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AMERICAN LEGACY VARIABLE LIFE
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT J
HOME OFFICE LOCATION AND ADMINISTRATIVE MAILING ADDRESS:
Lincoln National Life Insurance Co.
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, Ind. 46801
800-4LINCOLN (800-454-6265)
This prospectus describes a flexible premium variable life insurance contract
(the "policy"), offered by The Lincoln National Life Insurance Company ("Lincoln
Life," "we," the "company").
The policy features:
- - flexible premium payments;
- - a choice of two death benefit options;
- - a choice of underlying investment options
The Class 1 shares of the funds (the "funds") of the American Variable Insurance
Series (the "series") are available through the Lincoln Life Flexible Premium
Variable Life Account J ("Separate Account"). Each fund has its own investment
objective. The policy owner (the "owner" or "you") is the person named in the
policy schedule who has all of the policy ownership rights. You should review
each fund's prospectus, which describes each fund in detail before making your
decision. The funds available through the Separate Account are:
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- - Global Small Capitalization Fund - Asset Allocation Fund
- - Global Growth Fund - High-Yield Bond Fund
- - Growth Fund - Bond Fund
- - International Fund - U.S. Government/AAA-Rated Securities Fund
- - Growth-Income Fund - Cash Management Fund
</TABLE>
This policy is designed to provide life insurance protection. Review your
personal financial objectives and discuss them with a qualified financial
counselor before you buy a variable life insurance policy. This policy may, or
may not, be appropriate for your individual financial goals. The value of the
policy depends on the investment results of the funding options you select.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance contract with the policy. This
prospectus and the prospectuses of the Funds, furnished with this prospectus,
should be read carefully to understand the policy being offered.
TO BE VALID, THIS PROSPECTUS MUST HAVE THE CURRENT MUTUAL FUNDS' PROSPECTUSES
WITH IT. KEEP ALL FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS A
CRIMINAL OFFENSE TO STATE OTHERWISE.
THIS POLICY MAY NOT BE AVAILABLE IN ALL STATES, AND THIS PROSPECTUS ONLY OFFERS
THE POLICY FOR SALE IN JURISDICTIONS WHERE SUCH OFFER AND SALE ARE LAWFUL.
Prospectus Dated: May 1, 1999
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TABLE OF CONTENTS
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PAGE
<S> <C>
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SUMMARY OF THE POLICY 1
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LINCOLN LIFE, THE GENERAL ACCOUNT
AND THE SEPARATE ACCOUNT
Lincoln Life 5
The General Account 5
The Separate Account 5
Fund participation agreement 6
The investment advisor 6
Addition, deletion, or substitution
of investments 6
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THE POLICY
Requirements for issuance of a
policy 7
Units and unit values 7
Premium payment and allocation of
premiums 7
Dollar cost averaging program 9
Effective date 9
Right to examine policy 10
Policy termination 10
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CHARGES AND DEDUCTIONS
Percent of premium charge 10
Contingent deferred sales charge
(CDSC) 10
Contingent deferred administrative
charge (CDAC) 11
Surrender charge 11
Monthly deductions 12
Cost of insurance charges 12
Monthly charge 13
Fund charges and expenses 13
Mortality and expense risk charge 13
Other charges 13
Reduction of charges 14
Exchange of Lincoln Life Universal
Life policies 14
Term conversion credits 14
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POLICY BENEFITS
Death benefit and death benefit
types 15
Death benefit guarantee 17
Policy changes 17
Policy value 17
Transfer between subaccounts 19
Transfer to and from the General
Account 19
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PAGE
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<S> <C>
Loans 19
Withdrawals 20
Policy lapse and reinstatement 21
Surrender of the policy 21
Proceeds and payment options 21
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GENERAL PROVISIONS
The contract 22
Suicide 22
Representations and contestability 23
Incorrect age or sex 23
Change of owner or beneficiary 23
Assignment 23
Reports and records 23
Projection of benefits and values 24
Postponement of payments 24
Riders 24
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DISTRIBUTION OF THE POLICY 26
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FEDERAL TAX MATTERS
Tax status of the policy 27
Tax treatment of policy benefits 28
Taxation of the Separate Account 30
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VOTING RIGHTS 30
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STATE REGULATION OF LINCOLN LIFE AND
THE SEPARATE ACCOUNT 31
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SAFEKEEPING OF THE SEPARATE
ACCOUNT'S ASSETS 31
- -------------------------------------------------
LEGAL PROCEEDINGS 31
- -------------------------------------------------
OFFICERS & DIRECTORS OF LINCOLN
NATIONAL LIFE INSURANCE CO. 32
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EXPERTS 34
- -------------------------------------------------
PREPARING FOR YEAR 2000 34
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ADDITIONAL INFORMATION 35
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APPENDIX A: Table of base minimum
premiums 36
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APPENDIX B: Table of surrender
charges 38
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APPENDIX C: Illustrations of policy
values 40
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FINANCIAL STATEMENTS
Separate Account Financials J-1
Company Financials S-1
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</TABLE>
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SUMMARY OF THE POLICY
This section is an overview of key policy features and is intended to provide
you with a brief explanation of some of the important features of your policy.
(Regulations in your state may vary the provisions of your own policy.) Its
value may change on a:
1.) fixed basis;
2.) variable basis; or a
3.) combination of both fixed and variable bases.
At all times, your policy must qualify as life insurance under the Internal
Revenue Code of 1986, as amended (the "Code") to receive favorable tax treatment
under federal law. If these requirements are met, you may benefit from favorable
federal tax treatment. Lincoln Life reserves the right to return your premium
payments if they result in your policy failing to meet federal tax law
requirements.
INITIAL CHOICES TO BE MADE
The initial owner of the policy (the "owner" or "you") is named in the "policy
specifications" and has all of the policy ownership rights. If no owner is
named, the insured (the person whose life is insured under the policy) will be
the owner of the policy. If a policy has been absolutely assigned, the assignee
is the owner.
You, as the owner, have three important choices to make:
1.) one of the two death benefit types;
2.) the amount of premium you want to pay; and
3.) the amount of your net premium payment to be placed in each of the
funding options you select.
Several riders are also available under the policy. See page 24.
LEVEL OR VARYING DEATH BENEFIT
We pay the death benefit to the beneficiary(ies), calculated on the date the
insured died, less outstanding loan account balances, other outstanding amounts
due, and surrendered amounts.
When you purchase your policy, you must choose one of two death benefit types.
If you choose type 1, the death benefit will be the greater of: the specified
amount of the policy or a specified percentage of the policy value on or prior
to the date of the insured's death. If you choose type 2, the death benefit will
be 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. See
page 15.
For the first three years of your policy, there is a death benefit guarantee
monthly premium. This means that the death benefit will not be lower than the
initial specified amount regardless of the gains or losses of the funds you
select as long as you pay that premium. Therefore, the initial death benefit
under your policy would be guaranteed for three years even though your policy
value is insufficient to pay current monthly deductions. If you have borrowed
against your policy or surrendered a portion of your policy, your initial death
benefit will be reduced by the loan account balance and any surrendered amount.
See page 15.
AMOUNT OF PREMIUM PAYMENT
When you apply for your policy, you must decide how much premium to pay. Premium
payments may be changed within the limits described on page 8. If your policy
lapses because your monthly premium deduction is larger than the total
accumulation value, you may reinstate your policy. See page 21.
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When you first receive your policy you will have 10 days to look it over. This
is called the "right-to-examine" period. Use this time to review your policy and
make sure its meets your needs. During this time period your initial premium
payment will be deposited in the General Account. If you then decide you do not
want your policy, all premium payments will be returned to you with no interest
paid. State laws where you live might change the number of days in the
"right-to-examine" time period. See page 10.
HOW ARE MY PREMIUMS PROCESSED?
You determine in the application what portions of net premiums are to be
allocated to the General Account and or the various subaccounts of the Separate
Account. Your initial net premiums are automatically allocated to the Lincoln
Life General Account. After the record date the policy value and all subsequent
net premiums will automatically be invested according to your instructions. You
may change future allocations of net premiums at any time without 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.
SELECTION OF FUNDING VEHICLES
You must choose the fund(s) in which you want to place each net premium payment.
Ten subaccounts make up the Separate Account, the "variable" part of the
contract. Each subaccount invests exclusively in the shares of a specified fund.
If the mutual fund(s) you select goes up in value, so does the cash value of
your policy.
You may also choose to place all or part of your premium payment into the
General Account. Premium payments put into the General Account become part of
Lincoln Life's General Account, do not share the investment experience of the
Separate Account and have a guaranteed minimum interest rate of 4% per year. For
additional information on the General Account, see page 5.
WHAT FUNDS ARE AVAILABLE TO SELECT?
You can allocate amounts to one or more of the subaccounts of the Separate
Account. Your investment amount is the portion of the policy value allocated to
the Separate Account. The Separate Account is Lincoln Life Flexible Premium
Variable Life Account J, established by Lincoln Life to receive and invest net
premiums paid under the policy. Currently you may select from the Class 1 shares
of the American Variable Insurance Series, which consists of ten funds:
GLOBAL SMALL CAPITALIZATION FUND -- The fund seeks to make your investment grow
over time by investing primarily in stocks of smaller companies located around
the world that typically have market capitalizations of $50 million to $1.2
billion. The fund is designed for investors seeking capital appreciation through
stocks. Investors in the fund should have a long-term perspective and be able to
tolerate potentially wide price fluctuations.
GLOBAL GROWTH FUND -- The fund seeks to make your investment grow over time by
investing primarily in common stocks of companies located around the world. The
fund is designed for investors seeking capital appreciation through stocks.
Investors in the fund should have a long-term perspective and be able to
tolerate potentially wide price fluctuations.
GROWTH FUND -- The fund seeks to make your investment grow by investing
primarily in common stocks of companies that appear to offer superior
opportunities for growth of capital. The fund is designed for investors seeking
capital appreciation through stocks. Investors in the fund should have a
long-term perspective and be able to tolerate potentially wide price
fluctuations.
INTERNATIONAL FUND -- The fund seeks to make your investment grow over time by
investing primarily in common stocks of companies located outside the United
States. The fund is designed for
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investors seeking capital appreciation through stocks. Investors in the fund
should have a long-term perspective and be able to tolerate potentially wide
price fluctuations.
GROWTH-INCOME FUND -- The fund seeks to make your investment grow and provide
you with income over time by investing primarily in common stocks or other
securities which demonstrate the potential for appreciation and/or dividends.
The fund is designed for investors seeking both capital appreciation and income.
ASSET ALLOCATION FUND -- The fund seeks to provide you with high total return
(including income and capital gains) consistent with preservation of capital
over the long-term by investing in a diversified portfolio of common stocks and
other equity securities; bonds and other intermediate and long-term debt
securities, and money market instruments (debt securities maturing in one year
or less).
HIGH-YIELD BOND FUND -- The fund seeks to provide you with a high level of
current income and secondarily capital appreciation by investing primarily in
lower quality debt securities (rated Ba or BB or below by Moody's Investors
Service, Inc. or Standard & Poor's Corporation), including those of non-U.S.
issuers. The fund may also invest in equity securities that provide an
opportunity for capital appreciation.
BOND FUND -- The fund seeks to maximize your level of current income and
preserve your capital by investing primarily in bonds. The fund is designed for
investors seeking income and more price stability than stocks, and capital
preservation over the long-term.
U.S. GOVERNMENT/AAA-RATED SECURITIES FUND -- The fund seeks to provide you with
a high level of current income, as well as preserve your investment. The fund
invests primarily in securities that are guaranteed by the "full faith and
credit" pledge of the U.S. Government and securities that are rated AAA or Aaa
by Moody's Investors Service, Inc. or Standard & Poor's Corporation or unrated
but determined to be of equivalent quality.
CASH MANAGEMENT FUND -- The fund seeks to provide you an opportunity to earn
income on your cash reserves while preserving the value of your investment and
maintaining liquidity by investing in a diversified selection of high quality
money market instruments.
WHAT CHARGES AND DEDUCTIONS ARE MADE FROM MY POLICY?
We deduct a percent of premium charges from each premium payment. The total
charge is currently 5.75%, 3.25% for sales loads, and 2.50% for taxes. We make
monthly deductions for administrative expenses (currently $7.50 per month) along
with the cost of insurance and any riders that are placed on your policy. We
make daily deductions against the Separate Account for mortality and expense
risks. This charge is currently at an annual rate of .81%, and is guaranteed not
to exceed .90%. See page 10.
Each fund has its own management fee charge, also deducted daily. Each fund's
expense levels will affect its investment results. The table on page 13 shows
your current expense levels for each fund.
Each policy year you may make 12 transfers between subaccounts or the General
Account and the subaccounts. For each transfer a charge of $10 is deducted from
the amount transferred. This charge is currently being waived. See page 13.
The surrender charge is the amount retained by us if the policy is surrendered.
This charge is deducted from policy value upon surrender of the policy or upon a
voluntary reduction in specified amount during the first 8 policy years or
during the 8 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. See page 11.
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You may borrow within the described limits under your policy. If you borrow,
interest will be charged to the loan amount. Currently the interest rate is 6%.
Interest will be credited to the loan amount. Currently the interest credited is
at an annual rate of 5.0%. See page 19.
BUYING VARIABLE LIFE INSURANCE
The policies this prospectus offers are variable life insurance policies which
provide death benefit protection. Investors not needing death benefit protection
should consider other forms of investment, as there are extra costs and expenses
of providing the insurance feature. Further, life insurance purchasers who are
risk-averse or want more predictable premium levels of benefits may be more
comfortable buying more traditional, non-variable life insurance. Variable life
insurance is a flexible tool for financial and investment planning for persons
needing death benefit protection, willing to assume risk, and to monitor
investment choices they have made.
A customer may be able to pay a large single premium, using the policy primarily
as a savings and investment vehicle for potential tax advantages. A parent or
grandparent may find a policy on the life of a child or grandchild a useful
gifting opportunity, or the basis of an investment program for the donee.
Sufficient premiums must always be paid to keep a policy inforce, and there is a
risk of lapse if premiums are too low in relation to the insurance amount and if
investment results are less favorable than anticipated.
Flexibility also results from being able to select, monitor and change
investment choices within a policy. With the wide variety of fund options
available, it is possible to fine tune an investment mix and change it to meet
changing personal objectives or investment conditions. Policy owners should
monitor their investment choices on an ongoing basis.
Variable life insurance has significant tax advantages under current tax law. A
transfer of values from one fund to another within the policy generates no
taxable gain or loss. Investment income and realized capital gains within a fund
are automatically reinvested without being taxed to the policy owners. Policy
values accumulate on a tax-deferred basis. These situations would normally
result in immediate tax liabilities in the case of direct investment in mutual
funds.
The ability of policy owners to access policy values is easily achieved with
variable life insurance. Unless a policy has become a "modified endowment
contract" (see page 28), an owner can borrow policy values tax-free, without
surrender charges, and at very low net interest cost. Policy loans can be a
source of retirement income. By contrast, variable annuity withdrawals are
generally taxable to the extent of accumulated income, may be subject to a
charge deducted from the policy value, a surrender charge (see page 11), and
will result in penalty tax if made before age 59 1/2.
Accumulated policy values may under limited circumstances also be part of the
eventual death benefit payable. If a policy is heavily funded and investment
performance is very favorable, the death benefit may increase because of tax law
requirements that the death benefit be a certain multiple of policy value
depending on the Insured's age (see page 15). The death benefit is income-tax
free and may, with proper estate planning, be estate-tax free.
Certain costs and expenses of variable life insurance ownership which are
directly related to policy values (i.e. asset-based costs) are not unlike those
incurred through investment in mutual funds or variable annuities. Surrender
charges and premium taxes may be applicable to your policy; these charges are
explained in more detail beginning on page 11. The significant additional costs
of variable life insurance is the "cost of insurance" charge which is imposed on
the "amount at risk" (approximately the death benefit, less policy loans and
less policy value). This charge increases with age, and varies by underwriting
classification, smoking status, and in most states by gender. The effect of
these costs and expenses can be seen in illustrations in this prospectus (see
Appendix C).
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LINCOLN LIFE, THE GENERAL ACCOUNT AND THE SEPARATE ACCOUNT
LINCOLN LIFE
Lincoln Life is a stock life insurance company incorporated 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) the
District of Columbia, Guam, and the Commonwealth of the Northern Mariana
Islands.
Lincoln Life is wholly owned by Lincoln National Corp. ("LNC"), a publicly held
insurance 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 its affiliated companies,
collectively Lincoln Financial Group, LNC provides wealth accumulation and
protection products and services including annuities, life insurance, 401(k)
plans, life-health reinsurance, institutional investment management and mutual
funds.
THE GENERAL ACCOUNT
The General Account of Lincoln Life 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 Account is not registered under the
Securities Act of 1933, and the General Account has not been registered as an
investment company under the Investment Company Act of 1940 ("1940 Act").
THE SEPARATE ACCOUNT
We established the separate account on March 9, 1994. Although the assets of the
Separate Account are our property, the laws of Indiana under which the Separate
Account was established provide that the Separate Account assets attributable to
the policies are not chargeable with liabilities arising out of any other
business which we may conduct. 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 it supports. 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 Separate Account has been registered as an investment company under the 1940
Act and meets the definition of "separate account" under Federal Securities
laws. Registration with the Securities and Exchange Commission ("Commission")
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 ten subaccounts. Each subaccount invests
exclusively in shares of one of the funds comprising the American Variable
Insurance Series: the Global Small Capitalization Fund, the Global Growth Fund,
the Growth Fund, the International Fund, the Bond Fund, the Growth-Income Fund,
the Asset Allocation Fund, the High-Yield Bond Fund, the U.S. Government/
AAA-Rated Securities Fund, and the Cash Management Fund.
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 without
regard to the income, gains or losses arising out of any other business we may
conduct. The funds are also invested in by variable annuity
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contract holders. Should we become aware of any material irreconcilable
conflict, either potential or existing, between its variable annuity and
variable life insurance contractowners, we have agreed to notify the Series'
Board of Trustees and to remedy, at our own expense, any such conflict. Each
fund has two classes of shares, designated as class 1 shares and class 2 shares.
Class 1 and class 2 differ in that class 2 (but not class 1) shares are subject
to a 12b-1 plan for the payment by the fund of certain distribution-related
expenses. Only class 1 shares are available under the policy.
There is no assurance that any fund of the American Variable Insurance Series
will achieve its stated investment objective.
FUND PARTICIPATION AGREEMENT
Lincoln Life has entered into agreements with a fund group under which Lincoln
Life makes the funds available under the policies and performs certain
administrative services.
THE INVESTMENT ADVISOR
Capital Research and Management Co. ("CRMC"), an investment management
organization founded in 1931, is the investment advisor to the series and other
mutual funds, including those in The American Funds Group. CRMC is located at
333 South Hope Street, Los Angeles, Calif. 90071 and 135 South State College
Boulevard, Brea, Calif. 92821. Capital Research and Management is registered
with the Commission as an investment advisor.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
Lincoln Life does not control the investment advisor and therefore cannot
guarantee that the American Variable Insurance Series or any particular funds
will be available for investment by the subaccounts. We reserve the right,
subject to compliance with applicable law, to make additions to, deletions from,
or substitutions for the shares that are held by the Separate Account or that
the Separate Account may purchase. We reserve the right to eliminate the shares
of any fund 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 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 Securities and
Exchange Commission, to the extent required by the 1940 Act or other applicable
law. Nothing contained herein shall prevent 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
objective. Lincoln Life may eliminate or establish one or more subaccounts when
marketing needs, tax or investment conditions warrant, and any new subaccounts
may be made available to existing policyowners on a basis to be determined by
Lincoln Life.
In the event of any such substitution or change, Lincoln Life may by appropriate
endorsement make such changes in the policy as may be necessary or appropriate
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 1940 Act, 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.
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THE POLICY
REQUIREMENTS FOR ISSUANCE OF A POLICY
Individuals wishing to purchase a policy must send a completed application to
our administrative mailing address. The minimum specified amount of a policy is
$50,000. A policy will generally be issued only to insureds 80 years of age or
younger (ages 81-85 by exception only) who supply satisfactory evidence of
insurability sufficient to us. Acceptance is subject to our underwriting 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
supplemental application. Approval of the additional insurance will be subject
to evidence 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 valuation
date. Whenever an amount is invested in a subaccount (due to net premium
payments, loan payments, or transfer of values into a subaccount), the amount
purchases units in that subaccount. The number of units you purchase is
determined 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 withdrawal
charges, surrender and surrender charges, transfers of values out of a
subaccount and transfer charges, income tax deductions (if any), cost of
insurance 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
allocated 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
valuation 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 AND ALLOCATION OF PREMIUMS
Subject to certain limitations, you have considerable flexibility in determining
the frequency and amount of premiums. During the first three policy years, the
policy will lapse unless 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 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), 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 includes additional amounts to
cover charges for additional benefits, monthly charges, and extra cost of
insurance
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charges for substandard risks. A table of base minimum premiums per $1,000 of
specified amount is in Appendix A.
You may designate in the application one of several ways to pay the death
benefit guarantee monthly premium. You may elect to pay the first twelve months
of premiums in full prior to commencement of insurance coverage. Alternatively,
you 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 our administrative mailing address.
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. You are not required to pay premiums in accord with this schedule.
Furthermore, you have 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 required 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), the policy
will lapse any time outstanding loans with interest exceed policy 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 reinstatement.)
Subject to the minimum premiums required to keep the policy in force and the
maximum premium limitations established under section 7702 of the Code), you 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
outstanding 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 exceed the
current maximum premium limitations established 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 issue 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, we
will only accept that portion 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. No further premiums will
be accepted until allowed by subsequent maximum premium 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 ("MEC"). A policy will become a MEC if premiums paid into the policy
cause the policy to fail the 7-pay test set forth under Section 7702A of the
Code. We will monitor premiums paid into each policy after the date of this
prospectus to determine when a premium payment will exceed the 7-pay test and
cause the policy to become a MEC. If you have given us instructions that the
policy should not be allowed to become a MEC, 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 you within 7 days of receipt.
If you have not given us instructions to the contrary, however, the premium will
be paid into the policy and a letter of notification of MEC status will be sent
to the owner. The letter of notification will include the available options, if
any, for remedying the MEC status of the policy.
NET PREMIUMS. The net premium equals the premium paid less the percent of
premium charge (see Percent of premium charge).
8
<PAGE>
ALLOCATION OF NET PREMIUMS. In the application for a policy, you can allocate
all or part of the net premiums to the General Account and the various
subaccounts of the Separate Account. Notwithstanding the allocation in the
application, 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
policy date. 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 your 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 your 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 numbers. The allocation of future net premiums may be changed
without charge at any time by providing written notification on a form suitable
to us. You can also make arrangements with us 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. You should
periodically review their allocations of premiums and values in light of market
conditions, interest rates, and overall estate planning requirements.
DOLLAR COST AVERAGING PROGRAM
You may wish to make 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, at least $5,000 is to be
transferred from the General Account to the chosen subaccounts in accord with
the most recent premium allocation. The transfers continue until the end of the
DCA period or until the policy value in the General Account has been exhausted,
whichever occurs sooner. DCA may also be terminated upon written request by the
owner.
DCA 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 us.
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
premium 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. It is stated in the policy specifications, and policy anniversaries are
measured from this date.
For any increase, the effective date will be the first monthly anniversary day
(the same date each month as the policy date) on or next following the day the
application for the increase is approved.
9
<PAGE>
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
Withdrawal 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 our administrative mailing address or to
the registered agent who sold it.
POLICY TERMINATION
All coverage under the policy will terminate when any one of the following
occurs:
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. 3.25% for charges deemed to be sales loads as defined by the Investment
Company Act of 1940. This item is guaranteed not to exceed 3.25%.
b. 2.50% 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 4.50%.
CONTINGENT DEFERRED SALES CHARGE (CDSC). During the first 8 policy years, the
policy value is subject to a contingent deferred sales charge 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) times one-third. (For example, the surrender
charge for a male preferred smoker age 35 is $9.99 per $1,000 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.) Furthermore, upon lapse
or surrender of the policy or voluntary reduction in specified
10
<PAGE>
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 table below.
CONTINGENT DEFERRED ADMINISTRATIVE CHARGE (CDAC). During the first 8 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
voluntary 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 table
of surrender charges (see Appendix B) times two-thirds. (For example, the
surrender charge for a male preferred smoker age 35 is $9.99 per $1,000 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
during the first policy year times the percent indicated in the table below. An
additional CDAC will be imposed under the policy in the event of each requested
increase in specified amount. The additional CDAC is an amount per $1,000 of
increased specified amount and will be deducted upon lapse or the surrender of
the policy or upon a voluntary reduction of the increased specified amount at
any time during the 8 years following such increase. The amount 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>
PERCENT OF CDSC AND
DURING POLICY YEAR CDAC
(OR AFTER AN INCREASE) TO BE DEDUCTED
<S> <C>
- --------------------------------------------------------
2 100%
3 100%
4 100%
5 100%
6 75%
7 50%
8 25%
</TABLE>
When you request an increase in the specified amount, no additional premium is
required provided that the current net cash surrender value is sufficient 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
Appendix B. For surrender charges during policy years 6 through 8 the values
shown in Appendix B should be multiplied by the percentages given in the table
under Charges and deductions above. For increases in the specified amount,
additional surrender charges
11
<PAGE>
apply. During the first 8 years after an increase, the values in Appendix B are
multiplied by two-thirds and times the percentage given in the table above.
MONTHLY DEDUCTIONS. On the policy date and on each monthly anniversary day
following, deductions will be made from the policy value. These deductions are
of two types: A monthly charge and a monthly cost of insurance deduction.
Ordinarily, the monthly deductions are deducted from the policy value in
proportion to the values in the General Account and the subaccounts.
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 value.
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 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, we will determine the
monthly cost of insurance for the following:
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 (age of the
insured on a policy anniversary), 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. For attained ages under
sixteen, these rates are based on the 1980 Commissioner's Standard Ordinary
Mortality Table, age last birthday; or for attained ages sixteen and over,
depending on the smoking status of the insured, these rates are based on the
1980 Commissioner's Standard Ordinary Mortality Table, age last birthday, or the
1980 Commissioner's Standard Ordinary Smoker Mortality Table, age last birthday.
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. We
currently place insureds into a standard rate class or rate classes involving a
higher mortality risk. In an otherwise identical policy, insureds 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, preferred smoker,
and standard smoker. Insureds who are standard nonsmoker or preferred nonsmoker
will generally incur a lower cost of insurance than those insureds who are in
the smoker rate classes. Likewise, insureds who are preferred smoker or
preferred nonsmoker will generally incur a lower cost of insurance 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
applied 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.
12
<PAGE>
MONTHLY CHARGE. A monthly charge of $7.50 is deducted from the policy value each
month the policy is in force to compensate us for continuing administration of
the policy, premium billings, overhead expenses, and other miscellaneous
expenses. We do not anticipate any profits from this charge. This charge is
guaranteed not to increase during the life of the policy.
FUND CHARGES AND EXPENSES. The investment advisor for each of the funds deducts
a daily charge as a percent of the net assets in each fund as an asset
management charge. It is estimated that, in the aggregate, such fees and
expenses for the funds, expressed as an annual percentage of each fund's net
assets, will range from .36% to .83%. These charges and other fund expenses have
the effect of reducing the investment results credited to the subaccounts.
<TABLE>
<CAPTION>
TOTAL ANNUAL
FUND OPERATING TOTAL FUND
EXPENSES WITHOUT TOTAL OPERATING EXPENSES
ASSET MANAGEMENT OTHER WAIVERS OR WAIVERS AND WITH WAIVERS OR
FUND FEE* EXPENSES* REDUCTIONS* REDUCTIONS* REDUCTIONS*
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Small
Capitalization** .79% .04% .83% 0.0 .83%
Global Growth .69% .06% .75% 0.0 .75%
Growth .40% .01% .41% 0.0 .41%
International .57% .09% .66% 0.0 .66%
Growth-Income .35% .01% .36% 0.0 .36%
Asset Allocation .44% .01% .45% 0.0 .45%
High-Yield Bond .49% .02% .51% 0.0 .51%
Bond .52% .02% .54% 0.0 .54%
U. S. Gov't/AAA-Rated .50% .01% .51% 0.0 .51%
Cash Management .45% .01% .46% 0.0 .46%
</TABLE>
*Expressed as an annual percentage of each fund's average daily net assets.
**These expenses are annualized. The fund did not begin operations until April
30, 1998.
See the funds' prospectus for more complete information about the expenses of
the funds.
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 credited
to the subaccounts. The daily rate currently charged is .0022191% (which is
equivalent to an annual rate of .81% of the value of the net assets of the
Separate Account. This deduction may increase or decrease, but is guaranteed not
to exceed .90% in any policy year.
The mortality risk assumed is that insureds may live for a shorter period of
time than estimated and, therefore, death benefits will be payable sooner than
expected. The expense risk assumed is that expenses incurred in issuing and
administering 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
voluntarily 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
withdrawal charge (currently limited voluntarily to 3%, during the first eight
policy years only). The amount, if any, by which the withdrawal charge exceeds
the processing fee first
13
<PAGE>
reduces any remaining CDSC; any further excess next reduces any remaining CDAC;
and any remaining excess will be waived. The withdrawal 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 transfer charge is incurred when the owner requests that funds be
transferred 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 we determine that such taxes may be imposed, we may make
deductions from the policy to pay those taxes. (See Federal tax matters.)
REDUCTION OF CHARGES
The percent of premium charge, surrender charge and monthly charge set forth in
this prospectus may be reduced because of special circumstances that result in
lower sales or administrative expenses. In particular, the percent of premium
charge and surrender charge will not be deducted on policies issued to employees
and registered representatives of any member of the selling group and their
spouses and minor children, or to officers, directors, trustees or bona-fide
full-time employees of LNC or CRMC or their affiliated or managed companies
(based on the owner's status at the time the policy was purchased.) The amounts
of any reductions will reflect the reduced sales effort and administrative
expenses resulting from, or differences in expected death claims as a result of,
the special circumstances. 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 our expenses are reduced 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 current 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 we receive special exemptive relief from
the Commission to honor such exchange requests.
TERM CONVERSION CREDITS
We currently have a term conversion program which gives premium credits 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 companies may be
converted to the policy under this program and receive term conversion credits.
Except for guaranteed term conversion privileges provided under some Lincoln
Life term insurance policies or otherwise provided by special agreement, all
term insurance policy conversions are subject to evidence of insurability
satisfactory to us. 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 discriminatory against any person,
including the affected policyowners and owners of all other policies funded by
the Separate Account.
14
<PAGE>
POLICY BENEFITS
DEATH BENEFIT AND DEATH BENEFIT TYPES
As long as the policy remains in force (see Policy lapse and reinstatement),
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.) 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.) These proceeds will be further increased by any additional
insurance on the insured provided by rider.
The policy offers 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.)
TYPE 1. The death benefit is calculated as 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 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
coverage. As a result, policy values under a Type 1 basic coverage tend to
increase 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.
15
<PAGE>
The specified percentages are shown in the table that follows:
<TABLE>
<CAPTION>
ATTAINED SPECIFIED ATTAINED SPECIFIED ATTAINED SPECIFIED
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
40 OR
YOUNGER 250% 55 150% 70 115%
41 243 56 146 71 113
42 236 57 142 72 111
43 229 58 138 73 109
44 222 59 134 74 107
45 215 60 130 75 105
46 209 61 128 THROUGH
47 203 62 126 90
48 197 63 124 91 104
49 191 64 122 92 103
50 185 65 120 93 102
51 178 66 119 94 101
52 171 67 118 95 OR 100
53 164 68 117 OLDER
54 157 69 116
</TABLE>
EXAMPLES. For both examples, assume that the insured dies at 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 policy
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 result, 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.
16
<PAGE>
The above examples describe scenarios which include favorable investment
performance. 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
We expect 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, 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, we will continue the policy in force for the first three policy
years, provided the death benefit guarantee monthly premium requirement
continues to be met. Lincoln Life makes no charge for this additional benefit.
POLICY CHANGES
CHANGE IN TYPE OF DEATH BENEFIT. You 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 us. The change will be
effective on the first monthly anniversary day on or next following the day we
receive 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, you
may request to increase or decrease the specified amount at any time. The
request for such a change must be from you and in writing on a form suitable to
us. Any decrease will become effective on the first monthly anniversary day on
or next following the day the request is received by us. Any such decrease will
reduce insurance first against insurance provided by the most recent increase,
next against the next most recent increases successively, and finally against
insurance provided under the original application. 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 application. Such increase will be subject
to evidence of insurability satisfactory to us 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 increase 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 varies
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 deductions 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.
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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
governmental 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;
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
governmental income taxes;
The charges and deductions described above are further discussed in Charges and
deductions.
NET INVESTMENT RESULTS. The net investment results are the changes in the unit
values of the subaccounts from the previous valuation day to the current day.
The net investment results are equal to the per unit change in the market value
of each fund's assets, reduced by the per unit share of the
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asset management charge, any miscellaneous expenses incurred by the fund, and
the mortality and expense risk charge for the period, and increased by the per
unit share of any dividends credited to the subaccount by the fund during the
period.
The value of the assets in the funds will be taken at their fair market value in
accordance with accepted accounting practices and applicable laws and
regulations.
TRANSFER BETWEEN SUBACCOUNTS
Any time after the record date, you may request to transfer an amount from one
subaccount to another. The request to transfer funds must be in writing on a
form suitable to us. Transfers may be made by telephone request only if the
owner has previously authorized telephone transfers in writing on a form
suitable to us. We 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, we 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 our administrative mailing address. A transfer charge of $10 is made
for each transfer and is deducted from the amount transferred; however, the
transfer charge is currently being waived for all transfers. The minimum amount
which may be transferred between 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, you may also request to transfer amounts from
the Separate Account to the General Account. 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 six
policy months. There is no minimum transfer amount; however, 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
You may, upon written request, borrow against the policy. You must execute a
written loan agreement with us. 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 request for a loan is received at our administrative mailing address.
Payments may be postponed under certain circumstances. (See Postponement of
payments.)
A loan taken from, or secured by, a policy may have federal income tax
consequences. In particular, adverse tax consequences may occur if the policy
lapses with outstanding loans. (See Federal tax matters.)
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
address 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 Policy
lapse and reinstatement.)
DEDUCTION OF LOAN AND LOAN INTEREST. Ordinarily the amount of any loan or unpaid
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
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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 no less than 4.0%; currently, loaned amounts earn interest
at an annual rate of 5.0%. Any interest not paid when due will be added to the
existing loan amount, and will also be charged interest at the same policy loan
rate.
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 benefit.
LOAN REPAYMENTS. Loan repayments will ordinarily be allocated to the General
Account and the subaccounts in accord with the most recent premium allocation.
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,
you may make a cash withdrawal 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 we have
the current practice of waiving the 20% limitation after the eighth 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 8 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. You should be aware that withdrawals may
result in the owner incurring a tax liability. (See Federal tax matters.)
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 us.
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 required
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 reduction in
the death benefit equal to the specified percentage times the reduction in
policy value. (See Death benefit and death benefit types.) In such cases, where
the death benefit is reduced by an amount greater than the withdrawal, 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 us.
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Ordinarily, withdrawals will be processed within seven days from the date the
request for a withdrawal is received at our administrative mailing address.
Payment of the withdrawal amount may be postponed under certain circumstances.
(See Postponement of payments.)
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 benefit
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), lapse will occur when the
policy value less surrender charges and less outstanding loans is insufficient
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
surrender value, coverage will never be continued beyond the maturity date of
the policy.
A grace period of 61 days will begin on the date we send 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 during
the grace period, regardless of the cause of the grace period, any due and
unpaid monthly deductions will be deducted from the death benefit.
You may reinstate a lapsed policy at any time within five years after the date
of lapse and before the maturity date by submitting evidence of insurability
satisfactory to us and a premium sufficient to keep the policy in force for two
months. The effective date of a reinstatement will be the first monthly
anniversary day on or next following the day the application for reinstatement
is approved.
SURRENDER OF THE POLICY
You may surrender the policy at any time during the lifetime of the insured 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 us. The request will be effective the
date the request is received at our administrative mailing address of Lincoln
Life, or at a later date if you so request. Ordinarily, the surrender will be
processed within seven days from the date the request for surrender is received.
The surrender of the policy may have tax consequences.
PROCEEDS AND PAYMENT OPTIONS
PROCEEDS. The amount payable under the policy on the maturity date (the policy
anniversary following the insured's 99th birthday), on the surrender 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.
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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 us at the
time payment is to be made. Under certain conditions, payment options will only
be available with our consent. 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, our approval is needed before any proceeds
can be applied to a payment option.
You 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
provision.
Any proceeds payable under the policy may also be settled under any other method
of settlement offered by us on the option date. Additional interest as we
determine may be paid or credited from time to time in addition to the payments
guaranteed under a payment option. The payment option elected as well as the
time the election is made, may have tax consequences.
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
supplemental 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 us only if the change is in writing and the
change is made by the President, Vice President, Secretary, or Assistant
Secretary of Lincoln Life.
The policy is nonparticipating; it will not share in our profit or surplus
earnings.
SUICIDE
If the insured commits suicide, while sane or insane, within two years from the
policy date, our total liability 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
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
reinstatement, minus any policy loan, plus any loan interest, minus any prior
withdrawals, and minus the cost of any riders.
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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
statements 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
successor. 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
insured. The owner may transfer all ownership rights and privileges to a new
owner. The request must be in writing on a form suitable to us. The change will
be effective the day that the request is received at our administrative mailing
address. We 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
receive 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 us. We reserve 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. 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 us unless it is in writing
on a form suitable to us and is received at our administrative mailing address.
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
We will maintain all records relating to the Separate Account. We 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 surrender value, the current death
benefit, any current policy loans, any premiums paid, any cost of insurance
charges deducted, and any withdrawals made. The report will also include any
other data that may be required where the contract is delivered. In addition, we
will provide to policyowners semi-annually, or otherwise as may be required by
regulations under the 1940 Act, a report containing information about the
operations of the funds.
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We have entered into an agreement with Delaware Management Company, Inc., and
Delaware Service Company, Inc., 2005 Market Street, Philadelphia, PA 19203,
affiliates of Lincoln Life, to provide accounting services to the Separate
Account.
PROJECTION OF BENEFITS AND VALUES
At the owner's request, we will provide a report to the owner which shows
projected future results. The request must be in writing on a form suitable to
us. The report will be comparable in format to those shown in Appendix C 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 us.
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 postponed 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 restricted
as determined by the Securities and Exchange Commission;
(ii) the Commission by order permits postponement for the protection of
owners; or
(iii) an emergency exists, as determined by the Commission, as a result of
which disposal of securities is not reasonably practical or it is not
reasonably practical 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
owner'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
Insured may be added as an Other Insured on the base plan. Likewise, other
individuals 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
deducted 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 purchase,
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
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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 adoption 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 insurance for this
rider is deducted monthly from the policy value.
ACCIDENTAL DEATH BENEFIT RIDER. This rider is available for the Primary Insured,
and/or those covered under the Term Rider for Covered Insured. The Accidental
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 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 disability has been approved. This rider is
available for ages 5 through 64. The cost of insurance for this rider is
deducted monthly from the policy value.
DISABILITY BENEFIT PAYMENT RIDER. 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. This rider is available for ages 5 through
64. 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
maximum policy specified amounts. The rider provides benefit payments when the
health of the insured is such that covered convalescent care services are
necessary. The cost of insurance for this rider is deducted monthly from the
policy value.
CONTINGENT OPTION RIDER. The Contingent Option Rider is a guaranteed
insurability rider that gives the owner the right to purchase an additional
policy without evidence of insurability upon the death of the designated person
(the Option 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
insurability rider that gives the owner the right to purchase an additional
policy without 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 owner's anticipated retirement date or some other date after which
additional insurance may be needed. Available to issue ages 0 through 70. The
cost of insurance for this rider is based on the retirement option amount and is
deducted monthly from the policy value.
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ACCELERATED BENEFIT ELECTION RIDER. This rider gives the owner the right to
receive a portion of the death benefit 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 advanced accelerated benefits creates
an interest-bearing lien against the death benefit otherwise payable at death.
This rider is available to issue ages 0 through 80. There is no cost of
insurance for this rider, but an administrative expense charge is payable upon
application for benefits.
JOINT LIFE TERM RIDER FOR COVERED INSUREDS. This rider provides term insurance
for two, three, or four individuals and pays the Joint Life Term death benefit
upon the death of the first to die of the Covered Insureds. This rider is
available for issue ages 20 to 80. 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 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. This
rider is available for issue ages 20 to 85 if the average of the ages does not
exceed 80. 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 cannot
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 offers the policy in all jurisdictions where it is licensed to do
business.
Lincoln Life and American Fund Distributors, Inc. (AFD) are the co-principal
underwriters for the policies. Both Lincoln Life and AFD are registered with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 as
broker-dealers and are members of the National Association of Securities Dealers
("NASD"). The principal business address of Lincoln Life is 1300 South Clinton
Street, Fort Wayne, Ind. 46802. The principal business address of AFD is 333
South Hope Street, Los Angeles, Calif. 90071.
The policy will be sold by registered representatives of broker dealers
(including Lincoln Life) who are appointed as Lincoln Life's life insurance
agents. The policy will also be sold by properly appointed representatives of
independent broker-dealers which in turn have selling agreements with AFD and
have been appropriately licensed by state insurance departments as agents of
Lincoln Life. These representatives ordinarily receive commission and service
fees up to 80% of the first year required premium (the death benefit guarantee
monthly premium times 12), plus up to 3.0% of all other
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premiums paid, plus .25% of accumulated policy values in the third policy year
and each year thereafter. The local agency or broker-dealer receives additional
compensation on the first year required premium and all additional premiums,
plus a small percentage of accumulated policy values. In some situations, the
local agency or broker-dealer 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
purport 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 our understanding of the
present federal income tax laws as they are currently interpreted by the
Internal Revenue Service ("IRS"). No representation is made as to the likelihood
of continuation of the present federal income tax laws or of the current
interpretation by the IRS. Federal tax laws may change without notice 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 Code includes 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 of the Treasury
(the Treasury) is authorized to prescribe regulations interpreting 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 mortality (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 provided 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 requirements,
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 standard 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 determined 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, we reserve the right to modify the policy as necessary to qualify
it as a life insurance contract under section 7702.
27
<PAGE>
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation 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 in which it invests, intends to comply with the diversification
requirements prescribed in Treasury Regulations, which affect how each fund's
assets may be invested. Lincoln Life does not have control over the American
Variable Insurance Series or its investments. Nonetheless, Lincoln Life believes
that the funds will be operated in compliance with the requirements prescribed
by the Treasury.
The regulations relating to diversification requirements do not provide guidance
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. As of the date of
this prospectus, the Treasury Department has issued no guidelines on this
subject, although it has indicated informally that guidelines could limit the
number of underlying funds or the frequency of transfers among those funds. Such
guidelines may apply prospectively only, although retroactive effect is possible
if the guidelines are considered not to embody a new position. 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 following discussion assumes that the policy will qualify as a life
insurance 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 policy,
or a surrender may have tax consequences depending upon the circumstances.
Federal estate and generation skipping transfer, and state and local 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
("MEC") under section 7702A.
2. MODIFIED ENDOWMENT CONTRACTS. A policy may be treated as a MEC depending upon
the amount of premiums paid in relation to the death benefit provided under such
policy. In addition, if a policy is "materially changed", it may be treated as a
MEC depending upon such relationship after such change. The premium limitation
and material change rules for determining whether a policy is a MEC are
extremely complex. Moreover, due to the policy's flexibility, classification of
a policy as a MEC will depend upon the circumstances of each policy. A
prospective owner should contact a competent tax advisor before purchasing a
policy to determine the circumstances in which the policy would be a MEC. 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 MEC.
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 MEC. In simplified terms, the 7-pay limitation
is satisfied only if the accumulated premiums paid
28
<PAGE>
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 MEC, 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 MEC status will be sent to the owner. The
letter of notification will include the available options, if any, for remedying
the MEC status of the policy.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Policies classified as Modified Endowment Contracts are subject to
the following tax rules:
1.) 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 at such time.
2.) loans taken from, or secured by, such a policy are treated as
distributions from such a policy and taxed accordingly.
3.) a 10% additional income tax is imposed on the portion of any
distribution from, or loan taken from or secured by, such a policy that
is included 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.
4.) 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 MEC 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 occurs in the
case of a decrease in the specified amount, a change in death benefits 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 MEC are not treated as
distributions. Instead, such loans are treated as indebtedness of the owner.
Upon a complete surrender or lapse of a policy that is not a MEC, 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 MEC 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
29
<PAGE>
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, and policies issued after June 8, 1997,
additional rules apply which may reduce or eliminate any interest deduction. You
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 excluded from the gross
income of the owner (except that the amount of any loan from, or secured by, a
policy that is a MEC, to the extent 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 MEC to the extent that such amount is included in the gross
income of the owner.
7. MULTIPLE POLICIES. All Modified Endowment Contracts that are issued by
Lincoln Life (or its affiliates) to the same owner during any calendar year are
treated as one MEC 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
Benefit 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
longterm 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 earnings
or the realized capital gains attributable to the Separate Account. Based upon
these expectations, no charge is being made currently to the Separate Account
for Federal income taxes which may be attributable to the Separate Account. 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, we will vote shares of the funds held in the
Separate Account at regular and special shareholder meetings of the funds. Votes
will be computed in accordance with instructions received from persons having
voting interests in the Separate Account. If, however, the l940 Act or any
regulation thereunder should be amended or if the present interpretation thereof
should change, and as a result we determine 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.
Fractional 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 established by the various series for determining shareholders eligible
to vote at the meetings of the funds. Voting instructions will be solicited by
written communications prior to such meeting in accordance with procedures
established by the funds. We will vote shares of each fund as to which no timely
instructions are received in proportion to the voting instructions which are
received with respect to all Policies participating in that fund through the
Separate Account. Each person having a voting interest will receive proxy
material, reports and other materials relating to the appropriate portfolio.
30
<PAGE>
DISREGARD OF VOTING INSTRUCTIONS. We may, when required by state insurance
regulatory authorities, disregard voting instructions if the instructions
require that the shares be voted so as to cause a change in the
sub-classification or investment objective of any of the funds or to approve or
disapprove an investment advisory contract for a fund. In addition, we may
disregard voting instructions in favor of changes initiated by a policyowner in
the investment policy or the investment advisor of a fund if we reasonably
disapprove 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
we determine that the change would have an adverse effect on our General Account
in that the proposed investment policy for any fund may result in overly
speculative or unsound investments. In the event we do 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
Indiana, is subject to regulation by the Insurance Department of the State of
Indiana. An annual statement is filed with the Indiana Department of Insurance
("Department") on or before March 1st of each year covering the operations and
reporting on the financial condition of Lincoln Life as of December 31 of the
preceding year. Periodically, the Department examines the liabilities and
reserves of Lincoln Life and the Separate Account and certifies their adequacy,
and a full examination of Lincoln Life's operations is conducted by the
Department at least once every five years.
In addition, we are 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 our directors and employees. The bond, which
was issued by Fidelity and Deposit Co. of Maryland covers up to $25,000,000.
The funds do not issue certificates. Thus, we hold the Separate Account's assets
in an open account in lieu of stock certificates.
LEGAL PROCEEDINGS
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of these proceedings are routine
and in the ordinary course of business. In some instances they include claims
for unspecified or substantial punitive damages and similar types of relief in
addition to amounts for equitable relief. After consultation with legal counsel
and a review of available facts, it is management's opinion that the ultimate
liability, if any, under these suits will not have a material adverse effect on
the financial position of Lincoln Life.
Lincoln Life is presently defending three lawsuits in which Plaintiffs seek to
represent national classes of policyholders in connection with alleged fraud,
breach of contract and other claims relating to the
31
<PAGE>
sale of interest-sensitive universal and participating whole life insurance
policies. As of the date of this prospectus, the courts have not certified a
class in any of the suits. Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. Although the relief sought in
these cases is substantial, the cases are in the preliminary stages of
litigation, and it is premature to make assessments about potential loss, if
any. Management is defending these suits vigorously. The amount of liability, if
any, which may ultimately arise as a result of these suits cannot be reasonably
determined at this time.
The co-principal underwriter, AFD, is not engaged in any material litigation of
any nature.
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 [4/96-present], (formerly Second Vice
Vice President President [1/90-4/96], Lincoln National Life Insurance Co.
- -------------------------------------------------------------------------------------------
ROLAND C. BAKER President [1/95-present], First Penn-Pacific Life Insurance
Vice President and Director Co. Formerly: Chairman and CFO [7/88-1/95], Baker, Ralish,
1801 S. Meyers Road Shipley & Politzer, Inc.
Oakbrook Terrace, Ill. 60181
- -------------------------------------------------------------------------------------------
JON A. BOSCIA President, Chief Executive Officer and Director, Lincoln
Director National Corp. [1/98-present] (Formerly: President and Chief
200 East Berry Street Executive Officer [10/96-1/98]); Chief Operating Officer
Fort Wayne, IN 46802 [5/94-10/96]), Lincoln National Life Insurance Co.,
President [7/91-5/94] Lincoln Investment Management Inc.
- -------------------------------------------------------------------------------------------
JOHN GOTTA Senior Vice President and General Manager (formerly Vice
Senior Vice President President) [1/98-present] Formerly: Senior Vice President,
350 Church Street CIGNA [3/96-12/97]; Vice President, Connecticut Mutual Life
Hartford, CT 06103 Insurance Company [8/94-3/96]; Vice President, CIGNA
[3/93-8/94].
- -------------------------------------------------------------------------------------------
J. MICHAEL HEMP President [11/96-present], Lincoln Financial Advisors Corp.;
Senior Vice President Senior Vice President (formerly Vice President)
350 Church Street [10/95-Present], Lincoln National Life Insurance Co.
Hartford, CT 06103 Formerly: Regional Chief Executive Officer [11/79-10/95],
Lincoln Dallas RMO.
- -------------------------------------------------------------------------------------------
STEPHEN H. LEWIS Senior Vice President, [5/94-present] Lincoln National Life
Senior Vice President Insurance Co. Formerly: President [2/85-5/94], First
Penn-Pacific Life Insurance Co.
- -------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION(S)
WITH APPLICANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- -------------------------------------------------------------------------------------------
<S> <C>
H. THOMAS MCMEEKIN President [5/94-present], Lincoln Investment Management,
Director Inc. Formerly: Executive Vice President [2/92-11/92], Senior
200 East Berry Street Vice President [11/87-2/92]; Executive Vice President
Fort Wayne, Ind. 46802 [5/94-Present], Lincoln National Corporation Formerly:
Senior Vice President [11/92-5/94]
- -------------------------------------------------------------------------------------------
ARTHUR S. ROSS Vice President [8/91-present], Lincoln National Life
Vice President Insurance Co.
- -------------------------------------------------------------------------------------------
LAWRENCE T. ROWLAND Executive Vice President [10/96-present] Formerly: Senior
Executive Vice President and Vice President [1/93-10/96], Lincoln National Life Insurance
Director Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
- -------------------------------------------------------------------------------------------
KEITH J. RYAN Vice President and Controller [4/99-present] Formerly:
Vice President and Controller Senior Vice President [2/98-4/99]; Vice President, Chief
Financial Officer and Assistant Treasurer [1/96-present];
Controller [6/95-12/95], Business Controls Director
[11/90-6/95], Lincoln National Life Insurance Company.
- -------------------------------------------------------------------------------------------
GABRIEL L. SHAHEEN President and Chief Executive Officer [1/98-present]
President, Chief Executive Formerly: Chairman and Managing Director, Lincoln National
Officer and Director (UK) PLC [12/96-1/98]; President, Lincoln National
Reassurance Company [7/95-12/96]; Senior Vice President,
Lincoln National Life Reinsurance Company [1/93-7/95]
- -------------------------------------------------------------------------------------------
TODD R. STEPHENSON Senior Vice President, Chief Financial Officer and Assistant
Senior Vice President, Chief Treasurer [4/99-present] Formerly: Vice President and
Financial Officer and Assistant Secretary [1/98-4/99], Senior Vice President,
Assistant Treasurer Lincoln Financial Advisors Corporation [1/98-4/99], Senior
Vice President, Treasurer and Chief Financial Officer,
American States Insurance Company [2/95-12/97], and Vice
President - Corp. Acct., American States Insurance Company
[5/92-2/95]
- -------------------------------------------------------------------------------------------
RICHARD C. VAUGHAN Executive Vice President and Chief Financial Officer
Director [1/95-present] Formerly: Senior Vice President [6/92-1/95]),
200 East Berry Street Lincoln National Corp.
Fort Wayne, Ind. 46802
- -------------------------------------------------------------------------------------------
MICHAEL R. WALKER Vice President [1/96-present], Lincoln National Life
Vice President Insurance Co. Formerly: Vice President [3/96-1/96],
Employers Health Insurance Co.
- -------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION(S)
WITH APPLICANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- -------------------------------------------------------------------------------------------
<S> <C>
ROY V. WASHINGTON Vice President [7/96-present], Lincoln National Life
Vice President Insurance Co. Formerly: Associate Counsel [2/95-7/96].
Formerly: Director of Compliance [8/94-2/95], Lincoln
Investment Management, Inc.; Compliance Consultant
[8/89-8/94], Lincoln National Corp.
- -------------------------------------------------------------------------------------------
MICHAEL L. WRIGHT Senior Vice President [3/95-present], Lincoln National Life
Senior Vice President Insurance Co. Formerly: Executive Vice President and Chief
Operating Officer [11/88-3/95], The Associate Group.
</TABLE>
*Unless otherwise indicated, the principal business address is 1300 South
Clinton Street, Fort Wayne, Indiana 46801.
EXPERTS
The financial statements of the Separate Account and the statutory-basis
financial statements 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 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 Vaughn W.
Robbins, FSA, as stated in the opinion filed as an exhibit to the registration
statement.
Legal matters in connection with the policies described herein are being passed
upon by Robert A. Picarello, Esq., as stated in the opinion filed as an exhibit
to this Registration Statement.
PREPARING FOR YEAR 2000
Many existing computer programs use only two digits in the date field to
identify the year. If left uncorrected these programs, which were designed and
developed without considering the impact of the upcoming change in the century,
could fail to operate or could produce erroneous results when processing dates
after December 31, 1999. For example, for a bond with a stated maturity date of
July 1, 2000, a computer program could read and store the maturity date as July
1, 1900. This problem is known by many names, such as the "Year 2000 Problem",
"Y2K" and the "Millenium Bug."
The Year 2000 Problem affects virtually all computer programs worldwide. It can
cause a computer system to suddenly stop operating. It can also result in a
computer corrupting vital company records, and the program could go undetected
for a long time. For our products, if left unchecked it could cause such
problems as purchase payment, collection and deposit errors; claim payment
difficulties; accounting errors; erroneous unit values; and difficulties or
delays in processing transfers, surrenders and withdrawals. In a worst case
scenario, this could result in a material disruption to the operations both of
Lincoln Life and of Delaware Service Company Inc. (Delaware), the provider of
the accounting and valuation services for the Separate Account.
However, both companies are wholly owned by Lincoln National Corporation (LNC),
which has had Year 2000 processes in place since 1996. LNC projects aggregate
expenditures in excess of $92 million for its Y2K efforts through the year 2000.
Both Lincoln Life and Delaware have dedicated Year 2000 teams and steering
committees that are answerable to their counterparts in LNC.
34
<PAGE>
In light of the potential problems discussed above, Lincoln Life, as part of its
Year 2000 updating process, has assumed responsibility for correcting all
high-priority Information Technology (IT) systems which service the Separate
Account. Delaware is responsible for updating all its high-priority IT systems
to support these vital services. The Year 2000 effort, for both IT and non-IT
systems, is organized into four phases:
- - awareness-raising and inventory of all assets (including third-party agent and
vendor relationships;
- - assessment and high-level planning and strategy;
- - remediation of affected systems and equipment; and
- - testing to verify Year 2000 readiness.
Both companies are currently on schedule to have their high-priority IT systems
remediated and tested to demonstrate readiness by June 30, 1999. During the
third and fourth quarters of 1999 additional testing of the environment will
continue. Both companies are currently on schedule to have their high-priority
non-IT systems (elevators, heating and ventilation, security systems, etc.)
remediated and tested by October 31, 1999.
The work on Year 2000 issues has not suffered significant delays; however, some
uncertainty remains. Specific factors that give rise to this uncertainty include
(but are certainly not limited to) a possible loss of technical resources to
perform the work; failure to identify all susceptible systems; and
non-compliance by third parties whose systems and operations impact Lincoln
Life. In a report dated February 26, 1999, entitled INVESTIGATING THE IMPACT OF
THE YEAR 2000 TECHNOLOGY PROBLEM, S. Rpt. 106-10, the U.S. Senate Special
Committee on the Year 2000 Technology Problem expressed its concern that
"Financial services firms ... are particularly vulnerable to ... the risk that a
material customer or business partner will fail, as a result of the computer
problems, to meet its obligations."
One important source of uncertainty is the extent to which the key trading
partners of Lincoln Life and of Delaware will be successful in their own
remediation and testing efforts. Lincoln Life and Delaware have been monitoring
the progress of their trading partners; however, the efforts of these partners
are beyond our control.
Lincoln Life and Delaware expect to have completed their necessary remediation
and testing efforts prior to December 31, 1999. However, given the nature and
complexity of the problem, there can be no guarantee by either company that
there will not be significant computer problems after December 31, 1999.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of l933, as amended, with respect to the
policy offered hereby. This prospectus does not contain all the information set
forth in the registration statement and the amendments and exhibits to the
Registration Statement, to all of which reference is made for further
information concerning the Separate Account, Lincoln Life and the policy offered
hereby. 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.
35
<PAGE>
APPENDIX A
BASE MINIMUM PREMIUMS
PER $1,000 OF SPECIFIED AMOUNT*
MALE (OR UNISEX), AGE ON POLICY DATE
PRF NS = Preferred nonsmoker
STD NS = Standard nonsmoker
PRF SM = Preferred smoker
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 16.0 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
specified amount divided by 1000 times the number shown for the age and
classification of the insured, then add $100 per policy and divide the result
by 12. Additional amounts are required for riders and/or substandards.
**This classification is not available below the age of 16.
36
<PAGE>
APPENDIX A CONTINUED
BASE MINIMUM PREMIUMS
PER $1,000 OF SPECIFIED AMOUNT*
FEMALE, AGE ON POLICY DATE
PRF NS = Preferred nonsmoker
STD NS = Standard nonsmoker
PRF SM = Preferred smoker
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
specified amount divided by 1000 times the number shown for the age and
classification of the insured, then add $100 per policy and divide the result
by 12. Additional amounts are required for riders and/or substandards.
**This classification is not available below the age of 16.
37
<PAGE>
APPENDIX B
SURRENDER CHARGES
PER $1,000 OF SPECIFIED AMOUNT
MALE (OR UNISEX), AGE ON POLICY DATE*
PRF NS = Preferred nonsmoker
STD NS = Standard nonsmoker
PRF SM = Preferred smoker
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 ** 3.52 ** **
- ------------------------------------------------------------------------------------------------------------
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 46.79 48.14 48.14
35 8.45 8.60 9.99 10.32 75 46.44 46.44 47.85 47.85
- ------------------------------------------------------------------------------------------------------------
36 8.87 9.04 10.54 10.85 76 46.06 46.06 46.81 46.81
37 9.35 9.50 11.11 11.42 77 45.38 45.38 45.65 45.65
38 9.50 9.99 12.01 12.34 78 44.08 44.08 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>
*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.
38
<PAGE>
APPENDIX B CONTINUED
SURRENDER CHARGES
PER $1,000 OF SPECIFIED AMOUNT
FEMALE, AGE ON POLICY DATE*
PRF NS = Preferred nonsmoker
STD NS = Standard nonsmoker
PRF SM = Preferred smoker
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 42.65
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.
39
<PAGE>
APPENDIX C
ILLUSTRATIONS OF POLICY VALUES
The following tables have been prepared to help show how values under the policy
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 were to be 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 l980 Commissioners Standard Ordinary Smoker and
Nonsmoker tables, and a maximum mortality and expense risk charge of .90% per
year, Lincoln Life expects that it will continue to charge the current percent
of premium 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 to be 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 annual return is indicated. The
gross annual return used in the illustrations is then reduced by the asset
management charge (current average .52%), the mortality and expense risk charge
(.81% current and .90% guaranteed), and other expenses incurred by the funds
including printing, mailing, Directors' fees, etc. (current average .03%) so
that the actual numbers in the illustrations are net of expenses. Thus, a 12%
gross annual return yields a net annual return of 10.64% using current charges,
and 10.55% using guaranteed charges. Similarly, gross annual returns of 6% and
0% yield net annual returns of 4.64% and -1.36% respectively using current
charges and 4.64% and -1.45% respectively using guaranteed charges.
40
<PAGE>
AMERICAN LEGACY VARIABLE LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35
STANDARD NONSMOKER
$100,000 SPECIFIED AMOUNT
$1,325 ANNUAL PREMIUM USING CURRENT CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
------------------------------- ------------------------------- -------------------------------
PREMIUMS ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ------------------------------- ------------------------------- -------------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% 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 $ 1,391 $100,000 $100,000 $100,000 $ 974 $ 1,040 $ 1,106 $ 114 $ 180 $ 246
2 2,852 100,000 100,000 100,000 1,928 2,120 2,321 1,068 1,260 1,461
3 4,386 100,000 100,000 100,000 2,860 3,241 3,653 2,000 2,381 2,793
4 5,996 100,000 100,000 100,000 3,767 4,400 5,114 2,907 3,540 4,254
5 7,688 100,000 100,000 100,000 4,652 5,603 6,719 3,792 4,743 5,859
- --------------------------------------------------------------------------------------------------------------------------
6 9,463 100,000 100,000 100,000 5,511 6,847 8,480 4,866 6,202 7,835
7 11,328 100,000 100,000 100,000 6,343 8,135 10,412 5,913 7,705 9,982
8 13,285 100,000 100,000 100,000 7,149 9,467 12,536 6,934 9,252 12,321
9 15,341 100,000 100,000 100,000 7,927 10,844 14,870 7,927 10,844 14,870
10 17,499 100,000 100,000 100,000 8,676 12,269 17,436 8,676 12,269 17,436
- --------------------------------------------------------------------------------------------------------------------------
15 30,021 100,000 100,000 100,000 11,931 20,118 34,713 11,931 20,118 34,713
20 46,003 100,000 100,000 100,000 14,129 29,236 63,034 14,129 29,236 63,034
25 66,400 100,000 100,000 146,769 14,721 39,646 109,529 14,721 39,646 109,529
30 92,433 100,000 100,000 225,458 13,149 51,762 184,801 13,149 51,762 184,801
</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
future 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 return averaged 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 .52% asset management charge, a .81% current mortality
and expense risk charge and other expenses estimated at .03%. Values illustrated
are also net of any other applicable contract charges.
41
<PAGE>
AMERICAN LEGACY VARIABLE LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35
STANDARD NONSMOKER
$100,000 SPECIFIED AMOUNT
$1,325 ANNUAL PREMIUM USING GUARANTEED CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
------------------------------- ------------------------------- -------------------------------
PREMIUMS ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ------------------------------- ------------------------------- -------------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% 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 $ 1,391 $100,000 $100,000 $100,000 $ 946 $ 1,010 $ 1,074 $ 86 $ 150 $ 214
2 2,852 100,000 100,000 100,000 1,872 2,058 2,253 1,012 1,198 1,393
3 4,386 100,000 100,000 100,000 2,774 3,144 3,545 1,914 2,284 2,685
4 5,996 100,000 100,000 100,000 3,653 4,267 4,960 2,793 3,407 4,100
5 7,688 100,000 100,000 100,000 4,507 5,429 6,512 3,647 4,569 5,652
- ------------------------------------------------------------------------------------------------------------------------
6 9,463 100,000 100,000 100,000 5,335 6,630 8,213 4,690 5,985 7,568
7 11,328 100,000 100,000 100,000 6,137 7,870 10,077 5,707 7,440 9,647
8 13,285 100,000 100,000 100,000 6,912 9,152 12,123 6,697 8,937 11,908
9 15,341 100,000 100,000 100,000 7,658 10,475 14,369 7,658 10,475 14,369
10 17,499 100,000 100,000 100,000 8,375 11,841 16,835 8,375 11,841 16,835
- ------------------------------------------------------------------------------------------------------------------------
15 30,021 100,000 100,000 100,000 11,464 19,329 33,372 11,464 19,329 33,372
20 46,003 100,000 100,000 100,000 13,487 27,929 60,300 13,487 27,929 60,300
25 66,400 100,000 100,000 139,911 13,826 37,537 104,411 13,826 37,537 104,411
30 92,433 100,000 100,000 213,810 11,408 48,054 175,254 11,408 48,054 175,254
</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
future 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 return averaged 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 .52% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .03%. Values
illustrated are also net of any other applicable contract charges.
42
<PAGE>
AMERICAN LEGACY VARIABLE LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35
STANDARD SMOKER
$100,000 SPECIFIED AMOUNT
$1,675 ANNUAL PREMIUM USING CURRENT CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
------------------------------- ------------------------------- -------------------------------
PREMIUMS ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ------------------------------- ------------------------------- -------------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% 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 $ 1,759 $100,000 $100,000 $100,000 $ 1,222 $ 1,305 $ 1,388 $ 190 $ 273 $ 356
2 3,605 100,000 100,000 100,000 2,419 2,661 2,913 1,387 1,629 1,881
3 5,544 100,000 100,000 100,000 3,581 4,060 4,579 2,549 3,028 3,547
4 7,580 100,000 100,000 100,000 4,707 5,503 6,401 3,677 4,471 5,369
5 9,718 100,000 100,000 100,000 5,799 6,994 8,397 4,767 5,962 7,365
- ------------------------------------------------------------------------------------------------------------------------
6 11,963 100,000 100,000 100,000 6,858 8,536 10,587 6,084 7,762 9,813
7 14,320 100,000 100,000 100,000 7,874 10,122 12,982 7,358 9,606 12,466
8 16,794 100,000 100,000 100,000 8,848 11,754 15,607 8,590 11,496 15,349
9 19,393 100,000 100,000 100,000 9,780 13,436 18,489 9,780 13,436 18,489
10 22,121 100,000 100,000 100,000 10,673 15,171 21,657 10,673 15,171 21,657
- ------------------------------------------------------------------------------------------------------------------------
15 37,951 100,000 100,000 100,000 14,345 24,586 42,956 14,345 24,586 42,956
20 58,155 100,000 100,000 122,257 16,338 35,275 77,871 16,338 35,275 77,871
25 83,940 100,000 100,000 179,805 16,219 47,673 134,183 16,219 47,673 134,183
30 116,849 100,000 100,000 274,065 12,997 62,555 224,644 12,997 62,555 224,644
</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
future 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 return averaged 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 .52% asset management charge, a .81% current mortality
and expense risk charge and other expenses estimated at .03%. Values illustrated
are also net of any other applicable contract charges.
43
<PAGE>
AMERICAN LEGACY VARIABLE LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35
STANDARD SMOKER
$100,000 SPECIFIED AMOUNT
$1,675 ANNUAL PREMIUM USING GUARANTEED CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
PREMIUMS ------------------------------- ------------------------------- -------------------------------
ACCUMULATED ASSUMING ASSUMING ASSUMING
END AT 5% HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY PER ------------------------------- ------------------------------- -------------------------------
YEAR YEAR 0% GROSS 6% GROSS 12% 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 $ 1,759 $100,000 $100,000 $100,000 $ 1,168 $ 1,248 $ 1,329 $ 136 $ 216 $ 297
2 3,605 100,000 100,000 100,000 2,304 2,536 2,779 1,272 1,504 1,747
3 5,544 100,000 100,000 100,000 3,402 3,861 4,360 2,370 2,829 3,328
4 7,580 100,000 100,000 100,000 4,462 5,222 6,082 3,430 4,190 5,050
5 9,718 100,000 100,000 100,000 5,480 6,619 7,959 4,448 5,587 6,927
- ------------------------------------------------------------------------------------------------------------------------
6 11,963 100,000 100,000 100,000 6,453 8,049 10,004 5,679 7,275 9,230
7 14,320 100,000 100,000 100,000 7,379 9,512 12,233 6,863 8,996 11,717
8 16,794 100,000 100,000 100,000 8,257 11,007 14,666 7,999 10,749 14,408
9 19,393 100,000 100,000 100,000 9,083 12,534 17,322 9,083 12,534 17,322
10 22,121 100,000 100,000 100,000 9,855 14,091 20,225 9,855 14,091 20,225
- ------------------------------------------------------------------------------------------------------------------------
15 37,951 100,000 100,000 100,000 12,835 22,357 39,574 12,835 22,357 39,574
20 58,155 100,000 100,000 111,761 13,911 31,302 71,186 13,911 31,302 71,186
25 83,940 100,000 100,000 163,367 12,043 40,641 121,916 12,043 40,641 121,916
30 116,849 100,000 100,000 246,793 5,479 50,239 202,289 5,479 50,239 202,289
</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
future 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 return averaged 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 .52% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .03%. Values
illustrated are also net of any other applicable contract charges.
44
<PAGE>
AMERICAN LEGACY VARIABLE LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 55
STANDARD NONSMOKER
$100,000 SPECIFIED AMOUNT
$3,300 ANNUAL PREMIUM USING CURRENT CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
------------------------------- ------------------------------- -------------------------------
PREMIUMS ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ------------------------------- ------------------------------- -------------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% 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 $ 3,465 $100,000 $100,000 $100,000 $ 2,188 $ 2,344 $ 2,501 $ 0 $ 0 $ 0
2 7,103 100,000 100,000 100,000 4,284 4,734 5,203 1,373 1,823 2,292
3 10,923 100,000 100,000 100,000 6,289 7,172 8,131 3,378 4,261 5,220
4 14,935 100,000 100,000 100,000 8,221 9,679 11,328 5,310 6,768 8,417
5 19,146 100,000 100,000 100,000 10,072 12,253 14,823 7,161 9,342 11,912
- ------------------------------------------------------------------------------------------------------------------------
6 23,569 100,000 100,000 100,000 11,825 14,882 18,636 9,642 12,698 16,453
7 28,212 100,000 100,000 100,000 13,485 17,574 22,814 12,029 16,119 21,358
8 33,088 100,000 100,000 100,000 15,044 20,331 27,400 14,316 19,603 26,672
9 38,207 100,000 100,000 100,000 16,496 23,153 32,447 16,496 23,153 32,447
10 43,582 100,000 100,000 100,000 17,836 26,043 38,018 17,836 26,043 38,018
- ------------------------------------------------------------------------------------------------------------------------
15 74,770 100,000 100,000 100,000 22,690 41,780 76,975 22,690 41,780 76,975
20 114,574 100,000 100,000 154,900 23,459 60,673 144,767 23,459 60,673 144,767
25 165,374 100,000 100,000 268,666 16,408 85,628 255,872 16,408 85,628 255,872
30 230,211 0 127,796 455,415 0 121,711 433,729 0 121,711 433,729
</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
future 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 return averaged 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 .52% asset management charge, a .81% current mortality
and expense risk charge and other expenses estimated at .03%. Values illustrated
are also net of any other applicable contract charges.
45
<PAGE>
AMERICAN LEGACY VARIABLE LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 55
STANDARD NONSMOKER
$100,000 SPECIFIED AMOUNT
$3,300 ANNUAL PREMIUM USING GUARANTEED CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
------------------------------- ------------------------------- -------------------------------
PREMIUMS ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ------------------------------- ------------------------------- -------------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% 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 $ 3,465 $100,000 $100,000 $100,000 $ 2,120 $ 2,272 $ 2,425 $ 0 $ 0 $ 0
2 7,103 100,000 100,000 100,000 4,146 4,583 5,040 1,235 1,672 2,129
3 10,923 100,000 100,000 100,000 6,080 6,935 7,864 3,169 4,024 4,953
4 14,935 100,000 100,000 100,000 7,914 9,325 10,924 5,003 6,414 8,013
5 19,146 100,000 100,000 100,000 9,643 11,748 14,235 6,732 8,837 11,324
- ------------------------------------------------------------------------------------------------------------------------
6 23,569 100,000 100,000 100,000 11,258 14,202 17,827 9,075 12,019 15,643
7 28,212 100,000 100,000 100,000 12,754 16,682 21,729 11,298 15,226 20,274
8 33,088 100,000 100,000 100,000 14,114 19,179 25,975 13,386 18,451 25,247
9 38,207 100,000 100,000 100,000 15,326 21,686 30,604 15,326 21,686 30,604
10 43,582 100,000 100,000 100,000 16,378 24,197 35,668 16,378 24,197 35,668
- ------------------------------------------------------------------------------------------------------------------------
15 74,770 100,000 100,000 100,000 18,768 36,728 70,369 18,768 36,728 70,369
20 114,574 100,000 100,000 140,894 13,663 48,639 131,677 13,663 48,639 131,677
25 165,374 0 100,000 243,526 0 58,892 231,930 0 58,892 231,930
30 230,211 0 100,000 408,888 0 67,025 389,417 0 67,025 389,417
</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
future 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 return averaged 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 .52% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .03%. Values
illustrated are also net of any other applicable contract charges.
46
<PAGE>
AMERICAN LEGACY VARIABLE LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 55
STANDARD SMOKER
$100,000 SPECIFIED AMOUNT
$4,300 ANNUAL PREMIUM USING CURRENT CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
------------------------------- ------------------------------- -------------------------------
PREMIUMS ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ------------------------------- ------------------------------- -------------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% 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 $ 4,515 $100,000 $100,000 $100,000 $ 2,647 $ 2,845 $ 3,044 $ 0 $ 0 $ 0
2 9,256 100,000 100,000 100,000 5,192 5,755 6,345 627 1,191 1,780
3 14,234 100,000 100,000 100,000 7,630 8,732 9,931 3,065 4,167 5,366
4 19,460 100,000 100,000 100,000 9,963 11,784 13,845 5,401 7,219 9,280
5 24,948 100,000 100,000 100,000 12,195 14,914 18,128 7,630 10,349 13,563
- ------------------------------------------------------------------------------------------------------------------------
6 30,711 100,000 100,000 100,000 14,312 18,127 22,827 10,888 14,703 19,404
7 36,761 100,000 100,000 100,000 16,322 21,436 28,011 14,040 19,153 25,728
8 43,114 100,000 100,000 100,000 18,203 24,831 33,730 17,062 23,689 32,589
9 49,785 100,000 100,000 100,000 19,950 28,320 40,070 19,950 28,320 40,070
10 56,789 100,000 100,000 100,000 21,549 31,909 47,124 21,549 31,909 47,124
- ------------------------------------------------------------------------------------------------------------------------
15 97,427 100,000 100,000 113,908 27,441 52,234 98,196 27,441 52,234 98,196
20 149,293 100,000 100,000 197,372 29,091 79,583 184,460 29,091 79,583 184,460
25 215,488 100,000 125,419 342,063 23,218 119,447 325,774 23,218 119,447 325,774
30 299,971 100,000 177,008 579,281 3,806 168,579 551,697 3,806 168,579 551,697
</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
future 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 return averaged 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 .52% asset management charge, a .81% current mortality
and expense risk charge and other expenses estimated at .03%. Values illustrated
are also net of any other applicable contract charges.
47
<PAGE>
AMERICAN LEGACY VARIABLE LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 55
STANDARD SMOKER
$100,000 SPECIFIED AMOUNT
$4,300 ANNUAL PREMIUM USING GUARANTEED CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT POLICY VALUE NET CASH SURRENDER VALUE
------------------------------- ------------------------------- -------------------------------
PREMIUMS ASSUMING ASSUMING ASSUMING
END ACCUMULATED HYPOTHETICAL GROSS HYPOTHETICAL GROSS HYPOTHETICAL GROSS
OF AT 5% ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ------------------------------- ------------------------------- -------------------------------
YEAR PER YEAR 0% GROSS 6% GROSS 12% 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 $ 4,515 $100,000 $100,000 $100,000 $ 2,300 $ 2,485 $ 2,670 $ 0 $ 0 $ 0
2 9,256 100,000 100,000 100,000 4,465 4,980 5,519 0 415 954
3 14,234 100,000 100,000 100,000 6,494 7,485 8,569 1,929 2,920 4,004
4 19,460 100,000 100,000 100,000 8,383 10,003 11,848 3,818 5,438 7,283
5 24,948 100,000 100,000 100,000 10,128 12,530 15,385 5,563 7,965 10,820
- ------------------------------------------------------------------------------------------------------------------------
6 30,711 100,000 100,000 100,000 11,717 15,060 19,210 8,293 11,636 15,786
7 36,761 100,000 100,000 100,000 13,133 17,582 23,355 10,851 15,300 21,073
8 43,114 100,000 100,000 100,000 14,356 20,084 27,862 13,215 18,943 26,721
9 49,785 100,000 100,000 100,000 15,365 22,554 32,782 15,365 22,554 32,782
10 56,789 100,000 100,000 100,000 16,141 24,984 38,185 16,141 24,984 38,185
- ------------------------------------------------------------------------------------------------------------------------
15 97,427 100,000 100,000 100,000 15,948 36,548 76,657 15,948 36,548 76,657
20 149,293 100,000 100,000 157,100 5,025 46,554 146,823 5,025 46,554 146,823
25 215,488 0 100,000 273,958 0 52,943 260,913 0 52,943 260,913
30 299,971 0 100,000 60,936 0 51,819 438,987 0 51,819 438,987
</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
future 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 return averaged 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 .52% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .03%. Values
illustrated are also net of any other applicable contract charges.
48
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM
VARIABLE LIFE ACCOUNT J
J-1
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT J
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1998
<TABLE>
<CAPTION>
AVIS AVIS
AVIS CASH HIGH-YIELD
BOND MANAGEMENT BOND
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
ASSETS
Investments at Market --
Unaffiliated (Cost
$14,925,107) $15,770,028 $7,928 $236,845 $723,941
- ------------------------------ ----------- ----------- ----------- -----------
TOTAL ASSETS 15,770,028 7,928 236,845 723,941
- ------------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 344 -- 5 16
- ------------------------------ ----------- ----------- ----------- -----------
NET ASSETS $15,769,684 $7,928 $236,840 $723,925
- ------------------------------ ----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PERCENTAGE OF NET ASSETS 100.00% 0.05% 1.50% 4.59%
- ------------------------------ ----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET ASSETS ARE REPRESENTED BY:
Units in accumulation period 6,505 203,768 540,261
Unit values $1.219 $ 1.162 $ 1.340
- ------------------------------ ----------- ----------- -----------
NET ASSETS $7,928 $236,840 $723,925
- ------------------------------ ----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
J-2
<PAGE>
<TABLE>
<CAPTION>
AVIS
U.S.
GOVERNMENT/ AVIS AVIS
AVIS AVIS AAA-RATED AVIS ASSET GLOBAL
GROWTH-INCOME GROWTH SECURITIES INTERNATIONAL ALLOCATION GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at Market --
Unaffiliated (Cost
$14,925,107) $4,137,396 $ 6,697,622 $103,503 $2,450,183 $ 1,131,273 $114,595
- ------------------------------ -------------- ------------ ------------ -------------- ------------ -----------
TOTAL ASSETS 4,137,396 6,697,622 103,503 2,450,183 1,131,273 114,595
- ------------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 91 146 2 54 25 2
- ------------------------------ -------------- ------------ ------------ -------------- ------------ -----------
NET ASSETS $4,137,305 $ 6,697,476 $103,501 $2,450,129 $ 1,131,248 $114,593
- ------------------------------ -------------- ------------ ------------ -------------- ------------ -----------
-------------- ------------ ------------ -------------- ------------ -----------
PERCENTAGE OF NET ASSETS 26.23% 42.47% 0.66% 15.54% 7.17% 0.73%
- ------------------------------ -------------- ------------ ------------ -------------- ------------ -----------
-------------- ------------ ------------ -------------- ------------ -----------
NET ASSETS ARE REPRESENTED BY:
Units in accumulation period 2,126,223 3,217,899 83,009 1,530,103 656,255 82,907
Unit values $ 1.946 $ 2.081 $ 1.247 $ 1.601 $ 1.724 $ 1.382
- ------------------------------ -------------- ------------ ------------ -------------- ------------ -----------
NET ASSETS $4,137,305 $ 6,697,476 $103,501 $2,450,129 $ 1,131,248 $114,593
- ------------------------------ -------------- ------------ ------------ -------------- ------------ -----------
-------------- ------------ ------------ -------------- ------------ -----------
<CAPTION>
AVIS
GLOBAL
SMALL
CAPITALIZATION
SUBACCOUNT
<S> <C>
- ------------------------------
ASSETS
Investments at Market --
Unaffiliated (Cost
$14,925,107) $166,742
- ------------------------------ ---------------
TOTAL ASSETS 166,742
- ------------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 3
- ------------------------------ ---------------
NET ASSETS $166,739
- ------------------------------ ---------------
---------------
PERCENTAGE OF NET ASSETS 1.06%
- ------------------------------ ---------------
---------------
NET ASSETS ARE REPRESENTED BY:
Units in accumulation period 163,717
Unit values $ 1.018
- ------------------------------ ---------------
NET ASSETS $166,739
- ------------------------------ ---------------
---------------
</TABLE>
J-3
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT J
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
AVIS
AVIS CASH
BOND MANAGEMENT
COMBINED SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- ---------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Net investment income:
- Dividends from investment
income $ 30,673 $103 $ 1,071
- ------------------------------
- Dividends from net
realized gain on
investments 162,703 -- --
- ------------------------------
- Mortality and expense risk
charge (10,978) (13) (143)
- ------------------------------ ---------- ----- -----------
NET INVESTMENT INCOME 182,398 90 928
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 4,134 12 (25)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 34,519 80 (163)
- ------------------------------ ---------- ----- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 38,653 92 (188)
- ------------------------------ ---------- ----- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 221,051 $182 $ 740
- ------------------------------ ---------- ----- -----------
---------- ----- -----------
YEAR ENDED DECEMBER 31, 1997
Net investment income:
- Dividends from investment
income $ 111,424 $255 $ 2,829
- ------------------------------
- Dividends from net
realized gain on
investments 808,228 57 --
- ------------------------------
- Mortality and expense risk
charge (44,707) (33) (382)
- ------------------------------ ---------- ----- -----------
NET INVESTMENT INCOME 874,945 279 2,447
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 78,307 25 (140)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 64,553 66 (295)
- ------------------------------ ---------- ----- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 142,860 91 (435)
- ------------------------------ ---------- ----- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $1,017,805 $370 $ 2,012
- ------------------------------ ---------- ----- -----------
---------- ----- -----------
YEAR ENDED DECEMBER 31, 1998
Net investment income:
- Dividends from investment
income $ 207,754 $405 $ 9,516
- ------------------------------
- Dividends from net
realized gain on
investments 1,607,115 37 0
- ------------------------------
- Mortality and expense risk
charge (95,773) (50) (1,427)
- ------------------------------ ---------- ----- -----------
NET INVESTMENT INCOME 1,719,096 392 8,089
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 79,926 15 599
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 752,810 (191) (1,385)
- ------------------------------ ---------- ----- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 832,736 (176) (786)
- ------------------------------ ---------- ----- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $2,551,832 $216 $ 7,303
- ------------------------------ ---------- ----- -----------
---------- ----- -----------
</TABLE>
See accompanying notes.
J-4
<PAGE>
<TABLE>
<CAPTION>
AVIS
U.S.
AVIS GOVERNMENT/ AVIS
HIGH-YIELD AVIS AVIS AAA-RATED AVIS ASSET
BOND GROWTH-INCOME GROWTH SECURITIES INTERNATIONAL ALLOCATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Net investment income:
- Dividends from investment
income $ 6,867 $ 7,831 $ 4,190 $ 602 $ 3,681 $ 6,328
- ------------------------------
- Dividends from net
realized gain on
investments -- 44,833 85,248 -- 14,791 17,831
- ------------------------------
- Mortality and expense risk
charge (539) (2,515) (5,180) (55) (1,403) (1,130)
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
NET INVESTMENT INCOME 6,328 50,149 84,258 547 17,069 23,029
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 342 2,103 (999) (26) 2,651 76
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 2,422 3,433 18,767 (202) 11,958 (1,776)
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 2,764 5,536 17,768 (228) 14,609 (1,700)
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 9,092 $ 55,685 $ 102,026 $ 319 $ 31,678 $ 21,329
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
----------- -------------- ------------- ------ -------------- -----------
YEAR ENDED DECEMBER 31, 1997
Net investment income:
- Dividends from investment
income $ 26,922 $ 27,752 $ 15,653 $2,147 $ 19,717 $ 16,009
- ------------------------------
- Dividends from net
realized gain on
investments 4,667 197,434 438,839 -- 135,707 31,449
- ------------------------------
- Mortality and expense risk
charge (2,221) (10,450) (20,972) (236) (6,865) (3,468)
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
NET INVESTMENT INCOME 29,368 214,736 433,520 1,911 148,559 43,990
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 606 22,496 49,915 16 2,188 3,216
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (422) 16,107 172,521 600 (149,128) 25,311
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 184 38,603 222,436 616 (146,940) 28,527
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 29,552 $253,339 $ 655,956 $2,527 $ 1,619 $ 72,517
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
----------- -------------- ------------- ------ -------------- -----------
YEAR ENDED DECEMBER 31, 1998
Net investment income:
- Dividends from investment
income $ 56,757 $ 55,502 $ 19,751 $4,376 $ 26,629 $ 33,255
- ------------------------------
- Dividends from net
realized gain on
investments 9,873 578,712 891,774 0 43,223 77,721
- ------------------------------
- Mortality and expense risk
charge (4,997) (24,961) (40,231) (534) (15,494) (7,089)
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
NET INVESTMENT INCOME 61,633 609,253 871,294 3,842 54,358 103,887
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments (4,309) 15,189 53,144 224 4,773 8,564
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (66,575) (121,701) 653,655 838 276,327 (19,654)
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (70,884) (106,512) 706,799 1,062 281,100 (11,090)
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ (9,251) $502,741 $ 1,578,093 $4,904 $ 335,458 $ 92,797
- ------------------------------ ----------- -------------- ------------- ------ -------------- -----------
----------- -------------- ------------- ------ -------------- -----------
<CAPTION>
AVIS
AVIS GLOBAL
GLOBAL SMALL
GROWTH CAPITALIZATION
SUBACCOUNT SUBACCOUNT
<S> <C> <C>
- ------------------------------
YEAR ENDED DECEMBER 31, 1996
Net investment income:
- Dividends from investment
income $ -- $ --
- ------------------------------
- Dividends from net
realized gain on
investments -- --
- ------------------------------
- Mortality and expense risk
charge -- --
- ------------------------------ ----------- -------
NET INVESTMENT INCOME -- --
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments -- --
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments -- --
- ------------------------------ ----------- -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS -- --
- ------------------------------ ----------- -------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ -- $ --
- ------------------------------ ----------- -------
----------- -------
YEAR ENDED DECEMBER 31, 1997
Net investment income:
- Dividends from investment
income $ 140 $ --
- ------------------------------
- Dividends from net
realized gain on
investments 75 --
- ------------------------------
- Mortality and expense risk
charge (80) --
- ------------------------------ ----------- -------
NET INVESTMENT INCOME 135 --
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments (15) --
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (207) --
- ------------------------------ ----------- -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (222) --
- ------------------------------ ----------- -------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ (87) $ --
- ------------------------------ ----------- -------
----------- -------
YEAR ENDED DECEMBER 31, 1998
Net investment income:
- Dividends from investment
income $ 761 $ 802
- ------------------------------
- Dividends from net
realized gain on
investments 3,642 2,133
- ------------------------------
- Mortality and expense risk
charge (533) (457)
- ------------------------------ ----------- -------
NET INVESTMENT INCOME 3,870 2,478
- ------------------------------
Net realized and unrealized
gain (loss) on
investments:
- Net realized gain (loss)
on investments 2,093 (366)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 13,988 17,508
- ------------------------------ ----------- -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 16,081 17,142
- ------------------------------ ----------- -------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $19,951 $19,620
- ------------------------------ ----------- -------
----------- -------
</TABLE>
J-5
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT J
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
AVIS
AVIS CASH
BOND MANAGEMENT
COMBINED SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- ----------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 1996 $ 229,123 $ -- $ 4,979
- ------------------------------
Changes from operations:
- Net investment income 182,398 90 928
- ------------------------------
- Net realized gain (loss)
on investments 4,134 12 (25)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 34,519 80 (163)
- ------------------------------ ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 221,051 182 740
- ------------------------------
Changes from unit
transactions:
- Contract purchases 3,520,791 3,481 35,092
- ------------------------------
- Contract redemptions (1,286,842) (549) (14,084)
- ------------------------------ ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 2,233,949 2,932 21,008
- ------------------------------ ----------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 2,455,000 3,114 21,748
- ------------------------------ ----------- ----------- -----------
NET ASSETS AT DECEMBER 31,
1996 2,684,123 3,114 26,727
Changes from operations:
- Net investment income 874,945 279 2,447
- ------------------------------
- Net realized gain (loss)
on investments 78,307 25 (140)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 64,553 66 (295)
- ------------------------------ ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 1,017,805 370 2,012
- ------------------------------
Change from unit transactions:
- Contract purchases 6,593,071 2,443 63,469
- ------------------------------
- Contract redemptions (1,938,582) (901) (43,305)
- ------------------------------ ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 4,654,489 1,542 20,164
- ------------------------------ ----------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 5,672,294 1,912 22,176
- ------------------------------ ----------- ----------- -----------
NET ASSETS AT DECEMBER 31,
1997 8,356,417 5,026 48,903
- ------------------------------
Changes from operations:
- Net investment income 1,719,096 392 8,089
- ------------------------------
- Net realized gain (loss)
on investments 79,926 15 599
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 752,810 (191) (1,385)
- ------------------------------ ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 2,551,832 216 7,303
- ------------------------------
Change from unit transactions:
- Contract purchases 8,650,016 3,544 941,511
- ------------------------------
- Contract redemptions (3,788,581) (858) (760,877)
- ------------------------------ ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 4,861,435 2,686 180,634
- ------------------------------
TOTAL INCREASE IN NET ASSETS 7,413,267 2,902 187,937
- ------------------------------ ----------- ----------- -----------
NET ASSETS AT DECEMBER 31,
1998 $15,769,684 $7,928 $236,840
- ------------------------------ ----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
J-6
<PAGE>
<TABLE>
<CAPTION>
AVIS
U.S.
AVIS GOVERNMENT/ AVIS
HIGH-YIELD AVIS AVIS AAA-RATED AVIS ASSET
BOND GROWTH-INCOME GROWTH SECURITIES INTERNATIONAL ALLOCATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 1996 $ 13,378 $ 64,112 $ 94,964 $ 2,550 $ 21,577 $ 27,563
- ------------------------------
Changes from operations:
- Net investment income 6,328 20,149 84,258 547 17,069 23,029
- ------------------------------
- Net realized gain (loss)
on investments 342 2,103 (999) (26) 2,651 76
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 2,422 3,433 18,767 (202) 11,958 (1,776)
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 9,092 55,685 102,026 319 31,678 21,329
- ------------------------------
Changes from unit
transactions:
- Contract purchases 162,540 726,276 1,785,703 18,085 513,755 275,859
- ------------------------------
- Contract redemptions (46,625) (215,910) (773,023) (7,926) (184,304) (44,421)
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 115,915 510,366 1,012,680 10,159 329,451 231,438
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
TOTAL INCREASE IN NET ASSETS 125,007 566,051 1,114,706 10,478 361,129 252,767
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
NET ASSETS AT DECEMBER 31,
1996 138,385 630,163 1,209,670 13,028 382,706 280,330
Changes from operations:
- Net investment income 29,368 214,736 433,520 1,911 148,559 43,990
- ------------------------------
- Net realized gain (loss)
on investments 606 22,496 49,915 16 2,188 3,216
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (422) 16,107 172,521 600 (149,128) 25,311
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 29,552 253,339 655,956 2,527 1,619 72,517
- ------------------------------
Change from unit transactions:
- Contract purchases 357,911 1,844,806 2,723,358 35,983 1,174,128 349,556
- ------------------------------
- Contract redemptions (72,063) (608,080) (881,665) (12,139) (207,458) (110,648)
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 285,848 1,236,726 1,841,693 23,844 966,670 238,908
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
TOTAL INCREASE IN NET ASSETS 315,400 1,490,065 2,497,649 26,371 968,289 311,425
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
NET ASSETS AT DECEMBER 31,
1997 453,785 2,120,228 3,707,319 39,399 1,350,995 591,755
- ------------------------------
Changes from operations:
- Net investment income 61,633 609,253 871,294 3,842 54,358 103,887
- ------------------------------
- Net realized gain (loss)
on investments (4,309) 15,189 53,144 224 4,773 8,564
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (66,575) (121,701) 653,655 838 276,327 (19,654)
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS (9,251) 502,741 1,578,093 4,904 335,458 92,797
- ------------------------------
Change from unit transactions:
- Contract purchases 499,259 2,404,044 2,476,671 81,214 1,285,142 703,474
- ------------------------------
- Contract redemptions (219,868) (889,708) (1,064,607) (22,016) (521,466) (256,778)
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 279,391 1,514,336 1,412,064 59,198 763,676 446,696
- ------------------------------
TOTAL INCREASE IN NET ASSETS 270,140 2,017,077 2,990,157 64,102 1,099,134 539,493
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
NET ASSETS AT DECEMBER 31,
1998 $723,925 $4,137,305 $ 6,697,476 $103,501 $2,450,129 $ 1,131,248
- ------------------------------ ----------- -------------- ------------ ------------ -------------- ------------
----------- -------------- ------------ ------------ -------------- ------------
<CAPTION>
AVIS
AVIS GLOBAL
GLOBAL SMALL
GROWTH CAPITALIZATION
SUBACCOUNT SUBACCOUNT
<S> <C> <C>
- ------------------------------
NET ASSETS AT JANUARY 1, 1996 $ -- $ --
- ------------------------------
Changes from operations:
- Net investment income -- --
- ------------------------------
- Net realized gain (loss)
on investments -- --
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments --
- ------------------------------ ----------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS -- --
- ------------------------------
Changes from unit
transactions:
- Contract purchases -- --
- ------------------------------
- Contract redemptions -- --
- ------------------------------ ----------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS -- --
- ------------------------------ ----------- ---------------
TOTAL INCREASE IN NET ASSETS -- --
- ------------------------------ ----------- ---------------
NET ASSETS AT DECEMBER 31,
1996 -- --
Changes from operations:
- Net investment income 135 --
- ------------------------------
- Net realized gain (loss)
on investments (15) --
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (207) --
- ------------------------------ ----------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS (87) --
- ------------------------------
Change from unit transactions:
- Contract purchases 41,417 --
- ------------------------------
- Contract redemptions (2,323) --
- ------------------------------ ----------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 39,094 --
- ------------------------------ ----------- ---------------
TOTAL INCREASE IN NET ASSETS 39,007 --
- ------------------------------ ----------- ---------------
NET ASSETS AT DECEMBER 31,
1997 39,007 --
- ------------------------------
Changes from operations:
- Net investment income 3,870 2,478
- ------------------------------
- Net realized gain (loss)
on investments 2,093 (366)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 13,988 17,508
- ------------------------------ ----------- ---------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 19,951 19,620
- ------------------------------
Change from unit transactions:
- Contract purchases 101,146 154,011
- ------------------------------
- Contract redemptions (45,511) (6,892)
- ------------------------------ ----------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 55,635 147,119
- ------------------------------
TOTAL INCREASE IN NET ASSETS 75,586 166,739
- ------------------------------ ----------- ---------------
NET ASSETS AT DECEMBER 31,
1998 $114,593 $166,739
- ------------------------------ ----------- ---------------
----------- ---------------
</TABLE>
J-7
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT J
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ACCOUNTING POLICIES & ACCOUNT INFORMATION
THE SEPARATE ACCOUNT: Lincoln Life Flexible Premium Variable Life Account J
(Separate Account) was established as a segregated investment account of The
Lincoln National Life Insurance Company (Lincoln Life) on March 9, 1994. The
Separate Account was registered with the Securities and Exchange Commission on
May 2, 1994, under the Investment Company Act of 1940, as amended, as a unit
investment trust, and commenced investment activity on June 21, 1995.
The assets of the Separate Account are owned by Lincoln Life. The portion of the
Separate Account's assets supporting the variable life policies may not be used
to satisfy liabilities arising out of any other business of Lincoln Life.
BASIS OF PRESENTATION: The accompanying financial statements have been prepared
in accordance with generally accepted accounting principles for unit investment
trusts.
INVESTMENTS: The Separate Account invests in the American Variable Insurance
Series (AVIS) which consists of ten funds: Bond Fund, Cash Management Fund,
High-Yield Bond Fund, Growth-Income Fund, Growth Fund, U.S. Government/AAA-Rated
Securities Fund, International Fund, Asset Allocation Fund, Global Growth Fund
and Global Small Capitalization (Funds). AVIS is registered as an open-ended
investment management company. Investments in the Funds are stated at the
closing net asset value per share on December 31, 1998, which approximates fair
value. The difference between cost and fair value is reflected as unrealized
appreciation and depreciation of investments.
Investment transactions are accounted for on a trade-date basis. The cost of
investments sold is determined by the average-cost method.
DIVIDENDS: Dividends paid to the Separate Account are automatically reinvested
in shares of the Funds on the payable date. Dividend income is recorded on the
ex-dividend date.
FEDERAL INCOME TAXES: Operations of the Separate Account form a part of and are
taxed with operations of Lincoln Life, which is taxed as a "life insurance
company" under the Internal Revenue Code. The Separate Account will not be taxed
as a regulated investment company under Subchapter M of the Internal Revenue
Code. Under current federal income tax 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 & OTHER TRANSACTIONS WITH AFFILIATES
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 5.75%
of each premium payment to cover state taxes and federal income tax liabilities.
Amounts retained during 1998, 1997 and 1996 by Lincoln Life for such charges
were $158,245, $193,178 and $22,989, respectively.
SEPARATE ACCOUNT CHARGES: Amounts are charged daily to the Separate Account by
Lincoln Life for a mortality and expense risk charge at a current annual rate of
.81% of the average daily net asset value of the Separate Account. These charges
are made in return for Lincoln Life's assumption of risks associated with
adverse mortality experience or excess administrative expenses in connection
with policies issued.
OTHER CHARGES: Other charges, which are paid to Lincoln Life by redeeming
Separate Account units, are for monthly administrative charges, the cost of
insurance, transfer and withdrawal charges, and contingent surrender charges.
These other charges for 1998, 1997 and 1996 amounted to $1,148,399, $600,215 and
$253,445, respectively.
The monthly administrative charge amounts to $7.50 for each policy in force and
is intended to compensate Lincoln Life for continuing administration of the
policies, premium billings, overhead expenses, and other miscellaneous expenses.
J-8
<PAGE>
Lincoln Life assumes the responsibility for providing the insurance benefits
included 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
insurance 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 described in the Separate Account's prospectus.
A transfer charge of $10 is incurred each time a policyowner transfers funds
from one account to another; however, the transfer charge is currently being
waived for all transfers. A withdrawal charge is incurred which is equal to 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
eight policy years. Surrender charges in the first five years are approximately
132% of the required base minimum annual premium. Surrender charges in years six
through eight decrease by policy year to 0% in the ninth year. Surrender charges
are assessed separately on the initial specified policy amount and subsequent
increases to the specified policy amount. The amount of the surrender charge
assessed on increases to the specified policy amount would be equal to the
surrender charge that would apply to a new policy.
J-9
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NET ASSETS
The following is a summary of net assets owned at December 31, 1998.
<TABLE>
<CAPTION>
AVIS AVIS
AVIS CASH HIGH-YIELD
BOND MANAGEMENT BOND
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Unit transactions $11,973,717 $7,160 $226,702 $694,144
- ---------------------------------------
Accumulated net investment income 2,788,508 761 11,601 97,725
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 162,538 52 433 (3,357)
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 844,921 (45) (1,896) (64,587)
- --------------------------------------- ----------- ----------- ----------- -----------
$15,769,684 $7,928 $236,840 $723,925
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
J-10
<PAGE>
<TABLE>
<CAPTION>
AVIS
U.S.
GOVERNMENT/ AVIS AVIS
AVIS AVIS AAA-RATED AVIS ASSET GLOBAL
GROWTH-INCOME GROWTH SECURITIES INTERNATIONAL ALLOCATION GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Unit transactions $3,323,316 $ 4,360,539 $ 95,635 $2,081,010 $ 943,363 $ 94,729
- ---------------------------------------
Accumulated net investment income 876,960 1,395,993 6,408 220,494 172,083 4,005
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 39,883 102,041 214 9,622 11,938 2,078
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments (102,854) 838,903 1,244 139,003 3,864 13,781
- --------------------------------------- -------------- ------------ ------------ -------------- ------------ -----------
$4,137,305 $ 6,697,476 $103,501 $2,450,129 $ 1,131,248 $114,593
-------------- ------------ ------------ -------------- ------------ -----------
-------------- ------------ ------------ -------------- ------------ -----------
<CAPTION>
AVIS
GLOBAL
SMALL
CAPITALIZATION
SUBACCOUNT
<S> <C>
- ---------------------------------------
Unit transactions $147,119
- ---------------------------------------
Accumulated net investment income 2,478
- ---------------------------------------
Accumulated net realized gain (loss) on
investments (366)
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 17,508
- --------------------------------------- ---------------
$166,739
---------------
---------------
</TABLE>
J-11
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1998.
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
COST OF PROCEEDS
PURCHASES FROM SALES
<S> <C> <C>
- ---------------------------------------------------------------
AVIS Bond Fund $ 3,799 $ 721
- ---------------------------------------
AVIS Cash Management Fund 900,361 711,634
- ---------------------------------------
AVIS High-Yield Bond Fund 493,638 152,608
- ---------------------------------------
AVIS Growth-Income Fund 2,430,832 307,199
- ---------------------------------------
AVIS Growth Fund 2,647,542 364,120
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 78,127 15,086
- ---------------------------------------
AVIS International Fund 1,036,101 218,043
- ---------------------------------------
AVIS Asset Allocation Fund 683,073 132,478
- ---------------------------------------
AVIS Global Growth Fund 91,243 31,737
- ---------------------------------------
AVIS Global Small Capitalization Fund 154,647 5,047
- ---------------------------------------
---------- ----------
$8,519,363 $1,938,673
---------- ----------
---------- ----------
</TABLE>
5. INVESTMENTS
The following is a summary of investments owned at December 31, 1998.
<TABLE>
<CAPTION>
NET
SHARES ASSET VALUE OF COST OF
OUTSTANDING VALUE SHARES SHARES
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
AVIS Bond Fund 780 $ 10.17 $ 7,928 $ 7,973
- ---------------------------------------
AVIS Cash Management Fund 21,492 11.02 236,845 238,741
- ---------------------------------------
AVIS High-Yield Bond Fund 54,432 13.30 723,941 788,528
- ---------------------------------------
AVIS Growth-Income Fund 114,009 36.29 4,137,396 4,240,250
- ---------------------------------------
AVIS Growth Fund 127,744 52.43 6,697,622 5,858,719
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 9,151 11.31 103,503 102,259
- ---------------------------------------
AVIS International Fund 143,959 17.02 2,450,183 2,311,180
- ---------------------------------------
AVIS Asset Allocation Fund 72,657 15.57 1,131,273 1,127,409
- ---------------------------------------
AVIS Global Growth Fund 8,603 13.32 114,595 100,814
- ---------------------------------------
AVIS Global Small Capitalization Fund 16,624 10.03 166,742 149,234
------------- -------------
$ 15,770,028 $ 14,925,107
------------- -------------
------------- -------------
</TABLE>
J-12
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NEW INVESTMENT FUNDS
Effective April 25, 1997, the AVIS Global Growth Fund became available as an
investment option for Separate Account contract owners. Effective May 1, 1998,
the AVIS Global Small Capitalization Fund became available as an investment
option for Separate Account contract owners.
7. DAILY VALUATION CALCULATIONS
Effective October 1996, the daily unit value calculation process was transferred
from Lincoln Life to the Delaware Group, an affiliate of Lincoln Life. Costs
associated with the calculation of the unit value are paid by Lincoln Life.
J-13
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors of The Lincoln National Life Insurance Company
and
Contract Owners of Lincoln Life Flexible Premium Variable Life
Account J
We have audited the accompanying statement of assets and liability
of Lincoln Life Flexible Premium Variable Life Account J ("Variable
Account") (comprised of the AVIS Bond, AVIS Cash Management, AVIS
High-Yield Bond, AVIS Growth-Income, AVIS Growth, AVIS US
Government/AAA-Rated Securities, AVIS International, AVIS Asset
Allocation, AVIS Global Growth, and AVIS Global Small
Capitalization subaccounts), as of December 31, 1998, and the
related statements of operations and changes in net assets for each
of the three years in the period then ended. These financial
statements are the responsibility of the Variable 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
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of investments owned as of December 31, 1998,
by correspondence with the custodian. An audit also includes
assessing 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 referred to above present
fairly, in all material respects, the financial position of each of
the respective subaccounts constituting the Lincoln Life Flexible
Premium Variable Life Account J at December 31, 1998, and the
results of their operations and changes in their net assets for
each of the three years in the period then ended in conformity with
generally accepted accounting principles.
Fort Wayne, Indiana
March 30, 1999
J-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $23,830.9 $18,560.7
- ------------------------------------------------------------------------------------
Preferred stocks 236.0 257.3
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 259.3 436.0
- ------------------------------------------------------------------------------------
Affiliated common stocks 322.1 412.1
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,932.9 3,012.7
- ------------------------------------------------------------------------------------
Real estate 473.8 584.4
- ------------------------------------------------------------------------------------
Policy loans 1,606.0 660.5
- ------------------------------------------------------------------------------------
Other investments 434.4 335.5
- ------------------------------------------------------------------------------------
Cash and short-term investments 1,725.4 2,133.0
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 32,820.8 26,392.2
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 33.3 42.4
- ------------------------------------------------------------------------------------
Accrued investment income 432.8 343.5
- ------------------------------------------------------------------------------------
Reinsurance recoverable 171.6 71.1
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 53.7 44.1
- ------------------------------------------------------------------------------------
Federal income taxes recoverable from parent company 64.7 6.9
- ------------------------------------------------------------------------------------
Goodwill 49.5 52.4
- ------------------------------------------------------------------------------------
Other admitted assets 89.3 85.6
- ------------------------------------------------------------------------------------
Separate account assets 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,310.6 $ 5,872.9
- ------------------------------------------------------------------------------------
Other policyholder funds 16,647.5 16,360.1
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 897.6 878.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 795.8 720.4
- ------------------------------------------------------------------------------------
Asset valuation reserve 484.5 450.0
- ------------------------------------------------------------------------------------
Interest maintenance reserve 159.7 135.4
- ------------------------------------------------------------------------------------
Other liabilities 504.5 294.7
- ------------------------------------------------------------------------------------
Short-term loan payable to parent company 140.0 120.0
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (789.0) (761.9)
- ------------------------------------------------------------------------------------
Separate account liabilities 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 68,058.2 55,400.7
- ------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 --
- ------------------------------------------------------------------------------------
Paid-in surplus 1,930.1 1,821.8
- ------------------------------------------------------------------------------------
Unassigned surplus (deficit) (640.6) 1,121.6
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,564.5 2,968.4
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $12,737.6 $ 5,589.0 $ 7,268.5
- ----------------------------------------------------------------------------
Net investment income 2,107.2 1,847.1 1,756.3
- ----------------------------------------------------------------------------
Amortization of interest maintenance reserve 26.4 41.5 27.2
- ----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 179.9 99.7 90.9
- ----------------------------------------------------------------------------
Expense charges on deposit funds 134.6 119.3 100.7
- ----------------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- ----------------------------------------------------------------------------
Other income 31.3 21.3 16.8
- ---------------------------------------------------------------------------- --------- --------- ---------
Total revenues 15,613.3 8,043.4 9,505.0
- ----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 13,964.1 4,522.1 5,989.9
- ----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,919.4 3,053.9 3,123.1
- ---------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 16,883.5 7,576.0 9,113.0
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before dividends to policyholders, income taxes
and net realized gain on investments (1,270.2) 467.4 392.0
- ----------------------------------------------------------------------------
Dividends to policyholders 67.9 27.5 27.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before federal income taxes and net realized
gain on investments (1,338.1) 439.9 364.7
- ----------------------------------------------------------------------------
Federal income taxes (credit) (141.0) 78.3 83.6
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before net realized gain on investments (1,197.1) 361.6 281.1
- ----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding
net transfers to the interest maintenance reserve 46.8 31.3 53.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Net income (loss) $(1,150.3) $ 392.9 $ 334.4
- ---------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- -----------------------------------------------------------------------------
Correction of prior year's asset valuation reserve -- (37.6) --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets -- (57.0) --
- ----------------------------------------------------------------------------- --------- --------- ---------
2,968.4 1,868.0 1,732.9
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) (1,150.3) 392.9 334.4
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (304.8) (36.2) 38.6
- -----------------------------------------------------------------------------
Nonadmitted assets (17.1) (0.4) (3.0)
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (35.2) (3.9) 0.6
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.4) (0.9) (0.4)
- -----------------------------------------------------------------------------
Asset valuation reserve (34.5) (36.9) (105.5)
- -----------------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 108.4 938.4 100.0
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation -- (2.6) --
- -----------------------------------------------------------------------------
Dividends to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,564.5 $ 2,968.4 $ 1,962.6
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 13,495.2 $ 6,364.3 $ 8,059.4
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (632.4) (649.2) (767.5)
- -----------------------------------------------------------------------
Investment income received 2,003.9 1,798.8 1,700.6
- -----------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- -----------------------------------------------------------------------
Benefits paid (7,395.8) (5,345.2) (4,050.4)
- -----------------------------------------------------------------------
Insurance expenses paid (2,909.7) (3,193.0) (3,216.8)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) 84.2 (87.0) (72.3)
- -----------------------------------------------------------------------
Dividends to policyholders (12.9) (28.4) (27.7)
- -----------------------------------------------------------------------
Other income received and expenses paid, net 207.0 (8.7) 117.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities 5,235.8 (822.9) 1,986.9
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 10,926.5 12,142.6 12,542.0
- -----------------------------------------------------------------------
Purchase of investments (16,950.0) (10,345.0) (14,175.4)
- -----------------------------------------------------------------------
Other sources (uses) including reinsured policy loans (778.3) 529.1 (377.2)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities (6,801.8) 2,326.7 (2,010.6)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 108.4 -- 100.0
- -----------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 140.0 120.0 100.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (120.0) (100.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 1,158.4 (130.0) 2.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (407.6) 1,373.8 (21.7)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 2,133.0 759.2 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 1,725.4 $ 2,133.0 $ 759.2
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE 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
Indiana. As of December 31, 1998, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Insurance Department"), which practices differ from generally
accepted accounting principles ("GAAP"). The more significant variances from
GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair 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 directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. 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 general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period in which 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
consolidated 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 and presented
in the balance sheet as affiliated common stocks.
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
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
period of the related policies using assumptions consistent with those used
in computing policy benefit reserves. For universal life insurance, annuity
and other investment-type products, deferred policy acquisition costs, to
the extent recoverable from future gross profits, 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
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to 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.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest 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 accompanying statements 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
authorized by the Insurance Department 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 established 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. Business
assumed under 100% indemnity and assumption reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of
the transaction and the excess of the purchase price over the sum of the
amounts assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
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.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner whereas under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1998 1997 1998 1997 1996
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,564.5 $ 2,968.4 $(1,150.3) $ 392.9 $ 334.4
- -------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
goodwill 3,085.2 958.3 48.5 (98.9) 66.7
----------------------------------------
Policy and contract reserves (2,299.9) (1,672.9) 1,743.4 (48.6) (57.1)
----------------------------------------
Interest maintenance reserve 159.7 135.4 24.4 58.7 (39.7)
----------------------------------------
Deferred income taxes 181.6 (13.0) (218.6) 70.3 1.8
----------------------------------------
Policyholders' share of earnings and
surplus on participating business (132.8) (79.8) 3.2 5.3 (.3)
----------------------------------------
Asset valuation reserve 484.5 450.0 -- -- --
----------------------------------------
Net realized gain (loss) on investments (174.1) (91.5) (116.7) (20.4) 78.7
----------------------------------------
Unrealized gain on investments 1,335.1 1,245.5 -- -- --
----------------------------------------
Nonadmitted assets, including nonadmitted
investments 119.1 61.0 -- -- --
----------------------------------------
Investments in subsidiary companies 490.4 188.8 41.3 (80.5) 29.9
----------------------------------------
Surplus notes and related interest (1,251.5) -- (1.5) -- --
----------------------------------------
Other, net (120.1) (162.5) 103.6 (35.0) (82.6)
---------------------------------------- --------- --------- --------- --------- ---------
Net increase (decrease) 1,877.2 1,019.3 1,627.6 (149.1) (2.6)
- ------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 4,441.7 $ 3,987.7 $ 477.3 $ 243.8 $ 331.8
- ------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
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 actual 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.
Unaffiliated common stocks are reported at fair 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
liability-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 underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between 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 or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the repurchase price. It is the Company's
policy to take possession of securities with a market value at least equal
to the securities loaned. Securities loaned are recorded at amortized cost
as long as the value of the related collateral is sufficient. The Company's
agreements with third parties generally contain contractual provisions to
allow for additional collateral to be obtained when necessary. The Company
values collateral daily and obtains additional collateral when deemed
appropriate.
GOODWILL
Goodwill, which represents the excess, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily 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
Insurance Department. 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 scenerios indicate the need for such
reserves. 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
using 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.
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 continually reviewed and adjusted as necessary as experience
develops or new information becomes known; such adjustments are included in
current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums, benefits and claims and claim adjustment expenses are
accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts. Certain
business is transacted on a funds withheld basis and investment income on
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
systematically 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 and certain LNC subsidiaries.
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 extent 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
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
unassigned surplus or net income previously reported.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
ACCOUNTING PRACTICES AND PROCEDURES MANUAL and a variety of other NAIC
publications. "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification 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. Codification will require adoption by the various
states before it becomes the prescribed statutory-basis of accounting for
insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, the state of Indiana must
adopt Codification as the prescribed basis of accounting on which domestic
insurers must report their statutory-basis results to the Insurance
Department. At this time, it is anticipated that Indiana will adopt
Codification, however, based on current guidance, management believes that
the impact of Codification will not be material to the Company's
statutory-basis financial statements.
The Company has received written approval from the Insurance Department to
record surrender charges applicable to separate account liabilities for
variable life and annuity products as a liability in the separate account
financial statements payable to the Company's general account. In the
accompanying 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.
S-10
<PAGE>
THE 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
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,714.3 $ 1,524.4 $ 1,442.2
----------------------------------------------------------------
Preferred stocks 19.7 23.5 9.6
----------------------------------------------------------------
Unaffiliated common stocks 10.6 8.3 6.5
----------------------------------------------------------------
Affiliated common stocks 5.2 15.0 9.5
----------------------------------------------------------------
Mortgage loans on real estate 323.6 257.2 269.3
----------------------------------------------------------------
Real estate 81.4 92.2 114.4
----------------------------------------------------------------
Policy loans 86.5 37.5 35.0
----------------------------------------------------------------
Other investments 26.5 28.2 22.4
----------------------------------------------------------------
Cash and short-term investments 104.7 70.3 48.9
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,372.5 2,056.6 1,957.8
- -------------------------------------------------------------------
Expenses:
Depreciation 19.3 21.0 25.0
----------------------------------------------------------------
Other 246.0 188.5 176.5
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 265.3 209.5 201.5
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 2,107.2 $ 1,847.1 $ 1,756.3
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
amounted to $2,600,000, consisting principally of interest
on bonds in default and mortgage loans. No accrued
investment income was nonadmitted at December 31, 1998.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized 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, 1998:
Corporate $17,658.4 $ 1,159.8 $ 148.2 $18,670.0
------------------------------------------------
U.S. government 900.7 88.8 3.4 986.1
------------------------------------------------
Foreign government 947.8 59.9 61.2 946.5
------------------------------------------------
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
------------------------------------------------
State and municipal 11.9 .7 -- 12.6
------------------------------------------------ --------- ----------- ----------- ---------
$23,830.9 $ 1,480.8 $ 246.2 $25,065.5
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1998 and 1997 reflects adjustments of
$11,800,000 and $5,500,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as low or lower quality.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1998, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1999 $ 705.6 $ 712.6
--------------------------------------------------------------------------
In 2000-2003 4,041.9 4,142.8
--------------------------------------------------------------------------
In 2004-2008 6,652.0 6,860.1
--------------------------------------------------------------------------
After 2008 8,119.3 8,899.7
--------------------------------------------------------------------------
Mortgage-backed securities 4,312.1 4,450.3
-------------------------------------------------------------------------- --------- ---------
Total $23,830.9 $25,065.5
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investments in bonds during 1998,
1997 and 1996 were $9,395,000,000, $9,715,000,000 and
$10,996,900,000, respectively. Gross gains during 1998, 1997
and 1996 of $186,300,000, $218,100,000 and $169,700,000,
respectively, and gross losses of $138,000,000, $78,000,000
and $177,000,000, respectively, were realized on those
sales.
At December 31, 1998 and 1997, investments in bonds, with an
admitted asset value of $97,800,000 and $76,200,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks and preferred stocks are reported directly in
unassigned surplus and do not affect operations. 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
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
- ----------------------------------------
Unaffiliated common stocks 223.3 62.0 26.0 259.3
- ----------------------------------------
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1998 and 1997 reflects adjustments of
$5,800,000 and $4,000,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1998, the minimum and maximum lending rates for
mortgage loans were 6.41% and 8.08%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1998, the
Company did not hold any mortgages with interest overdue
beyond one year. 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.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The components of the Company's real estate are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
--------------------------------------------------------------------------------
Buildings 9.0 8.4
--------------------------------------------------------------------------------
Less accumulated depreciation (1.7) (1.2)
-------------------------------------------------------------------------------- --------- ---------
Net real estate occupied by the Company 9.8 9.7
- -----------------------------------------------------------------------------------
Other:
Land 93.2 124.1
--------------------------------------------------------------------------------
Buildings 413.0 491.6
--------------------------------------------------------------------------------
Other 7.9 8.1
--------------------------------------------------------------------------------
Less accumulated depreciation (50.1) (49.1)
-------------------------------------------------------------------------------- --------- ---------
Net other real estate 464.0 574.7
- ----------------------------------------------------------------------------------- --------- ---------
Net real estate $ 473.8 $ 584.4
- ----------------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 179.7 $ 209.3 $ 69.3
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $27.3,
$54.0 and $(6.7) in 1998, 1997 and 1996, respectively) 50.8 100.2 (12.4)
- ------------------------------------------------------------------------ --------- --------- ---------
128.9 109.1 81.7
Less federal income taxes on realized gains 82.1 77.8 28.4
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 46.8 $ 31.3 $ 53.3
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly owned insurance subsidiaries is
summarized as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,221.1 $ 333.9 $ 403.6 $ 1,938.0
- ---------------------------------------------------------
Other assets 40.3 31.3 490.0 270.2
- --------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,149.8 $ 266.3 $ 281.8 $ 1,814.5
- ---------------------------------------------------------
Other liabilities 42.0 24.0 553.7 45.1
- ---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 236.9
- ---------------------------------------------------------
Capital and surplus 69.6 74.9 58.1 111.7
- --------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 310.4 $ 165.0 $ 150.3 $ 1,402.6
- -----------------------------------------------------------
Expenses 310.6 164.4 139.5 1,656.1
- -----------------------------------------------------------
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
- ----------------------------------------------------------- --------- ----------- --------- ---------
Net income (loss) $ (0.5) $ 1.5 $ 10.7 $ (254.2)
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
- -----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
- -----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
- -----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
- -----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
- -------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
- -------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
- ------------------------------------------------------------- --------- --------- ----------- -----------
Net income (loss) $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------- --------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The Company also owns three non-insurance subsidiaries, all
of which were formed or acquired in 1998. AnnuityNet, Inc.
was formed for the distribution of variable annuities over
the internet and is valued on the equity method with an
admitted asset value of $1,500,000 at December 31, 1998.
Lincoln National Insurance Associates was purchased for
$600,000 and is valued on the equity method with an admitted
asset value of $600,000 at December 31, 1998. Sagemark
Consulting, Inc. ("Sagemark") was purchased in 1998 and is a
broker dealer acquired in connection with a reinsurance
transaction completed in 1998. Sagemark is valued on the
equity method with an admitted asset value of $5,700,000 at
December 31, 1998.
The carrying value of all affiliated common stocks, was
$322,100,000 and $412,100,000 at December 31, 1998 and 1997,
respectively. The insurance affiliates are carried at
statutory-basis net equity while other affiliates are
recorded at GAAP basis net equity, adjusted for certain
items which would be non-admitted under statutory accounting
principles. The cost basis of investments in subsidiaries as
of December 31, 1998 and 1997 was $631,100,000 and
$466,200,000, respectively.
During 1998, 1997 and 1996 the Company's insurance
subsidiaries paid dividends of $5,200,000, $15,000,000 and
$10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying
statements of operations differs from the prevailing
statutory tax rate principally due to tax-exempt investment
income, dividends received tax deductions and differences
between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract
liabilities and reinsurance ceding commissions.
In 1997 and 1996, federal income taxes incurred totaled
$78,300,000 and $83,600,000, respectively. In 1998, a
federal income tax net operating loss of $103,800,000 and
tax credits of $19,300,000 were incurred and carried back to
recover taxes paid in prior years.
The Company paid $2,300,000, $164,500,000 and $100,400,000
to LNC in 1998, 1997 and 1996, respectively, for federal
income taxes.
Under prior income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a
special tax account designated as "Policyholders' Surplus."
The Company has approximately $187,000,000 of untaxed
"Policyholders' Surplus" on which no payment of federal
income taxes will be required unless it is distributed as a
dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not
believe that any significant portion of the account will be
taxed in the foreseeable future and no related tax liability
has been recognized. If the entire balance of the account
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
became taxable under the current federal income tax rate,
the tax would be approximately $65,500,000.
6. 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
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 4,081.8 $ 1,431.0
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 79.9 35.9
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 9,018.9 $ 727.2 $ 241.3
- ----------------------------------------------------------------------
Insurance ceded 877.1 302.9 193.3
- ---------------------------------------------------------------------- --------- --------- ---------
Net amount included in premiums $ 8,141.8 $ 424.3 $ 48.0
- ---------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,098,800,000, $1,240,500,000 and $787,900,000 for 1998,
1997 and 1996, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Premium deposit funds $16,285.2 $16,201.8
- -----------------------------------------------------------------------------
Undistributed earnings on participating business 348.4 142.0
- -----------------------------------------------------------------------------
Other 13.9 16.3
- ----------------------------------------------------------------------------- --------- ---------
$16,647.5 $16,360.1
--------- ---------
--------- ---------
</TABLE>
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and fees in course of collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
- -----------------------------------------------------------------------
Ordinary renewal (13.7) 11.3 (25.0)
- -----------------------------------------------------------------------
Group life 14.2 .2 14.0
- ----------------------------------------------------------------------- --------- ----- -----------
$ 10.0 $ 14.9 $ (4.9)
--------- ----- -----------
--------- ----- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $ 2.4 $ .8
- ------------------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
- ------------------------------------------------------------------------
Group life 10.6 .2 10.4
- ------------------------------------------------------------------------ --------- --- -----
$ 31.6 $ 5.8 $ 25.8
--------- --- -----
--------- --- -----
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $11,900,000 and $13,400,000 in 1998 and 1997,
respectively. During 1996, LNC Administrative Services
Corporation, an affiliate, entered into a similar agreement
with the Company with direct premiums written amounting to
$7,000,000 and $7,200,000 in 1998 and 1997, respectively.
Authority granted by the managing general agents agreements
include underwriting, claims adjustment and claims payment
services.
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES
At December 31, 1998, the Company's annuity reserves and
deposit 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
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,659.5 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 2,959.2 5
-----------------------------------------------------------------------------
At market value 35,472.0 63
----------------------------------------------------------------------------- --------- ---
41,090.7 73
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 12,747.3 22
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,625.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 56,463.1 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,683.8
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $54,779.3
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
A reconciliation of the total net annuity reserves and
deposit fund liabilities to the amounts reported in the
Company's 1998 Annual Statement and the Company's Separate
Accounts Annual Statement is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
(IN MILLIONS)
-------------
<S> <C>
Per 1998 Annual Statement:
Exhibit 8, Section B -- Total (net) $ 2,554.6
- ----------------------------------------------------------------
Exhibit 8, Section C -- Total (net) 26.0
- ----------------------------------------------------------------
Exhibit 10, Column 1, Line 19 16,579.6
- ---------------------------------------------------------------- -------------
19,160.2
- ---------------------------------------------------------------- -------------
Per Separate Accounts Annual Statement
Exhibit 6, Column 2, Line 0299999 146.4
- ----------------------------------------------------------------
Page 3, Line 3 35,472.7
- ---------------------------------------------------------------- -------------
35,619.1
- ---------------------------------------------------------------- -------------
Total net annuity reserves and deposit fund liabilities $54,779.3
- ---------------------------------------------------------------- -------------
-------------
</TABLE>
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA indemnity reinsurance transaction on January 5,
1998. This note calls for the Company to pay the principal amount of the
notes on or before March 31, 2028 and interest to be paid quarterly at an
annual rate of 6.56%. Subject to approval by the Indiana Insurance
Commissioner, LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the anniversary date of the
note, but not before January 5, 2003. Any payment of interest or
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS (CONTINUED)
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1998), and subject to approval by the Indiana Insurance
Commissioner. No interest payments were approved by the Indiana Insurance
Commissioner as of December 31, 1998 and, thus, no amounts were accrued at
that date.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna indemnity reinsurance transaction. This note calls
for the Company to pay the principal amount of the notes on or before
December 31, 2028 and interest to be paid quarterly at an annual rate of
6.03%. Subject to approval by the Indiana Insurance Commissioner, LNC also
has a right to redeem the note for immediate repayment in total or in part
once per year on the anniversary date of the note, but not before December
18, 2003. Any payment of interest or repayment of principal may be paid only
out of the Company's earnings, only if the Company's surplus exceeds
specified levels ($2,379,600,000 at December 31, 1998), and subject to
approval by the Indiana Insurance Commissioner. No interest payments were
approved by the Indiana Insurance Commissioner as of December 31, 1998 and,
thus, no amounts were accrued at that date.
A summary of the terms of these surplus notes follows:
<TABLE>
<CAPTION>
CURRENT YEAR
PRINCIPAL PRINCIPAL INTEREST
DATE ISSUED AMOUNT OF NOTE OUTSTANDING PAID
------------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
January 5, 1998 $500,000,000 $ 500,000,000 $ 32,300,000
-------------------------------
December 18, 1998 750,000,000 750,000,000 --
-------------------------------
</TABLE>
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 maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1998, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot 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 January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in October
1998, the Company assumed a block of individual life insurance business from
Aetna (SEE NOTE 10). The statutory accounting regulations do not allow
goodwill to be recognized on indemnity reinsurance transactions and
therefore, the related ceding commission was expensed in the accompanying
Statement of Operations and resulted in the reduction of unassigned surplus.
As a result of these transactions, the Company's statutory-basis unassigned
surplus is negative as of December 31, 1998 and it will be necessary for the
Company to obtain prior approval of the Indiana Insurance Commissioner
before paying any dividends to LNC until such time as statutory-basis
unassigned surplus is positive. It is expected that statutory-basis
unassigned surplus will return to a positive position within two to three
years from the closing of the Aetna transaction assuming a level of
statutory-basis earnings coinciding with recent earnings patterns. If
statutory-basis earnings are less then recent patterns due to adverse
operating conditions or further indemnity reinsurance transactions of this
nature or other factors, or if dividends are approved and paid at amounts
higher than recent history, the statutory-basis unassigned surplus may not
return to a positive position as soon as expected. Although no assurance can
be given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1998, 885,252 and 504,369 shares of LNC common stock were
subject to options granted to Company employees and agents, respectively,
under the stock option incentive plans of which 430,053 and 87,160,
respectively, were exercisable on that date. The exercise prices of the
outstanding options range from $23.50 to $96.41. During 1998, 1997 and 1996,
136,469, 170,789 and 72,405 options were exercised, respectively, and
18,288, 1,846 and 10,950 options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1998 and 1997 is a net
liability of $670,100,000 and $516,900,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels and/or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves could be required in the future. Accordingly, this liability may
prove to be deficient or excessive. The Company reviews reserve levels on an
ongoing basis. However, it is management's opinion that such future
development will not materially affect the financial position of the
Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. As a result of this study, the reserve level
was deemed to be inadequate to meet future obligations if current incident
levels were to continue in the future. In order to address this situation,
the Company strengthened its disability income reserves by $80,000,000 in
1997.
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 policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
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
liabilities. Due to the 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. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
development will not materially affect the financial position of the
Company.
LEASES
The Company leases its home office properties 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 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. The Company also 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 ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1998, 1997 and 1996 was
$34,000,000, $29,300,000 and $26,400,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1999 $ 18.9
- --------------------------------------
2000 18.4
- --------------------------------------
2001 18.7
- --------------------------------------
2002 18.7
- --------------------------------------
2003 18.6
- --------------------------------------
Thereafter 116.6
- -------------------------------------- ---------
$ 209.9
---------
---------
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne operations.
Total costs incurred in 1998 were $54,800,000. Future minimum annual costs
range from $33,600,000 to $56,800,000, however future costs are dependent on
usage and could exceed these amounts.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Prior to December 31, 1997, the Company
limited its maximum coverage that it retained on an individual to
$3,000,000. Based on a review of the capital and business in-force effective
in January 1998, the Company changed the amount it will retain on an
individual to $10,000,000. Portions of the Company's deferred annuity
business have also been reinsured with other companies to limit its exposure
to interest rate risks. At December 31, 1998, the reserves associated with
these reinsurance arrangements totaled $1,608,500,000. To cover products
other than life insurance, the Company acquires other insurance coverages
with retentions and limits that management believes are appropriate for the
circumstances. The accompanying statutory-basis financial statements reflect
premiums, benefits and policy acquisition expenses net of reinsurance ceded.
The Company remains liable if its reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American Statements Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LLANY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA Corporation ("CIGNA"). The Company
paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$1,127,700,000 in 1998, which is included in the Statement of Operations
line item "Underwriting, acquisition, insurance and other expenses." At the
time of closing, this block of business had statutory liabilities of
$4,658,200,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities.
Pursuant to the terms of the reinsurance agreement, the Company, LLANY and
CIGNA are in the final stages of agreeing to the statutory-basis values of
these assets and liabilities. Any changes to these values that may occur in
future periods will not be material to the Company's financial position.
Subsequent to this transaction, the Company and LLANY announced that they
had reached an agreement to sell the administration rights to a variable
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
annuity portfolio that had been acquired as part of the block of business
assumed on January 2, 1998. This sale closed on October 12, 1998 with an
effective date of August 1, 1998.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
On October 1, 1998, the Company and LLANY entered into an indemnity
reinsurance transaction whereby the Company and LLANY reinsured 100% of a
block of individual life insurance business from Aetna, Inc. The Company
paid $856,300,000 to Aetna on October 1, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$815,300,000 in 1998, which is included in the Statement of Operations line
item "Underwriting, acquisition, insurance and other expenses." At the time
of closing, this block of business had statutory liabilities of
$2,813,300,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities. The Company financed this reinsurance transaction with proceeds
from short-term debt borrowings from LNC until the December 18, 1998 surplus
note was approved by the Insurance Department. Subsequent to the Aetna
transaction, the Company and LLANY announced that they had reached an
agreement to retrocede the sponsored life business assumed for $87,600,000.
The retrocession agreement closed on October 14, 1998 with an effective date
of October 1, 1998.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1998, the Company has provided $44,900,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company has retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. Generally, such
amounts are offset by corresponding receivables 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.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $43,400,000 and $8,200,000 at December 31, 1998
and 1997, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1998, 25% of such mortgages ($980,500,000) involved properties
located in Texas and California. Such investments consist of first mortgage
liens on completed income-producing properties and the mortgage outstanding
on any individual property does not exceed $58,200,000.
At December 31, 1998, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular 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 the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage will depend on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and 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 the ultimate liability, if any, under these suits
will not have a material adverse affect on the financial position of the
Company.
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Four lawsuits involving alleged fraud in the sale of interest sensitive
universal life and whole life insurance have been filed as class actions
against the Company, although the court has not certified a class in any of
these cases. Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While the relief sought in
these cases is substantial, it is premature to make assessments about the
potential loss, if any, because the status of the cases ranges from the
early states of litigation to the dismissal and appeals stage. Management
intends to defend these suits vigorously. The amount of liability, if any,
which may arise as a result of these suits cannot be reasonably estimated at
this time.
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
rehabilitated 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.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks at December 31, 1998 relate to mortgage loan
pass-through certificates. The Company has sold commercial mortgage loans
through grantor trusts which issued pass-through certificates. The Company
has agreed to repurchase any mortgage loans which remain delinquent for 90
days at a repurchase price substantially equal to the outstanding principal
balance plus accrued interest thereon to the date of repurchase. The
outstanding guarantees as of December 31, 1998 and 1997 were $30,900,000 and
$41,600,000, respectively. 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, 1998 and 1997.
The Company's wholly owned subsidiary, LNH&C, accepts personal accident
reinsurance programs from other insurance companies. Most of these programs
are presented to LNH&C by independent brokers who represent the ceding
companies. Certain excess of loss personal accident reinsurance programs
created in the London market during 1993 through 1996 have produced and have
potential to produce significant losses. At December 31, 1998 and 1997,
liabilities of $177,400,000 and $186,300,000, respectively, have been
established for such programs. These reserves are based on various estimates
that are subject to considerable uncertainty. Accordingly, this reserve 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 and LNH&C continue to investigate the personal accident
reinsurance programs to determine if there are additional programs including
certain workers compensation programs, which may produce losses. At this
time, the Company and LNH&C do not have sufficient information to determine
whether or not it is probable that additional losses have been incurred nor
can the Company and LNH&C accurately estimate the ultimate cost or timing of
the outcome on these programs.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company 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, commodity risk, credit risk, increased liabilities
associated with reinsurance agreements 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 value generally are
offset by changes in the value of the items
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1998 1998 1997 1997
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,108.8 $4,900.0 $ 9.3 $ .9 $13.9 $ .9
---------------------------------
Swaptions 1,899.5 1,752.0 16.2 2.5 6.9 6.9
---------------------------------
Interest rate swaps 258.3 10.0 -- 9.9 -- (1.8)
---------------------------------
Put options 21.3 -- -- 2.2 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,287.9 6,662.0 25.5 15.5 20.8 6.0
Foreign currency derivatives:
Forward contracts 1.5 163.1 -- -- 5.4 5.4
---------------------------------
Foreign currency swaps 47.2 15.0 -- .3 -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
48.7 178.1 -- .3 5.4 3.3
Commodity derivatives:
Commodity swaps 8.1 -- -- 2.4 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
$6,344.7 $6,840.1 $25.5 $18.2 $26.2 $ 9.3
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ------------------------------------
New contracts 708.8 -- -- 50.0 218.3 1,080.0
- ------------------------------------
Terminations and maturities (1,500.0) (600.0) -- (50.0) (70.8) --
- ------------------------------------ --------- --------- --- --------- --------- ---------
Balance at end of year $ 4,108.8 $ 4,900.0 $ -- $ -- $ 1,899.5 $ 1,752.0
- ------------------------------------ --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES
CONTRACTS INTEREST RATE SWAPS
--------------------------------------------
1998 1997 1998 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ 147.7 $ 10.0 $ --
- -------------------------------------------------------------
New contracts -- 88.3 2,226.6 10.0
- -------------------------------------------------------------
Terminations and maturities -- (236.0) (1,978.3) --
- ------------------------------------------------------------- --- --------- --------- ---------
Balance at end of year $ -- $ -- $ 258.3 $ 10.0
- ------------------------------------------------------------- --- --------- --------- ---------
--- --------- --------- ---------
</TABLE>
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
PUT OPTIONS COMMODITY SWAPS
------------------------------------------------
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ -- $ --
- --------------------------------------------------------------------
New contracts 21.3 -- 8.1 --
- --------------------------------------------------------------------
Terminations and maturities -- -- -- --
- -------------------------------------------------------------------- --------- --- --- ---
Balance at end of year $ 21.3 $ -- $ 8.1 $ --
- -------------------------------------------------------------------- --------- --- --- ---
--------- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
------------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------------
New contracts 419.8 833.1 -- -- 39.2 --
- -------------------------------------------
Terminations and maturities (581.4) (921.6) -- (43.9) (7.0) --
- ------------------------------------------- --------- --------- --- --------- --------- ---------
Balance at end of year $ 1.5 $ 163.0 $ -- $ -- $ 47.2 $ 15.0
- ------------------------------------------- --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 1999 through 2006, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such 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 effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($9,300,000 as of December 31, 1998) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 1999 through 2003, 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 between 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 its annuity line of business from the effect of rising
interest rates. The premium paid for the swaptions is included in other
assets ($16,200,000 as of December 31, 1998) and is being amortized over the
terms of the agreements. This amortization is included in net investment
income.
SPREAD LOCK AGREEMENTS
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
government 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 government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURE CONTRACTS
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the agreements the stream of variable coupon
payments generated from the bonds, and in turn, receives a fixed payment
from the counterparty at a predetermined interest rate. The net
receipts/payments from interest rate swaps are recorded in net investment
income.
The Company also uses interest rate swap agreements to hedge its exposure to
interest rate fluctuations related to the anticipated purchase of assets to
support newly acquired or assumed blocks of business. Once the assets are
purchased, the gains resulting from the termination of the swap agreements
are applied to the basis of the assets purchased. The gains are recognized
in earnings over the life of the assets.
PUT OPTION
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate a fixed income, fixed
maturity investment. The put options give the Company the right, but not the
obligation, to sell to the counterparty of the agreement the specified
securities on a specified date at a fixed price.
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
The Company uses a combination of foreign exchange forward contracts,
foreign 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
future date.
COMMODITY SWAP
The Company uses a commodity swap to hedge its exposure to fluctuations in
the price of gold, which is the underlying variable in determining the
periodic interest payments associated with a fixed income security. A
commodity swap is a contractual agreement to exchange a certain amount of a
particular commodity for a fixed amount of cash. The Company owns a fixed
income security that meets its coupon payment obligations in gold bullion.
The Company is obligated to pay to the counterparty the gold bullion, and in
return, receives from the counterparty a stream of fixed income payments.
The fixed income payments are the product of the swap notional multiplied by
the fixed rate stated in the swap agreement. The net receipts/payments from
commodity swaps are recorded in net investment income.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$10,000,000, $7,000,000 and $6,900,000 in 1998, 1997 and 1996, respectively.
Deferred losses of $48,200,000 as of December 31, 1998, were the result of:
1) terminated and expired spread-lock agreements and; 2) terminated interest
rate swaps. These losses are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, financial futures, interest rate swaps, put options and foreign
currency derivatives. However, the Company does not anticipate
nonperformance
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
by any of the 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 the
Company's favor. At December 31, 1998, the exposure was $21,100,000.
11. 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. Accordingly,
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 AND UNAFFILIATED COMMON STOCK
Fair values of 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. In the case of private placements, 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 unaffiliated common stocks
are based on quoted market prices.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market prices, where
available. For preferred stock not actively traded, fair values are based on
values of issues of comparable yield and quality.
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. The ratings for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage
loans are based on: 1) the present value of expected future cash flows
discounted at the loan's effective interest rate; 2) the loan's market
price; or 3) the fair value of the collateral if the loan is collateral
dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate 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.,
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 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 that are 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
conclusions 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
liabilities defined as financial
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 insurance contract liabilities.
SHORT-TERM DEBT
For short-term debt, the carrying value approximates fair value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for
similar types of borrowing arrangements.
GUARANTEES
The Company's guarantees include guarantees related to 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 zero.
DERIVATIVES
The Company employs several different methods for determining the fair value
of its derivative instruments. Fair values for these contracts are
based on current settlement values. These values are based on quoted market
prices for the foreign currency exchange contracts and financial future
contracts and; 2) industry standard models that are commercially available
for interest rate cap agreements, swaptions, spread lock agreements,
interest rate swaps, commodity swaps and put options.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments 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
commitments.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the accompanying
statutory-basis balance sheets at fair value. The related liabilities are
also reported at fair value in amounts equal to the separate account assets.
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. 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
----------------------------------------------
1998 1997
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 23,830.9 $ 25,065.5 $ 18,560.7 $ 19,798.6
- -----------------------------------------------
Preferred stocks 236.0 242.5 257.3 268.7
- -----------------------------------------------
Unaffiliated common stocks 259.3 259.3 436.0 436.0
- -----------------------------------------------
Mortgage loans on real estate 3,932.9 4,100.1 3,012.7 3,179.2
- -----------------------------------------------
Policy loans 1,606.0 1,685.9 660.5 648.3
- -----------------------------------------------
Other investments 434.4 434.4 335.5 335.5
- -----------------------------------------------
Cash and short-term investments 1,725.4 1,725.4 2,133.0 2,133.0
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,845.8) (17,486.4) (17,324.2) (16,887.6)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (714.4) (738.2) (1,267.0) (1,294.6)
--------------------------------------------
Short-term debt (140.0) (140.0) (120.0) (120.0)
- -----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,335.1) -- --
- -----------------------------------------------
Derivatives 25.5 18.2 26.2 9.3
- -----------------------------------------------
Investment commitments -- (0.6) -- (0.5)
- -----------------------------------------------
Separate account assets 36,907.0 36,907.0 31,330.9 31,330.9
- -----------------------------------------------
Separate account liabilities (36,907.0) (36,907.0) (31,330.9) (31,330.9)
- -----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation affiliates. The bulk of
the transaction was completed in the form of an assumption reinsurance
transaction, which resulted in a ceding commission of $71,800,000. The
ceding commission resulted in admissible goodwill of $62,300,000, which is
being amortized on a straight-line basis over 10 years. LLANY was required
by the New York Department 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 1997, LNC contributed 25,000,000 shares of common stock of American
States to the Company. American States is a property casualty insurance
holding company of which LNC owned 83.3%. The contributed common stock was
accounted for as a capital contribution equal to the fair value of the
common stock received by the Company. Subsequently, the American States
common stock owned by the Company, along with all other American States
common stock owned by LNC and its affiliates, was sold. The Company received
proceeds from the sale in the amount of $1,175,000,000. The Company
recognized no gain or loss on the sale of its portion of the common stock
due to the receipt of the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity Distributors,
Inc. ("LLAD"), has a nearly exclusive general agent's 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 offices. For providing these selling and marketing services, the
Company paid LLAD override commissions of $76,700,000 in 1998 and override
commissions and operating expense allowances of $61,600,000 and $56,300,000
in 1997 and 1996, respectively. LLAD incurred expenses of $102,400,000,
$5,500,000 and $15,700,000 in 1998, 1997 and 1996, respectively, in excess
of the override commissions and operating expense allowances received from
the Company, which the Company is not required to reimburse. Effective in
January 1998, the Company and LLAD agreed to increase the override
commission expense and eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1998 and 1997 include the
Company's participation in a short-term investment pool with LNC of
$383,600,000 and $325,600,000, respectively. Related investment income
amounted to $16,800,000, $15,500,000 and $15,300,000 in 1998, 1997 and 1996,
respectively. Short-term loan payable to parent company at December 31, 1998
and 1997 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $92,100,000, $48,500,000 and
$34,100,000 in 1998, 1997 and 1996, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 13.7 $ 11.9 $ 17.9
- ----------------------
Insurance ceded 290.1 100.3 302.8
- ----------------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 197.3 $ 245.5
- ------------------------
Future policy benefits
and claims ceded 1,125.0 997.2
- ------------------------
Amounts recoverable on
paid and unpaid losses 84.2 30.4
- ------------------------
Reinsurance payable on
paid losses 6.0 5.3
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,375.4 1,115.4
- ------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $318,300,000 and $280,900,000 at December 31, 1998 and 1997,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1998 and 1997, LNC had guaranteed $237,000,000 and $229,100,000,
respectively, of these letters of credit. At December 31, 1998, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $122,400,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially all of the separate accounts do not
have any minimum guarantees and the investment risks associated with market
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$3,953,300,000, $4,821,800,000 and $4,148,700,000 in 1998, 1997
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
and 1996, respectively. Reserves for separate accounts with assets at fair
value were $36,145,900,000 and $30,560,700,000 at
December 31, 1998 and 1997, respectively. All reserves are subject to
discretionary withdrawal at market value.
A reconciliation of transfers to (from) separate accounts is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 3,954.9 $ 4,824.0
- ------------------------------------------------------------
Transfers from separate accounts (4,069.8) (2,943.8)
- ------------------------------------------------------------ --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (114.9) $ 1,880.2
- ------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $1,962.6
- ----------------------------------------
Effect of AVR errors -- 37.6 (37.6)
- ----------------------------------------
Effect of change in investment
limitations (57.0) -- (57.0)
- ---------------------------------------- --------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
- ---------------------------------------- --------- ----------- --------
--------- ----------- --------
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The Company has been
redirecting a large portion of internal Information Technology efforts and
contracting with outside consultants to update systems to address Year 2000
issues. Experts have been engaged to assist in developing work plans and
cost estimates and to complete remediation activities.
For the year ended December 31, 1998, the Company identified expenditures of
$26,300,000 to address this issue. This brings the expenditures for 1996
through 1998 to $34,200,000 million. The Company's financial plans for 1999
and 2000 include expected expenditures of an additional $38,300,000 bringing
estimated overall Year 2000 expenditures to $72,500,000. Because updating
systems and procedures is an integral part of the Company's on-going
operations, approximately 50% of expenditures shown above are expected to
continue after all Year 2000 issues have been resolved. Actual Year 2000
expenditures through December 31, 1998 and future Year 2000 expenditures are
expected to be funded from operating cash flows. The anticipated cost of
addressing Year 2000 issues is based on management's current best estimates
which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. Such costs will be closely monitored
by management. Nevertheless, there can be no guarantee that actual costs
will not be higher than these estimated costs. Specific factors that might
cause such differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer problems and other uncertainties. The total
expenditures identified represent only the Company's portion of LNC's larger
expenditures to address the Year 2000 issue.
The current scope of the overall Year 2000 program includes the following
four major project areas: 1) addressing the readiness of business
applications, operating systems and hardware on mainframe, personal computer
and Local Area Network
platforms (IT); 2) addressing the readiness of non-IT embedded software and
equipment (non-IT); 3) addressing the readiness of key business partners and
4) establishing Year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases.
Phase one involves raising awareness and creating an inventory of all IT and
non-IT assets. The second phase consists of assessing all items inventoried
to initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
The Company has completed those four phases for over two-thirds of its high
priority IT systems, including those provided by software vendors. While the
Company's year 2000 program for nearly all high priority IT systems is
expected to be completed in the first quarter 1999, phase four, for a small
but important subset of these systems, will continue through the end of the
second quarter 1999. As of December 31, 1998, the status of projects
addressing readiness of IT assets is: 100% of IT assets have been
inventoried (Phase 1) and assessed (Phase 2); 94% of IT projects have been
through the remediation phase (Phase 3) with the last project scheduled for
completion by the end of March 1999; and 69% of IT projects have completed
the testing phase (Phase 4) with the last project scheduled to finish
testing by the end of June 1999. A portion of the effort that extends into
1999 is dependent on outside third parties and is behind the original
schedule. The Company is working with these parties to modify the completion
schedule.
As of December 31, 1998, the status of projects that address readiness of
high priority non-IT assets is: 100% of non-IT assets have been inventoried
(Phase 1) and assessed (Phase 2); 79% of non-IT projects addressing
remediation (Phase 3) have been completed and 21% of non-IT projects have
completed the testing phase (Phase 4). The Company expects to have all
phases related to high priority non-IT completed by the end of October 1999.
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED) (CONTINUED)
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being
developed. The most significant categories of key business partners are
financial institutions, software vendors and utility providers (gas,
electric and telecommunications). Surveys have been mailed to these key
business partners. Based on responses received, current levels of readiness
are being assessed, follow-up contacts are underway, alternative strategies
are being developed and testing is being scheduled where feasible. This
effort is expected to continue well into 1999. As noted above, software
vendor assessments are considered part of the IT projects and, therefore,
would follow the schedule shown above for such projects.
While the Company is working to meet the schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact the Company and other similar uncertainties.
A worst case scenario might include the Company's inability to achieve Year
2000 readiness with respect to one or more of the Company's significant
policyholder systems resulting in a material
disruption to the Company's operations. Specifically, the Company could
experience an interruption in its ability to collect and process premiums or
deposits, process claim payments, accurately maintain policyholder
information, accurately maintain accounting records and/or perform adequate
customer service. Should the worst case scenario occur, it could, depending
on its duration, have a material impact on the Company's results of
operations and financial position. Simple failures can be repaired and
returned to production within a matter of hours with no material impact.
Unanticipated failures with a longer service disruption period would have a
more serious impact. For this reason, the Company is placing significant
emphasis on risk management and Year 2000 contingency planning. The Company
is in the process of modifying its contingency plans to address potential
Year 2000 issues. Where these efforts identify high risks due either to
unacceptable work around procedures or significant readiness risks,
appropriate risk management techniques are being developed. These
techniques, such as resource shifting or use of alternate providers, will be
employed to provide stronger assurances of readiness. The Company has gone
through exercises to identify worst case scenario failures. At this time,
the Company believes its plans are sufficient to mitigate identified worst
case scenarios.
S-34
<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,
1998 and 1997, and the related statutory-basis statements of
operations, changes in capital and surplus and cash flows for
each of the three years in the period ended December 31, 1998.
These financial statements 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 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 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 presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally 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 position of The
Lincoln National Life Insurance Company at December 31, 1998 and
1997, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1998.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
February 1, 1999
S-35
