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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
(800-942-5500)
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 Funds Insurance
Series, also known as 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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- - Asset Allocation Fund - Growth Fund
- - Bond Fund - Growth-Income Fund
- - Cash Management Fund - High-Yield Bond Fund
- - Global Growth Fund - International Fund
- - Global Small Capitalization Fund - U.S. Government/AAA-Rated Securities 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. If
your plan already benefits from favorable tax treatment, be sure your policy
meets your other financial goals before purchasing.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance contract with the policy. This
Separate Account prospectus is being furnished along with the prospectuses for
the funds. Both 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, 2000
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TABLE OF CONTENTS
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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 8
Dollar cost averaging program 9
Effective date 10
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) 11
Contingent deferred
administrative charge (CDAC) 11
Surrender charge 12
Monthly deductions 12
Cost of insurance charges 12
Monthly charge 13
Fund charges and expenses 13
Mortality and expense risk charge 13
Other charges 14
Reduction of charges 14
Exchange of Lincoln Life
Universal Life policies 14
Term conversion credits 15
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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
Loans 19
Withdrawals 20
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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 24
Projection of benefits and values 24
Postponement of payments 24
Riders 24
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DISTRIBUTION OF THE POLICY 26
Advertising 27
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TAX ISSUES
Taxation of life insurance
contracts in general 27
Policies which are MECS 28
Policies which are not MECS 29
Other considerations 30
Tax status of Lincoln Life 30
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VOTING RIGHTS 31
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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
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LEGAL PROCEEDINGS 32
- ---------------------------------------
OFFICERS & DIRECTORS OF LINCOLN
NATIONAL LIFE INSURANCE CO. 32
- ---------------------------------------
EXPERTS 34
- ---------------------------------------
ADDITIONAL INFORMATION 34
- ---------------------------------------
APPENDIX A: Table of base minimum
premiums 35
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APPENDIX B: Table of surrender
charges 37
- ---------------------------------------
APPENDIX C: Illustrations of
policy values 39
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FINANCIAL STATEMENTS
Separate Account Financial
Statements J-1
Company Financial Statements S-1
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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 such tax
treatment. Lincoln Life reserves the right to return your premium payments if it
results 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 Riders, 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 Policy benefits beginning on 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 in the Premium payment
section on page 8. If your
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policy lapses because your monthly premium deduction is larger than the total
accumulation value, you may reinstate your policy. (See Policy lapse and
reinstatement, page 21.)
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 Right to examine policy, 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.
Each portfolio described below is an investment vehicle for one or more
insurance company separate accounts. A given portfolio may have a similar
investment objective and principal investment strategy to those for another
mutual fund managed by the same investment advisor or subadvisor. However,
because of timing of investments and other variables we cannot guarantee there
will be any correlation between the two investments. Even though the management,
strategies and objectives of the fund are similar, the investment results may
vary.
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 see the General Account on 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 Funds Insurance Series, which consists of ten funds. Below is a
brief description of the investment objective of each fund. There can be no
assurance that any of the stated investment objectives will be achieved.
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).
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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.
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.
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.
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
$1.5 billion. The fund is designed for investors seeking capital appreciation
through stocks. Investors in the fund should have a long-term perspective and be
able to tolerate potentially wide price fluctuations.
GROWTH FUND -- The fund seeks to make your investment grow over time 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.
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.
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.
INTERNATIONAL FUND -- The fund seeks to make your investment grow over time by
investing primarily in common stocks of companies located outside the United
States. The fund is designed for investors seeking capital appreciation through
stocks. Investors in the fund should have a long-term perspective and be able to
tolerate potentially wide price fluctuations.
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.
WHAT CHARGES AND DEDUCTIONS ARE MADE FROM MY POLICY?
We deduct a percent of premium charge 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 Charges and deductions, page 10.)
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Each fund has its own management fee charge, also deducted daily. Each fund's
expense levels will affect its investment results. The table under Fund charges
and expenses 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 Other
charges, page 14.)
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 Charges and
deductions beginning on page 10.)
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 Loans, 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 or 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 Policies which are MECS, 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, and will
result in penalty tax if made before age 59 1/2.
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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 table under Policy benefits, page 16.) 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 which
decrease over time are explained in more detail beginning on page 12. 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 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).
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
2005 Market Street, Philadelphia, PA 19103. 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 Lincoln Life Flexible Premium Variable Life Account J,
("Account J"), 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
of Lincoln Life. 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
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regular trading (currently 4:00 p.m. Eastern 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 Funds
Insurance Series: Asset Allocation Fund, Bond Fund, Cash Management Fund, Global
Growth Fund, Global Small Capitalization Fund, Growth Fund, Growth-Income Fund,
High-Yield Bond Fund, International Fund, U.S. Government/AAA-Rated Securities
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 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 Funds 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 and prior approval of the Commission,
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 Commission, to the extent required by the 1940 Act or
other applicable law. A substituted fund may have higher charges than the one it
replaces. 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.
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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.
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.
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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 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
8
<PAGE>
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).
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.
9
<PAGE>
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.
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 I 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 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%.
10
<PAGE>
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 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>
DURING POLICY YEAR PERCENT OF CDSC AND 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
11
<PAGE>
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 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. Surrender charges are higher in the earlier years of
the policy reducing its net cash surrender value. Thus if you surrender the
policy in the early years, and there have been significantly unfavorable
investment results, there may be little or no money to return to you.
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.
12
<PAGE>
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.
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 .35% to .81%. 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>
- --------------------------------------------------------------------------------------------------------
Asset Allocation .43% .01% .44% 0.0 .44%
Bond .51% .02% .53% 0.0 .53%
Cash Management .44% .01% .45% 0.0 .45%
Global Growth .68% .03% .71% 0.0 .71%
Global Small
Capitalization .78% .03% .81% 0.0 .81%
Growth .38% .01% .39% 0.0 .39%
Growth-Income .34% .01% .35% 0.0 .35%
High-Yield Bond .50% .01% .51% 0.0 .51%
International .55% .05% .60% 0.0 .60%
U. S. Gov't/AAA-Rated .51% .01% .52% 0.0 .52%
</TABLE>
*Expressed as an annual percentage of each fund's average daily net assets.
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.
13
<PAGE>
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 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 Tax issues.)
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.
14
<PAGE>
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.
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 or 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, and taking into consideration loans or partial withdrawals.
(See Policy lapse and reinstatement, page 21.) 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.
Changes in the initial specified amount, partial withdrawals, and/or death
benefit options during the first two policy years may effect the death benefit
guarantee monthly premium. These events and loans may also effect the policy's
ability to remain in force.
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.
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On the policy date, the policy value will be the initial net premium, minus the
sum of the following:
a. The monthly charge;
b. The cost of insurance for the first month;
c. Any charges for extra benefits.
On each monthly anniversary day, the policy value is equal to the sum of the
following:
a. The policy value on the preceding day;
b. Any increase due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
c. Interest at not less than the General Account guaranteed interest rate
shown on the policy schedule on amounts allocated to the General Account;
d. Interest at not less than the rate shown on the policy schedule on any
outstanding loan amount;
e. Any net premiums received since the preceding day.
Minus the sum of the following:
f. Any decrease due to net investment results in the value of the subaccounts
to which the investment amount is allocated;
g. Any withdrawals;
h. Any amount charged against the investment amount for federal or other
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 the Charges
and deductions section beginning on page 10.
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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 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 Tax issues.)
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. Unless we agree otherwise, 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
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such method is acceptable to Lincoln Life. Amounts deducted from the Separate
Account will be transferred to the Lincoln Life General Account, where they will
earn interest at an annual rate of 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 Tax issues.)
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, page 17), 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. The above will not apply if the policy has previously been
surrendered.
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. However, if you have money due from the
General Account, payment or transfers from the General Account may be deferred
up to six months at Lincoln Life's option. If Lincoln Life exercises its right
to defer any payment from the General Account, interest will be paid as required
by law from the date the recipient would otherwise have been entitled to receive
the payment. The tax treatment of a surrendered policy is discussed under Tax
Issues.
All coverage under the policy will automatically terminate and may not be
reinstated if the owner makes a full surrender.
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.
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Any amount to be paid at the death of the insured or any other termination of
this policy will be paid in one sum unless otherwise provided. Interest will be
paid on this amount from date of death or maturity to date of payment at a
specified rate, not less than that required by law. All or part of the sum of
this amount and such interest credited to date of payment will be applied to any
payment option.
To the extent allowed by law, proceeds are not to be subject to any claims of a
beneficiary's creditors.
PAYMENT OPTIONS. Upon written request, all or part of the proceeds and interest
credited thereon may be applied to any payment option available from 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.
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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.
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 while the insured is living. The request must be in writing on a form
suitable to us and received at our administrative address. Once recorded the
change will be effective as of date signed. 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 and received at our administrative address. Once recorded the
change will be effective as of the date signed. 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.
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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.
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. There may be separate charge(s) for rider(s) that become part of
the policy.
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
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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 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
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 Financial Advisors Corp., a registered broker-dealer
affiliated with 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
26
<PAGE>
benefit guarantee monthly premium times 12), plus up to 3.0% of all other
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.
ADVERTISING
Lincoln Life is ranked and rated by independent financial rating services,
including Moody's, Standard & Poor's, Duff & Phelps and A.M. Best Company. The
purpose of these ratings is to reflect the financial strength or claims-paying
ability of Lincoln Life. The ratings are not intended to reflect the investment
experience or financial strength of the Separate Account. We may advertise these
ratings from time to time. In addition, we may include in certain
advertisements, endorsements in the form of a list of organizations, individuals
or other parties which recommend us or the Policies. We may also occasionally
include in advertisements comparisons of currently taxable and tax deferred
investment programs, based on selected tax brackets, or discussions of
alternative investment vehicles and general economic conditions.
We are a member of the Insurance Marketplace Standards Association ("IMSA") and
may include the IMSA logo and information about IMSA membership in our
advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services for individually
sold life insurance and annuities.
TAX ISSUES
INTRODUCTION. The Federal income tax treatment of the policy is complex and
sometimes uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion does not include all the Federal income tax rules
that may affect you and your policy, and is not intended as tax advice. This
discussion also does not address other Federal tax consequences, or state or
local tax consequences, associated with the policy. As a result, you should
always consult a tax adviser about the application of tax rules to your
individual situation.
TAXATION OF LIFE INSURANCE CONTRACTS IN GENERAL
TAX STATUS OF THE POLICY. Section 7702 of the Code establishes a statutory
definition of life insurance for Federal tax purposes. We believe that the
policy will meet the statutory definition of life insurance, which places
limitations on the amount of premium payments that may be made and the contract
values that can accumulate relative to the death benefit. As a result, the death
benefit payable under the policy will generally be excludable from the
beneficiary's gross income, and interest and other income credited under the
policy will not be taxable unless certain withdrawals are made (or are deemed to
be made) from the policy prior to the insured's death, as discussed below. This
tax treatment will only apply, however, if (1) the investments of the Separate
Account are "adequately diversified" in accordance with Treasury Department
regulations, and (2) we, rather than the you, are considered the owner of the
assets of the Separate Account for Federal income tax purposes.
INVESTMENTS IN THE SEPARATE ACCOUNT MUST BE DIVERSIFIED. For a policy to be
treated as a life insurance contract for Federal income tax purposes, the
investments of the Separate Account must be "adequately diversified." IRS
regulations define standards for determining whether the investments of the
Separate Account are adequately diversified. If the Separate Account fails to
comply with these
27
<PAGE>
diversification standards, you could be required to pay tax currently on the
excess of the contract value over the contract premium payments. Although we do
not control the investments of the subaccounts, we expect that the subaccounts
will comply with the IRS regulations so that the Separate Account will be
considered "adequately diversified."
RESTRICTION ON INVESTMENT OPTIONS. Federal income tax law limits your right to
choose particular investments for the policy. Because the IRS has not issued
guidance specifying those limits, the limits are uncertain and your right to
allocate contract values among the subaccounts may exceed those limits. If so,
you would be treated as the owner of the assets of the Separate Account and thus
subject to current taxation on the income and gains from those assets. We do not
know what limits may be set by the IRS in any guidance that it may issue and
whether any such limits will apply to existing policies. We reserve the right to
modify the policy without your consent to try to prevent the tax law from
considering you as the owner of the assets of the Separate Account.
NO GUARANTEES REGARDING TAX TREATMENT. We make no guarantee regarding the tax
treatment of any policy or of any transaction involving a policy. However, the
remainder of this discussion assumes that your policy will be treated as a life
insurance contract for Federal income tax purposes and that the tax law will not
impose tax on any increase in your contract value until there is a distribution
from your policy.
TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In general, the amount
of the death benefit payable from a policy because of the death of the insured
is excludable from gross income. Certain transfers of the policy for valuable
consideration, however, may result in a portion of the death benefit being
taxable.
If the death benefit is not received in a lump sum and is, instead, applied
under one of the settlement options, payments generally will be prorated between
amounts attributable to the death benefit which will be excludable from the
beneficiary's income and amounts attributable to interest (accruing after the
insured's death) which will be includible in the beneficiary's income.
TAX DEFERRAL DURING ACCUMULATION PERIOD. Under existing provisions of the Code,
except as described below, any increase in your contract value is generally not
taxable to you unless amounts are received (or are deemed to be received) from
the policy prior to the insured's death. If there is a total withdrawal from the
policy, the surrender value will be includible in the your income to the extent
the amount received exceeds the "investment in the contract." (If there is any
debt at the time of a total withdrawal, such debt will be treated as an amount
received by the owner.) The "investment in the contract" generally is the
aggregate amount of premium payments and other consideration paid for the
policy, less the aggregate amount received under the policy previously to the
extent such amounts received were excludable from gross income. Whether partial
withdrawals (or other amounts deemed to be distributed) from the policy
constitute income to you depends, in part, upon whether the policy is considered
a "modified endowment contract" (a "MEC") for Federal income tax purposes.
POLICIES WHICH ARE MECS
CHARACTERIZATION OF A POLICY AS A MEC. A policy will be classified as a MEC if
premiums are paid more rapidly than allowed by a "7-pay test" under the tax law
or if the policy is received in exchange for another policy that is a MEC. In
general, this policy will constitute a MEC unless (1) it was received in
exchange for another life insurance contract which was not a MEC, and (2) no
premium payments (other than the exchanged contract) are paid into the policy
during the first seven contract years. In addition, even if the policy initially
is not a MEC, it may in certain circumstances become a MEC. These circumstances
would include a later increase in benefits, any other material change of
28
<PAGE>
the policy (within the meaning of the tax law), and a withdrawal or reduction in
the death benefit during the first seven contract years.
TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES UNDER MECS. If the
policy is a MEC, withdrawals from the policy will be treated first as
withdrawals of income and then as a recovery of premium payments. Thus,
withdrawals will be includible in income to the extent the contract value
exceeds the investment in the policy. The Code treats any amount received as a
loan under a policy, and any assignment or pledge (or agreement to assign or
pledge) any portion of your contract value, as a withdrawal of such amount or
portion. Your investment in the policy is increased by the amount includible in
income with respect to such assignment, pledge, or loan.
PENALTY TAXES PAYABLE ON WITHDRAWALS. A 10% penalty tax may be imposed on any
withdrawal (or any deemed distribution) from your MEC which you must include in
your gross income. The 10% penalty tax does not apply if one of several
exceptions exists. These exceptions include withdrawals or surrenders that: you
receive on or after you reach age 59 1/2, you receive because you became
disabled (as defined in the tax law), or you receive as a series of
substantially equal periodic payments for your life (or life expectancy).
SPECIAL RULES IF YOU OWN MORE THAN ONE MEC. In certain circumstances, you must
combine some or all of the life insurance contracts which are MECs that you own
in order to determine the amount of withdrawal (including a deemed withdrawal)
that you must include in income. For example, if you purchase two or more MECs
from the same life insurance company (or its affiliates) during any calendar
year, the Code treats all such policies as one contract. Treating two or more
policies as one contract could affect the amount of a withdrawal (or a deemed
withdrawal) that you must include in income and the amount that might be subject
to the 10% penalty tax described above.
POLICIES WHICH ARE NOT MECS
TAX TREATMENT OF WITHDRAWALS. If the policy is not a MEC, the amount of any
withdrawal from the policy will generally be treated first as a non-taxable
recovery of premium payments and then as income from the policy. Thus, a
withdrawal from a policy that is not a MEC will not be includible in income
except to the extent it exceeds the investment in the policy immediately before
the withdrawal.
CERTAIN DISTRIBUTIONS REQUIRED BY THE TAX LAW IN THE FIRST 15 POLICY
YEARS. Section 7702 places limitations on the amount of premium payments that
may be made and the contract values that can accumulate relative to the death
benefit. Where cash distributions are required under Section 7702 in connection
with a reduction in benefits during the first 15 years after the policy is
issued (or if withdrawals are made in anticipation of a reduction in benefits,
within the meaning of the tax law, during this period), some or all of such
amounts may be includible in income. A reduction in benefits may occur when the
face amount is decreased, withdrawals are made, and in certain other instances.
TAX TREATMENT OF LOANS. If your policy is not a MEC, a loan you receive under
the policy is generally treated as your indebtedness. As a result, no part of
any loan under such a policy constitutes income to you so long as the policy
remains in force. Nevertheless, in those situations where the interest rate
credited to the loan account equals the interest rate charged to you for the
loan, it is possible that some or all of the loan proceeds may be includible in
your income. If a policy lapses (or if all contract value is withdrawn) when a
loan is outstanding, the amount of the loan outstanding will be treated as
withdrawal proceeds for purposes of determining whether any amounts are
includible in your income.
29
<PAGE>
OTHER CONSIDERATIONS
INSURED LIVES PAST AGE 100. If the insured survives beyond the end of the
mortality table used to measure charges under the policy, which ends at age 100,
we believe the policy will continue to qualify as life insurance for Federal tax
purposes. However, there is some uncertainty regarding this treatment, and it is
possible that you would be viewed as constructively receiving the cash value in
the year the insured attains age 100.
COMPLIANCE WITH THE TAX LAW. We believe that the maximum amount of premium
payments we have determined for the policies will comply with the Federal tax
definition of life insurance. We will monitor the amount of premium payments,
and, if the premium payments during a contract year exceed those permitted by
the tax law, we will refund the excess premiums within 60 days of the end of the
policy year and will pay interest and other earnings (which will be includible
in income subject to tax) as required by law on the amount refunded. We also
reserve the right to increase the death benefit (which may result in larger
charges under a policy) or to take any other action deemed necessary to maintain
compliance of the policy with the Federal tax definition of life insurance.
DISALLOWANCE OF INTEREST DEDUCTIONS. If an entity (such as a corporation or a
trust, not an individual) purchases a policy or is the beneficiary of a policy
issued after June 8, 1997, a portion of the interest on indebtedness unrelated
to the policy may not be deductible by the entity. However, this rule does not
apply to a policy owned by an entity engaged in a trade or business which covers
the life of an individual who is a 20-percent owner of the entity, or an
officer, director, or employee of the trade or business, at the time first
covered by the policy. This rule also does not apply to a policy owned by an
entity engaged in a trade or business which covers the joint lives of the 20%
owner of the entity and the owner's spouse at the time first covered by the
policy.
FEDERAL INCOME TAX WITHHOLDING. We will withhold and remit to the IRS a part of
the taxable portion of each distribution made under a policy unless you notify
us in writing at or before the time of the distribution that tax is not to be
withheld. Regardless of whether you request that no taxes be withheld or whether
the Company withholds a sufficient amount of taxes, you will be responsible for
the payment of any taxes and early distribution penalties that may be due on the
amounts received. You may also be required to pay penalties under the estimated
tax rules, if your withholding and estimated tax payments are insufficient to
satisfy your total tax liability.
CHANGES IN THE POLICY AND CHANGES IN THE LAW. Changing the owner, exchanging the
contract, and other changes under the policy may have tax consequences (in
addition to those discussed herein) depending on the circumstances of such
change. The above discussion is based on the Code, IRS regulations, and
interpretations existing on the date of this Prospectus. However, Congress, the
IRS, and the courts may modify these authorities, sometimes retroactively.
TAX STATUS OF LINCOLN LIFE
Under existing Federal income tax laws, Lincoln Life does not pay tax on
investment income and realized capital gains of the Separate Account. Lincoln
Life does not expect that it will incur any Federal income tax liability on the
income and gains earned by the Separate Account. We, therefore, do not impose a
charge for Federal income taxes. If Federal income tax law changes and we must
pay tax on some or all of the income and gains earned by the Separate Account,
we may impose a charge against the Separate Account to pay the taxes.
30
<PAGE>
VOTING RIGHTS
VOTING RIGHTS
To determine how many votes each policy owner is entitled to direct with respect
to a Fund, first we will calculate the dollar amount of your account value
attributable to that Fund. Second, we will divide that amount by $100.00. The
result is the number of votes you may direct.
We will vote the shares of each Fund held in the Separate Account at special
meetings of the shareholders of the particular Fund in accordance with
instructions received by the Administrative Office in proper written form from
persons having a voting interest in the Separate Account. Lincoln Life will vote
shares for which it has not received instructions in the same proportion as it
votes shares in the Separate Account for which it has received instructions. The
Funds do not hold regular meetings of shareholders.
The number of shares which a person has a right to vote will be determined as of
a date to be chosen by the appropriate Fund not more than sixty (60) days prior
to the meeting of the particular Fund. Voting instructions will be solicited by
written communication at least fourteen (14) days prior to the meeting.
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. There is a primary fidelity bond covering Lincoln Life
directors and employees with a limit in the amount of $25,000,000 for a single
loss and a $50,000,000 aggregate loss limit issued by Fidelity and Deposit
Company of Maryland.
The funds do not issue certificates. Thus, we hold the Separate Account's assets
in an open account in lieu of stock certificates.
31
<PAGE>
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 several 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 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], The Lincoln National Life Insurance
Company.
- ---------------------------------------------------------------------------------------------------
ROLAND C. BAKER Vice President [1/95-present] The Lincoln National Life
VICE PRESIDENT Insurance Co., President and Director, First Penn Pacific
1801 S. Meyers Rd. Life Insurance Company.
Oakbrook Terrace, IL 60181
- ---------------------------------------------------------------------------------------------------
JON A. BOSCIA President, Chief Executive Officer and Director, Lincoln
PRESIDENT AND DIRECTOR National Corporation [1/98-present], Formerly: President,
1500 Market Street Chief Executive Officer and Director [10/96-1/98] and
Suite 3900 President and Chief Operating Officer [5/94-10/96], The
Philadelphia, PA 19102 Lincoln National Life Insurance Company.
- ---------------------------------------------------------------------------------------------------
JOHN H. GOTTA Chief Executive Officer of Life Insurance, Senior Vice
CHIEF EXECUTIVE OFFICER OF LIFE President and Assistant Secretary [12/99-present] The
INSURANCE, SENIOR VICE PRESIDENT AND Lincoln National Life Insurance Company. Formerly: Senior
ASSISTANT SECRETARY Vice President and Assistant Secretary [4/98-12/99]; Senior
350 Church Street Vice President [2/98-4/98]; Vice President and General
Hartford, CT 06103 Manager [1/98-2/98] The Lincoln National Life Insurance Co.
Formerly: Senior Vice President, Connecticut General Life
Insurance Company [3/96-12/97]; Vice President, Connecticut
(Massachusetts Mutual) Mutual Life Insurance Company
[8/94-3/96].
- ---------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION(S)
WITH APPLICANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------
<S> <C>
J. MICHAEL HEMP President and Director [7/97-present], Lincoln Financial
SENIOR VICE PRESIDENT Advisors Inc.; Senior Vice President [formerly Vice
350 Church Street President] [10/95-present], The Lincoln National Life
Hartford, CT 06103 Insurance Company.
- ---------------------------------------------------------------------------------------------------
STEPHEN H. LEWIS Interim Chief Executive Officer of Annuities and Senior Vice
INTERIM CHIEF EXECUTIVE OFFICER OF President, [12/99-present]. Formerly: Senior Vice President,
ANNUITIES AND SENIOR VICE PRESIDENT [5/94-12/99] The Lincoln National Life Insurance Company.
- ---------------------------------------------------------------------------------------------------
H. THOMAS MCMEEKIN President and Director 5/94-present, Lincoln Investment
DIRECTOR Management, Inc.
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
- ---------------------------------------------------------------------------------------------------
GARY W. PARKER Senior Vice President [4/00-present], Vice President,
SENIOR VICE PRESIDENT Product Management, [7/98-3/00] The Lincoln National Life
350 Church Street Insurance Company. Formerly: Senior Vice President, Life
Hartford, CT 06103 Products [10/97-6/98]; Vice President, Marketing Services
[9/89-10/97] Life of Virginia.
- ---------------------------------------------------------------------------------------------------
LAWRENCE T. ROWLAND Executive Vice President [10/96-present] Formerly: Senior
EXECUTIVE VICE PRESIDENT AND DIRECTOR Vice President [1/93-10/96], The Lincoln National Life
One Reinsurance Place Insurance Company. Chairman, Chief Executive Officer,
1700 Magnavox Way President and Director [10/96-present], Formerly: Senior
Fort Wayne, IN 46802 Vice President [10/95-10/96].
- ---------------------------------------------------------------------------------------------------
KEITH J. RYAN Vice President, Controller and Chief Accounting Officer
VICE PRESIDENT, CONTROLLER AND CHIEF [1/96-present] The Lincoln National Life Insurance Company.
ACCOUNTING OFFICER
- ---------------------------------------------------------------------------------------------------
TODD R. STEPHENSON Senior Vice President, Chief Financial Officer and Assistant
SENIOR VICE PRESIDENT, CHIEF Treasurer [3/99-present] The Lincoln National Life Insurance
FINANCIAL OFFICER AND ASSISTANT Company. Formerly: Senior Vice President and Chief Operating
TREASURER Officer [1/98-3/99] Lincoln Life & Annuity Distributors,
Inc.; Senior Vice President and Chief Operating Officer
[1/98-3/99] Lincoln Financial Advisors Corp.; Senior Vice
President, Treasurer, Chief Financial Officer and Director,
American States Insurance Co. [2/95-12/97].
- ---------------------------------------------------------------------------------------------------
RICHARD C. VAUGHAN Executive Vice President and Chief Financial Officer
DIRECTOR [1/95-present] The Lincoln National Life Insurance Company.
Centre Square
West Tower
1500 Market Street
Suite 3900
Philadelphia, PA 19102
- ---------------------------------------------------------------------------------------------------
MICHAEL R. WALKER Senior Vice President [1/98-present], Vice President
SENIOR VICE PRESIDENT [1/96-1/98] The Lincoln National Life Insurance Company.
350 Church Street Formerly: Vice President [3/93-1/96] Employers Health
Hartford, CT 06103 Insurance Co.
- ---------------------------------------------------------------------------------------------------
ROY V. WASHINGTON Vice President [7/96-present] formerly, Associate Counsel
VICE PRESIDENT [2/95-7/96] The Lincoln National Life Insurance Company.
</TABLE>
*Unless otherwise indicated, the principal business address is 1300 South
Clinton Street, Fort Wayne, Indiana 46801.
33
<PAGE>
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.
ADDITIONAL INFORMATION
A registration statement has been filed with the 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.
34
<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.
35
<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.
36
<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.
37
<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.
38
<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 .51%), 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 .02%) so
that the actual numbers in the illustrations are net of expenses. Thus, a 12%
gross annual return yields a net annual return of 10.51% using current charges,
and 10.41% using guaranteed charges. Similarly, gross annual returns of 6% and
0% yield net annual returns of 4.59% and -1.33% respectively using current
charges and 4.50% and -1.42% respectively using guaranteed charges.
39
<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 $ 975 $ 1,040 $ 1,106 $ 115 $ 180 $ 246
2 2,852 100,000 100,000 100,000 1,929 2,121 2,321 1,069 1,261 1,461
3 4,386 100,000 100,000 100,000 2,861 3,242 3,655 2,001 2,382 2,795
4 5,996 100,000 100,000 100,000 3,769 4,403 5,117 2,909 3,543 4,257
5 7,688 100,000 100,000 100,000 4,655 5,607 6,723 3,795 4,747 5,863
- -------------------------------------------------------------------------------------------------------------------
6 9,463 100,000 100,000 100,000 5,515 6,852 8,486 4,870 6,207 7,841
7 11,328 100,000 100,000 100,000 6,349 8,142 10,421 5,919 7,712 9,991
8 13,285 100,000 100,000 100,000 7,156 9,476 12,548 6,941 9,261 12,333
9 15,341 100,000 100,000 100,000 7,936 10,856 14,886 7,936 10,856 14,886
10 17,499 100,000 100,000 100,000 8,687 12,283 17,457 8,687 12,283 17,457
- -------------------------------------------------------------------------------------------------------------------
15 30,021 100,000 100,000 100,000 11,952 20,155 34,778 11,952 20,155 34,778
20 46,003 100,000 100,000 100,000 14,162 29,310 63,201 14,162 29,310 63,201
25 66,400 100,000 100,000 147,262 14,770 39,782 109,897 14,770 39,782 109,897
30 92,433 100,000 100,000 226,384 13,212 51,996 185,560 13,212 51,996 185,560
</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 .51% asset management charge, a .81% current mortality
and expense risk charge and other expenses estimated at .02%. Values illustrated
are also net of any other applicable contract 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 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 $ 1,075 $ 86 $ 150 $ 215
2 2,852 100,000 100,000 100,000 1,872 2,059 2,254 1,012 1,199 1,394
3 4,386 100,000 100,000 100,000 2,775 3,145 3,546 1,915 2,285 2,686
4 5,996 100,000 100,000 100,000 3,655 4,269 4,963 2,795 3,409 4,103
5 7,688 100,000 100,000 100,000 4,510 5,432 6,516 3,650 4,572 5,656
- -------------------------------------------------------------------------------------------------------------------
6 9,463 100,000 100,000 100,000 5,339 6,635 8,219 4,694 5,990 7,574
7 11,328 100,000 100,000 100,000 6,142 7,877 10,086 5,712 7,447 9,656
8 13,285 100,000 100,000 100,000 6,918 9,160 12,135 6,703 8,945 11,920
9 15,341 100,000 100,000 100,000 7,666 10,486 14,384 7,666 10,486 14,384
10 17,499 100,000 100,000 100,000 8,385 11,855 16,855 8,385 11,855 16,855
- -------------------------------------------------------------------------------------------------------------------
15 30,021 100,000 100,000 100,000 11,484 19,364 33,435 11,484 19,364 33,435
20 46,003 100,000 100,000 100,000 13,519 28,000 60,460 13,519 28,000 60,460
25 66,400 100,000 100,000 140,383 13,872 37,666 104,763 13,872 37,666 104,763
30 92,433 100,000 100,000 214,691 11,468 48,278 175,976 11,468 48,278 175,976
</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 .51% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .2%. 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 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 $ 1,223 $ 1,305 $ 1,388 $ 191 $ 273 $ 356
2 3,605 100,000 100,000 100,000 2,420 2,662 2,914 1,388 1,630 1,882
3 5,544 100,000 100,000 100,000 3,582 4,061 4,581 2,550 3,029 3,549
4 7,580 100,000 100,000 100,000 4,710 5,506 6,404 3,678 4,474 5,372
5 9,718 100,000 100,000 100,000 5,803 6,999 8,402 4,771 5,967 7,370
- -------------------------------------------------------------------------------------------------------------------
6 11,963 100,000 100,000 100,000 6,863 8,543 10,594 6,089 7,769 9,820
7 14,320 100,000 100,000 100,000 7,881 10,130 12,993 7,365 9,614 12,477
8 16,794 100,000 100,000 100,000 8,856 11,765 15,622 8,598 11,507 15,364
9 19,393 100,000 100,000 100,000 9,791 13,450 18,508 9,791 13,450 18,508
10 22,121 100,000 100,000 100,000 10,686 15,190 21,683 10,686 15,190 21,683
- -------------------------------------------------------------------------------------------------------------------
15 37,951 100,000 100,000 100,000 14,371 24,632 43,038 14,371 24,632 43,038
20 58,155 100,000 100,000 122,577 16,379 35,369 78,075 16,379 35,369 78,075
25 83,940 100,000 100,000 180,399 16,278 47,846 134,626 16,278 47,846 134,626
30 116,849 100,000 100,000 275,175 13,076 62,861 225,554 13,076 62,861 225,554
</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 .51% asset management charge, a .81% current mortality
and expense risk charge and other expenses estimated at .02%. 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 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 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 $ 1,169 $ 1,249 $ 1,329 $ 137 $ 217 $ 297
2 3,605 100,000 100,000 100,000 2,304 2,537 2,780 1,272 1,505 1,748
3 5,544 100,000 100,000 100,000 3,404 3,863 4,361 2,372 2,831 3,329
4 7,580 100,000 100,000 100,000 4,464 5,225 6,085 3,432 4,193 5,053
5 9,718 100,000 100,000 100,000 5,483 6,623 7,964 4,451 5,591 6,932
- --------------------------------------------------------------------------------------------------------------------
6 11,963 100,000 100,000 100,000 6,458 8,055 10,011 5,684 7,281 9,237
7 14,320 100,000 100,000 100,000 7,386 9,520 12,244 6,870 9,004 11,728
8 16,794 100,000 100,000 100,000 8,265 11,018 14,680 8,007 10,760 14,422
9 19,393 100,000 100,000 100,000 9,093 12,548 17,341 9,093 12,548 17,341
10 22,121 100,000 100,000 100,000 9,866 14,108 20,250 9,866 14,108 20,250
- --------------------------------------------------------------------------------------------------------------------
15 37,951 100,000 100,000 100,000 12,859 22,400 39,651 12,859 22,400 39,651
20 58,155 100,000 100,000 112,065 13,949 31,388 71,379 13,949 31,388 71,379
25 83,940 100,000 100,000 163,920 12,096 40,801 122,328 12,096 40,801 122,328
30 116,849 100,000 100,000 247,808 5,547 50,523 203,121 5,547 50,523 203,121
</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 .51% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .02%. 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 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 $ 2,345 $ 2,502 $ 0 $ 0 $ 0
2 7,103 100,000 100,000 100,000 4,285 4,735 5,205 1,374 1,824 2,294
3 10,923 100,000 100,000 100,000 6,292 7,175 8,134 3,381 4,264 5,223
4 14,935 100,000 100,000 100,000 8,225 9,684 11,334 5,314 6,773 8,423
5 19,146 100,000 100,000 100,000 10,079 12,261 14,833 7,168 9,350 11,922
- -------------------------------------------------------------------------------------------------------------------
6 23,569 100,000 100,000 100,000 11,834 14,893 18,650 9,651 12,710 16,467
7 28,212 100,000 100,000 100,000 13,497 17,590 22,834 12,041 16,135 21,378
8 33,088 100,000 100,000 100,000 15,059 20,352 27,427 14,331 19,624 26,700
9 38,207 100,000 100,000 100,000 16,515 23,179 32,484 16,515 23,179 32,484
10 43,582 100,000 100,000 100,000 17,859 26,076 38,067 17,859 26,076 38,067
- -------------------------------------------------------------------------------------------------------------------
15 74,770 100,000 100,000 100,000 22,736 41,866 77,134 22,736 41,866 77,134
20 114,574 100,000 100,000 155,318 23,538 60,862 145,157 23,538 60,862 145,157
25 165,374 100,000 100,000 269,568 16,529 86,027 256,732 16,529 86,027 256,732
30 230,211 0 128,466 457,280 0 122,349 435,505 0 122,349 435,505
</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 .51% asset management charge, a .81% current mortality
and expense risk charge and other expenses estimated at .02%. 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 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 4,148 4,585 5,041 1,237 1,674 2,130
3 10,923 100,000 100,000 100,000 6,083 6,938 7,869 3,172 4,027 4,958
4 14,935 100,000 100,000 100,000 7,919 9,330 10,930 5,008 6,419 8,019
5 19,146 100,000 100,000 100,000 9,649 11,756 14,244 6,738 8,845 11,333
- -------------------------------------------------------------------------------------------------------------------
6 23,569 100,000 100,000 100,000 11,267 14,213 17,840 9,084 12,030 15,657
7 28,212 100,000 100,000 100,000 12,765 16,697 21,749 11,310 15,242 20,293
8 33,088 100,000 100,000 100,000 14,129 19,199 26,001 13,401 18,471 25,273
9 38,207 100,000 100,000 100,000 15,344 21,711 30,640 15,344 21,711 30,640
10 43,582 100,000 100,000 100,000 16,400 24,229 35,715 16,400 24,229 35,715
- -------------------------------------------------------------------------------------------------------------------
15 74,770 100,000 100,000 100,000 18,811 36,810 70,521 18,811 36,810 70,521
20 114,574 100,000 100,000 141,299 13,735 48,821 132,055 13,735 48,821 132,055
25 165,374 0 100,000 244,380 0 59,294 232,743 0 59,294 232,743
30 230,211 0 100,000 410,614 0 68,033 391,061 0 68,033 391,061
</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 .51% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .02%. 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 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 $ 2,648 $ 2,846 $ 3,044 $ 0 $ 0 $ 0
2 9,256 100,000 100,000 100,000 5,194 5,758 6,347 629 1,193 1,782
3 14,234 100,000 100,000 100,000 7,634 8,736 9,935 3,069 4,171 5,370
4 19,460 100,000 100,000 100,000 9,972 11,791 13,852 5,407 7,226 9,287
5 24,948 100,000 100,000 100,000 12,203 14,924 18,140 7,638 10,359 13,575
- -------------------------------------------------------------------------------------------------------------------
6 30,711 100,000 100,000 100,000 14,323 18,141 22,845 10,899 14,717 19,421
7 36,761 100,000 100,000 100,000 16,337 21,455 28,036 14,055 19,173 25,753
8 43,114 100,000 100,000 100,000 18,222 24,856 33,765 17,081 23,715 32,624
9 49,785 100,000 100,000 100,000 19,973 28,354 40,117 19,973 28,354 40,117
10 56,789 100,000 100,000 100,000 21,578 31,952 47,185 21,578 31,952 47,185
- -------------------------------------------------------------------------------------------------------------------
15 97,427 100,000 100,000 114,141 27,502 52,347 98,398 27,502 52,347 98,398
20 149,293 100,000 100,000 197,888 29,196 79,842 184,942 29,196 79,842 184,942
25 215,488 100,000 125,914 343,185 23,389 119,918 326,843 23,389 119,918 326,843
30 299,971 100,000 177,774 581,606 4,081 169,309 553,911 4,081 169,309 553,911
</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 .51% asset management charge, a .81% current mortality
and expense risk charge and other expenses estimated at .02%. 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 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 $ 2,301 $ 2,485 $ 2,671 $ 0 $ 0 $ 0
2 9,256 100,000 100,000 100,000 4,467 4,981 5,521 0 416 956
3 14,234 100,000 100,000 100,000 6,497 7,489 8,573 1,932 2,924 4,008
4 19,460 100,000 100,000 100,000 8,388 10,008 11,854 3,823 5,443 7,289
5 24,948 100,000 100,000 100,000 10,135 12,538 15,395 5,570 7,973 10,830
- -------------------------------------------------------------------------------------------------------------------
6 30,711 100,000 100,000 100,000 11,727 15,073 19,225 8,304 11,649 15,801
7 36,761 100,000 100,000 100,000 13,146 17,599 23,377 10,864 15,317 21,095
8 43,114 100,000 100,000 100,000 14,373 20,107 27,893 13,232 18,966 26,751
9 49,785 100,000 100,000 100,000 15,386 22,583 32,823 15,386 22,583 32,823
10 56,789 100,000 100,000 100,000 16,165 25,020 38,239 16,165 25,020 38,239
- -------------------------------------------------------------------------------------------------------------------
15 97,427 100,000 100,000 100,000 15,997 36,644 76,841 15,997 36,644 76,841
20 149,293 100,000 100,000 157,566 5,104 46,777 147,258 5,104 46,777 147,258
25 215,488 0 100,000 274,930 0 53,481 261,838 0 53,481 261,838
30 299,971 0 100,000 462,885 0 53,308 440,843 0 53,308 440,843
</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 .51% asset management charge, a .90% guaranteed maximum
mortality and expense risk charge and other expenses estimated at .02%. Values
illustrated are also net of any other applicable contract charges.
47
<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, 1999
<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 $23,002,614) $27,464,981 $ 29,205 $282,584 $ 651,992
- ------------------------------ ----------- ---------- ---------- ----------
TOTAL ASSETS 27,464,981 29,205 282,584 651,992
- ------------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 603 -- 6 14
- ------------------------------ ----------- ---------- ---------- ----------
NET ASSETS $27,464,378 $ 29,205 $282,578 $ 651,978
- ------------------------------ =========== ========== ========== ==========
PERCENTAGE OF NET ASSETS 100.00% 0.11% 1.03% 2.37%
- ------------------------------ =========== ========== ========== ==========
NET ASSETS ARE REPRESENTED BY:
Units in accumulation period 23,499 233,802 463,622
Unit values $ 1.243 $ 1.209 $ 1.406
- ------------------------------ ---------- ---------- ----------
NET ASSETS $ 29,205 $282,578 $ 651,978
- ------------------------------ ========== ========== ==========
</TABLE>
See accompanying notes.
J-2
<PAGE>
<TABLE>
<CAPTION>
AVIS
U.S. AVIS
GOVERNMENT/ AVIS AVIS GLOBAL
AVIS AVIS AAA-RATED AVIS ASSET GLOBAL SMALL
GROWTH-INCOME GROWTH SECURITIES INTERNATIONAL ALLOCATION GROWTH CAPITALIZATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at Market --
Unaffiliated
(Cost $23,002,614) $ 6,153,052 $ 12,101,313 $ 133,632 $ 4,455,015 $ 1,932,496 $ 1,247,866 $ 477,826
- ------------------------------ ------------- ------------ ----------- ------------- ----------- ----------- --------------
TOTAL ASSETS 6,153,052 12,101,313 133,632 4,455,015 1,932,496 1,247,866 477,826
- ------------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 136 266 3 98 43 27 10
- ------------------------------ ------------- ------------ ----------- ------------- ----------- ----------- --------------
NET ASSETS $ 6,152,916 $ 12,101,047 $ 133,629 $ 4,454,917 $ 1,932,453 $ 1,247,839 $ 477,816
- ------------------------------ ============= ============ =========== ============= =========== =========== ==============
PERCENTAGE OF NET ASSETS 22.40% 44.06% 0.49% 16.22% 7.04% 4.54% 1.74%
- ------------------------------ ============= ============ =========== ============= =========== =========== ==============
NET ASSETS ARE REPRESENTED BY:
Units in accumulation period 2,859,647 3,718,609 108,617 1,589,702 1,053,725 535,313 246,618
Unit values $ 2.152 $ 3.254 $ 1.230 $ 2.802 $ 1.834 $ 2.331 $ 1.937
- ------------------------------ ------------- ------------ ----------- ------------- ----------- ----------- --------------
NET ASSETS $ 6,152,916 $ 12,101,047 $ 133,629 $ 4,454,917 $ 1,932,453 $ 1,247,839 $ 477,816
- ------------------------------ ============= ============ =========== ============= =========== =========== ==============
</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, 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 --
- ------------------------------
- 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
- ------------------------------ ========== ========== ==========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income:
- Dividends from investment
income $ 314,480 $ 1,756 $ 10,172
- ------------------------------
- Dividends from net
realized gain on
investments 3,206,722 -- --
- ------------------------------
- Mortality and expense risk
charge (163,946) (152) (1,932)
- ------------------------------ ---------- ---------- ----------
NET INVESTMENT INCOME 3,357,256 1,604 8,240
- ------------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
- Net realized gain (loss)
on investments 254,297 (427) 97
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 3,617,446 (427) 882
- ------------------------------ ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 3,871,743 (854) 979
- ------------------------------ ---------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $7,228,999 $ 750 $ 9,219
- ------------------------------ ========== ========== ==========
</TABLE>
See accompanying notes.
J-4
<PAGE>
<TABLE>
<CAPTION>
AVIS
U.S.
AVIS GOVERNMENT/ AVIS AVIS
HIGH-YIELD AVIS AVIS AAA-RATED AVIS ASSET GLOBAL
BOND GROWTH-INCOME GROWTH SECURITIES INTERNATIONAL ALLOCATION GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Net Investment Income:
- Dividends from investment
income $ 26,922 $ 27,752 $ 15,653 $ 2,147 $ 19,717 $ 16,009 $ 140
- ------------------------------
- Dividends from net
realized gain on
investments 4,667 197,434 438,839 -- 135,707 31,449 75
- ------------------------------
- Mortality and expense risk
charge (2,221) (10,450) (20,972) (236) (6,865) (3,468) (80)
- ------------------------------ ---------- ------------- ----------- ----------- ------------- ---------- ----------
NET INVESTMENT INCOME 29,368 214,736 433,520 1,911 148,559 43,990 135
- ------------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
- Net realized gain (loss)
on investments 606 22,496 49,915 16 2,188 3,216 (15)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (422) 16,107 172,521 600 (149,128) 25,311 (207)
- ------------------------------ ---------- ------------- ----------- ----------- ------------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 184 38,603 222,436 616 (146,940) 28,527 (222)
- ------------------------------ ---------- ------------- ----------- ----------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 29,552 $ 253,339 $ 655,956 $ 2,527 $ 1,619 $ 72,517 $ (87)
- ------------------------------ ========== ============= =========== =========== ============= ========== ==========
YEAR ENDED DECEMBER 31, 1998
Net Investment Income:
- Dividends from investment
income $ 56,757 $ 55,502 $ 19,751 $ 4,376 $ 26,629 $ 33,255 $ 761
- ------------------------------
- Dividends from net
realized gain on
investments 9,873 578,712 891,774 -- 43,223 77,721 3,642
- ------------------------------
- Mortality and expense risk
charge (4,997) (24,961) (40,231) (534) (15,494) (7,089) (533)
- ------------------------------ ---------- ------------- ----------- ----------- ------------- ---------- ----------
NET INVESTMENT INCOME 61,633 609,253 871,294 3,842 54,358 103,887 3,870
- ------------------------------
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 2,093
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (66,575) (121,701) 653,655 838 276,327 (19,654) 13,988
- ------------------------------ ---------- ------------- ----------- ----------- ------------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (70,884) (106,512) 706,799 1,062 281,100 (11,090) 16,081
- ------------------------------ ---------- ------------- ----------- ----------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ (9,251) $ 502,741 $ 1,578,093 $ 4,904 $ 335,458 $ 92,797 $ 19,951
- ------------------------------ ========== ============= =========== =========== ============= ========== ==========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income:
- Dividends from investment
income $ 62,065 $ 94,142 $ 16,238 $ 7,555 $ 52,089 $ 59,570 $ 9,704
- ------------------------------
- Dividends from net
realized gain on
investments -- 977,393 1,627,784 -- 390,123 119,653 49,941
- ------------------------------
- Mortality and expense risk
charge (5,251) (41,925) (69,769) (955) (23,878) (12,902) (5,023)
- ------------------------------ ---------- ------------- ----------- ----------- ------------- ---------- ----------
NET INVESTMENT INCOME 56,814 1,029,610 1,574,253 6,600 418,334 166,321 54,622
- ------------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
- Net realized gain (loss)
on investments (21,578) 2,861 139,956 (164) 108,575 309 6,670
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (2,599) (555,794) 2,437,446 (7,979) 1,342,723 (86,053) 358,585
- ------------------------------ ---------- ------------- ----------- ----------- ------------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (24,177) (552,933) 2,577,402 (8,143) 1,451,298 (85,744) 365,255
- ------------------------------ ---------- ------------- ----------- ----------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 32,637 $ 476,677 $ 4,151,655 $ (1,543) $ 1,869,632 $ 80,577 $ 419,877
- ------------------------------ ========== ============= =========== =========== ============= ========== ==========
<CAPTION>
AVIS
GLOBAL
SMALL
CAPITALIZATION
SUBACCOUNT
<S> <C>
- ------------------------------
YEAR ENDED DECEMBER 31, 1997
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 (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ --
- ------------------------------ ==============
YEAR ENDED DECEMBER 31, 1998
Net Investment Income:
- Dividends from investment
income $ 802
- ------------------------------
- Dividends from net
realized gain on
investments 2,133
- ------------------------------
- Mortality and expense risk
charge (457)
- ------------------------------ --------------
NET INVESTMENT INCOME 2,478
- ------------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
- Net realized gain (loss)
on investments (366)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 17,508
- ------------------------------ --------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 17,142
- ------------------------------ --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 19,620
- ------------------------------ ==============
YEAR ENDED DECEMBER 31, 1999
Net Investment Income:
- Dividends from investment
income $ 1,189
- ------------------------------
- Dividends from net
realized gain on
investments 41,828
- ------------------------------
- Mortality and expense risk
charge (2,159)
- ------------------------------ --------------
NET INVESTMENT INCOME 40,858
- ------------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
- Net realized gain (loss)
on investments 17,998
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 130,662
- ------------------------------ --------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 148,660
- ------------------------------ --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 189,518
- ------------------------------ ==============
</TABLE>
J-5
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT J
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
AVIS
AVIS CASH
BOND MANAGEMENT
COMBINED SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- -------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 1997 $ 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 (DECREASE) 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
- ------------------------------
Changes from operations:
- Net investment income 3,357,256 1,604 8,240
- ------------------------------
- Net realized gain (loss)
on investments 254,297 (427) 97
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 3,617,446 (427) 882
- ------------------------------ ----------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 7,228,999 750 9,219
- ------------------------------
Change from unit transactions:
- Contract purchases 9,758,426 87,470 622,759
- ------------------------------
- Contract redemptions (5,292,731) (66,943) (586,240)
- ------------------------------ ----------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM UNIT
TRANSACTIONS 4,465,695 20,527 36,519
- ------------------------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS 11,694,694 21,277 45,738
- ------------------------------ ----------- ---------- ----------
NET ASSETS AT DECEMBER 31,
1999 $27,464,378 $ 29,205 $ 282,578
- ------------------------------ =========== ========== ==========
</TABLE>
See accompanying notes.
J-6
<PAGE>
<TABLE>
<CAPTION>
AVIS
U.S.
AVIS GOVERNMENT/ AVIS AVIS
HIGH-YIELD AVIS AVIS AAA-RATED AVIS ASSET GLOBAL
BOND GROWTH-INCOME GROWTH SECURITIES INTERNATIONAL ALLOCATION GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 1997 $ 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 43,990 135
- ------------------------------
- Net realized gain (loss)
on investments 606 22,496 49,915 16 2,188 3,216 (15)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (422) 16,107 172,521 600 (149,128) 25,311 (207)
- ------------------------------ ---------- ------------- ------------ ----------- ------------- ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 29,552 253,339 655,956 2,527 1,619 72,517 (87)
- ------------------------------
Change from unit transactions:
- Contract purchases 357,911 1,844,806 2,723,358 35,983 1,174,128 349,556 41,417
- ------------------------------
- Contract redemptions (72,063) (608,080) (881,665) (12,139) (207,458) (110,648) (2,323)
- ------------------------------ ---------- ------------- ------------ ----------- ------------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 285,848 1,236,726 1,841,693 23,844 966,670 238,908 39,094
- ------------------------------ ---------- ------------- ------------ ----------- ------------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 315,400 1,490,065 2,497,649 26,371 968,289 311,425 39,007
- ------------------------------ ---------- ------------- ------------ ----------- ------------- ----------- -----------
NET ASSETS AT DECEMBER 31,
1997 453,785 2,120,228 3,707,319 39,399 1,350,995 591,755 39,007
Changes from operations:
- Net investment income 61,633 609,253 871,294 3,842 54,358 103,887 3,870
- ------------------------------
- Net realized gain (loss)
on investments (4,309) 15,189 53,144 224 4,773 8,564 2,093
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (66,575) (121,701) 653,655 838 276,327 (19,654) 13,988
- ------------------------------ ---------- ------------- ------------ ----------- ------------- ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS (9,251) 502,741 1,578,093 4,904 335,458 92,797 19,951
- ------------------------------
Change from unit transactions:
- Contract purchases 499,259 2,404,044 2,476,671 81,214 1,285,142 703,474 101,146
- ------------------------------
- Contract redemptions (219,868) (889,708) (1,064,607) (22,016) (521,466) (256,778) (45,511)
- ------------------------------ ---------- ------------- ------------ ----------- ------------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 279,391 1,514,336 1,412,064 59,198 763,676 446,696 55,635
TOTAL INCREASE IN NET ASSETS 270,140 2,017,077 2,990,157 64,102 1,099,134 539,493 75,586
- ------------------------------ ---------- ------------- ------------ ----------- ------------- ----------- -----------
NET ASSETS AT DECEMBER 31,
1998 723,925 4,137,305 6,697,476 103,501 2,450,129 1,131,248 114,593
- ------------------------------
Changes from operations:
- Net investment income 56,814 1,029,610 1,574,253 6,600 418,334 166,321 54,622
- ------------------------------
- Net realized gain (loss)
on investments (21,578) 2,861 139,956 (164) 108,575 309 6,670
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments (2,599) (555,794) 2,437,446 (7,979) 1,342,723 (86,053) 358,585
- ------------------------------ ---------- ------------- ------------ ----------- ------------- ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 32,637 476,677 4,151,655 (1,543) 1,869,632 80,577 419,877
- ------------------------------
Change from unit transactions:
- Contract purchases 285,858 2,684,521 2,737,646 51,202 1,085,823 1,165,323 810,529
- ------------------------------
- Contract redemptions (390,442) (1,145,587) (1,485,730) (19,531) (950,667) (444,695) (97,160)
- ------------------------------ ---------- ------------- ------------ ----------- ------------- ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM UNIT
TRANSACTIONS (104,584) 1,538,934 1,251,916 31,671 135,156 720,628 713,369
- ------------------------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS (71,947) 2,015,611 5,403,571 30,128 2,004,788 801,205 1,133,246
- ------------------------------ ---------- ------------- ------------ ----------- ------------- ----------- -----------
NET ASSETS AT DECEMBER 31,
1999 $ 651,978 $6,152,916 $ 12,101,047 $ 133,629 $ 4,454,917 $ 1,932,453 $ 1,247,839
- ------------------------------ ========== ============= ============ =========== ============= =========== ===========
<CAPTION>
AVIS
GLOBAL
SMALL
CAPITALIZATION
SUBACCOUNT
<S> <C>
- ------------------------------
NET ASSETS AT JANUARY 1, 1997 $ --
- ------------------------------
Changes from operations:
- Net investment income --
- ------------------------------
- Net realized gain (loss)
on investments --
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments --
- ------------------------------ --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS --
- ------------------------------
Change 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,
1997 --
Changes from operations:
- Net investment income 2,478
- ------------------------------
- Net realized gain (loss)
on investments (366)
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 17,508
- ------------------------------ --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 19,620
- ------------------------------
Change from unit transactions:
- Contract purchases 154,011
- ------------------------------
- Contract redemptions (6,892)
- ------------------------------ --------------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 147,119
TOTAL INCREASE IN NET ASSETS 166,739
- ------------------------------ --------------
NET ASSETS AT DECEMBER 31,
1998 166,739
- ------------------------------
Changes from operations:
- Net investment income 40,858
- ------------------------------
- Net realized gain (loss)
on investments 17,998
- ------------------------------
- Net change in unrealized
appreciation or
depreciation on
investments 130,662
- ------------------------------ --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 189,518
- ------------------------------
Change from unit transactions:
- Contract purchases 227,295
- ------------------------------
- Contract redemptions (105,736)
- ------------------------------ --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM UNIT
TRANSACTIONS 121,559
- ------------------------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS 311,077
- ------------------------------ --------------
NET ASSETS AT DECEMBER 31,
1999 $ 477,816
- ------------------------------ ==============
</TABLE>
J-7
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT J
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION
THE VARIABLE ACCOUNT: Lincoln Life Flexible Premium Variable Life Account J
(Variable Account) was established as a segregated investment account of The
Lincoln National Life Insurance Company (Lincoln Life) on March 9, 1994. The
Variable 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 Variable Account are owned by Lincoln Life. The portion of the
Variable Account's assets supporting the variable life policies may not be used
to satisfy liabilities arising from any other business of Lincoln Life.
BASIS OF PRESENTATION: The accompanying financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for unit investment trusts.
INVESTMENTS: The Variable 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, 1999, 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 Variable 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 Variable 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 Variable 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 Variable Account's net investment income and the net
realized gain on investments.
2. MORTALITY AND EXPENSE RISK CHARGE & OTHER TRANSACTIONS WITH AFFILIATE
PERCENT OF PREMIUM CHARGE: Prior to allocation of net premiums to the Variable
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 1999, 1998 and 1997 by Lincoln Life for such charges
were $326,225, $158,245 and $193,178, respectively.
VARIABLE ACCOUNT CHARGES: Amounts are charged daily to the Variable 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 Variable 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
Variable Account units, are for monthly administrative charges, the cost of
insurance, transfer and withdrawal charges, and
J-8
<PAGE>
contingent surrender charges. These other charges for 1999, 1998 and 1997
amounted to $1,504,586, $1,148,399 and $600,215, 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.
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 Variable 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, 1999.
<TABLE>
<CAPTION>
AVIS AVIS
AVIS CASH HIGH-YIELD
BOND MANAGEMENT BOND
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Unit transactions $16,439,412 $ 27,687 $263,221 $ 589,560
- ---------------------------------------
Accumulated net investment income 6,145,764 2,365 19,841 154,539
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 416,835 (375) 530 (24,935)
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 4,462,367 (472) (1,014) (67,186)
- --------------------------------------- ----------- ---------- ---------- ----------
$27,464,378 $ 29,205 $282,578 $ 651,978
=========== ========== ========== ==========
</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 $ 4,862,250 $ 5,612,455 $ 127,306 $ 2,216,166 $ 1,663,991 $ 808,098
- ---------------------------------------
Accumulated net investment income 1,906,570 2,970,246 13,008 638,828 338,404 58,627
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 42,744 241,997 50 118,197 12,247 8,748
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments (658,648) 3,276,349 (6,735) 1,481,726 (82,189) 372,366
- --------------------------------------- ------------- ------------ ----------- ------------- ----------- -----------
$ 6,152,916 $ 12,101,047 $ 133,629 $ 4,454,917 $ 1,932,453 $ 1,247,839
============= ============ =========== ============= =========== ===========
<CAPTION>
AVIS
GLOBAL
SMALL
CAPITALIZATION
SUBACCOUNT
<S> <C>
- ---------------------------------------
Unit transactions $ 268,678
- ---------------------------------------
Accumulated net investment income 43,336
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 17,632
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 148,170
- --------------------------------------- --------------
$ 477,816
==============
</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 1999.
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
COST OF PROCEEDS
PURCHASES FROM SALES
<S> <C> <C>
- -----------------------------------------------------------------
AVIS Bond Fund $ 87,804 $ 65,673
- ---------------------------------------
AVIS Cash Management Fund 621,475 576,715
- ---------------------------------------
AVIS High-Yield Bond Fund 223,273 271,045
- ---------------------------------------
AVIS Growth-Income Fund 2,897,585 328,996
- ---------------------------------------
AVIS Growth Fund 3,401,373 575,084
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 52,593 14,321
- ---------------------------------------
AVIS International Fund 1,146,741 593,207
- ---------------------------------------
AVIS Asset Allocation Fund 1,151,596 264,629
- ---------------------------------------
AVIS Global Growth Fund 817,458 49,442
- ---------------------------------------
AVIS Global Small Capitalization Fund 254,977 92,553
- ---------------------------------------
----------- -----------
$10,654,875 $ 2,831,665
=========== ===========
</TABLE>
5. INVESTMENTS
The following is a summary of investments owned at December 31, 1999.
<TABLE>
<CAPTION>
NET
SHARES ASSET VALUE OF COST OF
OUTSTANDING VALUE SHARES SHARES
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
AVIS Bond Fund 2,999 $ 9.74 $ 29,205 $ 29,677
- ---------------------------------------
AVIS Cash Management Fund 25,573 11.05 282,584 283,598
- ---------------------------------------
AVIS High-Yield Bond Fund 51,137 12.75 651,992 719,178
- ---------------------------------------
AVIS Growth-Income Fund 186,005 33.08 6,153,052 6,811,700
- ---------------------------------------
AVIS Growth Fund 171,358 70.62 12,101,313 8,824,964
- ---------------------------------------
AVIS U.S. Government/AAA-Rated
Securities Fund 12,655 10.56 133,632 140,367
- ---------------------------------------
AVIS International Fund 166,605 26.74 4,455,015 2,973,289
- ---------------------------------------
AVIS Asset Allocation Fund 128,235 15.07 1,932,496 2,014,685
- ---------------------------------------
AVIS Global Growth Fund 58,257 21.42 1,247,866 875,500
- ---------------------------------------
AVIS Global Small Capitalization Fund 27,508 17.37 477,826 329,656
- ---------------------------------------
------------ ------------
$ 27,464,981 $ 23,002,614
============ ============
</TABLE>
6. NEW INVESTMENT FUNDS
Effective April 25, 1997, the AVIS Global Growth Fund became available as an
investment option for Variable Account contract owners. Effective May 1, 1998,
the AVIS Global Small Capitalization Fund became available as an investment
option for Variable Account contract owners.
J-12
<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, 1999, 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 auditing standards
generally accepted in the United States. 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, 1999, 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, 1999, 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
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 24, 2000
J-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $22,985.0 $23,830.9
- ------------------------------------------------------------
Preferred stocks 253.8 236.0
- ------------------------------------------------------------
Unaffiliated common stocks 166.9 259.3
- ------------------------------------------------------------
Affiliated common stocks 604.7 322.1
- ------------------------------------------------------------
Mortgage loans on real estate 4,211.5 3,932.9
- ------------------------------------------------------------
Real estate 254.0 473.8
- ------------------------------------------------------------
Policy loans 1,652.9 1,606.0
- ------------------------------------------------------------
Other investments 426.6 434.4
- ------------------------------------------------------------
Cash and short-term investments 1,409.2 1,725.4
- ------------------------------------------------------------ --------- ---------
Total cash and investments 31,964.6 32,820.8
- ------------------------------------------------------------
Premiums and fees in course of collection 115.8 33.3
- ------------------------------------------------------------
Accrued investment income 435.3 432.8
- ------------------------------------------------------------
Reinsurance recoverable 199.0 171.6
- ------------------------------------------------------------
Funds withheld by ceding companies 73.5 53.7
- ------------------------------------------------------------
Federal income taxes recoverable from parent company 61.6 64.7
- ------------------------------------------------------------
Goodwill 43.1 49.5
- ------------------------------------------------------------
Other admitted assets 66.7 89.3
- ------------------------------------------------------------
Separate account assets 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total admitted assets $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,184.0 $12,310.6
- ------------------------------------------------------------
Other policyholder funds 16,589.5 16,647.5
- ------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 364.0 897.6
- ------------------------------------------------------------
Funds held under reinsurance treaties 796.9 795.8
- ------------------------------------------------------------
Asset valuation reserve 490.9 484.5
- ------------------------------------------------------------
Interest maintenance reserve 72.3 159.7
- ------------------------------------------------------------
Other liabilities 627.0 504.5
- ------------------------------------------------------------
Short-term loan payable to parent company 205.0 140.0
- ------------------------------------------------------------
Net transfers due from separate accounts (896.5) (789.0)
- ------------------------------------------------------------
Separate account liabilities 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total liabilities 76,538.2 68,058.2
- ------------------------------------------------------------
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 1,250.0
- ------------------------------------------------------------
Paid-in surplus 1,942.6 1,930.1
- ------------------------------------------------------------
Unassigned surplus -- deficit (691.1) (640.6)
- ------------------------------------------------------------ --------- ---------
Total capital and surplus 2,526.5 2,564.5
- ------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- --------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 7,273.6 $12,737.6 $5,589.0
- ------------------------------------------------------------
Net investment income 2,203.2 2,107.2 1,847.1
- ------------------------------------------------------------
Amortization of interest maintenance reserve 29.1 26.4 41.5
- ------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 472.3 179.9 99.7
- ------------------------------------------------------------
Expense charges on deposit funds 146.5 134.6 119.3
- ------------------------------------------------------------
Separate account investment management and administration
service fees 473.9 396.3 325.5
- ------------------------------------------------------------
Other income 88.8 31.3 21.3
- ------------------------------------------------------------ --------- --------- --------
Total revenues 10,687.4 15,613.3 8,043.4
- ------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 8,504.9 13,964.1 4,522.1
- ------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 1,618.3 2,919.4 3,053.9
- ------------------------------------------------------------ --------- --------- --------
Total benefits and expenses 10,123.2 16,883.5 7,576.0
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments 564.2 (1,270.2) 467.4
- ------------------------------------------------------------
Dividends to policyholders 80.3 67.9 27.5
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments 483.9 (1,338.1) 439.9
- ------------------------------------------------------------
Federal income taxes (credit) 85.4 (141.0) 78.3
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before net realized gain on
investments 398.5 (1,197.1) 361.6
- ------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 114.4 46.8 31.3
- ------------------------------------------------------------ --------- --------- --------
Net income (loss) $ 512.9 $(1,150.3) $ 392.9
- ------------------------------------------------------------ ========= ========= ========
</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
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,564.5 $2,968.4 $1,868.0
- ------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) 512.9 (1,150.3) 392.9
- ------------------------------------------------------------
Difference in cost and admitted investment amounts (101.9) (304.8) (36.2)
- ------------------------------------------------------------
Nonadmitted assets (22.9) (17.1) (0.4)
- ------------------------------------------------------------
Regulatory liability for reinsurance 26.0 (35.2) (3.9)
- ------------------------------------------------------------
Gain on reinsurance of disability income business 71.8 -- --
- ------------------------------------------------------------
Life policy reserve valuation basis -- (0.4) (0.9)
- ------------------------------------------------------------
Asset valuation reserve (6.4) (34.5) (36.9)
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 12.5 108.4 938.4
- ------------------------------------------------------------
Separate account receivable due to change in valuation -- -- (2.6)
- ------------------------------------------------------------
Dividends to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,526.5 $2,564.5 $2,968.4
- ------------------------------------------------------------ ======== ======== ========
</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
1999 1998 1997
--------- ---------- ---------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 7,671.1 $ 13,495.2 $ 6,364.3
- ------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (19.9) (632.4) (649.2)
- ------------------------------------------------------------
Investment income received 2,168.6 2,003.9 1,798.8
- ------------------------------------------------------------
Separate account investment management and administration
service fees 470.6 396.3 325.5
- ------------------------------------------------------------
Benefits paid (8,699.4) (7,395.8) (5,345.2)
- ------------------------------------------------------------
Insurance expenses paid (1,734.5) (2,909.7) (3,193.0)
- ------------------------------------------------------------
Proceeds related to sale of disability income business 71.8 -- --
- ------------------------------------------------------------
Federal income taxes recovered (paid) (81.2) 84.2 (87.0)
- ------------------------------------------------------------
Dividends to policyholders (82.8) (12.9) (28.4)
- ------------------------------------------------------------
Other income received and expenses paid, net 252.1 207.0 (8.7)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) operating activities 16.4 5,235.8 (822.9)
- ------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 6,557.7 10,926.5 12,142.6
- ------------------------------------------------------------
Purchase of investments (5,940.8) (16,950.0) (10,345.0)
- ------------------------------------------------------------
Other sources (uses) including reinsured policy loans (497.0) (778.3) 529.1
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) investing activities 119.9 (6,801.8) 2,326.7
- ------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 12.5 108.4 --
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Proceeds from borrowings from shareholder 205.0 140.0 120.0
- ------------------------------------------------------------
Repayment of borrowings from shareholder (140.0) (120.0) (100.0)
- ------------------------------------------------------------
Dividends paid to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) financing activities (452.5) 1,158.4 (130.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net increase (decrease) in cash and short-term investments (316.2) (407.6) 1,373.8
- ------------------------------------------------------------
Cash and short-term investments at beginning of year 1,725.4 2,133.0 759.2
- ------------------------------------------------------------ --------- ---------- ---------
Cash and short-term investments at end of year $ 1,409.2 $ 1,725.4 $ 2,133.0
- ------------------------------------------------------------ ========= ========== =========
</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 (the "Company") is a wholly
owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1999, the Company owned 100% of the outstanding
common stock of four insurance company subsidiaries and four non-insurance
subsidiaries. The Company also owned 85% of the common stock of an Internet
distributor of variable annuities.
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 accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
INVESTMENTS
Bonds and preferred stocks 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 and preferred stocks 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 a 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
writedowns 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
insurance subsidiaries are carried at their statutory-basis net equity and
the non-insurance subsidiaries are carried at their GAAP-basis net equity,
adjusted for certain items which would be non-admitted under statutory
accounting principles. Both insurance subsidiaries and non-insurance
subsidiaries are presented in the balance sheet as investments in affiliated
common stocks.
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
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 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 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 are accounted
for using deposit accounting under GAAP.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
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
1999 1998 1999 1998 1997
----------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,526.5 $ 2,564.5 $ 512.9 $(1,150.3) $392.9
-----------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
non-admitted goodwill 3,628.2 3,085.2 135.0 48.5 (98.9)
--------------------------------------
Policy and contract reserves (1,943.1) (2,299.9) (97.9) 1,743.4 (48.6)
--------------------------------------
Interest maintenance reserve 72.3 159.7 (86.6) 24.4 58.7
--------------------------------------
Deferred income taxes 244.5 181.6 (117.4) (218.6) 70.3
--------------------------------------
Policyholders' share of earnings and
surplus on participating business (122.7) (132.8) (1.8) 3.2 5.3
--------------------------------------
Asset valuation reserve 490.9 484.5 -- -- --
--------------------------------------
Net realized gain (loss) on investments (186.4) (174.1) (32.4) (116.7) (20.4)
--------------------------------------
Unrealized gain (loss) on investments (555.2) 1,335.1 -- -- --
--------------------------------------
Nonadmitted assets, including
nonadmitted investments 139.6 119.1 -- -- --
--------------------------------------
Investments in subsidiary companies 460.9 490.4 39.1 41.3 (80.5)
--------------------------------------
Surplus notes and related interest (1,250.0) (1,251.5) 1.5 (1.5) --
--------------------------------------
Other, net (61.0) (120.1) 129.8 103.6 (35.0)
-------------------------------------- --------- --------- --------- --------- ------
Net increase (decrease) 918.0 1,877.2 (30.7) 1,627.6 (149.1)
----------------------------------------- --------- --------- --------- --------- ------
Amounts on a GAAP basis $ 3,444.5 $ 4,441.7 $ 482.2 $ 477.3 $243.8
----------------------------------------- ========= ========= ========= ========= ======
</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 or deferred in IMR, where
applicable, and are amortized over the remaining lives of the hedged items
as adjustments to investment income. 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 amortized 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 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 are
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 cash collateral received which is
typically greater than the market value of the related securities loaned. In
other instances, the Company will hold as collateral securities with a
market value at least equal to the securities loaned. Securities held as
collateral are not recorded in the Company's balance sheet in accordance
with accounting guidance for secured borrowings and collateral. 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 reserves released and 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 the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LNC's common stock at the grant date, or other measurement date, over the
amount an employee or agent 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.
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") effective January 1, 2001. 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.
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
1999 1998 1997
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,840.6 $1,714.3 $1,524.4
------------------------------------------------------------
Preferred stocks 20.3 19.7 23.5
------------------------------------------------------------
Unaffiliated common stocks 6.3 10.6 8.3
------------------------------------------------------------
Affiliated common stocks 7.8 5.2 15.0
------------------------------------------------------------
Mortgage loans on real estate 321.0 323.6 257.2
------------------------------------------------------------
Real estate 57.8 81.4 92.2
------------------------------------------------------------
Policy loans 101.7 86.5 37.5
------------------------------------------------------------
Other investments 50.6 26.5 28.2
------------------------------------------------------------
Cash and short-term investments 95.9 104.7 70.3
------------------------------------------------------------ -------- -------- --------
Total investment income 2,502.0 2,372.5 2,056.6
------------------------------------------------------------
Expenses:
Depreciation 14.4 19.3 21.0
------------------------------------------------------------
Other 284.4 246.0 188.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 298.8 265.3 209.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,203.2 $2,107.2 $1,847.1
------------------------------------------------------------ ======== ======== ========
</TABLE>
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, 1999:
Corporate $17,758.4 $ 229.6 $763.0 $17,225.0
------------------------------------------------
U.S. government 316.8 29.6 21.5 324.9
------------------------------------------------
Foreign government 984.5 49.8 39.9 994.4
------------------------------------------------
Mortgage-backed 3,913.7 46.2 139.0 3,820.9
------------------------------------------------
State and municipal 11.6 -- .5 11.1
------------------------------------------------ --------- -------- ------ ---------
$22,985.0 $ 355.2 $963.9 $22,376.3
========= ======== ====== =========
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
========= ======== ====== =========
</TABLE>
The carrying amounts of bonds in the balance sheets at
December 31, 1999 and 1998 reflect adjustments of
$38,900,000 and $11,800,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as in or near default.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1999, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 2000 $ 598.0 $ 599.2
------------------------------------------------------------
In 2001-2004 4,359.8 4,313.4
------------------------------------------------------------
In 2005-2009 6,636.0 6,392.9
------------------------------------------------------------
After 2009 7,477.5 7,249.9
------------------------------------------------------------
Mortgage-backed securities 3,913.7 3,820.9
------------------------------------------------------------ --------- ---------
Total $22,985.0 $22,376.3
------------------------------------------------------------ ========= =========
</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 1999,
1998 and 1997 were $5,351,400,000, $9,395,000,000 and
$9,715,000,000, respectively. Gross gains during 1999, 1998
and 1997 of $95,400,000, $186,300,000 and $218,100,000,
respectively, and gross losses of $195,500,000, $138,000,000
and $78,000,000, respectively, were realized on those sales.
At December 31, 1999 and 1998, investments in bonds, with an
admitted asset value of $116,500,000 and $97,800,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks are reported directly in unassigned surplus
and are not reported in the statutory-basis Statements of
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, 1999:
Preferred stocks $253.8 $ 1.3 $31.5 $223.6
----------------------------------------
Unaffiliated common stocks 150.4 34.2 17.7 166.9
----------------------------------------
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
----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1999 and 1998 reflects adjustments of
$4,100,000 and $5,800,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1999, the minimum and maximum lending rates for
mortgage loans were 6.5% and 11.5%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. 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)
Components of the Company's investments in real estate are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 11.1 9.0
------------------------------------------------------------
Less accumulated depreciation (2.2) (1.7)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 11.4 9.8
------------------------------------------------------------
Other:
Land 46.2 93.2
------------------------------------------------------------
Buildings 226.8 413.0
------------------------------------------------------------
Other 4.7 7.9
------------------------------------------------------------
Less accumulated depreciation (35.1) (50.1)
------------------------------------------------------------ ------ ------
Net other real estate 242.6 464.0
------------------------------------------------------------ ------ ------
Net real estate $254.0 $473.8
------------------------------------------------------------ ====== ======
</TABLE>
Net realized capital gains are reported net of federal
income taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Net realized capital gains $ 20.8 $179.7 $209.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credits) of ($31.4), $27.3 and $54.0 in 1999, 1998 and
1997, respectively) (58.3) 50.8 100.2
------------------------------------------------------------ ------ ------ ------
79.1 128.9 109.1
Less federal income taxes (credits) on realized gains (35.3) 82.1 77.8
------------------------------------------------------------ ------ ------ ------
Net realized capital gains after transfer to IMR and taxes
(credits) $114.4 $ 46.8 $ 31.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
4. SUBSIDIARIES
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 ("LNY"). The Company also owns 100% of
the outstanding common stock of four non-insurance company
subsidiaries: Lincoln National Insurance Associates
("LNIA"), Sagemark Consulting, Inc. ("Sagemark"), Wakefield
Tower Alpha Limited ("Wakefield"), and Lincoln Realty
Capital
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
Corporation ("LRCC"). The Company also owns 85% of one
non-insurance company subsidiary, AnnuityNet, Inc.
(AnnuityNet). Statutory-basis financial information related
to the insurance subsidiaries is summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------
FIRST
PENN LNH&C LNRAC LNY
-----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,318.7 $434.6 $443.6 $1,888.6
---------------------------------------------------------
Other assets 40.6 55.5 492.6 403.1
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,242.2 $394.4 $261.4 $1,802.4
---------------------------------------------------------
Other liabilities 44.3 27.9 614.4 25.6
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 328.8
---------------------------------------------------------
Capital and surplus 72.8 67.8 60.4 134.9
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
---------------------------------
FIRST
PENN LNH&C LNRAC LNY
---------------------------------
<S> <C> <C> <C> <C>
Revenues $332.7 $263.3 $ 88.4 $ 313.3
-----------------------------------------------------------
Expenses 329.0 346.9 75.4 291.4
-----------------------------------------------------------
Net realized gains (losses) -- -- .2 (2.0)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ 3.7 $(83.6) $ 13.2 $ 19.9
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------
FIRST
PENN LNH&C LNRAC LNY
------------------------------------
<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>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
FIRST
PENN LNH&C LNRAC LNY
---------------------------------
<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>
AnnuityNet was formed in 1998 for the distribution of
variable annuities over the Internet and is valued on the
equity method (at 85% of GAAP equity) with an admitted asset
value of $2,400,000 at December 31, 1999. LNIA was purchased
in 1998 for $600,000 and is valued on the equity method with
an admitted asset value of $800,000 at December 31, 1999.
Sagemark is a broker dealer and was acquired in connection
with a reinsurance transaction completed in 1998. Sagemark
is valued on the equity method with an admitted asset value
of $6,400,000 at December 31, 1999. Wakefield was formed in
1999 to engage in the ownership and management of
investments and is valued on the equity method with an
admitted asset value of $248,300,000. Wakefield's assets as
of December 31, 1999 consist entirely of investments in
bonds. LRCC was formed in 1999 to engage in the management
of certain real estate investments. It was capitalized with
cash and three real estate investments of $12,700,000 and is
valued on the equity method with an admitted asset value of
$10,900,000.
The carrying value of all affiliated common stocks, was
$604,700,000 and $322,100,000 at December 31, 1999 and 1998,
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, 1999 and 1998 was $970,700,000 and
$631,100,000, respectively.
During 1999, 1998 and 1997 the Company's insurance
subsidiaries paid dividends of $5,200,000, $5,200,000 and
$15,000,000, 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 1999, 1998 and 1997, federal income tax expense (benefit)
incurred totaled $85,400,000, ($141,000,000) and
$78,300,000, respectively. In 1999, capital losses of
$151,700,000 were incurred, and carried back to recover
taxes paid in prior years.
The Company paid $45,300,000, $2,300,000 and $164,500,000 to
LNC in 1999, 1998 and 1997, respectively, in 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
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
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
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 "Reinsurance recoverable" includes
amounts recoverable from other insurers for claims paid by
the Company. The balance sheet caption, "Future policy
benefits and claims," and the balance sheet caption "Other
policyholder funds" have been reduced for insurance ceded as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $5,340.0 $4,081.8
------------------------------------------------------------
Amounts recoverable from other insurers 81.2 79.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
Insurance assumed $2,606.5 $9,018.9 $727.2
------------------------------------------------------------
Insurance ceded 1,675.1 877.1 302.9
------------------------------------------------------------ -------- -------- ------
Net amount included in premiums $ 931.4 $8,141.8 $424.3
------------------------------------------------------------ ======== ======== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,609,000,000, $2,098,800,000 and $1,240,500,000 for 1999,
1998 and 1997, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,208.3 $16,285.2
------------------------------------------------------------
Undistributed earnings on participating business 346.9 348.4
------------------------------------------------------------
Other 34.3 13.9
------------------------------------------------------------ --------- ---------
$16,589.5 $16,647.5
========= =========
</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, 1999
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $10.8 $ 7.3 $ 3.5
------------------------------------------------------------
Ordinary renewal 54.2 6.8 47.4
------------------------------------------------------------
Group life 13.7 .1 13.6
------------------------------------------------------------ ----- ----- -----
$78.7 $14.2 $64.5
===== ===== =====
</TABLE>
<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>
7. ANNUITY RESERVES
At December 31, 1999, 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 $ 2,427.7 4%
------------------------------------------------------------
At book value, less surrender charge 2,237.3 3
------------------------------------------------------------
At market value 44,076.2 68
------------------------------------------------------------ --------- ---
48,741.2 75
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 13,486.5 21
------------------------------------------------------------
Not subject to discretionary withdrawal 2,622.4 4
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund 64,850.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,548.0
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $63,302.1
------------------------------------------------------------ =========
</TABLE>
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
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 Corporation ("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
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, 1999), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna, Inc. ("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, 1999), and subject
to approval by the Indiana Insurance Commissioner.
A summary of the terms of these surplus notes follows (in millions):
<TABLE>
<CAPTION>
PRINCIPAL INCEPTION ACCRUED
OUTSTANDING AT TO DATE INTEREST AT
PRINCIPAL DECEMBER 31, CURRENT YEAR INTEREST DECEMBER 31,
DATE ISSUED AMOUNT OF NOTE 1999 INTEREST PAID PAID 1999
----------- -------------- -------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
January 5, 1998 $ 500.0 $ 500.0 $ 32.8 $ 65.1 $ --
-------------------------------
December 18, 1998 750.0 750.0 46.7 46.7 --
-------------------------------
</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,
1999, 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, 1999 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. The time frame for
unassigned surplus to return to a positive position is dependent upon future
statutory earnings and dividends paid to LNC. 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-19
<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). Effective July 1, 1999, the
agents' postretirement plan was changed to require agents retiring on or
after that date to pay the full premium costs. This change to the plan
resulted in a one-time curtailment gain of $1,400,000 in 1999. 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 Operations 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. Options issued subsequent to 1991
are exercisable in 25% increments on the option issuance anniversary in the
four years following issuance.
As of December 31, 1999, there were 2,072,087 and 1,397,005 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 919,749 and
241,097, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $12.50 to $56.75. During 1999, 1998 and
1997, there were 318,421, 136,469 and 170,789 options exercised,
respectively, and 82,024, 18,288 and 1,846 options 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, 1999 and 1998 is
$221,600,000 and $670,100,000, 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.
PERSONAL ACCIDENT PROGRAMS
In the past, the Company and its wholly owned subsidiary, LNH&C, accepted
personal accident reinsurance programs from other insurance companies. Most
of these programs were presented by independent brokers who represented 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. The liabilities for these
programs, net of related assets recoverable from reinsurers, were
$174,700,000 and $177,400,000 at December 31, 1999 and 1998, respectively.
Settlement activities relating to the Company's participation in workers'
compensation carve-out (i.e., life and health risks associated with workers'
compensation coverage) programs managed by Unicover Managers, Inc. have
allowed the Company to evaluate the possibility of settlements and to
estimate its potential costs to settle Unicover-related exposures. As of
December 31, 1999, a liability of $62,200,000 has been established for the
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement of the Company's exposure to the Unicover programs.
These amounts are based on various estimates that are subject to
considerable uncertainty. Accordingly, the liabilities may prove to be
deficient or excessive. However, it is management's opinion that future
developments in these programs will not materially affect the financial
position of the Company.
HMO EXCESS-OF-LOSS REINSURANCE PROGRAMS
In light of the continued volatility in the HMO excess-of-loss line of
business, LNH&C discontinued writing new HMO excess-of-loss reinsurance
programs in the third quarter of 1999. The liability for HMO claims, net of
the related assets for amounts recoverable from reinsurers, was $101,900,000
and $55,900,000 at December 31, 1999 and 1998, respectively. LNH&C reviews
reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss
ratios fluctuate significantly from the assumptions underlying the reserves,
adjustments to reserves could be required in the future. Accordingly, the
liability may prove to be deficient or excessive. However, it is
management's opinion that such future developments will not materially
affect the financial position of the Company.
MARKETING AND COMPLIANCE MATTERS
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 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 1999, 1998 and 1997 was
$38,900,000, $34,000,000 and $29,300,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
2000 $ 28.7
--------------------------------
2001 28.8
--------------------------------
2002 27.5
--------------------------------
2003 26.2
--------------------------------
2004 26.5
--------------------------------
Thereafter 123.5
-------------------------------- ------
$261.2
======
</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
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
operations. Total costs incurred in 1999 and 1998 were $67,400,000 and
$54,800,000, respectively. 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. The Company limits its maximum coverage that
it retains on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been coinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1999, the
reserves associated with these reinsurance arrangements totaled
$1,422,800,000. 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 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 States 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 LNY reinsured 100% of a block of individual life
insurance and annuity business from 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 $4,780,300,000 that became
the Company's obligation. The Company also received assets, measured on a
historical statutory-basis, equal to the liabilities.
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.
In 1999, the Company and CIGNA reached an agreement through arbitration on
the final statutory-basis values of the assets and liabilities reinsured. As
a result, the Company's ceding commission for this transaction was reduced
by $58.6 million.
Subsequent to this transaction, the Company and LNY announced that they had
reached an agreement to sell the administration rights to a variable 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 September 1, 1998.
On October 1, 1998, the Company and LNY entered into an indemnity
reinsurance transaction whereby the Company and LNY reinsured 100% of a
block of individual life insurance business from Aetna. 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 $2,813,800,000
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 LNY 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.
On November 1, 1999, the Company closed its previously announced agreement
to transfer a block of disability income business to MetLife. Under this
indemnity reinsurance agreement, the Company transferred $490,800,000 of
cash to MetLife representing the statutory reserves transferred on this
business less $17,800,000 of purchase price consideration. A gain on the
reinsurance transaction of $71,800,000 was recorded directly in unassigned
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
surplus and will be recognized in statutory earnings over the life of the
business.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1999, the Company provided $270,000,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company 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 $17,300,000 and $43,400,000 at December 31, 1999
and 1998, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999, 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, 1999, 29% of such mortgages ($1,212,700,000) 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 $70,000,000.
At December 31, 1999, 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 certain 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
proceedings will not have a material adverse affect on the financial
position of the Company.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, the Company now has
several such actions pending. While each of these lawsuits seeks class
action status, the court has not certified a class in any of them. In each
of these lawsuits, plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While relief sought in these
lawsuits is substantial, they are in the discovery stages of litigation, and
it is premature to make assessments about potential loss, if any. Management
intends to defend these lawsuits vigorously. The amount of liability, if
any, which may arise as a result of these lawsuits cannot be reasonably
estimated at this time. In another lawsuit, a settlement has been
preliminarily approved by the court, and a class has been conditionally
certified for settlement purposes. Two other similar lawsuits previously
have been resolved and dismissed.
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
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
credit exposure. Outstanding guarantees with off-balance-sheet risks at
December 31, 1999 relate to mortgage loan pass-through certificates. The
Company has sold commercial mortgage loans through grantor trusts that
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, 1999 and 1998 were $25,900,000 and $30,900,000, 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, 1999 and 1998.
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 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 being hedged by
such contracts.
Outstanding derivatives with off-balance-sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values,
are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
---------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-----------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1999 1998 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ .9
---------------------------------
Swaptions 1,837.5 1,899.5 12.2 10.8 16.2 2.5
---------------------------------
Interest rate swaps 630.9 258.3 -- (19.5) -- 9.9
---------------------------------
Put options 21.3 21.3 -- 1.9 -- 2.2
--------------------------------- -------- -------- ----- ------ ----- -----
4,998.5 6,287.9 17.4 (3.6) 25.5 15.5
Foreign currency derivatives:
Forward contracts -- 1.5 -- -- -- --
---------------------------------
Foreign currency swaps 44.2 47.2 -- (.4) -- .3
--------------------------------- -------- -------- ----- ------ ----- -----
44.2 48.7 -- (.4) -- .3
Commodity derivatives:
Commodity swaps -- 8.1 -- -- -- 2.4
--------------------------------- -------- -------- ----- ------ ----- -----
$5,042.7 $6,344.7 $17.4 $ (4.0) $25.5 $18.2
======== ======== ===== ====== ===== =====
</TABLE>
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 SWAPTIONS
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,108.8 $4,900.0 $1,899.5 $1,752.0
-------------------------------------------------------
New contracts -- 708.8 -- 218.3
-------------------------------------------------------
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
------------------------------------------------------- -------- -------- -------- --------
Balance at end of year $2,508.8 $4,108.8 $1,837.5 $1,899.5
------------------------------------------------------- ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Balance at beginning of year $ 258.3 $ 10.0
------------------------------------------------------------
New contracts 482.4 2,226.6
------------------------------------------------------------
Terminations and maturities (109.8) (1,978.3)
------------------------------------------------------------ ------- ---------
Balance at end of year $ 630.9 $ 258.3
------------------------------------------------------------ ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
----------------------------------------
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $21.3 $ -- $ 8.1 $ --
------------------------------------------------------------
New contracts -- 21.3 -- 8.1
------------------------------------------------------------
Terminations and maturities -- -- (8.1) --
------------------------------------------------------------ ----- ----- ----- ----
Balance at end of year $21.3 $21.3 $ -- $8.1
------------------------------------------------------------ ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
(FOREIGN INVESTMENTS)
------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY
FORWARD CONTRACTS SWAPS
------------------------------------
1999 1998 1999 1998
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1.5 $ 163.1 $47.2 $15.0
---------------------------------------------
New contracts 2.7 419.8 -- 39.2
---------------------------------------------
Terminations and maturities (4.2) (581.4) (3.0) (7.0)
--------------------------------------------- ----- ------- ----- -----
Balance at end of year $ -- $ 1.5 $44.2 $47.2
--------------------------------------------- ===== ======= ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 2000 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
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
premium paid for the interest rate caps is included in other investments
(amortized costs of $5.2 million as of December 31, 1999) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2000 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
investments (amortized cost of $12.2 million as of December 31, 1999) 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 security 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. While spreadlocks are
used periodically, there are no spreadlock agreements outstanding at
December 31, 1999.
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 agreement the stream of variable interest
payments based on the coupon payments hedged 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 blocks of business or to extend
the duration of certain portfolios of assets. Once the assets are purchased
the gains (losses) resulting from the termination of the swap agreements
will be applied to the basis of the assets. The gains (losses) will be
recognized in earnings over the life of the assets. The anticipated purchase
of assets related to extending the duration of certain portfolios of assets
is expected to be completed in 2000.
PUT OPTIONS
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed
maturity investments. The risk being hedged is a drop in bond prices due to
credit concerns with international bond issuers. The put options allow the
Company to put the bonds back to the counterparties at original par.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts and
foreign currency swaps, 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. A foreign currency swap is a contractual
agreement to exchange the currencies of two different countries at a fixed
rate of exchange in the future.
COMMODITY SWAPS
The Company used a commodity swap to hedge its exposure to fluctuations in
the price of gold. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a fixed amount of cash. The
Company owned a fixed income security that met its coupon
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 were the
product of the swap notional multiplied by the fixed rate stated in the swap
agreement. The net receipts or payments from commodity swaps were recorded
in net investment income. The fixed income security was called in the third
quarter of 1999 and the commodity swap expired.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,200,000, $10,000,000 and $7,000,000 in 1999, 1998 and 1997, respectively.
Deferred gains of $100,000 as of December 31, 1999, were the result of
terminated interest rate swaps. These gains are included with the related
fixed maturity securities to which the hedge applied or as deferred
liabilities 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 various derivative contracts. However, the Company does
not anticipate nonperformance 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 less collateral held for such agreements with each
counterparty if the net market value is in the Company's favor. At
December 31, 1999, the exposure was $8,500,000.
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.,
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 instruments are disclosed.
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
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-28
<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
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 22,985.0 $ 22,376.3 $ 23,830.9 $ 25,065.5
-----------------------------------------------
Preferred stocks 253.8 223.6 236.0 242.5
-----------------------------------------------
Unaffiliated common stocks 166.9 166.9 259.3 259.3
-----------------------------------------------
Mortgage loans on real estate 4,211.5 4,104.0 3,932.9 4,100.1
-----------------------------------------------
Policy loans 1,652.9 1,770.5 1,606.0 1,685.9
-----------------------------------------------
Other investments 426.6 426.6 434.4 434.4
-----------------------------------------------
Cash and short-term investments 1,409.2 1,409.2 1,725.4 1,725.4
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,730.4) (17,364.3) (17,845.8) (17,486.4)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (454.7) (465.1) (714.4) (738.2)
--------------------------------------------
Short-term debt (205.0) (205.0) (140.0) (140.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,022.1) (1,250.0) (1,335.1)
-----------------------------------------------
Derivatives 17.4 (4.0) 25.5 18.2
-----------------------------------------------
Investment commitments -- (0.8) -- (.6)
-----------------------------------------------
Separate account assets 46,105.1 46,105.1 36,907.0 36,907.0
-----------------------------------------------
Separate account liabilities (46,105.1) (46,105.1) (36,907.0) (36,907.0)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
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.
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 $60,400,000 and
$76,700,000 in 1999 and 1998, respectively, and override commissions and
operating expense allowances of $61,600,000 in 1997. LLAD incurred expenses
of $113,400,000, $102,400,000 and
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$5,500,000 in 1999, 1998 and 1997, 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, 1999 and 1998 include the
Company's participation in a short-term investment pool with LNC of
$390,300,000 and $383,600,000, respectively. Related investment income
amounted to $16,700,000, $16,800,000 and $15,500,000 in 1999, 1998 and 1997,
respectively. Short-term loan payable to parent company at December 31, 1999
and 1998 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $49,400,000, $92,100,000 and
$48,500,000 in 1999, 1998 and 1997, 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
1999 1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 19.7 $ 13.7 $ 11.9
----------------------
Insurance ceded 777.6 290.1 100.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 413.7 $ 197.3
------------------------
Future policy benefits
and claims ceded 1,680.4 1,125.0
------------------------
Amounts recoverable on
paid and unpaid losses 146.4 84.2
------------------------
Reinsurance payable on
paid losses 8.8 6.0
------------------------
Funds held under
reinsurance treaties --
net liability 2,106.4 1,375.4
------------------------
</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 $917,300,000 and $318,300,000 at December 31, 1999 and 1998,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1999 and 1998, LNC had guaranteed $818,900,000 and $237,000,000,
respectively, of these letters of credit. At December 31, 1999 and 1998, the
Company has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $118,800,000 and $122,400,000,
respectively, 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 none of the separate accounts have
any minimum guarantees and the investment risks associated with market
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$4,572,600,000, $3,953,300,000 and $4,821,800,000 in 1999, 1998 and 1997,
respectively. Reserves for separate accounts with assets at fair value were
$45,198,900,000 and $36,145,900,000 at December 31, 1999 and 1998,
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
1999 1998 1997
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 4,573.2 $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,933.8) (4,069.8) (2,943.8)
------------------------------------------------------------ --------- --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (360.6) $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= ========= =========
</TABLE>
15. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue was complex and affected many aspects of the Company's
business. The Company was particularly concerned with Year 2000 issues that
related to the Company's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners. From 1996
through 1999 the Company and its operating subsidiaries redirected a large
portion of internal Information Technology ("IT") efforts and contracted
with outside consultants to update systems to address Year 2000 issues.
Experts were engaged to assist in developing work plans and cost estimates
and to complete remediation activities.
For the year ended December 31, 1999, the Company identified expenditures of
$39,500,000 to address this issue. This brings the expenditures for 1996
through 1999 to $75,300,000. Because updating systems and procedures is an
integral part of the Company's on-going operations, most of the expenditures
shown above are expected to continue after all Year 2000 issues have been
resolved. All Year 2000 expenditures have been funded from operating cash
flows.
The scope of the overall Year 2000 program included 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 Company
completed these projects prior to year-end.
The Company's businesses have not identified any major problems in their
business processing. Minor problems have been resolved quickly. The
Company's businesses have not experienced any significant interruption in
service to clients or business partners or in reporting to regulators.
S-31
<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 (the "Company"),
a wholly owned subsidiary of Lincoln National Corporation, as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards
generally accepted in the United States. 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 accounting principles
generally accepted in the United States. The variances between
such practices and accounting principles generally accepted in
the United States 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 accounting
principles generally accepted in the United States, the
financial position of The Lincoln National Life Insurance
Company at December 31, 1999 and 1998, or the results of its
operations or its cash flows for each of the three years in the
period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
January 31, 2000
S-32
