan
Financial Accounting Standards No. 114 entitled "Accounting by Creditors
for Impairment of a Loan" ("FAS 114") issued in May 1993, was adopted by
Lincoln Life effective January 1, 1993. FAS 114 requires that if an im-
paired mortgage loan's fair value as described in Note 3 is less than the
recorded investment in the loan, the difference is recorded in the mortgage
loan allowance for losses account. The adoption of FAS 114 resulted in ad-
ditions to the mortgage loan allowance for losses account and reduced first
quarter 1993 income before cumulative effect of accounting change and net
income by $37,700,000, or $3.77 per share ($57,200,000 pre-tax). See Note 3
for further mortgage loan disclosures. Most of the effect of this change in
accounting was within the Life Insurance and Annuities business segment.
Accounting for certain investments in debt
and equity securities
Financial Accounting Standards No. 115 entitled "Accounting for Certain In-
vestments in Debt and Equity Securities" ("FAS 115") issued in May 1993,
was adopted by Lincoln Life as of December 31, 1993. In accordance with the
rules, the
G-8
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
2. CHANGES IN ACCOUNTING PRINCIPLESAND CHANGES IN ESTIMATES CONTINUED
prior year financial statements have not been restated to reflect the
change in accounting principle. Under FAS 115, securities can be classified
as available-for-sale, trading or held-to-maturity according to the hold-
er's intent. Lincoln Life classified its entire fixed maturity securities
portfolio as "available-for-sale." Securities classified as available-for-
sale are carried at fair value and unrealized gains and losses on such se-
curities are carried as a separate component of shareholder's equity. The
ending balance of shareholder's equity at December 31, 1993 was increased
by $564,200,000 (net of $377,500,000 of related adjustments to deferred ac-
quisition costs, $50,700,000 of policyholder commitments and $303,700,000
in deferred income taxes, all of which would have been recognized if those
securities would have been sold at their fair value, net of amounts appli-
cable to Security-Connecticut Corp.) to reflect the net unrealized gain on
fixed maturity securities classified as available-for-sale previously car-
ried at amortized cost. Prior to the adoption of FAS 115, Lincoln Life car-
ried a portion of its fixed maturity securities at fair value with
unrealized gains and losses carried as a separate component of sharehold-
er's equity. The remainder of such securities were carried at amortized
cost.
Change in estimate for net investment income related to mortgage-backed
securities
At December 31, 1993, Lincoln Life had $5,942,100,000 invested in mortgage-
backed securities. As indicated in Note 1, Lincoln Life recognizes income
on these securities using a constant effective yield based on anticipated
prepayments. With the implementation of new investment software in December
1993, Lincoln Life was able to significantly refine its estimate of the ef-
fective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the amor-
tization of purchase discount on these securities of $58,000,000 and, after
related amortization of deferred acquisition costs ($18,300,000) and income
taxes ($14,300,000), increased 1993's income before cumulative effect of
accounting change and net income by $25,500,000 or $2.55 per share.
Most of the effect of this change in estimate was within the Life Insurance
and Annuities business segment.
Change in estimate for disability income reserves
During the fourth quarter of 1993, income before cumulative effect of ac-
counting change and net income decreased by $15,500,000 or $1.55 per share
as the result of strengthening reinsurance disability income reserves by
$23,900,000. The need for this reserve increase within the Reinsurance seg-
ment was identified as the result of management's assessment of current ex-
pectations for morbidity trends and the impact of lower investment income
due to lower interest rates.
During the fourth quarter of 1995, Lincoln Life completed an in-depth re-
view of the experience of its disability income business. As a result of
this study, and based on the assumption that recent experience will con-
tinue in the future, income before cumulative effect of accounting change
and net income decreased by $33,500,000 or $3.35 per share ($51,500,000
pre-tax) as a result of strengthening disability income reserves by
$15,200,000 and writing-off deferred acquisition costs of $36,300,000 in
the Reinsurance segment.
G-9
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------
(in millions)
--------------------------
<S> <C> <C> <C>
Fixed maturity securities $1,549.4 $1,357.4 $1,497.6
-----------------------------
Equity securities 8.9 7.4 4.3
-----------------------------
Mortgage loans on real estate 268.3 271.3 294.2
-----------------------------
Real estate 110.0 97.8 75.2
-----------------------------
Policy loans 35.4 32.7 36.0
-----------------------------
Invested cash 55.4 46.4 24.8
-----------------------------
Other investments 15.8 7.3 8.0
----------------------------- -------- -------- --------
Investment revenue 2,043.2 1,820.3 1,940.1
-----------------------------
Investment expenses 143.6 146.3 116.6
----------------------------- -------- -------- --------
Net investment income $1,899.6 $1,674.0 $1,823.5
-----------------------------
======== ======== ========
</TABLE>
The realized gain (loss) on investments is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
--------------------------
(in millions)
------------------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
. Gross gain $239.6 $ 69.6 $ 91.1
------------------------------------------------
. Gross loss (87.8) (294.1) (8.4)
------------------------------------------------
Equity securities available-for-sale:
. Gross gain 82.3 50.2 88.3
------------------------------------------------
. Gross loss (31.3) (50.5) (33.7)
------------------------------------------------
Fixed maturity securities held for investment:
. Gross gain -- -- 209.9
------------------------------------------------
. Gross loss -- -- (69.5)
------------------------------------------------
Other investments 42.2 5.1 (161.8)
------------------------------------------------
Related restoration or amortization of deferred
acquisition
costs and provision for policyholder commitments (108.8) 81.2 (23.7)
------------------------------------------------ ------ ------- -------
$136.2 $(138.5) $ 92.2
====== ======= =======
</TABLE>
Provisions (credits) for write-downs and net changes in pro-
visions for losses, which are included in realized gain
(loss) on investments shown above, are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994 1993
(in millions)
-------------------
<S> <C> <C> <C>
Fixed maturity securities $10.4 $14.2 $ 55.6
-----------------------------
Equity securities 3.3 6.8 --
-----------------------------
Mortgage loans on real estate 14.7 19.5 136.7
-----------------------------
Real estate (7.2) 13.0 21.8
-----------------------------
Other long-term investments (1.5) .3 3.9
-----------------------------
Guarantees (2.2) 4.3 1.7
-----------------------------
----- ----- ------
$17.5 $58.1 $219.7
===== ===== ======
</TABLE>
G-10
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The change in unrealized appreciation (depreciation) on in-
vestments in fixed maturity and equity securities is as fol-
lows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------
(in millions)
----------------------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale $2,063.7 $(1,903.7) $1,387.1
---------------------------------------------
Equity securities available-for-sale 78.1 (26.0) 9.2
---------------------------------------------
Fixed maturity securities held for investment -- -- (959.7)
---------------------------------------------
-------- --------- --------
$2,141.8 $(1,929.7) $ 436.6
======== ========= ========
</TABLE>
The cost, gross unrealized gain and loss and fair value of
securities available-for-sale are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1995
-----------------------------------
Gross
unrealized
--------------- Fair
Cost Gain Loss value
----------------------------------------
(in millions)
-----------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $12,412.1 $1,141.0 $ 28.7 $13,524.4
-------------------------------------
U.S. Government bonds 569.6 83.9 .1 653.4
-------------------------------------
Foreign government bonds 927.9 70.3 .6 997.6
-------------------------------------
Mortgage-backed securities:
. Mortgage pass-through securities 1,072.5 41.0 3.2 1,110.3
-------------------------------------
. Collateralized mortgage obligations 3,816.3 262.5 7.4 4,071.4
-------------------------------------
. Other mortgage-backed securities 2.8 .3 -- 3.1
-------------------------------------
State and municipal bonds 12.3 .1 -- 12.4
-------------------------------------
Redeemable preferred stocks 39.3 2.9 -- 42.2
-------------------------------------
--------- -------- ------ ---------
Total fixed maturity securities 18,852.8 1,602.0 40.0 20,414.8
-------------------------------------
Equity securities 480.3 123.6 5.5 598.4
-------------------------------------
--------- -------- ------ ---------
$19,333.1 $1,725.6 $ 45.5 $21,013.2
========= ======== ====== =========
<CAPTION>
Year ended December 31, 1994
-----------------------------------
Gross
unrealized
--------------- Fair
Cost Gain Loss value
----------------------------------------
(in millions)
-----------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $11,519.3 $ 143.3 $514.4 $11,148.2
-------------------------------------
U.S. Government bonds 1,048.4 6.9 25.5 1,029.8
-------------------------------------
Foreign governments bonds 541.2 4.7 12.5 533.4
-------------------------------------
Mortgage-backed securities:
. Mortgage pass-through securities 1,176.8 3.0 44.1 1,135.7
-------------------------------------
. Collateralized mortgage obligations 3,835.5 85.8 148.6 3,772.7
-------------------------------------
. Other mortgage-backed securities 5.0 .1 .1 5.0
-------------------------------------
State and municipal bonds 16.3 .4 -- 16.7
-------------------------------------
Redeemable preferred stocks 51.4 .2 .9 50.7
-------------------------------------
--------- -------- ------ ---------
Total fixed maturity securities 18,193.9 244.4 746.1 17,692.2
-------------------------------------
Equity securities 416.3 56.4 16.4 456.3
-------------------------------------
--------- -------- ------ ---------
$18,610.2 $ 300.8 $762.5 $18,148.5
========= ======== ====== =========
</TABLE>
G-11
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
Future maturities of fixed maturity securities available-
for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------
Fair
Cost value
--------- ---------
(in millions)
-------------------
<S> <C> <C>
Due in one year or less $ 278.4 $ 282.6
--------------------------------------
Due after one year through five years 2,955.7 3,102.1
--------------------------------------
Due after five years through ten years 4,918.2 5,265.9
--------------------------------------
Due after ten years 5,808.9 6,579.4
-------------------------------------- --------- ---------
13,961.2 15,230.0
Mortgage-backed securities 4,891.6 5,184.8
-------------------------------------- --------- ---------
$18,852.8 $20,414.8
========= =========
</TABLE>
The foregoing data is based on stated maturities. Actual
maturities will differ in some cases because borrowers may
have the right to call or pre-pay obligations.
At December 31, 1995, the current par, amortized cost and
estimated fair value of investments in mortgage-backed
securities summarized by interest rates of the underlying
collateral are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------
Current Par Cost Fair value
----------- -------- ----------
(in millions)
-------------------------------
<S> <C> <C> <C>
Below 7% $ 292.6 $ 290.5 $ 293.6
--------
7%-8% 1,302.8 1,276.9 1,318.2
--------
8%-9% 1,607.0 1,564.7 1,669.8
--------
Above 9% 1,810.5 1,759.5 1,903.2
-------- -------- -------- --------
$5,012.9 $4,891.6 $5,184.8
======== ======== ========
</TABLE>
The quality ratings of fixed maturity securities available-
for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Treasuries and AAA 34.1%
------------------
AA 8.0
------------------
A 25.9
------------------
BBB 24.5
------------------
BB 3.9
------------------
Less than BB 3.6
------------------ ------
100.0%
======
</TABLE>
Mortgage loans on real estate are considered impaired when,
based on current information and events, it is probable that
the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
When Lincoln Life determines that a loan is impaired, a
provision for loss is established for the difference between
the carrying value of the mortgage loan and the estimated
value. Estimated value is based on either the present value
of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price
or the fair value of the collateral. The provision for
losses is reported as realized gain (loss) on investments.
Mortgage loans deemed to be uncollectible are charged
against the provision for losses and subsequent recoveries,
if any, are credited to the provision for losses.
G-12
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The provision for losses is maintained at a level believed
adequate by management to absorb estimated probable credit
losses. Management's periodic evaluation of the adequacy of
the provision for losses is based on the Company's past loan
loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the
estimated value of the underlying collateral, composition of
the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective
as it requires estimating the amounts and timing of future
cash flows expected to be received on impaired loans that
may be susceptible to significant change.
Impaired loans along with the related allowance for losses
are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
--------------
<S> <C> <C>
Impaired loans with allowance for losses $144.7 $246.0
-------------------------------------------
Allowance for losses (28.5) (56.6)
-------------------------------------------
Impaired loans with no allowance for losses 2.1 2.2
-------------------------------------------
------ ------
Net impaired loans $118.3 $191.6
-------------------------------------------
====== ======
</TABLE>
Impaired loans with no allowance for losses are a result of
direct write-downs or for collateral dependent loans where
the fair value of the collateral is greater than the re-
corded investment in such loans.
A reconciliation of the mortgage loan allowance for losses
for these impaired mortgage loans is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------- ------
(in millions)
-----------------------
<S> <C> <C> <C>
Balance at beginning of year $ 56.6 $ 220.7 $129.1
---------------------------------
Provisions for losses 14.7 19.5 79.5
---------------------------------
Provision for adoption of FAS 114 -- -- 57.2
---------------------------------
Releases due to write-downs (12.0) -- --
---------------------------------
Releases due to sales (15.9) (164.7) (12.2)
---------------------------------
Releases due to foreclosures (14.9) (18.9) (32.9)
---------------------------------
------ ------- ------
Balance at end of year $ 28.5 $ 56.6 $220.7
---------------------------------
====== ======= ======
</TABLE>
G-13
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The average recorded investment in impaired loans and the
interest income recognized on impaired loans were as fol-
lows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Average recorded investment in impaired loans $181.7 $467.5 $703.6
---------------------------------------------
Interest income recognized on impaired loans 16.6 36.1 47.3
---------------------------------------------
</TABLE>
All interest income on impaired loans was recognized on the
cash basis of income recognition.
As of December 31, 1995 and 1994, Lincoln Life had restruc-
tured loans of $62,500,000 and $36,200,000, respectively.
Lincoln Life recorded $6,300,000 and $800,000 interest income
on these restructured loans in 1995 and 1994, respectively.
Interest income in the amount of $6,600,000 and $3,900,000
would have been recorded on these loans according to their
original terms in 1995 and 1994, respectively. As of December
31, 1995 and 1994, Lincoln Life had no outstanding commit-
ments to lend funds on restructured loans.
As of December 31, 1995, the Company's investment commit-
ments for fixed maturity securities (primarily private
placements), mortgage loans on real estate and real estate
were $543,100,000.
Fixed maturity securities available-for-sale, mortgage loans
on real estate and real estate with a combined carrying
value at December 31, 1995 of $1,300,000 were non-income
producing for the year ended December 31, 1995.
The cost information for mortgage loans on real estate, real
estate and other long-term investments are net of allowances
for losses. The balance sheet account for other liabilities
includes a reserve for guarantees of third-party debt. The
amount of allowances and a reserve for such items is as fol-
lows:
<TABLE>
<CAPTION>
December 31
1995 1994
----- -----
(in
millions)
-----------
<S> <C> <C>
Mortgage loans on real estate $28.5 $56.6
-----------------------------
Real estate 46.6 65.2
-----------------------------
Other long-term investments 11.8 13.5
-----------------------------
</TABLE>
Details underlying the balance sheet caption "Net Unrealized
Gain (loss) on Securities Available-for-Sale," are as fol-
lows:
<TABLE>
<CAPTION>
December 31
1995 1994
--------- ---------
(in millions)
--------------------
<S> <C> <C>
Fair value of securities available-for-sale $21,013.2 $18,148.5
----------------------------------------------------
Cost of securities available-for-sale 19,333.1 18,610.2
---------------------------------------------------- --------- ---------
Unrealized gain (loss) 1,680.1 (461.7)
----------------------------------------------------
Adjustments to deferred acquisition costs (492.1) 158.2
----------------------------------------------------
Amounts required to satisfy policyholder commitments (510.1) 8.6
----------------------------------------------------
Deferred income credits (taxes) (234.6) 105.9
----------------------------------------------------
Valuation allowance for deferred tax assets -- (135.6)
----------------------------------------------------
--------- ---------
Net unrealized gain (loss) on securities available-
for-sale $ 443.3 $ (324.6)
----------------------------------------------------
========= =========
</TABLE>
G-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
Adjustments to Deferred acquisition costs and amounts re-
quired to satisfy policyholder commitments are netted
against the Deferred acquisition costs asset account and in-
cluded with the Future policy benefits, claims and claims
expense liability on the balance sheet, respectively.
4.FEDERAL INCOME TAXES
The Federal income tax expense (benefit) before cumulative
effect of accounting change is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
(in millions)
----------------------
<S> <C> <C> <C>
Current $172.5 $(93.4) $261.3
--------
Deferred (45.0) 133.8 (118.8)
-------- ------ ------ ------
$127.5 $ 40.4 $142.5
====== ====== ======
</TABLE>
Cash paid for Federal income taxes in 1995, 1994 and 1993
was $27,500,000, $41,400,000 and $272,600,000, respectively.
The cash paid in 1995 is net of a $146,900,000 cash refund
related to the carryback of 1994 capital losses to prior
years.
The effective tax rate on pre-tax income before cumulative
effect of accounting change is lower than the prevailing
corporate Federal income tax rate. A reconciliation of this
difference is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
---------
(in millions)
---------------------
<S> <C> <C> <C>
Tax rate times pre-tax income $157.3 $91.1 $117.5
------------------------------------
Effect of:
. Tax-exempt investment income (22.0) (21.5) (16.2)
------------------------------------
. Participating policyholders' share 5.4 3.4 4.1
------------------------------------
. Loss (gain) on sale of affiliates -- (24.1) 34.5
------------------------------------
. Other items (13.2) (8.5) 2.6
------------------------------------ ------ ----- ------
Provision for income taxes $127.5 $40.4 $142.5
------------------------------------ ====== ===== ======
Effective tax rate 28.4% 15.5% 42.5%
------------------------------------ ====== ===== ======
</TABLE>
The Federal income tax recoverable (liability) is as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- ------
(in millions)
---------------
<S> <C> <C>
Current $ (25.0) $118.2
--------
Deferred (141.4) 16.3
-------- ------- ------
$(166.4) $134.5
======= ======
</TABLE>
G-15
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
4.FEDERAL INCOME TAXES CONTINUED
Significant components of Lincoln Life's net deferred tax
asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- -------
(in millions)
----------------
<S> <C> <C>
Deferred tax assets:
. Policy liabilities and
accruals and
contractholder funds $ 694.5 $ 430.9
------------------------
. Loss on investments -- 16.8
------------------------
. Net unrealized loss on
securities available-
for-sale -- 161.6
------------------------
. Postretirement
benefits other than
pensions 25.3 24.2
------------------------
. Other 39.5 34.6
------------------------ ------- -------
Total deferred tax
assets 759.3 668.1
------------------------
Valuation allowance for
deferred tax assets -- (135.6)
------------------------ ------- -------
Net deferred tax assets 759.3 532.5
------------------------
Deferred tax
liabilities:
. Deferred acquisition
costs 218.8 475.5
------------------------
. Net unrealized gain on
securities available-
for-sale 579.6 --
------------------------
. Gain on investments 7.7 --
------------------------
. Other 94.6 40.7
------------------------ ------- -------
Total deferred tax
liabilities 900.7 516.2
------------------------ ------- -------
Net deferred tax
(liability) asset $(141.4) $ 16.3
------------------------ ======= =======
</TABLE>
Lincoln Life is required to establish a "valuation allow-
ance" for any portion of its deferred tax assets which are
unlikely to be realized. At December 31, 1994, $161,600,000
of deferred tax assets relating to net unrealized capital
losses on fixed maturity and equity securities available-
for-sale were available to be recorded in shareholder's eq-
uity before considering a valuation allowance. For Federal
income tax purposes, capital losses may only be used to off-
set capital gains in the current year or during a three-year
carryback and five-year carryforward period. Due to these
restrictions, and the uncertainty at that time of future
capital gains, these deferred tax assets were substantially
offset by a valuation allowance of $135,600,000. By December
31, 1995, the fair values of fixed maturity and equity secu-
rities available-for-sale were greater than the cost basis
resulting in unrealized capital gains. Accordingly, no valu-
ation allowance was established as of December 31, 1995
since management believes it is more likely than not that
Lincoln Life will realize the benefit of its deferred tax
assets.
Prior to 1984, a portion of the life companies' current
income was not subject to current income tax, but was
accumulated for income tax purposes in a memorandum account
designated as "policyholders' surplus." The total of the
life companies' balances in their respective "policyholders'
surplus" accounts at December 31, 1983 of $204,800,000 was
"frozen" by the Tax Reform Act of 1984 and, accordingly,
there have been no additions to the accounts after that
date. That portion of current income on which income taxes
have been paid will continue to be accumulated in a
memorandum account designated as "shareholder surplus," and
is available for dividends to the shareholder without
additional payment of tax. The December 31, 1995 total of
the life companies' account balances for their "shareholder
surplus" was $1,554,000,000. Should dividends to the
shareholder for each life company exceed its respective
"shareholder surplus," amounts would need to be transferred
from its respective "policyholders' surplus" and would be
subject to Federal income tax at that time. In connection
with the 1993 sale of a life insurance affiliate (see Note
10), $8,800,000 was transferred from policyholders' surplus
G-16
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
4.FEDERAL INCOME TAXES CONTINUED
to shareholder surplus and current income tax of $3,100,000
was paid. Under existing or foreseeable circumstances,
Lincoln Life neither expects nor intends that distributions
will be made from the remaining balance in "policyholders'
surplus" of $196,000,000 that will result in any such tax.
Accordingly, no provision for deferred income taxes has been
provided by Lincoln Life on its "policyholders' surplus"
account. In the event that such excess distributions are
made, it is estimated that income taxes of approximately
$68,600,000 would be due.
5.SUPPLEMENTAL FINANCIAL DATA
The balance sheet captions, "Real estate," "Other
investments" and "Property and equipment," are shown net of
allowances for depreciation as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
-------------
<S> <C> <C>
Real estate $ 51.6 $ 37.0
----------------------
Other investments 14.6 12.2
----------------------
Property and equipment 100.7 104.7
----------------------
</TABLE>
Details underlying the balance sheet caption,
"Contractholder funds," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
--------- ---------
(in millions)
-------------------
<S> <C> <C>
Premium deposit funds $17,886.9 $16,770.3
------------------------------------------------
Undistributed earnings on participating business 91.9 63.6
------------------------------------------------
Other 193.0 194.7
------------------------------------------------
--------- ---------
$18,171.8 $17,028.6
========= =========
</TABLE>
Details underlying the balance sheet captions, "Short-term
and Long-term Debt," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
-------------
<S> <C> <C>
Short-term debt:
---------------------------------------
. Short-term notes $123.5 $150.8
---------------------------------------
. Current portion of long-term debt 1.3 2.9
---------------------------------------
------ ------
Total short-term debt $124.8 $153.7
---------------------------------------
====== ======
Long-term debt less current portion:
---------------------------------------
. 7% mortgage note payable, due 1996 $ -- $ 4.9
---------------------------------------
. 9.48% mortgage note payable, due 1996 -- 7.7
---------------------------------------
. 12% mortgage note payable, due 1996 -- .2
---------------------------------------
. 8.42% mortgage note payable, due 1997 7.0 7.2
---------------------------------------
. 8.25% mortgage note payable, due 1997 10.1 10.2
---------------------------------------
. 8% mortgage note payable, due 1997 2.1 --
---------------------------------------
. 8.75% mortgage note payable, due 1998 18.4 18.8
---------------------------------------
. 9.75% mortgage note payable, due 2002 3.2 5.8
---------------------------------------
------ ------
Total long-term debt $ 40.8 $ 54.8
---------------------------------------
====== ======
</TABLE>
G-17
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Fixed maturities of long-term debt are as follows (in mil-
lions):
1996 -- $ 1.31998 -- $18.42000 -- $ --
1997 -- 19.21999 -- --Thereafter -- 3.2
Cash paid for interest for 1995, 1994 and 1993 was $67,000,
$615,000 and $96,000, respectively.
Reinsurance transactions included in the income statement
caption, "Insurance premiums," are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $777.6 $910.8 $807.5
------------------------
Insurance ceded 441.7 716.7 568.6
------------------------
------ ------ ------
Net reinsurance premiums $335.9 $194.1 $238.9
------------------------
====== ====== ======
</TABLE>
The income statement caption, "Benefits and settlement ex-
penses," is net of reinsurance recoveries of $456,000,
$524,000 and $438,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
The income statement caption, "Underwriting, acquisition,
insurance and other Expenses," includes amortization of de-
ferred acquisition costs of $399,700,000, $115,200,000 and
$241,000,000 for the years ended December 31, 1995, 1994 and
1993, respectively. An additional $(85,200,000), $81,200,000
and ($23,700,000) of deferred acquisition costs was restored
(amortized) and netted against "Realized gain (loss) on in-
vestments" for the years ended December 31, 1995, 1994 and
1993, respectively.
6.EMPLOYEE BENEFIT PLANS
Pension plans
LNC maintains funded defined benefit pension plans for most
of its employees and, prior to January 1, 1995, full-time
agents. The benefits for employees are based on total years
of service and the highest 60 months of compensation during
the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings.
The plans are funded by contributions to tax-exempt trusts.
Lincoln Life's funding policy is consistent with the funding
requirements of Federal laws and regulations. Contributions
are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the
future. Plan assets consist principally of listed equity se-
curities and corporate obligations and government bonds.
All benefits applicable to the funded defined benefit plan
for agents were frozen as of December 31, 1994. The curtail-
ment of this plan did not have a significant effect on net
pension cost for 1994. Effective January 1, 1995, pension
benefits for agents have been provided by a new defined con-
tribution plan. Contributions to this plan will be based on
2.3% of an agent's earnings up to the social security wage
base and 4.6% of any excess.
LNC also administers two types of unfunded, nonqualified,
defined benefit plans for certain employees and agents. A
supplemental retirement plan provides defined benefit pen-
sion benefits in excess of limits imposed by federal tax
law. A salary continuation plan provides certain officers of
Lincoln Life defined pension benefits based on years of
service and final monthly salary upon death or retirement.
G-18
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The status of the funded defined benefit pension plans and
the amounts recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- -------
(in millions)
----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
. Vested benefits $(162.1) $(130.5)
------------------------------------------------------
. Nonvested benefits (9.2) (7.3)
------------------------------------------------------ ------- -------
Accumulated benefit obligation (171.3) (137.8)
------------------------------------------------------
Effect of projected future compensation increases (37.2) (24.3)
------------------------------------------------------ ------- -------
Projected benefit obligation (208.5) (162.1)
------------------------------------------------------
Plan assets at fair value 196.4 159.3
------------------------------------------------------ ------- -------
Projected benefit obligations in excess of plan assets (12.1) (2.8)
------------------------------------------------------
Unrecognized net loss (gain) 12.6 (.5)
------------------------------------------------------
Unrecognized prior service cost 1.2 1.1
------------------------------------------------------ ------- -------
Prepaid (accrued) pension cost included in other
liabilities $ 1.7 $ (2.2)
------------------------------------------------------ ======= =======
</TABLE>
The status of the unfunded defined benefit pension plans and
the amounts recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ -----
(in
millions)
-------------
<S> <C> <C>
Actuarial present value of benefit obligation:
. Vested benefits $ (7.0) $(5.4)
---------------------------------------------------
. Nonvested benefits (1.5) (1.0)
--------------------------------------------------- ------ -----
Accumulated benefit obligation (8.5) (6.4)
---------------------------------------------------
Effect of projected future compensation increases (2.4) (2.5)
--------------------------------------------------- ------ -----
Projected benefit obligation (10.9) (8.9)
---------------------------------------------------
Unrecognized transition obligation -- --
---------------------------------------------------
Unrecognized net loss (gain) 1.0 (.3)
---------------------------------------------------
Unrecognized prior service cost .8 .8
--------------------------------------------------- ------ -----
Accrued pension costs included in other liabilities $ (9.1) $(8.4)
--------------------------------------------------- ====== =====
</TABLE>
The determination of the projected benefits obligation for
the defined benefit plans was based on the following assump-
tions:
<TABLE>
<CAPTION>
1995 1994 1993
------------
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 8.0% 7.0%
------------------------------------------------
Rate of increase in compensation:
. Salary continuation plan 6.0 6.5 6.0
------------------------------------------------
. All other plans 5.0 5.0 5.0
------------------------------------------------
Expected long-term rate of return on plan assets 9.0 9.0 9.0
------------------------------------------------
</TABLE>
G-19
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The components of net pension cost for the defined benefit
pension plans are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
-------------------
(in millions)
-------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 5.0 $ 8.9 $ 8.5
---------------------------------------------
Interest cost on projected benefit obligation 13.2 12.9 12.4
---------------------------------------------
Actual return on plan assets (36.3) 4.7 (20.1)
---------------------------------------------
Net amortization (deferral) 22.9 (18.6) 6.1
--------------------------------------------- ------ ------ ------
Net pension cost $ 4.8 $ 7.9 $ 6.9
--------------------------------------------- ====== ====== ======
</TABLE>
401(k)
LNC and Lincoln Life sponsor contributory defined contribu-
tion plans for eligible employees and agents. Lincoln Life's
contributions to the plans are equal to each participant's
pre-tax contribution, not to exceed 6% of base pay, multi-
plied by a percentage, ranging from 25% to 150%, which var-
ies according to certain incentive criteria as determined by
LNC's Board of Directors. Expense for these plans amounted
to $8,000,000, $13,200,000 and $11,800,000 in 1995, 1994 and
1993, respectively.
Postretirement medical and life insurance benefit plans
LNC sponsors unfunded defined benefit plans that provide
postretirement medical and life insurance benefits to full-
time employees and agents who, depending on the plan, have
worked for Lincoln Life 10 to 15 years and attained age 55
to 60. Medical benefits are also available to spouses and
other dependents of employees and agents. For medical bene-
fits, limited contributions are required from individuals
retired prior to November 1, 1988; contributions for later
retirees, which can be adjusted annually, are based on such
items as years of service at retirement and age at retire-
ment. The life insurance benefits are noncontributory, al-
though participants can elect supplemental contributory ben-
efits.
The status of the postretirement medical and life insurance
benefit plans and the amounts recognized on the balance
sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
--
(in millions)
--
<S> <C> <C>
Accumulated postretirement benefit obligation:
. Retirees $(39.8) $(34.9)
-----------------------------------------------
. Fully eligible active plan participants (9.9) (7.0)
-----------------------------------------------
. Other active plan participants (20.8) (15.0)
----------------------------------------------- ------ ------
Accumulated postretirement benefit obligation (70.5) (56.9)
-----------------------------------------------
Unrecognized net gain (.8) (5.5)
----------------------------------------------- ------ ------
Accrued plan cost included in other liabilities $(71.3) $(62.4)
----------------------------------------------- ====== ======
</TABLE>
G-20
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The components of periodic postretirement benefit cost are
as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994 1993
--
(in millions)
--
<S> <C> <C> <C>
Service cost $1.5 $1.7 $2.6
----------------------------------------
Interest cost 4.4 4.2 4.6
----------------------------------------
Amortization cost (credit) (.8) .1 --
---------------------------------------- ---- ---- ----
Net periodic postretirement benefit cost $5.1 $6.0 $7.2
---------------------------------------- ==== ==== ====
</TABLE>
The calculation of the accumulated postretirement benefit
obligation assumes a weighted-average annual rate of in-
crease in the per capita cost of covered benefits (i.e.,
health care cost trend rate) of 9.5% for 1996 gradually de-
creasing to 5.5% by 2004 and remaining at that level there-
after. The health care cost trend rate assumption has a sig-
nificant effect on the amounts reported. For example, in-
creasing the assumed health care cost trend rates by one
percentage point each year would increase the accumulated
postretirement benefit obligation as of December 1995 and
1994 by $5,100,000 and $4,100,000, respectively, and the ag-
gregate of the estimated service and interest cost compo-
nents of net periodic postretirement benefit cost for the
year ended December 31, 1995 by $488,000. The calculation
assumes a long-term rate of increase in compensation of 5.0%
for both December 31, 1995 and 1994. The weighted-average
discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% and 8.0% at De-
cember 31, 1995 and 1994, respectively.
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
Shareholder's equity restrictions
Net income as determined in accordance with statutory accounting practices
for Lincoln Life and its insurance subsidiaries in 1995, 1994 and 1993 was
$284,500,000, $366,700,000 and $237,000,000, respectively. Lincoln Life's
shareholder's equity as determined in accordance with statutory accounting
practices at December 31, 1995 and 1994 was $1,732,900,000 and
$1,679,700,000, respectively.
Lincoln Life is subject to certain insurance department regulatory restric-
tions as to the transfer of funds and payments of dividends to LNC. In
1996, Lincoln Life can transfer up to $284,500,000 without seeking prior
approval from the insurance regulators.
Disability income claims
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1995 and 1994 is a net
liability of $602,600,000 and $441,700,000, respectively, excluding de-
ferred acquisition costs. The bulk of the increase to this liability re-
lates to the assumption of a large block of disability claim reserves and
related assets during the third quarter of 1995. In addition, as indicated
in Note 2, Lincoln Life strengthened its disability income reserves and
wrote off certain related deferred acquisition costs in the fourth quarter
of 1995. The reserves were established on the assumption that the recent
experience will continue in the future. If incidence levels or claim termi-
nation rates vary significantly from these assumptions, further adjustments
to reserves may be required in the future. It is not possible to provide a
meaningful estimate of a range of possible outcomes at this time. Lincoln
Life reviews and updates the level of these reserves on an on-going basis.
Compliance of qualified annuity plans
Tax authorities continue to focus on compliance of
qualified annuity plans marketed by insurance companies. If sponsoring em-
ployers cannot demonstrate
compliance and the insurance company is held re-
sponsible due to its marketing efforts, Lincoln Life
and other insurers may be subject to potential liability. It is not possi-
ble to provide a meaningful estimate of the range of potential liability at
this time. Management continues to monitor this matter and to take steps to
minimize any potential liability.
Group pension annuities
The liabilities for guaranteed interest and group pension annuity con-
tracts, which are no longer be-
G-21
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
ing sold, are supported by a single portfolio of assets which attempts to
match the duration of these liabilities. Due to the very long-term nature
of group pension annuities and the resulting inability to exactly match
cash flows, a risk exists that future cash flows from investments will not
be reinvested at rates as high as currently earned by the portfolio. This
situation could cause losses which would be recognized at some future time.
Leases
Lincoln Life and certain of its subsidiaries lease their home office prop-
erties through sale-leaseback agreements. The agreements provide for a 25
year lease period with options to renew for six additional terms of five
years each. The agreements also provide Lincoln Life with the right of
first refusal to purchase the properties during the term of the lease, in-
cluding renewal periods, at a price as defined in the agreements. In addi-
tion, Lincoln Life has the option to purchase the leased properties at fair
market value as defined in the agreements on the last day of the initial 25
year lease period ending in 2009 or the last day of any of the renewal pe-
riods.
Total rental expense under operating leases in 1995, 1994 and 1993 was
$24,400,000, $21,700,000 and $27,100,000. Future minimum rental commitments
are as follows (in millions):
<TABLE>
<S> <C>
1996 $ 20.9
----------
1997 19.5
----------
1998 18.3
----------
1999 18.3
----------
2000 17.7
----------
Thereafter 172.4
---------- ------
$267.1
======
</TABLE>
Insurance ceded and assumed
Lincoln Life cedes insurance to other companies, including certain affili-
ates. That portion of risks exceeding each company's retention limit is re-
insured with other insurers. Lincoln Life seeks reinsurance coverage within
the business segment that sells life insurance that limits its liabilities
on an individual insured to $3,000,000. To cover products other than life
insurance, Lincoln Life acquires other insurance coverages with retentions
and limits which management believes are appropriate for the circumstances.
The accompanying financial statements reflect premiums, benefits and set-
tlement expenses and deferred acquisition costs, net of insurance ceded
(see Note 5). Lincoln Life and its subsidiaries remain liable if their re-
insurers are unable to meet their contractual obligations under the appli-
cable reinsurance agreements.
Lincoln Life assumes insurance from other companies, including certain af-
filiates. At December 31, 1995, Lincoln Life has provided $92,700,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables from the ceding company, which are secured by future profits on the
reinsured business. However, Lincoln Life is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
Vulnerability from concentrations
At December 31, 1995, Lincoln Life did not have
a material concentration of financial instruments in
a single investee, industry or geographic location. Also at December 31,
1995, Lincoln Life did not have a concentration of 1) business transactions
with a particular customer, lender or distributor, 2) revenues from a par-
ticular product or service, 3) sources of supply of labor or services used
in the
business or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a se-
vere impact to Lincoln Life's financial condition.
Other contingency matters
Lincoln Life and its subsidiaries are involved in various pending or
threatened legal proceedings arising from the conduct of their business. In
some instances, these proceedings include claims for punitive damages and
similar types of relief in unspecified or substantial amounts, in addition
to amounts for alleged contractual liability or requests for equitable re-
lief. After consultation with counsel and a review of available facts, it
is management's opinion that these proceedings ultimately will be resolved
without materially affecting the consolidated financial statements of Lin-
coln Life.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabili-
tated companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. Lincoln Life has accrued
for expected assessments net of estimated future premium tax deductions.
G-22
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Guarantees
Lincoln Life has guarantees with off-balance-sheet risks
whose contractual amounts represent credit exposure. Out-
standing guarantees with off-balance-sheet risks, shown in
notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
contract
amounts
-----------
December 31
1995 1994
---------------
(in
millions)
-----------
<S> <C> <C>
Real estate partnerships $ 3.3 $17.6
---------------------------------------
Mortgage loan pass-through certificates 63.6 78.2
--------------------------------------- ----- -----
$66.9 $95.8
===== =====
</TABLE>
Lincoln Life has invested in real estate partnerships that
use conventional mortgage loans. In some cases, the terms of
these arrangements involve guarantees by each of the part-
ners to indemnify the mortgagor in the event a partner is
unable to pay its principal and interest payments. In addi-
tion, Lincoln Life has sold commercial mortgage loans
through grantor trusts which issued pass-through certifi-
cates. Lincoln Life has agreed to repurchase any mortgage
loans which remain delinquent for 90 days at a repurchase
price substantially equal to the outstanding principal bal-
ance plus accrued interest thereon to the date of repur-
chase. It is management's opinion that the value of the
properties underlying these commitments is sufficient that
in the event of default the impact would not be material to
Lincoln Life. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1995 and
1994.
G-23
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Derivatives
Lincoln Life has derivatives with off-balance-sheet risks
whose notional or contract amounts exceed the credit expo-
sure. Lincoln Life has entered into derivative transactions
to reduce its exposure to fluctuations in interest rates,
the widening of bond yield spreads over comparable maturity
U.S. Government obligations and foreign exchange risks. In
addition, Lincoln Life is subject to the risks associated
with changes in the value of its derivatives; however, such
changes in the value generally are offset by changes in the
value of the items being hedged by such contracts. Outstand-
ing derivatives with off-balance-sheet risks, shown in
notional or contract amounts along with their carrying value
and estimated fair values, are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
------------------------------
Notional or Carrying Fair Carrying Fair
contract amounts value value value value
----------------- -------- ----- -------- -----
December 31 December 31 December 31
1995 1994 1995 1995 1994 1994
-------- -------- -------- ----- -------- -----
(in millions)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate
derivatives:
Interest rate cap
agreements $5,110.0 $4,400.0 $22.7 $5.3 $23.3 $34.4
------------------------
Spread-lock agreements 600.0 1,300.0 (.9) (.9) 3.2 3.2
------------------------
Financial futures
contracts -- 382.5 -- -- (7.5) (7.5)
------------------------
Interest rate swaps 5.0 5.0 .2 .2 .2 .2
------------------------ -------- -------- ----- ---- ----- -----
5,715.0 6,087.5 22.0 4.6 19.2 30.3
Foreign currency
derivatives:
Foreign exchange forward
contracts 15.7 21.2 (.6) (.6) .2 .2
------------------------
Foreign currency options 99.2 -- 1.9 1.4 -- --
------------------------
Foreign currency swaps 15.0 -- .4 .4 -- --
------------------------ -------- -------- ----- ---- ----- -----
129.9 21.2 1.7 1.2 .2 .2
-------- -------- ----- ---- ----- -----
$5,844.9 $6,108.7 $23.7 $5.8 $19.4 $30.5
======== ======== ===== ==== ===== =====
</TABLE>
A reconciliation and discussion of the notional or contract
amounts for the significant programs using derivative agree-
ments and contracts is as follows:
<TABLE>
<CAPTION>
Interest rate
caps Spread locks
----------------- -------------------
December 31 December 31
1995 1994 1995 1994
-------- -------- --------- --------
(in millions)
-------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,400.0 $3,800.0 $ 1,300.0 $1,700.0
----------------------------
New contracts 710.0 600.0 800.0 --
----------------------------
Terminations and maturities -- -- (1,500.0) (400.0)
---------------------------- -------- -------- --------- --------
Balance at end of year $5,110.0 $4,400.0 $ 600.0 $1,300.0
---------------------------- ======== ======== ========= ========
</TABLE>
G-24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
<TABLE>
<CAPTION>
Financial futures
-------------------------------------
Contracts Options
1995 1994 1995 1994
--------- -------- ------- -------
(in millions)
-------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 382.5 $ 33.1 $ -- $ --
----------------------------
New contracts 810.5 1,087.7 181.6 308.0
----------------------------
Terminations and maturities (1,193.0) (738.3) (181.6) (308.0)
---------------------------- --------- -------- ------- -------
Balance at end of year $ -- $ 382.5 $ -- $ --
---------------------------- ========= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Foreign currency derivatives
-----------------------------------------
Foreign
exchange Foreign Foreign
forward currency currency
contracts options swaps
1995 1994 1995 1994 1995 1994
------- ------ ------- ---- ----- ----
(in millions)
-----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 21.2 $ -- $ -- $ -- $ -- $ --
----------------------------
New contracts 131.2 38.5 356.6 -- 15.0 --
----------------------------
Terminations and maturities (136.7) (17.3) (257.4) -- -- --
---------------------------- ------- ------ ------- ---- ----- ----
Balance at end of year $ 15.7 $ 21.2 $ 99.2 $ -- $15.0 $ --
---------------------------- ======= ====== ======= ==== ===== ====
</TABLE>
Interest rate caps
The interest rate cap agreements, which expire in 1997
through 2003, entitle Lincoln Life to receive payments from
the counterparties on specified future reset dates, contin-
gent on future interest rates. For each cap, the amount of
such quarterly payments, if any, is determined by the excess
of a market interest rate over a specified cap rate times
the notional amount divided by four. The purpose of Lincoln
Life's interest rate cap agreement program is to protect its
annuity line of business from the effect of fluctuating in-
terest rates. The premium paid for the interest rate caps is
included in other assets ($22,700,000 and $23,400,000 as of
December 31, 1995 and 1994, respectively) and is being amor-
tized over the terms of the agreements and is included in
net investment income.
Spread locks
Spread-lock agreements in effect at December 31, 1995 all
expire in 2005. Spread-lock agreements provide for a lump
sum payment to or by Lincoln Life depending on whether the
spread between the swap rate and a specified U.S. Treasury
note is larger or smaller than a contractually specified
spread. Cash payments are based on the product of the
notional amount, the spread between the swap rate and the
yield of an equivalent maturity U.S. Treasury security and
the price sensitivity of the swap at that time, expressed in
dollars per basis point. The purpose of Lincoln Life's
spread-lock program is to protect a portion of its fixed ma-
turity securities against widening of spreads.
G-25
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, spread-lock agreements, in-
terest rate swaps, foreign exchange forward contracts, foreign currency op-
tions and foreign currency swaps, but Lincoln Life does not anticipate non-
performance by any of these counterparties. The credit risk associated with
such agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount
of such exposure is essentially the net replacement cost or market value
for such agreements with each counterparty if the net market value is in
Lincoln Life's favor. At December 31, 1995, the exposure was $6,900,000.
8.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of Lincoln Life's financial instruments.
Considerable judgment is required to develop these fair values and, accord-
ingly, the estimates shown are not necessarily indicative of the amounts
that would be realized in a one time, current market exchange of all of
Lincoln Life's financial instruments.
Fixed maturity and equity securities
Fair values for fixed maturity securities are based on quoted market pric-
es, where available. For fixed maturity securities not actively traded,
fair values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by discount-
ing expected future cash flows using a current market rate applicable to
the coupon rate, credit quality and maturity of the investments. The fair
values for equity securities are based on quoted market prices.
Mortgage loans on real estate
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income when compared to the expected yield for mortgages having sim-
ilar characteristics. The rating for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service cov-
erage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loans are measured based either on the present
value of expected future cash flows discounted at the loan's effective in-
terest rate, at the loan's market price or the fair value of the collateral
if the loan is collateral dependent.
7.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
Financial futures
Lincoln Life uses exchange-traded financial futures contracts and options
on those financial futures to hedge against interest rate risks and to man-
age duration of a portion of its fixed maturity securities. Financial
futures contracts obligate Lincoln Life to buy or sell a financial instru-
ment at a specified future date for a specified price and may be settled in
cash or through delivery of the financial instrument. Cash settlements on
the change in market values of financial futures contracts are made daily.
Options on financial futures give Lincoln Life the right, but not the obli-
gation, to assume a long or short position in the underlying futures at a
specified price during a specified time period.
Foreign currency derivatives
Lincoln Life uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate Lincoln Life to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give Lincoln Life the right, but not the obligation, to
buy or sell a foreign currency at a specific exchange rate during a speci-
fied time period. A foreign currency swap is a contractual agreement to ex-
change the currencies of two different countries pursuant to an agreement
to reexchange the two currencies at the same rate of exchange at a speci-
fied future date.
Additional derivative information
Expenses for the agreements and contracts described above amounted to
$5,600,000 and $5,400,000 in 1995 and 1994, respectively. Deferred losses
of $21,800,000 as of December 31, 1995, resulting from (1) terminated and
expired spread-lock agreements, (2) financial futures contracts and (3) op-
tions on financial futures, are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
G-26
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Short-term and long-term debt
Fair values for long-term debt issues are estimated using discounted cash
flow analysis based on Lincoln Life's current incremental borrowing rate
for similar types of borrowing arrangements. For short-term debt, the car-
rying value approximates fair value.
Guarantees
Lincoln Life's guarantees include guarantees related to real estate part-
nerships and mortgage loan pass-through certificates. Based on historical
performance where repurchases have been negligible and the current status,
which indicates none of the loans are delinquent, the fair value liability
for the guarantees related to the mortgage loan pass-through certificates
is insignificant. Fair values for all other guarantees are based on fees
that would be charged currently to enter into similar agreements, taking
into consideration the remaining terms of the agreements and the
counterparties' credit standing.
Derivatives
Lincoln Life's derivatives include interest rate cap agreements, spread-
lock agreements, foreign currency exchange contracts, financial futures
contracts, options on financial futures, interest rate swaps, foreign cur-
rency options and foreign currency swaps. Fair values for these contracts
are based on current settlement values. The current settlement values are
based on quoted market prices for the foreign currency exchange contracts,
financial future contracts and options on financial futures and on broker-
age quotes, which utilized pricing models or formulas using current assump-
tions, for all other swaps and agreements.
Investment commitments
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real es-
tate are based on the difference between the value of the committed invest-
ments as of the date of the accompanying balance sheets and the commitment
date, which would take into account changes in interest rates, the
counterparties' credit standing and the remaining terms of the commitments.
8.FAIR VALUE OF FINANCIAL
INSTRUMENTS CONTINUED
Policy loans
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on
historical experience.
Other investments and cash and invested cash
The carrying value for assets classified as other investments and cash and
invested cash in the accom-
panying balance sheets approximates their fair value.
Investment type insurance contracts
The balance sheet captions, "Future policy benefits, claims and claims ex-
penses" and "Contractholder funds," include investment type insurance con-
tracts (i.e., deposit contracts and guaranteed interest contracts). The
fair values for the deposit contracts and certain guaranteed interest con-
tracts are based on their approximate surrender values. The fair values for
the remaining guaranteed interest and similar contracts are estimated using
discounted cash flow calculations based on interest rates currently being
offered on similar contracts with maturities consistent with those remain-
ing for the contracts being valued.
The remainder of the balance sheet captions, "Future policy benefits,
claims and claims expenses" and "Contractholder funds," that do not fit the
definition of "investment type insurance contracts" are considered insur-
ance contracts. Fair value disclosures are not required for these insurance
contracts and have not been determined by Lincoln Life. It is Lincoln
Life's position that the disclosure of the fair value of these insurance
contracts is important in that readers of these financial statements could
draw inappropriate conclusions about Lincoln Life's shareholder's equity
determined on a fair value basis if only the fair value of assets and lia-
bilities defined as financial instruments are disclosed. Lincoln Life and
other companies in the insurance industry are monitoring the related ac-
tions of the various rule-making bodies and attempting to determine an ap-
propriate methodology for estimating and disclosing the "fair value" of
their insurance contract liabilities.
G-27
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
8.FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED
The carrying values and estimated fair values of Lincoln
Life's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
---------------------------------------------
Carrying Fair Carrying Fair
Assets (Liabilities) value value value value
---------------------------------------------------------------------------
(in millions)
----------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 20,414.8 $ 20,414.8 $ 17,692.2 $ 17,692.2
-------------------------
Equity securities 598.4 598.4 456.3 456.3
-------------------------
Mortgage loans on real
estate 3,147.8 3,330.5 2,795.9 2,720.6
-------------------------
Policy loans 565.3 557.4 528.7 508.1
-------------------------
Other investments 241.2 241.2 158.2 158.2
-------------------------
Cash and invested cash 802.7 802.7 990.9 990.9
-------------------------
Investment type insurance
contracts:
-------------------------
. Deposit contracts and
certain guaranteed
interest contracts (15,390.8) (15,179.1) (14,294.7) (14,052.5)
-------------------------
. Remaining guaranteed
interest and similar
contracts (2,470.9) (2,396.5) (2,485.5) (2,423.9)
-------------------------
Short-term debt (124.8) (124.8) (153.7) (153.7)
-------------------------
Long-term debt (40.8) (36.7) (54.8) (57.0)
-------------------------
Derivatives 23.7 5.8 19.4 30.5
-------------------------
Investment commitments -- (.8) -- (.5)
-------------------------
</TABLE>
As of December 31, 1995 and 1994, the carrying values of the
deposit contracts and certain guaranteed contracts is net of
deferred acquisition costs of $333,797,000 and $399,000,000,
respectively, excluding adjustments for deferred acquisition
costs applicable to changes in fair value of securities. The
carrying values of these contracts are stated net of de-
ferred acquisition costs in order that they be comparable
with the fair value basis.
9.SEGMENT INFORMATION
Lincoln Life has two major business segments: Life Insurance
and Annuities and Reinsurance. The Life Insurance and Annui-
ties segment offers universal life, pension products and
other individual coverages through a network of career
agents, independent general agencies and insurance agencies
located within a variety of financial institutions. These
products are sold throughout the United States by Lincoln
Life. Reinsurance sells reinsurance products and services to
insurance companies, HMOs, self-funded employers and other
primary risk accepting organizations in the U.S. and econom-
ically attractive international markets. Effective in the
fourth quarter of 1995, operating results of the direct dis-
ability income business previously included in the Life In-
surance and Annuities segment is now included in the Rein-
surance segment. This direct disability income business,
which is no longer being sold, is now managed by the Rein-
surance segment along with its disability income business.
Prior to the sale of 100% of the ownership of its primary
underwriter of employee life-health benefit coverages in
1994 (see Note 10), the Employee Life-Health Benefits seg-
ment distributed group life and health insurance, managed
health care and other related coverages through career
agents and independent general agencies. Activity which is
not included in the major business segments is shown as
"Other Operations."
"Other Operations" includes operations not directly related
to the business segments and unallocated corporate items
(i.e., corporate investment income, interest expense on cor-
porate debt and unallocated corporate overhead expenses).
G-28
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
9.SEGMENT INFORMATION CONTINUED
The revenue, pre-tax income and assets by segment for 1993
through 1995 are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
---------------------------
(in millions)
-----------------------------
<S> <C> <C> <C>
Revenue:
. Life Insurance and Annuities $ 2,569.2 $ 2,065.3 $ 2,341.9
---------------------------------------
. Reinsurance 751.2 660.4 610.7
---------------------------------------
. Employee Life-Health Benefits -- 314.9 1,326.8
---------------------------------------
. Other Operations 16.1 74.6 (28.8)
--------------------------------------- --------- --------- ---------
$ 3,336.5 $ 3,115.2 $ 4,250.6
========= ========= =========
Income (loss) before income taxes and
cumulative effect of accounting change:
. Life Insurance and Annuities $ 361.0 $ 75.6 $ 265.3
---------------------------------------
. Reinsurance 83.5 93.9 31.6
---------------------------------------
. Employee Life-Health Benefits -- 22.9 83.0
---------------------------------------
. Other Operations 5.0 67.8 (44.2)
--------------------------------------- --------- --------- ---------
$ 449.5 $ 260.2 $ 335.7
========= ========= =========
Assets:
. Life Insurance and Annuities $45,280.0 $37,675.9 $36,021.0
---------------------------------------
. Reinsurance 3,383.5 2,311.5 2,328.9
---------------------------------------
. Employee Life-Health Benefits -- -- 588.5
---------------------------------------
. Other Operations 923.6 1,038.1 770.0
--------------------------------------- --------- --------- ---------
$49,587.1 $41,025.5 $39,708.4
========= ========= =========
</TABLE>
Provisions for depreciation and capital additions were not material.
10.SALE OF AFFILIATES
In December 1993, Lincoln Life recorded a provision for loss
of $98,500,000 (also $98,500,000 after-tax) in the "Other
Operations" segment for the sale of Security-Connecticut
Life Insurance Company (Security-Connecticut). The sale was
completed on February 2, 1994 through an initial public of-
fering and Lincoln Life received cash and notes, net of re-
lated expenses, totaling $237,700,000. The loss on sale and
disposal expenses did not differ materially from the esti-
mate recorded in the fourth quarter of 1993. For the year
ended December 31, 1993, Security-Connecticut, which oper-
ated in the Life Insurance and Annuities segment, had reve-
nue of $274,500,000 and net income of $24,000,000.
In 1994, Lincoln Life completed the sale of 100% of the com-
mon stock of EMPHESYS (parent company of Employers Health
Insurance Company, which comprised the Employee Life-Health
Benefits segment) for $348,200,000 of cash, net of related
expenses, and a $50,000,000 promissory note. A gain on sale
of $69,000,000 (also $69,000,000 after-tax) was recognized
in 1994 in "Other Operations". For the year ended December
31, 1993, EMPHESYS had revenues of $1,304,700,000 and net
income of $55,300,000. EMPHESYS had revenue and net income
of $314,900,000 and $14,400,000, respectively, during the
three months of ownership in 1994.
G-29
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life provides services to and receives services from affiliated
companies which resulted in a net receipt of $7,500,000, $13,900,000 and
$18,900,000 in 1995, 1994 and 1993, respectively.
Lincoln Life both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994
---------
(in millions)
---------
<S> <C> <C>
Insurance assumed $ 17.6 $ 19.8
-----------------
Insurance ceded 214.4 481.3
-----------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies
as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
-----------------------------------------------
(in millions)
-----------------------------------------------
<S> <C> <C>
Future policy benefits and claims assumed $ 344.8 $341.3
---------------------------------------------------
Future policy benefits and claims ceded 1,344.5 857.7
---------------------------------------------------
Amounts recoverable on paid and unpaid losses 65.9 36.8
---------------------------------------------------
Reinsurance payable on paid losses 5.5 3.5
---------------------------------------------------
Funds held under reinsurance treaties-net liability 712.3 238.4
---------------------------------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with unau-
thorized companies. To take a reserve credit for such reinsurance, Lincoln
Life holds assets from the reinsurer, including funds held under reinsur-
ance treaties, and is the beneficiary on letters of credit aggregating
$340,800,000 and $308,200,000 at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, LNC had guaranteed $275,300,000 and
$298,200,000, respectively, of these letters of credit. At December 31,
1995, Lincoln Life has a receivable (included in the foregoing amounts)
from affiliated insurance companies in the amount of $241,900,000 for stat-
utory surplus relief received under financial reinsurance ceded agreements.
11.SUBSEQUENT EVENT
In January 1996, LNC announced that it had signed a definitive agreement to
acquire the group tax-sheltered annuity business of UNUM Corporation's af-
filiates. This purchase is expected to be completed in the form of a rein-
surance transaction with an initial ceding commission of approximately
$70,000,000. This ceding commission represents the present value of busi-
ness in-force and, accordingly, will be classified as other intangible as-
sets upon the close of this transaction. This transaction, which is ex-
pected to close in the third quarter of 1996, will increase LNC's assets
and policy liabilities and accruals by approximately $3,200,000,000.
12.TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with Lincoln Life under
which it sells Lincoln Life's products and provides the service that other-
wise would be provided by a home office marketing department and regional
offices. For providing these selling and marketing services, Lincoln Life
paid LFGI override commissions and operating expense allowances of
$81,900,000, $78,500,000 and $74,500,000 in 1995, 1994 and 1993, respec-
tively. LFGI incurred expenses of $10,400,000, $10,700,000 and $10,500,000
in 1995, 1994 and 1993, respectively, in excess of the override commission
and operating expense allowances received from Lincoln Life, which Lincoln
Life is not required to reimburse.
Cash and invested cash at December 31, 1995 and 1994 include Lincoln Life's
participation in a short-term investment pool with LNC of $333,800,000 and
$428,300,000, respectively. Related investment income amounted to
$22,500,000, $17,100,000 and $9,100,000 in 1995, 1994 and 1993, respective-
ly. Short-term debt at December 31, 1995 and 1994 includes $67,000,000 and
$68,600,000, respectively, borrowed from LNC. Lincoln Life paid interest to
LNC of $24,000, $8,000 and $137,000 in 1995, 1994 and 1993, respectively.
G-30
<PAGE>
FINANCIAL SCHEDULES
The following consolidated financial statement schedules of
Lincoln National Life Insurance Company and subsidiaries are
included on pages G-32 through G-36:
I. Summary of Investments--Other than Investments in Related
Parties -- December 31, 1995
III. Supplementary Insurance Information Years ended Decem-
ber 31, 1995, 1994 and 1993
IV. Reinsurance -- Years ended December 31, 1995, 1994 and
1993
V. Valuation and Qualifying Accounts -- Years ended December
31, 1995, 1994 and 1993
All other schedules for which provision is made in the ap-
plicable accounting regulation of the Securities and Ex-
change Commission are not required under the related in-
structions, are inapplicable or the required information is
included in the consolidated financial statements, and
therefore have been omitted.
G-31
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- ------------------------------------------------------------------------------
Amount at
which shown
in the
balance
Type of Investment Cost Value sheet
- ------------------------------------------------------------------------------
(000's omitted)
-----------------------------------
<S> <C> <C> <C>
Fixed maturity securities available-
for-sale:
Bonds:
. United States Government and
government agencies and authorities $ 569,552 $ 653,444 $ 653,444
--------------------------------------
. States, municipalities and political
subdivisions 12,325 12,375 12,375
--------------------------------------
. Mortgage-backed securities 4,891,521 5,184,751 5,184,751
--------------------------------------
. Foreign governments 927,901 997,567 997,567
--------------------------------------
. Public utilities 2,572,309 2,772,990 2,772,990
--------------------------------------
. Convertibles and bonds with warrants
attached 181,431 199,658 199,658
--------------------------------------
. All other corporate bonds 9,658,371 10,551,770 10,551,770
--------------------------------------
Redeemable preferred stocks 39,427 42,230 42,230
-------------------------------------- ----------- ----------- -----------
Total fixed maturity securities 18,852,837 20,414,785 20,414,785
- ---------------------------------------
Equity securities available-for-sale:
Common stocks:
. Public utilities 8,980 10,989 10,989
--------------------------------------
. Banks, trust and insurance companies 74,897 89,197 89,197
--------------------------------------
. Industrial, miscellaneous and all
other 345,434 436,556 436,556
--------------------------------------
Nonredeemable preferred stocks 50,950 61,693 61,693
-------------------------------------- ----------- ----------- -----------
Total equity securities 480,261 598,435 598,435
- ---------------------------------------
Mortgage loans on real estate 3,176,275 3,147,783(A)
Real estate:
. Investment properties 635,135 635,135
--------------------------------------
. Acquired in satisfaction of debt 157,441 110,888(A)
--------------------------------------
Policy loans 565,325 565,325
- ---------------------------------------
Other investments 253,015 241,219(A)
- --------------------------------------- ----------- -----------
Total investments $24,120,189 $25,713,570
- --------------------------------------- =========== ===========
</TABLE>
(A) Investments which are deemed to have declines in value that are other than
temporary are written down or reserved for to reduce their carrying value
to their estimated realizable value.
G-32
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------
Future policy
benefits, Other policy
Deferred claims and claims and
acquisition claim Unearned benefits Premium
Segment costs expenses premiums payable revenue (A)
- --------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance and
annuities $ 713,213 $6,530,475 $ 9,145 $-- $ 685,258
----------------------
Reinsurance 247,921 1,855,039 45,951 -- 611,416
----------------------
Other (including
consolidating
adjustments) (7,300) 49,505 78 -- 622
----------------------
---------- ---------- ------- --- ----------
$ 953,834 $8,435,019 $55,174 $-- $1,297,296
========== ========== ======= === ==========
Year ended December 31,
1994:
Life insurance and
annuities $1,427,692 $5,888,581 $11,201 $-- $ 647,416
----------------------
Reinsurance 304,913 1,626,033 51,618 -- 542,034
----------------------
Employee life-health
benefits -- -- -- -- 299,338
----------------------
Other (including
consolidating
adjustments) 3,921 26,158 (1,347) -- 1,076
----------------------
---------- ---------- ------- --- ----------
$1,736,526 $7,540,772 $61,472 $-- $1,489,864
========== ========== ======= === ==========
Year ended December 31,
1993:
Life insurance and
annuities $ 999,126 $6,782,207 $ 5,188 $-- $ 662,353
----------------------
Reinsurance 298,787 1,616,088 54,157 -- 491,397
----------------------
Employee life-health
benefits -- 228,892 -- -- 1,243,576
----------------------
Other (including
consolidating
adjustments) -- 171,043 315 -- 387
----------------------
---------- ---------- ------- --- ----------
$1,297,913 $8,798,230 $59,660 $-- $2,397,713
========== ========== ======= === ==========
</TABLE>
(A) Includes insurance fees on universal life and other interest sensitive
products.
G-33
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION CONTINUED
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
- -------------------------------------------------------------------------------------------
Amortization
Benefits, claims of deferred Other
Net investment and claim acquisition operating Premium
Segment income (B) expenses costs expenses (B) written
- -------------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance and
annuities $1,741,231 $1,649,119 $298,020 $261,016 $ --
----------------------
Reinsurance 134,000 472,198 101,729 93,750 --
----------------------
Other (including
consolidating
adjustments) 24,399 1,299 -- 9,898 --
---------------------- ---------- ---------- -------- -------- -----
$1,899,630 $2,122,616 $399,749 $364,664 $ --
========== ========== ======== ======== =====
Year ended December 31,
1994:
Life insurance and
annuities $1,542,552 $1,554,479 $ 85,697 $349,529 $ --
----------------------
Reinsurance 116,957 419,266 29,477 117,238 --
----------------------
Employee life-health
benefits (C) 10,838 218,672 -- 73,355 --
----------------------
Other (including
consolidating
adjustments) 3,634 1,630 -- 5,682 --
---------------------- ---------- ---------- -------- -------- -----
$1,673,981 $2,194,047 $115,174 $545,804 $ --
========== ========== ======== ======== =====
Year ended December 31,
1993:
Life insurance and
annuities $1,676,163 $1,615,883 $197,363 $268,066 $ --
----------------------
Reinsurance 115,582 467,824 38,351 72,840 --
----------------------
Employee life-health
benefits 54,513 943,235 -- 300,648 --
----------------------
Other (including
consolidating
adjustments) (22,799) 6,197 5,275 (744) --
---------------------- ---------- ---------- -------- -------- -----
$1,823,459 $3,033,139 $240,989 $640,810 $ --
========== ========== ======== ======== =====
</TABLE>
(B) The allocation of expenses between investments and other operations are
based on a number of assumptions and estimates. Results would change if
different methods were applied.
(C) Includes data through the March 21, 1994 date of sale of the direct writer
of employee life-health coverages.
G-34
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE (A)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------
Percentage
Ceded Assumed of amount
Gross to other from other assumed to
Segment amount companies companies Net amount net
- --------------------------------------------------------------------------------------
(000's omitted)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance in force $ 51,570,782 $17,612,782 $142,794,000 $176,752,000 80.8%
-----------------------
Premiums:
-----------------------
Health insurance 302,463 299,222 273,572 276,813 98.8
----------------------
Life insurance (B) 658,936 142,523 504,070 1,020,483 49.4
---------------------- ------------ ----------- ------------ ------------
$ 961,399 $ 441,745 $ 777,642 $ 1,297,296
============ =========== ============ ============
Year ended December 31,
1994:
Life insurance in force $ 79,802,000 $45,822,000 $125,640,000 $159,620,000 78.7%
-----------------------
Premiums:
-----------------------
Health insurance 666,609 496,090 359,659 530,178 67.8
----------------------
Life insurance (B) 629,185 220,678 551,179 959,686 57.4
---------------------- ------------ ----------- ------------ ------------
$ 1,295,794 $ 716,768 $ 910,838 $ 1,489,864
============ =========== ============ ============
Year ended December 31,
1993:
Life insurance in force $135,401,000 $61,401,000 $109,257,000 $183,257,000 59.6%
-----------------------
Premiums:
-----------------------
Health insurance 1,387,414 217,705 262,171 1,431,880 18.3
----------------------
Life insurance (B) 771,408 350,907 545,332 965,833 56.5
---------------------- ------------ ----------- ------------ ------------
$ 2,158,822 $ 568,612 $ 807,503 $ 2,397,713
============ =========== ============ ============
</TABLE>
(B) Includes insurance fees on universal life and other interest sensitive
products.
G-35
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------
Additions
-----------------------
(1) (2)
Charged to
Balance at Charged other Deductions- Balance
beginning to costs and accounts- describe at end of
Description of period expenses (A) describe (B) period
- ---------------------------------------------------------------------------------
(000's omitted)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $ 56,614 $ 2,659 $ -- $ (30,781) $ 28,492
-----------------------
. Reserve for real
estate 65,186 (7,227) -- (11,406) 46,553
-----------------------
. Reserve for other
long-term investments 13,492 (1,541) -- (155) 11,796
-----------------------
Year ended December 31,
1994:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $220,671 $ 19,464 $ -- $(183,521) $ 56,614
-----------------------
. Reserve for real
estate 121,427 13,058 -- (69,299) 65,186
-----------------------
. Reserve for other
long-term investments 26,730 262 -- (13,500) 13,492
-----------------------
Included in other
liabilities:
Investment guarantees 1,804 4,280 -- (6,084) --
-----------------------
Year ended December 31,
1993:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $129,093 $136,717 $ -- $ (45,139) $220,671
-----------------------
. Reserve for real
estate 114,178 21,776 -- (14,527) 121,427
-----------------------
. Reserve for other
long-term investments 31,582 3,905 -- (8,757) 26,730
-----------------------
Included in other
liabilities:
Investment guarantees 12,550 1,674 -- (12,420) 1,804
-----------------------
</TABLE>
(A) Exclude charges for the direct write-off of assets. The negative amounts
represent improvements in the underlying assets for which valuation ac-
counts had previously been established.
(B) Deductions reflect sales or foreclosures of the underlying holdings.
G-36
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors
Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets
of Lincoln National Life Insurance Co., a wholly owned sub-
sidiary of Lincoln National Corp., as of December 31, 1995
and 1994, and the related consolidated statements of income,
shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1995. Our audits also
included the financial statement schedules listed on page G-
31. These financial statements and schedules are the respon-
sibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally ac-
cepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the fi-
nancial statements. An audit also includes assessing the ac-
counting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Lincoln National Life Insurance Co. at
December 31, 1995 and 1994, and the consolidated result of
its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when
considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the consolidated financial state-
ments, in 1993 the Company changed its method of accounting
for postretirement benefits other than pensions, accounting
for impairment of loans and accounting for certain invest-
ments in debt and equity securities.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
February 7, 1996
G-37
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
<TABLE>
<CAPTION>
December 31
1996 1995
--------- ---------
(in millions)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $19,389.6 $17,729.7
- -------------------------------------------------------------------------------------------------------
Preferred stocks 239.7 89.9
- -------------------------------------------------------------------------------------------------------
Unaffiliated common stocks 358.3 535.5
- -------------------------------------------------------------------------------------------------------
Affiliated common stocks 241.5 193.0
- -------------------------------------------------------------------------------------------------------
Mortgage loans on real estate 2,976.7 2,909.7
- -------------------------------------------------------------------------------------------------------
Real estate 621.3 655.2
- -------------------------------------------------------------------------------------------------------
Policy loans 626.5 515.8
- -------------------------------------------------------------------------------------------------------
Other investments 282.7 248.0
- -------------------------------------------------------------------------------------------------------
Cash and short-term investments 759.2 780.9
- ----------------------------------------------------------------------------------- --------- ---------
Total cash and investments 25,495.5 23,657.7
- -------------------------------------------------------------------------------------------------------
Premiums and fees in course of collection 60.9 17.1
- -------------------------------------------------------------------------------------------------------
Accrued investment income 343.6 342.5
- -------------------------------------------------------------------------------------------------------
Funds withheld by ceding companies 25.8 595.3
- -------------------------------------------------------------------------------------------------------
Other admitted assets 355.7 217.7
- -------------------------------------------------------------------------------------------------------
Separate account assets 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total admitted assets $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,954.0 $ 5,713.3
- -------------------------------------------------------------------------------------------------------
Other policyholder funds 17,262.4 15,598.5
- -------------------------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 250.2 499.3
- -------------------------------------------------------------------------------------------------------
Funds held under reinsurance treaties 564.6 1,053.5
- -------------------------------------------------------------------------------------------------------
Asset valuation reserve 375.5 270.0
- -------------------------------------------------------------------------------------------------------
Interest maintenance reserve 76.7 116.3
- -------------------------------------------------------------------------------------------------------
Other liabilities 490.9 391.3
- -------------------------------------------------------------------------------------------------------
Federal income taxes 4.3 3.2
- -------------------------------------------------------------------------------------------------------
Net transfers due from separate accounts (659.7) (548.0)
- -------------------------------------------------------------------------------------------------------
Separate account liabilities 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities 48,054.0 41,559.0
- -------------------------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares--10 million (owned by Lincoln National
Corporation) 25.0 25.0
- -------------------------------------------------------------------------------------------------------
Paid-in surplus 883.4 783.4
- -------------------------------------------------------------------------------------------------------
Unassigned surplus 1,054.2 924.5
- ----------------------------------------------------------------------------------- --------- ---------
Total capital and surplus 1,962.6 1,732.9
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities and capital and surplus $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
</TABLE>
See accompanying notes.
S-1
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------
(in millions)
--------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $7,268.5 $4,899.1 $5,648.7
- -------------------------------------------------------------------------------
Net investment income 1,756.3 1,772.2 1,606.8
- -------------------------------------------------------------------------------
Amortization of interest maintenance reserve 27.2 34.0 9.8
- -------------------------------------------------------------------------------
Commissions and expense allowances on reinsurance
ceded 90.9 98.3 145.0
- -------------------------------------------------------------------------------
Expense charges on deposit funds 100.7 83.2 70.5
- -------------------------------------------------------------------------------
Other income 16.8 14.5 15.6
- --------------------------------------------------- -------- -------- --------
Total revenues 9,260.4 6,901.3 7,496.4
- -------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 5,989.9 4,184.0 5,071.6
- -------------------------------------------------------------------------------
Underwriting, acquisition, insurance and other
expenses 2,878.5 2,345.7 2,136.1
- --------------------------------------------------- -------- -------- --------
Total benefits and expenses 8,868.4 6,529.7 7,207.7
- --------------------------------------------------- -------- -------- --------
Gain from operations before dividends to
policyholders, income taxes and net realized gain
on investments 392.0 371.6 288.7
- -------------------------------------------------------------------------------
Dividends to policyholders 27.3 27.3 18.0
- --------------------------------------------------- -------- -------- --------
Gain from operations before federal income taxes
and net realized gain on investments 364.7 344.3 270.7
- -------------------------------------------------------------------------------
Federal income taxes 83.6 103.7 52.8
- --------------------------------------------------- -------- -------- --------
Gain from operations before net realized gain on
investments 281.1 240.6 217.9
- -------------------------------------------------------------------------------
Net realized gain on investments, net of income tax
expense (benefits) [1996--$28.5; 1995--$48.1;
1994--$(178.1)] and excluding net transfers to
(from) the interest maintenance reserve [1996--
$(12.4); 1995--$94.9; 1994--$(147.1)] 53.3 43.9 124.0
- --------------------------------------------------- -------- -------- --------
Net income $ 334.4 $ 284.5 $ 341.9
- --------------------------------------------------- ======== ======== ========
</TABLE>
See accompanying notes.
S-2
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year
ended
December
31
1996 1995 1994
-------- -------- --------
(in millions)
----------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $1,732.9 $1,679.6 $1,302.5
- ----------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 334.4 284.5 341.9
- ----------------------------------------------------------------
Differences in cost and admitted investment amounts 38.6 143.2 (123.3)
- ----------------------------------------------------------------
Nonadmitted assets (3.0) 2.9 (3.2)
- ----------------------------------------------------------------
Regulatory liability for reinsurance 0.6 (2.0) (1.1)
- ----------------------------------------------------------------
Life policy reserve valuation basis (0.4) 2.9 (1.3)
- ----------------------------------------------------------------
Asset valuation reserve (105.5) (112.5) 83.8
- ----------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- 2.2 218.6
- ----------------------------------------------------------------
Paid-in surplus 100.0 15.1 --
- ----------------------------------------------------------------
Separate account receivable due to change in valuation -- 27.0 --
- ----------------------------------------------------------------
Accounting for separate account contracts -- -- (13.3)
- ----------------------------------------------------------------
Dividends to shareholder (135.0) (310.0) (125.0)
- ---------------------------------------------------------------- -------- -------- --------
Capital and surplus at end of year $1,962.6 $1,732.9 $1,679.6
- ---------------------------------------------------------------- ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
S-3
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
----------------------------------
(in millions)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 8,059.4 $ 5,430.9 $ 5,654.5
- -------------------------------------------------------------------------------------
Allowances and reserve adjustments received (paid) on
reinsurance ceded (767.5) (383.6) 137.1
- -------------------------------------------------------------------------------------
Investment income received 1,700.6 1,713.2 1,588.5
- -------------------------------------------------------------------------------------
Benefits paid (4,050.4) (3,239.6) (3,054.1)
- -------------------------------------------------------------------------------------
Insurance expenses paid (2,972.2) (2,513.5) (2,542.5)
- -------------------------------------------------------------------------------------
Federal income taxes recovered (paid) (72.3) 38.4 (191.8)
- -------------------------------------------------------------------------------------
Dividends to policyholders (27.7) (16.5) (18.4)
- -------------------------------------------------------------------------------------
Other income received and expenses paid, net 6.3 14.4 59.2
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by operating activities 1,876.2 1,043.7 1,632.5
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,542.0 13,183.9 11,877.0
- -------------------------------------------------------------------------------------
Purchase of investments (14,175.4) (14,049.6) (12,871.8)
- -------------------------------------------------------------------------------------
Other uses (266.5) (64.0) (123.4)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash used in investing activities (1,899.9) (929.7) (1,118.2)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 100.0 15.1 --
- -------------------------------------------------------------------------------------
Proceeds from borrowings 100.0 63.0 63.0
- -------------------------------------------------------------------------------------
Repayment of borrowings (63.0) (63.0) (60.0)
- -------------------------------------------------------------------------------------
Dividends paid to shareholder (135.0) (310.0) (125.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by (used in) financing activities 2.0 (294.9) (122.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (21.7) (180.9) 392.3
- -------------------------------------------------------------------------------------
Cash and short-term investments at beginning of year 780.9 961.8 569.5
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Cash and short-term investments at end of year $ 759.2 $ 780.9 $ 961.8
- -------------------------------------------------------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
S-4
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in In-
diana. As of December 31, 1996, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific
Life Insurance Company, Lincoln National Health & Casualty Insurance Compa-
ny, Lincoln National Reassurance Company and Lincoln Life & Annuity Company
of New York.
The Company's principal business consist of underwriting annuities, depos-
it-type contracts, life and health insurance through multiple distribution
channels and the reinsurance of individual and group life and health busi-
ness. The Company is licensed and sells its products in 49 states, Canada
and several U.S. territories.
USE OF ESTIMATES
The preparation of financial statements requires management to make esti-
mates and assumptions that affect amounts reported in the financial state-
ments and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known, which could impact the
amounts reported and disclosed herein.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted accounting prin-
ciples ("GAAP"). The more significant variances from GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or market value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported di-
rectly in shareholder's equity after adjustments for related amortization
of deferred acquisition costs, additional policyholder commitments and de-
ferred income taxes.
Investments in real estate are reported net of related obligation rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the gen-
eral level of interest rates and amortizes those deferrals over the remain-
ing period to maturity of the individual security sold. The net deferral is
reported as the interest maintenance reserve in the accompanying balance
sheets. Realized capital gains and losses are reported in income net of
federal income tax and transfers to the interest maintenance reserve. The
asset valuation reserve is determined by an NAIC prescribed formula and is
reported as a liability rather than unassigned surplus. Under GAAP, real-
ized capital gains and losses are reported in the income statement on a
pre-tax basis in the period that the asset giving rise to the gain or loss
is sold and valuation allowances are provided when there has been a decline
in value deemed other than temporary, in which case, the provision for such
declines are charged to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not consoli-
dated with the accounts and operations of the Company as would be required
by GAAP. Under statutory accounting principles, the Company's subsidiaries
are carried at their statutory-basis net equity.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For uni-
versal life insurance, annuity and other investment-type products, deferred
policy acquisition costs, to the extent recoverable from future gross prof-
its, are amortized generally in proportion to the present value of expected
gross profits from surrender charges and investment, mortality and expense
margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying bal-
ance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
S-5
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method.
For mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect ac-
tual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Common stocks are reported at market value as determined by the Securities
Valuation Office of the NAIC and the related unrealized gains (losses) are
reported in unassigned surplus without adjustment for federal income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall lia-
bility-asset management program for certain investments and life insurance
and annuity products. The Company values all derivative instruments on a
basis consistent with that of the hedged item. Upon termination, gains and
losses on those instruments are included in the carrying values of the un-
derlying hedged items and are amortized over the remaining lives of the
hedged items as adjustments to investment income or benefits from the
hedged items. Any unamortized gains or losses are recognized when the un-
derlying hedged items are sold.
Mortgage loans on real estate are reported at unpaid balances, less allow-
ances for impairments. Real estate is reported at depreciated cost. As of
June 30, 1994, the Company changed its method of accounting for reserves on
impaired real estate and mortgage loans. The impaired investment is now
shown on a pre-tax basis as a nonadmitted asset. Previously, these reserves
were presented as a liability, net of related tax benefits, to approximate
the impact on surplus if losses were realized.
Realized investment gains and losses on investments sold are determined us-
ing the specific identification method. Changes in admitted asset carrying
amounts of
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required inter-
est and mortality assumptions rather than on estimated expected experience
or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other investment-
type contracts are reported as benefits and settlement expenses; in the ac-
companying statement of income, whereas, under GAAP, withdrawals are
treated as a reduction of the policy or contract liabilities and benefits
would represent the excess of benefits paid over the policy account value
and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not au-
thorized by the Indiana Department of Insurance to assume such business.
Changes to those amounts are credited or charged directly to unassigned
surplus. Under GAAP, an allowance for amounts deemed uncollectible is es-
tablished through a charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using tradi-
tional reinsurance accounting whereas such contracts would be accounted for
using deposit accounting under GAAP.
POSTRETIREMENT BENEFITS
For purposes of calculating the Company's postretirement benefit obliga-
tion, only vested employees and current retirees are included in the valua-
tion. Under GAAP, active employees not currently eligible would also be in-
cluded.
S-6
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations
and statistical analyses. Those estimates are subject to the effects of
trends in claim severity and frequency. Although considerable variability
is inherent in such estimates, management believes that the reserves for
claims and claim adjustment expenses are adequate. The estimates are con-
tinually reviewed and adjusted as necessary as experience develops or new
information becomes known; such adjustments are included in current opera-
tions.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original pol-
icies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is sys-
tematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the ex-
tent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other mea-
surement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
These assets and liabilities represent segregated funds administered and
invested by LNC's insurance subsidiaries for the exclusive benefit of pen-
sion and variable life and annuity contractholders. The fees received by
the Company for administrative and contractholder maintenance services per-
formed for these separate accounts are included in the Company's statements
of income.
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
bonds, mortgage loans and common and preferred stocks are credited or
charged directly in unassigned surplus.
DATA PROCESSING EQUIPMENT
Data processing equipment is reported at depreciated cost, with deprecia-
tion determined on a straight-line basis over five years.
GOODWILL
Goodwill, which represents the excess of the ceding commission over statu-
tory-basis net assets of business purchased under an assumption reinsurance
agreement, is amortized on a straight-line basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due. Ac-
cident and health premiums are earned prorata over the contract term of the
policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by ac-
tuarial methods and are determined based on published tables using statuto-
rily specified interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than or equal to the minimum or
guaranteed policy cash values or the amounts required by the Indiana De-
partment of Insurance. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenarios indicate the need for such
reserve. If net premiums exceed the gross premiums on any insurance in-
force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined us-
ing the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
S-7
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of the Company's net income and capital and surplus deter-
mined on a statutory accounting basis with amounts determined in accordance
with GAAP is as follows:
<TABLE>
<CAPTION>
Capital and Surplus Net Income
-------------------- -----------------------
Year ended December
December 31 31
1996 1995 1996 1995 1994
--------- --------- ------ ------ -------
(in millions)
<S> <C> <C> <C> <C> <C>
Amounts reported on a
statutory basis $ 1,962.6 $ 1,732.9 $334.4 $284.5 $ 341.9
----------------------------
GAAP adjustments:
----------------------------
Deferred policy acquisition
costs and present value of
future profits 1,119.1 850.2 66.7 (63.0) 191.1
----------------------------
Policy and contract
reserves (1,405.3) (1,562.2) (57.1) (55.3) (53.6)
----------------------------
Interest maintenance
reserve 76.7 116.3 (39.7) 60.9 (157.0)
----------------------------
Deferred income taxes (27.4) (122.5) 1.8 38.3 (138.3)
----------------------------
Policyholders' share of
earnings and surplus on
participating business (81.9) (91.9) (.3) .2 (3.0)
----------------------------
Asset valuation reserve 375.5 270.0 -- -- --
----------------------------
Net realized gain (loss) on
investments (72.0) (67.4) 78.7 30.0 47.1
----------------------------
Adjustment to unrealized
gain (loss) 825.2 1,494.0 -- -- --
----------------------------
Nonadmitted assets,
including nonadmitted
investments (7.1) 57.9 -- -- --
----------------------------
Net GAAP adjustments of
subsidiary companies 156.6 131.2 29.9 34.3 48.2
----------------------------
Other, net (99.0) (89.7) (82.6) (7.3) (58.6)
---------------------------- --------- --------- ------ ------ -------
Net increase (decrease) 860.4 985.9 (2.6) 38.1 (124.1)
---------------------------- --------- --------- ------ ------ -------
Amounts on a GAAP basis $ 2,823.0 $ 2,718.8 $331.8 $322.6 $ 217.8
---------------------------- ========= ========= ====== ====== =======
</TABLE>
S-8
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
2.PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in accor-
dance with accounting practices prescribed or permitted by the Indiana De-
partment of Insurance (the "Department"). "Prescribed" statutory accounting
practices include state laws, regulations and general administrative rules,
as well as a variety of publications of the NAIC. "Permitted" statutory ac-
counting practices encompass all accounting practices that are not pre-
scribed; such practices may differ from state to state, may differ from
company to company within a state and may change in the future. The NAIC
currently is in the process of recodifying statutory accounting practices,
the result of which is expected to constitute the only source of "pre-
scribed" statutory accounting practices. Accordingly, that project, which
is expected to be completed in 1998, will likely change, to some extent,
prescribed statutory accounting practices, and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements.
In 1994, the Company received approval from the Department to change its
accounting for surrender charges applicable to separate account liabilities
for variable life and annuity products so that the surrender charges on
these products are recorded as a liability in the separate account finan-
cial statements payable to the Company's general account. In the accompany-
ing financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds. The
cumulative effect of this change increased 1994 net income by $13,299,000.
The Company has approval from the Department to establish valuation allow-
ances on mortgage loans on real estate in accordance with GAAP, which are
in excess of that prescribed by the NAIC and the Department.
Prior to 1995, the Company has considered certain amounts under modified
coinsurance reinsurance contracts as adjustments to premiums. As such, pol-
icyholder dividends, cash surrender charges and reserve adjustments with
interest thereon and commissions on reinsurance assumed are classified as
premiums, rather than on expense lines, with no net effect on net income or
capital and surplus. On a net-of-ceded basis for the year ended December
31, 1994, this practice resulted in increases to both revenues and expenses
of approximately $600,000,000. In addition, reserve adjustments with inter-
est thereon and commissions on reinsurance ceded were also classified as
premiums, rather than in other revenue classifications. For the year ended
December 31, 1994, this intra-revenue grouping reduced premiums by approxi-
mately $50,000,000. Beginning in 1995, the Company reports modified coin-
surance agreements on a gross basis. This change was made as a result of
communications with the Department. This accounting change had no effect on
income or surplus and prior period amounts have not been restated.
S-9
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------
(in millions)
--------------------------
<S> <C> <C> <C>
Income:
Bonds $1,442.2 $1,457.4 $1,266.7
--------------------------------------------------------------------------------
Preferred stocks 9.6 6.4 5.8
--------------------------------------------------------------------------------
Unaffiliated common stocks 6.5 5.2 4.4
--------------------------------------------------------------------------------
Affiliated common stocks 9.5 12.6 62.5
--------------------------------------------------------------------------------
Mortgage loans on real estate 269.3 252.0 255.2
--------------------------------------------------------------------------------
Real estate 114.4 110.0 97.4
--------------------------------------------------------------------------------
Policy loans 35.0 32.1 29.7
--------------------------------------------------------------------------------
Other investments 22.4 62.6 121.3
--------------------------------------------------------------------------------
Cash and short-term investments 48.9 53.2 43.3
--------------------------------------------------------------- -------- -------- --------
Total investment income 1,957.8 1,991.5 1,886.3
-----------------------------------------------------------------------------------
Expenses:
Depreciation 25.0 25.9 21.9
--------------------------------------------------------------------------------
Other 176.5 193.4 257.6
--------------------------------------------------------------- -------- -------- --------
Total investment expenses 201.5 219.3 279.5
---------------------------------------------------------------- -------- -------- --------
Net investment income $1,756.3 $1,772.2 $1,606.8
---------------------------------------------------------------- ======== ======== ========
</TABLE>
Nonadmitted accrued investment income at December 31, 1996
and 1995 amounted to $2,500,000 and $11,500,000, respective-
ly, consisting principally of interest on bonds in default
and mortgage loans.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are summa-
rized as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------
(in millions)
-----------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1996:
Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0
--------------------------------------------------------------
U.S. government 1,088.7 43.2 18.0 1,113.9
--------------------------------------------------------------
Foreign government 1,234.0 105.1 1.4 1,337.7
--------------------------------------------------------------
Mortgage-backed 4,478.4 183.3 27.4 4,634.3
--------------------------------------------------------------
State and municipal 40.4 .1 -- 40.5
-------------------- --------- -------- ------ ---------
$19,389.6 $ 918.2 $113.4 $20,194.4
========= ======== ====== =========
At December 31, 1995:
Corporate $11,642.0 $1,074.7 $ 41.4 $12,675.3
--------------------------------------------------------------
U.S. government 546.4 82.2 -- 628.6
--------------------------------------------------------------
Foreign government 908.0 68.0 .6 975.4
--------------------------------------------------------------
Mortgage-backed 4,628.3 283.2 11.2 4,900.3
--------------------------------------------------------------
State and municipal 5.0 .1 -- 5.1
-------------------- --------- -------- ------ ---------
$17,729.7 $1,508.2 $ 53.2 $19,184.7
========= ======== ====== =========
</TABLE>
S-10
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
Fair values for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are esti-
mated by discounting expected future cash flows using a cur-
rent market rate applicable to the coupon rate, credit qual-
ity and maturity of the investments.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1996, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
------------------------------
(in millions)
-------------------
<S> <C> <C>
Maturity:
In 1997 $ 358.0 $ 360.1
----------------------------------------------------------------------------------------------
In 1998-2001 3,809.0 3,912.3
----------------------------------------------------------------------------------------------
In 2002-2006 4,760.9 4,917.3
----------------------------------------------------------------------------------------------
After 2006 5,983.3 6,370.4
----------------------------------------------------------------------------------------------
Mortgage-backed securities 4,478.4 4,634.3
--------------------------------------------------------------------------- --------- ---------
Total $19,389.6 $20,194.4
--------------------------------------------------------------------------- ========= =========
</TABLE>
The expected maturities may differ from the contractual ma-
turities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1996, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
Proceeds from sales of investments in bonds during 1996,
1995 and 1994 were $10,996,900,000, $12,234,100,000 and
$9,668,300,000, respectively. Gross gains during 1996, 1995
and 1994 of $169,700,000, $225,600,000 and $62,600,000, re-
spectively, and gross losses of $177,000,000, $83,100,000
and $286,800,000, respectively, were realized on those
sales.
At December 31, 1996 and 1995, investments in bonds, with an
admitted asset value of $70,700,000 and $60,700,000, respec-
tively, were on deposit with state insurance departments to
satisfy regulatory requirements.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in unaffiliated
common stocks and preferred stocks are as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------
<S> <C> <C> <C> <C>
(in millions)
-------------------------------
At December 31, 1996:
Preferred stocks $239.7 $ 10.5 $ 1.7 $248.5
----------------------------------------------------------
Unaffiliated common stocks 289.9 84.6 16.2 358.3
----------------------------------------------------------
At December 31, 1995:
Preferred stocks 89.9 13.9 .2 103.6
----------------------------------------------------------
Unaffiliated common stocks 438.0 110.0 12.5 535.5
----------------------------------------------------------
</TABLE>
S-11
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $241,500,000 and
$193,000,000 at December 31, 1996 and 1995, respectively.
The cost basis of investments in subsidiaries as of December
31, 1996 and 1995 was $194,000,000 and $123,000,000, respec-
tively.
During 1996, the maximum and minimum lending rates for mort-
gage loans were 10.5% and 6.0%, respectively. At the issu-
ance of a loan, the percentage of loan to value on any one
loan does not exceed 75%. At December 31, 1996, the Company
did not hold any mortgages with interest overdue beyond one
year. At December 31, 1996, the Company's investments in
mortgage loans were subject to $59,700,000 of prior liens.
All properties covered by mortgage loans have fire insurance
at least equal to the excess of the loan over the maximum
loan that would be allowed on the land without the building.
4.FEDERAL INCOME TAXES
The effective federal income tax rate for financial report-
ing purposes differs from the prevailing statutory tax rate
principally due to tax-exempt investment income, dividends-
received tax deductions, differences in policy acquisition
costs and policy and contract liabilities for tax return and
financial statement purposes.
Federal income taxes incurred of $83,600,000, $103,700,000
and $52,800,000 in 1996, 1995 and 1994, respectively, would
be subject to recovery in the event that the Company incurs
net operating losses within three years of the years for
which such taxes were paid.
Prior to 1984, a portion of the Company's current income was
not subject to current income tax, but was accumulated for
income tax purposes in a memorandum account designated as
"policyholders' surplus." The Company's balance in the "pol-
icyholders' surplus" account at December 31, 1983 of
$187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
accordingly, there have been no additions to the accounts
after that date. That portion of current income on which in-
come taxes have been paid will continue to be accumulated in
a memorandum account designated as "shareholder's surplus,"
and is available for dividends to the shareholder without
additional payment of tax by the Company. The December 31,
1996 memorandum account balance for "shareholder's surplus"
was $1,606,000,000. Should dividends to the shareholder ex-
ceed its respective "shareholder's surplus," amounts would
need to be transferred from the "policyholders' surplus" and
would be subject to federal income tax at that time. Under
existing or foreseeable circumstances, the Company neither
expects nor intends that distributions will be made that
will result in any such tax.
5.SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets," includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995 1994
----------------------------------------
(in millions)
----------------------------------------
<S> <C> <C> <C>
Insurance ceded $1,154.5 $1,634.0 $1,721.1
Amounts recoverable from other insurers 16.0 4.4 4.8
</TABLE>
S-12
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1996 1995 1994
--
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $241.3 $667.7 $607.3
-------------------------------
Insurance ceded 193.3 453.1 583.8
------------------------------- ------ ------ ------
Net amount included in premiums $ 48.0 $214.6 $ 23.5
------------------------------- ====== ====== ======
</TABLE>
The income statement caption, "Benefits and Settlement Ex-
penses," is net of reinsurance recoveries of $787,886,200,
$1,407,000,000 and $1,391,100,000 for 1996, 1995 and 1994,
respectively.
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption, "Pre-
miums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 3.9 $1.9 $ 2.0
---------------------
Ordinary renewal 35.1 3.0 32.1
---------------------
Group life 9.4 (.1) 9.5
---------------------
Group annuity -- -- --
--------------------- ------ ---- ------
$ 48.4 $4.8 $ 43.6
====== ==== ======
<CAPTION>
December 31, 1995
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 2.5 $1.1 $ 1.4
---------------------
Ordinary renewal (19.1) 2.8 (21.9)
---------------------
Group life 15.8 -- 15.8
---------------------
Group annuity .2 -- .2
--------------------- ------ ---- ------
$ (.6) $3.9 $ (4.5)
====== ==== ======
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance Consul-
tants, Inc. to write group life and health business. Direct
premiums written amounted to $26,200,000 $3,800,000 and
$8,600,000 in 1996 and $33,100,000, $10,600,000 and
$8,800,000 in 1995, respectively. During 1996, LNC Adminis-
trative Services entered into a similar agreement with the
Company with direct premiums written amounting to
$6,200,000. Authority granted by the managing general agents
agreements include underwriting, claims adjustment and
claims payment services.
S-13
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
6.ANNUITY RESERVES
At December 31, 1996, the Company's annuity reserves and de-
posit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are sum-
marized as follows:
<TABLE>
<CAPTION>
Amount Percent
----------------
(in millions)
-------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,971.8 6.0%
------------------------------------------------------
At book value, less surrender charge 5,228.6 12.0
------------------------------------------------------
At market value 22,703.4 51.0
------------------------------------------------------ ---------- ------
30,903.8 69.0
Subject to discretionary withdrawal without adjustment
at book value with minimal or no charge or adjustment 10,986.4 25.0
------------------------------------------------------
Not subject to discretionary withdrawal 2,601.9 6.0
------------------------------------------------------
---------- ------
Total annuity reserves and deposit fund 44,492.1
liabilities--before reinsurance 100.0%
------------------------------------------------------
======
Less reinsurance 1,848.8
------------------------------------------------------ ----------
Net annuity reserves and deposit fund liabilities,
including separate accounts $42,643.3
------------------------------------------------------ ==========
</TABLE>
7.CAPITAL AND SURPLUS
Life insurance companies are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under
those requirements, the amount of capital and surplus main-
tained by a life insurance company is to be determined based
on the various risk factors related to it. At December 31,
1996, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and can-
not be made except from earned profits. The maximum amount
of dividends that may be paid by life insurance companies
without prior approval of the Indiana Insurance Commissioner
is subject to restrictions relating to statutory surplus and
net gain from operations. In 1997, the Company can pay divi-
dends of $281,100,000 without prior approval of the Indiana
Insurance Commissioner.
8.EMPLOYEE BENEFIT PLANS
Pension plans
LNC maintains funded defined benefit pension plans for most
of its employees and, prior to January 1, 1995, full-time
agents. The benefits for employees are based on total years
of service and the highest 60 months of compensation during
the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings.
The plans are funded by contributions to tax-exempt trusts.
The Company's funding policy is consistent with the funding
requirements of Federal laws and regulations. Contributions
are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the
future. Plan assets consist principally of listed equity se-
curities, corporate obligations and government bonds.
All benefits applicable to the funded defined benefit plan
for agents were frozen as of December 31, 1994. The curtail-
ment of this plan did not have a significant effect on net
pension cost for 1994. Effective January 1, 1995, pension
benefits for agents have been provided by a new defined
S-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
contribution plan. Contributions to this plan will be based
on 2.3% of an agent's earnings up to the social security
wage base and 4.6% of any excess.
LNC also administers two types of unfunded, non-qualified,
defined benefit plans for certain employees and agents. A
supplemental retirement plan provides employees and agents
defined benefit pension benefits in excess of limits imposed
by Federal tax law. A salary continuation plan provides cer-
tain officers of the Company defined pension benefits based
on years of service and final monthly salary upon death or
retirement.
The status of the funded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
------- 1995
(in millions)
----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(156.9) $(146.1)
-------------------------------------------------------------------------
Nonvested benefits (6.0) (7.7)
-------------------------------------------------------------------------
------- -------
Accumulated benefit obligation (162.9) (153.8)
-------------------------------------------------------------------------
Effect of projected future compensation increases (27.9) (28.5)
-------------------------------------------------------------------------
------- -------
Projected benefit obligation (190.8) (182.3)
-------------------------------------------------------------------------
Plan assets at fair value 186.1 173.2
-------------------------------------------------------------------------
------- -------
Projected benefit obligation in excess of plan assets (4.7) (9.1)
-------------------------------------------------------------------------
Unrecognized net loss 4.9 9.3
-------------------------------------------------------------------------
Unrecognized prior service cost 1.4 1.5
-------------------------------------------------------------------------
------- -------
Prepaid pension costs included in other liabilities $ 1.6 $ 1.7
-------------------------------------------------------------------------
======= =======
</TABLE>
The status of the unfunded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
----- 1995
(in
millions)
------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(6.6) $(6.4)
-------------------------------------------------------------------
Nonvested benefits (.9) (1.1)
-------------------------------------------------------------------
----- -----
Accumulated benefit obligation (7.5) (7.5)
-------------------------------------------------------------------
Effect of projected future compensation increases (1.1) (1.7)
-------------------------------------------------------------------
----- -----
Projected benefit obligation (8.6) (9.2)
-------------------------------------------------------------------
Unrecognized net loss (gain) (.1) .9
-------------------------------------------------------------------
Unrecognized prior service cost .2 .3
-------------------------------------------------------------------
----- -----
Accrued pension costs included in other liabilities $(8.5) $(8.0)
-------------------------------------------------------------------
===== =====
</TABLE>
S-15
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The determination of the projected benefit obligation for
the defined benefit plans was based on the following assump-
tions:
<TABLE>
<CAPTION>
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 7.0% 8.0%
----------------------------------------------------------------------
Rate of increase in compensation:
----------------------------------------------------------------------
Salary continuation plan 5.5 6.0 6.5
----------------------------------------------------------------------
All other plans 4.5 5.0 5.0
----------------------------------------------------------------------
Expected long-term rate of return on plan assets 9.0 9.0 9.0
----------------------------------------------------------------------
The components of net pension cost for the defined benefit
pension plans are as follows:
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 5.2 $ 4.1 $ 7.9
------------------------------------------------------------------------
Interest cost on projected benefit obligation 12.9 11.9 11.6
------------------------------------------------------------------------
Actual return on plan assets (17.5) (32.0) 4.2
------------------------------------------------------------------------
Net amortization (deferral) 3.1 20.3 (16.7)
------------------------------------------------------------------------ ----- ----- -----
Net pension cost $ 3.7 $ 4.3 $ 7.0
------------------------------------------------------------------------ ===== ===== =====
</TABLE>
401K PLAN
LNC and the Company sponsor contributory defined contribu-
tion plans for eligible employees and agents. The Company's
contributions to the plans are equal to each participant's
pre-tax contribution, not to exceed 6% of base pay, multi-
plied by a percentage ranging from 25% to 150%, which varies
according to certain incentive criteria as determined by
LNC's Board of Directors. Expense for these plans amounted
to $9,300,000, $6,700,000 and $11,200,000 in 1996, 1995 and
1994, respectively.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLANS
LNC sponsors unfunded defined benefit plans that provide
postretirement medical and life insurance benefits to full-
time employees and agents who, depending on the plan, have
worked for the Company 10 to 15 years and attained age 55 to
60. Medical benefits are also available to spouses and other
dependents of employees and agents. For medical benefits,
limited contributions are required from individuals retired
prior to November 1, 1988; contributions for later retirees,
which can be adjusted annually, are based on such items as
years of service at retirement and age at retirement. The
life insurance benefits are noncontributory, although par-
ticipants can elect supplemental contributory benefits.
The status of the postretirement medical and life insur-
ance benefit plans and the amounts recognized in the bal-
ance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
--------------------------
(in millions)
--------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(32.4) $(37.9)
------------------------------------------------------------------------
Fully eligible active plan participants (8.2) (8.7)
------------------------------------------------------------------------ ------ ------
Accumulated postretirement benefit obligation (40.6) (46.6)
------------------------------------------------------------------------
Unrecognized net loss (gain) (7.0) .8
------------------------------------------------------------------------ ------ ------
Accrued plan cost included in other liabilities $(47.6) $(45.8)
------------------------------------------------------------------------ ====== ======
</TABLE>
S-16
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The components of periodic postretirement benefit cost
are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------------
(in millions)
----------------
<S> <C> <C> <C>
Service cost $1.3 $1.1 $1.4
------------------------------------------------------------------------
Interest cost 2.7 3.0 3.1
------------------------------------------------------------------------
Amortized cost (credit) (.5) (.4) .1
------------------------------------------------------------------------ ---- ---- ----
Net periodic postretirement benefit cost $3.5 $3.7 $4.6
------------------------------------------------------------------------ ==== ==== ====
</TABLE>
The calculation of the accumulated postretirement benefit
obligation assumes a weighted-average annual rate of in-
crease in the per capita cost of covered benefits (i.e.,
health care cost trend rate) of 8.5% for 1997. It further
assumes the rate will gradually decrease to 5.0% by 2005 and
remain at that level. The health care cost trend rate as-
sumption has a significant effect on the amounts reported.
For example, increasing the assumed health care cost trend
rates by one percentage point each year would increase the
accumulated postretirement benefit obligation as of December
31, 1996 and 1995 by $1,900,000 and $2,100,000, respective-
ly. The aggregate of the estimated service and interest cost
components of net periodic postretirement benefit cost for
the year ended December 31, 1996 would increase by $184,000.
The calculation assumes a long-term rate of increase in com-
pensation of 4.5% and 5.0% at December 31, 1996 and 1995,
respectively. The weighted-average discount rate used in de-
termining the accumulated postretirement benefit obligation
was 7.0% for both December 31, 1996 and 1995.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES
DISABILITY INCOME POLICIES
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1996 and 1995 is a net
liability of $572,000,000 and $503,800,000, respectively. This liability is
based on the assumption that the recent experience will continue in the fu-
ture. If incidence levels or claim termination rates vary significantly
from these assumptions, adjustments to reserves may be required in the fu-
ture. Accordingly, this liability may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company. The Company con-
tinually reviews and updates the level of these reserves.
During the fourth quarter of 1995, the Company completed an in-depth review
of the experience of its disability income business. As a result of this
study, and based on the assumption that recent experience will continue in
the future, net income decreased by $15,200,000 as a result of strengthen-
ing the disability income reserve.
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with poli-
cies that were less advantageous to the policyholder. The Company's manage-
ment continues to monitor the Company's sales materials and compliance pro-
cedures and is making an extensive effort to minimize any potential liabil-
ity. However, due to the uncertainty surrounding such matters, it is not
possible to provide a meaningful estimate of the range of potential out-
comes at this time.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity con-
tracts, which are no longer being sold by the Company, are supported by a
single portfolio of assets that attempts to match the duration of these li-
abilities. Due to the very long-term nature of group pension annuities and
the resulting inability to exactly match cash flows, a risk exists that fu-
ture cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future development will
S-17
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain affili-
ates. The portion of risks exceeding the Company's retention limit is rein-
sured with other insurers. Industry regulations prescribe the maximum cov-
erage that the Company can retain on an individual insured. As of December
31, 1996, the Company's maximum retention on a single insured was
$3,000,000. To cover products other than life insurance, the Company ac-
quires other insurance coverages with retentions and limits that management
believes are appropriate for the circumstances. The accompanying financial
statements reflect premiums and benefits and settlement expenses, net of
insurance ceded. The Company remains liable if its reinsurers are unable to
meet their contractual obligations under the applicable reinsurance agree-
ments.
The Company assumes insurance from other companies, including certain af-
filiates. At December 31, 1996, the Company has provided $17,200,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables from the ceding company, which are secured by future profits on the
reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1996, the Company did not have a concentration of: 1) busi-
ness transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of la-
bor or services used in the business; or 4) a market or geographic area in
which business is conducted that makes it vulnerable to an event that is at
least reasonably possible to occur in the near term and which could cause a
severe impact to the Company's financial condition.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
not materially affect the financial position of the Company.
LEASES
The Company leases its home office properties. The agreements provide for a
25 year lease period with options to renew for six additional terms of five
years each. The agreements also provide the Company with the right of first
refusal to purchase the properties during the term of the lease, including
renewal periods, at a price as defined in the agreements. In addition, the
Company has the option to purchase the leased properties at fair value as
defined in the agreements on the last day of the initial 25 year lease pe-
riod ending in 2009 or on the last day of any of the renewal periods.
Total rental expense on operating leases in 1996, 1995 and 1994 was
$26,400,000, $22,500,000 and $20,600,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1997 $ 17.5
1998 17.1
1999 17.4
2000 16.9
2001 17.2
Thereafter 151.6
------
$237.7
======
</TABLE>
S-18
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. In some instances, these proceedings
include claims for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for alleged contractual liability or
requests for equitable relief. After consultation with legal counsel and a
review of available facts, it is management's opinion that these proceed-
ings ultimately will be resolved without materially affecting the financial
position or results of operations of the Company.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabili-
tated companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. The Company has accrued
for expected assessments net of estimated future premium tax deductions.
REINSURANCE
The regulatory required liability for unsecured reserves ceded to unautho-
rized reinsurers was $4,300,000 and $5,600,000 at December 31, 1996 and
1995, respectively.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-balance-
sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
Contract Amounts
-----------------
December 31
-----------------
1996 1995
--------------------
(in millions)
-----------------
<S> <C> <C>
Mortgage loan pass-through certificates $ 50.3 $ 63.6
Real estate partnerships .5 3.3
-------- --------
$ 50.8 $ 66.9
======== ========
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans. In some cases, the terms of these arrangements involve
guarantees by each of the partners to indemnify the mortgagor in the event
a partner is unable to pay its principal and interest payments. In addi-
tion, the Company has sold commercial mortgage loans through grantor trusts
which issued pass-through certificates. The Company has agreed to repur-
chase any mortgage loans which remain delinquent for 90 days at a repur-
chase price substantially equal to the outstanding principal balance plus
accrued interest thereon to the date of repurchase. It is management's
opinion that the value of the properties underlying these commitments is
sufficient that in the event of default the impact would not be material to
the Company. Accordingly, both the carrying value and fair value of these
guarantees is zero at December 31, 1996 and 1995.
S-19
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
DERIVATIVES
The Company has derivatives with off-balance-sheet risks
whose notional or contract amounts exceed the credit ex-
posure. The Company has entered into derivative transac-
tions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable
maturity U.S. Government obligations and foreign exchange
risks. In addition, the Company is subject to the risks
associated with changes in the value of its derivatives;
however, such changes in the value generally are offset
by changes in the value of the items being hedged by such
contracts. Outstanding derivatives with off-balance-sheet
risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as
follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
------------------------------
Notional or Carrying Fair Carrying Fair
contract amounts value value value value
---------------------------------------------
December 31 December 31 December 31
1996 1995 1996 1996 1995 1995
---------------------------------------------
(in millions)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate
derivatives:
Interest rate cap
agreements $5,500.0 $5,110.0 $20.8 $ 8.2 $22.7 $5.3
Spread-lock agreements -- 600.0 -- -- (.9) (.9)
Swaptions 672.0 -- 11.0 10.6 -- --
Financial futures
contracts 147.7 -- (2.4) (2.4) -- --
Interest rate swaps -- 5.0 -- -- .2 .2
-------- -------- ----- ----- ----- ----
6,319.7 5,715.0 29.4 16.4 22.0 4.6
Foreign currency
derivatives:
Foreign exchange forward
contracts 251.5 15.7 .2 (.2) (.6) (.6)
Foreign currency options 43.9 99.2 .6 .4 1.9 1.4
Foreign currency swaps 15.0 15.0 -- (2.1) .4 .4
-------- -------- ----- ----- ----- ----
310.4 129.9 .8 (1.9) 1.7 1.2
-------- -------- ----- ----- ----- ----
$6,630.1 $5,844.9 $30.2 $14.5 $23.7 $5.8
======== ======== ===== ===== ===== ====
</TABLE>
S-20
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
A reconciliation and discussion of the notional or contract
amounts for the significant programs using derivative agree-
ments and contracts at December 31 is as follows:
<TABLE>
<CAPTION>
Interest Rate Caps Spread Locks Swaptions
----------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 5,110.0 $ 4,400.0 $ 600.0 $ 1,300.0 $ -- $ --
New contracts 390.0 710.0 15.0 800.0 672.0 --
Terminations and -- -- (615.0) (1,500.0) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Financial Futures
------------------------------------------
Contracts Options Interest Rate Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ -- $ 382.5 $ -- $ -- $ 5.0 $ --
New contracts 7,918.8 810.5 -- 181.6 -- --
Terminations and (7,771.1) (1,193.0) -- (181.6) (5.0) --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 147.7 $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Foreign Currency Derivatives
----------------------------------------------------------------------
Foreign Exchange Foreign Currency Foreign
Forward Contracts Options Currency Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 15.7 $ 21.2 $ 99.2 $ -- $ 15.0 $ --
New contracts 406.9 131.2 1,168.8 356.6 -- 15.0
Terminations and (171.1) (136.7) (1,224.1) (257.4) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
========= ========= ========= ========= ========= =========
</TABLE>
S-21
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1997 through 2003, enti-
tle the Company to receive payments from the counterparties on specified
future reset dates, contingent on future interest rates. For each cap, the
amount of such quarterly payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the ef-
fect of fluctuating interest rates. The premium paid for the interest rate
caps is included in other assets ($20,800,000 as of December 31, 1996) and
is being amortized over the terms of the agreements. This amortization is
included in net investment income.
SWAPTIONS
Swaptions, which expire in 2002, entitle the Company to receive settlement
payments from the counterparties on specified expiration dates, contingent
on future interest rates. For each swaption, the amount of such settlement
payments, if any, is determined by the present value of the difference be-
tween the fixed rate on a market rate swap and the strike rate multiplied
by the notional amount. The purpose of the Company's swaption program is to
protect the assets supporting its annuity line of business from the effect
of fluctuating interest rates. The premium paid for the swaptions is in-
cluded in other assets ($11,000,000 as of December 31, 1996) and is being
amortized over the terms of the agreements. This amortization is included
in net investment income.
SPREAD LOCKS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified U.S.
Treasury note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity U.S. Treasury
security and the price sensitivity of the swap at that time. It is ex-
pressed in dollars-per-basis point. The purpose of the Company's spread-
lock program is to protect a portion of its fixed maturity securities
against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts and options on
those financial futures to hedge against interest rate risks and to manage
duration of a portion of its fixed maturity securities. Financial futures
contracts obligate the Company to buy or sell a financial instrument at a
specified future date for a specified price. They may be settled in cash or
through delivery of the financial instrument. Cash settlements on the
change in market values of financial futures contracts are made daily. Op-
tions on financial futures give the Company the right, but not the obliga-
tion, to assume a long or short position in the underlying futures at a
specified price during a specified time period.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to re-
exchange the two currencies at the same rate of exchange at a specified fu-
ture date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,900,000 and $5,600,000 in 1996 and 1995, respectively. Deferred losses
of $37,600,000 as of December 31, 1996, were the result of: 1) terminated
and expired spread-lock agreements; and 2) financial futures contracts.
These losses are included with the related fixed maturity securities to
which the hedge applied and are being amortized over the life of such secu-
rities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, interest rate swaps, foreign exchange forward contracts, for-
eign currency options and foreign currency swaps. However, the Company does
not anticipate nonperformance by any of these counterparties. The credit
risk associated with such agreements is minimized by purchasing such agree-
ments from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement
cost or market value for such agreements with each counterparty if the net
market value is in the Company's favor. At December 31, 1996, the exposure
was $17,500,000.
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Ac-
S-22
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
cordingly, the estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of
all of the Company's financial instruments.
BONDS
Fair values of bonds are based on quoted market prices, where available.
For bonds not actively traded, fair values are estimated using values ob-
tained from independent pricing services. In the case of private place-
ments, fair values are estimated by discounting expected future cash flows
using a current market rate applicable to the coupon rate, credit quality
and maturity of the investments. The fair values of affiliated common
stocks are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income when compared to the expected yield for mortgages having sim-
ilar characteristics. The rating for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service cov-
erage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loan are measured based on: 1) the present
value of expected future cash flows discounted at the loan's effective in-
terest rate; 2) the loan's market price; or 3) the fair value of the col-
lateral if the loan is collateral dependent.
POLICY LOANS
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on
historical experience.
OTHER INVESTMENTS AND CASH AND INVESTED CASH
The carrying value for assets classified as other investments and cash and
invested cash in the accompanying balance sheet approximates their fair
value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment-type insurance contracts (i.e., de-
posit contracts and guaranteed interest contracts). The fair values for the
deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining guar-
anteed interest and similar contracts are based on their approximate sur-
render values. The fair values for the remaining guaranteed interest and
similar contracts are estimated using discounted cash flow calculations.
These calculations are based on interest rates currently offered on similar
contracts with maturities consistent with those remaining for the contracts
being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate con-
clusions about the Company's capital and surplus determined on a fair value
basis. It could be misleading if only the fair value of assets and liabili-
ties defined as financial instruments are disclosed. The Company and other
companies in the insurance industry are monitoring the related actions of
the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their insur-
ance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate partner-
ships and mortgage loan pass-through certificates. Based on historical per-
formance where repurchases have been negligible and the current status,
which indicates none of the loans are delinquent, the fair value liability
for the guarantees related to the mortgage loan pass-through certificates
is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, options on financial futures, interest rate swaps, call
options, foreign currency options and foreign currency swaps.
Fair values for derivative contracts are based on current settlement val-
ues. These values are based on: 1) quoted market prices for the foreign
currency exchange contracts, financial future contracts, and options on fi-
nancial futures; and 2) brokerage quotes that utilized pricing models or
formulas using current assumptions for all other swaps and agreements.
S-23
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real es-
tate are based on the difference between the value of the committed invest-
ments as of the date of the accompanying balance sheets and the commitment
date. These estimates would take into account changes in interest rates,
the counterparties' credit standing and the remaining terms of the commit-
ments.
S-24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
The carrying values and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------
1996 1995
---------------------- ----------------------
Carrying Fair Carrying Fair
Assets (Liabilities) value value value value
---------------------------------------- ---------- ---------- ---------- ----------
(in millions)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 19,389.6 $ 20,194.4 $ 17,729.7 $ 19,184.7
----------------------------------------
Preferred stock 239.7 248.5 89.9 103.6
----------------------------------------
Unaffiliated common stock 358.3 358.3 535.5 535.5
----------------------------------------
Mortgage loans on real estate 2,976.7 3,070.9 2,909.7 3,081.9
----------------------------------------
Policy loans 626.5 612.7 515.8 504.0
----------------------------------------
Other investments 282.7 282.7 248.0 248.0
----------------------------------------
Cash and short-term investments 759.2 759.2 780.9 780.9
----------------------------------------
Investment type insurance contracts:
----------------------------------------
Deposit contracts and certain
guaranteed interest contracts (17,871.6) (17,333.0) (15,586.7) (15,046.0)
----------------------------------------
Remaining guaranteed interest and
similar contracts (1,799.7) (1,835.4) (2,261.1) (2,340.4)
----------------------------------------
Short-term debt (100.0) (100.0) (63.0) (63.0)
----------------------------------------
Derivatives 26.5 13.8 23.7 5.8
----------------------------------------
Investment commitments -- (.6) -- (.8)
----------------------------------------
</TABLE>
11.ACQUISITIONS AND SALES OF SUBSIDIARIES
The Company sold its 100% interest in two subsidiaries--Se-
curity Connecticut Life Insurance Company ("SCL") and Em-
ployers Health Insurance Company ("EHI"). SCL was sold
through a public offering of stock in January 1994. This
transaction resulted in a realized gain of $90,000,000 and a
direct increase in surplus of $24,000,000. Net of expenses,
the Company received cash of $172,000,000 and notes of
$65,000,000.
EHI was also sold through public offerings in March and
April 1994. LNC purchased 29% of the stock of the new pub-
licly traded holding company from LNL. Prior to the sale,
the Company received a $50,000,000 dividend in the form of a
note. The sale transaction resulted in a realized gain of
$133,000,000 and a direct reduction in surplus of
$21,000,000 due to release of unrealized gain amounts, for a
net surplus increase of $112,000,000. Net of expenses, the
Company received cash of $348,000,000.
In October 1996, the Company and its wholly owned subsidiary
purchased a block of group tax qualified annuity business
from UNUM Corporation. The transaction was completed in the
form of a reinsurance transaction, which resulted in a ced-
ing commission of $71,800,000. The ceding commission has
been recorded as admissible goodwill of $62,300,000, which
is to be amortized on a straight-line basis over 10 years.
The Company's subsidiary was required by the New York De-
partment of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals
of the Company and its wholly owned subsidiary increased by
$3,200,000,000 as a result of this transaction.
In its previously-filed 1996 NAIC Annual Statement, the Com-
pany recorded the ceding commission as a nonadmitted asset,
which was charged directly to unassigned surplus. According-
ly, unassigned surplus was understated at December 31, 1996
by $62,300,000, net of amortization in 1996. In 1997, man-
agement will correct its opening balance of unassigned sur-
plus in its NAIC Annual Statement.
S-25
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
The balance sheets include reinsurance balances with affiliated companies
as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
-------- --------
(in millions)
-----------------
<S> <C> <C>
Future policy benefits and claims assumed $ 312.7 $ 344.8
Future policy benefits and claims ceded 891.8 1,344.5
Amounts recoverable on paid and unpaid losses 31.2 65.9
Reinsurance payable on paid losses 2.7 5.5
Funds held under reinsurance treaties--net liability 1,062.4 712.3
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with unau-
thorized companies. To take a reserve credit for such reinsurance, the Com-
pany holds assets from the reinsurer, including funds held under reinsur-
ance treaties, and is the beneficiary on letters of credit aggregating
$314,200,000 and $306,800,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, LNC had guaranteed $239,200,000 and
$241,400,000, respectively, of these letters of credit. At December 31,
1996, the Company has a receivable (included in the foregoing amounts) from
affiliated insurance companies in the amount of $135,700,000 for statutory
surplus relief received under financial reinsurance ceded agreements.
13. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying bal-
ance sheets represent funds that are separately administered, principally
for annuity contracts, and for which the contractholder, rather than the
Company, bears the investment risk. Separate account contractholders have
no claim against the assets of the general account of the Company. Separate
account assets are reported at fair value and consist primarily of long-
term bonds, common stocks, short-term investments and mutual funds. The de-
tailed operations of the separate accounts are not included in the accompa-
nying financial statements. Fees charged on separate account policyholder
deposits are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,148,700,000, $3,068,200,000 and $2,694,700,000 in 1996, 1995 and 1994,
respectively. Reserves for separate accounts with assets at fair value were
$23,047,800,000 and $17,891,400,000 at December 31, 1996 and 1995, respec-
tively. All reserves are subject to discretionary withdrawal at market val-
ue. Substantially all of the Company's separate accounts are nonguaranteed.
12. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional of-
fices. For providing these selling and marketing services, the Company paid
LFGI override commissions and operating expense allowances of $56,300,000,
$43,300,000 and $41,200,000 in 1996, 1995 and 1994, respectively. LFGI in-
curred expenses of $15,700,000, $10,400,000 and $10,700,000 in 1996, 1995
and 1994, respectively, in excess of the override commissions and operating
expense allowances received from the Company, which the Company is not re-
quired to reimburse.
Cash and short-term investments at December 31, 1996 and 1995 include the
Company's participation in a short-term investment pool with LNC of
$175,100,000 and $324,000,000, respectively. Related investment income
amounted to $15,300,000, $21,100,000 and $16,100,000 in 1996, 1995 and
1994, respectively. Other liabilities at December 31, 1996 and 1995 include
$100,000,000 of notes payable to LNC.
The Company provides services to and receives services from affiliated com-
panies which resulted in a net payment of $34,100,000 and $24,900,000 in
1996 and 1995, respectively.
The Company both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statement of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $ 17.9 $ 17.6 $ 19.8
Insurance ceded 302.8 214.4 481.3
</TABLE>
S-26
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
13. SEPARATE ACCOUNTS CONTINUED
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995
----------------------------------------------------
(in millions)
---------------------
<S> <C> <C>
Transfers as reported in the Summary of
Operations of various Separate Accounts:
Transfers to separate accounts $ 4,149.6 $ 3,070.2
Transfers from separate accounts (2,058.5) (1,457.8)
--------- ---------
Net transfer to separate accounts as reported
in the Company's NAIC Annual Statement $ 2,091.1 $ 1,612.4
========= =========
</TABLE>
S-27
<PAGE>
OTHER FINANCIAL INFORMATION
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of The Lincoln
National Life Insurance Company (a wholly owned subsidiary of Lincoln National
Corporation) as of December 31, 1996 and 1995, and the related statutory-basis
statements of income, changes in capital and surplus and cash flows for each of
the three years in the period ended December 31, 1996. These financial state-
ments are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or per-
mitted by the Indiana Department of Insurance, which practices differ from gen-
erally accepted accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the accompanying
financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial posi-
tion of The Lincoln National Life Insurance Company at December 31, 1996 and
1995, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1996.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Lincoln Na-
tional Life Insurance Company at December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance.
As described in Note 2, in 1994 the Company changed its method of accounting
for separate account contracts.
/s/ Ernst & Young LLP
February 6, 1997
S-28
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Investment income earned:
Government bonds $ 74.6
---------------------------------------------------------------------
Other bonds (unaffiliated) 1,367.6
---------------------------------------------------------------------
Preferred stocks (unaffiliated) 9.6
---------------------------------------------------------------------
Common stocks (unaffiliated) 6.5
---------------------------------------------------------------------
Common stocks of affiliates 9.5
---------------------------------------------------------------------
Mortgage loans 269.3
---------------------------------------------------------------------
Real estate 114.4
---------------------------------------------------------------------
Premium notes, policy loans and liens 35.0
---------------------------------------------------------------------
Cash on hand and on deposit 0.9
---------------------------------------------------------------------
Short-term investments 48.0
---------------------------------------------------------------------
Other invested assets 17.6
---------------------------------------------------------------------
Derivative instruments (6.3)
---------------------------------------------------------------------
Aggregate write-ins for investment income 11.1
----------------------------------------------------------- --------
Gross investment income $1,957.8
- ------------------------------------------------------------- ========
Real estate owned (cost, less encumbrances) $ 621.3
- ------------------------------------------------------------- ========
Mortgage loans (unpaid balance):
Farm mortgages $ 1.1
---------------------------------------------------------------------
Residential mortgages 3.7
---------------------------------------------------------------------
Commercial mortgages 2,971.9
----------------------------------------------------------- --------
Total mortgage loans $2,976.7
- ------------------------------------------------------------- ========
Mortgage loans by standing (unpaid balance):
Good standing $2,922.1
----------------------------------------------------------- ========
Good standing with restructured terms $ 39.6
----------------------------------------------------------- ========
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------- ========
Foreclosure in process $ 14.9
----------------------------------------------------------- ========
Other long-term assets (statement value) $ 248.1
- ------------------------------------------------------------- ========
</TABLE>
S-29
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks $ 194.0
------------------------------------------------------------- ==========
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 1,618.0
-------------------------------------------------------------
Over 1 year through 5 years 5,928.1
-------------------------------------------------------------
Over 5 years through 10 years 6,025.9
-------------------------------------------------------------
Over 10 years through 20 years 3,670.6
-------------------------------------------------------------
Over 20 years 2,860.4
------------------------------------------------------------- ----------
Total by maturity $ 20,103.0
- --------------------------------------------------------------- ==========
Bonds by class (statement value):
Class 1 $ 14,013.7
-------------------------------------------------------------
Class 2 4,504.1
-------------------------------------------------------------
Class 3 807.6
-------------------------------------------------------------
Class 4 705.9
-------------------------------------------------------------
Class 5 71.4
-------------------------------------------------------------
Class 6 0.3
------------------------------------------------------------- ----------
Total by class $ 20,103.0
- --------------------------------------------------------------- ==========
Total bonds publicly traded $ 16,520.3
- --------------------------------------------------------------- ==========
Total bonds privately placed $ 3,582.7
- --------------------------------------------------------------- ==========
Preferred stocks (cost or amortized cost) $ 239.7
- --------------------------------------------------------------- ==========
Unaffiliated common stocks (market value) $ 358.3
- --------------------------------------------------------------- ==========
Short-term investments (cost or amortized cost) $ 713.4
- --------------------------------------------------------------- ==========
Financial options and caps owned (statement value) $ 32.2
- --------------------------------------------------------------- ==========
Financial options and caps written (statement value) $ 0.3
- --------------------------------------------------------------- ==========
Swap and forward agreements open (statement value) $ 0.2
- --------------------------------------------------------------- ==========
Futures contracts open (current value) $ 161.2
- --------------------------------------------------------------- ==========
Cash on deposit $ 45.8
- --------------------------------------------------------------- ==========
Life insurance in-force:
Ordinary $ 97.9
------------------------------------------------------------- ==========
Group life $ 31.4
------------------------------------------------------------- ==========
</TABLE>
S-30
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 4.9
- ----------------------------------------------------------------------------------------------- =========
Life insurance policies with disability provisions in-force:
Ordinary $ 4.9
--------------------------------------------------------------------------------------------- =========
Group life $ 12.9
--------------------------------------------------------------------------------------------- =========
Supplementary contracts in-force:
Ordinary--not involving life contingencies:
Amount on deposit $ --
--------------------------------------------------------------------------------------------- =========
Income payable $ 3.2
--------------------------------------------------------------------------------------------- =========
Ordinary--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Group--not involving life contingencies:
Income payable $ --
--------------------------------------------------------------------------------------------- =========
Group--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Annuities:
Ordinary:
Immediate--amount of income payable $ 68.4
--------------------------------------------------------------------------------------------- =========
Deferred--fully paid account balance $ 0.6
--------------------------------------------------------------------------------------------- =========
Deferred--not fully paid account balance $ 326.6
--------------------------------------------------------------------------------------------- =========
Group:
Amount of income payable $ --
--------------------------------------------------------------------------------------------- =========
Fully paid account balance $ --
--------------------------------------------------------------------------------------------- =========
Not fully paid account balance $ 78.1
--------------------------------------------------------------------------------------------- =========
Accident and health insurance--premiums in-force:
Ordinary $ 180.6
--------------------------------------------------------------------------------------------- =========
Group $ 97.1
--------------------------------------------------------------------------------------------- =========
Deposit funds and dividend accumulations:
Deposit funds account balance $17,456.6
--------------------------------------------------------------------------------------------- =========
Dividend accumulations--account balance $ 114.7
--------------------------------------------------------------------------------------------- =========
</TABLE>
S-31
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
Claim payments 1996:
Group Accident and Health:
<TABLE>
<S> <C>
1996 $ 9.4
=====
--------------
1995 $ 3.1
=====
--------------
1994 $ 0.1
=====
--------------
1993 $ --
=====
--------------
1992 $(0.1)
=====
--------------
Prior $ --
=====
--------------
</TABLE>
S-32
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA
NOTE--BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis financial data as
of December 31, 1996 and for the year then ended for purposes of complying with
paragraph 9 of the Annual Audited Financial Reports in the General Section of
the National Association of Insurance Commissioners' Annual Statement Instruc-
tions and agrees to or is included in the amounts reported in The Lincoln Na-
tional Life Insurance Company's 1996 Statutory Annual Statement as filed with
the Indiana Department of Insurance.
S-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
The Lincoln National Life Insurance Company
Our audits were conducted for the purpose of forming an
opinion on the statutory-basis financial statements taken as
a whole. The accompanying supplemental schedule of selected
statutory-basis financial data is presented to comply with
the National Association of Insurance Commissioners' Annual
Statement Instructions and is not a required part of the
statutory-basis financial statements. Such information has
been subjected to the auditing procedures applied in our au-
dit of the statutory-basis financial statements and, in our
opinion, is fairly stated in all material respects in rela-
tion to the statutory-basis financial statements taken as a
whole.
/s/ Ernst & Young LLP
February 6, 1997
S-34
<PAGE>
PREFACE TO THE MULTI FUND(R) PROSPECTUSES
THESE PAGES ARE PART OF THE PROSPECTUS FOR EACH OF THE FOLLOWING FUNDS:
Lincoln National Aggressive Growth Fund, Inc. (AG)
Lincoln National Bond Fund, Inc. (B)
Lincoln National Capital Appreciation Fund, Inc. (CA)
Lincoln National Equity-Income Fund, Inc. (E-I)
Lincoln National Global Asset Allocation Fund, Inc. (GAA)
Lincoln National Growth and Income Fund, Inc. (GI)
Lincoln National International Fund, Inc. (I)
Lincoln National Managed Fund, Inc. (M)
Lincoln National Money Market Fund, Inc. (MM)
Lincoln National Social Awareness Fund, Inc. (SA)
Lincoln National Special Opportunities Fund, Inc. (SO)
Preface/Directory
Shares of all the funds are sold to Lincoln National Life Insurance Co.
(Lincoln Life) for allocation to its Variable Annuity Account C (the variable
annuity account [VAA]) to fund variable annuity contracts and for allocation to
its Variable Life Account K to fund variable life insurance contracts.
To fund its variable life contracts, Variable Life Account D buys shares of the
Bond, Growth and Income, Managed, Money Market and Special Opportunities Funds.
To fund its variable life contracts, Variable Life Account G buys shares of the
Growth and Income and Special Opportunities Funds.
Each of these Variable Life and Annuity Accounts may be referred to as a
variable account. For each fund listed above, see Description of the fund in
its Prospectus for a statement of that fund's investment objective. Each of
these funds is referred to individually as a fund; collectively, as the funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THESE PROSPECTUSES. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
These Prospectuses set forth concisely the information about each fund that you
ought to know before investing. Please read and keep this Prospectus booklet
for future reference.
A separate Statement of Additional Information (SAI) for each fund has been
filed with the SEC. By this reference, each SAI, dated May 1, 1997, is
incorporated into the Prospectus of the fund with which it is registered. A
free copy will be provided upon request. Either write Lincoln National Life
Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or call 1-800-4LINCOLN
(454-6265).
The Financial Highlights table of each fund contains per-share data calculated
on the basis of a share outstanding throughout the period, together with
financial ratios and other supplemental data. The Financial Highlights table is
incorporated by reference to the fund's 1996 Annual Report. A copy of the
Annual Report will be provided on request and without charge. Either write
Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801
or call 1-800-4LINCOLN (454-6265).
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THESE
PROSPECTUSES, IN CONNECTION WITH THE OFFERS CONTAINED IN THEM. IF ANY ARE GIVEN
OR MADE, THE INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND(S) IN QUESTION. THESE PROSPECTUSES DO NOT
CONSTITUTE OFFERS BY THE FUNDS TO SELL, OR SOLICITATIONS OF ANY OFFERS TO BUY,
ANY OF THE SECURITIES OFFERED BY THEM IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL FOR THE FUNDS TO MAKE THOSE OFFERS.
Prospectuses dated May 1, 1997
F-1
<PAGE>
DIRECTORY FOR THE FUND PROSPECTUSES
Preface/Directory
<TABLE>
<CAPTION>
Subject Page
- ----------------------------------------
<S> <C>
PREFACE F-1
DESCRIPTION OF THE FUND
Aggressive Growth Fund F-3
Bond Fund F-9
Capital Appreciation Fund F-13
Equity-Income Fund F-17
Global Asset Allocation Fund F-21
Growth and Income Fund F-27
International Fund F-29
Managed Fund F-33
Money Market Fund F-37
Social Awareness Fund F-39
Special Opportunities Fund F-43
- ----------------------------------------
INVESTMENT POLICIES AND TECHNIQUES
Aggressive Growth Fund F-3
Bond Fund F-9
Capital Appreciation Fund F-13
Equity-Income Fund F-17
Global Asset Allocation Fund F-21
Growth and Income Fund F-27
International Fund F-29
Managed Fund F-33
Money Market Fund F-37
Social Awareness Fund F-39
Special Opportunities Fund F-43
- ----------------------------------------
INVESTMENT RESTRICTIONS
Aggressive Growth Fund F-6
Bond Fund F-11
Capital Appreciation Fund F-15
Equity-Income Fund F-19
Global Asset Allocation Fund F-24
Growth and Income Fund F-27
International Fund F-31
Managed Fund F-35
Money Market Fund F-38
Social Awareness Fund F-40
Special Opportunities Fund F-44
</TABLE>
<TABLE>
<CAPTION>
Subject Page
- -------------------------------------------------------------
<S> <C>
STRATEGIC PORTFOLIO TRANSACTIONS
Aggressive Growth Fund F-6
Bond Fund F-11
Capital Appreciation Fund F-16
Equity-Income Fund F-20
Global Asset Allocation Fund F-24
Growth and Income Fund F-28
International Fund F-31
Managed Fund F-35
Money Market Fund F-38
Social Awareness Fund F-40
Special Opportunities Fund F-45
- -------------------------------------------------------------
APPENDIX - CONTAINS IMPORTANT INFORMATION FOR ALL FUNDS
Net asset value F-47
Management of the funds F-47
Purchase of securities being offered F-49
Sale and redemption of shares F-50
Distributions and federal income tax considerations F-50
Management discussion of fund performance F-50
Description of shares F-50
Strategic portfolio transactions-additional information F-51
Foreign investments F-53
General information F-54
Statement of Additional Information
Table of contents - 11 underlying funds F-56
</TABLE>
F-2
<PAGE>
This filing is made pursuant to Rule 6e-3(T)
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
REPRESENTATION PURSUANT TO SECTION 26(e) (2) (A)
OF THE INVESTMENT COMPANY ACT OF 1940
Lincoln National Life Insurance Company hereby represents that the fees and
charges deducted under the Policies registered by this registration statement,
in the aggregate, are reasonable in relation to the services rendered, the
expenses expected to be incurred, and the risks assumed by Lincoln National Life
Insurance Company.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
A reconciliation and tie-in of information shown in the Prospectus with the
items of Form N-8B-2.
The Prospectus consisting of 206 pages.
The undertaking to file reports
The representation pursuant to Section 26(e) (2) (A) of the Investment
Company Act of 1940
The signatures
The written consents of the following persons:
Jeremy Sachs, Esquire
Denis G. Schwartz, FSA
Ernst & Young LLP
The following exhibits:
1. (1) Certified Resolution of the Board of Directors of the Company
establishing the Account.*
(2) Not applicable.
(3) (a) Proposed Form of Underwriting Agreement.*
(b) Form of Agents Contract.*
(c) Commission Schedule (Revised).*
(4) Not applicable.
(5) Form of Policy.*
(6) (a) Certificate of Incorporation of the Company.*
(b) By-Laws of the Company.*
(7) Not applicable.
(8) Fund Participation Agreements
(a) Lincoln National Special Opportunities Fund, Inc.
(b) Lincoln National Social Awareness Fund, Inc.
(c) Lincoln National Global Asset Allocation Fund, Inc.
(formerly, Lincoln National Putnam Master Fund, Inc.)
(d) Lincoln National Aggressive Growth, Fund, Inc.
(e) Lincoln National Money Market Fund, Inc.
(f) Lincoln National Managed Fund, Inc.
(g) Lincoln National International Fund, Inc.
(h) Lincoln National Bond Fund, Inc.
(i) Lincoln National Capital Appreciation Fund, Inc.
(j) Lincoln National Equity Income Fund, Inc.
(k) Lincoln National Growth & Income Fund, Inc.
(formerly Lincoln National Growth Fund, Inc.)
(l) Delaware Group Premium Fund, Inc.
(9)(a) Proposed Form of Indemnification Agreement (Revised).*
(9)(b) Services Agreement between Delaware Management Holdings, Inc.,
Delaware Service Company, Inc. and Lincoln National Life Insurance
Company dated 8/29/96.
(10) Form of Application.*
2. See Exhibit 1(5)
3. Opinion and Consent of Jeremy Sachs, Esquire.*
4. Not applicable.
5. Opinion and Consent of Denis G. Schwartz, FSA, Assistant Vice President
6. Consent of Ernst & Young LLP, Independent Auditors.
7. Memorandum describing the Company's issuance, transfer and redemption and
conversion procedures for the Policy.*
8. Financial Data Schedule
9. Other Exhibits.*
(1) Power of Attorney - Jack D. Hunter
(2) Power of Attorney - Gabriel Shaheen
(3) Power of Attorney - Ian M. Rolland
(4) Power of Attorney - Robert A. Anker
(5) Power of Attorney - O. Douglas Worthington
(6) Power of Attorney - Jon A. Boscia
(7) Power of Attorney - Richard C. Vaughan
*Previously filed as an exhibit to the registration statement
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Lincoln Life Flexible Premium Variable Life Account K, certifies that it meets
all the requirements for effectiveness of this Registration Statement Pursuant
to Rule 485 (b) under the Securities Act of 1933 and has duly caused this post-
effective amendment to this registration statement to be signed on its behalf by
the undersigned thereunto duly authorized, and its seal to be hereunto affixed
and attested, all in the City of Fort Wayne, State of Indiana on this 25th day
of April, 1997.
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
on its own behalf as Depositor and on behalf of
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT K
By: /s/ Stephen H. Lewis
---------------------------------------
Stephen H. Lewis, Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Jon A. Boscia Chief Executive Officer, April 25, 1997
- -------------------------- President and Director
Jon A. Boscia (Principal Executive Officer)
/s/ Keith J. Ryan Vice President, Assistant April 25, 1997
- -------------------------- Treasurer and Chief Financial
Keith J. Ryan Officer (Principal Financial
Officer)
/s/ O. Douglas Worthington Vice President and Controller April 25, 1997
- -------------------------- (Principal Accounting Officer)
O. Douglas Worthington
/s/ Jack D. Hunter Executive Vice President, April 25, 1997
- -------------------------- General Counsel and Director
Jack D. Hunter
Director --------, 1997
- --------------------------
H. Thomas McMeekin
/s/ Ian M. Rolland Director April 25, 1997
- --------------------------
Ian M. Rolland
Director and Executive --------, 1997
- -------------------------- Vice President
Lawrence T. Rowland
/s/ Richard C. Vaughan Director April 25, 1997
- --------------------------
Richard C. Vaughan
<PAGE>
Exhibit 8(a)
AGREEMENT TO PURCHASE SHARES
----------------------------
Effective June 30, 1994, The Lincoln National Life Insurance
Company ("LNL"), on its behalf and on behalf of Lincoln Life Flexible
Premium Variable Life Account K (the "Variable Account"), and Lincoln
National Special Opportunities Fund, Inc. (the "Fund") hereby agree that
shares of the Fund shall be made available to serve as an underlying
investment medium for variable life insurance contracts to be offered by
LNL through the Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company
duly organized and existing in good standing under Indiana law and that
it has legally and validly established the Variable Account as permitted
under Indiana law and has registered the Variable Account as a unit
investment trust in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), to serve as a
segregated investment account for certain variable life insurance
contracts (the "Contracts"). LNL further represents and warrants that
the Contracts will be registered under the Securities Act of 1933, as
amended (the "1933 Act"), and the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Contracts
will provide for the allocation of net amounts received by LNL
thereunder to separate divisions of the Variable Account designated as
"sub-accounts" for investment in the shares of registered investment
companies selected by LNL ("underlying
<PAGE>
funds"). The Fund will be an underlying fund for one of the
sub-accounts.
2. Fund shares may be purchased and redeemed by LNL in
accordance with the provisions of the then current prospectus of the
Fund. The Fund anticipates that it will make its shares available
indefinitely for purchase by LNL hereunder, but the Fund reserves the
right to suspend or terminate sales of its shares hereunder at any time
or times when its Board of Directors makes a good faith determination
that further sales would be to the detriment of current holders of Fund
shares. Payment for Fund shares shall be made by LNL within five days
after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the
accrual and/or declaration of dividends in accordance with any policy
set forth in its then current prospectus with respect to such shares
until any payment check has cleared. If payment is not received by the
Fund or an agent of the Fund within the five day period the Fund may,
without notice, cancel the order and require LNL to promptly reimburse
the Fund for any loss suffered by the Fund resulting from such failure
to make timely payment. The Fund represents and warrants that Fund
shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning
the Fund or Fund shares except those contained in the
-2-
<PAGE>
then current prospectus of the Fund or in current printed sales
literature of the Fund, or as otherwise approved by the Fund in writing.
4. Administrative services to owners of and participants under
Contracts shall be the responsibility of LNL and shall not be the
responsibility of the Fund. The Fund will furnish LNL copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantities as LNL shall reasonably require for
distribution to owners of or participants under the Contracts and LNL
will distribute these materials to such owners or participants as
required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will
vote Fund shares for which no instructions have been received in the
same proportion as Fund shares for which instructions have been received
from Contract owners. LNL and persons under its control will in no way
recommend action in connection with the solicitation of proxies for Fund
shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares and shall
provide LNL with as many copies of its current prospectus as LNL may
reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund
shares as follows:
(a) at the option of LNL or the Fund upon 90 days'
written notice to the other party;
(b) at the option of LNL if Fund shares are not available
for any reason to meet the requirements of the
Contracts as determined by LNL; or
(c) at the option of the Fund upon institution of any
proceedings against LNL relating to the Variable
Account or the issuance and sale of the Contracts, by
the National Association of Securities Dealers, Inc.,
the Securities and Exchange Commission, the Indiana
Insurance Commissioner or any other regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and
each of its directors who is not an "interested person" of the Fund, as
defined in the 1940 Act (collectively, the "Indemnified Parties")
against any losses, claims, damages, liabilities (including amounts paid
in settlement thereof with the written consent of LNL) or expenses or
actions with respect thereto to which such Indemnified Parties may
become subject, under the federal securities laws or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any
material fact contained in the Registration
Statement or prospectus of the Variable Account
or contained in the Contracts or sales
literature (or any amendment or supplement to
any of the foregoing), or arise out of or are
based upon the omission or the alleged omission
to state therein a material fact required to be
stated therein or necessary to make the
statements therein not misleading, provided that
this agreement to indemnify shall not apply as
to an Indemnified Party if such statement or
omission or such alleged
-4-
<PAGE>
statement or omission was made in reliance upon
and in conformity with written information
furnished to LNL by such Indemnified Party
expressly for use in the Registration Statement
or prospectus for the Variable Account or the
Contracts or sales literature (or any amendment
or supplement);
(ii) arise out of or as a result of conduct,
statements, or representations (other than
statements or representations contained in the
prospectus of the Fund and sales literature not
supplied by LNL) of LNL or persons under its
control, with respect to the sale and
distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to
provide the services and furnish the materials
set forth in paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred
by the Indemnified Parties in connection with investigating or defending
any such loss, claim, damage, liability or action. This indemnity
agreement is in addition to any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified
Parties of notice of the commencement of any action, or the making of
any claim for which indemnity may apply under this paragraph, the
Indemnified Parties will, if a claim in respect thereof is to be made
against LNL, notify LNL of the commencement thereof; but the omission so
to notify LNL will not relieve LNL from any liability which it may have
to the Indemnified Parties otherwise than under this Agreement. In case
any such action is brought against the Indemnified Parties, and LNL is
notified of the commencement thereof, LNL will be entitled to
participate therein and to assume the defense thereof, with counsel
-5-
<PAGE>
satisfactory to the party named in the action, and after notice from LNL
to such party of LNL's election to assume the defense thereof, LNL will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8. (a) The parties shall in good faith attempt to resolve any
dispute arising out of or relating to this agreement promptly by
negotiations between executives who have authority to settle the
controversy. Either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 20 days
after delivery of that notice, executives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 60 days of the disputing party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in sub-paragraph (b) above. If a
negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the
-6-
<PAGE>
dispute by mediation under the then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes. The neutral
third party will be selected from the CPR Panels of Neutrals. If the
parties encounter difficulty in agreeing on a neutral, they will seek
the assistance of CPR in the selection process. All negotiations
pursuant to sub-paragraphs (a) and (b) of this paragraph 8 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
(c) Any dispute arising out of or relating to this
contract or the breach, termination or validity thereof, which has not
been resolved by non-binding procedures as provided in sub-paragraphs
(a) or (b) herein within 60 days of the initiation of those procedures
shall be finally settled by arbitration conducted expeditiously in
accordance with the CPR Rules for Non-Administered Arbitration of
Business Disputes by a sole arbitrator; provided, however, that if one
party has requested the other party to participate in a non-binding
procedure and the other has failed to participate, the requesting party
may initiate arbitration before expiration of the 60-day period set out
just above. If within 45 days of the commencement of the process to
select an arbitrator the parties cannot agree upon the arbitrator, then
he or she will be selected from the CPR Panels of Neutrals. The
arbitration shall be governed by the United States Arbitration Act, 9
U.S.C. Sec. 1-16, and judgment
-7-
<PAGE>
upon the award rendered by the Arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Fort
Wayne, Indiana. The Arbitrator is not empowered to award damages in
excess of compensatory damages.
9. LNL shall be deemed to own and control all pertinent records
pertaining to the variable life operations which are the subject of this
agreement. LNL, on its behalf and on behalf of the Variable Account,
shall have the right to inspect, audit and copy all records pertaining
to the performance of services under this agreement.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By /s/ Denis Swartz
----------------------
Denis Schwartz
Assistant Vice President
LINCOLN NATIONAL SPECIAL
OPPORTUNITIES FUND, INC.
By /s/Robert A. Nikels
----------------------
Robert A. Nikels
Chairman of the Board,
President & Director
-8-
<PAGE>
Exhibit 8(b)
AGREEMENT TO PURCHASE SHARES
----------------------------
Effective June 30, 1994, The Lincoln National Life Insurance
Company ("LNL"), on its behalf and on behalf of Lincoln Life Flexible
Premium Variable Life Account K (the "Variable Account"), and Lincoln
National Social Awareness Fund, Inc. (the "Fund") hereby agree that
shares of the Fund shall be made available to serve as an underlying
investment medium for variable life insurance contracts to be offered by
LNL through the Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company
duly organized and existing in good standing under Indiana law and that
it has legally and validly established the Variable Account as permitted
under Indiana law and has registered the Variable Account as a unit
investment trust in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), to serve as a
segregated investment account for certain variable life insurance
contracts (the "Contracts"). LNL further represents and warrants that
the Contracts will be registered under the Securities Act of 1933, as
amended (the "1933 Act"), and the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Contracts
will provide for the allocation of net amounts received by LNL
thereunder to separate divisions of the Variable Account designated as
"sub-accounts" for investment in the shares of registered investment
companies selected by LNL ("underlying
<PAGE>
funds"). The Fund will be an underlying fund for one of the
sub-accounts.
2. Fund shares may be purchased and redeemed by LNL in
accordance with the provisions of the then current prospectus of the
Fund. The Fund anticipates that it will make its shares available
indefinitely for purchase by LNL hereunder, but the Fund reserves the
right to suspend or terminate sales of its shares hereunder at any time
or times when its Board of Directors makes a good faith determination
that further sales would be to the detriment of current holders of Fund
shares. Payment for Fund shares shall be made by LNL within five days
after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the
accrual and/or declaration of dividends in accordance with any policy
set forth in its then current prospectus with respect to such shares
until any payment check has cleared. If payment is not received by the
Fund or an agent of the Fund within the five day period, the Fund may,
without notice, cancel the order and require LNL to promptly reimburse
the Fund for any loss suffered by the Fund resulting from such failure
to make timely payment. The Fund represents and warrants that Fund
shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning
the Fund or Fund shares except those contained in the
-2-
<PAGE>
then current prospectus of the Fund or in current printed sales
literature of the Fund, or as otherwise approved by the Fund in writing.
4. Administrative services to owners of and participants under
Contracts shall be the responsibility of LNL and shall not be the
responsibility of the Fund. The Fund will furnish LNL copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantities as LNL shall reasonably require for
distribution to owners of or participants under the Contracts and LNL
will distribute these materials to such owners or participants as
required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will
vote Fund shares for which no instructions have been received in the
same proportion as Fund shares for which instructions have been received
from Contract owners. LNL and persons under its control will in no way
recommend action in connection with the solicitation of proxies for Fund
shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares and shall
provide LNL with as many copies of its current prospectus as LNL may
reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund
shares as follows:
(a) at the option of LNL or the Fund upon 90 days' written
notice to the other party;
(b) at the option of LNL if Fund shares are not available for
any reason to meet the requirements of the Contracts as
determined by LNL; or
(c) at the option of the Fund upon institution of any
proceedings against LNL relating to the Variable Account or
the issuance and sale of the Contracts, by the National
Association of Securities Dealers, Inc., the Securities and
Exchange Commission, the Indiana Insurance Commissioner or
any other regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and
each of its directors who is not an "interested person" of the Fund, as
defined in the 1940 Act (collectively, the "Indemnified Parties")
against any losses, claims, damages, liabilities (including amounts paid
in settlement thereof with the written consent of LNL) or expenses or
actions with respect thereto to which such Indemnified Parties may
become subject, under the federal securities laws or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact
contained in the Registration Statement or prospectus
of the Variable Account or contained in the Contracts
or sales literature (or any amendment or supplement to
any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state
therein a material fact required to be stated therein
or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to an Indemnified Party if such
statement or omission or such alleged
-4-
<PAGE>
statement or omission was made in reliance upon and in
conformity with written information furnished to LNL
by such Indemnified Party expressly for use in the
Registration Statement or prospectus for the Variable
Account or the Contracts or sales literature (or any
amendment or supplement);
(ii) arise out of or as a result of conduct, statements, or
representations (other than statements or
representations contained in the prospectus of the
Fund and sales literature not supplied by LNL) of LNL
or persons under its control, with respect to the sale
and distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to provide the
services and furnish the materials set forth in
paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred
by the Indemnified Parties in connection with investigating or defending
any such loss, claim, damage, liability or action. This indemnity
agreement is in addition to any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified
Parties of notice of the commencement of any action, or the making of
any claim for which indemnity may apply under this paragraph, the
Indemnified Parties will, if a claim in respect thereof is to be made
against LNL, notify LNL of the commencement thereof; but the omission so
to notify LNL will not relieve LNL from any liability which it may have
to the Indemnified Parties otherwise than under this Agreement. In case
any such action is brought against the Indemnified Parties, and LNL is
notified of the commencement thereof, LNL will be entitled to
participate therein and to assume the defense thereof, with counsel
-5-
<PAGE>
satisfactory to the party named in the action, and after notice from LNL
to such party of LNL's election to assume the defense thereof, LNL will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8. (a) The parties shall in good faith attempt to resolve any
dispute arising out of or relating to this agreement promptly by
negotiations between executives who have authority to settle the
controversy. Either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 20 days
after delivery of that notice, executives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 60 days of the disputing party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in sub-paragraph (b) above. If a
negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the
-6-
<PAGE>
dispute by mediation under the then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes. The neutral
third party will be selected from the CPR Panels of Neutrals. If the
parties encounter difficulty in agreeing on a neutral, they will seek
the assistance of CPR in the selection process. All negotiations
pursuant to sub-paragraphs (a) and (b) of this paragraph 8 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
(c) Any dispute arising out of or relating to this
contract or the breach, termination or validity thereof, which has not
been resolved by non-binding procedures as provided in sub-paragraphs
(a) or (b) herein within 60 days of the initiation of those procedures
shall be finally settled by arbitration conducted expeditiously in
accordance with the CPR Rules for Non-Administered Arbitration of
Business Disputes by a sole arbitrator; provided, however, that if one
party has requested the other party to participate in a non-binding
procedure and the other has failed to participate, the requesting party
may initiate arbitration before expiration of the 60-day period set out
just above. If within 45 days of the commencement of the process to
select an arbitrator the parties cannot agree upon the arbitrator, then
he or she will be selected from the CPR Panels of Neutrals. The
arbitration shall be governed by the United States Arbitration Act, 9
U.S.C. Sec. 1-16, and judgment
-7-
<PAGE>
upon the award rendered by the Arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Fort
Wayne, Indiana. The Arbitrator is not empowered to award damages in
excess of compensatory damages.
9. LNL shall be deemed to own and control all pertinent records
pertaining to the variable life operations which are the subject of this
agreement. LNL, on its behalf and on behalf of the Variable Account,
shall have the right to inspect, audit and copy all records pertaining
to the performance of services under this agreement.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By /s/ Denis Schwartz
----------------------------
Denis Schwartz
Assistant Vice President
LINCOLN NATIONAL SOCIAL
AWARENESS FUND, INC.
By /s/ Robert A. Nikels
---------------------------
Robert A. Nikels
Chairman of the Board,
President & Director
-8-
<PAGE>
Exhibit 8(c)
AGREEMENT TO PURCHASE SHARES
----------------------------
Effective June 30, 1994, The Lincoln National Life Insurance
Company ("LNL"), on its behalf and on behalf of Lincoln Life Flexible
Premium Variable Life Account K (the "Variable Account"), and Lincoln
National Putnam Master Fund, Inc. (the "Fund") hereby agree that shares
of the Fund shall be made available to serve as an underlying investment
medium for variable life insurance contracts to be offered by LNL
through the Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company
duly organized and existing in good standing under Indiana law and that
it has legally and validly established the Variable Account as permitted
under Indiana law and has registered the Variable Account as a unit
investment trust in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), to serve as a
segregated investment account for certain variable life insurance
contracts (the "Contracts"). LNL further represents and warrants that
the Contracts will be registered under the Securities Act of 1933, as
amended (the "1933 Act"), and the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Contracts
will provide for the allocation of net amounts received by LNL
thereunder to separate divisions of the Variable Account designated as
"sub-accounts" for investment in the shares of registered investment
companies selected by LNL ("underlying
<PAGE>
funds'). The Fund Will be an underlying fund for one of the
sub-accounts.
2. Fund shares may be purchased and redeemed by LNL in
accordance with the provisions of the then current prospectus of the
Fund. The Fund anticipates that it will make its shares available
indefinitely for purchase by LNL hereunder, but the Fund reserves the
right to suspend or terminate sales of its shares hereunder at any time
or times when its Board of Directors makes a good faith determination
that further sales would be to the detriment of current holders of Fund
shares. Payment for Fund shares shall be made by LNL within five days
after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the
accrual and/or declaration of dividends in accordance with any policy
set forth in its then current prospectus with respect to such shares
until any payment check has cleared. If payment is not received by the
Fund or an agent of the Fund within the five day period, the Fund may,
without notice, cancel the order and require LNL to promptly reimburse
the Fund for any loss suffered by the Fund resulting from such failure
to make timely payment. The Fund represents and warrants that Fund
shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning
the Fund or Fund shares except those contained in the
-2-
<PAGE>
then current prospectus of the Fund or in current printed sales
literature of the Fund, or as otherwise approved by the Fund in writing.
4. Administrative services to owners of and participants under
Contracts shall be the responsibility of LNL and shall not be the
responsibility of the Fund. The Fund will furnish LNL copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantities as LNL shall reasonably require for
distribution to owners of or participants under the Contracts and LNL
will distribute these materials to such owners or participants as
required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will
vote Fund shares for which no instructions have been received in the
same proportion as Fund shares for which instructions have been received
from Contract owners. LNL and persons under its control will in no way
recommend action in connection with the solicitation of proxies for Fund
shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares and shall
provide LNL with as many copies of its current prospectus as LNL may
reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund
shares as follows:
(a) at the option of LNL or the Fund upon 90 days' written
notice to the other party;
(b) at the option of LNL if Fund shares are not available
for any reason to meet the requirements of the
Contracts as determined by LNL; or
(c) at the option of the Fund upon institution of any
proceedings against LNL relating to the Variable
Account or the issuance and sale of the Contracts, by
the National Association of Securities Dealers, Inc.,
the Securities and Exchange Commission, the Indiana
Insurance Commissioner or any other regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and
each of its directors who is not an "interested person" of the Fund, as
defined in the 1940 Act (collectively, the "Indemnified Parties")
against any losses, claims, damages, liabilities (including amounts paid
in settlement thereof with the written consent of LNL) or expenses or
actions with respect thereto to which such Indemnified Parties may
become subject, under the federal securities laws or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact
contained in the Registration Statement or prospectus
of the Variable Account or contained in the Contracts
or sales literature (or any amendment or supplement to
any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state
therein a material fact required to be stated therein
or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to an Indemnified Party if such
statement or omission or such alleged
-4-
<PAGE>
statement or omission was made in reliance upon and in
conformity with written information furnished to LNL
by such Indemnified Party expressly for use in the
Registration Statement or prospectus for the Variable
Account or the Contracts or sales literature (or any
amendment or supplement);
(ii) arise out of or as a result of conduct, statements, or
representations (other than statements or
representations contained in the prospectus of the
Fund and sales literature not supplied by LNL) of LNL
or persons under its control, with respect to the sale
and distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to provide the
services and furnish the materials set forth in
paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred
by the Indemnified Parties in connection with investigating or defending
any such loss, claim, damage, liability or action. This indemnity
agreement is in addition to any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified
Parties of notice of the commencement of any action, or the making of
any claim for which indemnity may apply under this paragraph, the
Indemnified Parties will, if a claim in respect thereof is to be made
against LNL, notify LNL of the commencement thereof; but the omission so
to notify LNL will not relieve LNL from any liability which it may have
to the Indemnified Parties otherwise than under this Agreement. In case
any such action is brought against the Indemnified Parties, and LNL is
notified of the commencement thereof, LNL will be entitled to
participate therein and to assume the defense thereof, with counsel
-5-
<PAGE>
satisfactory to the party named in the action, and after notice from LNL
to such party of LNL's election to assume the defense thereof, LNL will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8. (a) The parties shall in good faith attempt to resolve any
dispute arising out of or relating to this agreement promptly by
negotiations between executives who have authority to settle the
controversy. Either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 20 days
after delivery of that notice, executives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 60 days of the disputing party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in sub-paragraph (b) above. If a
negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the
-6-
<PAGE>
dispute by mediation under the then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes. The neutral
third party will be selected from the CPR Panels of Neutrals. If the
parties encounter difficulty in agreeing on a neutral, they will seek
the assistance of CPR in the selection process. All negotiations
pursuant to sub-paragraphs (a) and (b) of this paragraph 8 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
(c) Any dispute arising out of or relating to this contract
or the breach, termination or validity thereof, which has not been
resolved by non-binding procedures as provided in sub-paragraphs (a) or
(b) herein within 60 days of the initiation of those procedures shall be
finally settled by arbitration conducted expeditiously in accordance
with the CPR Rules for Non-Administered Arbitration of Business Disputes
by a sole arbitrator; provided, however, that if one party has requested
the other party to participate in a non-binding procedure and the other
has failed to participate, the requesting party may initiate arbitration
before expiration of the 60-day period set out just above. If within 45
days of the commencement of the process to select an arbitrator the
parties cannot agree upon the arbitrator, then he or she will be
selected from the CPR Panels of Neutrals. The arbitration shall be
governed by the United States Arbitration Act, 9 U.S.C. Sec. 1-16, and
judgment
-7-
<PAGE>
upon the award rendered by the Arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Fort
Wayne, Indiana. The Arbitrator is not empowered to award damages in
excess of compensatory damages.
9. LNL shall be deemed to own and control all pertinent records
pertaining to the variable life operations which are the subject of this
agreement. LNL, on its behalf and on behalf of the Variable Account,
shall have the right to inspect, audit and copy all records pertaining
to the performance of services under this agreement.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By /s/ Denis Schwartz
-----------------------
Denis Schwartz
Assistant Vice President
LINCOLN NATIONAL PUTNAM
MASTER FUND, INC.
By /s/ Robert A. Nikels
-----------------------
Robert A. Nikels
Chairman of the Board,
President & Director
-8-
<PAGE>
Exhibit 8(d)
AGREEMENT TO PURCHASE SHARES
----------------------------
Effective June 30, 1994, The Lincoln National Life Insurance
Company ("LNL"), on its behalf and on behalf of Lincoln Life Flexible
Premium Variable Life Account K (the "Variable Account"), and Lincoln
National Aggressive Growth Fund, Inc. (the "Fund") hereby agree that
shares of the Fund shall be made available to serve as an underlying
investment medium for variable life insurance contracts to be offered by
LNL through the Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company
duly organized and existing in good standing under Indiana law and that
it has legally and validly established the Variable Account as permitted
under Indiana law and has registered the Variable Account as a unit
investment trust in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), to serve as a
segregated investment account for certain variable life insurance
contracts (the "Contracts"). LNL further represents and warrants that
the Contracts will be registered under the Securities Act of 1933, as
amended (the "1933 Act"), and the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Contracts
will provide for the allocation of net amounts received by LNL
thereunder to separate divisions of the Variable Account designated as
"sub-accounts" for investment in the shares of registered investment
companies selected by LNL ("underlying
<PAGE>
funds") The Fund will be an underlying fund for one of the sub-accounts.
2. Fund shares may be purchased and redeemed by LNL in
accordance with the provisions of the then current prospectus of the
Fund. The Fund anticipates that it will make its shares available
indefinitely for purchase by LNL hereunder, but the Fund reserves the
right to suspend or terminate sales of its shares hereunder at any time
or times when its Board of Directors makes a good faith determination
that further sales would be to the detriment of current holders of Fund
shares. Payment for Fund shares shall be made by LNL within five days
after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the
accrual and/or declaration of dividends in accordance with any policy
set forth in its then current prospectus with respect to such shares
until any payment check has cleared. If payment is not received by the
Fund or an agent of the Fund within the five day period, the Fund may,
without notice, cancel the order and require LNL to promptly reimburse
the Fund for any loss suffered by the Fund resulting from such failure
to make timely payment. The Fund represents and warrants that Fund
shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning
the Fund or Fund shares except those contained in the
-2-
<PAGE>
then current prospectus of the Fund or in current printed sales
literature of the Fund, or as otherwise approved by the Fund in writing.
4. Administrative services to owners of and participants under
Contracts shall be the responsibility of LNL and shall not be the
responsibility of the Fund. The Fund will furnish LNL copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantities as LNL shall reasonably require for
distribution to owners of or participants under the Contracts and LNL
will distribute these materials to such owners or participants as
required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will
vote Fund shares for which no instructions have been received in the
same proportion as Fund shares for which instructions have been received
from Contract owners. LNL and persons under its control will in no way
recommend action in connection with the solicitation of proxies for Fund
shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares and shall
provide LNL with as many copies of its current prospectus as LNL may
reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund
shares as follows:
(a) at the option of LNL or the Fund upon 90 days' written
notice to the other party;
(b) at the option of LNL if Fund shares are not available
for any reason to meet the requirements of the
Contracts as determined by LNL; or
(c) at the option of the Fund upon institution of any
proceedings against LNL relating to the Variable
Account or the issuance and sale of the Contracts, by
the National Association of Securities Dealers, Inc.,
the Securities and Exchange Commission, the Indiana
Insurance Commissioner or any other regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and
each of its directors who is not an "interested person" of the Fund, as
defined in the 1940 Act (collectively, the "Indemnified Parties")
against any losses, claims, damages, liabilities (including amounts paid
in settlement thereof with the written consent of LNL) or expenses or
actions with respect thereto to which such Indemnified Parties may
become subject, under the federal securities laws or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any
material fact contained in the Registration
Statement or prospectus of the Variable Account
or contained in the Contracts or sales literature
(or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein
a material fact required to be stated therein or
necessary to make the statements therein not
misleading, provided that this agreement to
indemnify shall not apply as to an Indemnified
Party if such statement or omission or such
alleged
-4-
<PAGE>
statement or omission was made in reliance upon
and in conformity with written information
furnished to LNL by such Indemnified Party
expressly for use in the Registration Statement
or prospectus for the Variable Account or the
Contracts or sales literature (or any amendment
or supplement);
(ii) arise out of or as a result of conduct,
statements, or representations (other than
statements or representations contained in the
prospectus of the Fund and sales literature not
supplied by LNL) of LNL or persons under its
control, with respect to the sale and
distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to
provide the services and furnish the materials
set forth in paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred
by the Indemnified Parties in connection with investigating or defending
any such loss, claim, damage, liability or action. This indemnity
agreement is in addition to any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified
Parties of notice of the commencement of any
action, or the making of any claim for which
indemnity may apply under this paragraph, the
Indemnified Parties will, if a claim in respect
thereof is to be made against LNL, notify LNL of
the commencement thereof; but the omission so to
notify LNL will not relieve LNL from any
liability which it may have to the Indemnified
Parties otherwise than under this Agreement. In
case any such action is brought against the
Indemnified Parties, and LNL is notified of the
commencement thereof, LNL will be entitled to
participate therein and to assume the defense
thereof, with counsel
-5-
<PAGE>
satisfactory to the party named in the action, and after notice from LNL
to such party of LNL's election to assume the defense thereof, LNL will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8. (a) The parties shall in good faith attempt to resolve any
dispute arising out of or relating to this agreement promptly by
negotiations between executives who have authority to settle the
controversy. Either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 20 days
after delivery of that notice, executives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 60 days of the disputing party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in sub-paragraph (b) above. If a
negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the
-6-
<PAGE>
dispute by mediation under the then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes. The neutral
third party will be selected from the CPR Panels of Neutrals. If the
parties encounter difficulty in agreeing on a neutral, they will seek
the assistance of CPR in the selection process. All negotiations
pursuant to sub-paragraphs (a) and (b) of this paragraph 8 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
(c) Any dispute arising out of or relating to this contract
or the breach, termination or validity thereof, which has not been
resolved by non-binding procedures as provided in sub-paragraphs (a) or
(b) herein within 60 days of the initiation of those procedures shall be
finally settled by arbitration conducted expeditiously in accordance
with the CPR Rules for Non-Administered Arbitration of Business Disputes
by a sole arbitrator; provided, however, that if one party has requested
the other party to participate in a non-binding procedure and the other
has failed to participate, the requesting party may initiate arbitration
before expiration of the 60-day period set out just above. If within 45
days of the commencement of the process to select an arbitrator the
parties cannot agree upon the arbitrator, then he or she will be
selected from the CPR Panels of Neutrals. The arbitration shall be
governed by the United States Arbitration Act, 9 U.S.C. Sec. 1-16, and
judgment
-7-
<PAGE>
upon the award rendered by the Arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Fort
Wayne, Indiana. The Arbitrator is not empowered to award damages in
excess of compensatory damages.
9. LNL shall be deemed to own and control all pertinent records
pertaining to the variable life operations which are the subject of this
agreement. LNL, on its behalf and on behalf of the Variable Account,
shall have the right to inspect, audit and copy all records pertaining
to the performance of services under this agreement.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By /s/ Denis Schwartz
-----------------------
Denis Schwartz
Assistant Vice President
LINCOLN NATIONAL AGGRESSIVE
GROWTH FUND, INC.
By /s/ Robert A. Nikels
-----------------------
Robert A. Nikels
Chairman of the Board,
President & Director
-8-
<PAGE>
Exhibit 8(e)
AGREEMENT TO PURCHASE SHARES
----------------------------
Effective June 30, 1994, The Lincoln National Life Insurance
Company ("LNL"), on its behalf and on behalf of Lincoln Life Flexible
Premium Variable Life Account K (the "Variable Account"), and Lincoln
National Money Market Fund, Inc. (the "Fund") hereby agree that shares
of the Fund shall be made available to serve as an underlying investment
medium for variable life insurance contracts to be offered by LNL
through the Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company
duly organized and existing in good standing under Indiana law and that
it has legally and validly established the Variable Account as permitted
under Indiana law and has registered the Variable Account as a unit
investment trust in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), to serve as a
segregated investment account for certain variable life insurance
contracts (the "Contracts"). LNL further represents and Warrants that
the Contracts will be registered under the Securities Act of 1933, as
amended (the "1933 Act"), and the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Contracts
will provide for the allocation of net amounts received by LNL
thereunder to separate divisions of the Variable Account designated as
"sub-accounts" for investment in the shares of registered investment
companies selected by LNL ("underlying
<PAGE>
funds"). The Fund will be an underlying fund for one of the
sub-accounts
2. Fund shares may be purchased and redeemed by LNL in
accordance with the provisions of the then current prospectus of the
Fund. The Fund anticipates that it will make its shares available
indefinitely for purchase by LNL hereunder, but the Fund reserves the
right to suspend or terminate sales of its shares hereunder at any time
or times when its Board of Directors makes a good faith determination
that further sales would be to the detriment of current holders of Fund
shares. Payment for Fund shares shall be made by LNL within five days
after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the
accrual and/or declaration of dividends in accordance with any policy
set forth in its then current prospectus with respect to such shares
until any payment check has cleared. If payment is not received by the
Fund or an agent of the Fund within the five day period, the Fund may,
without notice, cancel the order and require LNL to promptly reimburse
the Fund for any loss suffered by the Fund resulting from such failure
to make timely payment. The Fund represents and warrants that Fund
shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning
the Fund or Fund shares except those contained in the
-2-
<PAGE>
then current prospectus of the Fund or in current printed sales
literature of the Fund, or as otherwise approved by the Fund in writing.
4. Administrative services to owners of and participants under
Contracts shall be the responsibility of LNL and shall not be the
responsibility of the Fund. The Fund will furnish LNL copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantities as LNL shall reasonably require for
distribution to owners of or participants under the Contracts and LNL
will distribute these materials to such owners or participants as
required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will
vote Fund shares for which no instructions have been received in the
same proportion as Fund shares for which instructions have been received
from Contract owners. LNL and persons under its control will in no way
recommend action in connection with the solicitation of proxies for Fund
shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares and shall
provide LNL with as many copies of its current prospectus as LNL may
reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund
shares as follows:
(a) at the option of LNL or the Fund upon 90 days' written notice
to the other party;
(b) at the option of LNL if Fund shares are not available for any
reason to meet the requirements of the Contracts as
determined by LNL; or
(c) at the option of the Fund upon institution of any proceedings
against LNL relating to the Variable Account or the issuance
and sale of the Contracts, by the National Association of
Securities Dealers, Inc., the Securities and Exchange
Commission, the Indiana Insurance commissioner or any other
regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and
each of its directors who is not an "interested person" of the Fund, as
defined in the 1940 Act (collectively, the "Indemnified Parties")
against any losses, claims, damages, liabilities (including amounts paid
in settlement thereof with the written consent of LNL) or expenses or
actions with respect thereto to which such Indemnified Parties may
become subject, under the federal securities laws or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact
contained in the Registration Statement or prospectus
of the Variable Account or contained in the Contracts
or sales literature (or any amendment or supplement to
any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state
therein a material fact required to be stated therein
or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to an Indemnified Party if such
statement or omission or such alleged
-4-
<PAGE>
statement or omission was made in reliance upon and in
conformity with written information furnished to LNL
by such Indemnified Party expressly for use in the
Registration Statement or prospectus for the Variable
Account or the Contracts or sales literature (or any
amendment or supplement);
(ii) arise out of or as a result of conduct, statements, or
representations (other than statements or
representations contained in the prospectus of the
Fund and sales literature not supplied by LNL) of LNL
or persons under its control, with respect to the sale
and distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to provide the
services and furnish the materials set forth in
paragraph four hereof. LNL will reimburse any legal or
other expenses reasonably incurred by the Indemnified
Parties in connection with investigating or defending
any such loss, claim, damage, liability or action.
This indemnity agreement is in addition to any
liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified Parties
of notice of the commencement of any action, or the making of any claim
for which indemnity may apply under this paragraph, the Indemnified
Parties will, if a claim in respect thereof is to be made against LNL,
notify LNL of the commencement thereof; but the omission so to notify
LNL will not relieve LNL from any liability which it may have to the
Indemnified Parties otherwise than under this Agreement. In case any
such action is brought against the Indemnified Parties, and LNL is
notified of the commencement thereof, LNL will be entitled to
participate therein and to assume the defense thereof, with counsel
-5-
<PAGE>
satisfactory to the party named in the action, and after notice from LNL
to such party of LNL's election to assume the defense thereof, LNL will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8. (a) The parties shall in good faith attempt to resolve any
dispute arising out of or relating to this agreement promptly by
negotiations between executives who have authority to settle the
controversy. Either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 20 days
after delivery of that notice, executives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 60 days of the disputing party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in sub-paragraph (b) above. If a
negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the
-6-
<PAGE>
dispute by mediation under the then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes. The neutral
third party will be selected from the CPR Panels of Neutrals. If the
parties encounter difficulty in agreeing on a neutral, they will seek
the assistance of CPR in the selection process. All negotiations
pursuant to sub-paragraphs (a) and (b) of this paragraph 8 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
(c) Any dispute arising out of or relating to this contract
or the breach, termination or validity thereof, which has not been
resolved by non-binding procedures as provided in sub-paragraphs (a) or
(b) herein within 60 days of the initiation of those procedures shall be
finally settled by arbitration conducted expeditiously in accordance
with the CPR Rules for Non-Administered Arbitration of Business Disputes
by a sole arbitrator; provided, however, that if one party has requested
the other party to participate in a non-binding procedure and the other
has failed to participate, the requesting party may initiate arbitration
before expiration of the 60-day period set out just above. If within 45
days of the commencement of the process to select an arbitrator the
parties cannot agree upon the arbitrator, then he or she will be
selected from the CPR Panels of Neutrals. The arbitration shall be
governed by the United States Arbitration Act, 9 U.S.C. Sec. 1-16, and
judgment
-7-
<PAGE>
upon the award rendered by the Arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Fort
Wayne, Indiana. The Arbitrator is not empowered to award damages in
excess of compensatory damages.
9. LNL shall be deemed to own and control all pertinent records
pertaining to the variable life operations which are the subject of this
agreement. LNL, on its behalf and on behalf of the Variable Account
shall have the right to inspect, audit and copy all records pertaining
to the performance of services under this agreement.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By /s/ Denis Schwartz
-----------------------
Denis Schwartz
Assistant Vice President
LINCOLN NATIONAL MONEY
MARKET FUND, INC.
By /s/ Robert A. Nikels
-----------------------
Robert A. Nikels
Chairman of the Board,
President & Director
-8-
<PAGE>
Exhibit 8(f)
AGREEMENT TO PURCHASE SHARES
----------------------------
Effective June 30, 1994, The Lincoln National Life Insurance
Company ("LNL"), on its behalf and on behalf of Lincoln Life Flexible
Premium Variable Life Account K (the "Variable Account"), and Lincoln
National Managed Fund, Inc. (the "Fund") hereby agree that shares of the
Fund shall be made available to serve as an underlying investment medium
for variable life insurance contracts to be offered by LNL through the
Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company
duly organized and existing in good standing under Indiana law and that
it has legally and validly established the Variable Account as permitted
under Indiana law and has registered the Variable Account as a unit
investment trust in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), to serve as a
segregated investment account for certain variable life insurance
contracts (the "Contracts"). LNL further represents and warrants that
the Contracts will be registered under the Securities Act of 1933, as
amended (the "1933 Act"), and the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Contracts
will provide for the allocation of net amounts received by LNL
thereunder to separate divisions of the Variable Account designated as
"sub-accounts" for investment in the shares of registered investment
companies selected by LNL ("underlying
<PAGE>
funds"). The Fund will be an underlying fund for one of the
sub-accounts.
2. Fund shares may be purchased and redeemed by LNL in
accordance with the provisions of the then current prospectus of the
Fund. The Fund anticipates that it will make its shares available
indefinitely for purchase by LNL hereunder, but the Fund reserves the
right to suspend or terminate sales of its shares hereunder at any time
or times when its Board of Directors makes a good faith determination
that further sales would be to the detriment of current holders of Fund
shares. Payment for Fund shares shall be made by LNL within five days
after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the
accrual and/or declaration of dividends in accordance with any policy
set forth in its then current prospectus with respect to such shares
until any payment check has cleared. If payment is not received by the
Fund or an agent of the Fund within the five day period, the Fund may,
without notice, cancel the order and require LNL to promptly reimburse
the Fund for any loss suffered by the Fund resulting from such failure
to make timely payment. The Fund represents and warrants that Fund
shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning
the Fund or Fund shares except those contained in the
-2-
<PAGE>
then current prospectus of the Fund or in current printed sales
literature of the Fund, or as otherwise approved by the Fund in writing.
4. Administrative services to owners of and participants under
Contracts shall be the responsibility of LNL and shall not be the
responsibility of the Fund. The Fund will furnish LNL copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantities as LNL shall reasonably require for
distribution to owners of or participants under the Contracts and LNL
will distribute these materials to such owners or participants as
required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will
vote Fund shares for which no instructions have been received in the
same proportion as Fund shares for which instructions have been received
from Contract owners. LNL and persons under its control will in no way
recommend action in connection with the solicitation of proxies for Fund
shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares and shall
provide LNL with as many copies of its current prospectus as LNL may
reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund
shares as follows:
(a) at the option of LNL or the Fund upon 90 days' written notice
to the other party;
(b) at the option of LNL if Fund shares are not available for any
reason to meet the requirements of the Contracts as
determined by LNL; or
(c) at the option of the Fund upon institution of any proceedings
against LNL relating to the Variable Account or the issuance
and sale of the Contracts, by the National Association of
Securities Dealers, Inc., the Securities and Exchange
Commission, the Indiana Insurance Commissioner or any other
regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and
each of its directors who is not an "interested person" of the Fund, as
defined in the 1940 Act (collectively, the "Indemnified Parties")
against any losses, claims, damages, liabilities (including amounts paid
in settlement thereof with the written consent of LNL) or expenses or
actions with respect thereto to which such Indemnified Parties may
become subject, under the federal securities laws or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact
contained in the Registration Statement or prospectus
of the Variable Account or contained in the Contracts
or sales literature (or any amendment or supplement to
any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state
therein a material fact required to be stated therein
or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to an Indemnified Party if such
statement or omission or such alleged
-4-
<PAGE>
statement or omission was made in reliance upon and in
conformity with written information furnished to LNL
by such Indemnified Party expressly for use in the
Registration Statement or prospectus for the Variable
Account or the Contracts or sales literature (or any
amendment or supplement);
(ii) arise out of or as a result of conduct, statements, or
representations (other than statements or
representations contained in the prospectus of the
Fund and sales literature not supplied by LNL) of LNL
or persons under its control, with respect to the sale
and distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to provide the
services and furnish the materials set forth in
paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred
by the Indemnified Parties in connection with investigating or defending
any such loss, claim, damage, liability or action. This indemnity
agreement is in addition to any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified Parties
of notice of the commencement of any action, or the making of any claim
for which indemnity may apply under this paragraph, the Indemnified
Parties will, if a claim in respect thereof is to be made against LNL,
notify LNL of the commencement thereof; but the omission so to notify
LNL will not relieve LNL from any liability which it may have to the
Indemnified Parties otherwise than under this Agreement. In case any
such action is brought against the Indemnified Parties, and LNL is
notified of the commencement thereof, LNL will be entitled to
participate therein and to assume the defense thereof, with counsel
-5-
<PAGE>
satisfactory to the party named in the action, and after notice from LNL
to such party of LNL's election to assume the defense thereof, LNL will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8. (a) The parties shall in good faith attempt to resolve any
dispute arising out of or relating to this agreement promptly by
negotiations between executives who have authority to settle the
controversy. Either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 20 days
after delivery of that notice, executives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 60 days of the disputing party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in sub-paragraph (b) above. If a
negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the
-6-
<PAGE>
dispute by mediation under the then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes. The neutral
third party will be selected from the CPR Panels of Neutrals. If the
parties encounter difficulty in agreeing on a neutral, they will seek
the assistance of CPR in the selection process. All negotiations
pursuant to sub-paragraphs (a) and (b) of this paragraph 8 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
(c) Any dispute arising out of or relating to this contract
or the breach, termination or validity thereof, which has not been
resolved by non-binding procedures as provided in sub-paragraphs (a) or
(b) herein within 60 days of the initiation of those procedures shall be
finally settled by arbitration conducted expeditiously in accordance
with the CPR Rules for Non-Administered Arbitration of Business Disputes
by a sole arbitrator; provided, however, that if one party has requested
the other party to participate in a non-binding procedure and the other
has failed to participate, the requesting party may initiate arbitration
before expiration of the 60-day period set out just above. If within 45
days of the commencement of the process to select an arbitrator the
parties cannot agree upon the arbitrator, then he or she will be
selected from the CPR Panels of Neutrals. The arbitration shall be
governed by the United States Arbitration Act, 9 U.S.C. Sec. 1-16, and
judgment
-7-
<PAGE>
upon the award rendered by the Arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Fort
Wayne, Indiana. The Arbitrator is not empowered to award damages in
excess of compensatory damages.
9. LNL shall be deemed to own and control all pertinent records
pertaining to the variable life operations which are the subject of this
agreement. LNL, on its behalf and on behalf of the Variable Account,
shall have the right to inspect, audit and copy all records pertaining
to the performance of services under this agreement.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By /s/ Denis Schwartz
----------------------
Denis Schwartz
Assistant Vice President
LINCOLN NATIONAL MANAGED
FUND, INC.
By /s/ Robert A. Nikels
-----------------------
Robert A. Nikels
Chairman of the Board,
President & Director
-8-
<PAGE>
Exhibit 8(g)
AGREEMENT TO PURCHASE SHARES
----------------------------
Effective June 30, 1994, The Lincoln National Life Insurance
Company ("LNL"), on its behalf and on behalf of Lincoln Life Flexible
Premium Variable Life Account K (the "Variable Account"), and Lincoln
National International Fund, Inc. (the "Fund") hereby agree that shares
of the Fund shall be made available to serve as an underlying investment
medium for variable life insurance contracts to be offered by LNL
through the Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company
duly organized and existing in good standing under Indiana law and that
it has legally and validly established the Variable Account as permitted
under Indiana law and has registered the Variable Account as a unit
investment trust in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), to serve as a
segregated investment account for certain variable life insurance
contracts (the "Contracts"). LNL further represents and warrants that
the Contracts will be registered under the Securities Act of 1933, as
amended (the "1933 Act"), and the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Contracts
will provide for the allocation of net amounts received by LNL
thereunder to separate divisions of the Variable Account designated as
"sub-accounts" for investment in the shares of registered investment
companies selected by LNL ("underlying
<PAGE>
funds"). The Fund will be an underlying fund for one of the
sub-accounts.
2. Fund shares may be purchased and redeemed by LNL in
accordance with the provisions of the then current prospectus of the
Fund. The Fund anticipates that it will make its shares available
indefinitely for purchase by LNL hereunder, but the Fund reserves the
right to suspend or terminate sales of its shares hereunder at any time
or times when its Board of Directors makes a good faith determination
that further sales would be to the detriment of current holders of Fund
shares. Payment for Fund shares shall be made by LNL within five days
after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the
accrual and/or declaration of dividends in accordance with any policy
set forth in its then current prospectus with respect to such shares
until any payment check has cleared. If payment is not received by the
Fund or an agent of the Fund within the five day period, the Fund may,
without notice, cancel the order and require LNL to promptly reimburse
the Fund for any loss suffered by the Fund resulting from such failure
to make timely payment. The Fund represents and warrants that Fund
shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning
the Fund or Fund shares except those contained in the
-2-
<PAGE>
then current prospectus of the Fund or in current printed sales
literature of the Fund or as otherwise approved by the Fund in
writing.
4. Administrative services to owners of and participants under
Contracts shall be the responsibility of LNL and shall not be the
responsibility of the Fund. The Fund will furnish LNL copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantities as LNL shall reasonably require for
distribution to owners of or participants under the Contracts and LNL
will distribute these materials to such owners or participants as
required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will
vote Fund shares for which no instructions have been received in the
same proportion as Fund shares for which instructions have been received
from Contract owners. LNL and persons under its control will in no way
recommend action in connection with the solicitation of proxies for Fund
shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares and shall
provide LNL with as many copies of its current prospectus as LNL may
reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund
shares as follows:
(a) at the option of LNL or the Fund upon 90 days' written notice
to the other party;
(b) at the option of LNL if Fund shares are not available for any
reason to meet the requirements of the Contracts as
determined by LNL; or
(c) at the option of the Fund upon institution of any proceedings
against LNL relating to the Variable Account or the issuance
and sale of the Contracts, by the National Association of
Securities Dealers, Inc., the Securities and Exchange
Commission, the Indiana Insurance Commissioner or any other
regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and
each of its directors who is not an "interested person" of the Fund, as
defined in the 1940 Act (collectively, the "Indemnified Parties")
against any losses, claims, damages, liabilities (including amounts paid
in settlement thereof with the written consent of LNL) or expenses or
actions with respect thereto to which such Indemnified Parties may
become subject, under the federal securities laws or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained
in the Registration Statement or prospectus of the
Variable Account or contained in the Contracts or sales
literature (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or necessary
to make the statements therein not misleading, provided
that this agreement to indemnify shall not apply as to
an Indemnified Party if such statement or omission or
such alleged
-4-
<PAGE>
statement or omission was made in reliance upon and in
conformity with written information furnished to LNL by
such Indemnified Party expressly for use in the
Registration Statement or prospectus for the Variable
Account or the Contracts or sales literature (or any
amendment or supplement);
(ii) arise out of or as a result of conduct, statements, or
representations (other than statements or
representations contained in the prospectus of the Fund
and sales literature not supplied by LNL) of LNL or
persons under its control, with respect to the sale and
distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to provide the
services and furnish the materials set forth in
paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred
by the Indemnified Parties in connection with investigating or defending
any such loss, claim, damage, liability or action. This indemnity
agreement is in addition to any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified Parties
of notice of the commencement of any action, or the making of any claim
for which indemnity may apply under this paragraph, the Indemnified
Parties will, if a claim in respect thereof is to be made against LNL,
notify LNL of the commencement thereof; but the omission so to notify
LNL will not relieve LNL from any liability which it may have to the
Indemnified Parties otherwise than under this Agreement. In case any
such action is brought against the Indemnified Parties, and LNL is
notified of the commencement thereof, LNL will be entitled to
participate therein and to assume the defense thereof, with counsel
-5-
<PAGE>
satisfactory to the party named in the action, and after notice from LNL
to such party of LNL's election to assume the defense thereof, LNL will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8. (a) The parties shall in good faith attempt to resolve any
dispute arising out of or relating to this agreement promptly by
negotiations between executives who have authority to settle the
controversy. Either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 20 days
after delivery of that notice, executives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 60 days of the disputing party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in sub-paragraph (b) above. If a
negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the
-6-
<PAGE>
dispute by mediation under the then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes. The neutral
third party will be selected from the CPR Panels of Neutrals. If the
parties encounter difficulty in agreeing on a neutral, they will seek
the assistance of CPR in the selection process. All negotiations
pursuant to sub-paragraphs (a) and (b) of this paragraph 8 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
(c) Any dispute arising out of or relating to this contract
or the breach, termination or validity thereof, which has not been
resolved by non-binding procedures as provided in sub-paragraphs (a) or
(b) herein within 60 days of the initiation of those procedures shall be
finally settled by arbitration conducted expeditiously in accordance
with the CPR Rules for Non-Administered Arbitration of Business Disputes
by a sole arbitrator; provided, however, that if one party has requested
the other party to participate in a non-binding procedure and the other
has failed to participate, the requesting party may initiate arbitration
before expiration of the 60-day period set out just above. If within 45
days of the commencement of the process to select an arbitrator the
parties cannot agree upon the arbitrator, then he or she will be
selected from the CPR Panels of Neutrals. The arbitration shall be
governed by the United States Arbitration Act, 9 U.S.C. Sec. 1-16, and
judgment
-7-
<PAGE>
upon the award rendered by the Arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Fort
Wayne, Indiana. The Arbitrator is not empowered to award damages in
excess of compensatory damages.
9. LNL shall be deemed to own and control all pertinent records
pertaining to the variable life operations which are the subject of this
agreement. LNL, on its behalf and on behalf of the Variable Account,
shall have the right to inspect, audit and copy all records pertaining
to the performance of services under this agreement.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By /s/ Denis Schwartz
----------------------
Denis Schwartz
Assistant Vice President
LINCOLN NATIONAL
INTERNATIONAL FUND, INC.
By /s/ Robert A. Nikels
----------------------
Robert A. Nikels
Chairman of the Board,
President & Director
-8-
<PAGE>
Exhibit 8(h)
AGREEMENT TO PURCHASE SHARES
----------------------------
Effective June 30, 1994, The Lincoln National Life Insurance
Company ("LNL"), on its behalf and on behalf of Lincoln Life Flexible
Premium Variable Life Account K (the "Variable Account"), and Lincoln
National Bond Fund, Inc. (the "Fund") hereby agree that shares of the
Fund shall be made available to serve as an underlying investment medium
for variable life insurance contracts to be offered by LNL through the
Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company
duly organized and existing in good standing under Indiana law and that
it has legally and validly established the Variable Account as permitted
under Indiana law and has registered the Variable Account as a unit
investment trust in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), to serve as a
segregated investment account for certain variable life insurance
contracts (the "Contracts"). LNL further represents and warrants that
the Contracts will be registered under the Securities Act of 1933, as
amended (the "1933 Act"), and the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Contracts
will provide for the allocation of net amounts received by LNL
thereunder to separate divisions of the Variable Account designated as
"sub-accounts" for investment in the shares of registered investment
companies selected by LNL ("underlying
<PAGE>
funds"). The Fund will be an underlying fund for one of the
sub-accounts.
2. Fund shares may be purchased and redeemed by LNL in
accordance with the provisions of the then current prospectus of the
Fund. The Fund anticipates that it will make its shares available
indefinitely for purchase by LNL hereunder, but the Fund reserves the
right to suspend or terminate sales of its shares hereunder at any time
or times when its Board Of Directors makes a good faith determination
that further sales would be to the detriment of current holders of Fund
shares. Payment for Fund shares shall be made by LNL within five days
after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the
accrual and/or declaration of dividends in accordance with any policy
set forth in its then current prospectus with respect to such shares
until any payment check has cleared. If payment is not received by the
Fund or an agent of the Fund within the five day period, the Fund may,
without notice, cancel the order and require LNL to promptly reimburse
the Fund for any loss suffered by the Fund resulting from such failure
to make timely payment. The Fund represents and warrants that Fund
shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning
the Fund or Fund shares except those contained in the
-2-
<PAGE>
then current prospectus of the Fund or in current printed sales
literature of the Fund, or as otherwise approved by the Fund in writing.
4. Administrative services to owners of and participants under
Contracts shall be the responsibility of LNL and shall not be the
responsibility of the Fund. The Fund will furnish LNL copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantities as LNL shall reasonably require for
distribution to owners of or participants under the Contracts and LNL
will distribute these materials to such owners or participants as
required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will
vote Fund shares for which no instructions have been received in the
same proportion as Fund shares for which instructions have been received
from Contract owners. LNL and persons under its control will in no way
recommend action in connection with the solicitation of proxies for Fund
shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares and shall
provide LNL with as many copies of its current prospectus as LNL may
reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund
shares as follows:
(a) at the option of LNL or the Fund upon 90 days' written notice
to the other party;
(b) at the option of LNL if Fund shares are not available for any
reason to meet the requirements of the Contracts as
determined by LNL; or
(c) at the option of the Fund upon institution of any proceedings
against LNL relating to the Variable Account or the issuance
and sale of the Contracts, by the National Association of
Securities Dealers, Inc., the Securities and Exchange
Commission, the Indiana Insurance Commissioner or any other
regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and
each of its directors who is not an "interested person" of the Fund, as
defined in the 1940 Act (collectively, the "Indemnified Parties")
against any losses, claims, damages, liabilities (including amounts paid
in settlement thereof with the written consent of LNL) or expenses or
actions with respect thereto to which such Indemnified Parties may
become subject, under the federal securities laws or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained
in the Registration Statement or prospectus of the
Variable Account or contained in the Contracts or sales
literature (or any amendment or supplement to any of
the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or
necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to an Indemnified Party if such
statement or omission or such alleged
-4-
<PAGE>
statement or omission was made in reliance upon and in
conformity with written information furnished to LNL by
such Indemnified Party expressly for use in the
Registration Statement or prospectus for the Variable
Account or the Contracts or sales literature (or any
amendment or supplement);
(ii) arise out of or as a result of conduct, statements, or
representations (other than statements or
representations contained in the prospectus of the Fund
and sales literature not supplied by LNL) of LNL or
persons under its control, with respect to the sale and
distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to provide the
services and furnish the materials set forth in
paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred
by the Indemnified Parties in connection with investigating or defending
any such loss, claim, damage, liability or action. This indemnity
agreement is in addition to any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified Parties
of notice of the commencement of any action, or the making of any claim
for which indemnity may apply under this paragraph, the Indemnified
Parties will, if a claim in respect thereof is to be made against LNL,
notify LNL of the commencement thereof; but the omission so to notify
LNL will not relieve LNL from any liability which it may have to the
Indemnified Parties otherwise than under this Agreement. In case any
such action is brought against the Indemnified Parties, and LNL is
notified of the commencement thereof, LNL will be entitled to
participate therein and to assume the defense thereof, with counsel
-5-
<PAGE>
satisfactory to the party named in the action, and after notice from LNL
to such party of LNL's election to assume the defense thereof, LNL will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8. (a) The parties shall in good faith attempt to resolve any
dispute arising out of or relating to this agreement promptly by
negotiations between executives who have authority to settle the
controversy. Either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 20 days
after delivery of that notice, executives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 60 days of the disputing party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in sub-paragraph (b) above. If a
negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the
-6-
<PAGE>
dispute by mediation under the then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes. The neutral
third party will be selected from the CPR Panels of Neutrals. If the
parties encounter difficulty in agreeing on a neutral, they will seek
the assistance of CPR in the selection process. All negotiations
pursuant to sub-paragraphs (a) and (b) of this paragraph 8 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
(c) Any dispute arising out of or relating to this contract
or the breach, termination or validity thereof, which has not been
resolved by non-binding procedures as provided in sub-paragraphs (a) or
(b) herein within 60 days of the initiation of those procedures shall be
finally settled by arbitration conducted expeditiously in accordance
with the CPR Rules for Non-Administered Arbitration of Business Disputes
by a sole arbitrator; provided, however, that if one party has requested
the other party to participate in a non-binding procedure and the other
has failed to participate, the requesting party may initiate arbitration
before expiration of the 60-day period set out just above. If within 45
days of the commencement of the process to select an arbitrator the
parties cannot agree upon the arbitrator, then he or she will be
selected from the CPR Panels of Neutrals. The arbitration shall be
governed by the United States Arbitration Act, 9 U.S.C. Sec. 1-16, and
judgment
-7-
<PAGE>
upon the award rendered by the Arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Fort
Wayne, Indiana. The Arbitrator is not empowered to award damages in
excess of compensatory damages.
9. LNL shall be deemed to own and control all pertinent records
pertaining to the variable life operations which are the subject of this
agreement. LNL, on its behalf and on behalf of the Variable Account,
shall have the right to inspect, audit and copy all records pertaining
to the performance of services under this agreement.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By /s/ Denis Schwartz
----------------------
Denis Schwartz
Assistant Vice President
LINCOLN NATIONAL BOND FUND,
INC.
By /s/ Robert A. Nikels
----------------------
Robert A. Nikels
Chairman of the Board,
President & Director
-8-
<PAGE>
Exhibit 8(i)
AGREEMENT TO PURCHASE SHARES
----------------------------
Effective June 30, 1994, The Lincoln National Life Insurance
Company ("LNL"), on its behalf and on behalf of Lincoln Life Flexible
Premium Variable Life Account K (the "Variable Account"), and Lincoln
National Capital Appreciation Fund, Inc. (the "Fund") hereby agree that
shares of the Fund shall be made available to serve as an underlying
investment medium for variable life insurance contracts to be offered by
LNL through the Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company
duly organized and existing in good standing under Indiana law and that
it has legally and validly established the Variable Account as permitted
under Indiana law and has registered the Variable Account as a unit
investment trust in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), to serve as a
segregated investment account for certain variable life insurance
contracts (the "Contracts"). LNL further represents and warrants that
the Contracts will be registered under the Securities Act of 1933, as
amended (the "1933 Act"), and the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Contracts
will provide for the allocation of net amounts received by LNL
thereunder to separate divisions of the Variable Account designated as
"sub-accounts" for investment in the shares of registered investment
companies selected by LNL ("underlying
<PAGE>
funds"). The Fund will be an underlying fund for one of the
sub-accounts.
2. Fund shares may be purchased and redeemed by LNL in
accordance with the provisions of the then current prospectus of the
Fund. The Fund anticipates that it will make its shares available
indefinitely for purchase by LNL hereunder, but the Fund reserves the
right to suspend or terminate sales of its shares hereunder at any time
or times when its Board of Directors makes a good faith determination
that further sales would be to the detriment of current holders of Fund
shares. Payment for Fund shares shall be made by LNL within five days
after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the
accrual and/or declaration of dividends in accordance with any policy
set forth in its then current prospectus with respect to such shares
until any payment check has cleared. If payment is not received by the
Fund or an agent of the Fund within the five day period, the Fund may,
without notice, cancel the order and require LNL to promptly reimburse
the Fund for any loss suffered by the Fund resulting from such failure
to make timely payment. The Fund represents and warrants that Fund
shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning
the Fund or Fund shares except those contained in the
-2-
<PAGE>
then current prospectus of the Fund or in current printed sales
literature of the Fund, or as otherwise approved by the Fund in writing.
4. Administrative services to owners of and participants under
Contracts shall be the responsibility of LNL and shall not be the
responsibility of the Fund. The Fund will furnish LNL copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantities as LNL shall reasonably require for
distribution to owners of or participants under the Contracts and LNL
will distribute these materials to such owners or participants as
required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will
vote Fund shares for which no instructions have been received in the
same proportion as Fund shares for which instructions have been received
from Contract owners. LNL and persons under its control will in no way
recommend action in connection with the solicitation of proxies for Fund
shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares and shall
provide LNL with as many copies of its current prospectus as LNL may
reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund
shares as follows:
(a) at the option of LNL or the Fund upon 90 days' written notice
to the other party;
(b) at the option of LNL if Fund shares are not available for any
reason to meet the requirements of the Contracts as
determined by LNL; or
(c) at the option of the Fund upon institution of any proceedings
against LNL relating to the Variable Account or the issuance
and sale of the Contracts, by the National Association of
Securities Dealers, Inc., the Securities and Exchange
Commission, the Indiana Insurance Commissioner or any other
regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and
each of its directors who is not an "interested person" of the Fund, as
defined in the 1940 Act (collectively, the "Indemnified Parties")
against any losses, claims, damages, liabilities (including amounts paid
in settlement thereof with the written consent of LNL) or expenses or
actions with respect thereto to which such Indemnified Parties may
become subject, under the federal securities laws or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact
contained in the Registration Statement or prospectus
of the Variable Account or contained in the Contracts
or sales literature (or any amendment or supplement to
any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state
therein a material fact required to be stated therein
or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to an Indemnified Party if such
statement or omission or such alleged
-4-
<PAGE>
statement or omission was made in reliance upon and in
conformity with written information furnished to LNL
by such Indemnified Party expressly for use in the
Registration Statement or prospectus for the Variable
Account or the Contracts or sales literature (or any
amendment or supplement);
(ii) arise out of or as a result of conduct, statements, or
representations (other than statements or
representations contained in the prospectus of the
Fund and sales literature not supplied by LNL) of LNL
or persons under its control, with respect to the sale
and distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to provide the
services and furnish the materials set forth in
paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred
by the Indemnified Parties in connection with investigating or defending
any such loss, claim, damage, liability or action. This indemnity
agreement is in addition to any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified
Parties of notice of the commencement of any action, or the making of
any claim for which indemnity may apply under this paragraph, the
Indemnified Parties will, if a claim in respect thereof is to be made
against LNL, notify LNL of the commencement thereof; but the omission so
to notify LNL will not relieve LNL from any liability which it may have
to the Indemnified Parties otherwise than under this Agreement. In case
any such action is brought against the Indemnified Parties, and LNL is
notified of the commencement thereof, LNL will be entitled to
participate therein and to assume the defense thereof, with counsel
-5-
<PAGE>
satisfactory to the party named in the action, and after notice from LNL
to such party of LNL's election to assume the defense thereof, LNL will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8. (a) The parties shall in good faith attempt to resolve any
dispute arising out of or relating to this agreement promptly by
negotiations between executives who have authority to settle the
controversy. Either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 20 days
after delivery of that notice, executives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 60 days of the disputing party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in sub-paragraph (b) above. If a
negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the
-6-
<PAGE>
dispute by mediation under the then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes. The neutral
third party will be selected from the CPR Panels of Neutrals. If the
parties encounter difficulty in agreeing on a neutral, they will seek
the assistance of CPR in the selection process. All negotiations
pursuant to sub-paragraphs (a) and (b) of this paragraph 8 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
(c) Any dispute arising out of or relating to this contract
or the breach, termination or validity thereof, which has not been
resolved by non-binding procedures as provided in sub-paragraphs (a) or
(b) herein within 60 days of the initiation of those procedures shall be
finally settled by arbitration conducted expeditiously in accordance
with the CPR Rules for Non-Administered Arbitration of Business Disputes
by a sole arbitrator; provided, however, that if one party has requested
the other party to participate in a non-binding procedure and the other
has failed to participate, the requesting party may initiate arbitration
before expiration of the 60-day period set out just above. If within 45
days of the commencement of the process to select an arbitrator the
parties cannot agree upon the arbitrator, then he or she will be
selected from the CPR Panels of Neutrals. The arbitration shall be
governed by the United States Arbitration Act, 9 U S.C. Sec. 1-16, and
judgment
-7-
<PAGE>
upon the award rendered by the Arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Fort
Wayne, Indiana. The Arbitrator is not empowered to award damages in
excess of compensatory damages.
9. LNL shall be deemed to own and control all pertinent records
pertaining to the variable life operations which are the subject of this
agreement. LNL, on its behalf and on behalf of the Variable Account,
shall have the right to inspect, audit and copy all records pertaining
to the performance of services under this agreement.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By /s/ Denis Schwartz
-----------------------
Denis Schwartz
Assistant Vice President
LINCOLN NATIONAL CAPITAL
APPRECIATION FUND, INC.
By /s/ Robert A. Nikels
-----------------------
Robert A. Nikels
Chairman of the Board,
President & Director
-8-
<PAGE>
Exhibit 8(j)
AGREEMENT TO PURCHASE SHARES
----------------------------
Effective June 30, 1994, The Lincoln National Life Insurance
Company ("LNL"), on its behalf and on behalf of Lincoln Life Flexible
Premium Variable Life Account K (the "Variable Account"), and Lincoln
National Equity-Income Fund, Inc. (the "Fund") hereby agree that shares
of the Fund shall be made available to serve as an underlying investment
medium for variable life insurance contracts to be offered by LNL
through the Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company
duly organized and existing in good standing under Indiana law and that
it has legally and validly established the Variable Account as permitted
under Indiana law and has registered the Variable Account as a unit
investment trust in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), to serve as a
segregated investment account for certain variable life insurance
contracts (the "Contracts"). LNL further represents and warrants that
the Contracts will be registered under the Securities Act of 1933, as
amended (the "1933 Act"), and the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Contracts
will provide for the allocation of net amounts received by LNL
thereunder to separate divisions of the Variable Account designated as
"sub-accounts" for investment in the shares of registered investment
companies selected by LNL ("underlying
<PAGE>
funds"). The Fund will be an underlying fund for one of the
sub-accounts.
2. Fund shares may be purchased and redeemed by LNL in
accordance with the provisions of the then current prospectus of the
Fund. The Fund anticipates that it will make its shares available
indefinitely for purchase by LNL hereunder, but the Fund reserves the
right to suspend or terminate sales of its shares hereunder at any time
or times when its Board of Directors makes a good faith determination
that further sales would be to the detriment of current holders of Fund
shares. Payment for Fund shares shall be made by LNL within five days
after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the
accrual and/or declaration of dividends in accordance with any policy
set forth in its then current prospectus with respect to such shares
until any payment check has cleared. If payment is not received by the
Fund or an agent of the Fund within the five day period, the Fund may,
without notice, cancel the order and require LNL to promptly reimburse
the Fund for any loss suffered by the Fund resulting from such failure
to make timely payment. The Fund represents and warrants that Fund
shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning
the Fund or Fund shares except those contained in the
-2-
<PAGE>
then current prospectus of the Fund or in current printed sales
literature of the Fund, or as otherwise approved by the Fund in writing.
4. Administrative services to owners of and participants under
Contracts shall be the responsibility of LNL and shall not be the
responsibility of the Fund. The Fund will furnish LNL copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantities as LNL shall reasonably require for
distribution to owners of or participants under the Contracts and LNL
will distribute these materials to such owners or participants as
required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will
vote Fund shares for which no instructions have been received in the
same proportion as Fund shares for which instructions have been received
from Contract owners. LNL and persons under its control will in no way
recommend action in connection with the solicitation of proxies for Fund
shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares and shall
provide LNL with as many copies of its current prospectus as LNL may
reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund
shares as follows:
(a) at the option of LNL or the Fund upon 90 days' written notice
to the other party;
(b) at the option of LNL if Fund shares are not available for
any reason to meet the requirements of the Contracts as
determined by LNL; or
(c) at the option of the Fund upon institution of any
proceedings against LNL relating to the Variable Account or
the issuance and sale of the Contracts, by the National
Association of Securities Dealers, Inc., the Securities and
Exchange Commission, the Indiana Insurance Commissioner or
any other regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and
each of its directors who is not an "interested person" of the Fund, as
defined in the 1940 Act (collectively, the "Indemnified Parties")
against any losses, claims, damages, liabilities (including amounts paid
in settlement thereof with the written consent of LNL) or expenses or
actions with respect thereto to which such Indemnified Parties may
become subject, under the federal securities laws or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact
contained in the Registration Statement or prospectus
of the Variable Account or contained in the Contracts
or sales literature (or any amendment or supplement to
any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state
therein a material fact required to be stated therein
or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to an Indemnified Party if such
statement or omission or such alleged
-4-
<PAGE>
statement or omission was made in reliance upon and in
conformity with written information furnished to LNL
by such Indemnified Party expressly for use in the
Registration Statement or prospectus for the Variable
Account or the Contracts or sales literature (or any
amendment or supplement);
(ii) arise out of or as a result of conduct, statements, or
representations (other than statements or
representations contained in the prospectus of the
Fund and sales literature not supplied by LNL) of LNL
or persons under its control, with respect to the sale
and distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to provide the
services and furnish the materials set forth in
paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred
by the Indemnified Parties in connection with investigating or defending
any such loss, claim, damage, liability or action. This indemnity
agreement is in addition to any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified Parties
of notice of the commencement of any action, or the making of any claim
for which indemnity may apply under this paragraph, the Indemnified
Parties will, if a claim in respect thereof is to be made against LNL,
notify LNL of the commencement thereof; but the omission so to notify
LNL will not relieve LNL from any liability which it may have to the
Indemnified Parties otherwise than under this Agreement. In case any
such action is brought against the Indemnified Parties, and LNL is
notified of the commencement thereof, LNL will be entitled to
participate therein and to assume the defense thereof, with counsel
-5-
<PAGE>
satisfactory to the party named in the action, and after notice from LNL
to such party of LNL's election to assume the defense thereof, LNL will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8. (a) The parties shall in good faith attempt to resolve any
dispute arising out of or relating to this agreement promptly by
negotiations between executives who have authority to settle the
controversy. Either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 20 days
after delivery of that notice, executives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 60 days of the disputing party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in sub-paragraph (b) above. If a
negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the
-6-
<PAGE>
dispute by mediation under the then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes. The neutral
third party will be selected from the CPR Panels of Neutrals. If the
parties encounter difficulty in agreeing on a neutral, they will seek
the assistance of CPR in the selection process. All negotiations
pursuant to sub-paragraphs (a) and (b) of this paragraph 8 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
(c) Any dispute arising out of or relating to this contract
or the breach, termination or validity thereof, which has not been
resolved by non-binding procedures as provided in sub-paragraphs (a) or
(b) herein within 60 days of the initiation of those procedures shall be
finally settled by arbitration conducted expeditiously in accordance
with the CPR Rules for Non-Administered Arbitration of Business Disputes
by a sole arbitrator; provided, however, that if one party has requested
the other party to participate in a non-binding procedure and the other
has failed to participate, the requesting party may initiate arbitration
before expiration of the 60-day period set out just above. If within 45
days of the commencement of the process to select an arbitrator the
parties cannot agree upon the arbitrator, then he or she will be
selected from the CPR Panels of Neutrals. The arbitration shall be
governed by the United States Arbitration Act, 9 U.S.C. Sec. 1-16, and
judgment
-7-
<PAGE>
upon the award rendered by the Arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Fort
Wayne, Indiana. The Arbitrator is not empowered to award damages in
excess of compensatory damages.
9. LNL shall be deemed to own and control all pertinent records
pertaining to the variable life operations which are the subject of
this agreement. LNL, on its behalf and on behalf of the Variable
Account, shall have the right to inspect, audit and copy all records
pertaining to the performance of services under this agreement.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By /s/ Denis Schwartz
-----------------------
Denis Schwartz
Assistant Vice President
LINCOLN NATIONAL EQUITY-
INCOME FUND, INC.
By /s/ Robert A. Nikels
-----------------------
Robert A. Nikels
Chairman of the Board,
President & Director
-8-
<PAGE>
Exhibit 8(k)
AGREEMENT TO PURCHASE SHARES
----------------------------
Effective June 30, 1994, The Lincoln National Life Insurance
Company ("LNL"), on its behalf and on behalf of Lincoln Life Flexible
Premium Variable Life Account K (the "Variable Account"), and Lincoln
National Growth Fund Inc. (the "Fund") hereby agree that shares of the
Fund shall be made available to serve as an underlying investment medium
for variable life insurance contracts to be offered by LNL through the
Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company
duly organized and existing in good standing under Indiana law and that
it has legally and validly established the Variable Account as permitted
under Indiana law and has registered the Variable Account as a unit
investment trust in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), to serve as a
segregated investment account for certain variable life insurance
contracts (the "Contracts"). LNL further represents and warrants that
the Contracts will be registered under the Securities Act of 1933, as
amended (the "1933 Act"), and the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Contracts
will provide for the allocation of net amounts received by LNL
thereunder to separate divisions of the Variable Account designated as
"sub-accounts" for investment in the shares of registered investment
companies selected by LNL ("underlying
<PAGE>
funds"). The Fund will be an underlying fund for one of the sub-
accounts.
2. Fund shares may be purchased and redeemed by LNL in
accordance with the provisions of the then current prospectus of the
Fund. The Fund anticipates that it will make its shares available
indefinitely for purchase by LNL hereunder, but the Fund reserves the
right to suspend or terminate sales of its shares hereunder at any time
or times when its Board of Directors makes a good faith determination
that further sales would be to the detriment of current holders of Fund
shares. Payment for Fund shares shall be made by LNL within five days
after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the
accrual and/or declaration of dividends in accordance with any policy
set forth in its then current prospectus with respect to such shares
until any payment check has cleared. If payment is not received by the
Fund or an agent of the Fund within the five day period, the Fund may,
without notice, cancel the order and require LNL to promptly reimburse
the Fund for any loss suffered by the Fund resulting from such failure
to make timely payment. The Fund represents and warrants that Fund
shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning
the Fund or Fund shares except those contained in the
-2-
<PAGE>
then current prospectus of the Fund or in current printed sales
literature of the Fund, or as otherwise approved by the Fund in writing.
4. Administrative services to owners of and participants under
Contracts shall be the responsibility of LNL and shall not be the
responsibility of the Fund. The Fund will furnish LNL copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantities as LNL shall reasonably require for
distribution to owners of or participants under the Contracts and LNL
will distribute these materials to such owners or participants as
required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will
vote Fund shares for which no instructions have been received in the
same proportion as Fund shares for which instructions have been received
from Contract owners. LNL and persons under its control will in no way
recommend action in connection with the solicitation of proxies for Fund
shares held in the Variable Account
5. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares and shall
provide LNL with as many copies of its current prospectus as LNL may
reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund
shares as follows:
(a) at the option of LNL or the Fund upon 90 days' written notice
to the other party;
(b) at the option of LNL if Fund shares are not available for any
reason to meet the requirements of the Contracts as
determined by LNL; or
(c) at the option of the Fund upon institution of any proceedings
against LNL relating to the Variable Account or the issuance
and sale of the Contracts, by the National Association of
Securities Dealers, Inc., the Securities and Exchange
Commission, the Indiana Insurance Commissioner or any other
regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and
each of its directors who is not an "interested person" of the Fund, as
defined in the 1940 Act (collectively, the "Indemnified Parties")
against any losses, claims, damages, liabilities (including amounts paid
in settlement thereof with the written consent of LNL) or expenses or
actions with respect thereto to which such Indemnified Parties may
become subject, under the federal securities laws or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained
in the Registration Statement or prospectus of the
Variable Account or contained in the Contracts or sales
literature (or any amendment or supplement to any of
the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or
necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to an Indemnified Party if such
statement or omission or such alleged
-4-
<PAGE>
statement or omission was made in reliance upon and in
conformity with written information furnished to LNL by
such Indemnified Party expressly for use in the
Registration Statement or prospectus for the Variable
Account or the Contracts or sales literature (or any
amendment or supplement)
(ii) arise out of or as a result of conduct, statements, or
representations (other than statements or
representations contained in the prospectus of the Fund
and sales literature not supplied by LNL) of LNL or
persons under its control, with respect to the sale and
distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to provide the
services and furnish the materials set forth in
paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred
by the Indemnified Parties in connection with investigating or defending
any such loss, claim, damage, liability or action. This indemnity
agreement is in addition to any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified Parties
of notice of the commencement of any action, or the making of any claim
for which indemnity may apply under this paragraph, the Indemnified
Parties will, if a claim in respect thereof is to be made against LNL,
notify LNL of the commencement thereof; but the omission so to notify
LNL will not relieve LNL from any liability which it may have to the
Indemnified Parties otherwise than under this Agreement. In case any
such action is brought against the Indemnified Parties, and LNL is
notified of the commencement thereof, LNL will be entitled to
participate therein and to assume the defense thereof, with counsel
-5-
<PAGE>
satisfactory to the party named in the action, and after notice from LNL
to such party of LNL's election to assume the defense thereof, LNL will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8. (a) The parties shall in good faith attempt to resolve any
dispute arising out of or relating to this agreement promptly by
negotiations between executives who have authority to settle the
controversy. Either party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 20 days
after delivery of that notice, executives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 60 days of the disputing party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in sub-paragraph (b) above. If a
negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the
-6-
<PAGE>
dispute by mediation under the then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes. The neutral
third party will be selected from the CPR Panels of Neutrals. If the
parties encounter difficulty in agreeing on a neutral, they will seek
the assistance of CPR in the selection process. All negotiations
pursuant to sub- paragraphs (a) and (b) of this paragraph 8 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
(c) Any dispute arising out of or relating to this
contract or the breach, termination or validity thereof, which has not
been resolved by non-binding procedures as provided in sub-paragraphs
(a) or (b) herein within 60 days of the initiation of those procedures
shall be finally settled by arbitration conducted expeditiously in
accordance with the CPR Rules for Non-Administered Arbitration of
Business Disputes by a sole arbitrator; provided, however, that if one
party has requested the other party to participate in a non-binding
procedure and the other has failed to participate, the requesting party
may initiate arbitration before expiration of the 60-day period set out
just above. If within 45 days of the commencement of the process to
select an arbitrator the parties cannot agree upon the arbitrator, then
he or she will be selected from the CPR Panels of Neutrals. The
arbitration shall be governed by the United States Arbitration Act, 9
U.S.C. Sec. 1-16, and judgment
-7-
<PAGE>
upon the award rendered by the Arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Fort
Wayne, Indiana. The Arbitrator is not empowered to award damages in
excess of compensatory damages.
9. LNL shall be deemed to own and control all pertinent records
pertaining to the variable life operations which are the subject of this
agreement. LNL, on its behalf and on behalf of the Variable Account,
shall have the right to inspect, audit and copy all records pertaining
to the performance of services under this agreement.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By /s/ Denis Schwartz
------------------------
Denis Schwartz
Assistant Vice President
LINCOLN NATIONAL GROWTH FUND,
INC.
By /s/ Robert A. Nikels
------------------------
Robert A. Nikels
Chairman of the Board,
President & Director
-8-
<PAGE>
Exhibit 1(8)L
PARTICIPATION AGREEMENT
Among
DELAWARE GROUP PREMIUM FUND, INC.
And
LINCOLN NATIONAL LIFE INSURANCE CO.
And
DELAWARE DISTRIBUTORS, LP
THIS AGREEMENT, made and entered into this 1st day of May, 1996, by
and between DELAWARE GROUP PREMIUM FUND, INC., a corporation organized under the
laws of Maryland (the "Fund"), and LINCOLN NATIONAL LIFE INSURANCE CO., an
Indiana insurance corporation (the "Company"), on its own behalf and on behalf
of each separate account of the Company named in Schedule 1 to this Agreement as
in effect at the time this Agreement is executed and such other separate
accounts that may be added to Schedule 1 from time to time in accordance with
the provisions of Article XI of this Agreement (each such account referred to as
the "Account"), and DELAWARE DISTRIBUTORS, LP, a Delaware limited partnership
(the "Distributor").
WHEREAS, the Fund is engaged in business as an open-end management
investment company and was established for the purpose of serving as the
investment vehicle for separate accounts established for variable life insurance
policies and variable annuity contracts (collectively referred to as "Variable
Insurance Products," the owners of such products being referred to as "Product
owners") to be offered by insurance companies which have entered into
participation agreements with the Fund ("Participating Insurance Companies");
and
WHEREAS, the common stock of the Fund (the "Fund shares") consists of
separate series ("Series") issuing separate classes of shares ("Series shares"),
each such class representing an interest in a particular managed portfolio of
securities and other assets; and
WHEREAS, the Fund filed with the Securities and Exchange Commission
(the "SEC") and the SEC has declared effective a registration statement
(referred to herein as the "Fund Registration Statement" and the prospectus
contained therein, or filed pursuant to Rule 497 under the 1933 Act, referred to
herein as the "Fund Prospectus") on Form N-lA to register itself as an open-end
management investment company (File No. 811-5162) under the Investment Company
Act of 1940, as amended (the "1940 Act"), and the Fund shares (File No. 33-
14363) under the Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Company has filed a registration statement with the SEC
to register under the 1933 Act certain variable annuity contracts described in
Schedule 2 to this Agreement as in effect at the time this Agreement is executed
and such other variable annuity contracts and variable life insurance policies
which may be added to Schedule 2 from time to time in accordance with Article XI
of this Agreement (such policies and contracts shall be referred to herein
collectively as the "Contracts," each such registration statement for a class or
classes of contracts
1
<PAGE>
listed on Schedule 2 being referred to as the "Contracts Registration Statement"
and the prospectus for each such class or classes being referred to herein as
the "Contracts Prospectus," and the owners of the such contracts, as
distinguished from all Product Owners, being referred to as "Contract Owners");
and
WHEREAS, each Account, a validly existing separate account, duly
authorized by resolution of the Board of Directors of the Company on the date
set forth on Schedule 1, sets aside and invests assets attributable to the
Contracts; and
WHEREAS, the Company has registered or will have registered each
Account with the SEC as a unit investment trust under the 1940 Act before any
Contracts are issued by that Account; and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and is
a member in good standing of the National Association of Securities Dealers,
Inc. (the "NASD"); and
WHEREAS, the Distributor and the Fund have entered into an agreement
(the "Fund Distribution Agreement") pursuant to which the Distributor will
distribute Fund shares; and
WHEREAS, Delaware Management Company, Inc. (the "Investment Manager")
is registered as an investment adviser under the 1940 Act and any applicable
state securities laws and serves as an investment manager to the Fund pursuant
to an agreement; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase Series shares on behalf of each
Account to fund its Contracts and the Distributor is authorized to sell such
Series shares to unit investment trusts such as the Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Distributor agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Distributor agrees to sell to the Company those Series
shares which the Company orders on behalf of the Account, executing such orders
on a daily basis in accordance with Section 1.4 of this Agreement.
1.2. The Fund agrees to make the shares of its Series available for
purchase by the Company on behalf of the Account at the then applicable net
asset value per share on Business Days as defined in Section 1.4 of this
Agreement, and the Fund shall use its best efforts to calculate such net asset
value by 6:00 p.m., E.S.T., on each such Business Day. Notwithstanding
2
<PAGE>
any other provision in this Agreement to the contrary, the Board of Directors of
the Fund (the "Fund Board") may suspend or terminate the offering of Fund shares
of any Series, if such action is required by law or by regulatory authorities
having jurisdiction or if, in the sole discretion of the Fund Board acting in
good faith and in light of its fiduciary duties under Federal and any applicable
state laws, suspension or termination is necessary and in the best interests of
the shareholders of any Series (it being understood that "shareholders" for this
purpose shall mean Product owners).
1.3. The Fund agrees to redeem, at the Company's request, any full or
fractional shares of the Fund held by the Account or the Company, executing such
requests at the net asset value on a daily basis in accordance with Section 1.4
of this Agreement, the applicable provisions of the 1940 Act and the then
currently effective Fund Prospectus. Notwithstanding the foregoing, the Fund
may delay redemption of Fund shares of any Series to the extent permitted by the
1940 Act, any rules, regulations or orders thereunder, or the then currently
effective Fund Prospectus.
1.4.
(a) For purposes of Sections 1.1, 1.2 and 1.3, the Company shall
be the agent of the Fund for the limited purpose of receiving redemption
and purchase requests from the Account (but not from the general account of
the Company), and receipt on any Business Day by the Company as such
limited agent of the Fund prior to the time prescribed in the current Fund
Prospectus (which as of the date of execution of this Agreement is 4 p.m.,
E.S.T.) shall constitute receipt by the Fund on that same Business Day,
provided that the Fund receives notice of such redemption or purchase
request by 11:00 a.m., E.S.T. on the next following Business Day. For
purposes of this Agreement, "Business Day" shall mean any day on which the
New York Stock exchange is open for trading.
(b) The Company shall pay for shares of each Series on the same
day that it places an order with the Fund to purchase those Series shares
for an Account. Payment for Series shares will be made by the Account or
the Company in Federal Funds transmitted to the Fund by wire to be received
by 11:00 a.m., E.S.T. on the day the Fund is properly notified of the
purchase order for Series shares. If Federal Funds are not received on
time, such funds will be invested, and Series shares purchased thereby will
be issued, as soon as practicable.
(c) Payment for Series shares redeemed by the Account or the
Company will be made in Federal Funds transmitted to the Company by wire on
the day the Fund is notified of the redemption order of Series shares,
except that the Fund reserves the right to delay payment of redemption
proceeds, but in no event may such payment be delayed longer than the
period permitted under Section 22(e) of the 1940 Act. Neither the Fund nor
the Distributor shall bear any responsibility whatsoever for the proper
disbursement or crediting of redemption proceeds; the Company alone shall
be responsible for such action.
3
<PAGE>
1.5. Issuance and transfer of Fund shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account. Purchase
and redemption orders for Fund shares will be recorded in an appropriate ledger
for the Account or the appropriate subaccount of the Account.
1.6. The Fund shall furnish notice as soon as reasonably practicable
to the Company of any income dividends or capital gain distributions payable on
any Series shares. The Company, on its behalf and on behalf of the Account,
hereby elects to receive all such dividends and distributions as are payable on
any Series shares in the form of additional shares of that Series. The Company
reserves the right, on its behalf and on behalf of the Account, to revoke this
election and to receive all such dividends in cash. The Fund shall notify the
Company of the number of Series shares so issued as payment of such dividends
and distributions.
1.7. The Fund shall use its best efforts to make the net asset value
per share for each Series available to the Company by 6 p.m., E.S.T. each
Business Day, and in any event, as soon as reasonably practicable after the net
asset value per share for such Series is calculated, and shall calculate such
net asset value in accordance with the then currently effective Fund Prospectus.
Neither the Fund, any Series, the Distributor, nor the Investment Manager nor
any of their affiliates shall be liable for any information provided to the
Company pursuant to this Agreement which information is based on incorrect
information supplied by the Company to the Fund, the Distributor or the
Investment Manager.
1.8.
(a) The Company may withdraw the Account's investment in the Fund
or a Series only: (I) as necessary to facilitate Contract owner requests;
(ii) upon a determination by a majority of the Fund Board, or a majority of
disinterested Fund Board members, that an irreconcilable material conflict
exists among the interests of (x) any Product Owners or (y) the interests
of the Participating Insurance Companies investing in the Fund; (iii) upon
requisite vote of the Contractowners having an interest in the affected
Series to substitute the shares of another investment company for Series
shares in accordance with the terms of the Contracts; (iv) as required by
state and/or federal laws or regulations or judicial or other legal
precedent of general application; or (v) at the Company's sole discretion,
pursuant to an order of the SEC under Section 26(b) of the 1940 Act.
(b) The parties hereto acknowledge that the arrangement
contemplated by this Agreement is not exclusive and that the Fund shares
may be sold to other insurance companies (subject to Section 1.9 hereof)
and the cash value of the Contracts may be invested in other investment
companies.
4
<PAGE>
(c) The Company shall not, without prior notice to the
Distributor (unless otherwise required by applicable law), take any action
to operate the Account as a management investment company under the 1940
Act.
1.9. The Fund and the Distributor agree that Fund shares will be sold
only to Participating Insurance Companies and their separate accounts. The Fund
and the Distributor will not sell Fund shares to any insurance company or
separate account unless an agreement complying with Article VII of this
Agreement is in effect to govern such sales. No Fund shares of any Series will
be sold to the general public.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants (a) that the Contracts are
registered under the 1933 Act or will be so registered before the issuance
thereof, (b) that the Contracts will be issued in compliance in all material
respects with all applicable Federal and state laws and (c) that the Company
will require of every person distributing the Contracts that the Contracts be
offered and sold in compliance in all material respects with all applicable
Federal and state laws. The Company further represents and warrants that it is
an insurance company duly organized and validly existing under applicable law
and that it has legally and validly authorized each Account as a separate
account under Section 27-1-5-1 of the Indiana Insurance Code, and has registered
or, prior to the issuance of any Contracts, will register each Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
separate account for its Contracts, and that it will maintain such registrations
for so long as any Contracts issued under them are outstanding.
2.2. The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act and duly authorized for
issuance in accordance with applicable law and that the Fund is and shall remain
registered under the 1940 Act for so long as the Fund shares are sold. The Fund
further represents and warrants that it is a corporation duly organized and in
good standing under the laws of Maryland.
2.3. The Fund represents and warrants that it currently qualifies as
a Regulated Investment Company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). The Fund further represents and warrants that
it will make every effort to continue to qualify and to maintain such
qualification (under Subchapter M or any successor or similar provision), and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Fund represents and warrants that it will comply with
Section 817(h) of the Code, and all regulations issued thereunder.
2.5. The Company represents that the Contracts are currently and at
the time of issuance will be treated as annuity contracts or life insurance
policies, whichever is appropriate, under applicable provisions of the Code.
The Company shall make every effort to maintain such
5
<PAGE>
treatment and shall notify the Fund and the Distributor immediately upon having
a reasonable basis for believing that the Contracts have ceased to be so treated
or that they might not be so treated in the future.
2.6. The Fund represents that the Fund's investment policies, fees
and expenses, and operations are and shall at all times remain in material
compliance with the laws of the state of Maryland, to the extent required to
perform this Agreement; and with any state- mandated investment restrictions set
forth on Schedule 3, as amended from time to time by the Company in accordance
with Section 6.6. The Fund, however, makes no representation as to whether any
aspect of its operations (including, but not limited to, fees and expenses and
investment policies) otherwise complies with the insurance laws or regulations
of any state. The Company alone shall be responsible for informing the Fund of
any investment restrictions imposed by state insurance law and applicable to the
Fund.
2.7. The Distributor represents and warrants that it is duly
registered as a broker-dealer under the 1934 Act, a member in good standing of
the NASD, and duly registered as a broker-dealer under applicable state
securities laws; its operations are in compliance with applicable law, and it
will distribute the Fund shares according to applicable law.
2.8. The Distributor, on behalf of the Investment Manager, represents
and warrants that the Investment Manager is registered as an investment adviser
under the Investment Advisers Act of 1940 and is in compliance with applicable
federal and state securities laws.
2.9. The Fund represents and warrants that it has and maintains a
fidelity bond in accordance with Rule 17g-1 under the 1940 Act. The Fund will
immediately notify the Company in the event the fidelity bond coverage should
lapse at any time.
ARTICLE III. Prospectuses and Proxy Statements; Sales Material and Other
Information
3.1. The Distributor shall provide the Company with as many copies of
the current Fund Prospectus as the Company may reasonably request. If requested
by the Company in lieu thereof, the Fund at its expense shall provide to the
Company a camera-ready copy of the current Fund Prospectus suitable for printing
and other assistance as is reasonably necessary in order for the Company to have
a new Contracts Prospectus printed together with the Fund Prospectus in one
document. See Article V for a detailed explanation of the responsibility for the
cost of printing and distributing Fund prospectuses.
3.2. The Fund Prospectus shall state that the Statement of Additional
Information for the Fund is available from the Distributor (or, in the Fund's
discretion, the Fund Prospectus shall state that such Statement is available
from the Fund), and the Distributor (or the Fund) shall provide such Statement
free of charge to the Company and to any outstanding or prospective Contract
owner who requests such Statement.
3.3. (a) The Fund at its expense shall provide to the Company a
camera-ready copy of the Fund's shareholder reports and other communications to
shareholders (except proxy material), in each case in a form suitable for
printing. The Fund shall be responsible for the costs of printing and
distributing these materials to Contract owners.
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(b) The Fund at its expense shall be responsible for preparing,
printing and distributing its proxy material. The Company will provide the
appropriate Contractowner names and addresses to the Fund for this purpose.
3.4. The Company shall furnish each piece of sales literature or
other promotional material in which the Fund or the Investment Manager is named
to the Fund or the Distributor prior to its use. No such material shall be
used, except with the prior written permission of the Fund or the Distributor.
The Fund and the Distributor agree to respond to any request for approval on a
prompt and timely basis. Failure of the Fund to respond within 10 days of the
request by the Company shall relieve the Company of the obligation to obtain the
prior written permission of the Fund or the Distributor.
3.5. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund other
than the information or representations contained in the Fund Registration
Statement or Fund Prospectus, as such Registration Statement and Prospectus may
be amended or supplemented from time to time, or in reports or proxy statements
for the Fund, or in sales literature or other promotional material approved by
the Fund or by the Distributor, except with the prior written permission of the
Fund or the Distributor. The Fund agrees to respond to any request for
permission on a prompt and timely basis. If neither the Fund nor the
Distributor responds within 10 days of a request by the Company, then the
Company shall be relieved of the obligation to obtain the prior written
permission of the Fund.
3.6. The Fund and the Distributor shall not give any information or
make any representations on behalf of the Company or concerning the Company, the
Account or the Contracts other than the information or representations contained
in the Contracts Registration Statement or Contracts Prospectus, as such
Registration Statement and Prospectus may be amended or supplemented from time
to time, or in published reports of the Account which are in the public domain
or approved in writing by the Company for distribution to Contract owners, or in
sales literature or other promotional material approved in writing by the
Company, except with the prior written permission of the Company. The Company
agrees to respond to any request for permission on a prompt and timely basis.
If the Company fails to respond within 10 days of a request by the Fund or the
Distributor, then the Fund and the Distributor are relieved of the obligation to
obtain the prior written permission of the Company.
3.7. The Fund will provide to the Company at least one complete copy
of all Fund Registration Statements, Fund Prospectuses, Statements of Additional
Information, annual and semi-annual reports and other reports, proxy statements,
sales literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments or supplements to any of the
above, that relate to the Fund or Fund shares, promptly after the filing of such
document with the SEC or other regulatory authorities.
3.8. The Company will provide to the Fund at least one complete copy
of all Contracts Registration Statements, Contracts Prospectuses, Statements of
Additional Information, Annual and Semi-annual Reports, sales literature and
other promotional materials, and all amendments or supplements to any of the
above, that relate to the Contracts, promptly after the filing of such document
with the SEC or other regulatory authorities.
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3.9. Each party will provide to the other party copies of draft
versions of any registration statements, prospectuses, statements of additional
information, reports, proxy statements, solicitations for voting instructions,
sales literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments or supplements to any of the
above, to the extent that the other party reasonably needs such information for
purposes of preparing a report or other filing to be filed with or submitted to
a regulatory agency. If a party requests any such information before it has been
filed, the other party will provide the requested information if then available
and in the version then available at the time of such request.
3.10. For purposes of this Article III, the phrase "sales literature
or other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use, in a newspaper, magazine or
other periodical, radio, television, telephone or tape recording, videotape
display, computer net site, signs or billboards, motion pictures or other public
media), sales literature (i.e., any written communication distributed or made
generally available to customers or the public, in print or electronically,
including brochures, circulars, research reports, market letters, form letters,
seminar texts, or reprints or excerpts of any other advertisement, sales
literature, or published article), educational or training materials or other
communications distributed or made generally available to some or all agents or
employees, registration statements, prospectuses, Statements of Additional
Information, shareholder reports and proxy materials, and any other material
constituting sales literature or advertising under NASD rules, the 1940 Act or
the 1933 Act.
ARTICLE IV. Voting
4.1 Subject to applicable law and the order referred to in Article
VII, the Fund shall: solicit voting instructions from Contract owners;
4.2 Subject to applicable law and the order referred to in Article
VII, the Company shall:
(a) vote Fund shares of each Series attributable to Contract owners in
accordance with instructions or proxies received in timely fashion from such
Contract owners;
(b) vote Fund shares of each Series attributable to Contract owners
for which no instructions have been received in the same proportion as Fund
shares of such Series for which instructions have been received in timely
fashion; and
(c) vote Fund shares of each Series held by the Company on its own
behalf or on behalf of the Account that are not attributable to Contract owners
in the same proportion as Fund shares of such Series for which instructions have
been received in timely fashion.
The Company shall be responsible for assuring that voting privileges for the
Accounts are calculated in a manner consistent with the provisions set forth
above.
ARTICLE V. Fees and Expenses
All expenses incident to performance by the Fund under this Agreement
(including
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expenses expressly assumed by the Fund pursuant to this Agreement) shall be paid
by the Fund to the extent permitted by law. Except as may otherwise be provided
in Section 1.4 and Article VII of this Agreement, the Company shall not bear any
of the expenses for the cost of registration and qualification of the Fund
shares under Federal and any state securities law, preparation and filing of the
Fund Prospectus and Fund Registration Statement, the preparation of all
statements and notices required by any Federal or state securities law, all
taxes on the issuance or transfer of Fund shares, and any expenses permitted to
be paid or assumed by the Fund pursuant to a plan, if any, under Rule 12b-1
under the 1940 Act.
The Fund is responsible for the cost of printing and distributing Fund
Prospectuses and SAIs to existing Contract owners. (If for this purpose the
Company prints the Fund Prospectuses and SAIs in a booklet containing disclosure
for the Contracts and for underlying funds other than those of the Fund, then
the Fund shall pay only its proportionate share of the total cost to distribute
the booklet to existing Contract owners.)
The Company is responsible for the cost of printing and distributing
Fund prospectuses and SAIs for new sales; and Account Prospectuses and SAIs for
existing Contract owners. The Company shall have the final decision on choice
of printer for all Prospectuses and SAIs.
ARTICLE VI. Compliance Undertakings
6.1. The Fund undertakes to comply with Subchapter M and Section
817(h) of the Code, and all regulations issued thereunder.
6.2. The Company shall amend the Contracts Registration Statements
under the 1933 Act and the Account's Registration Statement under the 1940 Act
from time to time as required in order to effect the continuous offering of the
Contracts or as may otherwise be required by applicable law. The Company shall
register and qualify the Contracts for sale to the extent required by applicable
securities laws of the various states.
6.3. The Fund shall amend the Fund Registration Statement under the
1933 Act and the 1940 Act from time to time as required in order to effect for
so long as Fund shares are sold the continuous offering of Fund shares as
described in the then currently effective Fund Prospectus. The Fund shall
register and qualify Fund shares for sale to the extent required by applicable
securities laws of the various states.
6.4. The Company shall be responsible for assuring that any
prospectus offering a Contract that is a life insurance contract where it is
reasonably possible that such Contract would be deemed a "modified endowment
contract," as that term is defined in Section 7702A of the Code, will describe
the circumstances under which a Contract could be treated as a modified
endowment contract (or policy).
6.5. To the extent that it decides to finance distribution expenses
pursuant to Rule 12b-1, the Fund undertakes to have a Fund Board of Directors, a
majority of whom are not interested persons of the Fund, formulate and approve
any plan under Rule 12b-1 to finance distribution expenses.
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<PAGE>
6.6. (a) The Company shall amend Schedule 3 when appropriate in order
to inform the Fund of any applicable state-mandated investment restrictions with
which the Fund must comply.
(b) Should the Fund or the Distributor become aware of any
restrictions which may be appropriate for inclusion in Schedule 3, the Company
shall be informed immediately of the substance of those restrictions.
ARTICLE VlI. Potential Conflicts
7.1. The Company has reviewed a copy of the order (the "Mixed and
Shared Funding Order") dated November 2, 1987 of the Securities and Exchange
Commission under Section 6(C) of the Act and, in particular, has reviewed the
conditions to the relief set forth in the related Notice. As set forth therein,
the Company agrees to report to the Board of Directors of the Fund (the "Board")
any potential or existing conflicts between the interests of Product Owners of
all separate accounts investing in the Fund, and to assist the Board in carrying
out its responsibilities under the conditions of the Mixed and Shared Funding
Order by providing all information reasonably necessary for the Board to
consider any issues raised, including information as to a decision to disregard
voting instructions of variable contract owners.
7.2. If a majority of the Board, or a majority of disinterested
Board Members, determines that a material irreconcilable conflict exists, the
Board shall give prompt notice to all Participating Insurance Companies.
(a) If a majority of the whole Board, after notice to the Company and
a reasonable opportunity for the Company to appear before it and present its
case, determines that the Company is responsible for said conflict, and if the
Company agrees with that determination, the Company shall, at its sole cost and
expense, take whatever steps are necessary to remedy the irreconcilable material
conflict. These steps could include: (a) withdrawing the assets allocable to
some or all of the affected Accounts from the Fund or any Series and reinvesting
such assets in a different investment vehicle, including another Series of the
Fund, or submitting the question of whether such segregation should be
implemented to a vote of all affected Contractowners and, as appropriate,
segregating the assets of any particular group (i.e., variable annuity
Contractowners, variable life insurance policyowners, or variable Contractowners
of one or more Participating Insurance Companies) that votes in favor of such
segregation, or offering to the affected Contractowners the option of making
such a change; and (b) establishing a new registered mutual fund or management
separate account, or taking such other action as is necessary to remedy or
eliminate the irreconcilable material conflict.
(b) If the Company disagrees with the Board's determination, the
Company shall file a written protest with the Board, reserving its right to
dispute the determination as between just the Company and the Fund. After
reserving that right the Company, although disagreeing with the Board that it
(the Company) was responsible for the conflict, shall take the necessary steps,
under protest, to remedy the conflict, substantially in accordance with
paragraph (a) just above, for the protection of Contractowners.
(c) As between the Company and the Fund, if within 45 days after the
Board's determination the Company elects to press the dispute, it shall so
notify the Board in writing. The
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parties shall then attempt to resolve the matter amicably through negotiation by
individuals from each party who are authorized to settle the controversy.
If the matter has not been amicably resolved within 60 days from the
date of the Company's notice of its intent to press the dispute, then before
either party shall undertake to litigate the dispute it shall be submitted to
non-binding arbitration conducted expeditiously in accordance with the CPR Rules
for Non-Administered Arbitration of Business Disputes, by a sole arbitrator;
provided, however, that if one party has requested the other party to seek an
amicable resolution and the other party has failed to participate, the
requesting party may initiate arbitration before expiration of the 60-day period
set out just above.
If within 45 days of the commencement of the process to select an
arbitrator the parties cannot agree upon the arbitrator, then he or she will be
selected from the CPR Panels of Neutrals. The arbitration shall be governed by
the United States Arbitration Act, 9 U.S.C. Sec. 1-16. The place of arbitration
shall be Fort Wayne, Indiana. The Arbitrator is not empowered to award damages
in excess of compensatory damages.
(d) If the Board shall determine that the Fund or another insurer was
responsible for the conflict, then the Board shall notify the Company
immediately of that determination. The Fund shall assure the Company that it
(the Fund) or that other insurer, as applicable, shall, at its sole cost and
expense, take whatever steps are necessary to eliminate the conflict.
7.3. If a material irreconcilable conflict arises because of the
Company's decision to disregard Contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company shall withdraw (without charge or penalty) the Account's investment in
the Fund, if the Fund so elects.
7.4. Subject to the terms of Section 7.2 above, the Company shall
carry out the responsibility to take remedial action in the event of a Board
determination of an irreconcilable material conflict with a view only to the
interests of Contract Owners.
7.5. For purposes of this Article, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable conflict, but in no event will the Fund
be required to establish a new funding medium for any variable contract, nor
will the Company be required to establish a new funding medium for any Contract
if an offer to do so has been declined by a vote of a majority of affected
Contractowners.
ARTICLE VIII. Indemnification
8.1. Indemnification by the Company. The Company agrees to indemnify
and hold harmless the Fund, the Distributor and each person who controls or is
associated with the Fund (other than another Participating Insurance Company) or
the Distributor within the meaning of such terms under the federal securities
laws and any officer, trustee, director, employee or agent of the foregoing,
against any and all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amounts paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they or any of them may become
subject under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities:
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<PAGE>
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Contracts
Registration Statement, Contracts Prospectus, sales literature or other
promotional material for the Contracts or the Contracts themselves (or any
amendment or supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances in which they were
made; provided that this obligation to indemnify shall not apply if such
statement or omission or such alleged statement or alleged omission was
made in reliance upon and in conformity with information furnished in
writing to the Company by the Fund or the Distributor (or a person
authorized in writing to do so on behalf of the Fund or the Distributor)
for use in the Contracts Registration Statement, Contracts Prospectus or in
the Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or Fund
shares; or
(b) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact by or on behalf of the Company
(other than statements or representations contained in the Fund
Registration Statement, Fund Prospectus or sales literature or other
promotional material of the Fund not supplied by the Company or persons
under its control) or wrongful conduct of the Company or persons under its
control with respect to the sale or distribution of the Contracts or Fund
shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the Fund Registration Statement, Fund
Prospectus or sales literature or other promotional material of the Fund or
any amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances in which they were made, if such statement or omission was
made in reliance upon and in conformity with information furnished to the
Fund by or on behalf of the Company; or
(d) arise as a result of any failure by the Company to provide
the services and furnish the materials or to make any payments under the
terms of this Agreement; or
(e) arise out of any material breach by the Company of this
Agreement, including but not limited to any failure to transmit a request
for redemption or purchase of Fund shares on a timely basis in accordance
with the procedures set forth in Article 1; or
(f) arise as a result of the Company's providing the Fund with
inaccurate information, which causes the Fund to calculate its Net Asset
Values incorrectly.
This indemnification will be in addition to any liability which the Company may
otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the wilful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
8.2. Indemnification by the Distributor. The Distributor agrees
to indemnify and hold harmless the Company and each person who controls or is
associated with the Company within the meaning of such terms under the federal
securities laws and any officer, director, employee or
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<PAGE>
agent of the foregoing, against any and all losses, claims, damages or
liabilities, joint or several (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amounts paid in
settlement of, any action, suit or proceeding or any claim asserted), to which
they or any of them may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Fund
Registration Statement, Fund Prospectus (or any amendment or supplement
thereto) or sales literature or other promotional material of the Fund, or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances in
which they were made; provided that this obligation to indemnify shall not
apply if such statement or omission or alleged statement or alleged
omission was made in reliance upon and in conformity with information
furnished in writing by the Company to the Fund or the Distributor for use
in the Fund Registration Statement, Fund Prospectus (or any amendment or
supplement thereto) or sales literature for the Fund or otherwise for use
in connection with the sale of the Contracts or Fund shares; or
(b) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact made by the Distributor or the
Fund (other than statements or representations contained in the Fund
Registration Statement, Fund Prospectus or sales literature or other
promotional material of the Fund not supplied by the Distributor or the
Fund or persons under their control) or wrongful conduct of the Distributor
or persons under its control with respect to the sale or distribution of
the Contracts or Fund shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the Contract's Registration Statement,
Contracts Prospectus or sales literature or other promotional material for
the Contracts (or any amendment or supplement thereto), or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances in which they were made, if such statement or omission
was made in reliance upon information furnished in writing by the
Distributor or the Fund to the Company (or a person authorized in writing
to do so on behalf of the Fund or the Distributor); or
(d) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this Agreement
(including, but not by way of limitation, a failure, whether unintentional
or in good faith or otherwise: (i) to comply with the diversification
requirements specified in Article VI of this Agreement; and (ii) to provide
the Company with accurate information sufficient for it to calculate its
accumulation and/or annuity unit values in timely fashion as required by
law and by the Contracts Prospectuses); or
(e) arise out of any material breach by the Distributor or the
Fund of this Agreement.
This indemnification will be in addition to any liability which the Distributor
may otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or
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<PAGE>
liability is due to the wilful misfeasance, bad faith, gross negligence or
reckless disregard of duty by the party seeking indemnification.
8.3. Indemnification Procedures. After receipt by a party entitled
to indemnification ("indemnified party") under this Article VIII of notice of
the commencement of any action, if a claim in respect thereof is to be made by
the indemnified party against any person obligated to provide indemnification
under this Article VIII ("indemnifying party"), such indemnified party will
notify the indemnifying party in writing of the commencement thereof as soon as
practicable thereafter, provided that the omission to so notify the indemnifying
party will not relieve it from any liability under this Article VIII, except to
the extent that the omission results in a failure of actual notice to the
indemnifying party and such indemnifying party is damaged solely as a result of
the failure to give such notice. The indemnifying party, upon the request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The indemnifying party shall not be liable for
any settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.
A successor by law of the parties to this Agreement shall be entitled
to the benefits of the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VIII shall survive any
termination of this Agreement.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the state of Indiana,
without giving effect to the principles of conflicts of laws.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant, and the terms hereof shall be limited, interpreted and construed in
accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall terminate:
(a) at the option of any party upon six months advance written
notice to the other parties; or
(b) at the option of the Company if shares of any Series are not
available
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to meet the requirements of the Contracts as determined by the Company.
Prompt notice of the election to terminate for such cause shall be
furnished by the Company. Termination shall be effective ten days after the
giving of notice by the Company; or
(c) at the option of the Fund upon institution of formal
proceedings against the Company by the NASD, the SEC, the insurance
commission of any state or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of the
Contracts, the operation of the Account, the administration of the
Contracts or the purchase of Fund shares, or an expected or anticipated
ruling, judgment or outcome which would, in the Fund's reasonable judgment,
materially impair the Company's ability to perform the Company's
obligations and duties hereunder; or
(d) at the option of the Company upon institution of formal
proceedings against the Fund, the Distributor, the Investment Manager or
any Sub-Investment Manager, by the NASD, the SEC, or any state securities
or insurance commission or any other regulatory body regarding the duties
of the Fund or the Distributor under this Agreement, or an expected or
anticipated ruling, judgment or outcome which would, in the Company's
reasonable judgment, materially impair the Fund's or the Distributor's
ability to perform Fund's or Distributor's obligations and duties
hereunder; or (e) at the option of the Company upon institution of formal
proceedings against the Investment Manager or Sub-investment Manager by the
NASD, the SEC, or any state securities or insurance commission or any other
regulatory body which would, in the good faith opinion of the Company,
result in material harm to the Accounts, the Company, or Contractowners.
(f) upon requisite vote of the Contract owners having an interest
in the affected Series (unless otherwise required by applicable law) and
written approval of the Company, to substitute the shares of another
investment company for the corresponding Series shares of the Fund in
accordance with the terms of the Contracts; or
(g) at the option of the Fund in the event any of the Contracts
are not registered, issued or sold in accordance with applicable Federal
and/or state law; or
(h) at the option of the Company or the Fund upon a determination
by a majority of the Fund Board, or a majority of disinterested Fund Board
members, that an irreconcilable material conflict exists among the
interests of (i) any Product owners or (ii) the interests of the
Participating Insurance Companies investing in the Fund; or
(i) at the option of the Company if the Fund ceases to qualify as
a Regulated Investment Company under Subchapter M of the Code, or under any
successor or similar provision, or if the Company reasonably believes,
based on an opinion of its counsel, that the Fund may fail to so qualify;
or
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(j) at the option of
the Company if the Fund fails to meet the diversification requirements
specified in Section 817(h) of the Code and any regulations thereunder; or
(k) at the option of the Fund if the Contracts cease to qualify
as annuity contracts or life insurance policies, as applicable, under the
Code, or if the Fund reasonably believes that the Contracts may fail to so
qualify; or
(l) at the option of either the Fund or the Distributor if the
Fund or the Distributor, respectively, shall determine, in their sole
judgment exercised in good faith, that either (1) the Company shall have
suffered a material adverse change in its business or financial condition;
or (2) the Company shall have been the subject of material adverse
publicity which is likely to have a material adverse impact upon the
business and operations of either the Fund or the Distributor; or
(m) at the option of the Company, if the Company shall determine,
in its sole judgment exercised in good faith, that either: (1) the Fund and
the Distributor, or either of them, shall have suffered a material adverse
change in their respective businesses or financial condition; or (2) the
Fund or the Distributor, or both of them, shall have been the subject of
material adverse publicity which is likely to have a material adverse
impact upon the business and operations of the Company; or
(n) upon the assignment of this Agreement (including, without
limitation, any transfer of the Contracts or the Accounts to another
insurance company pursuant to an assumption reinsurance agreement) unless
the non-assigning party consents thereto or unless this Agreement is
assigned to an affiliate of the Distributor.
10.2. Notice Requirement. Except as otherwise provided in Section
10.1, no termination of this Agreement shall be effective unless and until the
party terminating this Agreement gives prior written notice to all other parties
to this Agreement of its intent to terminate which notice shall set forth the
basis for such termination. Furthermore:
(a) In the event that any termination is based upon the
provisions of Article VII or the provisions of Section 10.1(a) of this
Agreement, such prior written notice shall be given in advance of the
effective date of termination as required by such provisions; and
(b) in the event that any termination is based upon the
provisions of Section 10.1(c) or 10.1(d) of this Agreement, such prior
written notice shall be given at least ninety (90) days before the
effective date of termination, or sooner if required by law or regulation.
(c) in the event that any termination is based upon the
provisions of Section 10.1(e) of this Agreement, such prior written notice
shall be given at least sixty (60) days before the date of any proposed
vote to replace the Fund's shares.
10.3. Effect of Termination
(a) Notwithstanding any termination of this Agreement pursuant to
Section
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10.1 of this Agreement, the Fund and the Distributor will, at the option of
the Company, continue to make available additional Fund shares for so long
after the termination of this Agreement as the Company desires, pursuant to
the terms and conditions of this Agreement as provided in paragraph (b)
below, for all Contracts in effect on the effective date of termination of
this Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, if the Company so elects to make
additional Fund shares available, the owners of the Existing Contracts or
the Company, whichever shall have legal authority to do so, shall be
permitted to reallocate investments in the Fund, redeem investments in the
Fund and/or invest in the Fund upon the making of additional purchase
payments under the Existing Contracts.
(b) In the event of a termination of this Agreement pursuant to
Section 10.1 of this Agreement, the Fund and the Distributor shall promptly
notify the Company whether the Distributor and the Fund will continue to
make Fund shares available after such termination. If Fund shares continue
to be made available after such termination, the provisions of this
Agreement shall remain in effect except for Section 10.1(a) and thereafter
either the Fund or the Company may terminate the Agreement, as so continued
pursuant to this Section 10.3, upon prior written notice to the other
party, such notice to be for a period that is reasonable under the
circumstances but, if given by the Fund, need not be for more than six
months.
(c) The parties agree that this Section 10.3 shall not apply to
any termination made pursuant to Article VII or any conditions or
undertakings incorporated by reference in Article VII, and the effect of
such Article VII termination shall be governed by the provisions set forth
or incorporated by reference therein.
ARTICLE XI. Applicability to New Accounts and New Contacts
The parties to this Agreement may amend the schedules to this
Agreement from time to time to reflect changes in or relating to the Contracts
and to add new classes of variable annuity contracts and variable life insurance
policies to be issued by the Company through a Separate Account investing in the
Fund. The provisions of this Agreement shall be equally applicable to each such
class of contracts or policies, unless the context otherwise requires.
ARTICLE XII. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party(ies) at the address of such party(ies) set
forth below or at such other address as such party(ies) may from time to time
specify in writing to the other party.
If to the Fund:
Delaware Group Premium Fund, Inc.
Ten Penn Center Plaza
Philadelphia, PA 19103
Attn: Christopher Price
17
<PAGE>
If to the Company:
Lincoln National Life Insurance Co.
1300 South Clinton Street
Fort Wayne, Indiana 46802
Attn: Kelly D. Clevenger
If to the Distributor:
Delaware Distributors, Inc.
Ten Penn Center Plaza
Philadelphia, PA 19103
Attn: Keith E. Mitchell
ARTICLE XIII. Miscellaneous
13.1. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
13.2. This Agreement may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
13.3. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
13.4. Each party hereto shall cooperate with each other party and
all appropriate governmental authorities (including without limitation the SEC,
the NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
13.5. Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate or trust action, as applicable, by
such party, and when so executed and delivered this Agreement will be the valid
and binding obligation of such party enforceable in accordance with its terms.
18
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and behalf by its duly authorized officer
on the date specified below.
DELAWARE GROUP PREMIUM FUND, INC. (Fund)
Date: By:
5/1/96 Name:/s/ David K. Downes
--------------------
Title: Senior Vice President, CAO and CFO
LINCOLN NATIONAL LIFE INSURANCE CO.
(Company)
Date: By:
4/30/96 Name:/s/ Kelly D. Clevenger
-----------------------
Title: Vice President
DELAWARE DISTRIBUTORS, LP (Distributor)
Date: By:
5/1/96 Name:/s/ Keith E. Mitchell
----------------------
Title: President and CEO
19
<PAGE>
Schedule 1
----------
Separate Accounts of Lincoln National Life Insurance Company
Investing in the Fund
As of May 1, 1996
Lincoln National Variable Annuity Account C
Lincoln Life Flexible Premium Variable Life Account K
20
<PAGE>
Schedule 2
----------
Variable Annuity Contracts
and Variable Life Insurance Policies
Supported by Separate Accounts
Listed on Schedule 1
As of May 1, 1996
Multi Fund Variable Annuity Contracts
Multi Fund Variable Life Insurance Contracts
21
<PAGE>
Schedule 3
----------
State-mandated Investment Restrictions
Applicable to the Fund
As of May 1, 1996
The California Department of Insurance has established the following Guidelines
for an underlying portfolio of a Separate Account:
Borrowing. Borrowing limits for any variable contract separate account
portfolio are (1) 10% of net asset value when borrowing for any general purpose;
and (2) 25% of net asset value when borrowing as a temporary measure to
facilitate redemptions. Net asset value of a portfolio is the market value of
all investments or assets owned less outstanding liabilities of the portfolio at
the time that any new or additional borrowing is undertaken.
Foreign Investments - Diversification.
1. A portfolio will be invested in a minimum of five different foreign countries
at all times. However, this minimum is reduced to four when foreign investments
comprise less than 80% of the portfolio's net asset value; to three when less
than 60% of that value; to two when less than 40%; and to one when less than
20%.
2. Except as set forth in items 3 and 4 below, a Portfolio will have no more
than 20% of its net asset value invested in securities of issuers located in any
one country.
3. A Portfolio may have an additional 15% of its net asset value invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom or Germany.
4. A Portfolio's investments in United States issuers are not subject to the
foreign country diversification guidelines.
22
<PAGE>
SERVICES AGREEMENT
------------------
(Exhibit B and Schedules Omitted)
THIS SERVICES AGREEMENT (the "Agreement") is made as of August 15, 1996, by
and among Delaware Management Holdings, Inc., a Delaware corporation
("Holdings"), Delaware Service Company, Inc., a Delaware corporation and a
wholly owned subsidiary of Holdings ("Delaware"), Lincoln National Life
Insurance Company, an Indiana insurance corporation ("Lincoln Life"), and each
of the investment companies listed in Exhibit A hereto, each a Maryland
corporation (together with any other investment company designated in accordance
with Section 5.1, the "Funds," or individually, a "Fund").
The parties hereto, in consideration of the mutual covenants hereinafter
expressed, agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Section 1.1 Definitions. The following terms shall have the respective
meanings set forth in this Section 1.1 for all purposes of this Agreement except
where the application of such definitions is limited by reference in this
Section 1.1 to a specific Article of this Agreement (such definitions to be
equally applicable to both the singular and plural forms of the terms herein
defined):
"Acceptance Test" means a test, reasonably acceptable to Lincoln Life,
Delaware and the Funds, of the performance of the Value Calculation Services for
the Accounts included in the respective Phases, to be conducted in accordance
with Article 4.
"Accounting Services" means the services listed in the Cutover Schedule
with respect to the Accounts.
"Accounts" means the Funds and the Separate Accounts, collectively.
"Affiliate" means, with respect to any entity, any other entity
controlling, controlled by or under common control with such entity.
"Business Day" means a day on which the New York Stock Exchange is open for
trading.
"Calculation Losses" means any losses suffered by a Contractowner, Third
Party Administrator, Fund or Separate Account directly caused by an error in a
Net Asset Value or Unit Value, or by the delivery to Lincoln Life or any Fund of
a Net Asset Value or Unit Value after the applicable deadline provided for in
Section 2.1; provided, however, that such losses shall not include any
consequential damages.
<PAGE>
"Contractowner" means the present or former owner of an insurance or
annuity contract supported by a Separate Account, or any beneficiary or
annuitant thereof.
"Cutover Date," with respect to any Phase, means the date, which shall be a
Business Day, on which Delaware actually commences providing the Accounting
Services with respect to such Phase in accordance with Section 4.2. The planned
Cutover Date for each Phase is set forth in the Cutover Schedule.
"Cutover Schedule" means Schedule 1.1(a) hereto, which sets forth the
accounting services to be rendered pursuant to this Agreement and the planned
Cutover Dates, as such Schedule may be amended from time to time pursuant to
Section 16.1.
"Delaware" has the meaning set forth in the preamble to this Agreement.
"Delaware Affiliate" means Holdings and any entity that is directly or
indirectly controlled by Holdings.
"Fee Schedule" means Schedule 6.1 hereto, as such Schedule may be amended
from time to time pursuant to Section 16.1.
"Fund" has the meaning set forth in the preamble to this Agreement.
"Holdings" has the meaning set forth in the preamble to this Agreement.
"Lincoln Affiliate" means any Affiliate of Lincoln Life other than a
Delaware Affiliate.
"Lincoln Life" has the meaning set forth in the preamble to this Agreement.
"Net Asset Value" means the daily net asset value per share of the
respective Funds for each Business Day, all determined in accordance with the
terms of the Cutover Schedule and with any applicable prospectus or regulatory
requirement.
"Phase" means a set of Accounts comprising the Phase I Accounts, the Phase
II Accounts or the Phase III Accounts.
"Phase I Account" means an Account designated as such on the Cutover
Schedule.
"Phase II Account" means an Account designated as such on the Cutover
Schedule.
"Phase III Account" means an Account designated as such on the Cutover
Schedule.
"Renewal Term" means each successive one-year term occurring
<PAGE>
after the expiration of the initial term of this Agreement as described in
Section 11.1.
"Separate Account" means a separate account of Lincoln Life identified as
such on the Cutover Schedule, and any additional separate account or sub-account
of Lincoln Life or any Lincoln Affiliate (or of any other person if Lincoln Life
or any Lincoln Affiliate has administrative responsibilities with respect to
such separate account or sub-account pursuant to any reinsurance agreement or
otherwise) designated in accordance with Section 5.1.
"Test Period" means, with respect to each Phase, a period of time prior to
the Cutover Date for such Phase, commencing on the date specified by Delaware
pursuant to Section 4.1 and having a duration of three weeks or such longer
period as may be determined pursuant to Section 4.1.
"Third Party Administrator" means an administrator of insurance or annuity
contracts acting on behalf of Contractowners.
"Unit Value" means the daily unit value per unit of the respective Separate
Accounts or sub-accounts thereof for each Business Day, all determined in
accordance with the terms of the Cutover Schedule and with any applicable
prospectus or regulatory requirement.
"Value Calculation Services" means those Accounting Services consisting of
or incidental to the calculation and communication of Unit Values and Net Asset
Values in accordance with the terms of this Agreement.
ARTICLE 2
SCOPE OF SERVICES; CUTOVER
--------------------------
Section 2.1 Scope of Services. Delaware shall provide the Accounting
Services to each of the Funds and to Lincoln Life with respect to each of the
Separate Accounts, all in accordance with the terms of this Agreement. Without
limiting the generality of the foregoing, from and after the Cutover Date for
each respective Phase, Delaware, no later than 6:00 p.m. (New York City time) on
each Business Day, shall in accordance with the terms of this Agreement provide
to Lincoln Life and to the Funds the Value Calculation Services for each of the
Accounts included in such Phase. In the event of any error in the Value
Calculation Services, the parties hereto will follow the procedures set forth in
Schedule 2.1, without prejudice to any other rights described in this Agreement.
Section 2.2 Cutover Schedule. Delaware, Lincoln Life and the Funds shall
use their respective best efforts to cause the Cutover Date to occur no later
than (a) August 15, 1996, with respect to the Phase I Accounts, (b) October 31,
1996, with
<PAGE>
respect to the Phase II Accounts and (c) January 1, 1997 with respect to the
Phase III Accounts.
ARTICLE 3
LINCOLN LIFE'S SUPPORT OBLIGATIONS
----------------------------------
Section 3.1 Provision of Data. Lincoln Life shall use its best efforts to
provide or cause to be provided to Delaware the data identified in Schedule 3.1
during the periods and in accordance with the procedures identified in such
Schedule, it being understood that Delaware shall not be responsible for any
Calculation Losses or other claims, suits, hearings, actions, damages,
liabilities, fines, penalties, costs, losses or expenses, including reasonable
attorney's fees, which any party may sustain or incur, directly or indirectly,
in each case to the extent caused by or arising from Lincoln Life's failure to
provide such data in accordance with such Schedule 3.1.
Section 3.2 Data to Be Provided by Third Parties. With respect to each of
the mutual funds identified in Schedule 3.2 as an available investment of one or
more of the Separate Accounts (other than mutual funds managed by Lincoln Life
or Delaware or their respective Affiliates) and each third party service
provider identified in such Schedule, Lincoln Life shall direct each of the
managers of such funds or such service provider, as the case may be, to provide
or cause to be provided to Delaware the data identified in Schedule 3.2 in
accordance with the procedures and time deadlines identified in such Schedule.
Section 3.3 Information for Periods Prior to Cutover Date. Lincoln Life
will provide appropriate financial and other information with respect to the
Accounts to Delaware, and will cooperate with Delaware, in connection with the
preparation of data for 1996 annual reports to Contractowner and other elements
of the Accounting Services that relate to periods prior to the Cutover Dates for
the respective Accounts. In addition, Lincoln Life will provide to Delaware
appropriate financial and other information regarding the Accounts for periods
prior to 1996 to the extent relevant to the performance of the Accounting
Services for 1996 and subsequent periods.
ARTICLE 4
ACCEPTANCE TEST; CUTOVER DATE
-----------------------------
Section 4.1 Acceptance Testing. Delaware shall notify Lincoln Life of the
date, which shall be a Business Day, on which the Value Calculation Services for
each respective Phase will be ready for the commencement of the Acceptance Test
for such Phase. During the Test Period for each Phase, Delaware, Lincoln Life
and the Funds shall cooperate in performing the Acceptance Test for such Phase,
and Delaware and Lincoln Life, respectively, shall use its best efforts to
remedy any failure in the performance of the Value Calculation Services caused
by such party. In the event that, during the Test Period with respect to any
Phase,
<PAGE>
performance of the Value Calculation Services is suspended for such Phase in
order to effect such remedy or for any other reason, the Test Period for such
Phase shall be extended by the number of days of such suspension. Further, if
at the date that would otherwise be the end of the Test Period for any Phase
Delaware is not performing the Value Calculation Services with respect to such
Phase to the reasonable satisfaction of Lincoln Life, and Lincoln Life shall so
notify Delaware, the Test Period shall be extended until the date on which
Lincoln Life notifies Delaware that the Value Calculation Services are being
performed to the reasonable satisfaction of Lincoln Life. All references in this
Section 4.1 to the performance of the Value Calculation Services shall refer to
the performance thereof in a test mode.
Section 4.2 Cutover Date. With respect to each Phase, upon the
termination of the Test Period, Lincoln Life, the Funds and Delaware shall
execute a written acknowledgment in the form of Exhibit B hereto confirming such
termination and specifying the Cutover Date, which shall be the Business Day
immediately following the date of such termination unless Lincoln Life, the
Funds and Delaware shall agree upon a different date.
ARTICLE 5
NEW ACCOUNTS; NEW INVESTMENT MANAGERS
-------------------------------------
Section 5.1 Additional Accounts. Lincoln Life may from time to time
designate (i) one or more additional investment companies or separate accounts
to constitute Funds or Separate Accounts, as the case may be, for all purposes
of this Agreement, or (ii) one or more newly established sub-accounts of any
Separate Account. Such designation shall be:
(a) subject to Delaware's consent, which shall not be unreasonably
withheld; provided, that such consent shall be considered to be
unreasonably withheld if Delaware does not make reasonable
efforts to accept such new investment companies, separate
accounts and sub-accounts, which efforts shall include, but not
be limited to, reasonable consideration of the expansion of
Delaware's infrastructure to handle such new investment
companies, separate accounts and sub-accounts; and
(b) evidenced by a writing executed by Lincoln Life, Delaware and, if
applicable, each such investment company, setting forth the name
of such investment company, separate account or new sub-account,
the applicable rate under the Fee Schedule that shall apply to
the Accounting Services for such investment company, separate
account or new sub-account, the effective date of the designation
thereof as a Fund, Separate Account or new sub-account, and any
other matters the parties wish to include.
<PAGE>
Notwithstanding clause (b) of the preceding sentence, if Delaware's performance
of the Accounting Services for such additional Funds, Separate Accounts, or sub-
accounts of such Separate Accounts would, in Delaware's reasonable opinion,
result in higher costs than the costs Delaware incurs for providing the
Accounting Services to the current Accounts, then the affected parties hereto
shall negotiate in good faith an addendum to the Fee Schedule for such
additional Funds, Separate Accounts and sub-accounts and Delaware shall not be
deemed to have unreason ably withheld its consent under clause (b) of this
Section 5.1 until such addendum has been agreed to. Except as otherwise
specified in such writing, from and after such effective date, Delaware shall
provide to such Fund, or to Lincoln Life with respect to a Separate Account or
new sub-account, the same Accounting Services as are specified in the Cutover
Schedule with respect to the other Funds, Separate Accounts or sub-account of a
Separate Account, as the case may be.
Section 5.2 New Investment Managers. If new investment managers are added
to provide investment advisory services to any of the Accounts, and Delaware's
performance of the Accounting Services is, as a result thereof, significantly
more costly to Delaware, the affected parties shall negotiate in good faith an
addendum to the Fee Schedule for such Accounts.
ARTICLE 6
FEES
----
Section 6.1 Accrual of Fees. From and after the Cutover Date with respect
to each Phase, Lincoln Life shall pay fees for the Accounting Services for each
of the Separate Accounts included in such Phase, and each Fund included in such
Phase shall pay fees for the Accounting Services for such Fund, in each case at
the respective rates per annum determined in accordance with the Fee Schedule.
Fees accrued pursuant to this Section 6.1 shall be payable in arrears on a
monthly basis.
Section 6.2 Payment of Fees by Lincoln Life. Delaware shall submit to
Lincoln Life an invoice for each month for all of the fees payable pursuant to
Section 6.1 with respect to each of the Separate Accounts, which invoice shall
be itemized to show the portion of such fees allocable to each of the Separate
Accounts in accordance with the Fee Schedule. Subject to the terms of this
Agreement, invoices for such fees shall be payable within 30 days of receipt.
Section 6.3 Payment of Fees by the Funds. Delaware shall submit to
each Fund, with a copy to Lincoln Life, an invoice for each month for all of the
fees payable pursuant to Section 6.1 with respect to such Fund. Subject to the
terms of this Agreement, invoices for such fees shall be payable within 30 days
of receipt.
<PAGE>
ARTICLE 7
STANDARD OF CARE; INDEMNIFICATION
---------------------------------
Section 7.1 Standard of Care. Delaware shall provide the Accounting
Services with a level of care equal to or greater than the level of care at
which it performs similar functions for mutual funds that are sponsored or
managed by any Delaware Affiliate, and in any event, Delaware shall always
exercise reasonable care in performing the Accounting Services.
Section 7.2 Indemnification
(a) Indemnification by Lincoln Life. Lincoln Life shall indemnify,
defend and hold harmless Delaware and any Delaware Affiliate, and the directors,
officers and employees of the fore going (each individually, a "Delaware
Indemnified Party"), against any and all claims, suits, hearings, actions,
damages, liabilities, fines, penalties, costs, losses or expenses, including
reasonable attorney's fees, which any Delaware Indemnified Party may sustain or
incur, directly or indirectly, in each case to the extent caused by or arising
from (i) the negligence, recklessness or intentional misconduct of Lincoln Life
or any Lincoln Affiliate, or any director, officer or employee thereof, in the
performance of this Agreement; or (ii) the failure of Lincoln Life to comply
with the terms of this Agreement.
(b) Indemnification by Delaware. Subject to Section 3.1, Delaware
shall indemnify, defend and hold harmless Lincoln Life, the Lincoln Affiliates
and the Funds, and the directors, officers and employees of the foregoing (each
individually, a "Lincoln Indemnified Party") against any and all claims, suits,
hearings, actions, damages, liabilities, fines, penalties, costs, losses
(including but not limited to (a) Calculation Losses reimbursed by Lincoln Life
and (b) any market fluctuation losses incurred by Lincoln Life in effecting such
reimbursement) or expenses, including reasonable attorney's fees, which any
Lincoln Indemnified Party may sustain or incur, directly or indirectly, in each
case to the extent caused by or arising from (i) the negligence, recklessness or
intentional misconduct of Delaware or any Delaware Affiliate, or any director,
officer or employee thereof, in the performance of this Agreement; or (ii) the
failure of Delaware to comply with the terms of this Agreement.
(c) Procedures. Subject to the provisions of Section 7.2(d), promptly
after receipt by a Delaware Indemnified Party or a Lincoln Indemnified Party
(each, an "Indemnified Party") of notice of the commencement of any action,
proceeding, investigation or claim by any Contractowner or other third party (a
"Proceeding"), the Indemnified Party shall, if a claim in respect thereof is to
be made pursuant to this Section 7.2 against another party to this Agreement
(the "Indemnifying Party"), notify the Indemnifying Party in writing of the
commencement thereof; but the failure so to notify the Indemnifying Party
<PAGE>
shall not relieve the Indemnifying Party from any liability under this Section
7.2, except to the extent that such failure to notify actually prejudices the
Indemnifying Party. In case any such Proceeding shall be brought against an
Indemnified Party, the Indemnifying Party shall be entitled to participate in
and to assume the defense thereof, with counsel satisfactory to the Indemnified
Party, and after notice from the Indemnifying Party to the Indemnified Party of
the Indemnifying Party's election to assume the defense thereof, the
Indemnifying Party shall not be liable to the Indemnified Party for any legal or
other expenses subsequently incurred by the Indemnified Party in connection with
the defense thereof other than reasonable costs of investigation; provided,
however, that (i) if, in the reasonable judgment of the Indemnified Party, it is
advisable for the Indemnified Party to be represented by separate counsel other
than counsel for the Indemnifying Party, the Indemnified Party shall have the
right to employ a single counsel to represent the Indemnified Party, in which
event the reasonable fees and expenses of such separate single counsel shall be
borne by the Indemnifying Party, and (ii) in the case of any Proceeding brought
by any governmental authority, the Indemnifying Party shall have the right to
participate in, but not to assume the defense of, such Proceeding. The
Indemnifying Party shall not be obligated under any settlement agreement
relating to any Proceeding under this Section 7.2 to which it has not consented
in writing, which consent shall not be unreasonably withheld.
(d) Preserving Rights with Respect to Calculation Losses. Notwithstanding
Section 7.2(c), Lincoln Life may in its sole discretion elect to reimburse a
Contractowner, Third Party Administrator, Separate Account or Fund for
Calculation Losses out of Lincoln Life's own funds and such reimbursement shall
have no effect on the respective indemnification obligations of the parties
pursuant to Section 7.2(a) and (b).
(e) Overpayments. The parties agree that there may be circumstances in
which it would not be commercially reasonable for Lincoln Life and the Funds to
seek reimbursement from one or more Contractowners of overpayments made them,
taking into account relevant factors such as industry practice; the amount of
such overpayments; the number of Contractowners overpaid; the cost of seeking
reimbursement; and the implications for customer relations of seeking
reimbursement. In the event of any overpayment to a Contractowner for which
Lincoln Life or any Fund intends to seek indemnification from Delaware pursuant
to Section 7.2(b) without seeking reimbursement from the Contractowner, the
parties shall negotiate in good faith as to what effect, if any, the
determination not to seek such reimbursement should have under the circumstances
on the rights of Lincoln Life or the Funds to indemnification for the amounts
overpaid.
<PAGE>
ARTICLE 8
INSURANCE COVERAGE
------------------
Section 8.1 Insurance. Delaware and Holdings shall maintain
insurance coverage at a level at least equal to the insurance coverage held by
each of them at the time this Agreement becomes effective.
ARTICLE 9
FORCE MAJEURE AND DISASTER RECOVERY PLAN
----------------------------------------
Section 9.1 Force Majeure; Disaster Recovery Plan. No party shall be
liable to any other party for any damages caused by delays beyond its reasonable
control, including, without limitation, those delays occasioned by fire, strike,
labor dispute, acts of the other party, acts of any common carrier, pricing
service, corporate action service, or telephone network, acts of the power
supply company or its networks, restrictions by civil or military authorities,
acts of nature, or unforeseen transportation failures. In the event of any such
delay, the hindered party shall promptly notify the other parties and, upon the
giving of such notice, the period of time for performance of obligations
hereunder affected by such delays will be extended by the same number of days as
the delay. Notwithstanding the foregoing, Delaware shall maintain and implement
a customary disaster recovery plan and such plan shall be reasonably acceptable
to Lincoln Life and the Funds. This Article 9 shall not excuse any failure to
perform, or extend the time for performance of, any obligation of Delaware under
this Agreement to the extent that such failure or delay would have been avoided
by compliance with such disaster recovery plan, or by the use of reasonable,
readily available alternatives.
ARTICLE 10
EFFECTIVENESS
-------------
Section 10.1 Effectiveness.
(a) This Agreement shall become effective upon the later of:
(i) the date first set forth above; or
(ii) the date as of which Lincoln Life has complied with the
requirements of the Indiana insurance holding company laws
at Section 27-1-23-4 of the Indiana Code.
(b) Lincoln Life shall diligently and reasonably pursue the satisfaction
of the requirements of the Indiana insurance holding company laws at
Section 27-1-23-4 of the Indiana Code.
<PAGE>
ARTICLE 11
TERM AND TERMINATION
--------------------
Section 11.1 Term. The initial term of this Agreement shall end on
the fourth anniversary of the Cutover Date of Phase III, and this Agreement
shall be automatically renewed for subsequent Renewal Terms thereafter unless
sooner terminated under Section 11.2.
Section 11.2 Termination. Subject to the procedures set forth in
Article 12 and to Section 11.3, this Agreement may be terminated as follows:
(a) by Lincoln Life, Delaware, or any Fund, in each case upon notice
to each of the other parties at least 180 days prior to the
expiration of the initial term or any Renewal Term, with such
termination to become effective upon such expiration; and
(b) by Lincoln Life, Delaware or any Fund upon 30 days notice to each
of the other parties, for any material breach of this Agreement
unless such breach is cured within such notice period.
For the purpose of this Section 11.2(b) only, a "material breach" shall include,
but not be limited to, the failure by Delaware to provide Accounting Services
hereunder of a quality reasonably determined by Lincoln Life or any Fund to be
consistent with a superior level of service in the industry.
Section 11.3 Effect of Termination by a Fund. In the event one or
more Funds shall terminate this Agreement, this Agreement shall nonetheless
continue in full force and effect between and among those parties who have not
terminated this Agreement.
ARTICLE 12
PROCEDURES UPON TERMINATION
---------------------------
Section 12.1 Obligations Upon Termination. Upon termination of this
Agreement by any party under Article 11, each party shall be obligated to
cooperate with each other party to provide for the transfer of all
responsibilities, duties and obligations of this Agreement as may be necessary
to ensure the orderly, undisrupted business of each party. Such cooperation
shall include, but not be limited to, returning all papers, documents, materials
or equipment to the party owning such materials. In the event that this
Agreement is terminated by Lincoln Life or any Fund under Section 11.2(b),
Lincoln Life and the Funds shall have the right to require Delaware to continue
performing all or any part of its responsibilities, duties and obligations under
this Agreement until the earlier of (a) 210 days following the date notice of
such termination was given, or (b) the date that is 30 days after notice from
Lincoln Life or the Funds that
<PAGE>
Delaware shall cease such performance. For this purpose, (a) the terms of this
Agreement (including without limitation the obligation of Lincoln Life and the
Funds to pay Delaware's fees under Article 6, and the obligation of Delaware to
continue to exercise the standard of care required under Section 7.1 shall
remain in effect with respect to the period in which Delaware is obligated to
continue such performance, and (b) if any portion of Delaware's
responsibilities, duties and obligations during such period are not so extended
as required by Lincoln Life, the parties shall mutually agree in good faith on a
reduction of fees which reflects the termination of such responsibilities,
duties and obligations.
ARTICLE 13
REPRESENTATIONS AND WARRANTIES
------------------------------
Each party represents and warrants to the other parties as follows:
Section 13.1 Organization and Authority. Such party is duly organized,
validly existing and in good standing as a corporation under the laws of the
state indicated on the first page of this Agreement, with the requisite
authority and power, in conformity with applicable laws, rules and regulations,
to execute and deliver this Agreement and to perform its obligations hereunder.
Such party has taken all necessary action to authorize such execution, delivery
and performance.
Section 13.2 No Conflict with Laws. The execution, delivery and
performance of this Agreement by such party do not conflict with or violate any
laws applicable to such party, any provision of its constituent documents, any
order or judgment of any court or governmental agency applicable to it or any of
its assets or any contractual restriction binding on it or its assets.
Section 13.3 Obligation. This Agreement constitutes a legal, valid and
binding obligation of such party, enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws relating to the enforcement of creditors' rights generally and
subject to principles of equity.
ARTICLE 14
PARENT GUARANTY
---------------
Section 14.1 Parent Guaranty. Holdings hereby unconditionally guarantees
the full and punctual performance of the covenants, agreements and obligations
of Delaware under this Agreement, including but not limited to the payment when
due of all amounts that may from time to time be payable by Delaware pursuant to
Section 7.2(b) (the "Guaranteed Obligations").
Section 14.2 Guaranty Unconditional. The obligations of
<PAGE>
Holdings hereunder shall be unconditional and absolute and, without limiting the
generality of the foregoing, shall not be released or discharged by:
(a) any extension, settlement, compromise, waiver or release in
respect of any obligation of Delaware under this Agreement;
(b) any modification or amendment of or supplement to this
Agreement;
(c) any change in the corporate existence, structure or ownership of
Delaware, or any insolvency, bankruptcy, reorganization or other similar
proceeding affecting Delaware or its assets; or
(d) any other act or omission to act or delay of any kind by
Delaware, Lincoln Life, any Fund or any other person which would, but for
the provisions of this paragraph (d), constitute a legal or equitable
discharge of Holding's obligations hereunder;
provided, however, that in the event of any extension, settlement, compromise,
waiver or release of any obligation of Delaware under this Agreement, or any
modification or amendment of or supplement to this Agreement, the guaranty
provided for in this Article 14 shall apply to the obligations of Delaware as so
extended, settled, compromised, waived, released, modified, amended or
supplemented.
Section 14.3 Discharge Only Upon Payment or Performance in Full;
Reinstatement in Certain Circumstances. Holding's obligations hereunder shall
remain in full force and effect until the Guaranteed Obligations shall have been
paid or performed in full. If at any time any payment of Guaranteed Obligations
by Delaware under this Agreement is rescinded or must be otherwise restored or
returned upon the insolvency, bankruptcy or reorganization of Delaware or
otherwise, Holding's obligations hereunder with respect to such payment shall be
reinstated as though such payment had been due but not made at such time.
Section 14.4 Waiver by Holdings. Holdings irrevocably waives acceptance
hereof, presentment, demand, protest and any notice not provided for herein, as
well as any requirement that at any time any action be taken by any person
against Delaware or any other person.
Section 14.5 Subrogation. Upon making any payment with respect to
Delaware hereunder, Holdings shall be subrogated to the rights of the payee
against Delaware with respect to such payment; provided that Holdings shall not
enforce payment by way of subrogation until all Guaranteed Obligations have been
paid or performed in full.
<PAGE>
ARTICLE 15
DISPUTE RESOLUTION
------------------
Before commencing litigation of any dispute arising out of or relating to
this Agreement, the parties shall attempt in good faith to resolve the dispute
by the following means:
Section 15.1 Negotiation. The parties shall in good faith attempt to
resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle the controversy. A
party may give the other parties written notice of any dispute not resolved in
the normal course of business. Within 20 days after delivery of that notice,
executives of the affected parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to exchange
relevant information and to attempt to resolve the dispute. If the matter has
not been resolved within 60 days of the disputing party's notice, or if the
parties fail to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in Section 15.2. If a negotiator intends to be
accompanied at a meeting by an attorney, the other negotiator shall be given at
least 3 Business Days' notice of that intention and may also be accompanied by
an attorney.
Section 15.2 Mediation. If the dispute has not been resolved by
negotiation as provided in Section 15.1, the parties shall endeavor for an
additional period of 60 days to settle the dispute by mediation under the then-
current Center for Public Resources (CPR) Model Procedure for Mediation of
Business Disputes. The neutral third party will be selected from the CPR Panel
of Neutrals. If the parties encounter difficulty in agreeing on a neutral, they
will seek the assistance of CPR in the selection process.
Section 15.3 Confidentiality. All activities under this Article 15 are
confidential and shall be treated as compromise and settlement negotiations for
purposes of the Federal Rules of Evidence and state rules of evidence.
ARTICLE 16
MISCELLANEOUS
-------------
Section 16.1 Amendment. This Agreement, including any Exhibits or
Schedules, may be amended, modified or supplemented only in writing signed by
Delaware, Lincoln Life and any Fund affected thereby. This Agreement shall be
binding upon all successors, assigns or transferees of the parties to this
Agreement.
Section 16.2 Assignment. This Agreement and the rights, duties and
obligations of the parties hereto shall not be assign able by any party, except
assignment to successors in the case of mergers, sales of all or substantially
all of the assets of such
<PAGE>
party or transfer of ownership by reorganization or similar restructuring to a
successor in interest to the business of such party, without the prior written
consent of the other parties, and any purported assignment in the absence of
such consent shall be void.
Section 16.3 Notices. All notices given or submitted pursuant to this
Agreement shall be made in writing and shall be deemed given when (a) deposited
with the United States Postal Service, postage prepaid, registered or certified
mail, return receipt requested; (b) deposited with a nationally recognized
overnight mail delivery service; (c) sent by facsimile with electronic
confirmation of delivery or with a copy sent by mail as described in (a) or (b)
above; or (d) delivered in person; all to the last address of record of each
party being notified.
Any notice under this Agreement to Lincoln Life shall be given to:
ATTN: O. Douglas Worthington
Vice President and Controller
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801
Phone: (219) 455-3669
Facsimile: (219) 455-1939
Any notice under this Agreement to Delaware or Holdings
shall be given to:
ATTN: Michael J. Bishof
Vice President and Treasurer
Delaware Management Company
1818 Market Street; 7th Floor
Philadelphia, PA 19103
Phone: (215) 255-2852
Facsimile: (215) 255-1645
With a copy to:
Richard J. Flannery
Managing Director, Corporate
& Tax Affairs
Delaware Management Company
2005 Market Street
Philadelphia, PA 19103
Phone: (215) 255-1244
Facsimile: (215) 255-2822
<PAGE>
Any notice under this Agreement to any Fund shall be given
to:
ATTN: Kelly D. Clevenger
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801
Phone: (219) 455-5119
Facsimile: (219) 455-1773
Any party may, by means of written notice in compliance with this Section
16.3, change the address or the identity of the person to whom any notice, or
copy thereof, is to be sent.
Section 16.4 Severability. If any provision of this Agreement, as applied
to any party or to any circumstances, shall be found by a court of competent
jurisdiction to be void, invalid or unenforceable, the same shall in no way
affect any other provision of this Agreement, the application of any such provi
sion in any other circumstances, or the validity or enforce ability of this
Agreement; provided, however, that nothing in this Section 16.4 shall adversely
affect the fundamental benefits received by the parties under this Agreement.
Section 16.5 Waiver. A waiver by any party of any of the terms and
conditions of this Agreement in any one instance shall not be deemed or
construed to be waiver of any such term or condition for the future, or of any
subsequent breach thereof, nor shall it be deemed a waiver of performance of any
other obligation hereunder. No waiver of any provision of this Agreement shall
be valid unless agreed to in writing by the party or parties against whom such
waiver is sought to be enforced.
Section 16.6 Entire Agreement. This Agreement contains the entire
understanding of the parties hereto relating to the subject matter of this
Agreement and supersedes all prior and collateral agreements, understandings,
statements and negotiations of the parties.
Section 16.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana, without giving
effect to the conflict of law provisions thereof.
Section 16.8 Section and Paragraph Headings. The titles of the sections
and paragraphs of this Agreement are for convenience only and shall not in any
way affect the interpretation of any provision or condition of this Agreement.
Section 16.9 Counterparts. This Agreement may be executed in counterparts
which, taken together, shall constitute the whole of the Agreement as between
the parties.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
LINCOLN LIFE:
LINCOLN NATIONAL LIFE INSURANCE COMPANY
By: ____________________________
O. Douglas Worthington
Title: Vice President and
Controller
Date: __________________________
HOLDINGS:
DELAWARE MANAGEMENT HOLDINGS, INC.
By: ____________________________
Title: _________________________
Date: __________________________
DELAWARE:
DELAWARE SERVICE COMPANY, INC.
By: ____________________________
Title: _________________________
Date: __________________________
<PAGE>
FUNDS:
LINCOLN NATIONAL AGGRESSIVE GROWTH
FUND, INC.
LINCOLN NATIONAL BOND FUND, INC.
LINCOLN NATIONAL CAPITAL
APPRECIATION FUND, INC.
LINCOLN NATIONAL EQUITY-INCOME
FUND, INC.
LINCOLN NATIONAL GLOBAL ASSET
ALLOCATION FUND, INC.
LINCOLN NATIONAL GROWTH AND INCOME
FUND, INC.
LINCOLN NATIONAL INTERNATIONAL
FUND, INC.
LINCOLN NATIONAL MANAGED FUND, INC.
LINCOLN NATIONAL MONEY MARKET FUND,
INC.
LINCOLN NATIONAL SOCIAL AWARENESS
FUND, INC.
LINCOLN NATIONAL SPECIAL
OPPORTUNITIES FUND, INC.
By: ____________________________
Kelly D. Clevenger
In his capacity as President of each of
the above-named Funds.
Date: __________________________
<PAGE>
EXHIBIT A
---------
INVESTMENT COMPANIES
<PAGE>
EXHIBIT A
---------
INVESTMENT COMPANIES
Lincoln National Aggressive Growth Fund, Inc.
Lincoln National Bond Fund, Inc.
Lincoln National Capital Appreciation Fund, Inc.
Lincoln National Equity-Income Fund, Inc.
Lincoln National Global Asset Allocation Fund, Inc.
Lincoln National Growth and Income Fund, Inc.
Lincoln National International Fund, Inc.
Lincoln National Managed Fund, Inc.
Lincoln National Money Market Fund, Inc.
Lincoln National Social Awareness Fund, Inc.
Lincoln National Special Opportunities Fund, Inc.
<PAGE>
EXHIBIT B
---------
FORM OF WRITTEN ACKNOWLEDGEMENT OF CUTOVER DATE
<PAGE>
SCHEDULE 1.1(a)
---------------
CUTOVER SCHEDULE
<PAGE>
SCHEDULE 2.1
------------
PROCEDURES FOR CORRECTING ERRORS
<PAGE>
SCHEDULE 3.1
------------
DATA PROVIDED BY LINCOLN LIFE
<PAGE>
SCHEDULE 3.2
------------
UNAFFILIATED MUTUAL FUNDS
AND
SERVICE PROVIDERS
<PAGE>
SCHEDULE 6.1
------------
FEE SCHEDULE
<PAGE>
Exhibit 5
[LOGO of LINCOLN LIFE]
1300 South Clinton
Fort Wayne, IN 46802
April 15, 1997
Gentlemen:
This Opinion is furnished in connection with the filing of Post-Effective
Amendment #5 to Registration #33-76432 for the Lincoln Life Flexible Premium
Variable Life Account K. In my capacity as Second Vice President - Business
Engineering, I am familiar with the Registration Statement, its exhibits, and
the policy forms associated with the Registration Statement. In my opinion:
1. The fees and charges deducted under the contract, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected
to be incurred, and the risks assumed by the Lincoln National Life
Insurance Company.
2. The illustrations of death benefits, policy values, accumulated
premiums shown in Appendix D to the Prospectus contained in the
Registration Statement, based on the assumptions stated in the
illustrations, are consistent with the assumptions stated in the
policies. The rate structure of the policies has not been designed so
as to make the relationship between premiums and benefits, as shown in
the illustrations, appear to be correspondingly more favorable to the
prospective purchaser of policies that are Standard Male Nonsmokers or
Smokers Age 35 or Age 55 than to prospective purchasers for policies
that are Males or Females at other ages or classifications.
3. The information contained in the illustrations in the section of the
Prospectus entitled "Policy Benefits", based on the assumptions stated
in the examples, is consistent with the Provisions of the policies.
I hereby consent to the use of this opinion as an Exhibit to Post-Effective
Amendment #5 to the Registration Statement and the use of my name under the
heading "Experts" in the Prospectus contained in the Registration Statement.
Sincerely,
/s/ Denis G. Schwartz
- ---------------------
Denis G. Schwartz, FSA
Second Vice President
Business Engineering
Lincoln National Life Insurance Co. is a part of Lincoln National Corp.
<PAGE>
Exhibit 6
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the Post-
Effective Amendment No. 3 to the Registration Statement (Form S-6 No. 33-76432)
and the related Prospectus appearing therein and pertaining to the Lincoln Life
Flexible Premium Variable Life Account K, and to the use therein of our reports
dated (a) February 6, 1997 with respect to the statutory-basis financial
statements of The Lincoln National Life Insurance Company and for each of the
three year is the period ended December 31, 1996; (b) February 7, 1996, with
respect to the consolidated financial statements of the Lincoln National Life
Insurance Company for each of the three years in the period ended December 31,
1995; (c) dated March 27, 1997 with respect to the financial statements of
Lincoln Life Flexible Premium Variable Life Account K.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND> This schedule contains summary financial information extracted from
Lincoln Life Flexible Premium Variable Life Account K and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 30,642,471
<INVESTMENTS-AT-VALUE> 34,342,245
<RECEIVABLES> 385,946
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34,728,191
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18,179
<TOTAL-LIABILITIES> 18,179
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 30,018,261
<SHARES-COMMON-STOCK> 22,592,493
<SHARES-COMMON-PRIOR> 9,233,386
<ACCUMULATED-NII-CURRENT> 844,725
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 147,252
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,699,774
<NET-ASSETS> 34,710,012
<DIVIDEND-INCOME> 873,112
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 137,790
<NET-INVESTMENT-INCOME> 735,322
<REALIZED-GAINS-CURRENT> 108,526
<APPREC-INCREASE-CURRENT> 2,619,503
<NET-CHANGE-FROM-OPS> 3,463,351
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21,059,313
<NUMBER-OF-SHARES-REDEEMED> 7,700,206
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 22,667,299
<ACCUMULATED-NII-PRIOR> 109,403
<ACCUMULATED-GAINS-PRIOR> 38,726
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 137,790
<AVERAGE-NET-ASSETS> 23,376,363
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
