<PAGE> 1
As filed with the Securities and Exchange Commission on December 29, 1995.
Registration No. 33-91938
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
------------------------
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(Exact name of trust)
NATIONAL LIFE INSURANCE COMPANY
(Name of depositor)
One National Life Drive
Montpelier, Vermont 05604
(Complete address of depositor's principal executive offices)
-------------------------
D. Russell Morgan
Counsel
National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
(Name and complete address of agent for service)
-------------------------
Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration
Statement.
-------------------------
Securities Being Offered -- Flexible Premium Variable Life Insurance Contracts
Pursuant to Rule 24f-2 of the Investment Company Act of 1940, the
Registrant has elected to register an indefinite amount of the securities being
offered. The $500 registration fee required pursuant to Rule 24f-2 has been
paid.
--------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
==============================================================================
<PAGE> 2
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
THE NATIONAL LIFE INSURANCE COMPANY
Cross Reference to Items Required by Form N-8B-2
<TABLE>
<CAPTION>
N-8B-2 ITEM CAPTION IN PROSPECTUS
- ----------- ---------------------
<S> <C>
1 Cover Page
2 Cover Page
3 Not applicable
4 Distribution of Policies
5 The Separate Account
6 The Separate Account
7 Not applicable
8 Not applicable
9 Legal Matters
10 Summary Description of the Policy; Payment and Allocation of
Premiums; Policy Rights; Other Policy Provisions; Changes in
Applicable Law, Funding or Otherwise; Voting Rights
11 The Market Street Fund; Variable Insurance Products Fund; Alger
American Fund
12 The Market Street Fund; Variable Insurance Products Fund; Alger
American Fund
13 Charges and Deductions
14 Payment and Allocation of Premiums
15 Payment and Allocation of Premiums
16 The Market Street Fund; Variable Insurance Products Fund; Alger
American Fund
17 Surrender Privilege; Withdrawal of Cash Surrender Value
18 The Separate Account
19 Policy Reports
20 Not Applicable
21 Loan Privileges
22 Not applicable
23 Not applicable
24 Not applicable
25 National Life Insurance Company
26 Not applicable
27 National Life Insurance Company
28 Officers and Directors of National Life
29 Not applicable
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
35 Not applicable
36 Not applicable
37 Not applicable
38 Distribution of Policies
39 Distribution of Policies
40 Distribution of Policies
41 Not applicable
42 Not applicable
43 Not applicable
44 Accumulated Value
45 Not applicable
46 Not applicable
47 National Life Insurance Company, The Separate Account, The Funds
48 Not applicable
49 Not applicable
50 The Separate Account
51 Payment and Allocation of Premiums; Death Benefit; Distribution of
Policies
52 Changes in Applicable Law, Funding and Otherwise
53 Not applicable
54 Not applicable
55 Appendix A - Illustration of Death Benefits, Accumulated Values and
Cash Surrender Values
56 Appendix A - Illustration of Death Benefits, Accumulated Values and
Cash Surrender Values
57 Appendix A - Illustration of Death Benefits, Accumulated Values and
Cash Surrender Values
58 Not applicable
59 Financial Statements
</TABLE>
<PAGE> 4
PART I
Information Required in Prospectus
<PAGE> 5
(logo) PROSPECTUS
VariTrak
FLEXIBLE PREMIUM ADJUSTABLE BENEFIT VARIABLE LIFE INSURANCE POLICY
ISSUED BY
NATIONAL LIFE INSURANCE COMPANY
One National Life Drive, Montpelier, Vermont 05604
Telephone: (802) 229-_____
This Prospectus describes the VariTrak Policy, a flexible premium
adjustable benefit variable life insurance policy (the "Policy") offered by
National Life Insurance Company ("National Life"). The Policy has an insurance
component and an investment component. The primary purpose of the Policy is
to provide insurance coverage on the life of the Insured. It is designed to
provide considerable flexibility in connection with premium payments,
investment options, and death benefits. It does so by giving the owner of a
Policy (the "Owner") the right to vary the frequency and amount of premium
payments (after the initial premium), to allocate Net Premiums among investment
alternatives with different investment objectives and (after the first Policy
Year) to increase or decrease the Death Benefit payable under the Policy.
After certain deductions are made, Net Premiums are allocated to the
National Variable Life Insurance Account, a separate account of National Life
(the "Separate Account") or to National Life's General Account (which pays
interest at declared rates guaranteed to equal or exceed 4%) or both. The
Separate Account has eleven Subaccounts, the assets of which are used to
purchase shares of a designated corresponding mutual fund portfolio (each, a
"Portfolio") that is part of one of the following funds (each, a "Fund"): the
Market Street Fund, Inc. (the "Market Street Fund"), managed by Sentinel
Advisors Company, except as to the International Portfolio and the Money Market
Portfolio, which are managed by Providentmutual Investment Management Company,
the Variable Insurance Products Fund, managed by Fidelity Investments, and the
Alger American Fund, managed by Fred Alger Management, Inc.
The portion of the Accumulated Value in the Subaccounts will vary with
the investment experience of the corresponding Portfolios. The Owner bears the
entire investment risk for all amounts allocated to the Separate Account; there
is no guaranteed minimum Accumulated Value for the Separate Account, and Cash
Surrender Value may be more or less than premiums paid.
The accompanying Prospectuses for the Funds describe the investment
objectives and the attendant risks of the Portfolios.
The Accumulated Value will reflect the Monthly Deductions and certain
other fees and charges such as the Mortality and Expense Risk Charge. Also, a
Surrender Charge may be imposed if, during the first 15 Policy Years, the
Policy lapses or is surrendered. Generally, during the first five Policy Years
the Policy will remain in force as long as the Minimum Guarantee Premium is
paid or the Cash Surrender Value is sufficient to pay Monthly Deductions
imposed in connection with the Policy. After the fifth Policy Year, whether
the Policy remains in force depends upon whether the Cash Surrender Value is
sufficient to pay the Monthly Deductions under the Policy, unless the optional
Guaranteed Death Benefit Rider has been purchased and Minimum Guarantee
Premiums have been paid in accordance with such Rider.
It may not be advantageous to purchase a Policy as a replacement for
another type of life insurance or as a means to obtain additional protection if
the purchaser already owns an adjustable benefit variable life insurance
policy.
---------------------
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY CURRENT PROSPECTUSES FOR THE
FUNDS LISTED ABOVE.
---------------------
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
SHARES OF THE FUNDS AND INTERESTS IN THE CONTRACTS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, A BANK, AND THE SHARES AND
INTERESTS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
Prospectus dated , 1996
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary Description of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Policy Offered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Separate Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Availability of Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flexibility to Adjust Amount of Death Benefit . . . . . . . . . . . . . . . . . . . . . .
Accumulated Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocation of Net Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Free-Look Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges Assessed in Connection with the Policy . . . . . . . . . . . . . . . . . . . . . .
Premium Tax Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monthly Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrender Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projection Report Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Daily Charges Against the Separate Account . . . . . . . . . . . . . . . . . . . .
Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy Lapse and Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawal of Cash Surrender Value . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrender of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available Automated Fund Management Features . . . . . . . . . . . . . . . . . . . . . . .
Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unisex Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illustrations of Death Benefits, Accumulated Value and Cash Surrender Value . . . . . . .
National Life Insurance Company, The Separate Account, and The Funds . . . . . . . . . . . . . . .
National Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Separate Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Market Street Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Aggressive Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . .
The Bond Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Managed Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The International Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Money Market Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable Insurance Products Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity-Income Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High Income Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overseas Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alger American Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alger American Small Capitalization Portfolio . . . . . . . . . . . . . . . . . .
Alger American Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . .
Termination of Participation Agreements . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
ii
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
<S> <C>
Resolving Material Conflicts
The General Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Detailed Description of Policy Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Death Benefit Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Which Death Benefit Option to Choose . . . . . . . . . . . . . . . . . . . . . . .
Change in Death Benefit Option . . . . . . . . . . . . . . . . . . . . . . . . . .
How the Death Benefit May Vary . . . . . . . . . . . . . . . . . . . . . . . . . .
Ability to Adjust Face Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How the Duration of the Policy May Vary . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Determination of Number of Units for the Separate Account . . . . . . . . . . . .
Determination of Unit Value . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Investment Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calculation of Accumulated Value . . . . . . . . . . . . . . . . . . . . . . . . .
Payment and Allocation of Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of a Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount and Timing of Premiums . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocation of Net Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy Lapse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges and Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium Tax Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrender Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Administrative Charge . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Sales Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monthly Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Insurance Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Insurance Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monthly Administrative Charge . . . . . . . . . . . . . . . . . . . . . . . . . .
Optional Benefit Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projection Report Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortality and Expense Risk Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
iii
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
<S> <C>
Policy Rights
Loan Privileges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Rate Charged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocation of Loans and Collateral . . . . . . . . . . . . . . . . . . . . . . . .
Interest Credited to Amounts Held as Collateral . . . . . . . . . . . . . . . . .
Bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Policy Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of Policy Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapse With Loans Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrender Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawal of Cash Surrender Value . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Free-Look Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telephone Transaction Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special Transfer Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Right for Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Right for Change in Investment Policy
Available Automated Fund Management Features . . . . . . . . . . . . . . . . . . . . . . .
Dollar Cost Averaging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Rebalancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The General Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum Guaranteed and Current Interest Rates . . . . . . . . . . . . . . . . . . . . . .
Bonus Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calculation of Non-loaned Accumulated Value in the General Account . . . . . . . .
Transfers from General Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Policy Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indefinite Policy Duration . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of Policy Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change of Owner and Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . .
Split Dollar Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Misstatement of Age and Sex . . . . . . . . . . . . . . . . . . . . . . . . . . .
Suicide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incontestability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Correspondence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of Interest Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for a Stated Time . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of a Stated Amount . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Joint and Two Thirds Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . .
50% Survivor Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
iv
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
<S> <C>
Optional Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Waiver of Monthly Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accidental Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guaranteed Insurability Option . . . . . . . . . . . . . . . . . . . . . . . . . .
Guaranteed Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Status of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Treatment of Policy Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Modified Endowment Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions from Policies Classified as Modified Endowment Contracts . . . . . .
Distributions from Policies Not Classified as Modified Endowment Contracts . . . .
Policy Loan Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multiple Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special Rules for Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . .
Possible Charge for National Life's Taxes . . . . . . . . . . . . . . . . . . . . . . . .
Policies Issued in Conjunction with Employee Benefit Plans . . . . . . . . . . . . . . . . . . . .
Legal Developments Regarding Unisex Actuarial Tables . . . . . . . . . . . . . . . . . . . . . . .
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in Applicable Law, Funding and Otherwise
Officers and Directors of National Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution of Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix A-Illustration of Death Benefits, Accumulated Values and
Cash Surrender Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
THE POLICY MAY NOT BE AVAILABLE IN ALL JURISDICTIONS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. IF GIVEN, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE
RELIED ON.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR
OR COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
v
<PAGE> 10
DEFINITIONS
<TABLE>
<S> <C>
ACCUMULATED VALUE The sum of the Policy's values in the Separate Account and the
General Account.
ATTAINED AGE The Issue Age of the Insured plus the number of full Policy Years
which have passed since the Date of Issue.
BENEFICIARY The person(s) or entity(ies) designated to receive all or some of the
Death Benefit when the Insured dies. The Beneficiary is designated in the application
or if subsequently changed, as shown in the latest change filed with National Life. If
no Beneficiary survives and unless otherwise provided, the Insured's estate will be the
Beneficiary.
CASH SURRENDER VALUE The Accumulated Value minus any applicable Surrender Charge, and
minus any outstanding Policy loans and accrued interest on such loans.
COLLATERAL The portion of the Accumulated Value in the General Account which
secures the amount of any Policy loan.
DAC TAX A tax attributable to Specified Policy Acquisition Expenses under
Internal Revenue Code Section 848.
DATE OF ISSUE The date on which the Policy is issued, which is set forth in the
Policy. It is used to determine Policy Years, Policy Months and Monthly Policy Dates,
as well as to measure suicide and contestable periods.
DEATH BENEFIT The Policy's Unadjusted Death Benefit, plus any dividends payable, plus any relevant
additional benefits provided by a supplementary benefit Rider, less any outstanding
Policy loan and accrued interest, and less any unpaid Monthly Deductions.
DURATION The number of full years the insurance has been in force; for the
Initial Face Amount, measured from the Date of Issue: for any increase in Face Amount,
measured from the effective date of such increase.
FACE AMOUNT The Initial Face Amount plus any increases in Face Amount and
minus any decreases in Face Amount.
GENERAL ACCOUNT The account which holds the assets of National Life which are
available to support its insurance and annuity obligations.
GRACE PERIOD A 61-day period measured from the date on which notice of pending lapse sent by National
Life during which the Policy will not lapse, and insurance coverage continues. To
prevent lapse, the Owner must during the Grace Period make a premium payment equal to
the sum of any amount by which the past Monthly Deductions have been in excess of Cash
Surrender Value, plus three times the Monthly Deduction due the date the Grace Period
began.
</TABLE>
1
<PAGE> 11
<TABLE>
<S> <C>
GUARANTEED DEATH BENEFIT
RIDER An optional Rider that will guarantee that the Policy will not lapse prior to Attained
Age 70, or 20 years from the Policy's Date of Issue, if longer, regardless of
investment performance, if the Minimum Guarantee Premium has been paid as of each
Monthly Policy Date.
HOME OFFICE National Life's Home Office at National Life Drive, Montpelier, Vermont 05604.
INITIAL FACE AMOUNT The Face Amount of the Policy on the Date of Issue. The Face Amount may be increased or
decreased after the first Policy Year.
INSURED The person upon whose life the Policy is issued.
ISSUE AGE The age of the Insured at his or her birthday nearest the Date of Issue. The Issue Age
is stated in the Policy.
MINIMUM FACE AMOUNT The Minimum Face Amount is generally $50,000. However, exceptions may be made in
employee benefit plan cases.
MINIMUM GUARANTEE PREMIUM The sum of the Minimum Monthly Premiums in effect on each Monthly Policy Date since the
Date of Issue (including the current month), plus all Withdrawals and outstanding Policy
loans and accrued interest.
MINIMUM INITIAL PREMIUM The minimum premium required to issue a Policy. It is equal to two
times the Minimum Monthly Premium.
MINIMUM MONTHLY PREMIUM The monthly amount used to determine the Minimum Guarantee
Premium. This amount, which includes any substandard charges and any applicable Rider
charges, is determined separately for each Policy, based on the requested Initial Face
Amount, and the Issue Age, sex and Rate Class of the Insured, and the Death Benefit
Option and any optional benefits selected. It is stated in each Policy.
MONTHLY ADMINISTRATIVE
CHARGE A charge of $7.50 per month included in the Monthly Deduction, which is intended to
reimburse National Life for ordinary administrative expenses.
MONTHLY DEDUCTION The amount deducted from the Accumulated Value on each Monthly Policy Date. It includes
the Monthly Administrative Charge, the Cost of Insurance Charge, and the monthly cost of
any benefits provided by Riders.
MONTHLY POLICY DATE The day in each calendar month which is the same day of the month as the Date of Issue,
or the last day of any month having no such date, except that whenever the Monthly
Policy Date would otherwise fall on a date other than a Valuation Day, the Monthly
Policy Date will be deemed to be the next Valuation Day.
NET AMOUNT AT RISK The amount by which the Unadjusted Death Benefit exceeds the Accumulated Value.
</TABLE>
2
<PAGE> 12
<TABLE>
<S> <C>
NET PREMIUM The remainder of a premium after the deduction of the Premium Tax
Charge.
OWNER The person(s) or entity(ies) entitled to exercise the rights granted in
the Policy.
PLANNED PERIODIC PREMIUM The premium amount which the Owner plans to pay at the frequency selected. The Owner
may request a reminder notice and may change the amount of the Planned Periodic Premium.
The Owner is not required to pay the designated amount.
POLICY ANNIVERSARY The same day and month as the Date of Issue in each later year.
POLICY YEAR A year that starts on the Date of Issue or on a Policy Anniversary.
PREMIUM TAX CHARGE A charge deducted from each premium payment to cover the cost of state and local premium
taxes, and the federal DAC Tax.
RATE CLASS The classification of the Insured for cost of insurance purposes. The Rate Classes are:
preferred nonsmoker; standard nonsmoker; smoker; juvenile; and substandard.
RIDERS Optional benefits that an Owner may elect to add to the Policy at an additional cost.
SURRENDER CHARGE The amount deducted from the Accumulated Value of the Policy upon lapse or surrender
during the first 15 Policy Years. The Maximum Surrender Charge is shown in the Policy.
UNADJUSTED DEATH BENEFIT Under Option A, the greater of the Face Amount or percentage of the Accumulated Value on
the date of death; under Option B, the greater of the Face Amount plus the Accumulated
Value on the date of death, or the applicable percentage of the Accumulated Value on the
date of death. The Death Benefit Option is selected at time of application but may be
later changed.
VALUATION DAY Each day that the New York Stock Exchange is open for business other than the day after
Thanksgiving and any day on which trading is restricted by directive of the Securities
and Exchange Commission. Unless otherwise indicated, whenever under a Policy an event
occurs or a transaction is to be effected on a day that is not a Valuation Date, it will
be deemed to have occurred on the next Valuation Date.
VALUATION PERIOD The time between two successive Valuation Days. Each Valuation Period includes a
Valuation Day and any non-Valuation Day or consecutive non-Valuation Days immediately
preceding it.
WITHDRAWAL A payment made at the request of the Owner pursuant to the right in the Policy to
withdraw a portion of the Cash Surrender
</TABLE>
3
<PAGE> 13
Value of the Policy. The Withdrawal Charge
will be deducted from the Withdrawal Amount.
SUMMARY DESCRIPTION OF THE POLICY
The following summary of the Policy provisions should be read in
conjunction with the detailed information appearing elsewhere in this
Prospectus. Unless otherwise noted, this Prospectus assumes the Insured is
alive.
THE POLICY OFFERED
The VariTrak flexible premium adjustable benefit variable life
insurance policy offered by this Prospectus is issued by National Life. The
Policy allows the Owner, subject to certain limitations, to make premium
payments in any amount and at any frequency. As long as the Policy remains in
force, it will provide for:
(1) Life insurance coverage on the named Insured;
(2) A Cash Surrender Value;
(3) Surrender and withdrawal rights and Policy loan privileges;
and
(4) A variety of additional insurance benefits.
The Policy described in this Prospectus is designed to provide
insurance coverage to help lessen the economic loss resulting from the death of
the Insured. It is not offered primarily as an investment. Life insurance is
not a short-term investment. Prospective Owners should consider their need for
insurance coverage and the Policy's investment potential on a long-term basis.
The Policy is called "flexible premium" because there is no fixed
schedule for premium payments, even though the Owner may establish a schedule
of Planned Periodic Premiums. The Policy is described as "adjustable benefit"
because the Owner may, after the first Policy Year and within limits, increase
or decrease the Face Amount and may change the Death Benefit Option. The
Policy is called "variable" because, unlike a fixed benefit whole life
insurance policy, the Death Benefit under the Policy may, and its Accumulated
Value will, vary to reflect the investment performance of the chosen
subaccounts of the Separate Account, and the crediting of interest to the
General Account, as well as other factors.
The failure to pay Planned Periodic Premiums will not itself cause the
Policy to lapse. Conversely, the payment of premiums in any amount or
frequency will not necessarily guarantee that the Policy will remain in force.
In general, the Policy will lapse if the Cash Surrender Value is insufficient
to pay the Monthly Deduction for Cost of Insurance, Monthly Administrative
Charges and any applicable Rider charges. During the first five Policy Years,
and, if the optional Guaranteed Death Benefit Rider has been purchased, until
the later of the Insured's Attained Age 70 or 20 Policy Years from the Date of
Issue, the Policy will not lapse, even if the Cash Surrender Value is
insufficient to pay the Monthly Deductions, so long as the Minimum Guarantee
Premium has been paid.
A prospective Owner who already has life insurance coverage should
consider whether or not changing or adding to existing coverage would be
advantageous. Generally it is not advisable to purchase another policy as a
replacement for an existing policy.
THE SEPARATE ACCOUNT
The Separate Account consists of eleven Subaccounts, the assets of
which are used to purchase shares of a designated corresponding Portfolio that
is part of one of the following Funds: the Market Street Fund, the Variable
Insurance Products Fund, and the Alger American Fund. There is no
4
<PAGE> 14
assurance that the investment objectives of a particular Portfolio will be met.
The Owner bears the entire investment risk of amounts allocated to the Separate
Account.
AVAILABILITY OF POLICY
This Policy can be issued for Insureds from Issue Ages 0 to 85. The
Minimum Face Amount is generally $50,000, although exceptions to this minimum
may be made for employee benefit plans. Before issuing a Policy, National Life
will require that the proposed Insured meet certain underwriting standards
satisfactory to National Life. The Rate Classes available are Preferred
Nonsmoker, Standard Nonsmoker, Smoker, Juvenile, and Substandard. (See
"Issuance of a Policy," Page ____.)
THE DEATH BENEFIT
As long as the Policy remains in force, National Life will pay the
Death Benefit to the Beneficiary upon receipt of due proof of the death of the
Insured. The Death Benefit will consist of the Policy's Unadjusted Death
Benefit, plus any dividends payable, plus any relevant additional benefits
provided by a supplementary benefit Rider, less any outstanding Policy loan and
accrued interest, and less any unpaid Monthly Deductions.
There are two Death Benefit Options available. Death Benefit Option A
provides for the greater of (a) the Face Amount and (b) the applicable
percentage of the Accumulated Value. Death Benefit Option B provides for the
greater of (a) the Face Amount plus the Accumulated Value and (b) the
applicable percentage of the Accumulated Value. (See "Death Benefit Options,"
Page ____.)
FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
After the first Policy Year, the Owner has significant flexibility to
adjust the Death Benefit by changing the Death Benefit Option or by increasing
or decreasing the Face Amount of the Policy. (See "Change in Death Benefit
Option," Page ____, and "Ability to Adjust Face Amount," Page ____.)
Any change in Death Benefit Option or in the Face Amount may affect
the charges under the Policy. Any increase in the Face Amount will result in
an increase in the Monthly Deductions. A decrease in Face Amount may also
affect the Monthly Deductions. (See "Cost of Insurance," Page ____.)
To the extent that a requested decrease in Face Amount would result in
cumulative premiums exceeding the maximum premium limitations applicable under
the Internal Revenue Code for life insurance, National Life will not effect the
decrease.
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held under the
Policy at any time. It equals the sum of the amounts held in the Separate
Account and the General Account. (See "Calculation of Accumulated Value," Page
____.)
The Accumulated Value in the Separate Account will reflect the
investment performance of the chosen Subaccounts of the Separate Account, any
Net Premiums paid, any transfers, any Withdrawals, any loans, any loan
repayments, any loan interest paid or credited and any charges assessed in
connection with the Policy. The Owner bears the entire investment risk for
amounts allocated to the Separate Account. There is no guaranteed minimum for
the portion of the Accumulated Value in the Separate Account. Accumulated
Value in the Separate Account may be greater or less than the Net Premiums
allocated to the Separate Account.
The General Account earns interest at rates National Life declares in
advance for specific periods. The rates are guaranteed to equal or exceed 4%.
The principal, after all deductions and charges, is also guaranteed. National
Life currently offers a bonus on the crediting rate in the amount of 0.50% per
annum on the non-loaned portion of the Accumulated Value in the General Account
in each
5
<PAGE> 15
Policy Year beginning with Policy Year 11; however, no bonus is guaranteed.
The value of the General Account will reflect any amounts allocated or
transferred to it plus interest credited to it, less amounts deducted,
transferred or withdrawn from it. (See "The General Account," Page ____.)
The Collateral portion of the Accumulated Value in the General Account
will reflect any amounts transferred from the Separate Account and/or
non-loaned portion of the General Account as collateral for Policy loans, plus
interest at rates National Life declares of at least 4%. The Collateral will be
reduced by loan repayments. (See "Loan Privileges," Page ____.)
The Accumulated Value is relevant to the computation of the Death
Benefit and Cost of Insurance Charges.
ALLOCATION OF NET PREMIUMS
Except as described below, Net Premiums will generally be allocated to
the Subaccounts of the Separate Account and the General Account in accordance
with the allocation percentages which are in effect for such premium when
received at National Life's Home Office. These percentages will be those
specified in the application or as subsequently changed by the Owner.
Any portion of the initial Net Premium and any Net Premiums received
before National Life receives at its Home Office a signed delivery receipt for
the Policy, and until the date which is ten days after the date of such signed
delivery receipt, that are designated to be allocated to the Separate Account
will be allocated instead to the Money Market Subaccount. At the end of such
period, the amount in the Money Market Subaccount (including investment
experience) will be allocated to each of the chosen Subaccounts based on the
proportion that the allocation percentage for such Subaccount bears to the sum
of the Separate Account premium allocation percentages. (See "Allocation of Net
Premiums," Page ____.)
TRANSFERS
The Owner may make transfers of the amounts in the Subaccounts of the
Separate Account and General Account between and among such accounts.
Transfers between the Subaccounts of the Separate Account or into the General
Account will be made on the Valuation Day National Life receives the request.
Transfers out of the General Account are limited in amount, and to one transfer
per Policy Year. Currently transfers may be made without charge regardless of
their frequency, and National Life has no present intent to impose a charge for
transfers in the foreseeable future; however, National Life reserves the right,
upon prior notice to Policy Owners, to impose in the future a charge of $25 on
each transfer in excess of five transfers in any one Policy Year. (See
"Transfers," Page ____.)
FREE-LOOK PRIVILEGE
The Policy provides for an initial "free-look" period, during which
the Owner may cancel the Policy and receive a refund equal to the gross
premiums paid on the Policy. This free-look period ends on the latest of: (a)
45 days after Part A of the application for the Policy is signed; (b) 10 days
after the Owner receives the Policy; and (c) 10 days after National Life mails
or personally delivers a Notice of Withdrawal Right to the Owner. To cancel
the Policy, the Owner must return the Policy to National Life or to an agent of
National Life within such time with a written request for cancellation. (See
"Free-Look Privilege," Page ____.)
CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Premium Tax Charge. A Premium Tax Charge will be deducted from each
premium payment, to cover the cost of state and local premium taxes, and the
federal DAC Tax. The charge is in an amount of 3.25% of each premium. For
qualified employee benefit plans, the charge will be 2.00% of each premium
rather than 3.25%. National Life reserves the right to change the amount of
the charge deducted from future premiums if the applicable law is changed.
(See "Premium Tax Charge," Page ____.)
6
<PAGE> 16
Monthly Deductions. On the Date of Issue and on each Monthly Policy
Date thereafter, the Accumulated Value will be reduced by a Monthly Deduction
equal to the sum of the monthly Cost of Insurance Charge, Monthly
Administrative Charge, and a charge for any additional benefits added by rider.
The monthly Cost of Insurance Charge will be determined by multiplying the Net
Amount at Risk (that is, the Unadjusted Death Benefit less Accumulated Value)
by the applicable cost of insurance rate(s), which will depend upon the Issue
Age, sex, and Rate Class of the Insured, the Duration and policy size band of
the Policy, and on National Life's expectations as to future mortality and
expense experience, but which will not exceed the guaranteed maximum cost of
insurance rates set forth in the Policy based on the Insured's Attained Age,
sex, Rate Class, and the "1980 Commissioners Standard Ordinary Smoker and
Nonsmoker Mortality Table." (See "Cost of Insurance," Page ____.) The Monthly
Administrative Charge is $7.50. (See "Monthly Administrative Charge," Page
____.) Beginning with Policy Year 11, National Life currently applies a bonus
under which the Monthly Deductions are reduced by 0.50% per annum of the
Accumulated Value in the Separate Account. (See "Bonus," Page ____.) However,
no such bonus is guaranteed.
Surrender Charge. A Surrender Charge is imposed if the Policy is
surrendered or lapses at any time before the end of the fifteenth Policy Year.
The Surrender Charge consists of a Deferred Administrative Charge and a
Deferred Sales Charge. (See "Surrender Charge," Page ____.)
The Deferred Administrative Charge varies by Issue Age, and is based
on Initial Face Amount. Charges per $1,000 of this amount for sample Issue
Ages are shown below. After the first five Policy Years, it declines linearly
by month until the end of Policy Year 15, when it becomes zero.
<TABLE>
<CAPTION>
Sample
Issue Age Charge per $1000 of Initial Face Amount
--------- ---------------------------------------
<S> <C>
0-5 None
10 $0.50
15 $1.00
20 $1.50
25-85 $2.00
</TABLE>
For Issue Ages not shown, the charge will increase by a ratable portion for
each full Policy Year.
The Deferred Sales Charge is calculated individually for each Policy,
based on its Surrender Charge target premium. The Surrender Charge target
premium is an annual amount, based on the Initial Face Amount, Issue Age, sex
and Rate Class of the Insured, used solely for the purpose of calculating the
Deferred Sales Charge. The Deferred Sales Charge is equal to the lesser of (a)
30% of the premiums received up to one Surrender Charge target premium, plus
10% of all premiums paid in excess of this amount but not greater than twice
such amount, plus 9% of all premiums paid in excess of twice such amount, or
(b) an amount that during the first five Policy Years is equal to 50% of the
Surrender Charge target premium and that then declines linearly by month
through the end of the fifteenth Policy Year, when it becomes zero (or, if
less, the maximum permitted under the New York nonforfeiture law).
Transfer Charge. Currently an unlimited number of transfers are permitted
in each Policy Year without charge, and National Life has no current intent to
impose a transfer charge in the foreseeable future; however, National Life
reserves the right to impose in the future a charge of $25 for each transfer in
excess of five transfers in any one Policy Year. (See "Transfer Charge," Page
____.)
Withdrawal Charge. A charge equal to the lesser of 2% of the amount
withdrawn or $25 will be deducted from each Withdrawal amount paid. (See
"Withdrawal Charge," Page ____.)
Projection Report Charge. National Life may impose a charge for each
projection report requested by the Owner. (See "Projection Report Charge, Page
___.)
7
<PAGE> 17
Daily Charge Against the Separate Account. A daily charge for National
Life's assumption of certain mortality and expense risks incurred in connection
with the Policy will be imposed at an annual rate which is currently 0.90% of
the average daily net assets of the Separate Account. (See "Charges Against the
Separate Account," Page ____.)
Other Charges. Shares of the Portfolios are purchased by the Separate
Account at net asset value, which reflects management fees and expenses
deducted from the assets of the Portfolios.
POLICY LAPSE AND REINSTATEMENT
During the first five Policy Years, the Policy will not lapse if premiums in
an amount at least equal to the Minimum Guarantee Premium have been paid,
regardless of the amount of Cash Surrender Value. If, however, premiums paid
are less than the Minimum Guarantee Premium, and the Cash Surrender Value on a
Monthly Processing Date is insufficient to cover the Monthly Deduction then
due, the Policy will lapse after a 61-day Grace Period unless a sufficient
premium has been paid.
An optional Guaranteed Death Benefit Rider is available which will
guarantee that the Policy will not lapse prior to the Insured's Attained Age
70, or 20 years from the Date of Issue of the Policy if longer, regardless of
investment performance, if the Minimum Guarantee Premium has been paid on a
timely basis. (See "Optional Benefits - Guaranteed Death Benefit" Page ____.)
Subject to certain conditions, including evidence of insurability
satisfactory to National Life and the payment of a sufficient premium, a Policy
may be reinstated at any time within five years (or such longer period as may
be required in a particular state) after the beginning of the Grace Period.
(See "Reinstatement," Page ____.)
LOAN PRIVILEGE
After the first Policy Year, the Owner may obtain Policy loans in an
amount not exceeding, in the aggregate, the Cash Surrender Value less three
Monthly Deductions.
Policy loans will bear interest at a fixed rate of 6% per year,
payable at the end of each Policy Year. If interest is not paid when due, it
will be added to the outstanding loan balance. Policy loans may be repaid at
any time and in any amount. Policy loans outstanding when the Death Benefit
becomes payable or the Policy is surrendered will be deducted from the proceeds
otherwise payable.
When a Policy loan is taken, Accumulated Value will be held in the
General Account as Collateral for the Policy loan. Accumulated Value is taken
from the Subaccounts of the Separate Account based on the instructions of the
Owner at the time a loan is taken. If specific allocation instructions have
not been received from the Owner, the Policy loan will be allocated to the
Subaccounts based on the proportion that each Subaccount's value bears to the
total Accumulated Value in the Separate Account. If the Accumulated Value in
one or more of the Subaccounts is insufficient to carry out the Owner's
instructions, the loan will not be processed until further instructions are
received from the Owner. Accumulated Value will be taken from the non-loaned
portion of the General Account as Collateral for a loan only to the extent that
the Accumulated Value in the Separate Account is insufficient. This amount
held in the General Account as Collateral will earn interest at an effective
annual rate National Life will determine prior to each calendar year. This
rate will not be less than 4%, and National Life currently intends to credit
interest on non-loaned Accumulated Value in the General Account for Policies in
Policy Year 11 and thereafter at rates which are 0.50% per annum higher than
those that apply to non-loaned Accumulated Value in the General Account for
Policies still in their first ten Policy Years. This bonus is not guaranteed,
however, and upon prior notice to Owners National Life may, in its sole
discretion, decide not to credit the bonus. National Life also currently
intends, but is not obligated to continue, to make preferred loans available on
the later of the Insured's Attained Age 65 and the end of Policy Year 20, in
limited amounts. For such Policy loans the amount held in the General Account
as Collateral will be credited with interest at an annual rate of 6%. However,
National Life is not obligated to continue to make preferred loans available,
and will make such loans available in its sole discretion. (See "Loan
Privileges," Page ____.)
8
<PAGE> 18
Depending upon the investment performance of Cash Surrender Value and
the amount of a Policy loan, the loan may cause a Policy to lapse. If a Policy
is not a Modified Endowment Contract, lapse of the Policy with Policy loans
outstanding may result in adverse tax consequences. (See "Tax Treatment of
Policy Benefits," Page ____.)
WITHDRAWAL OF CASH SURRENDER VALUE
After the first Policy Anniversary, the Owner may, subject to certain
restrictions, request a Withdrawal of Cash Surrender Value. The minimum amount
for such Withdrawal is $500 (exceptions down to $100 may be made for employee
benefit plans). The Withdrawal amount will be taken from the Subaccounts of
the Separate Account based on instructions provided by the Owner at the time of
the Withdrawal. If specific allocation instructions have not been received
from the Owner, the Withdrawal will be allocated to the Subaccounts based on
the proportion that the value in each account bears to the total Accumulated
Value in the Separate Account. If the Accumulated Value in one or more
Subaccounts is insufficient to carry out the Owner's instructions, the
Withdrawal will not be processed until further instructions are received from
the Owner. Withdrawal amounts will be taken from the General Account only to
the extent that the Accumulated Value in the Separate Account is insufficient.
If Death Benefit Option A is in effect, National Life will reduce the Face
Amount by an amount equal to the lesser of (a) the amount of the withdrawal and
(b) the excess of the Face Amount divided by the applicable percentage over the
Accumulated Value just after the withdrawal, but in any case not less than
zero. (See "Withdrawal of Cash Surrender Value," Page ____.)
A Withdrawal Charge will be deducted from the amount of each Withdrawal.
(See "Charges and Deductions - Withdrawal Charge," Page____.)
If a requested Withdrawal would reduce the Face Amount below the Minimum
Face Amount, the Withdrawal will not be allowed.
SURRENDER OF THE POLICY
The Owner may at any time fully surrender the Policy and receive the
Cash Surrender Value, if any. The Cash Surrender Value will equal the
Accumulated Value less any Policy loan with accrued interest and any applicable
Surrender Charge. (See "Surrender Privilege," Page ____.)
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
National Life currently offers, at no charge to Policy Owner, two
automated fund management programs, Dollar Cost Averaging and Portfolio
Rebalancing. (For a description of these features, see "Contract Rights -
Available Automated Fund Management Features," Page ____.)
TAX TREATMENT
National Life believes (based upon Notice 88-128 and the proposed
Regulations under Section 7702, issued on July 5, 1991) that a Policy issued on
a standard Rate Class basis generally should meet the Section 7702 definition
of a life insurance contract. With respect to a Policy issued on a substandard
basis, there is insufficient guidance to determine if such a Policy would in
all situations satisfy the Section 7702 definition of a life insurance
contract, particularly if the Owner pays the full amount of premiums permitted
under such a Policy. Assuming that a Policy qualifies as a life insurance
contract for Federal income tax purposes, an Owner should not be deemed to be
in constructive receipt of Accumulated Value under a Policy until there is a
distribution from the Policy. Moreover, death benefits payable under a Policy
should be completely excludable from the gross income of the Beneficiary. As a
result, the Beneficiary generally should not be taxed on these proceeds. (See
"Tax Status of the Policy," Page ____.)
Under certain circumstances, a Policy may be treated as a "Modified
Endowment Contract." If the Policy is a Modified Endowment Contract, then all
pre-death distributions, including Policy loans,
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<PAGE> 19
will be treated first as a distribution of taxable income and then as a return
of basis or investment in the contract. In addition, prior to age 59 1/2 any
such distributions generally will be subject to a 10% penalty tax. (For further
discussion on the circumstances under which a Policy will be treated as a
Modified Endowment Contract, See "Tax Treatment of Policy Benefits," Page____.)
If the Policy is not a Modified Endowment Contract, distributions
generally will be treated first as a return of basis or investment in the
contract and then as disbursing taxable income. Moreover, loans will not be
treated as distributions. Finally, neither distributions nor loans from a
Policy that is not a Modified Endowment Contract are subject to the 10% penalty
tax. (See "Distributions from Policies Not Classified as Modified Endowment
Contracts," Page ____.)
UNISEX POLICIES
Policies issued in several states provide for policy values which do
not vary by the sex of the Insured. (See "Cost of Insurance", Page ____.) In
addition, Policies issued in conjunction with employee benefit plans provide
for policy values which do not vary by the sex of the Insured. (See "Policies
Issued in Conjunction with Employee Benefit Plans", Page ____.) Thus,
references in this Prospectus to sex-distinct cost of insurance rates and any
values that vary by the sex of the Insured are not applicable to Policies
issued in states which require "unisex" policies or to Policies issued in
conjunction with employee benefit plans. Illustrations of the effect of these
unisex rates on premiums, Cash Surrender Values, and Death Benefits are
available from National Life on request.
ILLUSTRATIONS OF DEATH BENEFITS, ACCUMULATED VALUE AND CASH SURRENDER VALUE
Illustrations of how investment performance of the Separate Account
may cause the Death Benefit, the Accumulated Value and the Cash Surrender Value
to vary are included in Appendix A commencing on page A-1.
These projections of hypothetical values may be helpful in
understanding the long-term effects of different levels of investment
performance, of charges and deductions, of electing one or the other death
benefit option, and generally comparing and contrasting this Policy to other
life insurance policies. Nonetheless, the illustrations are based on
hypothetical investment rates of return and are not guaranteed. Illustrations
are illustrative only and are not a representation of past or future
performance. Actual rates of return may be more or less than those reflected
in the illustrations and, therefore, actual values will be different from those
illustrated.
NATIONAL LIFE INSURANCE COMPANY, THE SEPARATE ACCOUNT,
AND THE FUNDS.
NATIONAL LIFE INSURANCE COMPANY
National Life, a mutual life insurance company chartered in 1848 under
Vermont law, is authorized to transact life insurance and annuity business in
Vermont and in 50 other jurisdictions. National Life assumes all insurance
risks under the Policy and its assets support the Policy's benefits. On
September 30, 1995, National Life's assets were over $5.7 billion. (See
"Financial Statements," Page F-__.)
THE SEPARATE ACCOUNT
The Separate Account was established by National Life on February 1,
1985 under the provisions of the Vermont Insurance Law. It is a separate
investment account to which assets are allocated to support the benefits
payable under the Policies as well as other variable life insurance policies
National Life may issue.
The Separate Account's assets are the property of National Life. Each
Policy provides that the portion of the Separate Account's assets equal to the
reserves and other liabilities under the Policies (and
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<PAGE> 20
other policies) supported by the Separate Account will not be chargeable with
liabilities arising out of any other business that National Life may conduct.
In addition to the net assets and other liabilities for the Policies, the
Separate Account's net assets may in the future include amounts held to support
other variable life insurance policies issued by National Life and amounts
derived from expenses charged to the Policies by National Life which it
currently holds in the Separate Account. From time to time these additional
amounts will be transferred in cash by National Life to its General Account.
The Separate Account is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act") as a
unit investment trust type of investment company. Such registration does not
involve any supervision of the management or investment practices or policies
of the Separate Account by the SEC. The Separate Account meets the definition
of a "Separate Account" under Federal securities laws.
THE MARKET STREET FUND
The Aggressive Growth, Bond, Managed, International, and Money Market
Subaccounts of the Separate Account invest in shares of The Market Street Fund,
Inc., a "series" type of mutual fund which is registered with the SEC under the
1940 Act as a diversified open-end management investment company. The Market
Street Fund currently issues six "series" or classes of shares, each of which
represents an interest in a separate portfolio within the Fund, and five of
which are purchased and redeemed by the corresponding Subaccounts of the
Separate Account: the Aggressive Growth Portfolio, the Bond Portfolio, the
Managed Portfolio, the International Portfolio and the Money Market Portfolio.
The Market Street Fund sells and redeems its shares at net asset value without
a sales charge.
The investment objectives of the Market Street Fund's Portfolios
eligible for purchase by the Separate Account are set forth below. The
investment experience of each of the Subaccounts of the Separate Account
depends on the investment performance of the corresponding Portfolio. There is
no assurance that any Portfolio will achieve its stated objective.
The Aggressive Growth Portfolio. The Aggressive Growth Portfolio
seeks to achieve a high level of long-term capital appreciation by investing in
securities of a diverse group of smaller emerging companies.
The Bond Portfolio. The Bond Portfolio seeks to generate a high level
of current income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
The Managed Portfolio. The Managed Portfolio seeks to realize as high
a level of long-term total rate of return as is consistent with prudent
investment risk by investing in stocks, bonds, money market instruments or a
combination thereof.
The International Portfolio. The International Portfolio seeks
long-term growth of capital principally through investments in a diversified
portfolio of marketable equity securities of established non-United States
companies.
The Money Market Portfolio. The Money Market Portfolio seeks to
provide maximum current income consistent with capital preservation and
liquidity by investing in high-quality money market instruments.
With respect to the Aggressive Growth, Bond, and Managed Portfolios,
the Market Street Fund is advised by Sentinel Advisors Company ("SAC"), which
is registered with the SEC as an investment adviser under the Investment
Advisers Act of 1940. SAC is a partnership whose partners are affiliates of
National Life, Provident Mutual, and The Penn Mutual Life Insurance Company.
National Life's affiliate is currently the managing partner of SAC and is
entitled to the majority share of SAC's profit or loss. As compensation for
its services, SAC receives monthly compensation as follows:
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<PAGE> 21
Bond Portfolio - 0.35% of the first $100 million of the average daily
net assets of the Portfolio and 0.30% of the average daily net assets in
excess of $100 million.
Managed Portfolio - 0.40% of the first $100 million of the average
daily net assets of the Portfolio and 0.35% of the average daily net
assets in excess of $100 million.
Aggressive Growth Portfolio - 0.50% of the first $20 million of the
average daily net assets of the Portfolio, 0.40% of the next $20 million
of the average daily net assets of the Portfolio and 0.30% of such average
daily net assets of the Portfolio in excess of $40 million.
With respect to the International Portfolio, the Market Street Fund is
advised by Providentmutual Investment Management Company ("PIMC"), which is
also registered with the SEC as an investment adviser under the Investment
Advisers Act of 1940, and which receives monthly compensation at an effective
annual rate of 0.75% of the first $500 million of the average daily net assets
of the portfolio and 0.60% of the average daily net assets in excess of $500
million. PIMC has employed The Boston Company Asset Management, Inc. to
provide investment advisory services in connection with the Portfolio. As
compensation for the investment advisory services rendered, PIMC pays The
Boston Company Asset Management, Inc. a monthly fee at an effective annual rate
of 0.375% of the first $500 million of the average daily net assets of the
portfolio and 0.30% of the average daily net assets in excess of $500 million.
The Market Street Fund also is advised by PIMC with respect to the Money
Market Portfolio. As compensation for the investment advisory services in
connection with the Money Market Portfolio, the Market Street Fund pays PIMC
monthly compensation at an effective annual rate of 0.25% of the average daily
net assets of the Portfolio.
In addition to the fee for the investment advisory services, the Market
Street Fund pays its own expenses generally, including brokerage costs,
administrative costs, custodian costs, and legal, accounting and printing
costs. However, Provident Mutual has entered into an agreement with the Market
Street Fund whereby it will reimburse the Aggressive Growth, Bond, Managed, and
Money Market Portfolios for all ordinary operating expenses, excluding advisory
fees, in excess of an annual rate of 0.40% of the average daily net assets of
each Portfolio. With respect to the International Portfolio, Provident Mutual
has entered into an agreement with the Market Street Fund whereby it will
reimburse the International Portfolio for all ordinary operating expenses,
excluding advisory fees, in excess of an annual rate of 0.75% of its average
daily net assets. It is anticipated that these arrangements will continue, but
neither Provident Mutual nor National Life are under any legal obligation to
continue these reimbursement arrangements for any particular period of time; if
they are terminated, Market Street Fund expenses may increase.
A full description of the Market Street Fund, its investment objectives and
policies, its risks, expenses, and all other aspects of its operation is
contained in the attached Prospectus for the Market Street Fund, which should
be read together with this Prospectus.
VARIABLE INSURANCE PRODUCTS FUND
The Separate Account has four Subaccounts which invest exclusively in
shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund").
Like the Market Street Fund, the VIP Fund is a "series" type mutual fund
registered with the SEC as a diversified open-end management investment company
issuing a number of series or classes of shares, each of which represents an
interest in a Portfolio of the VIP Fund.
The Fidelity Equity-Income Subaccount, Fidelity Growth Subaccount,
Fidelity High Income Subaccount, and Fidelity Overseas Subaccount of the
Separate Account invest in shares of the Equity-Income Portfolio, Growth
Portfolio, the High Income Portfolio, and the Overseas Portfolio, respectively,
of the VIP Fund. Shares of these Portfolios are purchased and redeemed by the
Separate Account at net asset value without a sales charge. The Separate
Account purchases shares of the
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<PAGE> 22
Portfolios from the VIP Fund in accordance with a participation agreement
between the VIP Fund and National Life. The termination provisions of this
participation agreement are described below.
The investment objectives of the Portfolios of the VIP Fund in which the
Subaccounts invest are set forth below. The investment experience of each
Subaccount depends upon the investment performance of the corresponding
Portfolio. There is no assurance that any Portfolio will achieve its stated
objective.
Equity-Income Portfolio. This Portfolio seeks reasonable income by
investing primarily in income producing equity securities. In choosing these
securities, the Equity-Income Portfolio considers the potential for capital
appreciation. The Portfolio's goal is to achieve a yield which exceeds the
composite yield of the securities comprising the Standard and Poor's 500
Composite Stock Price Index.
Growth Portfolio. This Portfolio seeks to achieve capital appreciation.
The Growth Portfolio normally purchases common stocks, although its investments
are not restricted to any one type of security. Capital appreciation may also
be found in other types of securities, including bonds and preferred stocks.
High Income Portfolio. This Portfolio seeks to obtain a high level of
current income by investing primarily in high-yielding, lower-rated,
fixed-income securities, while also considering growth of capital. The risks
of investing in these high-yielding, high-risk securities is described in the
attached Prospectus for the VIP Fund, which should be read carefully before
investing.
Overseas Portfolio. This Portfolio seeks long term growth of capital
primarily through investments in foreign securities. The Overseas Portfolio
provides a means for diversification by participating in companies and
economies outside of the United States.
The Equity-Income, Growth, High Income, and Overseas Portfolios of the VIP
Fund are managed by Fidelity Management & Research Company ("FMR"). For
managing its investments and business affairs, each Portfolio pays FMR a
monthly fee.
For the Equity Income, Growth, and Overseas Portfolios, the annual fee
rate is the sum of two components:
1. A group fee rate based on the monthly average net assets of all the
mutual funds advised by FMR. This rate cannot rise above 0.52% and
it drops (to as low as a marginal rate of 0.30% when average group
assets exceed $174 billion) as total assets in all these funds rise.
2. An individual fund fee rate of 0.20% for the Equity-Income Portfolio,
0.30% for the Growth Portfolio and .45% for the Overseas Portfolio.
One-twelfth of the combined annual fee rate is applied to each Portfolio's
net assets averaged over the most recent month, giving a dollar amount which is
the fee for that month.
For the High Income Portfolio, the annual fee rate is the sum of two
components:
1. A group fee rate based on the monthly average net assets of all the
mutual funds advised by FMR. This rate cannot rise above .37%, and
it drops (to as low as a marginal rate of .14%) as total assets in
all these funds rise.
2. An individual fund fee rate of .35% for the High Income Portfolio.
One-twelfth of the combined annual fee rate is applied to the Portfolio's
net assets averaged over the most recent month, giving a dollar amount which
is the fee for that month.
On behalf of Overseas Portfolio, FMR has entered into sub-advisory
agreements with FMR U.K., FMR Far East, and Fidelity International Investment
Advisors ("FIIA"). Under the sub-advisory agreements, FMR may receive
investment advice and research services with respect to companies based
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<PAGE> 23
outside the U.S. and may grant them investment management authority as well as
the authority to buy and sell securities if FMR believes it would be beneficial
to the Portfolio. FIIA, in turn, has entered into a sub-advisory agreement
with its wholly owned subsidiary Fidelity International Investment Advisors
(U.K.) Limited ("FIIAL U.K.").
Currently, FMR U.K., FMR Far East, FIIA and FIIAL U.K. each focus on
investment opportunities in countries other than the U.S., including
countries in Europe, Asia and the Pacific Basin.
Under the sub-advisory agreements FMR pays the fees of FMR U.K., FMR
Far East, and FIIA. FIIA, in turn, pays the fees of FIIAL U.K.
For providing investment advice and research services the sub-advisors
are compensated as follows:
- FMR pays FMR U.K. and FMR Far East fees equal to 110% and 105%,
respectively, of FMR U.K.'s and FMR Far East's costs incurred in
connection with providing investment advice and research services.
- FMR pays FIIA 30% of its monthly management fee with respect to the
average market value of investments held by the Portfolio for which
FIIA has provided FMR with investment advice.
- FIIA pays FIIAL U.K. a fee equal to 110% of FIIAL U.K.'s costs
incurred in connection with providing investment advice and research
services.
For providing investment management services, the sub-advisors are compensated
according to the following formulas:
- FMR pays FMR U.K., FMR Far East, and FIIA 50% of its monthly
management fee with respect to the Portfolio's average net assets
managed by the sub-advisor on a discretionary basis.
- FIIA pays FIIAL U.K. 110% of FIIAL U.K.'s costs incurred in connection
with providing investment management.
Each Portfolio utilizes Fidelity Investments Institutional Operations
Company ("FIIOC"), an affiliate of FMR, to maintain the master accounts of the
participating insurance companies. Under the transfer agent agreement with
FIIOC, each Portfolio pays fees based on the type, size, and number of accounts
in each Portfolio and the number of transactions made by shareholders of each
Portfolio.
Each Portfolio also has an agreement with Fidelity Service Co.
("Service"), an affiliate of FMR under which each Portfolio pays Service to
calculate its daily share prices and to maintain the portfolio and general
accounting records of each Portfolio and to administer each Portfolio's
securities lending program. The fees for pricing and bookkeeping services are
based on each Portfolio's average net assets but must fall within a range of
$45,000 to $750,000. The fees for securities lending services are based on the
number and duration of individual securities loans.
FMR may, from time to time, agree to reimburse a Portfolio for management
fees and other expenses above a specified percentage of average net assets.
Reimbursement arrangements, which may be terminated at any time without notice,
will increase a Portfolio's yield. If FMR discontinues a reimbursement
arrangement, each Portfolio's expenses will go up and its yield will be
reduced. FMR retains the right to be repaid by a Portfolio for expense
reimbursements if expenses fall below the limit prior to the end of a fiscal
year. Repayment by a Portfolio will lower its yield. FMR has voluntarily
agreed to reimburse the management fees and all other expenses (excluding
taxes, interest and extraordinary expenses) in excess of 1.50% of the average
net assets of the Equity-Income and Growth Portfolios.
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<PAGE> 24
A full description of the VIP Fund, the investment objectives and
policies of the Portfolios, the risks, expenses and all other aspects of their
operation is contained in the attached Prospectus for the VIP Fund.
ALGER AMERICAN FUND
The Separate Account has two Subaccounts which invest exclusively in
shares of Portfolios of the Alger American Fund. Like the Market Street Fund
and the VIP Fund, the Alger American Fund is a "series" type mutual fund
registered with the SEC as a diversified open-end management investment company
issuing a number of series or classes of shares, each of which represents an
interest in a Portfolio of the Alger American Fund.
The Alger Small Cap Subaccount and the Alger Growth Subaccount of the
Separate Account invest in shares of the Alger American Small Capitalization
Portfolio and the Alger American Growth Portfolio, respectively, of the Alger
American Fund. Shares of these Portfolios are purchased and redeemed by the
Separate Account at net asset value without a sales charge. The Separate
Account purchases shares of the Portfolios from the Alger American Fund in
accordance with a participation agreement between the Alger American Fund and
National Life. The termination provisions of this participation agreement are
described below.
The investment objectives of the Portfolios of the Alger American Fund
in which the Subaccounts invest are set forth below. The investment experience
of each Subaccount depends upon the investment performance of the corresponding
Portfolio. There is no assurance that any Portfolio will achieve its stated
objective.
Alger American Small Capitalization Portfolio. This Portfolio seeks
long-term capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total market
capitalization of less than $1 billion. Income is a consideration in the
selection of investments but is not an investment objective of the Portfolio.
Alger American Growth Portfolio. This Portfolio seeks long-term
capital appreciation by investing in a diversified, actively managed portfolio
of equity securities, primarily of companies with a total market capitalization
of $1 billion or greater. Income is a consideration in the selection of
investments but is not an investment objective of the Portfolio.
The Alger American Small Capitalization Portfolio and the Alger
American Growth Portfolio are managed by Fred Alger Management, Inc. As
compensation for the investment advisory services rendered, the Alger American
Small Capitalization Portfolio and the Alger American Growth Portfolio pay Fred
Alger Management, Inc. a monthly fee at an annual rate of 0.85% and 0.75%,
respectively of the average daily net assets of the relevant portfolio.
In addition to the fee for the investment advisory services, the Alger
American Fund pays its own expenses generally, including brokerage costs,
administrative costs, custodian costs, and legal, accounting and printing
costs. Fred Alger Management, Inc. has agreed that it will reimburse the Alger
American Small Capitalization Portfolio and the Alger American Growth Portfolio
to the extent that annual operating expenses (excluding interest, taxes, fees
for brokerage services and extraordinary expenses) exceed 1.50% of the average
daily net assets of these Portfolios. In recent years, the expenses of these
Portfolios have been substantially less than 1.50% of average daily net
assets, and these agreements have not resulted in reimbursements to these
Portfolios from Fred Alger Management, Inc.
A full description of the Alger American Fund, the investment
objectives and policies of the Portfolios, the risks, expenses and all other
aspects of their operation is contained in the attached Prospectus for the
Alger American Fund.
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<PAGE> 25
TERMINATION OF PARTICIPATION AGREEMENTS
The participation agreements pursuant to which the Funds sell their
shares to Subaccounts of the Separate Account contain varying provisions
regarding termination. In the case of the VIP Fund, the agreement provides for
termination 1) upon six months' advance notice by either party, 2) at National
Life's option if shares of the Fund are not reasonably available to meet
requirements of the Policies, 3) at National Life's option if shares of the
Fund are not registered, issued, or sold in accordance with applicable laws, if
the Fund ceases to qualify as a regulated investment company under the Code or
for a Portfolio of the Fund in the event such Portfolio fails to meet
diversification requirements under the Code, 4) at the option of the Fund or
its principal underwriter if it determines that National Life has suffered
material adverse changes in its business or financial condition or is subject
to material adverse publicity, 5) at the option of National Life if the Fund
has suffered material adverse changes in its business or financial condition or
is a subject of material adverse publicity, or 6) at the option of the Fund or
its principal underwriter if National Life decides to make another mutual fund
available as a funding vehicle for its policies.
In the case of the Alger American Fund, the participation agreement
provides for termination 1) upon 60 days' advance notice by either party, 2) at
the option of the Fund or its principal underwriter, if the Policies cease to
qualify as life insurance contracts under the Code, or if the Policies are not
registered, issued or sold in accordance with applicable law, 3) at the option
of any party, if the Trustees of the Fund determine that a material
irreconcilable conflict exists, 4) at National Life's option, if formal
proceedings are instituted against the Fund or its principal underwriter by the
NASD, the SEC, any state securities or insurance department or any other
regulatory body regarding the Fund's or such principal underwriter's duties
under the agreement or related to the sale of Fund shares or the operation of
the Fund, 5) at National Life's option, as to a Portfolio if it fails to meet
diversification requirements under the Code, 6) at National Life's option, if
shares of the Fund are not reasonably available to meet requirements of the
Policies, 7) at National Life's option, if shares of the Fund are not
registered, issued, or sold in accordance with applicable laws, or applicable
law precludes the use of such shares as the underlying investment media for the
Policies, 8) at National Life's option, as to any Portfolio if that Portfolio
fails to qualify as a regulated investment company under Subchapter M of the
Code, or 9) at the option of the Fund's principal underwriter if it determines
that National Life has suffered material adverse changes in its business,
operations, financial condition or prospects or is subject to material adverse
publicity.
In the case of the Market Street Fund, the agreement provides for
termination 1) on one year's advance notice by any party, 2) at National Life's
option if shares of the Fund are not reasonably available to meet the
requirements of the Policies, 3) at the option of the Fund or National Life if
certain enforcement proceedings are instituted against the other, 4) upon vote
of the Owners of Policies to substitute shares of another mutual fund, 5) at
National Life's option if the Fund ceases to qualify as a regulated investment
company under the Code or fails to meet the diversification requirements
thereunder, 6) at the option of National Life or the Fund upon a determination
that an irreconcilable material conflict exists between Owners of variable
insurance products of all the separate accounts or the interests of
participating insurance companies investing in the Fund, 7) at the option of
National Life if it has withdrawn the Separate Account's investment in the
Fund, or 8) at the option of any party upon another party's material breach of
any provision of the agreement.
Should an agreement between National Life and a Fund terminate, the
Subaccounts which invest in that Fund may not be able to purchase additional
shares of such Fund. In that event, Owners will no longer be able to transfer
Accumulated Values or Net Premiums to Subaccounts investing in Portfolios of
such Fund.
Additionally, in certain circumstances, it is possible that a Fund or
a Portfolio of a Fund may refuse to sell its shares to a Subaccount despite the
fact that the participation agreement between the Fund and National Life has
not been terminated. Should a Fund or Portfolio of such Fund decide not to
sell its shares to National Life, National Life will not be able to honor
requests by Owners to allocate cash values or net premiums to Subaccounts
investing in shares of that Fund or Portfolio.
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<PAGE> 26
RESOLVING MATERIAL CONFLICTS
The Funds are available to registered separate accounts of insurance
companies, other than National Life, offering variable annuity and variable
life insurance policies. As a result, there is a possibility that a material
conflict may arise between the interests of Owners with Accumulated Value
allocated to the Separate Account and the owners of life insurance policies and
variable annuities issued by such other companies whose values are allocated to
one or more other separate accounts investing in any one of the Funds.
In the event of a material conflict, National Life will take any
necessary steps, including removing the Separate Account from that Fund, to
resolve the matter. The Board of Directors or Trustees of the Funds intend to
monitor events in order to identify any material conflicts that possibly may
arise and to determine what action, if any, should be taken in response to
those events or conflicts. See the individual Fund Prospectuses for more
information.
THE GENERAL ACCOUNT
For information on the General Account, see page ____.
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, the Death Benefit of
the Policy will, upon due proof of the Insured's death (and fulfillment of
certain other requirements), be paid to the named Beneficiary in accordance
with the designated Death Benefit Option, unless the claim is contestable in
accordance with the terms of the Policy. The proceeds may be paid in cash or
under one of the Settlement Options set forth in the Policy. The Death Benefit
payable under the designated Death Benefit Option will be the Unadjusted Death
Benefit under that Death Benefit Option, increased by any additional benefits
and any dividend payable, and decreased by any outstanding Policy loan and
accrued interest and any unpaid Monthly Deductions.
Death Benefit Options. The Policy provides two Death Benefit Options:
Option A and Option B. The Owner designates the Death Benefit Option in the
application and may change it as described in "Change in Death Benefit Option,"
Page ___.
Option A. The Unadjusted Death Benefit is equal to the greater of (a)
the Face Amount of the Policy and (b) the Accumulated Value on the Valuation
Date on or next following the Insured's date of death multiplied by the
specified percentage shown in the table below:
<TABLE>
<CAPTION>
Attained Age Percentage Attained Age Percentage
-------- --- ---------- ------------ ----------
<S> <C> <C> <C>
40 and under 250% 60 130%
45 215% 65 120%
50 185% 70 115%
55 150% 75 and over 105%
</TABLE>
For Attained Ages not shown, the percentages will decrease by a ratable portion
of each full year.
Illustration of Option A -- For purposes of this illustration, assume
that the Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will generally
pay an Unadjusted Death Benefit of $200,000. The specified percentage for an
Insured under Attained Age 40 on the Policy Anniversary prior to the date of
death is 250%. Because the Unadjusted Death Benefit must be equal to or
greater than 2.50 times the Accumulated Value, any time the Accumulated Value
exceeds $80,000 the
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<PAGE> 27
Unadjusted Death Benefit will exceed the Face Amount. Each additional dollar
added to the Accumulated Value will increase the Unadjusted Death Benefit by
$2.50. Thus, a 35 year old Insured with an Accumulated Value of $90,000 will
have an Unadjusted Death Benefit of $225,000 (2.50 x $90,000, and an
Accumulated Value of $150,000 will have an Unadjusted Death Benefit of $375,000
(2.50 x $150,000).
Similarly, any time the Accumulated Value exceeds $80,000, each dollar
taken out of the Accumulated Value will reduce the Unadjusted Death Benefit by
$2.50. If at any time, however, the Accumulated Value multiplied by the
specified percentage is less than the Face Amount, the Unadjusted Death Benefit
will be the Face Amount of the Policy.
Option B. The Unadjusted Death Benefit is equal to the greater of (a)
the Face Amount of the Policy plus the Accumulated Value and (b) the
Accumulated Value on the Valuation Date on or next following the Insured's date
of death multiplied by the specified percentage shown in the table above.
Illustration of Option B -- For purposes of this illustration, assume
that the Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option B, a Policy with a face amount of $200,000 will generally
pay an Unadjusted Death Benefit of $200,000 plus the Accumulated Value. Thus,
for example, a Policy with a $50,000 Accumulated Value will have an Unadjusted
Death Benefit of $250,000 ($200,000 plus $50,000). Since the specified
percentage is 250%, the Unadjusted Death Benefit will be at least 2.50 times
the Accumulated Value. As a result, if the Accumulated Value exceeds $133,333,
the Unadjusted Death Benefit will be greater than the Face Amount plus the
Accumulated Value. Each additional dollar added to the Accumulated Value above
$133,333 will increase the Unadjusted Death Benefit by $2.50. An Insured with
an Accumulated Value of $150,000 will have an Unadjusted Death Benefit of
$375,000 (2.50 x $150,000), and an Accumulated Value of $200,000 will yield an
Unadjusted Death Benefit of $500,000 (2.50 x $200,000). Similarly, any time
the Accumulated Value exceeds $133,333, each dollar taken out of the
Accumulated Value will reduce the Unadjusted Death Benefit by $2.50. If at any
time, however, the Accumulated Value multiplied by the specified percentage is
less than the Face Amount plus the Accumulated Value, the Unadjusted Death
Benefit will be the Face Amount plus the Accumulated Value.
At Attained Age 99, Option B automatically becomes Option A.
Which Death Benefit Option to Choose. If an Owner prefers to have
premium payments and favorable investment performance reflected partly in the
form of an increasing Death Benefit, the Owner should choose Option B. If an
Owner is satisfied with the amount of the Insured's existing insurance coverage
and prefers to have premium payments and favorable investment performance
reflected to the maximum extent in the Accumulated Value, the Owner should
choose Option A.
Change in Death Benefit Option. After the first Policy Year, the
Death Benefit Option in effect may be changed by sending National Life a
written request. No charges will be imposed to make a change in the Death
Benefit Option. The effective date of any such change will be the Monthly
Policy Date on or next following the date National Life receives the written
request. Only one change in Death Benefit Option is permitted in any one
Policy Year.
If the Death Benefit Option is changed from Option A to Option B, on
the effective date of the change, the Death Benefit will not change and the
Face Amount will be decreased by the Accumulated Value on that date. However,
this change may not be made if it would reduce the Face Amount to less than the
Minimum Face Amount.
If the Death Benefit Option is changed from Option B to Option A, on
the effective date of the change, the Death Benefit will not change and the
Face Amount will be increased by the Accumulated Value on that date.
18
<PAGE> 28
A change in the Death Benefit Option may affect the Net Amount at Risk
over time which, in turn, would affect the monthly Cost of Insurance Charge
(see "Monthly Deductions," Page __). Changing from Option A to Option B will
generally result in a Net Amount at Risk that remains level. Such a change
will result in a relative increase in the Cost of Insurance Charges over time
because the Net Amount at Risk will, unless the Unadjusted Death Benefit is
based on the applicable percentage of Accumulated Value, remain level as cost
of insurance rates increase over time, rather than the Net Amount at Risk
decreasing as the Accumulated Value increases. Changing from Option B to
Option A will, if the Accumulated Value increases, decrease the Net Amount at
Risk over time, thereby potentially offsetting the effect of increases and over
time in the cost of insurance rates.
The effects of these Death Benefit Option changes on the Face Amount,
Unadjusted Death Benefit and Net Amount at Risk can be illustrated as follows.
Assume that a contract under Option A has a Face Amount of $500,000 and an
Accumulated Value of $100,000 and, therefore, an Unadjusted Death Benefit of
$500,000 and a Net Amount at Risk of $400,000 ($500,000 - $100,000). If the
Death Benefit Option is changed from Option A to Option B, the Face Amount will
decrease from $500,000 to $400,000 and the Unadjusted Death Benefit and Net
Amount at Risk would remain the same. Assume that a contract under Option B
has a Face Amount of $500,000 and an Accumulated Value of $50,000 and,
therefore, the Unadjusted Death Benefit is $550,000 ($500,000 + $50,000) and
the Net Amount at Risk is $500,000 ($550,000 - $50,000). If the Death Benefit
Option is changed from Option B to Option A, the Face Amount will increase to
$550,000, and the Unadjusted Death Benefit and Net Amount at Risk would remain
the same.
If a change in the Death Benefit Option would result in cumulative
premiums exceeding the maximum premium limitations under the Internal Revenue
Code for life insurance, National Life will not effect the change.
A change in the Death Benefit Option may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page ____).
How the Death Benefit May Vary. The amount of the Death Benefit may
vary with the Accumulated Value in the following circumstances. The Death
Benefit under Option A will vary with the Accumulated Value whenever the
specified percentage of Accumulated Value exceeds the Face Amount of the
Policy. The Death Benefit under Option B will always vary with the Accumulated
Value because the Unadjusted Death Benefit equals the greater of (a) the Face
Amount plus the Accumulated Value and (b) the Accumulated Value multiplied by
the specified percentage.
ABILITY TO ADJUST FACE AMOUNT
Subject to certain limitations, an Owner may generally, at any time
after the first Policy Year, increase or decrease the Policy's Face Amount by
submitting a written application to National Life. The effective date of an
increase will be the Monthly Policy Date on or next following National Life's
approval of the request, and the effective date of a decrease is the Monthly
Policy Date on or next following the date that National Life receives the
written request. Employee benefit plan Policies may adjust the Face Amount
even in Policy Year 1. An increase in Face Amount may have federal tax
consequences. (See "Tax Treatment Of Policy Benefits," Page ___). The effect
of changes in Face Amount on Policy charges, as well as other considerations,
are described below.
Increase. A request for an increase in Face Amount may not be for
less than $25,000, or such lesser amount required in a particular state (except
that the minimum for employee benefit plans is $2000). The Owner may not
increase the Face Amount after the Insured's Attained Age 85. To obtain the
increase, the Owner must submit an application for the increase and provide
evidence satisfactory to National Life of the Insured's insurability.
On the effective date of an increase, and taking the increase into
account, the Cash Surrender Value must be equal to the Monthly Deductions then
due. If the Cash Surrender Value is not
19
<PAGE> 29
sufficient, the increase will not take effect until the Owner makes a
sufficient additional premium payment to increase the Cash Surrender Value.
An increase in the Face Amount will generally affect the total Net
Amount at Risk which will increase the monthly Cost of Insurance Charges. In
addition, the Insured may be in a different Rate Class as to the increase in
insurance coverage. An increase in premium payment or frequency may be
appropriate after an increase in Face Amount. (See "Cost of Insurance," Page
___).
Decrease. The amount of the Face Amount after a decrease cannot be
less than 75% of the largest Face Amount in force at any time in the twelve
months immediately preceding National Life's receipt of the request. The Face
Amount after any decrease may not be less than the Minimum Face Amount, which
is generally currently $50,000. To the extent a decrease in the Face Amount
could result in cumulative premiums exceeding the maximum premium limitations
applicable for life insurance under the Internal Revenue Code, National Life
will not effect the decrease.
A decrease in the Face Amount generally will decrease the total Net
Amount at Risk, which will decrease an Owner's monthly Cost of Insurance
Charges.
For purposes of determining the Cost of Insurance Charge, any decrease
in the Face Amount will reduce the Face Amount in the following order: (a) the
increase in Face Amount provided by the most recent increase; (b) the next most
recent increases, in inverse chronological order; and (c) the Initial Face
Amount.
HOW THE DURATION OF THE POLICY MAY VARY
The Policy will remain in force as long as the Cash Surrender Value of
the Policy is sufficient to pay the Monthly Deductions and the charges under
the Policy. When the Cash Surrender Value is insufficient to pay the charges
and the Grace Period expires without an adequate premium payment by the Owner,
the Policy will lapse and terminate without value. Notwithstanding the
foregoing, during the first five Policy Years the Policy will not lapse if, as
of the Monthly Policy Date that the Cash Surrender Value of the Policy first
becomes insufficient to pay the charges, the Minimum Guarantee Premium has been
paid. The Owner has certain rights to reinstate the Policy. (See
"Reinstatement," Page ___).
In addition, an optional Guaranteed Death Benefit Rider is available
which will guarantee that the Policy will not lapse prior to age 70, or 20
years from the Date of Issue of the Policy, if longer, regardless of investment
performance, if the Minimum Guarantee Premium has been paid as of each Monthly
Policy Date.
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held under the
Policy at any time. It is equal to the sum of the Policy's values in the
Separate Account and the General Account. The Accumulated Value minus any
applicable Surrender Charge, and minus any outstanding Policy loans and accrued
interest, is equal to the Cash Surrender Value. There is no guaranteed minimum
for the portion of the Accumulated Value in any of the Subaccounts of the
Separate Account and, because the Accumulated Value on any future date depends
upon a number of variables, it cannot be predetermined.
The Accumulated Value and Cash Surrender Value will reflect the Net
Premiums paid, investment performance of the chosen Subaccounts of the Separate
Account, the crediting of interest on non-loaned Accumulated Value in the
General Account and amounts held as Collateral in the General Account, any
transfers, any Withdrawals, any loans, any loan repayments, any loan interest
paid, and charges assessed in connection with the Policy.
Determination of Number of Units for the Separate Account. Amounts
allocated, transferred or added to a Subaccount of the Separate Account under a
Policy are used to purchase units of that Subaccount; units are redeemed when
amounts are deducted, transferred or withdrawn. The number of
20
<PAGE> 30
units a Policy has in a Subaccount equals the number of units purchased minus
the number of units redeemed up to such time. For each Subaccount, the number
of units purchased or redeemed in connection with a particular transaction is
determined by dividing the dollar amount by the unit value.
Determination of Unit Value. The unit value of a Subaccount is equal
to the unit value on the immediately preceding Valuation Day multiplied by the
Net Investment Factor for that Subaccount on that Valuation Day.
Net Investment Factor. Each Subaccount of the Separate Account has
its own Net Investment Factor. The Net Investment Factor measures the daily
investment performance of the Subaccount. The factor will increase or
decrease, as appropriate, to reflect net investment income and capital gains or
losses, realized and unrealized, for the securities of the underlying portfolio
or series.
The asset charge for mortality and expense risks will be deducted in
determining the applicable Net Investment Factor. (See "Charges and Deductions
- - Mortality and Expense Risk Charge," Page __).
Calculation of Accumulated Value. The Accumulated Value is determined
first on the Date of Issue and thereafter on each Valuation Day. On the Date
of Issue, the Accumulated Value will be the Net Premiums received, plus any
earnings prior to the Date of Issue, less any Monthly Deductions due on the
Date of Issue. On each Valuation Day after the Date of Issue, the Accumulated
Value will be:
(1) The aggregate of the values attributable to the Policy in the
Separate Account, determined by multiplying the number of
units the Policy has in each Subaccount of the Separate
Account by such Subaccount's unit value on that date; plus
(2) The value attributable to the Policy in the General Account
(See "The General Account," Page___).
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy. In order to purchase a Policy, an individual
must make application to National Life through a licensed National Life agent
who is also a registered representative of Equity Services, Inc. ("ESI") or a
broker/dealer having a Selling Agreement with ESI or a broker/dealer having a
Selling Agreement with such a broker/dealer. If the Minimum Initial Premium is
not submitted with the application, it must be submitted when the Policy is
delivered. The Minimum Face Amount of a Policy under National Life's rules is
generally $50,000; however, exceptions may be made for employee benefit plans.
National Life reserves the right to revise its rules from time to time
to specify a different Minimum Face Amount for subsequently issued policies. A
Policy will be issued only on Insureds who have an Issue Age of 85 or less and
who provide National Life with satisfactory evidence of insurability.
Acceptance is subject to National Life's underwriting rules. National Life
reserves the right to reject an application for any reason permitted by law.
(See "Distribution of Policies," Page ___.)
From the time the application for a Policy is signed until the time
the Policy is issued, an applicant can, subject to National Life's underwriting
rules, obtain temporary insurance protection, pending issuance of the Policy,
by answering "no" to the Health Questions of the Receipt & Temporary Life
Insurance Agreement and submitting (a) a complete Application including any
medical questionnaire required, and (b) payment of the Minimum Initial Premium.
The Minimum Initial Premium will equal two times the Minimum Monthly Premium.
The amount of coverage under the Receipt & Temporary Life Insurance
Agreement is the lesser of the Face Amount applied for or $1,000,000 ($100,000
in the case of proposed Insureds age 70 or over). Coverage under the agreement
will end on the earliest of (a) the 90th day from the date of the agreement;
(b) the date that insurance takes effect under the Policy; (c) the date a
policy, other than as applied for, is offered to the Applicant; (d) three days
from the date National Life mails a notice of
21
<PAGE> 31
termination of coverage; (e) the time the Applicant first learns that the
Company has terminated the temporary life insurance; or (f) the time the
Applicant withdraws the application for life insurance.
Amount and Timing of Premiums. Each premium payment must be at least
$50. Subject to certain limitations described below, an Owner has considerable
flexibility in determining the amount and frequency of premium payments.
At the time of application, each Owner will select a Planned Periodic
Premium schedule, based on a periodic billing mode of annual, semi-annual, or
quarterly payments. The Owner may request National Life to send a premium
reminder notice at the specified interval. The Owner may change the Planned
Periodic Premium frequency and amount. Also, under a "Check-O-Matic" plan, the
Owner can select a monthly payment schedule pursuant to which premium payments
will be automatically deducted from a bank account or other source, rather than
being "billed."
The Owner is not required to pay the Planned Periodic Premiums in
accordance with the specified schedule. The Owner may pay premiums in any
amount (subject to the $50 minimum and the limitations described in the next
section), frequency and time period. Payment of the Planned Periodic Premiums
will not, however, guarantee that the Policy will remain in force (except that
if such premiums are at least equal to the Minimum Guarantee Premium, then the
Policy will remain in force for at least 5 years, or for the period covered by
the Guaranteed Death Benefit Rider if such Rider is purchased). Instead, the
duration of the Policy depends upon the Policy's Cash Surrender Value. Thus,
even if Planned Periodic Premiums are paid, the Policy will lapse whenever the
Cash Surrender Value is insufficient to pay the Monthly Deductions and any
other charges under the Policy and if a Grace Period expires without an
adequate payment by the Owner (unless the Policy is in its first five years, or
the Guaranteed Death Benefit Rider has been purchased and remains applicable,
in either case so long as the Minimum Guarantee Premium has been paid).
Any payments made while there is an outstanding Policy loan will be
applied as premium payments rather than loan repayments, unless National Life
is notified in writing that the amount is to be applied as a loan repayment.
No premium payments may be made after the Insured reaches Attained Age 99.
However, loan repayments will be permitted after Attained Age 99.
Higher premium payments under Death Benefit Option A, until the
applicable percentage of Accumulated Value exceeds the Face Amount, will
generally result in a lower Net Amount at Risk, and lower Cost of Insurance
Charges against the Policy. Conversely, lower premium payments in this
situation will result in a higher Net Amount at Risk, which will result in
higher Cost of Insurance Charges under the Policy.
Under Death Benefit Option B, until the applicable percentage of
Accumulated Value exceeds the Face Amount plus the Accumulated Value, the level
of premium payments will not affect the Net Amount at Risk. (However, both the
Accumulated Value and Death Benefit will be higher if premium payments are
higher, and lower if premium payments are lower.)
Under either Death Benefit Option, if the Unadjusted Death Benefit is
the applicable percentage of Accumulated Value, then higher premium payments
will result in higher Net Amount at Risk, and higher Cost of Insurance Charges.
Lower premium payments will result in lower Net Amount at Risk, and lower Cost
of Insurance Charges.
Premium Limitations. With regard to a Policy's inside build-up, the
Internal Revenue Code of 1986 (the "Code") provides for exclusion of the
Unadjusted Death Benefit from gross income if total premium payments do not
exceed certain stated limits. In no event can the total of all premiums paid
under a Policy exceed such limits. If at any time a premium is paid which
would result in total premiums exceeding such limits, National Life will only
accept that portion of the premium which would make total premiums equal the
maximum amount which may be paid under the Policy. The excess will be promptly
refunded, and in the cases of premiums paid by check, after such check has
cleared. If there is an outstanding loan on the Policy, the excess may instead
be applied as a loan repayment. Even if total premiums were to exceed the
maximum premium limitations established by
22
<PAGE> 32
the Code, the excess of (a) a Policy's Unadjusted Death Benefit over (b) the
Policy's Cash Surrender Value plus outstanding Policy loans and accrued
interest, would still be excludable from gross income under the Code.
The maximum premium limitations set forth in the Code depend in part
upon the amount of the Unadjusted Death Benefit at any time. As a result, any
Policy changes which affect the amount of the Unadjusted Death Benefit may
affect whether cumulative premiums paid under the Policy exceed the maximum
premium limitations. To the extent that any such change would result in
cumulative premiums exceeding the maximum premium limitations, National Life
will not effect such change. (See "Federal Income Tax Considerations," Page
___).
Unless the Insured provides satisfactory evidence of insurability,
National Life reserves the right to limit the amount of any premium payment if
it increases the Unadjusted Death Benefit more than it increases the
Accumulated Value.
Allocation of Net Premiums. The Net Premium equals the premium paid
less the Premium Tax Charge. In the application for the Policy, the Owner will
indicate how Net Premiums should be allocated among the Subaccounts of the
Separate Account and/or the General Account, and such allocations may be
changed at any time by the Owner by written notice to National Life at its Home
Office, or if the telephone transaction privilege has been elected, by
telephone instructions (See "Telephone Transaction Privilege," Page ). The
percentages of each Net Premium that may be allocated to any Subaccount must be
in whole numbers of not less than 5%, and the sum of the allocation percentages
must be 100%. Except in the circumstances described in the following
paragraph, National Life will allocate the Net Premiums as of the Valuation
Date it receives such premium at its Home Office, based on the allocation
percentages then in effect.
Any portion of the Initial Premium and any subsequent premiums
received by National Life before National Life receives at its Home Office a
signed delivery receipt for the Policy and for a 10 day period beginning with
the date of such signed delivery receipt, which are to be allocated to the
Separate Account will be allocated to the Money Market Subaccount. At the end
of such period, National Life will allocate the amount in the Money Market
Subaccount to each of the Subaccounts selected in the application based on the
proportion that the allocation percentage set forth in the application for such
Subaccount bears to the sum of the Separate Account premium allocation
percentages.
For example, assume a Policy was issued with Net Premiums to be
allocated 25% to the Managed Subaccount, 25% to the Bond Subaccount and 50% to
the General Account. During the period stated above, 50% (25% + 25%) of the
Net Premiums will be allocated to the Money Market Subaccount. At the end of
such period, 50% (25% / 50%) of the amount in the Money Market Subaccount will
be transferred to the Managed Subaccount and 50% to the Bond Subaccount.
The values of the Subaccounts will vary with their investment
experience and the Owner bears the entire investment risk. Owners should
periodically review their allocation percentages in light of market conditions
and the Owner's overall financial objectives.
Transfers. The Owner may transfer the Accumulated Value between and
among the Subaccounts of the Separate Account and the General Account by making
a written transfer request to National Life, or if the telephone transaction
privilege has been elected, by telephone instructions to National Life (See
"Telephone Transaction Privilege," Page ). Transfers between and among the
Subaccounts of the Separate Account and the General Account are made as of the
Valuation Day that the request for transfer is received at the Home Office.
The Owner may, at any time, transfer all or part of the amount in one of the
Subaccounts of the Separate Account to another Subaccount and/or to the General
Account. (For transfers from the General Account to the Separate Account, see
"Transfers from General Account," Page ___).
Currently an unlimited number of transfers are permitted without
charge, and National Life has no current intent to impose a transfer charge in
the foreseeable future. However, National Life reserves
23
<PAGE> 33
the right, upon prior notice to Policy Owners, to change this policy so as to
deduct a $25 transfer charge from each transfer in excess of the fifth transfer
during any one Policy Year. All transfers requested during one Valuation
Period are treated as one transfer transaction. If a transfer charge is
adopted in the future, transfers resulting from Policy loans, the exercise of
Special Transfer Rights (see "Policy Rights - Special Transfer Rights, Page
____), and the reallocation from the Money Market Subaccount following the
10-day period after the Date of Issue, will not be subject to a transfer charge
and will not count against the five free transfers in any Policy Year. Under
present law, transfers are not taxable transactions.
Policy Lapse. The failure to make a premium payment will not itself
cause a Policy to lapse. Lapse will only occur when the Cash Surrender Value
is insufficient to cover the Monthly Deductions and other charges under the
Policy and the Grace Period expires without a sufficient payment. During the
first five Policy Years, the Policy will not lapse so long as the Minimum
Guarantee Premium has been paid.
In addition, if the Owner has elected at issue the Guaranteed Death
Benefit Rider, and has paid the Minimum Guarantee Premium as of each Monthly
Policy Date, the Policy will not lapse prior to the Insured's Attained Age 70,
or 20 years from the Date of Issue of the Policy if longer, regardless of
whether the Cash Surrender Value is sufficient to cover the Monthly Deductions.
See "Optional Benefits - Guaranteed Death Benefit", Page _______
The Policy provides for a 61-day Grace Period that is measured from
the date on which notice is sent by National Life. The Policy does not lapse,
and the insurance coverage continues, until the expiration of this Grace
Period. In order to prevent lapse, the Owner must during the Grace Period make
a premium payment equal to the sum of any amount by which the past Monthly
Deductions have been in excess of Cash Surrender Value, plus three times the
Monthly Deduction due the date the Grace Period began. The notice sent by
National Life will specify the payment required to keep the Policy in force.
Failure to make a payment at least equal to the required amount within the
Grace Period will result in lapse of the Policy without value.
Reinstatement. A Policy that lapses without value may be reinstated
at any time within five years (or longer period required in a particular state)
after the beginning of the Grace Period by submitting evidence of the Insured's
insurability satisfactory to National Life and payment of an amount sufficient
to provide for two times the Monthly Deduction due on the date the Grace Period
began plus three times the Monthly Deduction due on the effective date of
reinstatement, which is the Monthly Policy Date on or next following the date
the reinstatement application is approved. Upon reinstatement, the Accumulated
Value will be based upon the premium paid to reinstate the Policy and the
Policy will be reinstated with the same Date of Issue as it had prior to the
lapse. Neither the five year no lapse guarantee nor the Death Benefit
Guarantee Rider may be reinstated.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate
National Life for (a) providing the insurance benefits set forth in the Policy;
(b) administering the Policy; (c) assuming certain risks in connection with the
Policy; and (d) incurring expenses in distributing the Policy.
PREMIUM TAX CHARGE
A deduction of 3.25% of the premium will be made from each premium
payment prior to allocation of Net Premiums, to cover state premium taxes and
the federal DAC Tax. For qualified employee benefit plans, the deduction will
be 2.0% of each premium rather than 3.25%.
The federal DAC Tax is a tax attributable to certain "policy
acquisition expenses" under Internal Revenue Code Section 848. Section 848 in
effect accelerates the realization of income National Life receives from the
Policies, and therefore the payment of federal income taxes on that income.
The economic consequence of Section 848 is, therefore, an increase in the tax
burden borne by National Life
24
<PAGE> 34
that is attributable to the Policies. National Life believes that the DAC Tax
charge is reasonable in relation to National Life's increased tax burden as a
result of Section 848.
SURRENDER CHARGES
A Surrender Charge, which consists of a Deferred Administrative Charge
and a Deferred Sales Charge, is imposed if the Policy is surrendered or lapses
at any time before the end of the fifteenth Policy Year.
This Surrender Charge is designed partially to compensate National
Life for the cost of administering and selling the Policy, including agent
sales commissions, the cost of printing the prospectuses and sales literature,
and any advertising and underwriting costs. National Life does not expect the
Surrender Charge to cover all of these costs. To the extent the Surrender
Charge does not, National Life will cover the short-fall from its General
Account assets, which may include profits from the Mortality and Expense Risk
Charge.
Deferred Administrative Charge. The Deferred Administrative Charge
varies by Issue Age, and is based on Initial Face Amount. After the first five
Policy Years, it declines linearly by Policy Month until the end of Policy Year
15, when it becomes zero. Charges per $1,000 of Face Amount for sample Issue
Ages are shown below:
<TABLE>
<CAPTION>
Sample
Issue Age Charge per $1000 of Initial Face Amount
--------- ---------------------------------------
<S> <C>
0-5 None
10 $0.50
15 $1.00
20 $1.50
25-85 $2.00
</TABLE>
For Issue Ages not shown, the charge will increase by a ratable
portion for each full year. The Deferred Administrative Charge has been
designed to cover actual expenses for the issue and underwriting of Policies,
and is not intended to produce a profit.
Deferred Sales Charge. The Deferred Sales Charge will not exceed the
Maximum Deferred Sales Charge specified in the Policy. During Policy Years 1
through 5, this maximum equals 50% of the Surrender Charge target premium
(which is an amount, based on the Initial Face Amount, Issue Age, sex and Rate
Class of the Insured, used solely for the purpose of calculating the Deferred
Sales Charge) for the Face Amount. Thereafter, the 50% declines linearly by
month through the 180th month, after which it is zero. The Maximum Deferred
Sales Charge will also be subject to the maximum imposed by New York State law,
where applicable. The Deferred Sales Charge actually imposed will equal the
lesser of this maximum and an amount equal to 30% of the premiums actually
received up to one Surrender Charge target premium, plus 10% of all premiums
paid in excess of this amount but not greater than twice this amount, plus 9%
of all premiums paid in excess of twice this amount.
To illustrate the calculation of a Policy's Surrender Charge,
assume that the Policy is issued to a male nonsmoker, Issue
Age 45, with a Face Amount of $100,000. Assume that the
Surrender Charge target premium ("SCTP") is $1,652, the
initial Maximum Deferred Sales Charge is $826 (50% of $1,652)
and the Insured pays annual premiums of $1,500 at the
beginning of each Policy Year. This example will illustrate
surrenders in the first five Policy Years and in the first
month of the eighth Policy Year.
Deferred Administrative Charge. The Deferred Administrative
Charge for the first five Policy Years is $200. This is
calculated by applying the charge of $2.00 per $1,000 of Face
Amount for Issue Age 45 from the schedule above to the Face
Amount of $100,000 ($2.00 x (100,000/1,000)). The Deferred
Administrative Charge reduces linearly by
25
<PAGE> 35
Policy Month in Policy Years 6 through 15. Linear reduction
is equivalent to a reduction each month of 1/121st of the
initial charge. For example, the Deferred Administrative
Charge in the first month of the eighth Policy Year (the 25th
month after the end of the 5th Policy Year) will be $158.68
($200 - ($200 x (25/121)). After completion of the 15th
Policy Year, the Deferred Administrative Charge is zero. The
schedule of Deferred Administrative Charges in effect for the
first fifteen Policy Years is shown in the Policy.
Deferred Sales Charge. The Deferred Sales Charge is the
lesser of the Maximum Deferred Sales Charge and an amount
calculated based on the Insured's actual premium payments.
The Maximum Deferred Sales Charge in effect for the first five
Policy Years is $826. The Maximum Deferred Sales Charge
reduces linearly by month in Policy Years 6 through 15.
Linear reduction is equivalent to a reduction each month of
1/121st of the initial charge. For example, the Maximum
Deferred Sales Charge in the first month of the 8th Policy
Year (the 25th month after the end of the 5th Policy Year)
will be $655.34 ($826 - ($826 x (25/121))). After the
completion of the 15th Policy Year, the Maximum Deferred Sales
Charge is $0. The schedule of Maximum Deferred Sales Charges
in effect for the first fifteen Policy Years is shown in the
Policy.
The Maximum Deferred Sales Charge is compared to an amount
calculated as a function of premiums actually paid and the
SCTP. The amount is calculated as the sum of 30% of premiums
paid up to the first SCTP ($1,652), 10% of premiums paid in
excess of the first SCTP but not more than two SCTP's (from
$1,653 to $3,304), and 9% of premiums paid in excess of two
SCTP's (above $3,304). As an example, the calculated amounts
in Policy Years 1 through 5 and Policy Year 8 would be as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Amount at 10%
Policy Cumulative Amount at 30% (From $1,653 Amount at 9%
Year Premiums (Below $1,652) to $3,304) (Above $3,304) Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
1 $ 1,500 $1,500x.30=$450.00 - - $ 450.00
- -----------------------------------------------------------------------------------------------------------------
2 $ 3,000 $1,652x.30=$495.60 $1,348x.10=$134.80 - $ 630.40
- -----------------------------------------------------------------------------------------------------------------
3 $ 4,500 $1,652x.30=$495.60 $1,652x.10=$165.20 $1,196x.09=$107.64 $ 768.44
- -----------------------------------------------------------------------------------------------------------------
4 $ 6,000 $1,652x.30=$495.60 $1,652x.10=$165.20 $2,696x.09=$242.64 $ 903.44
- -----------------------------------------------------------------------------------------------------------------
5 $ 7,500 $1,652x.30=$495.60 $1,652x.10=$165.20 $4,196x.09=$377.64 $1,038.44
- -----------------------------------------------------------------------------------------------------------------
8 $12,000 $1,652x.30=$495.60 $1,652x.10=$165.20 $8,696x.09=$782.64 $1,443.44
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 36
The total calculated amount would be compared to the Maximum Deferred
Sales Charge to determine the applicable Deferred Sales Charge. For
example, the Deferred Sales Charge in the first five years would be
the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(A) (B)
- ------------------------------------------------------------------------------------------------------------------
Maximum Deferred Deferred Sales Charge
Policy Year Calculated Amount Sales Charge (Lesser of (A) and (B)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
1 $ 450.00 $826.00 $450.00
- ------------------------------------------------------------------------------------------------------------------
2 $ 630.40 $826.00 $630.40
- ------------------------------------------------------------------------------------------------------------------
3 $ 768.44 $826.00 $768.44
- ------------------------------------------------------------------------------------------------------------------
4 $ 903.44 $826.00 $826.00
- ------------------------------------------------------------------------------------------------------------------
5 $1,038.44 $826.00 $826.00
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
In this example, the charge based on SCTP is less than the
Maximum Deferred Sales Charge until the fourth Policy Year.
Thereafter, the Maximum Deferred Sales Charge is less than the
charge based on SCTP. For example, the Deferred Sales Charge
in the first month of the eighth Policy Year will be the
Maximum Deferred Sales Charge of $655.34 (calculated above)
since this is less than $1,443.44 (the calculated amount based
on premiums paid).
MONTHLY DEDUCTIONS
Charges will be deducted from the Accumulated Value on the Date of
Issue and on each Monthly Policy Date to compensate National Life for
administrative expenses and for the insurance coverage provided by the Policy.
The Monthly Deduction consists of three components - (a) the Cost of Insurance
Charge, (b) the Monthly Administrative Charge, and (c) the cost of any
additional benefits provided by Rider. Because portions of the Monthly
Deduction, such as the Cost of Insurance Charge, can vary from Policy Month to
Policy Month, the Monthly Deduction may vary in amount from Policy Month to
Policy Month. The Monthly Deduction will be deducted on a pro rata basis from
the Subaccounts of the Separate Account and the General Account, unless the
Owner has elected at the time of application, or later requests in writing,
that the Monthly Deduction be made from the Money Market Subaccount. If a
Monthly Deduction cannot be made from the Money Market Subaccount, where that
has been elected, the amount of the deduction in excess of the Accumulated
Value available in the Money Market Subaccount will be made on a pro rata basis
from Accumulated Value in the Subaccounts of the Separate Account and the
General Account.
Cost of Insurance Charge. Because the Cost of Insurance Charge
depends upon several variables, the cost for each Policy Month can vary.
National Life will determine the monthly Cost of Insurance Charge by
multiplying the applicable cost of insurance rate or rates by the Net Amount at
Risk for each Policy Month.
The Net Amount at Risk on any Monthly Policy Date is the amount by
which the Unadjusted Death Benefit on that Monthly Policy Date, adjusted by a
factor, exceeds the Accumulated Value. This factor is 1.00327234, and is used
to reduce the Net Amount at Risk, solely for purposes of computing the Cost of
Insurance Charge, by taking into account assumed monthly earnings at an annual
rate of 4%.
27
<PAGE> 37
The Net Amount at Risk is determined separately for the Initial Face Amount and
any increases in Face Amount. In determining the Net Amount at Risk for each
increment of Face Amount, the Accumulated Value is first considered part of the
Initial Face Amount. If the Accumulated Value exceeds the Initial Face Amount,
it is considered as part of any increases in Face Amount in the order such
increases took effect.
A cost of insurance rate is also determined separately for the Initial
Face Amount and any increases in Face Amount. In calculating the Cost of
Insurance Charge, the rate for the Rate Class on the Date of Issue is applied
to the Net Amount at Risk for the Initial Face Amount. For each increase in
Face Amount, the rate for the Rate Class applicable to the increase is used.
If, however, the Unadjusted Death Benefit is calculated as the Accumulated
Value times the specified percentage, the rate for the Rate Class for the
Initial Face Amount will be used for the amount of the Unadjusted Death Benefit
in excess of the total Face Amount.
Any change in the Net Amount at Risk will affect the total Cost of
Insurance Charges paid by the Owner.
Cost of Insurance Rate. The guaranteed maximum cost of insurance
rates are set forth in the Policy, and will depend on the Insured's Attained
Age, sex, Rate Class, and the 1980 Commissioners Standard Ordinary
Smoker/Nonsmoker Mortality Table. For Policies issued in states which require
"unisex" policies or in conjunction with employee benefit plans, the guaranteed
maximum cost of insurance rate will depend on the Insured's Attained Age, Rate
Class and the 1980 Commissioners Standard Ordinary Mortality Tables NB and SB.
The actual cost of insurance rates used ("current rates") will depend on the
Insured's Issue Age, sex, and Rate Class, as well as the Policy's Duration and
size. Current cost of insurance rates generally decline as the Policy's
Duration and size increase, other factors being equal. National Life
periodically reviews the adequacy of its current cost of insurance rates and
may adjust their level. However, they will never exceed guaranteed maximum
cost of insurance rates. Any change in the current cost of insurance rates
will apply to all persons of the same Issue Age, sex, and Rate Class, and with
Policies of the same Duration and size.
Policies may also be issued on a guaranteed issue basis, where no
medical underwriting is required prior to issuance of a Policy. Current cost
of insurance rates for Policies issued on a guaranteed issue basis may be
higher than current cost of insurance rates for healthy Insureds who undergo
medical underwriting.
Rate Class. The Rate Class of the Insured will affect the guaranteed
and current cost of insurance rates. National Life currently places Insureds
into preferred nonsmoker, standard nonsmoker, smoker, juvenile classes, and
substandard classes. Smoker, juvenile, and substandard classes reflect higher
mortality risks. In an otherwise identical Policy, an Insured in a preferred
or standard class will have a lower Cost of Insurance Charge than an Insured in
a substandard class with higher mortality risks. Nonsmoking Insureds will
generally incur lower cost of insurance rates than Insureds who are classified
as smokers.
Since the nonsmoker designation is not available for Insureds under
Attained Age 20, shortly before an Insured attains age 20, National Life will
notify the Insured about possible classification as a nonsmoker and direct the
Insured to his or her agent to initiate a change in Rate Class. If the Insured
either does not initiate a change in Rate Class or does not qualify as a
nonsmoker, guaranteed cost of insurance rates will remain as shown in the
Policy. However, if the Insured qualifies as a nonsmoker, the guaranteed and
current cost of insurance rates will be changed to reflect the nonsmoker
classification.
Current cost of insurance rates will also vary by Policy size, in the
following bands: those with Unadjusted Death Benefits less than $250,000; those
with Unadjusted Death Benefits between $250,000 and $999,999, inclusive; and
those with Unadjusted Death Benefits of $1,000,000 and over. Cost of insurance
rates will be lower as the Policy size band is larger.
28
<PAGE> 38
Monthly Administrative Charge. National Life administers the Policy
and the Separate Account and, therefore, will incur certain ordinary
administrative expenses. National Life therefore assesses a Monthly
Administrative Charge. The Monthly Administrative Charge of $7.50 will be
deducted from the Accumulated Value on the Date of Issue and each Monthly
Policy Date as part of the Monthly Deduction. This charge is intended to
reimburse National Life for ordinary administrative expenses expected to be
incurred, including record keeping, processing claims and certain Policy
changes, preparing and mailing reports, and overhead costs, and is not intended
to produce a profit.
Optional Benefit Charges. The Monthly Deduction will include charges
for any additional benefits added to the Policy. The monthly charges will be
specified in the applicable Rider. The available Riders are listed under
"Optional Benefits", on page below.
Bonus. National Life currently intends to reduce the Monthly
Deductions starting in the eleventh Policy Year by an amount equal to 0.50% per
annum of the Accumulated Value in the Separate Account. This bonus is not
guaranteed, however, and will only be continued if National Life's mortality
and expense experience with the Policies justifies such continuation. National
Life will notify the Owner before the commencement of the eleventh Policy Year
if it intends to discontinue this practice.
The bonus is calculated on each Monthly Policy Date as .041572% (the
monthly equivalent of 0.50% per annum) of the Accumulated Value in the Separate
Account on the just prior Monthly Policy Date. For example, if the Accumulated
Value in the Separate Account on the just prior Monthly Policy Date is $10,000,
then the bonus calculated for the current Monthly Policy Date will be $4.16
($10,000 X .00041572). To calculate the Monthly Deduction for the current
Monthly Policy Date, the $4.16 bonus is netted against the Monthly Deductions
for Cost of Insurance, the Monthly Administrative Charge, and charges for any
Optional Benefits.
WITHDRAWAL CHARGE
At the time of a Withdrawal, National Life will assess a charge equal
to the lesser of 2% of the Withdrawal amount and $25. This Withdrawal Charge
will be deducted from the Withdrawal amount. The Withdrawal Charge is intended
to reimburse National Life for expenses incurred in processing Withdrawals, and
is not intended to produce a profit.
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts, or
from the Separate Account to the General Account, and transfers from the
General Account to the Separate Account are permitted within the limits
described on page , in each case without charge. National Life has no
present intention to impose a transfer charge in the foreseeable future.
However, National Life reserves the right to impose in the future a transfer
charge of $25 on each transfer in excess of five transfers in any Policy Year.
The Transfer Charge would be imposed to compensate National Life for the costs
of processing such transfers, and would not be designed to produce a profit.
If imposed, the transfer charge will be deducted from the amount being
transferred. All transfers requested on the same Valuation Day are treated as
one transfer transaction. Any future transfer charge will not apply to
transfers resulting from Policy loans, the exercise of special transfer rights,
the initial reallocation of account values from the Money Market Subaccount to
other Subaccounts, and any transfers made pursuant to the Dollar Cost Averaging
and Portfolio Rebalancing features. These transfers will not count against the
five free transfers in any Policy Year.
PROJECTION REPORT CHARGE
National Life may impose a charge for each projection report requested
by the Owner. This report will project future values and future Death Benefits
for the Policy. National Life will notify the Owner in advance of the amount
of the charge, and the Owner may elect to pay the charge in advance. If not
paid in advance, this charge will be allocated among and deducted from the
Subaccounts of the Separate Account and/or the General Account in proportion to
their respective Accumulated Values on the date of
29
<PAGE> 39
the deduction. The charge would be imposed to reimburse National Life for its
expenses in preparing the projection reports, and would not be intended to
produce a profit.
MORTALITY AND EXPENSE RISK CHARGE
A daily charge will be deducted from the value of the net assets of
the Separate Account to compensate National Life for mortality and expense
risks assumed in connection with the Policy. This charge will be deducted at
an annual rate of 0.90% (or a daily rate of .0024548%) of the average daily net
assets of each Subaccount of the Separate Account. The mortality risk assumed
by National Life is that Insureds may live for a shorter time than projected
and, therefore, greater death benefits than expected will be paid in relation
to the amount of premiums received. The expense risk assumed is that expenses
incurred in issuing and administering the Policies will exceed the
administrative charges provided in the Policy.
If the Mortality and Expense Risk Charge proves insufficient, National
Life will provide for all Death Benefits and expenses and any loss will be
borne by National Life. Conversely, National Life will realize a gain from
this charge to the extent all money collected from this charge is not needed to
provide for benefits and expenses under the Policies.
OTHER CHARGES
The Separate Account purchases shares of the Funds at net asset value.
The net asset value of those shares reflect management fees and expenses
already deducted from the assets of the Funds' Portfolios. The fees and
expenses for the Funds and their Portfolios are described briefly in connection
with a general description of each Fund.
More detailed information is contained in the Funds Prospectuses which
are attached to or accompany this Prospectus.
POLICY RIGHTS
LOAN PRIVILEGES
General. The Owner may at any time after the first anniversary of the
Date of Issue borrow money from National Life using the Policy as the only
security for the loan. The Owner may obtain Policy loans while the Policy is
in force in an amount not exceeding the Policy's Cash Surrender Value on the
date of receipt of the loan request, minus three times the Monthly Deduction
for the most recent Monthly Policy Date. While the Insured is living, the
Owner may repay all or a portion of a loan and accrued interest. Loans may be
taken by making a written request to National Life at its Home Office, or, if
the telephone transaction privilege has been elected, by providing telephone
instructions to National Life at its Home Office. Loan proceeds will be paid
within seven days of a valid loan request (See "Telephone Transaction
Privilege," Page ). National Life limits the amount of a Policy loan taken
pursuant to telephone instructions to $10,000.
Interest Rate Charged. The interest rate charged on Policy loans will
be at the fixed rate of 6% per year. Interest is charged from the date of the
loan and is due at the end of each Policy Year. If interest is not paid when
due, it will be added to the loan balance and bear interest at the same rate.
Allocation of Loans and Collateral. When a Policy loan is taken,
Accumulated Value is held in the General Account as Collateral for the Policy
loan. Accumulated Value is taken from the Subaccounts of the Separate Account
based upon the instructions of the Owner at the time the loan is taken. If
specific allocation instructions have not been received from the Owner, the
Policy loan will be allocated to the Subaccounts based on the proportion that
each Subaccount's value bears to the total Accumulated Value in the Separate
Account. If the Accumulated Value in one or more of the Subaccounts is
insufficient to carry out the Owner's instructions, the loan will not be
processed until further instructions are received from the Owner. Non-loaned
Accumulated Value in the General Account will become Collateral for a loan only
to the extent that the Accumulated Value in the Separate
30
<PAGE> 40
Account is insufficient. Any loan interest due and unpaid will be allocated
among and transferred first from the Subaccounts of the Separate Account in
proportion to the Accumulated Values held in the Subaccounts, and then from the
non-loaned portion of the General Account.
The Collateral for a Policy loan will initially be the loan amount.
Any loan interest due and unpaid will be added to the Policy loan. National
Life will take additional Collateral for such loan interest so added pro rata
from the Subaccounts of the Separate Account, and then, if the amounts in the
Separate Account are insufficient, from the non-loaned portion of the General
Account, and hold the Collateral in the General Account. At any time, the
amount of the outstanding loan under a Policy equals the sum of all loans
(including due and unpaid interest added to the loan balance) minus any loan
repayments.
Interest Credited to Amounts Held as Collateral. As long as the
Policy is in force, National Life will credit the amount held in the General
Account as Collateral with interest at effective annual rates it determines,
but not less than 4% or such higher minimum rate required under state law. The
rate will apply to the calendar year which follows the date of determination.
Bonus. In Policy Years 11 and thereafter, National Life currently
intends to credit interest on amounts held in the General Account as Collateral
at a rate 0.50% per annum higher than for similar amounts for Policies still in
their first ten Policy Years. This bonus is not guaranteed, however, and upon
prior notice to Owners National Life may, in its sole discretion, decide not to
credit the bonus.
Preferred Policy Loans. National Life currently intends, but is not
obligated to continue, to make preferred Policy loans available, on the later
of the Insured's Attained Age 65 and the beginning of Policy Year 21, in
maximum amounts of 5% of Accumulated Value per year, subject to a cumulative
maximum of 50% of Accumulated Value. For such preferred Policy loans amounts
held as Collateral in the General Account will be credited with interest at an
annual rate of 6%. If both preferred and non-preferred loans exist at the same
time, any loan repayment will be applied first to the non-preferred loan.
Preferred loans may not be treated as indebtedness for federal income tax
purposes. However, National Life is not obligated to continue to make
preferred loans available, and will make such loans available in its sole
discretion.
Effect of Policy Loan. Policy loans, whether or not repaid, will have
a permanent effect on the Accumulated Value and the Cash Surrender Value, and
may permanently affect the Death Benefit under the Policy. The effect on the
Accumulated Value and Death Benefit could be favorable or unfavorable,
depending on whether the investment performance of the Subaccounts and the
interest credited to the Accumulated Value in the General Account not held as
Collateral is less than or greater than the interest being credited on the
amounts held as Collateral in the General Account while the loan is
outstanding. Compared to a Policy under which no loan is made, values under a
Policy will be lower when the credited interest rate on Collateral is less than
the investment experience of assets held in the Separate Account and interest
credited to the Accumulated Value in the General Account not held as
Collateral. The longer a loan is outstanding, the greater the effect a Policy
loan is likely to have. The Death Benefit will be reduced by the amount of any
outstanding Policy loan.
Loan Repayments. National Life will assume that any payments made
while there is an outstanding loan on the Policy are premium payments, rather
than loan repayments, unless it receives written instructions that a payment is
a loan repayment. In the event of a loan repayment, the amount held as
Collateral in the General Account will be reduced by an amount equal to the
repayment, and such amount will be transferred to the Subaccounts of the
Separate Account and to the non-loaned portion of the General Account based on
the Net Premium allocations in effect at the time of the repayment.
Lapse With Loans Outstanding. The amount of an outstanding loan under
a Policy plus any accrued interest on outstanding loans is not part of Cash
Surrender Value. Therefore, the larger the amount of an outstanding loan, the
more likely it is that the Policy could lapse. (See "How the Duration of the
Policy May Vary," Page ___ and "Policy Lapse," Page ____.) In addition, if the
Policy is not a
31
<PAGE> 41
Modified Endowment Policy, lapse of the Policy with outstanding loans may
result in adverse federal income tax consequences. (See "Tax Treatment of
Policy Benefits," Page ___.)
Tax Considerations. Any loans taken from a "Modified Endowment
Contract" will be treated as a taxable distribution. In addition, with certain
exceptions, a 10% additional income tax penalty will be imposed on the portion
of any loan that is included in income. (See "Distributions from Policies
Classified as Modified Endowment Contracts," Page ___).
SURRENDER PRIVILEGE
At any time before the death of the Insured, the Owner may surrender
the Policy for its Cash Surrender Value. The Cash Surrender Value is the
Accumulated Value minus any Policy loan and accrued interest and less any
applicable Surrender Charge. The Cash Surrender Value will be determined by
National Life on the Valuation Day it receives, at its Home Office, a written
surrender request signed by the Owner, and the Policy. A surrender may not be
requested over the telephone. Coverage under the Policy will end on the day
the Owner mails or otherwise sends the written surrender request and the Policy
to National Life. Surrender proceeds will ordinarily be mailed by National
Life to the Owner within seven days of receipt of the request. (See "Other
Policy Provisions - Payment of Policy Benefits", Page ____).
A surrender may have Federal income tax consequences. (See "Tax
Treatment of Policy Benefits," Page ___).
WITHDRAWAL OF CASH SURRENDER VALUE
At any time before the death of the Insured and, except for employee
benefit plans, after the first Policy Anniversary, the Owner may withdraw a
portion of the Policy's Cash Surrender Value. The minimum amount which may be
withdrawn is $500, except for employee benefit plans, where the minimum is
$100. The maximum Withdrawal is the Cash Surrender Value on the date of
receipt of the Withdrawal request, minus three times the Monthly Deduction for
the most recent Monthly Policy Date. A Withdrawal Charge will be deducted from
the amount of the Withdrawal. For a discussion of the Withdrawal Charge, see
"Charges and Deductions - Withdrawal Charge" on page ____.
The Withdrawal will be taken from the Subaccounts of the Separate
Account based upon the instructions of the Owner at the time of the Withdrawal.
If specific allocation instructions have not been received from the Owner, the
Withdrawal will be allocated to the Subaccounts based on the proportion that
each Subaccount's value bears to the total Accumulated Value in the Separate
Account. If the Accumulated Value in one or more Subaccounts is insufficient
to carry out the Owner's instructions, the Withdrawal will not be processed
until further instructions are received from the Owner. Withdrawals will be
taken from the General Account only to the extent that Accumulated Value in the
Separate Account is insufficient.
The effect of a Withdrawal on the Death Benefit and Face Amount will
vary depending upon the Death Benefit Option in effect and whether the
Unadjusted Death Benefit is based on the applicable percentage of Accumulated
Value. (See "Death Benefit Options," Page ___.)
Option A. The effect of a Withdrawal on the Face Amount and Unadjusted
Death Benefit under Option A can be described as follows:
If the Face Amount divided by the applicable percentage of
Accumulated Value exceeds the Accumulated Value just after the
Withdrawal, a Withdrawal will reduce the Face Amount and the
Unadjusted Death Benefit by the lesser of such excess and the amount
of the Withdrawal.
For the purposes of this illustration (and the following
illustrations of Withdrawals), assume that the Attained Age of the
Insured is under 40 and there is no indebtedness. The applicable
percentage is 250% for an Insured with an Attained Age under 40.
32
<PAGE> 42
Under Option A, a contract with a Face Amount of $300,000 and
an Accumulated Value of $30,000 will have an Unadjusted Death Benefit
of $300,000. Assume that the Owner takes a Withdrawal of $10,000. The
Withdrawal Charge will be $25 and the amount paid to the Owner will be
$9,975. The Withdrawal will reduce the Accumulated Value to $20,000
($30,000 - $10,000) after the Withdrawal. The Face Amount divided by
the applicable percentage is $120,000 ($300,000 / 2.50), which exceeds
the Accumulated Value after the Withdrawal by $100,000 ($120,000 -
$20,000). The lesser of this excess and the amount of the Withdrawal
is $10,000, the amount of the Withdrawal. Therefore, the Unadjusted
Death Benefit and Face Amount will be reduced by $10,000 to $290,000.
If the Face Amount divided by the applicable percentage of
Accumulated Value does not exceed the Accumulated Value just after the
Withdrawal, then the Face Amount is not reduced. The Unadjusted Death
Benefit will be reduced by an amount equal to the reduction in
Accumulated Value times the applicable percentage (or equivalently,
the Unadjusted Death Benefit is equal to the new Accumulated Value
times the applicable percentage).
Under Option A, a policy with a Face Amount of $300,000 and an
Accumulated Value of $150,000 will have an Unadjusted Death Benefit of
$375,000 ($150,000 x 2.50). Assume that the Owner takes a Withdrawal
of $10,000. The Withdrawal Charge will be $25 and the amount paid to
the Owner will be $9,975. The Withdrawal will reduce the Accumulated
Value to $140,000 ($150,000 - $10,000). The Face Amount divided by
the applicable percentage is $120,000, which does not exceed the
Accumulated Value after the withdrawal. Therefore, the Face Amount
stays at $300,000 and the Unadjusted Death Benefit is $350,000
($140,000 x 2.50).
Option B. The Face Amount will never be decreased by a Withdrawal. A
Withdrawal will, however, always decrease the Death Benefit.
If the Unadjusted Death Benefit equals the Face Amount plus the
Accumulated Value, a Withdrawal will reduce the Accumulated Value by
the amount of the Withdrawal and thus the Unadjusted Death Benefit
will also be reduced by the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $90,000 will have an Unadjusted Death Benefit of
$390,000 ($300,000 + $90,000). Assume the Owner takes a Withdrawal of
$20,000. The Withdrawal Charge will be $25 and the amount paid to the
Owner will be $19,975. The Withdrawal will reduce the Accumulated
Value to $70,000 ($90,000 - $20,000) and the Unadjusted Death Benefit
to $370,000 ($300,000 + $70,000). The Face Amount is unchanged.
If the Unadjusted Death Benefit immediately prior to the
Withdrawal is based on the applicable percentage of Accumulated Value,
the Unadjusted Death Benefit will be reduced to equal the greater of
(a) the Face Amount plus the Accumulated Value after deducting the
amount of the Withdrawal and Withdrawal Charge and (b) the applicable
percentage of Accumulated Value after deducting the amount of the
Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $210,000 will have an Unadjusted Death Benefit of
$525,000 ($210,000 X 2.5). Assume the Owner takes a Withdrawal of
$60,000. The Withdrawal Charge will be $25 and the amount paid to the
Owner will be $59,975. The Withdrawal will reduce the Accumulated
Value to $150,000 ($210,000 - $60,000), and the Unadjusted Death
Benefit to the greater of (a) the Face Amount plus the Accumulated
Value, or $450,000 ($300,000 + $150,000) and (b) the Unadjusted Death
Benefit based on the applicable percentage of the Accumulated Value,
or $375,000 ($150,000 X 2.50). Therefore, the Unadjusted Death
Benefit will be $450,000. The Face Amount is unchanged.
33
<PAGE> 43
Any decrease in Face Amount due to a Withdrawal will first reduce the
most recent increase in Face Amount, then the most recent increases,
successively, and lastly, the Initial Face Amount.
Because a Withdrawal can affect the Face Amount and the Unadjusted
Death Benefit as described above, a Withdrawal may also affect the Net Amount
at Risk which is used to calculate the Cost of Insurance Charge under the
Policy. (See "Cost of Insurance," Page ___). Since a Withdrawal reduces the
Accumulated Value, the Cash Surrender Value of the Policy is reduced, thereby
increasing the likelihood that the Policy will lapse. (See "Policy Lapse,"
Page ___). A request for Withdrawal may not be allowed if such Withdrawal
would reduce the Face Amount below the Minimum Face Amount for the Policy.
Also, if a Withdrawal would result in cumulative premiums exceeding the maximum
premium limitations applicable under the Code for life insurance, National Life
will not allow such Withdrawal.
Withdrawals may be requested only by sending a written request, signed
by the Owner, to National Life at its Home Office. A Withdrawal may not be
requested over the telephone. A Withdrawal will ordinarily be paid within
seven days of receipt at the Home Office of a valid Withdrawal request.
A Withdrawal of Cash Surrender Value may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits", Page ___).
FREE-LOOK PRIVILEGE
The Policy provides for a "free-look" period, during which the Owner
may cancel the Policy receive a refund equal to the gross premiums paid on the
Policy. This free-look period ends on the latest of: (a) 45 days after Part A
of the application for the Policy is signed; (b) 10 days after the Owner
receives the Policy; and (c) 10 days after National Life mails the Notice of
Withdrawal Right to the Owner. To cancel the Policy, the Owner must return the
Policy to National Life or to an agent of National Life within such time with a
written request for cancellation.
TELEPHONE TRANSACTION PRIVILEGE
If the telephone transaction privilege has been elected, either on the
application for the Policy or by thereafter providing a proper written
authorization to National Life, an Owner may effect changes in premium
allocation, transfers, and loans of up to $10,000 by providing instructions to
National Life at its Home Office over the telephone. National Life reserves
the right to suspend telephone transaction privileges at any time, for any
reason, if it deems such suspension to be in the best interests of Policy
Owners.
National Life will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If National Life follows
these procedures it will not be liable for any losses due to unauthorized or
fraudulent instructions. National Life may be liable for any such losses if
those reasonable procedures are not followed. The procedures to be followed
for telephone transfers will include one or more of the following: requiring
some form of personal identification prior to acting on instructions received
by telephone, providing written confirmation of the transaction, and making a
tape recording of the instructions given by telephone.
SPECIAL TRANSFER RIGHTS
Transfer Right for Policy. During the first two years following
Policy issue, the Owner may, on one occasion, transfer the entire Accumulated
Value in the Separate Account to the General Account, without regard to any
limits on transfers or free transfers.
Transfer Right for Change in Investment Policy. If the investment
policy of a Subaccount of the Separate Account is materially changed, the Owner
may transfer the portion of the Accumulated Value in such Subaccount to another
Subaccount or to the General Account, without regard to any limits on transfers
or free transfers.
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AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
National Life currently offers, at no charge to Owners, the following
automated fund management features. However, National Life is not legally
obligated to continue to offer these features, and although it has no current
intention to do so, it may cease offering one or both such features at any
time, after providing 60 days prior written notice to all Owners who are
currently utilizing the features being discontinued.
Dollar Cost Averaging. This feature permits an Owner to automatically
transfer funds from the Money Market Subaccount to any other Subaccounts on a
monthly basis. It may be elected at issue by marking the appropriate box on
the initial application, and completing the appropriate instructions, or, after
issue, by filling out similar information on a change request form and sending
it to the Home Office.
If this feature is elected, the amount to be transferred will be taken
from the Money Market Subaccount and transferred to the Subaccount or
Subaccounts designated to receive the funds, each month on the Monthly Policy
Date (starting with the Monthly Policy Date next succeeding the date that the
reallocation of the Accumulated Value out of the Money Market Subaccount and
into the other Subaccounts would normally have occurred after expiration of the
10-day free look period after the Owner receives the Policy, or next succeeding
the date of an election subsequent to purchase), until the amount in the Money
Market Fund is depleted. The minimum monthly transfer by Dollar Cost Averaging
is $100, except for the transfer which reduces the amount in the Money Market
Subaccount to zero. An Owner may discontinue Dollar Cost Averaging at any time
by sending an appropriate change request form to the Home Office.
This feature allows an Owner to move funds into the various investment
types on a more gradual and systematic basis than the frequency on which
premiums are paid. The periodic investment of the same amount will result in
higher numbers of units being purchased when unit prices are lower, and lower
numbers of units being purchased when unit prices are higher. This will
result, over time, in a lower cost per unit than the average of the unit costs
on the days on which the automated purchases are made. This technique will
not, however, assure a profit or protect against a loss in declining markets.
Moreover, for the dollar cost averaging technique to be effective, amounts
should be available for allocation from the Money Market Subaccount through
periods of low price levels as well as higher price levels.
Portfolio Rebalancing. This feature permits an Owner to automatically
rebalance the value in the Subaccounts on a semi-annual basis, based on the
Owner's premium allocation percentages in effect at the time of the
rebalancing. It may be elected at issue by marking the appropriate box on the
initial application, or, after issue, by completing a change request form and
sending it to the Home Office.
In Policies utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer will take place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages,
starting with the Monthly Policy Date six months after the Date of Issue, and
then on each Policy Anniversary, and each Monthly Policy Date six months
thereafter. Policies electing Portfolio Rebalancing after issue will have the
first automated transfer occur as of the Valuation Date on or next following
the date that the election is received at the Home Office, and subsequent
rebalancing transfers will occur every six months from such date. An Owner may
discontinue Portfolio Rebalancing at any time by submitting an appropriate
change request form to the Home Office.
In the event that an Owner changes the Policy's premium allocation
percentages, Portfolio Rebalancing will automatically be discontinued unless
the Owner specifically directs otherwise.
Portfolio rebalancing will result in periodic transfers out of
Subaccounts that have had relatively favorable investment performance in
relation to the other Subaccounts to which a Policy allocates
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premiums, and into Subaccounts which have had relatively unfavorable investment
performance in relation to the other Subaccounts to which the Policy allocates
premiums.
THE GENERAL ACCOUNT
An Owner may allocate some or all of the Net Premiums and transfer
some or all of the Accumulated Value to National Life's General Account.
National Life credits interest on Net Premiums and Accumulated Value allocated
to the General Account at rates declared by National Life (subject to a minimum
guaranteed interest rate of 4%). The principal, after deductions, is also
guaranteed. National Life's General Account supports its insurance and annuity
obligations. All assets in the General Account are subject to National Life's
general liabilities from business operations.
The General Account has not, and is not required to be, registered
with the SEC 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. Therefore, the General Account and the interests therein are generally
not subject to regulation under the 1933 Act or the 1940 Act. The disclosures
relating to this account which are included in this Prospectus are for your
information and have not been reviewed by the SEC. However, such disclosures
may be subject to certain generally applicable provisions of the Federal
securities laws relating to the accuracy and completeness of statements made in
prospectuses.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES.
The Accumulated Value not held as Collateral in the General Account is
guaranteed to accumulate at a minimum effective annual interest rate of 4%.
National Life may credit the non-loaned Accumulated Value in the General
Account with current rates in excess of the minimum guarantee but is not
obligated to do so. These current interest rates are influenced by, but do not
necessarily correspond to, prevailing general market interest rates. Since
National Life, in its sole discretion, anticipates changing the current
interest rate from time to time, allocations to the General Account made at
different times are likely to be credited with different current interest
rates. An interest rate will be declared by National Life each month to apply
to amounts allocated or transferred to the General Account in that month. The
rate declared on such amounts will remain in effect for twelve months. At the
end of the 12-month period, National Life reserves the right to declare a new
current interest rate on such amounts and accrued interest thereon (which may
be a different current interest rate than the current interest rate on new
allocations to the General Account on that date). Any interest credited on the
amounts in the General Account in excess of the minimum guaranteed rate of 4%
per year will be determined in the sole discretion of National Life. The Owner
assumes the risk that interest credited may not exceed the guaranteed minimum
rate.
Amounts deducted from the non-loaned Accumulated Value in the General
Account for Withdrawals, Policy loans, transfers to the Separate Account,
Monthly Deductions or other charges are currently, for the purpose of crediting
interest, accounted for on a last in, first out ("LIFO") method.
National Life reserves the right to change the method of crediting
interest from time to time, provided that such changes do not have the effect
of reducing the guaranteed rate of interest below 4% per annum or shorten the
period for which the interest rate applies to less than 12 months.
Bonus Interest. National Life currently intends to credit interest on
non-loaned Accumulated Value in the General Account for Policies in Policy Year
11 and thereafter at rates which are 0.50% per annum higher than those that
apply to non-loaned Accumulated Value in the General Account for Policies still
in their first ten Policy Years. This bonus is not guaranteed, however, and
upon prior notice to Owners National Life may, in its sole discretion, decide
not to credit the bonus.
Calculation of Non-loaned Accumulated Value in the General Account.
The non-loaned Accumulated Value in the General Account at any time is equal to
amounts allocated and transferred to it plus interest credited to it, minus
amounts deducted, transferred or withdrawn from it.
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Interest will be credited to the non-loaned Accumulated Value in the
General Account on each Monthly Policy Date as follows: for amounts in the
account for the entire Policy Month, from the beginning to the end of the
month; for amounts allocated to the account during the prior Policy Month, from
the date the Net Premium or loan repayment is allocated to the end of the
month; for amounts transferred to the account during the Policy Month, from the
date of transfer to the end of the month; and for amounts deducted or withdrawn
from the account during the prior Policy Month, from the beginning of the month
to the date of deduction or withdrawal.
TRANSFERS FROM GENERAL ACCOUNT.
One transfer in each Policy Year is allowed from the amount of
non-loaned Accumulated Value in the General Account to any or all of the
Subaccounts of the Separate Account. The amount transferred from the General
Account may not exceed the greater of 25% of the value of the non-loaned
Accumulated Value in such account at the time of transfer, or $1000. The
transfer will be made as of the Valuation Day National Life receives the
written or telephone request at its Home Office.
OTHER POLICY PROVISIONS
Indefinite Policy Duration. The Policy can remain in force
indefinitely. However, for a Policy to remain in force after the Insured
reaches Attained Age 99, if the Face Amount is greater than the Accumulated
Value, the Face Amount will automatically be decreased to the current
Accumulated Value. Also, at Attained Age 99 Option B automatically becomes
Option A, and no premium payments are allowed after Attained Age 99, although
loan repayments are allowed. The tax treatment of a Policy's Accumulated Value
after Age 100 is unclear, and the Owner may wish to discuss this treatment with
a tax advisor.
Payment of Policy Benefits. The Death Benefit under a Policy will
ordinarily be paid to the Beneficiary within seven days after National Life
receives proof of the Insured's death at its Home Office and all other
requirements are satisfied.
Interest at the annual rate of 4% or any higher rate declared by
National Life or required by law is paid on the Death Benefit from the date of
death until payment is made.
Any amounts payable as a result of surrender, Withdrawal, or Policy
loan will ordinarily be paid within seven days of receipt of written request at
National Life's Home Office in a form satisfactory to National Life.
Generally, the amount of a payment will be determined as of the date
of receipt by National Life of all required documents. However, National Life
may defer the determination or payment of such amounts if the date for
determining such amounts falls within any period during which: (1) the disposal
or valuation of a Subaccount's assets is not reasonably practicable because the
New York Stock Exchange is closed or conditions are such that, under the SEC's
rules and regulations, trading is restricted or an emergency is deemed to
exist; or (2) the SEC by order permits postponement of such actions for the
protection of National Life policyholders. National Life also may defer the
determination or payment of amounts from the General Account for up to six
months.
National Life may postpone any payment under the Policy derived from
an amount paid by check or draft until National Life is satisfied that the
check or draft has been paid by the bank upon which it was drawn.
The Owner may decide the form in which proceeds will be paid. During
the Insured's lifetime, the Owner may arrange for the Death Benefit to be paid
in a lump sum or under a Settlement Option. These choices are also available
upon surrender of the Policy for its Cash Surrender Value. If no election is
made, payment will be made in a lump sum. The Beneficiary may also arrange for
payment of the Death Benefit in a lump sum or under a Settlement Option.
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The Contract. The Policy and a copy of the applications attached
thereto are the entire contract. Only statements made in the applications can
be used to void the Policy or deny a claim. The statements are considered
representations and not warranties. Only one of National Life's duly
authorized officers or registrars can agree to change or waive any provisions
of the Policy and only in writing. As a result of differences in applicable
state laws, certain provisions of the Policy may vary from state to state.
Ownership. The Owner is the Insured unless a different Owner is named
in the application or thereafter changed. While the Insured is living, the
Owner is entitled to exercise any of the rights stated in the Policy or
otherwise granted by National Life. If the Insured and Owner are not the same,
and the Owner dies before the Insured, these rights will vest in the estate of
the Owner, unless otherwise provided.
Beneficiary. The Beneficiary is designated in the application for the
Policy, unless thereafter changed by the Owner during the Insured's lifetime by
written notice to National Life. Any Death Benefit for which there is not a
designated Beneficiary surviving at the Insured's death is payable in a single
sum to the Insured's executors or administrators.
Change of Owner and Beneficiary. As long as the Policy is in force,
the Owner or Beneficiary may be changed by written request in a form acceptable
to National Life. The change will take effect as of the date it is signed,
whether or not the Insured is living when the request is received by National
Life. National Life will not be responsible for any payment made or action
taken before it receives the written request.
Split Dollar Arrangements. The Owner or Owners may enter into a Split
Dollar Arrangement between each other or another person or persons whereby the
payment of premiums and the right to receive the benefits under the Policy
(i.e., Cash Surrender Value or Death Benefit) are split between the parties.
There are different ways of allocating such rights.
For example, an employer and employee might agree that under a Policy
on the life of the employee, the employer will pay the premiums and will have
the right to receive the Cash Surrender Value. The employee may designate the
Beneficiary to receive any Death Benefit in excess of the Cash Surrender Value.
If the employee dies while such an arrangement is in effect, the employer would
receive from the Death Benefit the amount which the employer would have been
entitled to receive upon surrender of the Policy and the employee's Beneficiary
would receive the balance of the proceeds.
No transfer of Policy rights pursuant to a Split Dollar Arrangement
will be binding on National Life unless in writing and received by National
Life.
The parties who elect to enter into a Split Dollar Arrangement should
consult their own tax advisers regarding the tax consequences of such an
arrangement.
Assignments. The Owner may assign any and all rights under the
Policy. No assignment binds National Life unless in writing and received by
National Life at its Home Office. National Life assumes no responsibility for
determining whether an assignment is valid or the extent of the assignee's
interest. All assignments will be subject to any Policy loan. The interest of
any Beneficiary or other person will be subordinate to any assignment. A payee
who is not also the Owner may not assign or encumber Policy benefits, and to
the extent permitted by applicable law, such benefits are not subject to any
legal process for the payment of any claim against the payee.
Misstatement of Age and Sex. If the age or sex of the Insured at the
Date of Issue has been misstated in the application, the Accumulated Value of
the Policy will be adjusted to be the amount that it would have been had the
Cost of Insurance Charges deducted been based on the correct age and sex. The
adjustment will take place on the Monthly Policy Date on or after the date on
which National Life has proof to its satisfaction of the misstatement. If the
Insured has died, National Life will adjust the Accumulated Value as of the
last Monthly Policy Date prior to the Insured's death; however, if the
Accumulated Value is insufficient for that adjustment, the amount of the
Unadjusted Death Benefit will also be adjusted.
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Suicide. In the event of the Insured's suicide, while sane or insane,
within two years from the Date of Issue of the Policy (except where state law
requires a shorter period), or within two years of the effective date of a
reinstatement, National Life's liability is limited to the payment to the
Beneficiary of a sum equal to the premiums paid less any Policy loan and
accrued interest and any Withdrawals (since the date of reinstatement, in the
case of a suicide within two years of the effective date of a reinstatement).
If the Insured commits suicide within two years (or shorter period
required by state law) from the effective date of any Policy change which
increases the Unadjusted Death Benefit and for which an application is
required, the amount which National Life will pay with respect to the increase
will be the Cost of Insurance Charges previously made for such increase.
Incontestability. The Policy will be incontestable after it has been
in force during the Insured's lifetime for two years from the Date of Issue (or
such other date as required by state law). Similar incontestability will apply
to an increase in Face Amount or reinstatement after it has been in force
during the Insured's lifetime for two years from its effective date.
Before such times, however, National Life may contest the validity of
the Policy (or changes) based on material misstatements in the initial or any
subsequent application.
Arbitration. The Policy provides that any controversy under the
Policy shall be settled by arbitration in the state of residence of the Owner,
in accordance with the rules of the American Arbitration Association or any
similar rules to which the parties agree. Any award rendered through
arbitration will be final on all parties, and the reward may be enforced in
court.
The purpose of the arbitration is to provide an alternative dispute
resolution mechanism for investors that may be more efficient and less costly
than court litigation. Owners should be aware, however, that arbitration is,
as noted above, final and binding on all parties, and that the right to seek
remedies in court is waived, including the right to jury trial.
Pre-arbitration discovery is generally more limited than and different from
court discovery procedures, and the arbitrator's award is not required to
include factual findings or legal reasoning. Any party's right to appeal or to
seek modification of rulings by the arbitrators is strictly limited.
Dividends. The Policy is participating; however, no dividends are
expected to be paid on the Policy. If dividends are ever declared, they will
be paid in cash.
Correspondence. All correspondence to the Owner is deemed to have
been sent to the Owner if mailed to the Owner at the Owner's last known
address.
Settlement Options. In lieu of a single sum payment on death or
surrender, an election may be made to apply the Death Benefit under any one of
the fixed-benefit Settlement Options provided in the Policy. The options are
described below.
Payment of Interest Only. Interest at a rate of 3.5% per year will be
paid on the amount of the proceeds retained by National Life. Upon the earlier
of the payee's death or the end of a chosen period, the proceeds retained will
be paid.
Payments for a Stated Time. Equal monthly payments, based on an
interest rate of 3.5% per annum, will be made for the number of years selected.
Payments for Life. Equal monthly payments, based on an interest rate
of 3.5% per annum, will be made for a guaranteed period and thereafter during
the life of a chosen person. Guaranteed payment periods may be elected for 0,
10, 15, or 20 years or for a refund period, at the end of which the total
payments will equal the proceeds placed under the option.
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Payments of a Stated Amount. Equal monthly payments will be made until
the proceeds, with interest at 3.5% per year on the unpaid balance, have been
paid in full. The total payments in any year must be at least $10 per month
for each thousand dollars of proceeds placed under this option.
Life Annuity. Equal monthly payments will be made in the same manner
as in the above Payments for Life option except that the amount of each payment
will be the monthly income provided by National Life's then current settlement
rates on the date the proceeds become payable. No additional interest will be
paid.
Joint and Two Thirds Annuity. Equal monthly payments, based on an
interest rate of 3.5% per year, will be made while two chosen persons are both
living. Upon the death of either, two-thirds of the amount of those payments
will continue to be made during the life of the survivor. National Life may
require proof of the ages of the chosen persons.
50% Survivor Annuity. Equal monthly payments, based on an interest
rate of 3.5% per year, will be made during the lifetime of the chosen primary
person. Upon the death of the chosen primary person, 50% of the amount of
those payments will continue to be made during the lifetime of the secondary
chosen person. National Life may require proof of the ages of the chosen
persons.
National Life may pay interest in excess of the stated amounts under
the first four options listed above, but not the last three. A right to change
options or to withdraw all or part of the remaining proceeds may be included in
the first two, and the fourth, options above. For additional information
concerning the payment options, see the Policy.
OPTIONAL BENEFITS
The following optional benefits, which are subject to the restrictions
and limitations set forth in the applicable Policy Riders, may be included in a
Policy at the option of the Owner (election of any of these optional benefits
involves an additional cost):
Waiver of Monthly Deductions. The Waiver of Monthly Deductions Rider
will waive Monthly Deductions against the Policy if the Insured becomes totally
disabled, before age 65 and for at least 120 days. If total disability occurs
after age 60 and before age 65, then Monthly Deductions will be waived only
until the Insured reaches Attained Age 65, or for a period of two years, if
longer. The monthly cost of this Rider is based on sex-distinct rates (except
for Policies issued in states which require "unisex" policies or in conjunction
with employee benefit plans, where the cost of this Rider will not vary by sex)
multiplied by the Monthly Deduction on the Policy, and will be added to the
Monthly Deduction on the Policy.
Accidental Death Benefit. The Accidental Death Rider provides for an
increased Death Benefit in the event that the Insured dies in an accident. If
this Rider is elected, the monthly cost of this Rider will be added to the
Monthly Deduction on the Policy.
Guaranteed Insurability Option. This Rider will permit the Owner to
increase the Face Amount of the Policy, within certain limits, without being
required to submit satisfactory proof of insurability at the time of the
request for the increase. Again, if this Rider is elected, the monthly cost of
this Rider will be added to the Monthly Deduction on the Policy.
Guaranteed Death Benefit. If this Rider is elected, National Life
will guarantee that the Policy will not lapse prior to the Insured's Attained
Age 70, or 20 years from the Date of Issue of the Policy, if longer, regardless
of the Policy's investment performance. To keep this Rider in force,
cumulative premiums paid must be greater than the Minimum Guarantee Premium
from the Date of Issue. The Policy will be tested monthly for this
qualification, and if not met, a notice will be sent to the Owner, who will
have 61 days from the date the notice is mailed to pay a premium sufficient to
keep the Rider in force. The premium required will be the Minimum Guarantee
Premium from the Date of Issue, plus two times the Minimum Monthly Premium,
minus premiums previously paid. The Rider will be cancelled if a sufficient
premium is not paid during that 61-day period.
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The cost of the Guaranteed Death Benefit Rider is $0.01 per thousand
of Face Amount per month. This Rider is available only at issue, and only for
Issue Ages 0-65.
If while the Guaranteed Death Benefit Rider is in force, the
Accumulated Value of the Policy is not sufficient to cover the Monthly
Deductions, Monthly Deductions will be made until the Accumulated Value of the
Policy is exhausted, and will thereafter be deferred, and collected at such
time as the Policy has positive Accumulated Value.
If the Face Amount of a Policy subject to the Guaranteed Death Benefit
Rider is increased, the Rider's guarantee will extend to the increased Face
Amount. This will result in increased Minimum Guarantee Premiums.
If both the Waiver of Monthly Deductions Rider and the Guaranteed
Death Benefit Rider apply to a Policy and Monthly Deductions are waived because
of total disability, then Minimum Guarantee Premiums required to keep the
Guaranteed Death Benefit Rider in force will be waived during the period that
Monthly Deductions are being waived.
For Policies with the Guaranteed Death Benefit Rider, Withdrawals and
Policy loans will be limited to the excess of premiums paid over the Minimum
Guarantee Premium, if the Owner wishes to keep the Rider in force. If a Policy
loan or Withdrawal for an amount greater than such excess is desired, the
Guaranteed Death Benefit Rider will enter a 61-day lapse-pending notification
period, and will be cancelled if a sufficient premium is not paid.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the Federal
income tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon National Life's
understanding of the present Federal income tax laws as they are currently
interpreted by the Internal Revenue Service (the "Service"). No representation
is made as to the likelihood of continuation of the present Federal income tax
laws or of the current interpretations by the Service.
TAX STATUS OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the
"Code") sets forth a definition of a life insurance contract for Federal tax
purposes. Although the Secretary of the Treasury (the "Treasury") is
authorized to prescribe regulations implementing Section 7702, while proposed
regulations and other interim guidance has been issued, final regulations have
not been adopted. Guidance as to how Section 7702 is to be applied is limited.
If a Policy were determined not to be a life insurance contract for purposes of
Section 7702, such Policy would not provide the tax advantages normally
provided by a life insurance policy.
With respect to a Policy issued on the basis of a standard rate class,
National Life believes (largely in reliance on the Service's Notice 88-128 and
the proposed regulations under Section 7702, issued on July 5, 1991) that such
a Policy should meet the Section 7702 definition of a life insurance contract.
With respect to a Policy that is issued on a substandard basis (i.e.,
a Rate Class involving higher than standard mortality risk), there is less
guidance. Thus, it is not clear whether or not such a Policy would satisfy
section 7702, particularly if the Owner pays the full amount of premiums
permitted under the Policy.
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If it is subsequently determined that a Policy does not satisfy
Section 7702, National Life may take whatever steps are appropriate and
necessary to attempt to cause such a Policy to comply with Section 7702. For
these reasons, National Life reserves the right to restrict Policy transactions
as necessary to attempt to qualify it as a life insurance contract under
Section 7702.
Section 817(h) of the Code requires that the investments of each
Subaccount of the Separate Account must be "adequately diversified" in
accordance with Treasury regulations in order for the Policy to qualify as a
life insurance contract under Section 7702 of the Code (discussed above). The
Separate Account, through the Funds, intends to comply with the diversification
requirements prescribed in Treas. Reg. Section 1.817-5, which affect how each
Fund's assets are to be invested. National Life believes that the Separate
Account will, thus, meet the diversification requirement, and National Life
will monitor continued compliance with this requirement.
In certain circumstances, owners of variable life insurance contracts
may be considered the owners, for federal income tax purposes, of the assets of
the separate accounts used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The Service has stated in published
rulings that a variable contract owner will be considered the owner of separate
account assets if the contract owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets.
The Treasury Department has also announced, in connection with the issuance of
regulations concerning diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
Owner), rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the Service in rulings in which it
was determined that Policy Owners were not owners of separate account assets.
For example, the Owner has additional flexibility in allocating premium
payments and Accumulated Value. These differences could result in an Owner
being treated as the owner of a pro rata portion of the assets of the Separate
Account. In addition, National Life does not know what standards will be set
forth, if any, in the regulations or rulings which the Treasury Department has
stated it expects to issue. National Life therefore reserves the right to
modify the Policy as necessary to attempt to prevent an Owner from being
considered the owner of a pro rata share of the assets of the Separate Account.
The following discussion assumes that the Policy will qualify as a
life insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
In General. National Life believes that the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a
fixed-benefit life insurance policy for Federal income tax purposes. Thus, the
Unadjusted Death Benefit under the Policy should be excludable from the gross
income of the Beneficiary under Section 101(a)(1) of the Code.
Depending on the circumstances, the exchange of a Policy, a change in
the Policy's Death Benefit Option (i.e., a change from Death Benefit Option A
to Death Benefit Option B or vice versa), a Policy loan, a Withdrawal, a
surrender, a change in ownership, or an assignment of the Policy' may have
Federal income tax consequences. In addition, Federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on the circumstances of each Owner or Beneficiary. The Policies also
may be used in various arrangements, including nonqualified deferred
compensation or salary continuance plans, split dollar insurance plans,
executive bonus plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if you are
contemplating the use of the Policies in any arrangement the value of which
depends in part on its tax consequences,
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you should be sure to consult a qualified tax advisor regarding the tax
attributes of the particular arrangement.
Generally, the Owner will not be deemed to be in constructive receipt
of the Accumulated Value, including increments thereof, until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by, a Policy depend on whether the Policy is classified as a
"Modified Endowment Contract". Whether a Policy is or is not a Modified
Endowment Contract, upon a complete surrender or lapse of a Policy or when
benefits are paid at a Policy's maturity date, if the amount received plus the
amount of indebtedness exceeds the total investment in the Policy, the excess
will generally be treated as ordinary income subject to tax.
Modified Endowment Contracts. Section 7702A establishes a class of
life insurance contracts designated as "Modified Endowment Contracts," which
applies to Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified
Endowment Contract will depend on the individual circumstances of each Policy.
In general, a Policy will be a Modified Endowment Contract if the accumulated
premiums paid at any time during the first seven Policy Years exceeds the sum
of the net level premiums which would have been paid on or before such time if
the Policy provided for paid-up future benefits after the payment of seven
level annual premiums. The determination of whether a Policy will be a
Modified Endowment Contract after a material change generally depends upon the
relationship of the Unadjusted Death Benefit and Accumulated Value at the time
of such change and the additional premiums paid in the seven years following
the material change. At the time a premium is credited which would cause the
Policy to become a Modified Endowment Contract, National Life will notify the
Owner's agent of action or actions that may be taken to prevent the Policy from
becoming a Modified Endowment Contract. If after 30 days from contacting the
agent, National Life has not heard from the Owner, National Life will mail a
letter directly to the Owner notifying him or her of actions that may be taken
to prevent the Policy from becoming a Modified Endowment Contract. If after 30
days from mailing such notification National Life has received no response,
National Life will assume the Owner wishes to take no action. If the Owner
requests a refund of excess premium, the excess premium paid (with the greater
of 4% interest or any positive Separate Account earnings) will be returned to
the Owner. The amount to be refunded will be deducted from the Accumulated
Value in the Separate Account and in the General Account in the same proportion
as the premium payment was allocated to such accounts.
The rules relating to whether a Policy will be treated as a Modified
Endowment Contract are extremely complex and cannot be adequately described in
the limited confines of this summary. Therefore, a current or prospective
Owner should consult with a competent advisor to determine whether a policy
transaction will cause the Policy to be treated as a Modified Endowment
Contract.
Distributions from Policies Classified as Modified Endowment
Contracts. Policies classified as Modified Endowment Contracts will be subject
to the following tax rules: First, all distributions, including distributions
upon surrender and Withdrawals from such a Policy are treated as ordinary
income subject to tax up to the amount equal to the excess (if any) of the
Accumulated Value immediately before the distribution over the investment in
the Policy (described below) at such time. Second, loans taken from or secured
by, such a Policy are treated as distributions from such a Policy and taxed
accordingly. Past due loan interest that is added to the loan amount will be
treated as a loan. Third, a 10 percent additional income tax is imposed on the
portion of any distribution from, or loan taken from or secured by, such a
Policy that is included in income except where the distribution or loan is made
on or after the Owner attains age 591/2, is attributable to the Owner's
becoming disabled, or is part of a series of substantially equal periodic
payments for the life (or life expectancy) of the Owner or the joint lives (or
joint life expectancies) of the Owner and the Owner's Beneficiary.
Distributions From Policies Not Classified as Modified Endowment
Contracts. Distributions from a Policy that is not a Modified Endowment
Contract, are generally treated as first recovering the investment in the
Policy (described below) and then, only after the return of all such investment
in the Policy, as distributing taxable income. An exception to this general
rule occurs in the case of a decrease
43
<PAGE> 53
in the Policy's Unadjusted Death Benefit or any other change that reduces
benefits under the Policy in the first 15 years after the Policy is issued and
that results in a cash distribution to the Owner in order for the Policy to
continue complying with the Section 7702 definitional limits. Such a cash
distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a Modified Endowment
Contract are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon
surrender) nor loans from, or secured by, a Policy that is not a Modified
Endowment Contract are subject to the 10 percent additional tax.
Policy Loan Interest. Generally, interest paid on any loan under a
Policy which is owned by an individual is not deductible. The deduction of
interest on Policy loans are also be subject to the restrictions of Section 264
of the Code. A tax advisor should be consulted before deducting Policy loan
interest.
Investment in the Policy. Investment in the Policy means: (i) the
aggregate amount of any premiums or other consideration paid for a Policy,
minus (ii) the aggregate amount received under the Policy which is excluded
from gross income of the Owner (except that the amount of any loan from, or
secured by, a Policy that is a Modified Endowment Contract, to the extent such
amount is excluded from gross income, will be disregarded), plus (iii) the
amount of any loan from, or secured by, a Policy that is a Modified Endowment
Contract to the extent that such amount is included in the gross income of the
Owner.
Multiple Policies. All Modified Endowment Contracts that are issued
by National Life to the same Owner during any calendar year are treated as one
Modified Endowment Contract for purposes of determining the amount includible
in the gross income under Section 72(e) of the Code.
SPECIAL RULES FOR PENSION AND PROFIT-SHARING PLANS
If Policies are purchased by a trust forming part of a pension or
profit-sharing plan meeting the qualification requirements of Section 401(a) of
the Code, various special tax rules will apply. Because these rules are
extensive and complicated, it is not possible to describe all of them here.
Accordingly, counsel or other competent tax advisors familiar with qualified
plan matters should be consulted in connection with any such purchase.
Generally, a plan participant on whose behalf a Policy is purchased
will be treated as having annual imputed income based on a cost of insurance
factor multiplied by the Net Amount at Risk under the Policy. This imputed
income is to be reported by the employer to the employee and the Service
annually and included in the employee's gross income. In the event of the
death of a plan participant while covered by the plan, an Unadjusted Death
Benefit paid to the participant's Beneficiary generally will not be completely
excludable from the Beneficiary's gross income under Section 101(a) of the
Code. Any Unadjusted Death Benefit in excess of the Accumulated Value will be
excludable. The portion of the Unadjusted Death Benefit equal to the
Accumulated Value, however, generally will be subject to Federal income tax to
the extent it exceeds the sum of $5,000 plus the participant's "investment in
the contract" as defined in the Code, which will include the imputed income
noted above. Special rules may apply in certain circumstances (e.g., to
Owner-employees or participants who have borrowed from the plan).
The Service has interpreted the plan qualification provisions of the
Code to require that non-retirement benefits, including death benefits, payable
under a qualified plan be "incidental to" retirement benefits provided by the
plan. These interpretations, which are primarily set forth in a series of
Revenue Rulings issued by the Service, should be considered in connection with
any purchase of life insurance policies to provide benefits under a qualified
plan.
44
<PAGE> 54
POSSIBLE CHARGE FOR NATIONAL LIFE'S TAXES
At the present time, National Life makes no charge for any Federal,
state or local taxes (other than state premium taxes or the DAC Tax) that the
Company incurs that may be attributable to the Separate Account or to the
Policies. National Life, however, reserves the right in the future to make a
charge for any such tax or other economic burden resulting from the application
of the tax laws that it determines to be properly attributable to the Accounts
or to the Policies. If any tax charges are made in the future, they will be
accumulated daily and transferred from the Separate Account to National Life's
General Account. Any investment earnings on tax charges accumulated in the
Separate Account will be retained by National Life.
POLICIES ISSUED IN CONJUNCTION WITH
EMPLOYEE BENEFIT PLANS
Policies may be acquired in conjunction with employee benefit plans,
including the funding of qualified pension plans meeting the requirements of
Section 401 of the Code.
For employee benefit plan Policies, the maximum cost of insurance
rates used to determine the monthly Cost of Insurance Charge are based on the
Commissioners' 1980 Standard Ordinary Mortality Tables NB and SB. Under these
Tables, mortality rates are the same for male and female Insureds of a
particular Attained Age and Rate Class. (See "Cost of Insurance", Page ___.)
Illustrations reflecting the premiums and charges for employee benefit
plan Policies will be provided upon request to purchasers of such Policies.
There is no provision for misstatement of sex in the employee benefit
plan Policies. (See "Misstatement of Age and Sex", Page ___.) Also, the rates
used to determine the amount payable under a particular Settlement Option will
be the same for male and female Insureds. (See "Settlement Options", Page ___.)
LEGAL DEVELOPMENTS REGARDING UNISEX ACTUARIAL TABLES
In 1983, the United States Supreme Court held in Arizona Governing
Committee v. Norris that optional annuity benefits provided under an employee's
deferred compensation plan could not, under Title VII of the Civil Rights Act
of 1964, vary between men and women on the basis of sex. In that case, the
Court applied its decision only to benefits derived from contributions made on
or after August 1, 1983. Subsequent decisions of lower federal courts indicate
that in other factual circumstances the Title VII prohibition of sex-distinct
benefits may apply at an earlier date. In addition, legislative, regulatory,
or decisional authority of some states may prohibit use of sex-distinct
mortality tables under certain circumstances. The Policies offered by this
Prospectus, other than Policies issued in states which require "unisex"
policies (currently Montana and Massachusetts) and employee benefit plan
Policies (see "Policies Issued in Conjunction with Employee Benefit Plans on
Page ___) are based upon actuarial tables which distinguish between men and
women and, thus, the Policy provides different benefits to men and women of the
same age. Accordingly, employers and employee organizations should consider,
in consultation with legal counsel, the impact of these authorities on any
employment-related insurance or benefits program before purchasing the Policy
and in determining whether an employee benefit plan Policy is appropriate.
VOTING RIGHTS
All of the assets held in the Subaccounts of the Separate Account will
be invested in shares of corresponding Portfolios of the Funds. The Funds do
not hold routine annual shareholders' meetings. Shareholders' meetings will be
called whenever each Fund believes that it is necessary to vote to elect the
Board of Directors of the Fund and to vote upon certain other matters that are
required by the 1940 Act or other applicable law or governing documents to be
approved or ratified by the shareholders of a mutual fund. National Life is
the legal owner of Fund shares and as such has the right to vote upon any
matter that may be voted upon at a shareholders' meeting. However, in
accordance with the SEC's view
45
<PAGE> 55
of present applicable law, National Life will vote the shares of the Funds at
meetings of the shareholders of the appropriate Fund or Portfolio in accordance
with instructions received from Owners. Fund shares held in each Subaccount of
the Separate Account for which no timely instructions from Owners are received
will be voted by National Life in the same proportion as those shares in that
Subaccount for which instructions are received.
Each Owner having a voting interest will be sent proxy material and a
form for giving voting instructions. Owners may vote, by proxy or in person,
only as to the Portfolios that correspond to the Subaccounts in which their
Policy values are allocated. The number of shares held in each Subaccount
attributable to a Policy for which the Owner may provide voting instructions
will be determined by dividing the Policy's Accumulated Value in that account
by the net asset value of one share of the corresponding Portfolio as of the
record date for the shareholder meeting. Fractional shares will be counted.
For each share of a Portfolio for which Owners have no interest, National Life
will cast votes, for or against any matter, in the same proportion as Owners
vote.
If required by state insurance officials, National Life may disregard
voting instructions if such instructions would require shares to be voted so as
to cause a change in the investment objectives or policies of one or more of
the Portfolios, or to approve or disapprove an investment policy or investment
adviser of one or more of the Portfolios. In addition, National Life may
disregard voting instructions in favor of certain changes initiated by an Owner
or the Fund's Board of Directors provided that National Life's disapproval of
the change is reasonable and is based on a good faith determination that the
change would be contrary to state law or otherwise inappropriate, considering
the portfolio's objectives and purposes, and the effect the change would have
on National Life. If National Life does disregard voting instructions, it will
advise Owners of that action and its reasons for such action in the next
semi-annual report to Owners.
Shares of the Funds are currently being offered to variable life
insurance and variable annuity separate accounts of life insurance companies
other than National Life that are not affiliated with National Life. National
Life understands that shares of these Funds also will be voted by such other
life insurance companies in accordance with instructions from their
policyholders invested in such separate accounts. This will dilute the effect
of voting instructions of Owners of the Policies.
CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under
applicable Federal securities laws. To the extent that such laws or
regulations promulgated thereunder eliminate the necessity to solicit voting
instructions from Owners or restrict such voting rights, National Life reserves
the right to proceed in accordance with any such laws or regulations.
National Life also reserves the right, subject to compliance with
applicable law, including approval of Owners, if so required: (1) to make
changes in the form of the Separate Account, if in its judgment such changes
would serve the interests of Owners or would be appropriate in carrying out the
purposes of the Policies, for example: (i) operating the Separate Account as a
management company under the 1940 Act; (ii) deregistering the Separate Account
under the 1940 Act if registration is no longer required; (iii) combining or
substituting separate accounts; (iv) transferring the assets of the Separate
Account to another separate account or to the General Account; (v) making
changes necessary to comply with, obtain or continue any exemptions from the
1940 Act; or (vi) making other technical changes in the Policy to conform with
any action described herein; (2) if in its judgment a Portfolio no longer suits
the investment goals of the Policy, or if tax or marketing conditions so
warrant, to substitute shares of another investment portfolio for shares of
such Portfolio; (3) to eliminate, combine, or substitute Subaccounts and
establish new Subaccounts, if in its judgment marketing needs, tax
considerations, or investment conditions so warrant; and (4) to transfer assets
from a Subaccount to another Subaccount or separate account if the transfer in
National Life's judgment would best serve interests of Policy Owners or would
be appropriate in carrying out the purposes of the Policies; and (5) to modify
the provisions of the Policies to comply with applicable laws. National Life
has reserved all rights in respect of its corporate name and any part thereof,
including without limitation the right to withdraw its use and to grant its use
to one or more other separate accounts and other entities.
46
<PAGE> 56
If a Policy has Accumulated Value in a Subaccount that is eliminated,
National Life will give the Owner at least 30 days notice before the
elimination, and will request that the Owner designate the Subaccount or
Subaccounts (or the General Account) to which the Accumulated Value in the
Subaccount to be eliminated should be transferred. If no such designation is
received prior to the date of the elimination, then the Accumulated Value in
such Subaccount will be transferred to the Money Market Subaccount. In any
case, if in the future a transfer charge is imposed or limits on the number of
transfers or free transfers are established, no charge will be made for this
transfer, and it will not count toward any limit on transfers or free
transfers.
OFFICERS AND DIRECTORS OF NATIONAL LIFE
The officers and directors of National Life, as well as their principal
occupations during the past five years, are listed below.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION DURING THE PAST FIVE YEARS
- ----------------- --------------------------
<S> <C>
Frederic H. Bertrand 1987 to present - Chairman of the
Chairman of the Board, Board and Chief Executive Officer
Chief Executive Officer,
and Director
John H. Harding 1987 to present - President and
President and Chief Chief Operating Officer
Operating Officer,
and Director
Robert E. Boardman 1994 to present - Chairman of Hickok &
Director Boardman Financial Network
1967 to present - President of Hickok & Boardman
Realty, Inc.
David R. Coates 1993 to present - Business
Director Consultant; 1987 to 1993 - Managing Partner of KPMG
Peat Marwick in Burlington, VT
Benjamin F. Edwards III 1983 to present - Chairman, President
Director and Chief Executive Officer of A.
G. Edwards, Inc.
Charles H. Erhart, Jr. Retired; 1989 to 1991 - President
Director of W. R. Grace & Company
Earle H. Harbison, Jr. 1993 to present: Chairman of
Director Harbison Walker, Inc.; 1986 to
1992 - President and Chief
Operating Officer of Monsanto Company
</TABLE>
47
<PAGE> 57
<TABLE>
<S> <C>
E. Miles Prentice III 1993 to present - Partner in the law
Director firm of Piper & Marbury; 1984 to 1993 - Partner in the
law firm of Brown & Wood
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
Thomas P. Salmon 1991 to present - President, the University of
Director Vermont; 1977 to 1991, Partner in the law firm of
Salmon & Nostrand; formerly Governor, State of Vermont
Stansfield Turner 1990 to present - Visiting Professor
Director at the University of Maryland, a
lecturer and author
Thomas R. Williams 1987 to present - President of the
Director Wales Group, Inc.
Patricia K. Woolf 1990 to present - Author, Consultant,
Director and lecturer at the Department of
Molecular Biology at Princeton University
Beverly A. Bagalio 1993 to present - Senior Vice
Senior Vice President - President - Service Strategies;
Service Strategies 1986 to 1993 - Vice President of
Retirement Services
Rodney A. Buck 1996 to present - Senior Vice
Senior Vice President & President and Chief Investment
Chief Investment Officer Officer; 1996 to present - Chairman
& Chief Executive Officer, National
Life Investment Management
Company, Inc. ("NLIMC"); 1993 to 1995 - Senior Vice
President -Investments; 1991 to 1995 - President and
Chief Operating Officer, NLIMC; 1987 to present -
Senior Vice President - Sentinel Advisors Company
William L. Cassidy 1993 to present - Executive Vice
Executive Vice President & President & Chief Marketing
Chief Marketing Officer Officer; 1990 to 1993 - Senior Vice President, Service
Christopher Graham 1994 to present - Senior Vice
Senior Vice President - President - New Business and Claims;
New Business and Claims 1991 to 1994 - Vice President - New Business
Mark J. Levesque 1988 to present - Senior Vice
Senior Vice President - President - Information Systems &
Information Systems & Management Services
Management Services
</TABLE>
48
<PAGE> 58
<TABLE>
<S> <C>
Thomas H. MacLeay 1993 to present - Executive Vice
Executive Vice President President & Chief Financial Officer;
& Chief Financial Officer 1991 to 1993 - Senior Vice President & Chief Financial
Officer; 1990 to 1991 - Senior Vice President - Financial
Craig A. Smith 1993 to present - Senior Vice
Senior Vice President - President - Product; 1992 to 1993 -
Product Vice President - Product Development; 1990 to 1992 -
Second Vice President - Product Development
John L. Stotler 1993 to present - Senior Vice
Senior Vice President & President & General Counsel; 1992
General Counsel to 1993 - Vice President & General Counsel; 1990 to
1992 - Vice President, Associate General Counsel and
Corporate Secretary
Theodore N. vonWallmenich 1989 to present - Senior Vice
Senior Vice President President & Chief Actuary
& Chief Actuary
</TABLE>
DISTRIBUTION OF POLICIES
Applications for the Policies are solicited by agents who are licensed
by state insurance authorities to sell National Life's variable life insurance
policies, and who are also registered representatives of Equity Services, Inc.
("ESI") or registered representatives of broker/dealers who have Selling
Agreements with ESI. ESI, whose address is National Life Drive, Montpelier,
Vermont 05604, is a registered broker/dealer under the Securities Exchange Act
of 1934 (the "1934 Act") and a member of the National Association of Securities
Dealers, Inc. (the "NASD"). ESI is an indirect wholly-owned subsidiary of
National Life. ESI acts as the principal underwriter, as defined in the 1940
Act, of the Policies, and for the Separate Account pursuant to an Underwriting
Agreement to which the Separate Account, ESI and National Life are parties.
The Policies are offered and sold only in those states where their sale is
lawful.
The insurance underwriting and the determination of a proposed
Insured's Rate Class and whether to accept or reject an application for a
Policy is done by National Life. National Life will refund any premiums paid
if a Policy ultimately is not issued or will refund the applicable amount if
the Policy is returned under the free look provision.
Agents are compensated for sales of the Policies on a commission and
service fee basis and with other forms of compensation. During the first
Policy Year, agent commissions will not be more than 45% of the premiums paid
up to a target amount (used only to determine commission payments) and 3% of
the premiums paid in excess of that amount. For Policy Years 2 through 5, the
agent commissions will not be more than 5.5% of the premiums paid up to the
target amount, and 3% of premiums paid in excess of that amount. For Policy
Years 6 through 10, agent commissions will be 4% of premiums paid up to the
target amount, and 3% of premiums paid in excess of that amount, and in Policy
Year 11 and thereafter, agent commissions will be 1.5% of all premiums paid.
For premiums received in the year following an increase in Face Amount and
attributable to the increase, agent commissions will not be more than 45% up to
the target amount for the increase. Agents may also receive expense
allowances. The agent may be required to return all or a portion of the first
year commission less the deferred sales charge imposed if a Policy is not
continued through the second Policy Year.
49
<PAGE> 59
POLICY REPORTS
Once each Policy Year a statement will be sent to the Owner describing
the status of the Policy, including setting forth the Face Amount, the current
Unadjusted Death Benefit, any Policy loans and accrued interest, the current
Accumulated Value, the non-loaned Accumulated Value in the General Account, the
amount held as Collateral in the General Account, the value in each Subaccount
of the Separate Account, premiums paid since the last report, charges deducted
since the last report, any Withdrawals since the last report, and the current
Cash Surrender Value. In addition, a statement will be sent to an Owner
showing the status of the Policy following the transfer of amounts from one
Subaccount of a Separate Account to another, the taking out of a loan, a
repayment of a loan, a Withdrawal and the payment of any premiums (excluding
those paid by bank draft or otherwise under the Automatic Payment Plan).
An Owner will be sent a semi-annual report containing the financial
statements of each Fund in which his or her Policy has Accumulated Value, as
required by the 1940 Act.
STATE REGULATION
National Life is subject to regulation and supervision by the
Insurance Department of the State of Vermont which periodically examines its
affairs. It is also subject to the insurance laws and regulations of all
jurisdictions where it is authorized to do business. A copy of the Policy form
has been filed with, and where required approved by, insurance officials in
each jurisdiction where the Policies are sold. National Life is required to
submit annual statements of its operations, including financial statements, to
the insurance departments of the various jurisdictions in which it does
business for the purposes of determining solvency and compliance with local
insurance laws and regulations.
EXPERTS
The Financial Statements listed on Page F-1, except as they relate to
the unaudited nine-month period ended September 30, 1995, have been included in
this Prospectus, in reliance on the reports of Price Waterhouse LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Actuarial matters included in the Prospectus have been examined by
Craig A. Smith, F.S.A., MAAA, Senior Vice President - Product of National Life.
LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice
on legal matters relating to certain aspects of Federal securities law
applicable to the issue and sale of the Policies. Matters of Vermont law
pertaining to the Policies, including National Life's right to issue the
Policies and its qualification to do so under applicable laws and regulations
issued thereunder, have been passed upon by John L. Stotler, General Counsel of
National Life.
The Separate Account is not a party to any litigation. Its depositor,
National Life, as an insurance company, ordinarily is involved in litigation.
National Life is of the opinion that such litigation is not material with
respect to the Owners or the Separate Account.
FINANCIAL STATEMENTS
The financial statements of National Life appear on the following
pages. The financial statements of National Life should be distinguished from
any financial statements of the Separate Account and should be considered only
as bearing upon National Life's ability to meet its obligations under the
Policies. No financial statements are included for the Separate Account
because the Subaccounts had no assets as of the date of this Prospectus.
50
<PAGE> 60
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES
AND CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Accumulated
Values and Cash Surrender Values of a Policy may change with the investment
experience of the Separate Account. The tables show how the Death Benefits,
Accumulated Values and Cash Surrender Values of a Policy issued to an Insured
of a given age, sex and Rate Class would vary over time if the investment
return on the assets held in each Portfolio of each of the Funds were a
uniform, gross, annual rate of 0%, 6% and 12%.
The tables on pages A-2 to A-7 illustrate a Policy issued to a male
Insured, Age 40 in the Preferred Nonsmoker Rate Class with a Face Amount of
$250,000 and a Planned Periodic Premium of $3,000 paid at the beginning of each
Policy Year. The Death Benefits, Accumulated Values and Cash Surrender Values
would be lower if the Insured was in a standard nonsmoker, smoker or
substandard class since the cost of insurance charges would increase. Also,
the values would be different from those shown if the gross annual investment
returns averaged 0%, 6% and 12% over a period of years, but fluctuated above
and below those averages for individual Policy Years.
The second column of the tables show the amount to which the premiums
would accumulate if an amount equal to those premiums were invested to earn
interest, after taxes, at 5% compounded annually. The columns shown under the
heading "Guaranteed" assume that throughout the life of the policy, the monthly
charge for cost of insurance is based on the maximum level permitted under the
Policy (based on the 1980 CSO Smoker/Nonsmoker Table); the columns under the
heading "Current" assume that throughout the life of the Policy, the monthly
charge for cost of insurance is based on the current cost of insurance rate,
and for Policy Years after year 10, a bonus under which the Monthly Deductions
are reduced by 0.50% per annum.
The amounts shown in all tables reflect an averaging of certain other
asset charges described below that may be assessed under the Policy, depending
upon how premiums are allocated. The total of the asset charges reflected in
the Current and Guaranteed illustrations, including the Mortality and Expense
Risk Charge of 0.90%, is 1.41%. This total charge is based on an assumption
that an Owner allocates the Policy values equally among the Subaccounts of the
Separate Account.
These asset charges reflect an investment advisory fee of 0.56%, which
represents an average of the fees incurred by the Portfolios during 1994 and
expenses of 0.25% which is based on an average of the actual expenses incurred
by the Portfolios during 1994. For some of the Portfolios, the annual expenses
used in the illustrations are net of certain reimbursements that may or may not
continue.
The tables also reflect the fact that no charges for Federal or state
income taxes are currently made against the Separate Accounts. If such a
charge is made in the future, it would take a higher gross annual rate of
return to produce the same Policy values.
The tables illustrate the Policy values that would result based upon
the hypothetical investment rates of return if premiums are paid and allocated
as indicated, no amounts are allocated to the General Account, and no Policy
loans are made. The tables are also based on the assumption that the Owner has
not requested an increase or decrease in the Face Amount, that no Withdrawals
have been made and no transfers have been made in any Policy Year.
Upon request, National Life will provide a comparable illustration
based upon the proposed Insured's Age and Rate Class, the Death Benefit Option,
Face Amount, Planned Periodic Premiums and Riders requested.
<PAGE> 61
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
PREMIUMS GUARANTEED CURRENT
----------------------------------------- -----------------------------------------
END OF ACCUMULATED ACCUM- CASH ACCUM- CASH
POLICY AT 5% INT. ULATED SURRENDER DEATH ULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ---- --- ---- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,204 804 250,000 2,302 902 250,000
2 6,458 4,332 2,593 250,000 4,545 2,806 250,000
3 9,930 6,385 4,373 250,000 6,725 4,712 250,000
4 13,577 8,359 6,261 250,000 8,841 6,744 250,000
5 17,406 10,255 8,157 250,000 10,886 8,788 250,000
6 21,426 12,065 10,175 250,000 12,861 10,971 250,000
7 25,647 13,787 12,106 250,000 14,756 13,074 250,000
8 30,080 15,419 13,946 250,000 16,566 15,093 250,000
9 34,734 16,958 15,693 250,000 18,296 17,031 250,000
10 39,620 18,397 17,340 250,000 19,941 18,884 250,000
11 44,751 19,734 18,885 250,000 21,859 21,009 250,000
12 50,139 20,956 20,314 250,000 23,703 23,061 250,000
13 55,796 22,048 21,614 250,000 25,472 25,038 250,000
14 61,736 23,000 22,774 250,000 27,159 26,933 250,000
15 67,972 23,795 23,777 250,000 28,759 28,742 250,000
16 74,521 24,419 24,419 250,000 30,270 30,270 250,000
17 81,397 24,857 24,857 250,000 31,683 31,683 250,000
18 88,617 25,101 25,101 250,000 32,986 32,986 250,000
19 96,198 25,137 25,137 250,000 34,162 34,162 250,000
20 104,158 24,940 24,940 250,000 35,193 35,193 250,000
25 150,340 19,323 19,323 250,000 37,979 37,979 250,000
30 209,282 1,400 1,400 250,000 35,737 35,737 250,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-2
<PAGE> 62
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
PREMIUMS GUARANTEED CURRENT
------------------------------------------ ------------------------------------------
END OF ACCUMULATED ACCUM- CASH ACCUM- CASH
POLICY AT 5% INT. ULATED SURRENDER DEATH ULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ---- --- ---- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,355 955 250,000 2,456 1,056 250,000
2 6,458 4,769 3,030 250,000 4,994 3,255 250,000
3 9,930 7,245 5,233 250,000 7,614 5,602 250,000
4 13,577 9,781 7,684 250,000 10,318 8,221 250,000
5 17,406 12,380 10,282 250,000 13,101 11,003 250,000
6 21,426 15,036 13,146 250,000 15,966 14,077 250,000
7 25,647 17,748 16,067 250,000 18,908 17,226 250,000
8 30,080 20,517 19,043 250,000 21,923 20,449 250,000
9 34,734 23,340 22,075 250,000 25,019 23,753 250,000
10 39,620 26,215 25,157 250,000 28,194 27,136 250,000
11 44,751 29,140 28,290 250,000 31,856 31,007 250,000
12 50,139 32,104 31,463 250,000 35,646 35,005 250,000
13 55,796 35,098 34,664 250,000 39,571 39,138 250,000
14 61,736 38,111 37,886 250,000 43,630 43,405 250,000
15 67,972 41,130 41,112 250,000 47,828 47,810 250,000
16 74,521 44,144 44,144 250,000 52,168 52,166 250,000
17 81,397 47,140 47,140 250,000 56,653 56,653 250,000
18 88,617 50,114 50,114 250,000 61,281 61,281 250,000
19 96,198 53,053 53,053 250,000 66,048 66,048 250,000
20 104,158 55,939 55,939 250,000 70,947 70,947 250,000
25 150,340 68,681 68,681 250,000 97,743 97,743 250,000
30 209,282 75,080 75,080 250,000 129,284 129,284 250,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
<PAGE> 63
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
PREMIUMS GUARANTEED CURRENT
----------------------------------------- -----------------------------------------
END OF ACCUMULATED ACCUM- CASH ACCUM- CASH
POLICY AT 5% INT. ULATED SURRENDER DEATH ULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ---- --- ---- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,506 1,106 250,000 2,610 1,210 250,000
2 6,458 5,224 3,485 250,000 5,462 3,724 250,000
3 9,930 8,178 6,165 250,000 8,578 6,566 250,000
4 13,577 11,386 9,288 250,000 11,983 9,886 250,000
5 17,406 14,875 12,778 250,000 15,698 13,600 250,000
6 21,426 18,668 16,778 250,000 19,756 17,867 250,000
7 25,647 22,792 21,110 250,000 24,183 22,501 250,000
8 30,080 27,280 25,806 250,000 29,011 27,537 250,000
9 34,734 32,168 30,903 250,000 34,288 33,022 250,000
10 39,620 37,494 36,436 250,000 40,056 38,998 250,000
11 44,751 43,302 42,452 250,000 46,839 45,989 250,000
12 50,139 49,634 48,992 250,000 54,311 53,670 250,000
13 55,796 56,536 56,103 250,000 62,550 62,117 250,000
14 61,736 64,067 63,842 250,000 71,638 71,413 250,000
15 67,972 72,285 72,268 250,000 81,668 81,650 250,000
16 74,521 81,264 81,264 250,000 92,747 92,747 250,000
17 81,397 91,087 91,087 250,000 104,994 104,994 250,000
18 88,617 101,857 101,857 250,000 118,539 118,539 250,000
19 96,198 113,687 113,687 250,000 133,529 133,529 250,000
20 104,158 126,705 126,705 250,000 150,133 150,133 250,000
25 150,340 215,773 215,773 263,243 264,602 264,602 322,814
30 209,282 359,712 359,712 417,266 452,628 452,628 525,048
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
<PAGE> 64
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
PREMIUMS GUARANTEED CURRENT
----------------------------------------- -----------------------------------------
END OF ACCUMULATED ACCUM- CASH ACCUM- CASH
POLICY AT 5% INT. ULATED SURRENDER DEATH ULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ---- --- ---- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,198 798 252,198 2,297 897 252,297
2 6,458 4,315 2,576 254,315 4,530 2,792 254,530
3 9,930 6,350 4,338 256,350 6,696 4,683 256,696
4 13,577 8,300 6,202 258,300 8,792 6,695 258,792
5 17,406 10,164 8,066 260,164 10,811 8,713 260,811
6 21,426 11,934 10,044 261,934 12,753 10,863 262,753
7 25,647 13,607 11,926 263,607 14,607 12,926 264,607
8 30,080 15,181 13,707 265,181 16,369 14,895 266,369
9 34,734 16,651 15,385 266,651 18,041 16,775 268,041
10 39,620 18,009 16,952 268,009 19,617 18,560 269,617
11 44,751 19,253 18,404 269,253 21,478 20,629 271,478
12 50,139 20,367 19,725 270,367 23,255 22,613 273,255
13 55,796 21,336 20,902 271,336 24,945 24,512 274,945
14 61,736 22,147 21,922 272,147 26,541 26,316 276,541
15 67,972 22,782 22,769 272,782 28,036 28,023 278,036
16 74,521 23,225 23,225 273,225 29,426 29,426 279,426
17 81,397 23,461 23,461 273,461 30,700 30,700 280,700
18 88,617 23,480 23,480 273,480 31,844 31,844 281,844
19 96,198 23,269 23,269 273,269 32,838 32,838 282,838
20 104,158 22,802 22,802 272,802 33,660 33,660 283,660
25 150,340 15,549 15,549 265,549 34,952 34,952 284,952
30 209,282 0 0 0 30,394 30,394 280,394
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
<PAGE> 65
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
PREMIUMS GUARANTEED CURRENT
----------------------------------------- -----------------------------------------
END OF ACCUMULATED ACCUM- CASH ACCUM- CASH
POLICY AT 5% INT. ULATED SURRENDER DEATH ULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ---- --- ---- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,348 948 252,348 2,450 1,050 252,450
2 6,458 4,749 3,011 254,749 4,978 3,240 254,978
3 9,930 7,205 5,193 257,205 7,581 5,569 257,581
4 13,577 9,710 7,613 259,710 10,260 8,162 260,260
5 17,406 12,267 10,169 262,267 13,008 10,910 263,008
6 21,426 14,867 12,977 264,867 15,827 13,938 265,827
7 25,647 17,507 15,825 267,507 18,709 17,027 268,709
8 30,080 20,184 18,710 270,184 21,648 20,174 271,648
9 34,734 22,894 21,628 272,894 24,648 23,383 274,648
10 39,620 25,628 24,570 275,628 27,706 26,649 277,706
11 44,751 28,382 27,533 278,382 31,257 30,408 281,257
12 50,139 31,140 30,499 281,140 34,912 34,271 284,912
13 55,796 33,884 33,450 283,884 38,673 38,239 288,673
14 61,736 36,597 36,371 286,597 42,534 42,309 292,534
15 67,972 39,255 39,242 289,255 46,492 46,479 296,492
16 74,521 41,839 41,839 291,839 50,548 50,548 300,548
17 81,397 44,325 44,325 294,325 54,692 54,692 304,692
18 88,617 46,695 46,695 296,695 58,914 58,914 308,914
19 96,198 48,928 48,928 298,928 63,195 63,195 313,195
20 104,158 50,986 50,986 300,986 67,511 67,511 317,511
25 150,340 57,061 57,061 307,061 89,363 89,363 339,363
30 209,282 50,144 50,144 300,144 110,252 110,252 360,252
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE> 66
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
PREMIUMS GUARANTEED CURRENT
----------------------------------------- -----------------------------------------
END OF ACCUMULATED ACCUM- CASH ACCUM- CASH
POLICY AT 5% INT. ULATED SURRENDER DEATH ULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ---- --- ---- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,499 1,099 252,499 2,604 1,204 252,604
2 6,458 5,203 3,464 255,203 5,445 3,706 255,445
3 9,930 8,132 6,120 258,132 8,540 6,528 258,540
4 13,577 11,302 9,204 261,302 11,914 9,816 261,914
5 17,406 14,736 12,638 264,736 15,583 13,485 265,583
6 21,426 18,451 16,561 268,451 19,578 17,688 269,578
7 25,647 22,469 20,788 272,469 23,918 22,236 273,918
8 30,080 26,817 25,344 276,817 28,630 27,156 278,630
9 34,734 31,523 30,257 281,523 33,754 32,489 283,754
10 39,620 36,611 35,553 286,611 39,325 38,267 289,325
11 44,751 42,115 41,265 292,115 45,901 45,051 295,901
12 50,139 48,058 47,417 298,058 53,110 52,469 303,110
13 55,796 54,468 54,035 304,468 61,018 60,585 311,018
14 61,736 61,374 61,149 311,374 69,688 69,463 319,688
15 67,972 68,804 68,791 318,804 79,193 79,180 329,193
16 74,521 76,792 76,792 326,792 89,616 89,616 339,616
17 81,397 85,373 85,373 355,373 101,043 101,043 351,043
18 88,617 94,594 94,594 344,594 113,564 113,564 363,564
19 96,198 104,500 104,500 354,500 127,271 127,271 377,271
20 104,158 115,131 115,131 365,131 142,266 142,266 392,266
25 150,340 180,522 180,522 430,522 241,520 241,520 491,520
30 209,282 269,817 269,817 519,817 398,475 398,475 648,475
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-7
<PAGE> 67
NATIONAL LIFE INSURANCE COMPANY
and
SUBSIDIARIES
* * * * *
CONSOLIDATED FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1994 AND 1993
F-1
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS
February 17, 1995
To the Board of Directors and Policyowners
of National Life Insurance Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and surplus and of cash flows present
fairly, in all material respects, the financial position of National Life
Insurance Company and its subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PRICE WATERHOUSE
F-2
<PAGE> 69
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
December 31, (In Thousands) 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and short-term investments $ 244,817 $ 111,163
Bonds 3,201,369 2,995,790
Preferred stocks 15,677 24,630
Common stocks 3,527 8,300
Mortgage loans 581,910 568,896
Policy loans 758,511 763,363
Real estate investments 100,219 114,469
Home office properties 45,016 44,454
Other invested assets 67,307 45,542
- -----------------------------------------------------------------------------
Total cash and invested assets 5,018,353 4,676,607
Due and deferred premiums 101,059 98,143
Due and accrued investment income 94,940 92,595
Other assets 43,437 45,585
Separate account assets 159,821 165,968
- -----------------------------------------------------------------------------
Total assets $ 5,417,610 $ 5,078,898
=============================================================================
LIABILITIES:
Policy and other contract reserves $ 4,391,860 $ 4,186,807
Policyowners' deposits 100,368 91,504
Claims in process of settlement 28,026 20,132
Policyowners' dividends 117,905 117,550
Interest maintenance reserve 31,663 38,117
Federal income taxes (recoverable) payable (716) 8,432
Asset valuation reserve 49,681 51,730
Other liabilities 231,916 167,102
Separate account liabilities 149,973 154,153
- -----------------------------------------------------------------------------
Total liabilities 5,100,676 4,835,527
- -----------------------------------------------------------------------------
SURPLUS:
Surplus notes 69,675
Policyowners' contingency reserves 247,259 243,371
- -----------------------------------------------------------------------------
Total surplus 316,934 243,371
- -----------------------------------------------------------------------------
Total liabilities and surplus $ 5,417,610 $ 5,078,898
=============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 70
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND SURPLUS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
For the Years Ended December 31, (In Thousands) 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C>
INCOME:
Insurance income $ 540,779 $ 518,599
Net investment income 365,226 366,026
Other income 52,716 50,651
- ----------------------------------------------------------------------------------
Total income 958,721 935,276
- ----------------------------------------------------------------------------------
EXPENSES:
Benefits 399,044 462,294
Increase in reserves 223,196 118,896
Commissions and operating expenses 192,004 191,211
- ----------------------------------------------------------------------------------
Total expenses 814,244 772,401
- ----------------------------------------------------------------------------------
Net gain from operations before dividends and
federal income taxes 144,477 162,875
Dividends to policyowners 111,535 112,485
- ----------------------------------------------------------------------------------
Net gain from operations before federal income taxes 32,942 50,390
Federal income tax expense 17,989 18,423
- ----------------------------------------------------------------------------------
Net gain from operations 14,953 31,967
Net realized gains (losses) 503 (993)
- ----------------------------------------------------------------------------------
NET INCOME 15,456 30,974
Unrealized (losses) gains (11,199) 5,680
Decrease (increase) in asset valuation reserve 2,049 (8,905)
Surplus notes issued 69,674
Other adjustments to surplus, net (2,417) 2,210
- ----------------------------------------------------------------------------------
Increase in surplus 73,563 29,959
SURPLUS:
Beginning of year 243,371 213,412
- ----------------------------------------------------------------------------------
End of year $ 316,934 $ 243,371
==================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 71
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
For the Years Ended December 31, (In Thousands) 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Insurance income received $ 534,306 $ 521,880
Net investment and other income received 395,795 400,598
Benefits paid (387,809) (444,100)
Commissions and operating expenses paid (192,587) (208,418)
Net decrease in policy loans 4,852 57,691
Net transfers from separate accounts 9,314 6,856
Federal income taxes paid (27,923) (42,126)
Dividends paid to policyowners (111,812) (115,458)
- ---------------------------------------------------------------------------------------
Net cash provided by operations 224,136 176,923
- ---------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold, matured or repaid:
Bonds 1,283,224 647,277
Stocks 16,558 10,091
Mortgage loans 78,295 69,958
Real estate and other investments 51,440 7,781
Cost of investments acquired:
Bonds (1,476,151) (857,286)
Stocks (4,000) (8,043)
Mortgage loans (108,307) (84,868)
Real estate and other investments (61,417) (48,725)
- ---------------------------------------------------------------------------------------
Net cash used for investing activities (220,358) (263,815)
- ---------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of surplus notes 69,674
OTHER SOURCES AND APPLICATIONS, NET 60,202 (1,429)
- ---------------------------------------------------------------------------------------
Net increase (decrease) in cash
and short-term investments 133,654 (88,321)
CASH AND SHORT-TERM INVESTMENTS:
Beginning of year 111,163 199,484
- ---------------------------------------------------------------------------------------
End of year $ 244,817 $ 111,163
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 72
NATIONAL LIFE INSURANCE COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 and 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of National Life Insurance
Company and its subsidiaries (the Company) have been prepared in accordance
with statutory accounting practices prescribed or permitted by the Vermont
Department of Banking, Insurance, and Securities which are considered generally
accepted accounting principles for Vermont-domiciled mutual life insurance
companies and their wholly owned life insurance subsidiaries. Certain
reclassifications have been made to prior year amounts to make them comparable
with the current year presentation.
The consolidated financial statements include the accounts of National Life
Insurance Company (National Life) and its wholly owned subsidiaries, National
Life Investment Management Company (NLIMC) and Redstone Properties, Inc. On
December 31, 1993, National Life's wholly owned life insurance subsidiaries,
Vermont Life Insurance Company and Champlain Life Insurance Company were merged
into National Life. The merger was accounted for using the pooling of
interests method, and accordingly, had no effect on the consolidated financial
statements.
All significant intercompany accounts and transactions have been eliminated.
INVESTMENTS
Bonds and preferred stocks are generally carried at amortized cost and cost,
respectively. Bonds in or near default are carried at the lower of amortized
cost or fair value. Common stocks are carried at market value. Mortgage loans
in good standing are valued at their unpaid principal balance. Mortgage loans
that are delinquent or in process of foreclosure are valued at the lower of
their principal balance or the estimated fair value of the underlying
collateral. The maximum ratio of loan to collateral value at the time a loan
is made is generally 75%. Policy loans are reported at their unpaid balances
and are fully collateralized by policy cash values. Real estate investments
are generally depreciated over 40 years using the straight line method, and are
reflected at the lower of depreciated cost or fair value, net of encumbrances.
Realized gains and losses are determined using the specific identification
method and are reported net of related income taxes.
SHORT-TERM INVESTMENTS
Short-term investments are carried at amortized cost, which approximates fair
value. For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a remaining maturity of one year or
less to be short-term investments.
F-6
<PAGE> 73
ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
The Asset Valuation Reserve (AVR) is designed to stabilize policyowners'
contingency reserves from default losses on bonds, preferred stocks, mortgages,
real estate and other invested assets and from fluctuations in the value of
common stocks. The AVR is calculated as prescribed by the National Association
of Insurance Commissioners (NAIC).
The Interest Maintenance Reserve (IMR) defers interest rate related after-tax
capital gains and losses on fixed income investments and amortizes them into
income over the remaining lives of the securities sold. IMR amortization is
included in investment income.
NON-ADMITTED ASSETS
In accordance with regulatory requirements, certain assets, including amounts
due from agents and furniture and equipment, are excluded from the balance
sheet. The net change in these assets is included in other adjustments to
surplus.
POLICY AND OTHER CONTRACT RESERVES
Policy reserves for life, annuity and disability income contracts are developed
using accepted actuarial methods. Actuarial factors used in determining life
insurance reserves are based primarily upon the 1941, 1958, and 1980
Commissioners' Standard Ordinary (CSO) mortality tables. Methods used to
calculate life reserves consist principally of net level premium,
Commissioners' Reserve Valuation Method, and modified preliminary term, with
valuation interest rates ranging from 2.0% to 6.0%.
Reserves for individual annuities are determined principally using the
Commissioners' Annuity Reserve Valuation Method, based on A-1949, and 1983
annuity tables with valuation interest rates from 2.0% to 9.0%. Active life
disability income reserves are determined primarily using Commissioners'
Disability 1964 with the 1958 CSO mortality table and the Disability
Termination Study 1985 and CIDA morbidity tables with the 1980 CSO mortality
tables. Valuation interest rates for active life reserves range from 3.0% to
6.0%. Disabled life reserves are based on expected experience at 8.5% interest
and exceed statutory minimum reserves.
PREMIUMS AND RELATED EXPENSES
Annual premiums and related policy reserve increases are recorded at each
policy anniversary. Commissions and other costs relating to new policies are
charged to current operations as incurred. These first-year costs and required
additions to policy reserves generally exceed first-year premiums.
DIVIDENDS TO POLICYOWNERS
The Company issues all of its traditional life insurance and certain annuity
policies on a participating basis. The Company's universal life and disability
income policies are issued on a non-participating basis. Policyowners'
dividends liabilities primarily represent amounts estimated to be paid or
credited in the subsequent year. The amount of dividends to be distributed is
based upon a scale which seeks to reflect the relative contribution of each
group of policies to the Company's overall operating results. The dividend
scale is approved at least annually by the Company's Board of Directors.
F-7
<PAGE> 74
SEPARATE ACCOUNTS
Separate account assets represent segregated funds held for the benefit of
certain variable annuity, variable life, pension policyowners, and the
Company's pension plans. Separate account liabilities represent the
policyowners' share of separate account assets. The Company also participates
in certain separate accounts. Separate account investment results are excluded
from operations. Policy values funded by separate accounts reflect the actual
investment performance of the respective accounts and are not guaranteed.
Investments held in the separate accounts are primarily common stocks, bonds,
mortgage loans, and real estate and are carried at fair value.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return that includes all of
its wholly owned subsidiaries. The Company's federal income tax liability is
estimated based on the federal taxable income to be reported in its
consolidated return.
The major differences between pre-tax statutory net income and taxable income
relate to policyowner dividends, investments, differential earnings
adjustments, differences between book and tax policy reserves, and the deferral
of deductions for certain acquisition costs for tax purposes.
NOTE 2 - REINSURANCE
For individual life products, the Company generally retains no more than $3.0
million of risk on any person (excluding accidental death benefits).
Reinsurance for life products is ceded under yearly renewable term,
coinsurance, and modified coinsurance agreements. Total individual life
premiums ceded were $22.8 million and $21.7 million for the years ended
December 31, 1994 and 1993, respectively. Total individual life insurance
ceded was $3.5 billion and $3.3 billion of the $32.6 billion and $31.5 billion
in force at December 31, 1994 and 1993, respectively. The Company has assumed
a small amount of yearly renewable term reinsurance from non-affiliated
insurers.
Disability income products are significantly reinsured under coinsurance and
modified coinsurance agreements. Total disability income premiums ceded in
1994 and 1993 were $52.1 million and $50.5 million, respectively. Reserve
transfers and related interest on disability income reserves were $7.0 million
and $9.8 million in 1994 and 1993, respectively, and are included in increase
in reserves. Disability income reinsurance effects included in other income
were $20.5 million in 1994 and 1993.
The Company is contingently liable with respect to ceded insurance should any
reinsurer be unable to meet its assumed obligations.
NOTE 3 - FEDERAL INCOME TAXES
The federal income tax provisions for 1994 and 1993 were $18.3 million and
$37.3 million respectively, including taxes on realized capital gains of $.3
million and $18.9 million.
The Internal Revenue Service has examined the Company's returns through 1991
and the Company has paid all assessed deficiencies. The Company is currently
litigating the disallowance of certain policyowner dividend deductions taken in
1984 under the 1984 Tax Act.
The Company believes that it has adequately provided for all material pending
tax matters.
F-8
<PAGE> 75
NOTE 4 - BENEFIT PLANS
The Company has pension programs covering substantially all employees and
full-time agents. The Company funds the pension cost accrued. The Company's
aggregate expense for pension plans was $7.0 million in 1994 and $6.2 million
in 1993.
The annual contributions to the Company's defined benefit plan covering home
office employees are based on the Aggregate Actuarial Cost Method. The accrued
plan benefits and net assets for this plan at December 31, 1994 and 1993 are
presented below (in thousands):
<TABLE>
<CAPTION>
1994 1993
---------------------------------
<S> <C> <C>
Actuarial present value of accrued plan benefits:
Vested $64,287 $57,437
Non-vested 440 568
---------------------------------
Total $64,727 $58,005
=================================
Net assets available for plan benefits $77,514 $80,936
=================================
</TABLE>
The discount rate used in determining the actuarial present value of accrued
plan benefits at December 31, 1994 and 1993 was 8.0% and 8.5%, respectively.
Mortality assumptions are based on the 1983 Group Annuity Mortality Table.
Plan assets are invested in the general account and various separate accounts
of the Company.
The Company also provides employee savings and 401-K plans whereby up to 3% of
an employee's compensation may be invested by the employee in either plan with
matching funds contributed by the Company. The Company also contributes a
foundation of 1.5% of an employee's compensation (up to certain levels) to a
401-K account. Additional voluntary employee contributions may be made to the
plans subject to certain limits. Company contributions to these plans
generally vest within two years.
Besides the Company's defined benefit pension plans, the Company sponsors four
defined benefit postretirement plans. The plans provide medical and dental
benefits and life insurance benefits to employees and agents, respectively.
Substantially all Company employees and agents may become eligible for retiree
benefits if they reach normal retirement age while working for the Company.
Most of the plans are contributory, with retiree contributions adjusted
annually, and contain other cost sharing features such as deductibles and
coinsurance. The plans are not funded and the Company pays for plan benefits
on a current basis.
In 1993 the Company adopted new accounting policies promulgated by the NAIC for
these postretirement benefit plans. The new accounting policies recognize the
cost of these benefits as they are earned by fully eligible employees. The
prevalent past practice had been to recognize the cost of these benefits as
they were paid. This change in accounting treatment increased the 1994 and
1993 expense of these plans by $1.4 million and $1.7 million, respectively.
F-9
<PAGE> 76
The following table shows the plans' combined funded status at December 31,
1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $ 13,676 $ 13,549
Fully eligible active plan participants 3,036 3,048
------------------------------
Total APBO 16,712 16,597
Unrecognized actuarial gain 480
Unrecognized transition obligation (14,144) (14,929)
------------------------------
Accrued post retirement benefit liability $ 3,048 $ 1,668
==============================
</TABLE>
The accrued post retirement benefit liability is included in other liabilities.
The net periodic postretirement benefit cost for 1994 and 1993 is included in
operating expenses and consists of the following components (in thousands):
<TABLE>
<CAPTION>
1994 1993
--------------------------
<S> <C> <C>
Estimated eligibility cost $ 277 $ 493
Interest cost on APBO 1,210 1,257
Amortization of transition obligation over 20 years 786 786
--------------------------
Net periodic postretirement benefit cost $ 2,273 $ 2,536
==========================
</TABLE>
The health care cost trend rates for 1995 are 7.9% and 8.6% for the employee
and agent medical plans, respectively, and grade to 5% in year 2000 and remain
level thereafter. Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the APBO by about $1.1 million and
the 1994 eligibility and interest cost components of net periodic
postretirement benefit cost by about $0.1 million.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% and 8.0% in 1994 and 1993, respectively.
F-10
<PAGE> 77
NOTE 5 - INVESTMENTS
BONDS
The amortized cost and estimated fair value of the Company's bond investments
at December 31, 1994 and 1993 were as follows (in thousands):
<TABLE>
<CAPTION>
Estimated Gross Unrealized
Amortized Fair ---------------------------
Cost Value Gains (Losses)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
U.S. government obligations
(including obligations guaranteed by
the U.S. government) $ 428,323 $ 415,052 $ 368 $ (13,639)
Foreign government obligations 21,440 21,567 652 (525)
Special revenue and special
assessment obligations and all
non-guaranteed obligations of
government agencies, authorities and
subdivisions 433,739 414,384 5,267 (24,622)
Public utilities 406,065 395,194 5,013 (15,884)
Industrial & miscellaneous 1,911,802 1,883,098 33,327 (62,031)
- ------------------------------------------------------------------------------------------------------
Total $ 3,201,369 $ 3,129,295 $ 44,627 $ (116,701)
======================================================================================================
1993
U.S. government obligations
(including obligations guaranteed by
the U.S. government) $ 222,284 $ 224,455 $ 2,566 $ (395)
Foreign government obligations 19,394 22,113 2,803 (84)
Special revenue and special
assessment obligations and all
non-guaranteed obligations of
government agencies, authorities and
subdivisions 482,714 523,415 44,946 (4,245)
Public utilities 460,043 505,594 47,403 (1,852)
Industrial & miscellaneous 1,811,355 2,011,707 205,061 (4,709)
- ------------------------------------------------------------------------------------------------------
Total $ 2,995,790 $ 3,287,284 $ 302,779 $ (11,285)
======================================================================================================
</TABLE>
F-11
<PAGE> 78
The amortized cost and estimated fair value of the Company's bond investments
at December 31, 1994 and 1993, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated Gross Unrealized
Amortiaed Fair ----------------------------
Cost Value Gains (Losses)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
Due - in one year or less $ 57,935 $ 58,133 $ 288 $ (90)
Due - one year through five years 473,643 467,554 6,204 (12,293)
Due - five years through ten years 1,137,069 1,103,541 13,391 (46,919)
Due - after ten years 1,532,722 1,500,067 24,744 (57,399)
- -----------------------------------------------------------------------------------------------------
Total $ 3,201,369 $ 3,129,295 $ 44,627 $ (116,701)
=====================================================================================================
1993
Due - in one year or less $ 29,879 $ 30,881 $ 1,005 $ (3)
Due - one year through five years 321,079 344,185 24,934 (1,828)
Due - five years through ten years 998,671 1,091,150 94,849 (2,370)
Due - after ten years 1,646,161 1,821,068 181,991 (7,084)
- -----------------------------------------------------------------------------------------------------
Total $ 2,995,790 $ 3,287,284 $ 302,779 $ (11,285)
=====================================================================================================
</TABLE>
Proceeds from bond sales during 1994 and 1993 were $1,283.2 million and $647.3
million, respectively. Gross gains of $29.6 million and $47.6 million and
gross losses of $35.8 million and $0.2 million were realized on these sales in
1994 and 1993, respectively.
The carrying value of preferred stocks at December 31, 1994 and 1993 was $15.7
million and $24.6 million, and the related fair value of preferred stocks was
$15.0 million and $26.1 million, respectively.
The cost of common stocks at December 31, 1994 and 1993 was $2.3 million and
$4.0 million, respectively. The market value of common stocks at December 31,
1994 and 1993 was $3.5 million and $8.3 million, respectively.
F-12
<PAGE> 79
MORTGAGE LOANS AND REAL ESTATE
At December 31, 1994 and 1993 the Company's mortgage loans and real estate
investments (excluding home office properties) were distributed as follows:
<TABLE>
<CAPTION>
Mortgage Loans Real Estate
----------------------------- ----------------------------
1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GEOGRAPHIC REGION
-----------------
New England 9.6% 9.5%
Middle Atlantic 11.8 9.7
East North Central 12.0 8.8 17.8% 9.4%
West North Central 0.4 0.6 0.1 0.1
South Atlantic 30.7 33.4 40.9 54.6
East South Central 5.8 6.1 5.8 4.4
West South Central 3.9 7.9 32.0 28.4
Mountain 14.9 10.8
Pacific 10.9 13.2 3.4 3.1
- ----------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
==========================================================================================================
PROPERTY TYPE
-------------
Residential 0.1% 1.6%
Apartment 23.4 14.4 16.2%
Retail 30.6 30.3 16.8% 13.7
Office Building 28.4 33.3 8.8 11.2
Industrial 11.0 13.2 73.5 58.1
Hotel/Motel 1.6 1.7
Mixed Use 2.7 2.9
Other Commercial 2.2 2.6 0.9 0.8
- ---------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
=========================================================================================================
</TABLE>
F-13
<PAGE> 80
The book value of mortgages, classified by scheduled year of contractual
maturity, as of December 31, 1994 and 1993 are shown below. Expected
maturities will differ because of scheduled principal payments and mortgage
prepayments.
<TABLE>
<S> <C> <C>
1994 1993
- ------------------------------------------------------------------------------------------------
1 year or less 6.6% 7.3%
Over 1 through 3 years 15.1 25.1
Over 3 through 5 years 24.2 36.1
Over 5 through 10 years 39.4 24.0
Over 10 through 15 years 11.0 4.9
Over 15 through 20 years 3.7 2.6
- ------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
================================================================================================
</TABLE>
The estimated fair value of mortgages at December 31, 1994 and 1993, was $577.0
million and $612.6 million, respectively. The fair value of mortgages was
estimated as the average of the present value of future cash flows under
different scenarios of future mortgage interest rates (including appropriate
provisions for default losses) and related changes in borrower prepayments.
POLICY LOANS
The estimated fair value of policy loans at December 31, 1994 and 1993, was
$654.2 million and $714.0 million, respectively. The book value of variable
rate policy loans approximates fair value. The fair value of fixed rate policy
loans was estimated as the present value of future cash flows using reasonable
assumptions for mortality and repayments, discounted at the current variable
policy loan rate.
NOTE 6 - INVESTMENT INCOME
Investment income is presented net of related investment expenses of $29.5
million and $24.7 million for the years ended December 31, 1994 and 1993,
respectively.
NOTE 7 - INVESTMENT PRODUCTS
The Company issues several different investment products, including flexible
premium annuities, single premium deferred annuities and supplementary
contracts not involving life contingencies. The book value of liabilities for
these investment products was $820.4 million and $783.4 million, respectively,
at December 31, 1994 and 1993. The fair value of liabilities for these
investment products was $763.0 million at December 31, 1994 and 1993. The fair
value of these liabilities was estimated as the average of the present value of
future cash flows under different scenarios of future interest rates of A-rated
corporate bonds and related changes in premium persistency and surrenders.
F-14
<PAGE> 81
NOTE 8 - JOINT VENTURE
In early 1993, mutual funds sponsored by another life insurance company were
merged with the Sentinel Funds sponsored by the Company. Concurrent with the
merger, several partnerships were created to provide distribution, investment
advisory, and administrative services to the mutual funds. The Sentinel Funds
are an independent entity, and their financial results are excluded from the
consolidated financial statements. The operating results of the partnerships
are included in the consolidated financial statements. The minority partner's
interest in the partnerships is included in other liabilities and their share
of operating results is included in operating expenses.
NOTE 9 - PENDING CHANGES IN ACCOUNTING POLICY
In April 1993 the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises" (Interpretation 40).
The interpretation clarified that beginning in 1995 mutual life insurance and
other enterprises are required to apply all applicable authoritative accounting
pronouncements when issuing financial statements prepared in conformity with
generally accepted accounting principles.
In January 1995, the FASB issued Statement of Financial Accounting Standards
No. 120, "Accounting and Reporting for Mutual Life Insurance Enterprises and by
Insurance Enterprises for Certain Long-Duration Participating Contracts"
(Statement 120). Statement 120 extends the effective date of Interpretation 40
from 1995 to 1996, and defines accounting principles to be used in accounting
for long duration participating contracts by reference to the American
Institute of Certified Public Accountants' Statement of Position 95-1,
"Accounting for Certain Insurance Activities of Mutual Life Insurance
Enterprises" (Statement of Position 95-1).
The effect of these pronouncements is that financial statements prepared on the
basis of statutory accounting principles will no longer be described as
prepared in conformity with generally accepted accounting principles beginning
in 1996.
The Company believes that the changes required by Interpretation 40, Statement
120 and Statement of Position 95-1 will result in an increase in reported
equity.
NOTE 10 - SURPLUS NOTES
On March 1, 1994, the Company issued $70.0 million of 8 1/4% Surplus Notes (the
Notes) scheduled to mature on March 1, 2024, with semiannual interest payments
commencing September 1, 1994. The Notes are unsecured and subordinated to all
present and future indebtedness, policy claims and prior claims of the Company.
The Notes may be redeemed in whole or in part at any time after March 1, 2004
at predetermined redemption prices. All interest and principal payments are
subject to prior written approval by the Commissioner of Banking, Insurance,
and Securities of the State of Vermont (the Commissioner).
Liability for interest payments cannot be recorded in the financial statements
until approval for the payments is received from the Commissioner. Total
interest paid during 1994 was $2.8 million. Prorata interest accrued but not
recorded at December 31, 1994 was $1.9 million.
The Notes were sold at a discount of $.3 million. None of the Notes
outstanding at December 31, 1994 were held by any affiliate of the Company.
F-15
<PAGE> 82
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
(In Thousands)
- -------------------------------------------------------------------------
<S> <C>
ASSETS:
Cash and short-term investments $ 350,605
Bonds 3,364,631
Preferred stocks 14,218
Common stocks 9,210
Mortgage loans 635,762
Policy loans 731,645
Real estate investments 92,143
Home office properties 45,430
Other invested assets 72,932
- -------------------------------------------------------------------------
Total cash and invested assets 5,316,576
Due and deferred premiums 92,905
Due and accrued investment income 101,743
Other assets 41,789
Separate account assets 174,950
- -------------------------------------------------------------------------
Total assets $ 5,727,963
=========================================================================
LIABILITIES:
Policy and other contract reserves $ 4,517,019
Policyowners' deposits 106,913
Claims in process of settlement 25,003
Policyowners' dividends 125,250
Interest maintenance reserve 49,291
Federal income taxes payable 30,718
Asset valuation reserve 57,838
Other liabilities 349,208
Separate account liabilities 165,310
- -------------------------------------------------------------------------
Total liabilities 5,426,550
- -------------------------------------------------------------------------
SURPLUS:
Surplus notes 69,678
Policyowners' contingency reserves 231,735
- -------------------------------------------------------------------------
Total surplus 301,413
- -------------------------------------------------------------------------
Total liabilities and surplus $ 5,727,963
=========================================================================
</TABLE>
The accompanying condensed notes are an integral part of
these financial statements
F-16
<PAGE> 83
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND SURPLUS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
(In Thousands)
- -------------------------------------------------------------------------
<S> <C>
INCOME:
Insurance income $ 409,419
Net investment income 290,996
Other income 39,637
- -------------------------------------------------------------------------
Total income 740,052
- -------------------------------------------------------------------------
EXPENSES:
Benefits 315,652
Increase in reserves 159,189
Commissions and operating expenses 150,181
- -------------------------------------------------------------------------
Total expenses 625,022
- -------------------------------------------------------------------------
Net gain from operations before dividends and
federal income taxes 115,030
Dividends to policyowners 88,896
- -------------------------------------------------------------------------
Net gain from operations before federal income taxes 26,134
Federal income tax expense 32,496
- -------------------------------------------------------------------------
Net loss from operations (6,362)
Net realized losses (10,625)
- -------------------------------------------------------------------------
NET LOSS (16,987)
Unrealized gains 13,231
Increase in asset valuation reserve (8,157)
Other adjustments to surplus, net (3,608)
- -------------------------------------------------------------------------
Decrease in surplus (15,521)
SURPLUS:
Beginning of period 316,934
- -------------------------------------------------------------------------
End of period $ 301,413
=========================================================================
</TABLE>
The accompanying condensed notes are an integral part of
these financial statements
F-17
<PAGE> 84
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
(In Thousands)
- -------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Insurance income received $ 422,214
Net investment and other income received 307,423
Benefits paid (316,157)
Commissions and operating expenses paid (171,593)
Net decrease in policy loans 26,866
Net transfers from separate accounts 6,748
Federal income taxes paid (10,847)
Dividends paid to policyowners (82,678)
- -------------------------------------------------------------------------
Net cash provided by operations 181,976
- -------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold, matured or repaid:
Bonds 1,418,187
Stocks 2,411
Mortgage loans 39,835
Real estate and other investments 24,348
Cost of investments acquired:
Bonds (1,544,043)
Stocks (5,721)
Mortgage loans (100,007)
Real estate and other investments (20,041)
- -------------------------------------------------------------------------
Net cash used for investing activities (185,031)
- -------------------------------------------------------------------------
OTHER SOURCES AND APPLICATIONS, NET 108,843
- -------------------------------------------------------------------------
Net increase in cash
and short-term investments 105,788
CASH AND SHORT-TERM INVESTMENTS:
Beginning of period 244,817
- -------------------------------------------------------------------------
End of period $ 350,605
=========================================================================
</TABLE>
The accompanying condensed notes are an integral part of
these financial statements
F-18
<PAGE> 85
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated interim financial statements of National Life
Insurance Company and its subsidiaries (the Company) have been prepared in
accordance with Article 10 of Regulation S-X of the Securities and Exchange
Commission and with statutory accounting practices prescribed or permitted by
the Vermont Department of Banking, Insurance, and Securities. Such statutory
accounting practices are considered generally accepted accounting principles
for Vermont-domiciled mutual life insurance companies.
The interim financial statements do not include all of the necessary
disclosures for a complete presentation in accordance with generally accepted
accounting principles. In the opinion of management, all adjustments
(consisting of normally recurring accruals) considered necessary for a fair
presentation have been included in the interim financial statements. Operating
results for the nine month period ended September 30, 1995 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1995. For more information, refer to the Company's December 31, 1994 audited
financial statements.
The consolidated interim financial statements include the accounts of National
Life Insurance Company and its wholly owned subsidiary, National Life
Investment Management Company.
NOTE 2 - SUBSEQUENT EVENT
During September 1995 the Company announced its intent to purchase a
controlling interest in LSW Holding Corporation, parent company of Life
Insurance Company of the Southwest (LSW), a Texas domiciled life insurance
company, in early 1996. LSW's statutory assets and surplus were $1.5
billion and $85.0 million, respectively, as of December 31, 1994.
<PAGE> 86
PART II
<PAGE> 87
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article VI, Section 2 of the Bylaws of National Life Insurance Company
("National Life" or the "Company") provides that, in accordance with the
provisions of the Section, the Company shall indemnify directors, officers and
employees of the Company or any other corporation served at the request of the
Company, and their heirs, executors and administrators, shall be indemnified to
the maximum extent permitted by law against all costs and expenses, including
judgments paid, settlement costs, and counsel fees, reasonably incurred in the
defense of any claim in which such person is involved by virtue of his or her
being or having been such a director, officer, or employee.
The Bylaws are filed as Exhibit 1.A.(7) to this Registration
Statement.
Vermont law authorizes Vermont corporations to provide indemnification
to directors, officers and other persons.
National Life owns a directors and officers liability insurance policy
covering liabilities that directors and officers of National Life and its
subsidiaries and affiliates may incur in acting as directors and officers.
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or other controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
REPRESENTATIONS PURSUANT TO RULE 6e-3(T)
This filing is made pursuant to Rule 6e-3(T) under the Investment
Company Act of 1940.
Registrant elects to be governed by Rule 6e-3(T)(b)(13)(i)(A) under
the Investment Company Act of 1940 with respect to the policies described in
the Prospectus.
Registrant makes the following representations:
(1) Rule 6e-3(T)(b)(13)(iii)(F) has been relied upon.
(2) The level of mortality and expense risk charge is within
the range of industry practice for comparable flexible or scheduled
contracts.
<PAGE> 88
(3) Registrant has concluded that there is a reasonable
likelihood that the distribution financing arrangement of the Separate
Account will benefit the Separate Account and policyowners, and will
keep and make available to the Commission on request a memorandum
setting forth the basis for this representation.
(4) The Separate Account will invest only in management
investment companies which have undertaken to have a board of
directors, a majority of which are not interested persons of the
Company, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
The methodology use to support the representation made in paragraph
(2) above is based on an analysis of the mortality and expense risk charge
contained in other variable life insurance contracts. Registrant undertakes to
keep and make available to the Commission on request the documents used to
support the representation in paragraph (2) above.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents.
The facing sheet.
The prospectus consisting of 81 pages.
Undertaking to file reports.
Rule 484 undertaking.
Representations pursuant to Rule 6e-3(T).
The signatures.
Written consents of the following persons:
(a) John L. Stotler, Esq.
(b) Craig A. Smith, F.S.A.
(c) Sutherland, Asbill & Brennan.
(d) Price Waterhouse LLP.
The following exhibits, corresponding to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
1.
A.
(1) Resolutions of the Board of Directors of National
Life Insurance Company establishing the National
Variable Life Insurance Account.*
(2) Not Applicable.
(3) (a) Form of Distribution Agreement between
National Life Insurance Company and Equity
Services, Inc.
(b)(1) Form of Equity Services, Inc. Branch Office
Supervisor Contract.*
(b)(2) Form of Equity Services, Inc. Registered
Representative Contract.*
(c) Schedule of Sales Commissions.
(4) Not Applicable.
(5) (a) Specimen VariTrak Policy Form.*
(b) Rider for Guaranteed Insurability Options.*
(c) Rider for Waiver of Monthly Deductions.*
(d) Rider for Accidental Death Benefit.*
(e) Rider for Guaranteed Death Benefit.*
(6) (a) Charter documents of National Life Insurance
Company.*
(b) Bylaws of National Life Insurance Company.*
(7) Not Applicable.
(8) (a) Form of Participation Agreement by and among
Market Street Fund, Inc., National Life
Insurance Company and Equity Services, Inc.
(b) Form of Amendment No. 1 to Participation
Agreement Among Variable Insurance Products
Fund, Fidelity Distributors Corporation and
National Life Insurance Company.
(b)(2) Participation Agreement among Variable
Insurance Products Fund, Fidelity
Distributors Corporation and Vermont Life
Insurance Company (now National Life
Insurance Comapny) dated August 1, 1989.**
(c) Form of Participation Agreement by and among
The Alger American Fund, National Life
Insurance Company and Fred Alger and Company.
<PAGE> 89
(9) Not Applicable.
(10) VariTrak Application Form.*
(11) Memorandum describing issuance, transfer and
redemption procedures.
2. Opinion and Consent of John L. Stotler, Esq., as to the
legality of the securities being offered.
3. Not Applicable.
4. Not Applicable.
5. Not Applicable.
6. Opinion and Consent of Craig A. Smith, F.S.A., M.A.A.A., as to
actuarial matters pertaining to the securities being
registered.
7. (a) Consent of Price Waterhouse LLP.
(b) Consent of Sutherland, Asbill & Brennan.
8. Powers of Attorney for Directors.*
9. Undertaking Pursuant To Rule 27D-2 under the Investment
Company Act of 1940.
- ------------------
* Incorporated herein by reference to the Form S-6 Registration
Statement (File No. 33-91938) for National Variable Life Insurance
Account filed on May 5, 1995.
** Incorporated herein by reference to Post-Effective Amendment No. 3
to the Form S-6 Registration Statement (File No. 33-16470) for
Vermont Variable Life Insurance Account filed April 30, 1990.
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, National Variable Life Insurance Account, has duly caused this
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Montpelier and the State of Vermont, on the
22nd day of December, 1995.
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(Registrant)
By: NATIONAL LIFE INSURANCE COMPANY
Attest: /s/ JEAN K. LANDOLT By: /s/ FREDERIC H. BERTRAND
--------------------- -----------------------------
Frederic H. Bertrand
Assistant Secretary Chairman of the Board and
Chief Executive Officer
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, National
Life Insurance Company has duly caused this Pre-Effective Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, and its seal fixed and attested, in the City of
Montpelier and the State of Vermont, on the 22nd day of December, 1995.
NATIONAL LIFE INSURANCE COMPANY
(SEAL) (Depositor)
Attest: /s/ JEAN K. LANDOLT By: /s/ FREDERIC H. BERTRAND
--------------------- -----------------------------
Frederic H. Bertrand
Assistant Secretary Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities indicated on the date(s) set
forth below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ FREDERIC H. BERTRAND Chairman of the Board and
- ------------------------ and Chief Executive Officer, ------------
Frederic H. Bertrand and Director
President & Chief Operating
- ------------------------ Officer, and Director ------------
John H. Harding
/s/ THOMAS H. MACLEAY Executive Vice President &
- ------------------------ Chief Financial Officer ------------
Thomas H. MacLeay
/s/ JOHN L. LAGUE, JR. Vice President & Controller
- ------------------------ (Chief Accounting Officer) ------------
John L. LaGue, Jr.
Robert E. Boardman* Director
- ------------------ ------------
Robert E. Boardman
David R. Coates* Director
- --------------- ------------
David R. Coates
</TABLE>
<PAGE> 92
<TABLE>
<S> <C> <C>
Benjamin F. Edwards III* Director
- ----------------------- ------------
Benjamin F. Edwards III
Charles H. Erhart, Jr.* Director
- ---------------------- ------------
Charles H. Erhart, Jr.
Earle H. Harbison, Jr.* Director
- ---------------------- ------------
Earle H. Harbison, Jr.
E. Miles Prentice, III* Director
- ---------------------- ------------
E. Miles Prentice, III
A. Gary Shilling* Director
- ---------------- ------------
A. Gary Shilling
Thomas P. Salmon* Director
- ---------------- ------------
Thomas P. Salmon
Stansfield Turner* Director
- ----------------- ------------
Stansfield Turner
Thomas R. Williams* Director
- ------------------ ------------
Thomas R. Williams
Patricia K. Woolf* Director
- ----------------- ------------
Patricia K. Woolf
*By /s/ FREDERIC H. BERTRAND Date: December 22, 1995
--------------------------
Frederic H. Bertrand
Pursuant to Power of Attorney
</TABLE>
<PAGE> 93
EXHIBIT INDEX
1.
A.
(3) (a) Form of Distribution Agreement between
National Life Insurance Company and Equity
Services, Inc.
(c) Schedule of Sales Commissions.
(8) (a) Form of Agreement by and among Market Street
Fund, Inc., National Life Insurance Company
and Equity Services, Inc.
(b) Form of Amendment No. 1 to Participation
Agreement among Variable Insurance Products
Fund, Fidelity Distributors Corporation and
National Life Insurance Company.
(c) Form of Participation Agreement by and among
The Alger American Fund, National Life
Insurance Company and Fred Alger and Company.
(11) Memorandum describing issuance, transfer and
redemption procedures.
2. Opinion and Consent of John L. Stotler, Esq., as to the
legality of the securities being offered.
6. Opinion and Consent of Craig A. Smith, F.S.A., M.A.A.A., as to
actuarial matters pertaining to the securities being
registered.
7. (a) Consent of Price Waterhouse LLP.
(b) Consent of Sutherland, Asbill & Brennan.
9. Undertaking Pursuant To Rule 27D-2 under the Investment
Company Act of 1940.
<PAGE> 1
EXHIBIT 1(A)(3)(a)
DISTRIBUTION AGREEMENT
AGREEMENT dated as of January ____, 1996 by and between NATIONAL LIFE
INSURANCE COMPANY ("Insurer"), a Vermont insurance company, on its behalf and
on behalf of each separate account identified in Schedule 1 hereto, and EQUITY
SERVICES, INC. ("Distributor"), a Vermont corporation.
WITNESSETH:
WHEREAS, Distributor is a broker-dealer that engages in the distribution
of variable insurance products and other investment products; and
WHEREAS, Insurer desires to issue certain variable insurance products
described more fully below to the public through Distributor acting as
principal underwriter;
NOW, THEREFORE, in consideration of their mutual promises, Insurer and
Distributor hereby agree as follows:
1. Definitions
a. Policies -- The class or classes of variable insurance products set
forth on Schedule 1 to this Agreement as in effect at the time this Agreement
is executed, and such other classes of variable insurance products that may be
added to Schedule 1 from time to time in accordance with Section 11.b of this
Agreement, and including any riders to such policies and any other policies
offered in connection therewith. For this purpose and under this Agreement
generally, a "class of Policies" shall mean those Policies issued by Insurer on
the same policy form or forms and covered by the same Registration Statement.
b. Registration Statement -- At any time that this Agreement is in
effect, each currently effective registration statement filed with the SEC
under the 1933 Act on a prescribed form, or currently effective post-effective
amendment thereto, as the case may be, relating to a class of Policies,
including financial statements included in, and all exhibits to, such
registration statement or post-effective amendment. For purposes of Section 9
of this Agreement, the term "Registration Statement" means any document which
is or at any time was a Registration Statement within the meaning of this
Section 1.b.
c. Prospectus -- The prospectus included within a Registration
Statement, except that, if the most recently filed version of the prospectus
(including any supplements thereto) filed pursuant to Rule 497 under the 1933
Act subsequent to the date on which a Registration Statement became effective
differs from the prospectus included within such Registration Statement at the
time it became effective, the term "Prospectus" shall refer to the most
recently filed prospectus filed under Rule 497 under the 1933 Act, from and
after the date on which it shall have been filed. For purposes of Section 9 of
this Agreement, the term "any Prospectus" means any document which is or at any
time was a Prospectus within the meaning of this Section 1.c.
d. Fund -- An investment company in which the Variable Account invests.
e. Variable Account -- A separate account supporting a class or classes
of Policies and specified on Schedule 1 as in effect at the time this Agreement
is executed, or as it may be amended from time to time in accordance with
Section 11.b of this Agreement.
f. 1933 Act -- The Securities Act of 1933, as amended.
- 1 -
<PAGE> 2
g. 1934 Act -- The Securities Exchange Act of 1934, as amended.
h. 1940 Act -- The Investment Company Act of 1940, as amended.
i. SEC -- The Securities and Exchange Commission.
j. NASD -- The National Association of Securities Dealers, Inc.
k. Regulations -- The rules and regulations promulgated by the SEC under
the 1933 Act, the 1934 Act and the 1940 Act as in effect at the time this
Agreement is executed or thereafter promulgated.
l. Selling Broker-Dealer -- A person or entity registered as a
broker-dealer and licensed as a life insurance agent or affiliated with a
person or entity so licensed, and authorized to distribute the Policies
pursuant to a sales agreement as provided for in Section 4 of this Agreement.
m. Representative -- When used with reference to Distributor or a
Selling Broker-Dealer, an individual who is an associated person, as that term
is defined in the 1934 Act, thereof.
n. Application -- An application for a Policy.
o. Premium -- A payment made under a Policy by an applicant or purchaser
to purchase benefits under the Policy.
p. Customer Service Center -- The service center identified in the
Prospectus as the location at which Premiums and Applications are accepted.
2. Authorization and Appointment
a. Scope of Authority. Insurer hereby authorizes Distributor on an
exclusive basis, and Distributor accepts such authority, subject to the
registration requirements of the 1933 Act and the 1940 Act and the provisions
of the 1934 Act and conditions herein, to be the distributor and principal
underwriter for the sale of the Policies to the public in each state and other
jurisdiction in which the Policies may lawfully be sold during the term of this
Agreement. Insurer hereby authorizes Distributor to grant authority to Selling
Broker-Dealers to solicit Applications and Premiums to the extent Distributor
deems appropriate and consistent with the marketing program for the Policies or
a class of Policies, subject to the conditions set forth in Section 4 of this
Agreement. The Policies shall be offered for sale and distribution at premium
rates set from time to time by Insurer. Distributor shall use its best efforts
to market the Policies actively, directly and/or through Selling Broker-Dealers
in accordance with Section 4 of this Agreement, subject to compliance with
applicable law, including rules of the NASD.
b. Limits on Authority. Distributor shall act as an independent contractor
and nothing herein contained shall constitute Distributor or its agents,
officers or employees as agents, officers or employees of Insurer solely by
virtue of their activities in connection with the sale of the Policies
hereunder. Distributor and its Representatives shall not have authority, on
behalf of Insurer: to make, alter or discharge any Policy or other insurance
policy or annuity entered into pursuant to a Policy; to waive any Policy
forfeiture provision; to extend the time of paying any Premium; or to receive
any monies or Premiums (except for the sole purpose of
- 2 -
<PAGE> 3
forwarding monies or Premiums to Insurer). Distributor shall not expend, nor
contract for the expenditure of, the funds of Insurer. Distributor shall not
possess or exercise any authority on behalf of Insurer other than that
expressly conferred on Distributor by this Agreement.
3. Solicitation Activities
a. Distributor Representatives. No Distributor Representative shall
solicit the sale of a Policy unless at the time of such solicitation such
individual is duly registered with the NASD and duly licensed with all
applicable state insurance and securities regulatory authorities, and is duly
appointed as an insurance agent of Insurer.
b. Solicitation Activities. All solicitation and sales activities
engaged in by Distributor and the Distributor Representatives with respect to
the Policies shall be in compliance with all applicable federal and state
securities laws and regulations, as well as all applicable insurance laws and
regulations and the Insurer's rules and procedures. In particular, without
limiting the generality of the foregoing:
(1) Distributor shall train, supervise and be solely responsible for
the conduct of Distributor Representatives in their solicitation of
Applications and Premiums and distribution of the Policies, and shall supervise
their compliance with applicable rules and regulations of any insurance or
securities regulatory agencies that have jurisdiction over variable insurance
product activities.
(2) Neither Distributor nor any Distributor Representative shall
offer, attempt to offer, or solicit Applications for, the Policies in any state
or other jurisdiction unless Insurer has notified Distributor that such
Policies may lawfully be sold or offered for sale in such state, and has not
subsequently revised such notice.
(3) Neither Distributor nor any Distributor Representative shall
give any information or make any representation in regard to a class of
Policies in connection with the offer or sale of such class of Policies that is
not in accordance with the Prospectus for such class of Policies, or in the
then-currently effective prospectus or statement of additional information for
a Fund, or in current advertising materials for such class of Policies
authorized by Insurer.
(4) All Premiums paid by check or money order that are collected by
Distributor or any of its Representatives shall be remitted promptly, and in
any event not later than two business days, in full, together with any
Applications, forms and any other required documentation, to the Customer
Service Center. Checks or money orders in payment of Premiums shall be drawn
to the order of the Insurer. If any Premium is held at any time by
Distributor, Distributor shall hold such Premium in a fiduciary capacity and
such Premium shall be remitted promptly, and in any event not later than two
business days, to Insurer. Distributor acknowledges that all such Premiums,
whether by check, money order or wire, shall be the property of Insurer.
Distributor acknowledges that Insurer shall have the unconditional right to
reject, in whole or in part, any Application or Premium.
c. Representations and Warranties of Distributor. Distributor represents and
warrants to Insurer that Distributor is and shall remain registered during the
term of this Agreement as a broker- dealer under the 1934 Act, is a member with
the NASD, and is duly registered under applicable state securities laws, and
that Distributor is and shall remain during the term of this Agreement in
compliance with Section 9(a) of the 1940 Act.
- 3 -
<PAGE> 4
4. Selling Broker-Dealers. Distributor shall ensure that sales of the
Policies by Selling Broker-Dealers comply with the following conditions, and
any additional conditions Insurer may specify from time to time.
a. Every Selling Broker-Dealer shall be both registered as a
broker-dealer with the SEC and a member of the NASD and licensed as an
insurance agent with authority to sell variable products or associated with an
insurance agent so licensed. Any individuals to be authorized to act on behalf
of Selling Broker-Dealer shall be duly registered with the NASD as
representatives of Selling Broker-Dealer with authority to sell variable
products, and shall be licensed as insurance agents with authority to sell
variable products. Distributor shall verify that Selling Broker-Dealer and its
Representatives are duly licensed under applicable state insurance law to sell
the Policies (or, if Broker-Dealer is not so licensed, that it is associated
with an entity so licensed).
b. Every Selling Broker-Dealer (or, if applicable, its associated
general insurance agency) and each of its Representatives shall have been
appointed by Insurer, provided that Insurer reserves the right to refuse to
appoint any proposed person, or once appointed, to terminate such appointment.
c. Every Selling Broker-Dealer must enter into a written sales agreement
with Distributor which sales agreement, among other things, will require such
Selling Broker-Dealer to use its best efforts to solicit applications for
Policies and to comply with applicable laws and regulations, including the
Insurer's rules and regulations as reflected in the Insurer's rules and
procedures or otherwise communicated to agents appointed by Insurer, and will
contain such other provisions as the Distributor deems to be consistent
herewith.
d. In view of Insurer's desire to ensure that Policies will be sold to
purchasers for whom the Policies will be suitable, the written Sales Agreement
shall require that Selling Broker-Dealers and their Representatives not make
recommendations to an applicant to purchase a Policy in the absence of
reasonable grounds to believe that the purchase of the Policy is suitable for
the applicant. While not limited to the following, a determination of
suitability shall be based on information supplied by an applicant after a
reasonable inquiry concerning the applicant's other security holdings,
insurance and investment objectives, financial situation and needs, and the
likelihood that the applicant will continue to make any premium payments
contemplated by the Policy applied for and will keep the Policy in force for a
sufficient period of time so that Insurer's acquisition costs are amortized
over a reasonable period of time.
5. Marketing Materials
a. Preparation and Filing. Insurer shall be primarily responsible for
the design and preparation of all promotional, sales and advertising material
relating to the Policies. Distributor shall be responsible for filing such
material, as required, with the NASD and any state securities regulatory
authorities. Insurer shall be responsible for filing all promotional, sales or
advertising material, as required, with any state insurance regulatory
authorities. Insurer shall be responsible for preparing the Policy Forms and
filing them with applicable state insurance regulatory authorities, and for
preparing the Prospectuses and Registration Statements and filing them with the
SEC and state regulatory authorities, to the extent required. The parties
shall notify each other expeditiously of any comments provided by the SEC, NASD
or any securities or insurance regulatory authority on such material, and will
cooperate expeditiously in resolving and implementing any comments, as
applicable.
b. Use in Solicitation Activities. Insurer shall be responsible for
furnishing Distributor with such Applications, Prospectuses and other materials
for use by Distributor and
- 4 -
<PAGE> 5
any Selling Broker-Dealers in their solicitation activities with respect to
the Policies. Insurer shall notify Distributor of those states or
jurisdictions which require delivery of a statement of additional information
with a prospectus to a prospective purchaser.
6. Compensation and Expenses
a. Insurer shall pay compensation for sales of the Policies in
accordance with Schedule 2 hereto. Insurer shall pay compensation payable to
Distributor Representatives and to Selling Broker-Dealers, on Distributor's
behalf, subject to the provisions of Section 7 of this Agreement.
b. Insurer shall pay all expenses in connection with:
(1) the preparation and filing of each Registration Statement
(including each pre-effective and post-effective amendment thereto) and the
preparation and filing of each Prospectus (including any preliminary and each
definitive Prospectus);
(2) the preparation, underwriting, issuance and administration of
the Policies;
(3) any registration, qualification or approval or other filing of
the Policies or Policy forms required under the securities or insurance laws of
the states in which the Policies will be offered.
(4) all registration fees for the Policies payable to the SEC;
(5) the printing and mailing of definitive Prospectuses for the
Policies and any supplements thereto for distribution to existing Policy
Owners; and
(6) the printing and mailing of all promotional materials relating
to the Policies.
c. Distributor shall pay the following expenses related to its
distribution of the Policies:
(1) NASD filing fees and expenses of Representatives for which the
Distributor agrees to be responsible; and
(2) any other expenses incurred by Distributor or its employees for
the purpose of carrying out the obligations of Distributor hereunder.
7. Compliance
a. Maintaining Registration and Approvals. Insurer shall be responsible
for maintaining the registration of the Policies with the SEC and any state
securities regulatory authority with which such registration is required, and
for gaining and maintaining approval of the Policy forms where required under
the insurance laws and regulations of each state or other jurisdiction in which
the Policies are to be offered.
b. Confirmations and 1934 Act Compliance. Insurer, as agent for
Distributor, shall confirm to each applicant for and purchaser of a Policy in
accordance with Rule 10b-10 under the 1934 Act acceptance of Premiums and such
other transactions as are required by
- 5 -
<PAGE> 6
Rule 10b-10 or administrative interpretations thereunder. Insurer shall
maintain and preserve such books and records with respect to such confirmations
and all other required books of account and related financial records relating
to the distribution of the Policies in conformity with the requirements of
Rules 17a-3 and 17a-4 under the 1934 Act to the extent such requirements apply.
Insurer shall maintain all such books and records and hold such books and
records on behalf of and as agent for Distributor whose property they are and
shall remain, and acknowledges that such books and records are at all times
subject to inspection by the SEC in accordance with Section 17(a) of the 1934
Act.
c. Issuance and Administration of Policies. Insurer shall be
responsible for issuing the Policies and administering the Policies and the
Variable Account, including all Policy Owner communications, provided, however,
that Distributor shall have full responsibility for the securities activities
of all persons employed by the Insurer who are engaged directly or indirectly
in the Policy operations, and for the training, supervision and control of such
persons to the extent of such activities.
8. Investigations and Proceedings
a. Cooperation. Distributor and Insurer shall cooperate fully in any
securities or insurance regulatory investigation or proceeding or judicial
proceeding arising in connection with the offering, sale or distribution of the
Policies distributed under this Agreement. Without limiting the foregoing,
Insurer and Distributor shall notify each other promptly of any customer
complaint or notice of any regulatory investigation or proceeding or judicial
proceeding received by either party with respect to the Policies.
b. Customer Complaints. Distributor and Insurer shall cooperate fully
in responding to any customer complaints. Distributor will promptly provide to
Insurer a copy of all customer complaints received by Distributor concerning or
related to the Policies. Distributor will timely provide information as needed
to enable Insurer to respond to such complaints, and, at Insurer's option, will
itself respond to such complaints as directed by Insurer.
9. Indemnification
a. By Insurer. Insurer shall indemnify and hold harmless Distributor
and each person who controls or is associated with Distributor within the
meaning of such terms under the federal securities laws, and any officer,
director, employee or agent of the foregoing, against any and all losses,
claims, damages or liabilities, joint or several (including any investigative,
legal and other expenses reasonably incurred in connection with, and any
amounts paid in settlement of, any action, suit or proceeding or any claim
asserted), to which Distributor and/or any such person may become subject,
under any statute or regulation, any NASD rule or interpretation, at common law
or otherwise, insofar as such losses, claims, damages or liabilities:
(1) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in light of the circumstances in which they were made,
contained in any (i) Registration Statement or in any Prospectus or (ii)
blue-sky application or other document executed by Insurer specifically for the
purpose of qualifying any or all of the Policies for sale under the securities
laws of any jurisdiction; provided that Insurer shall not be liable in any such
case to the extent that such loss, claim, damage or liability arises out of, or
is based upon, an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon information furnished
- 6 -
<PAGE> 7
in writing to Insurer by Distributor specifically for use in the preparation of
any such Registration Statement or any such blue-sky application or any
amendment thereof or supplement thereto;
(2) result from any breach by Insurer of any provision of this
Agreement.
This indemnification agreement shall be in addition to any liability
that Insurer may otherwise have; provided, however, that no person shall be
entitled to indemnification pursuant to this provision if such loss, claim,
damage or liability is due to the willful misfeasance, bad faith, gross
negligence or reckless disregard of duty by the person seeking indemnification.
b. By Distributor. Distributor shall indemnify and hold harmless
Insurer and each person who controls or is associated with Insurer within the
meaning of such terms under the federal securities laws, and any officer,
director, employee or agent of the foregoing, against any and all losses,
claims, damages or liabilities, joint or several (including any investigative,
legal and other expenses reasonably incurred in connection with, and any
amounts paid in settlement of, any action, suit or proceeding or any claim
asserted), to which Insurer and/or any such person may become subject under any
statute or regulation, any NASD rule or interpretation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities:
(1) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, in light of the circumstances in which they
were made, contained in any (i) Registration Statement or in any Prospectus, or
(ii) blue-sky application or other document executed by Insurer specifically
for the purpose of qualifying any or all of the Policies for sale under the
securities laws of any jurisdiction; in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon information furnished in writing
by Distributor to Insurer specifically for use in the preparation of any such
Registration Statement or any such blue-sky application or any amendment
thereof or supplement thereto;
(2) result because of any use by Distributor or any Distributor
Representative of promotional, sales or advertising material not authorized by
Insurer or any verbal or written misrepresentations by Distributor or any
Distributor Representative or any unlawful sales practices concerning the
Policies by Distributor or any Distributor Representative under federal
securities laws or NASD regulations; or
(3) result from any breach by Distributor of any provision of this
Agreement.
This indemnification shall be in addition to any liability that
Distributor may otherwise have; provided, however, that no person shall be
entitled to indemnification pursuant to this provision if such loss, claim,
damage or liability is due to the willful misfeasance, bad faith, gross
negligence or reckless disregard of duty by the person seeking indemnification.
c. General. Promptly after receipt by a party entitled to
indemnification ("indemnified person") under this Section 9 of notice of the
commencement of any action as to which a claim will be made against any person
obligated to provide indemnification under this Section 9 ("indemnifying
party"), such indemnified person shall notify the indemnifying party in writing
of the commencement thereof as soon as practicable thereafter, but failure to
so notify the indemnifying party shall not relieve the indemnifying party from
any liability which
- 7 -
<PAGE> 8
it may have to the indemnified person otherwise than on account of this Section
9. The indemnifying party will be entitled to participate in the defense of
the indemnified person but such participation will not relive such indemnifying
party of the obligation to reimburse the indemnified person for reasonable
legal and other expenses incurred by such indemnified person in defending
himself or itself.
The indemnification provisions contained in this Section 9 shall
remain operative in full force and effect, regardless of any termination of
this Agreement. A successor by law of Distributor or Insurer, as the case may
be, shall be entitled to the benefits of the indemnification provisions
contained in this Section 9.
10. Termination. This Agreement shall terminate automatically if it is
assigned by a party without the prior written consent of the other party. This
Agreement may be terminated at any time for any reason or for no reason by
either party upon 60 days' written notice to the other party, without payment
of any penalty. (The term "assigned" shall not include any transaction
exempted from Section 15(b)(2) of the 1940 Act.) This Agreement may be
terminated immediately at the option of either party to this Agreement upon the
other party's material breach of any provision of this Agreement or of any
representation or warranty made in this Agreement, unless such breach has been
cured within 10 days after receipt of notice of breach from the non-breaching
party. Upon termination of this Agreement all authorizations, rights and
obligations shall cease except the obligation to settle accounts hereunder,
including commissions on Premiums subsequently received for Policies in effect
at the time of termination or issued pursuant to Applications signed prior to
termination.
11. Miscellaneous
a. Binding Effect. This Agreement shall be binding on and shall inure
to the benefit of the respective successors and assigns of the parties hereto
provided that neither party shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other party.
b. Schedules. The parties to this Agreement may amend Schedule 1 to
this Agreement from time to time to reflect additions of any class of Policies
and Variable Accounts. The provisions of this Agreement shall be equally
applicable to each such class of Policies and each Variable Account that may be
added to the Schedule, unless the context otherwise requires. Insurer may
amend Schedule 2 unilaterally, from time to time. Any other change in the
terms or provisions of this Agreement shall be by written agreement between
Insurer and Distributor.
c. Rights, Remedies, etc, are Cumulative. The rights, remedies and
obligations contained in this Agreement are cumulative and are in addition to
any and all rights, remedies and obligations, at law or in equity, which the
parties hereto are entitled to under state and federal laws. Failure of either
party to insist upon strict compliance with any of the conditions of this
Agreement shall not be construed as a waiver of any of the conditions, but the
same shall remain in full force and effect. No waiver of any of the provisions
of this Agreement shall be deemed, or shall constitute, a waiver of any other
provisions, whether or not similar, nor shall any waiver constitute a
continuing waiver.
d. Notices. All notices hereunder are to be made in writing and shall
be given:
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<PAGE> 9
if to Insurer, to:
D. Russell Morgan, Esq.
National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
if to Distributor, to:
Pauline Stebar, Director of Compliance
Equity Services, Inc.
National Life Drive
Montpelier, Vermont 05604
or such other address as such party may hereafter specify in writing.
Each such notice to a party shall be either hand delivered or transmitted by
registered or certified United States mail with return receipt requested, or by
overnight mail by a nationally recognized courier, and shall be effective upon
delivery. Failure to provide written notice shall not constitute a defense to
any action unless the party who did not receive written notice was materially
prejudiced thereby.
f. Interpretation; Jurisdiction. This Agreement constitutes the whole
agreement between the parties hereto with respect to the subject matter hereof,
and supersedes all prior oral or written understandings, agreements or
negotiations between the parties with respect to such subject matter. No prior
writings by or between the parties with respect to the subject matter hereof
shall be used by either party in connection with the interpretation of any
provision of this Agreement. This Agreement shall be construed and its
provisions interpreted under and in accordance with the internal laws of the
state of [Vermont] without giving effect to principles of conflict of laws.
g. Severability. This is a severable Agreement. In the event that any
provision of this Agreement would require a party to take action prohibited by
applicable federal or state law or prohibit a party from taking action required
by applicable federal or state law, then it is the intention of the parties
hereto that such provision shall be enforced to the extent permitted under the
law, and, in any event, that all other provisions of this Agreement shall
remain valid and duly enforceable as if the provision at issue had never been a
part hereof.
h. Section and Other Headings. The headings in this Agreement are
included for convenience of reference only and in no way define or delineate
any of the provisions hereof or otherwise affect their construction or effect.
i. Counterparts. This Agreement may be executed in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
j. Regulation. This Agreement shall be subject to the provisions of the
1933 Act, 1934 Act and 1940 Act and the Regulations and the rules and
regulations of the NASD, from time to time in effect, including such exemptions
from the 1940 Act as the SEC may grant, and the terms hereof shall be
interpreted and construed in accordance therewith.
- 9 -
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by such authorized officers on the date specified below.
NATIONAL LIFE INSURANCE COMPANY
By:
-----------------------------
Name:
Title:
EQUITY SERVICES, INC.
By:
-----------------------------
Name:
Title:
- 10 -
<PAGE> 11
SCHEDULE 1
<TABLE>
<CAPTION>
==========================================================================
REGISTRATION VARIABLE
VARIABLE POLICY FORM STATEMENT ACCOUNT
==========================================================================
<S> <C> <C>
1. Variable life Form S-6 National Variable Life
policy File No. 33-91938 Insurance Account
File No. 811-
==========================================================================
</TABLE>
<PAGE> 12
SCHEDULE 2
SCHEDULES OF SALES COMMISSIONS
Commission Paid to
Year Distributor (% of Premium)
<PAGE> 1
EXHIBIT 1(A)(3)(c)
SCHEDULE OF SALES COMMISSIONS
Agents are compensated for sales of this Policy on a commission and service fee
basis. The compensation is calculated as a percentage of premium paid up to
the Commissionable Target Premium (a target amount used only to determine
commission payments), plus a percentage of premium paid in excess of
Commissionable Target Premium. The schedule of percentage is as follows:
Percent of Premium up to Commissionable Target Premium:
<TABLE>
<CAPTION>
Policy Year Commission Service Fee
- ----------- ---------- -----------
<S> <C> <C>
1 45%
2-4 3% 2.5%
5 5.5%
6-10 4.0%
11+ 1.5%
</TABLE>
Percent of Premium in excess of Commissionable Target Premium:
<TABLE>
<CAPTION>
Policy Year Commission Service Fee
- ----------- ---------- -----------
<S> <C> <C>
1 3%
2-4 3.0%
5 3.0%
6-10 3.0%
11+ 1.5%
</TABLE>
<PAGE> 1
EXHIBIT 1(A)(8)(a)
PARTICIPATION AGREEMENT
BY AND AMONG
MARKET STREET FUND, INC.
AND
NATIONAL LIFE INSURANCE COMPANY
AND
EQUITY SECURITIES, INC.
THIS AGREEMENT, made and entered into this ____ day of
_________ 1996 by and among NATIONAL LIFE INSURANCE COMPANY, a Vermont
insurance company (hereinafter the "Company"), on its own behalf and on behalf
of NATIONAL VARIABLE LIFE INSURANCE ACCOUNT (hereinafter, the "Account"), a
segregated asset account of the Company, the MARKET STREET FUND, INC., an
open-end diversified management investment company organized under the laws of
the State of Maryland (hereinafter the "Fund") and EQUITY SERVICES, INC., a
Vermont corporation (hereinafter the "Underwriter").
WHEREAS, the Fund engages in business as an open-end
diversified, management investment company and is available to act as the
investment vehicle for separate accounts established for variable life
insurance contracts and variable annuity contracts to be offered by insurance
companies which have entered into participation agreements substantially
identical to this Agreement (hereinafter "Participating Insurance Companies");
and
WHEREAS, beneficial interests in the Fund are divided into
several series of shares, each representing the interest in a particular
managed portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Fund has obtained an order from the Securities
and Exchange Commission (the "SEC"), dated October 3, 1985 (File No. 812-6143),
- 1 -
<PAGE> 2
granting Participating Insurance Companies and variable life insurance separate
accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940
Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Mixed and Shared
Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management
investment company under the 1940 Act and its shares are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Company has registered or will register certain
flexible premium adjustable benefit variable life insurance policies (the
"Policies") under the 1933 Act; and
WHEREAS, the Account is a duly organized, validly existing
segregated asset account, established by resolution of the Board of Directors
of the Company under the insurance laws of Vermont, to set aside and invest
assets attributable to the Policies; and
WHEREAS, the Company has registered the Account as a unit
investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a brokerdealer with
the SEC under the Securities Exchange Act of 1934, as amended (hereinafter the
"1934 Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws
and regulations, the Company intends to purchase shares in the Portfolios on
behalf of
- 2 -
<PAGE> 3
the Account to fund the Policies and the Underwriter is authorized to sell such
shares to unit investment trusts such as the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those
shares of the Fund which the Company orders on behalf of the Account, executing
such orders on a daily basis at the net asset value next computed after receipt
and acceptance by the Fund or its agent of the order for the shares of the
Fund.
1.2. The Fund agrees to make its shares available
indefinitely for purchase at the applicable net asset value per share by
Participating Insurance Companies and their separate accounts on those days on
which the Fund calculates its net asset value pursuant to rules of the SEC;
provided, however, that the Board of Directors of the Fund (hereinafter the
"Directors") may refuse to sell shares of any Portfolio to any person, or
suspend or terminate the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Directors, acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, necessary in the
best interests of the shareholders of any Portfolio.
1.3. The Fund and the Underwriter agree that shares of the
Fund will be sold only to Participating Insurance Companies and their separate
accounts. No shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares
to any insurance company or separate account unless an agreement containing
provisions substantially the same as Articles I, III, V, and VII of this
Agreement is in effect to govern such sales.
- 3 -
<PAGE> 4
1.5. The Fund agrees to redeem for cash, upon the Company's
request, any full or fractional shares of the Fund held by the Company,
executing such requests on a daily basis at the net asset value next computed
after receipt and acceptance by the Fund or its agent of the request for
redemption.
1.6. The Company agrees to purchase and redeem the shares of
each Portfolio offered by the then current prospectus of the Fund in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the Policies shall be invested in the Fund, or in the Company's
general account; provided that such amounts may also be invested in an
investment company other than the Fund if (a) such other investment company, or
series thereof, has investment objectives or policies that are substantially
different from the investment objectives and policies of all the Portfolios of
the Fund; or (b) the Company gives the Fund and the Underwriter 45 days written
notice of its intention to make such other investment company available as a
funding vehicle for the Policies; or (c) such other investment company was
available as a funding vehicle for the Policies prior to the date of this
Agreement and the Company so informs the Fund and Underwriter prior to their
signing this Agreement; or (d) the Fund or Underwriter consents to the use of
such other investment company.
1.7. The Company shall pay for Fund shares on the same day
that it places an order to purchase Fund shares. Payment shall be in federal
funds transmitted by wire.
1.8. Issuance and transfer of the Fund's shares will be by
book entry only. Stock certificates will not be issued to the Company or the
Account. Shares ordered from the Fund will be recorded in an appropriate title
for the Account or the appropriate subaccount of the Account.
1.9. The Fund shall furnish same day notice (by wire or
telephone, followed by written confirmation) to the Company of any income
dividends or
- 4 -
<PAGE> 5
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such dividends and distributions as are payable on the
Portfolio shares in additional shares of that Portfolio. The Company reserves
the right to revoke this election and to receive all such dividends and
distributions in cash. The Fund shall notify the Company of the number of
shares so issued as payment of such dividends and distributions.
1.10. The Fund shall make the net asset value per share for
each Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Policies
are or will be registered under the 1933 Act and that the Policies will be
issued and sold in compliance with all applicable federal and state laws. The
Company further represents and warrants that it is an insurance company duly
organized and in good standing under applicable law and that it has legally and
validly established the Account as a segregated asset account under Section
[___________] of the Vermont Insurance Code and has registered the Account as a
unit investment trust in accordance with the provisions of the 1940 Act to
serve as segregated investment accounts for the Policies, and that it will
maintain such registration for so long as any Policies are outstanding. The
Company shall amend the registration statement under the 1933 Act for the
Policies and the registration statement under the 1940 Act for the Account from
time to time as required in order to effect the continuous offering of the
Policies or as may otherwise be required by applicable law. The Company shall
register and qualify the Policies for sale in accordance with the securities
laws of the various states only if and to the extent deemed necessary by the
Company.
- 5 -
<PAGE> 6
2.2. The Company represents that it believes, in good faith,
that the Policies are currently and at the time of issuance will be treated as
life insurance policies under applicable provisions of the Internal Revenue
Code of 1986, and that it will make every effort to maintain such treatment and
that it will notify the Fund and the Underwriter immediately upon having a
reasonable basis for believing that the Policies have ceased to be so treated
or that they might not be so treated in the future.
2.3. The Fund represents and warrants that Fund shares sold
pursuant to this Agreement shall be registered under the 1933 Act and duly
authorized for issuance in accordance with applicable law and that the Fund is
and shall remain registered under the 1940 Act for as long as the Fund shares
are sold. The Fund shall amend the registration statement for its shares under
the 1933 Act and the 1940 Act from time to time as required in order to effect
the continuous offering of its shares. The Fund shall register and qualify the
shares for sale in accordance with the laws of the various states only if and
to the extent deemed advisable by the Fund or the Underwriter.
2.4. The Fund represents that it believes, in good faith,
that it is currently qualified as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code of 1986, and that it will make every
effort to maintain such qualification (under Subchapter M or any successor or
similar provision) and that it will notify the Company immediately upon having
a reasonable basis for believing that it has ceased to so qualify or that it
might not so qualify in the future.
2.5. The Fund represents that its investment objectives,
policies and restrictions comply with the [VERMONT] Insurance Code as it
applies to the Fund. To the extent feasible and consistent with market
conditions, the Fund will adjust its investments to comply with requirements of
the Company's domiciliary state upon written notice from the Company of such
requirements and proposed
- 6 -
<PAGE> 7
adjustments, it being agreed and understood that in any such case the Fund
shall be allowed a reasonable period of time under the circumstances after
receipt of such notice to make any such adjustment.
2.6. The Fund currently does not intend to make any payments
to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although it may make such payments in the future. To the extent
that it decides to finance distribution expenses pursuant to Rule 12b-1, the
Fund undertakes to have a board of directors, a majority of whom are not
interested persons of the Fund, formulate and approve any plan under Rule 12b-1
to finance distribution expenses.
2.7. The Underwriter represents and warrants that it is a
member in good standing of the NASD and is registered as a broker-dealer with
the SEC. The Underwriter further represents that it will sell and distribute
the Fund shares in accordance with the 1933 Act, the 1934 Act, and the 1940
Act.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company, at the
Company's expense, with as many copies of the Fund's current prospectus as the
Company may reasonably request for use with prospective Policy owners and
applicants. The Underwriter shall print and distribute, at the Fund's expense,
as many copies as necessary for distribution to existing Policy owners or
partici pants. If requested by the Company in lieu thereof, the Fund shall
provide such documentation and other assistance as is reasonably necessary in
order for the Company to have the new prospectus for the Policies and the
Fund's new prospectus printed together in one document, in such case the Fund
shall bear its share of expenses as described above.
- 7 -
<PAGE> 8
3.2. The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter (or, in
the Fund's discretion, the Prospectus shall state that such Statement is
available from the Fund), and the Underwriter (or the Fund) shall provide such
Statement, at its expense, to the Company and to any owner of or participant
under a Policy who requests such Statement or, at the Company's expense, to any
prospective Policy owner and applicant who requests such statement.
3.3. The Fund, at its expense, shall provide the Company with
copies of its proxy material, reports to shareholders and other communications
to shareholders in such quantity as the Company shall reasonably require and
shall bear the costs of distributing them to existing Policy owners or
participants.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Policy
owners or participants;
(ii) vote the Fund shares held in the Account in
accordance with instructions received from
Policy owners or participants; and
(iii) vote Fund shares held in the Account for which
no timely instructions have been received, and
any Fund shares held in the Company's general
account, in the same proportion as Fund
shares of such Portfolio for which
instructions have been received;
so long as and to the extent that the SEC continues to interpret the 1940 Act
to require passthrough voting privileges for variable policy owners. The
Company reserves the right to vote Fund shares held in any segregated asset
account or in its general account in its own right, to the extent permitted by
law. Participating Insurance Companies shall be responsible for assuring that
each of their separate accounts participating in the Fund calculates voting
privileges in a manner consistent with other Participating Insurance Companies.
- 8 -
<PAGE> 9
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either
provide for annual meetings or comply with Section 16(c) of the 1940 Act
(although the Fund is not one of the trusts described in Section 16(c) of that
Act) as well as with Sections 16(a) and, if and when applicable, 16(b).
Further, the Fund will act in accordance with the SEC interpretation of the
requirements of Section 16(a) with respect to periodic elections of directors
and with whatever rules the Commission may promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished,
to the Fund or the Underwriter, each piece of sales literature or other
promotional material in which the Fund or the Underwriter is named, at least
fifteen business days prior to its use. No such material shall be used if the
Fund or the Underwriter objects to such use within fifteen business days after
receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Policies other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or by
the Underwriter, except with the permission of the Fund or the Underwriter.
The Fund and the Underwriter agree to respond to any request for approval on a
prompt and timely basis.
4.3. The Fund or the Underwriter shall furnish, or shall cause to
be furnished, to the Company or its designee, each piece of sales literature or
other
- 9 -
<PAGE> 10
promotional material in which the Company or its separate account(s) is named,
at least fifteen business days prior to its use. No such material shall be
used if the Company objects to such use within fifteen business days after
receipt of such material.
4.4. The Fund and the Underwriter shall not give any information
or make any representations on behalf of the Company or concerning the Company,
the Account, or the Policies other than the information or representations
contained in a registration statement or prospectus for the Policies, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for the Account which are in the public domain
or approved by the Company for distribution to Policy owners or participants,
or in sales literature or other promotional material approved by the Company,
except with the permission of the Company. The Company agrees to respond to
any request for approval on a prompt and timely basis.
4.5. For purposes of this Article IV, the phrase "sales
literature or other promotional material" includes, but is not limited to,
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures, or other
public media), sales literature (i.e., any written communication distributed or
made generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts,
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees, registration
statements, prospectuses, statements of additional information, shareholder
reports, and proxy materials and any other material constituting sales
literature or advertising under NASD rules, the 1940 Act or the 1933 Act.
- 10 -
<PAGE> 11
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other
compensation to the Company under this Agreement, except that if the Fund or
any Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance
distribution expenses, then, subject to obtaining any required exemptive orders
or other regulatory approvals, the Underwriter may make payments to the Company
or to the underwriter for the Policies if and in amounts agreed to by the
Underwriter in writing. Currently, no such payments are contemplated.
5.2. All expenses incident to performance by the Fund of this
Agreement shall be paid by the Fund to the extent permitted by law. The Fund
shall bear the expenses for the cost of registration and qualification of the
Fund's shares under federal law, and, if applicable, under any state securities
law, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting in type, printing and
distributing the prospectuses, the proxy materials and reports to existing
shareholders and Policy owners, the preparation of all statements and notices
required by any federal or state law, all taxes on the issuance or transfer of
the Fund's shares, and any expenses permitted to be paid or assumed by the Fund
pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act.
ARTICLE VI. Diversification
6.1. The Fund will comply with Section 817(h) of the Internal
Revenue Code of 1986, and all regulations issued thereunder, relating to the
diversification requirements for variable annuity, endowment, and life
insurance policies.
- 11 -
<PAGE> 12
ARTICLE VII. Potential Conflicts
7.1. The Board of Directors of the Fund (the "Board") will
monitor the Fund for the existence of any material irreconcilable conflict
between the interests of the policy owners of all separate accounts investing
in the Fund. An irreconcilable material conflict may arise for a variety of
reasons, including: (a) an action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio
are being managed; (e) a difference in voting instructions given by
Participating Insurance Companies or by variable annuity contract and variable
life insurance policy owners; or (f) a decision by an insurer to disregard the
voting instructions of policy owners. The Board shall promptly inform the
Company if it determines that an irreconcilable material conflict exists and
the implications thereof. A majority of the Board shall consist of persons who
are not "interested" persons of the Fund.
7.2. The Company has reviewed a copy of the Mixed and Shared
Funding Exemptive Order, and in particular, has reviewed the conditions to the
requested relief set forth therein. As set forth in the Mixed and Shared
Funding Exemptive Order, the Company will report any potential or existing
conflicts of which it is aware to the Board. The Company agrees to assist the
Board in carrying out its responsibilities under the Mixed and Shared Funding
Exemptive Order, by providing the Board with all information reasonably
necessary for the Board to consider any issues raised. This includes, but is
not limited to, an obligation by the Company to inform the Board whenever
Policy owner voting instructions are disregarded. The Board shall record in
its minutes or other
- 12 -
<PAGE> 13
appropriate records, all reports received by it and all action with regard to a
conflict.
7.3. If it is determined by a majority of the Board, or a
majority of its disinterested Directors, that an irreconcilable material
conflict exists, the Company and other Participating Insurance Companies shall,
at their expense and to the extent reasonably practicable (as determined by a
majority of the disinterested Directors), take whatever steps are necessary to
remedy or eliminate the irreconcilable material conflict, up to and including:
(1) withdrawing the assets allocable to some or all of the separate accounts
from the Fund or any Portfolio and reinvesting such assets in a different
investment medium, including (but not limited to) another Portfolio of the
Fund, or submitting the question whether such segregation should be implemented
to a vote of all affected policy owners and, as appropriate, segregating the
assets of any appropriate group (i.e., variable annuity contract owners or
variable life insurance contract owners, of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
policy owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account.
7.4. If the Company's disregard of voting instructions could
conflict with the majority of Policy owner voting instructions, and the
Company's judgment represents a minority position or would preclude a majority
vote, the Company is permitted to withdraw the Account's investment in the
Fund. The Underwriter and Fund shall continue to accept and implement orders
by the Company for the purchase (and redemption) of shares of the Fund until
the Company notifies the Underwriter and the Fund that it is withdrawing the
Account's investment in the Fund pursuant to this Section 7.4.
- 13 -
<PAGE> 14
7.5. If a particular state insurance regulator's decision
applicable to the Company conflicts with the majority of other state insurance
regulators, then the Company is permitted to withdraw the Account's investment
in the Fund. The Underwriter and Fund shall continue to accept and implement
orders by the Company for the purchase (and redemption) of shares of the Fund
until the Company notifies the Underwriter and the Fund that it is withdrawing
the Account's investment in the Fund pursuant to this Section 7.5.
7.6. For purposes of Section 7.3 of this Agreement, the Board
shall determine whether any proposed action adequately remedies any
irreconcilable material conflict, but in no event will the Fund be required to
establish a new funding medium for the Policies. The Company shall not be
required by Section 7.3 to establish a new funding medium for the Policies if
an offer to do so has been declined by vote of a majority of Policy owners
materially adversely affected by the irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any
provision of the Act or the rules promulgated thereunder with respect to mixed
or shared funding (as defined in the Mixed and Shared Funding Exemptive Order)
on terms and conditions materially different from those contained in the Mixed
and Shared Funding Exemptive Order, then (a) the Fund and/or the Participating
Insurance Companies, as appropriate, shall take such steps as may be necessary
to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted,
to the extent such rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2,
7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent
that terms and conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
- 14 -
<PAGE> 15
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a). The Company agrees to indemnify and hold harmless the
Fund, the Underwriter, and each of the Fund's or the Underwriter's directors,
officers, employees or agents and each person, if any, who controls or is
associated with the Fund or the Underwriter within the meaning of such terms
under the federal securities laws (collectively, the "indemnified parties" for
purposes of this Section 8.1) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Company) or litigation (including legal and other expenses), to which the
indemnified parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of the Fund's shares and:
(i) arise out of or are based upon any untrue
statements or alleged untrue statements of any
material fact contained in the registration
statement or prospectus for the Policies or
contained in the Policies or sales literature for
the Policies (or any amendment or supplement to
any of the foregoing), or arise out of or are
based upon the omission or the alleged omission
to state therein a material fact required to be
stated therein or necessary to make the
statements therein not misleading in light of the
circumstances in which they were made; provided
that this agreement to indemnify shall not apply
as to any indemnified party if such statement or
omission or such alleged statement or omission
was made in reliance upon and in conformity with
information furnished to the Company by or on
behalf of the Fund for use in the registration
statement or prospectus for the Policies or in
the Policies or sales literature (or any
amendment or supplement) or otherwise for use in
connection with the sale of the Policies or Fund
shares; or
(ii) arise out of or as a result of statements or
representations by or on behalf of the Company
(other than statements or representations
contained in the Policy or Fund registration
statement, the Policy or Fund prospectus or sales
literature for the Policies or the Fund not
supplied by the Company or persons under its
control) or wrongful con-
- 15 -
<PAGE> 16
duct of the Company or persons under its control,
with respect to the sale or distribution of the
Policies or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a
registration statement, prospectus, or sales
literature of the Fund or any amendment thereof
or supplement thereto or the omission or alleged
omission to state therein a material fact
required to be stated therein or necessary to
make the statements therein not misleading in
light of the circumstances in which they were
made, if such a statement or omission was made in
reliance upon and in conformity with information
furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any failure by the Company to
provide the services and furnish the materials or
to make any payments under the terms of this
Agreement; or
(v) arise out of any material breach by the Company of
this Agreement;
except to the extent provided in Sections 8.1(b) and 8.4 hereof. This
indemnification shall be in addition to any liability which the Company may
otherwise have.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an indemnified party would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence in the
performance of his or her duties or by reason of his or her reckless disregard
of obligations or duties under this Agreement or to the Fund.
8.1(c). The indemnified parties will promptly notify the Company
of the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund shares or the Policies or the operation
of the Fund.
8.2. Indemnification By the Underwriter
- 16 -
<PAGE> 17
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors, officers, employees or agents and each
person, if any, who controls or is associated with the Company within the
meaning of such terms under the federal securities laws (collectively, the
"indemnified parties" for purposes of this Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Underwriter) or litigation (including legal and
other expenses) to which the indemnified parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any
material fact contained in the registration
statement or prospectus or sales literature of
the Fund (or any amendment or supplement to any
of the foregoing), or arise out of or are based
upon the omission or the alleged omission to
state therein a material fact required to be
stated therein or necessary to make the
statements therein not misleading in light of the
circumstances in which they were made; provided
that this agreement to indemnify shall not apply
as to any indemnified party if such statement or
omission or such alleged statement or omission
was made in reliance upon and in conformity with
information furnished to the Underwriter or Fund
by or on behalf of the Company for use in the
registration statement or prospectus for the Fund
or in sales literature for the Fund (or any
amendment or supplement thereto) or otherwise for
use in connection with the sale of the Policies
or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the Policies or in
the Policy or Fund registration statement, the
Policy or Fund prospectus or sales literature for
the Policies or the Fund not supplied by the
Underwriter or persons under its control) or
wrongful conduct of the Underwriter or persons
under its control, with respect to the sale or
distribution of the Policies or Fund shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in
a registration statement,
- 17 -
<PAGE> 18
prospectus, or sales literature covering the
Policies (or any amendment thereof or supplement
thereto), or the omission or alleged omission to
state therein a material fact required to be
stated therein or necessary to make the statement
or statements therein not misleading in light of
the circumstances in which they were made, if
such statement or omission was made in reliance
upon and in conformity with information furnished
to the Company by or on behalf of the
Underwriter; or
(iv) arise out of any material breach by the
Underwriter of this Agreement;
except to the extent provided in Sections 8.2(b) and 8.4 hereof. This
indemnification shall be in addition to any liability which the Underwriter may
otherwise have.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an indemnified party would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence in the
performance of his or her duties or by reason of his or her reckless disregard
of obligations and duties under this Agreement or to the Company or the
Account.
8.2(c). The Company agrees promptly to notify the Underwriter of
the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Policies
or the operation of the Account.
8.3. Indemnification by the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the
Company and each of its directors, officers, employees or agents and each
person, if any, who controls or is associated with the Company within the
meaning of such terms under the federal securities laws (collectively, the
"indemnified parties" for the purpose of this Section 8.3) against any and all
losses, claims, damages or liabilities (including amounts paid in settlement
with the written consent of the
- 18 -
<PAGE> 19
Fund) or litigation (including legal and other expenses) to which they or any
of them may become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any
material fact contained in the registration
statement or prospectus for the Fund or sales
literature of the Fund (or any amendment or
supplement thereto), or arise out of or are based
upon the omission or the alleged omission to
state therein a material fact required to be
stated therein or necessary to make the
statements therein not misleading in light of the
circumstances in which they were made; provided
that this agreement to indemnify shall not apply
if such statement or omission or alleged
statement or alleged omission was made in
reliance upon and in conformity with information
furnished to the Fund by or on behalf of the
Company for use in the registration statement or
prospectus for the Fund or sales literature for
the Fund (or any amendment or supplement thereto)
or otherwise for use in connection with the sale
or distribution of the Policies or Fund shares;
or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the Policies or the
Policy or Fund registration statement or the
Policy or Fund prospectus or sales literature for
the Policy or the Fund not supplied by the Fund
or persons under its control) or wrongful conduct
of the Fund or the Fund's investment adviser or
persons under their control, with respect to the
sale or distribution of the Policies or Fund
shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the
registration statement or prospectus or sales
literature covering the Policies (or any
amendment or supplement thereto), or the omission
or alleged omission to state therein a material
fact required to be stated therein or necessary
to make the statements therein not misleading in
light of the circumstances in which they were
made, if such statement or omission was made in
reliance upon and in conformity with information
furnished by or on behalf of the Fund to the
Company; or
(iv) arise as a result of any failure by the Fund to provide
the services and furnish the materials under the
terms of this Agreement (including a failure,
whether unintentional or
- 19 -
<PAGE> 20
in good faith or otherwise, to comply with the
diversification requirements specified in Article
VI of this Agreement); or
(v) arise out of any material breach by the Fund of
this Agreement;
except to the extent provided in Section 8.3(b) and 8.4 hereof. This
indemnification shall be in addition to any liability which the Fund may
otherwise have.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation to which an indemnified party would otherwise be subject by reason
of willful misfeasance, bad faith, or gross negligence in the performance of
his or her duties or by reason of his or her reckless disregard of obligations
or duties under this Agreement or to the Company or the Account.
8.3(c). The indemnified parties will promptly notify the Fund of
the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund Shares or the Policies or the operation
of the Fund.
8.4. Indemnification Procedure
Any person obligated to provide indemnification under this Article
VIII ("indemnifying party" for the purpose of this Section 8.4) shall not be
liable under the indemnification provisions of this Article VIII with respect
to any claim made against a party entitled to indemnification under this
Article VIII ("indemnified party" for the purpose of this Section 8.4) unless
such indemnified party shall have notified the indemnifying party in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
indemnified party (or after such party shall have received notice of such
service on any designated agent), but failure to notify the
- 20 -
<PAGE> 21
indemnifying party of any such claim shall not relieve the indemnifying party
from any liability which it may have to the indemnified party against whom such
action is brought under the indemnification provision of this Article VIII,
except to the extent that the failure to notify results in the failure of
actual notice to the indemnifying party and such indemnifying party is damaged
solely as a result of failure to give such notice. In case any such action is
brought against the indemnified party, the indemnifying party will be entitled
to participate, at its own expense, in the defense thereof. The indemnifying
party also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from the
indemnifying party to the indemnified party of the indemnifying party's
election to assume the defense thereof, the indemnified party shall bear the
fees and expenses of any additional counsel retained by it, and the
indemnifying party will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently
in connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnifying party and the indemnified party
shall have mutually agreed to the retention of such counsel or (ii) the named
parties to any such proceeding (including any impleaded parties) include both
the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent but
if settled with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this Article VIII.
The
- 21 -
<PAGE> 22
indemnification provisions contained in this Article VIII shall survive any
termination of this Agreement.
ARTICLE IX. Applicable Law.
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Vermont.
9.2. This Agreement shall be subject to the provisions of the
1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
grant (including, but not limited to, the Mixed and Shared Funding Exemptive
Order) and the terms hereof shall be interpreted and construed in accordance
therewith.
ARTICLE X. Termination
10.1. This Agreement shall terminate:
(a) at the option of any party upon one-year advance
written notice to the other parties; or
(b) at the option of the Company if shares of all
Portfolios are not reasonably available to meet the requirements of the
Policies as determined by the Company. Prompt notice of the election to
terminate for such cause shall be furnished by the Company; or
(c) at the option of the Fund upon institution of formal
proceedings against the Company by the NASD, the SEC, the Vermont Insurance
Commissioner or any other regulatory body regarding the Company's duties under
this Agreement or related to the sale of the Policies, the operation of the
Account, or the purchase of the Fund shares; or
- 22 -
<PAGE> 23
(d) at the option of the Company upon institution of
formal proceedings against the Fund by the NASD, the SEC, or any state
securities or insurance department or any other regulatory body; or
(e) at the option of the Company or the Fund upon receipt
of any necessary regulatory approvals and/or the vote of the Policy owners
having an interest in the Account (or any subaccount) to substitute the shares
of another investment company for the corresponding Portfolio shares of the
Fund in accordance with the terms of the Policies for which those Portfolio
shares had been selected to serve as the underlying investment media. The
Company will give 30 day's prior written notice to the Fund of the date of any
proposed vote or other action taken to replace the Fund's shares; or
(f) at the option of the Company or the Fund upon a
determination by a majority of the Directors of the Fund, or a majority of its
disinterested Directors, that an irreconcilable material conflict exists among
the interests of (i) all contract owners of variable insurance products of all
separate accounts or (ii) the interests of the Participating Insurance
Companies investing in the Fund; or
(g) at the option of the Company if the Company has
withdrawn the Account's investment in the Fund because the Company's disregard
of voting instructions could conflict with the majority of policy owner voting
instructions and if the Company's judgment represents a minority position or
would preclude a majority vote; or
(h) at the option of the Company if the Company has
withdrawn the Account's investment in the Fund because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state insurance regulators;
- 23 -
<PAGE> 24
(i) at the option of the Company if the Fund ceases to
qualify as a Regulated Investment Company under Subchapter M of the Internal
Revenue Code of 1986, or under any successor or similar provision, or if the
Company reasonably believes that the Fund may fail to so qualify; or
(j) at the option of the Company if the Fund fails to meet
the diversification requirements specified in Article VI hereof; or
(k) at the option of any party to this Agreement, upon
another party's material breach of any provision of this Agreement.
10.2. It is understood and agreed that the right to terminate
this Agreement pursuant to Section 10.1(a) may be exercised for any reason or
for no reason.
10.3. Except as necessary to implement Policy owner initiated
transactions, or as required by state insurance laws or regulations, the
Company shall not redeem Fund shares attributable to the Policies (as opposed
to Fund shares attributable to the Company's assets held in the Account), and
the Company shall not prevent Policy owners from allocating payments to a
Portfolio that was otherwise available under the Policies, until 90 days after
the Company shall have notified the Fund or Underwriter of its intention to do
so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Mr. Stanley R. Reber
President
Market Street Fund, Inc.
1600 Market Street
- 24 -
<PAGE> 25
Philadelphia, PA 19103
If to the Company:
D. Russell Morgan, Esq.
Counsel
National Life Insurance Company
One National Life Drive
Montpelier, VT 05604
If to the Underwriter:
Ms. Pauline Stebar, Director of Compliance
Equity Services, Inc.
One National Life Drive
Montpelier, VT 05604
ARTICLE XII. Miscellaneous
12.1. All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Directors, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2. Subject to law and regulatory authority, each party hereto
shall treat as confidential all information reasonably identified as such in
writing by any other party hereto (including without limitation the names and
addresses of the owners of the Policies) and, except as contemplated by this
Agreement, shall not disclose, disseminate or utilize such confidential
information until such time as it may come into the public domain without the
express prior written consent of the affected party.
12.3. The captions in this Agreement are included for convenience
of reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or
more counterparts, each of which taken together shall constitute one and the
same instrument.
- 25 -
<PAGE> 26
12.5. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
12.6. This Agreement shall not be assigned by any party hereto
without the prior written consent of all the parties.
12.7. Each party hereto shall cooperate with each other party and
all appropriate governmental authorities (including without limitation the SEC,
the NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
12.8. Each party represents that the execution and delivery of
this Agreement and the consummation of the transactions contemplated herein
have been duly authorized by all necessary corporate action, as applicable, by
such party and when so executed and delivered this Agreement will be the valid
and binding obligation of such party enforceable in accordance with its terms.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
Company:
NATIONAL LIFE INSURANCE COMPANY
SEAL By:
------------------------------
Date:
Fund:
MARKET STREET FUND, INC.
- 26 -
<PAGE> 27
SEAL By:
------------------------------
Date:
Underwriter:
EQUITY SERVICES, INC.
SEAL By:
------------------------------
Date:
- 27 -
<PAGE> 1
EXHIBIT 1(A)(8)(b)
AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT
AMONG
VARIABLE INSURANCE PRODUCTS FUND
FIDELITY DISTRIBUTORS CORPORATION
AND
NATIONAL LIFE INSURANCE COMPANY (AS SUCCESSOR TO VERMONT LIFE INSURANCE
COMPANY)
THIS AMENDMENT NO.1 to the Participation Agreement by and among Vermont
Life Insurance Company (since merged into National Life Insurance Company),
Variable Insurance Products Fund (the "Fund"), and Fidelity Distributors
Corporation (the "Underwriter"), dated August 1, 1989 (the "Participation
Agreement"), and is made and entered into this ______ day of January, 1996.
1. Schedule A is hereby amended to add the following contract forms:
National Life Contract Form 7206 (Flexible Premium Adjustable Benefit Variable
Life Insurance)
National Life Contract Form 7207 (Flexible Premium Adjustable Benefit Variable
Life Insurance (Unisex Version)
2. Schedule C is hereby amended to add the following separate account:
National Variable Life Insurance Account - February 5, 1985
3. Pursuant to section 1.6 hereof, the Fund and the Distributor hereby
consents to the investment of net amounts available under the variable
contracts listed in paragraph 1 above in the following Funds other than the
Fund: The Market Street Fund, and the Alger American Fund.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
No. 1 to the Particiaption Agreement to be executed in its name and on its
behalf by its duly authorized representative and its seal to be affixed hereto
as of the date specified below.
NATIONAL LIFE INSURANCE COMPANY
by
----------------------------
Name:
Title:
VARIABLE INSURANCE PRODUCTS FUND
by
----------------------------
Name:
Title:
FIDELITY DISTRIBUTORS CORPORATION
by
----------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 1(A)(8)(c)
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this ________, day _____________, 1995, by and
among The Alger American Fund (the "Trust"), an open-end management investment
company organized as a Massachusetts business trust, ________________________,
a life insurance company organized as a corporation under the laws of the State
of __________ (the "Company"), on its own behalf and on behalf of each
segregated asset account of the Company set forth in Schedule A, as may be
amended from time to time (the "Accounts"), and Fred Alger and Company,
Incorporated, a Delaware corporation, the Trust's distributor (the
"Distributor").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company
under the Investment Company Act of 1940, as amended (the " 1940 Act"), and has
an effective registration statement relating to the offer and sale of the
various series of its shares under the Securities Act of 1933, as amended (the
" 1933 Act");
WHEREAS, the Trust and the Distributor desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, shares of beneficial interest in the Trust are divided into the
following series which are available for purchase by the Company for the
Accounts: Alger American Small Capitalization Portfolio, Alger American Growth
Portfolio, Alger American Income & Growth Portfolio, Alger American Balanced
Portfolio, Alger American MidCap Growth Portfolio, and Alger American Leveraged
AllCap Portfolio;
WHEREAS, the Trust has received an order from the Commission, dated
February 17, 1989 (File No. 812-7076), granting Participating Insurance
Companies and their separate accounts exemptions from the provisions of
Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios of the Trust to be sold to and held by variable annuity and variable
life insurance separate accounts of both affiliated and unaffiliated life
insurance companies (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and variable annuity contracts to be
issued by the Company under which the Portfolios are to be made available as
investment vehicles (the "Contracts");
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised;
WHEREAS, the Company desires to use shares of one or more Portfolios as
investment vehicles for the Accounts;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
<PAGE> 2
ARTICLE I.
PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
1.1. For purposes of this Article L the Company shall be the Trust's agent for
the receipt from each account of purchase orders and requests for
redemption pursuant to the Contracts relating to each Portfolio, provided
that the Company notifies the Trust of such purchase orders and requests
for redemption by 9:30 a.m. Eastern time on the next following Business
Day, as defined in Section 1.3.
1.2. The Trust shall make shares of the Portfolios available to the Accounts
at the net asset value next computed after receipt of a purchase order by
the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust describing
Portfolio purchase procedures. The Company will transmit orders from
time to time to the Trust for the purchase and redemption of shares of
the Portfolios. The Trustees of the Trust (the "Trustees") may refuse to
sell shares of any Portfolio to any person, or suspend or terminate the
offering of shares of any Portfolio if such action is required by law or
by regulatory authorities having jurisdiction or if, in the sole
discretion of the Trustees acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, such action
is deemed in the best interests of the shareholders of such Portfolio.
1.3. The Company shall pay for the purchase of shares of a Portfolio on behalf
of an Account with federal funds to be transmitted by wire to the Trust,
with the reasonable expectation of receipt by the Trust by 2:00 p.m.
Eastern time on the next Business Day after the Trust (or its agent)
receives the purchase order. Upon receipt by the Trust of the federal
funds so wired, such funds shall cease to be the responsibility of the
Company and shall become the responsibility of the Trust for this
purpose. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the Commission.
1.4. The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the
net asset value next computed after receipt by the Trust (or its agent)
of the request for redemption, as established in accordance with the
provisions of the then current prospectus of the Trust describing
Portfolio redemption procedures. The Trust shall make payment for such
shares in the manner established from time to time by the Trust.
Proceeds of redemption with respect to a Portfolio will normally be paid
to the Company for an Account in federal funds transmitted by wire to the
Company by order of the Trust with the reasonable expectation of receipt
by the Company by 2:00 p.m. Eastern time on the next Business Day after
the receipt by the Trust (or its agent) of the request for redemption.
Such payment may be delayed if, for example, the Portfolio's cash
position so requires or if extraordinary market conditions exist, but in
no event shall payment be delayed for a greater period than is permitted
by the 1940 Act. The Trust reserves the right to suspend the right of
redemption, consistent with Section 22(e) of the 1940 Act and any rules
thereunder.
1.5. Payments for the purchase of shares of the Trust's Portfolios by the
Company under Section 1.3 and payments for the redemption of shares of
the Trust's Portfolios under Section 1.4 on any Business Day may be
netted against one another for the purpose of determining the amount of
any wire transfer.
1.6. Issuance and transfer of the Trust's Portfolio shares will be by book
entry only. Stock certificates will not be issued to the Company or the
Accounts. Portfolio Shares
PAGE 2
<PAGE> 3
purchased from the Trust will be recorded in the appropriate title for
each Account or the appropriate subaccount of each Account.
1.7. The Trust shall furnish, on or before the ex-dividend date, notice to the
Company of any income dividends or capital gain distributions payable on
the shares of any Portfolio of the Trust. The Company hereby elects to
receive all such income dividends and capital gain distributions as are
payable on a Portfolio's shares in additional shares of that Portfolio.
The Trust shall notify the Company of the number of shares so issued as
payment of such dividends and distributions.
1.8. the Trust shall calculate the net asset value of each Portfolio on each
Business Day, as defined in Section 1.3. The Trust shall make the net
asset value per share for each Portfolio available to the Company or its
designated agent on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best
efforts to make such net asset value per share available to the Company
by 6:30 p.m. Eastern time each Business Day.
1.9. The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their segregated asset accounts, to
the Fund Sponsor or its affiliates and to such other entities as may be
permitted by Section 817(h) of the Code, the regulations hereunder, or
judicial or administrative interpretations thereof No shares of any
Portfolio will be sold directly to the general public. The Company
agrees that it will use Trust shares only for the purposes of funding the
Contracts through the Accounts listed in Schedule A, as amended from time
to time.
1.10. The Trust agrees that all Participating lnsurance Companies shall have
the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding materially to those contained in
Section 2.9 and Article IV of this Agreement.
ARTICLE II.
OBLIGATIONS OF THE PARTIES
2.1. The Trust shall prepare and be responsible for filing with the Commission
and any state regulators requiring such filing all shareholder reports,
notices, proxy materials (or similar materials such as voting instruction
solicitation materials), prospectuses and statements of additional
information of the Trust. The Trust shall bear the costs of registration
and qualification of shares of the Portfolios, preparation and filing of
the documents listed in this Section 2.1 and all taxes to which an issuer
is subject on the issuance and transfer of its shares.
2.2. The Company shall distribute such prospectuses, proxy statements and
periodic reports of the Trust to the Contract owners as required to be
distributed to such Contract owners under applicable federal or state
law.
2.3. The Trust shall provide such documentation (including a final copy of the
Trust's prospectus as set in type or in camera-ready copy) and other
assistance as is reasonably necessary in order for the Company to print
together in one document the current prospectus for the Contracts issued
by the Company and the current prospectus for the Trust. The Trust shall
bear the expense of printing copies of its current prospectus that will
be distributed to existing Contract owners, and the Company shall bear
the expense of printing copies of the Trust's prospectus that are used in
connection with offering the Contracts issued by the Company.
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2.4. The Trust and the Distributor shall provide (1) at the Trust's expense,
one copy of the Trust's current Statement of Additional Information
("SAI") to the Company and to any Contract owner who requests such SAI,
(2) at the Company's expense, such additional copies of the Trust's
current SAI as the Company shall reasonably request and that the Company
shall require in accordance with applicable law in connection with
offering the Contracts issued by the Company.
2.5. The Trust, at its expense, shall provide the Company with copies of its
proxy material, periodic reports to shareholders and other communications
to shareholders in such quantity as the Company shall reasonably require
for purposes of distributing to Contract owners. The Trust, at the
Company's expense, shall provide the Company with copies of its periodic
reports to shareholders and other communications to shareholders in such
quantity as the Company shall reasonably request for use in connection
with offering the Contracts issued by the Company. If requested by the
Company in lieu thereof, the Trust shall provide such documentation
(including a final copy of the Trust's proxy materials, periodic reports
to shareholders and other communications to shareholders, as set in type
or in camera-ready copy) and other assistance as reasonably necessary in
order for the Company to print such shareholder communications for
distribution to Contract owners.
2.6. The Company agrees and acknowledges that the Distributor is the sole
owner of the name and mark "Alger" and that all use of any designation
comprised in whole or part of such name or mark under this Agreement
shall insure to the benefit of the Distributor. Except as provided in
Section 2.5, the Company shall not use any such name or mark on its own
behalf or on behalf of the Accounts or Contracts in any registration
statement, advertisement, sales literature or other materials relating to
the Accounts or Contracts without the prior written consent of the
Distributor. Upon termination of this Agreement for any reason, the
Company shall cease all use of any such name or mark as soon as
reasonably practicable.
2.7. The Company shall furnish, or cause to be furnished, to the Trust or its
designee a copy of each Contract prospectus and/or statement of
additional information describing the Contracts, each report to Contract
owners, proxy statement, application for exemption or request for
no-action letter in which the Trust or the Distributor is named
contemporaneously with the filing of such document with the Commission.
The Company shall furnish, or shall cause to be furnished, to the Trust
or its designee each piece of sales literature or other promotional
material in which the Trust or the Distributor is named, at least five
Business Days prior to its use. No such material shall be used if the
Trust or its designee reasonably objects to such use within three
Business Days after receipt of such material.
2.8. The Company shall not give any information or make any representations or
statements on behalf of the Trust or concerning the Trust or the
Distributor in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from
the registration statement or prospectus for the Trust shares (as such
registration statement and prospectus may be amended or supplemented from
time to time), annual and semi-annual reports of the Trust,
Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as
required by legal process or regulatory authorities or with the prior
written permission of the Trust, the Distributor or their respective
designees. The Trust and the Distributor agree to respond to any request
for approval on a prompt and timely basis. The Company shall adopt and
implement procedures reasonably designed
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<PAGE> 5
to ensure that "broker only" materials including information therein
about the Trust or the Distributor are not distributed to existing or
prospective Contract owners.
2.9. The Trust shall use its best efforts to provide the Company, on a timely
basis, with such information about the Trust, the Portfolios and the
Distributor, in such form as the Company may reasonably require, as the
Company shall reasonably request in connection with the preparation of
registration statements, prospectuses and annual and semi-annual reports
pertaining to the Contracts.
2.10. The Trust and the Distributor shall not give, and agree that no affiliate
of either of them shall give, any information or make any representations
or statements on behalf of the Company or concerning the Company, the
Accounts or the Contracts other than information or representations
contained in and accurately derived from the registration statement or
prospectus for the Contracts (as such registration statement and
prospectus may be amended or supplemented from time to time), or in
materials approved by the Company for distribution including sales
literature or other promotional materials, except as required by legal
process or regulatory authorities or with the prior written permission of
the Company. The Company agrees to respond to any request for approval
on a prompt and timely basis.
2.11 So long as, and to the extent that, the Commission interprets the 1940
Act to require passthrough voting privileges for Contract owners, the
Company will provide pass-through voting privileges to Contract owners
whose cash values are invested, through the registered Accounts, in
shares of one or more Portfolios of the Trust. The Trust shall require
all Participating Insurance Companies to calculate voting privileges in
the same manner and the Company shall be responsible for assuring that
the Accounts calculate voting privileges in the manner established by the
Trust. With respect to each registered Account, the Company will vote
shares of each Portfolio of the Trust held by a registered Account and
for which no timely voting instructions from Contract owners are received
in the same proportion as those shares for which voting instructions are
received. The Company and its agents will in no way recommend or oppose
or interfere with the solicitation of proxies for Portfolio shares held
to fund the Contacts without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion. The
Company reserves the right, to the extent permitted by law, to vote
shares held in any Account in its sole discretion.
2.12. The Company and the Trust will each provide to the other information
about the results of any regulatory examination relating to the Contracts
or the Trust, including relevant portions of any "deficiency letter" and
any response thereto.
2.13. No compensation shall be paid by the Trust to the Company, or by the
Company to the Trust, under this Agreement (except for specified expense
reimbursements). However, nothing herein shall prevent the parties
hereto from otherwise agreeing to perform, and arranging for appropriate
compensation for, other services relating to the Trust, the Accounts or
both.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1. The Company represents and warrants that it is an insurance company duly
organized and in good standing under the laws of the State of Vermont and
that it has legally and validly established each Account as a segregated
asset account under such law as of the date set forth in Schedule A, and
that _______________________ , the
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principal underwriter for the Contracts, is registered as a broker-dealer
under the Securities Exchange Act of 1934 and is a member in good
standing of the National Association of Securities Dealers, Inc.
3.2. The Company represents and warrants that it has registered or, prior to
any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act
and cause each Account to remain so registered to serve as a segregated
asset account for the Contracts, unless an exemption from registration is
available.
3.3. The Company represents and warrants that the Contracts win be registered
under the 1933 Act unless an exemption from registration is available
prior to any issuance or sale of the Contracts; the Contracts will be
issued and sold in compliance in all materials respects with all
applicable federal and state laws; and the sale of the Contracts shall
comply in all material respects with state insurance law suitability
requirements.
3.4. The Trust represents and warrants that it is duly organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and the
rules and regulations thereunder.
3.5. The Trust and the Distributor represent and warrant that the Portfolio
shares offered and sold pursuant to this Agreement will be registered
under the 1933 Act and sold in accordance with all applicable federal and
state laws, and the Trust shall be registered under the 1940 Act prior to
and at the time of any issuance or sale of such shares. The Trust shall
amend its registration statement under the 1933 Act and the 1940 Act from
time to time as required in order to effect the continuous offering of
its shares. The Trust shall register and qualify its shares for sale in
accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6. The Trust represents and warrants that the investments of each Portfolio
will comply with the diversification requirements for variable annuity,
endowment or life insurance contracts set forth in Section 817(h) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the rules and
regulations thereunder, including without limitation Treasury Regulation
1.817-5, and will notify the Company immediately upon having a reasonable
basis for believing any Portfolio has ceased to comply or might not so
comply and will immediately take all reasonable steps to adequately
diversify the Portfolio to achieve compliance within the grace period
afforded by Regulation 1.817-5.
3.7. The Trust represents and warrants that it is currently qualified as a
"regulated investment company" under Subchapter M of the Code, that it
will make every effort to maintain such qualification and will notify the
Company immediately upon having a reasonable basis for believing it has
ceased to so qualify or might not so qualify in the future.
3.8. The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or
similar coverage for the benefit of the Trust in an amount not less than
the minimum coverage required by Rule 17g-1 or other applicable
regulations under the 1940 Act. Such bond shall include coverage for
larceny and embezzlement and be issued by a reputable bonding company.
3.9. The Distributor represents that it is duly organized and validly existing
under the laws of the State of Delaware and that it is registered, and
will remain registered, during the term of this Agreement, as a
broker-dealer under the Securities Exchange Act of 1934 and is a member
in good standing of the National Association of Securities Dealers, Inc.
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ARTICLE IV.
POTENTIAL CONFLICTS
4.1. The parties acknowledge that a Portfolio's shares may be made available
for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any
material irreconcilable conflict between the interests of the contract
owners of all Participating Insurance Companies. A material
irreconcilable conflict may arise for a variety of reasons, including:
(a) an action by any state insurance regulatory authority; (b) a change
in applicable federal or state insurance, tax or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in
voting instructions given by variable annuity contract and variable life
insurance contract owners; or (f) a decision by an insurer to disregard
the voting instructions of contract owners. The Trust shall promptly
inform the Company of any determination by the Trustees that a material
irreconcilable conflict exists and of the implications thereof.
4.2. The Company agrees to report promptly any potential or existing conflicts
of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Funding
Exemptive Order by providing the Trustees with all information reasonably
necessary for and requested by the Trustees to consider any issues raised
including, but not limited to, information as to a decision by the
Company to disregard Contract owner voting instructions. All
communications from the Company to the Trustees may be made in care of
the Trust.
4.3. If it is determined by a majority of the Trustees, or a majority of the
disinterested Trustees, that a material irreconcilable conflict exists
that affects the interests of contract owners, the Company shall, in
cooperation with other Participating Insurance Companies whose contract
owners are also affected, at its own expense and to the extent reasonably
practicable (as determined by the Trustees) take whatever steps are
necessary to remedy or eliminate the material irreconcilable conflict,
which steps could include: (a) withdrawing the assets allocable to some
or all of the Accounts from the Trust or any Portfolio and reinvesting
such assets in a different investment medium, including (but not limited
to) another Portfolio of the Trust, or submitting the question of whether
or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or offering
to the affected Contract owners the option of making such a change; and
(b) establishing a new registered management investment company or
managed separate account.
4.4. If a material irreconcilable conflict arises because of a decision by the
Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the
Company may be required, at the Trust's election, to withdraw the
affected Account's investment in the Trust and terminate this Agreement
with respect to such Account; provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority of the
disinterested Trustees. Any such withdrawal and termination must take
place within six (6) months
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after the Trust gives written notice that this provision is being
implemented. Until the end of such six (6) month period, the Trust shall
continue to accept and implement orders by the Company for the purchase
and redemption of shares of the Trust.
4.5. If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw
the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account within six (6) months after the
Trustees inform the Company in writing that the Trust has determined that
such decision has created a material irreconcilable conflict; provided,
however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested Trustees. Until the end of
such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares
of the Trust.
4.6. For purposes of Section 4.3 through 4.6 of this Agreement, a majority of
the disinterested Trustees shall determine whether any proposed action
adequately remedies any material irreconcilable conflict, but in no event
will the Trust be required to establish a new funding medium for any
Contract. The Company shall not be required to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
material irreconcilable conflict. In the event that the Trustees
determine that any proposed action does not adequately remedy any
material irreconcilable conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six
(6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and
termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested
Trustees.
4.7. The Company shall at least annually submit to the Trustees such reports,
materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared
Funding Exemptive Order, and said reports, materials and data shall be
submitted more frequently if reasonably deemed appropriate by the
Trustees.
4.8. If and to the extent that Rule 6e-3(T) is amended, or Rule 6e-3 is
adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared
Funding Exemptive Order, then the Trust and/or the Participating
Insurance Companies, as appropriate, shall take such steps as may be
necessary to comply with Rule 6e-3(T), as amended, or Rule 6e-3, as
adopted, to the extent such rules are applicable.
ARTICLE V.
INDEMNIFICATION
5.1. Indemnification By the Company. The Company agrees to indemnify and hold
harmless the Distributor, the Trust and each of its Trustees, officers,
employees and agents and each person, if any, who controls the Trust
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 5. 1) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Company, which consent shall
not be unreasonably withheld) or
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expenses (including the reasonable costs of investigating or defending
any alleged loss, claim, damage, liability or expense and reasonable
legal counsel fees incurred in connection therewith) (collectively,
"Losses"), to which the Indemnified Parties may become subject under any
statute or regulation, or at common law or otherwise, insofar as such
Losses are related to the sale or acquisition of the Contracts or Trust
shares and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts
themselves or in sales literature generated or approved by the
Company on behalf of the Contracts or Accounts (or any amendment or
supplement to any of the foregoing) (collectively, "Company
Documents" for the purposes of this Article V), or arise out of or
are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written
information furnished to the Company by or on behalf of the Trust
for use in Company Documents or otherwise for use in connection
with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately
derived from Trust Documents as defined in Section 5.2(a)) or
WRONGFUL conduct of the Company or persons under its control, with
respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as
defined in Section 5.2(a) or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately
derived from written information furnished to the Trust by or on
behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of
this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Company; or
(f) arise out of or result from the provision by the Company to the
Trust of insufficient or incorrect information regarding the
purchase or sale of shares of any Portfolio, or the failure of the
Company to provide such information on a timely basis.
5.2. Indemnification by the Distributor, The Distributor agrees to indemnify
and hold harmless the Company and each of its directors, officers,
employees, and agents and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for the purposes of this Section 5.2) against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Distributor, which consent
shall not be unreasonably withheld) or expenses (including the reasonable
costs of investigating or defending any alleged loss, claim, damage,
liability or expense and reasonable legal
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counsel fees incurred in connection therewith) (collectively, "Losses"),
to which the Indemnified Parties may become subject under any statute or
regulation, or at common law or otherwise, insofar as such Losses are
related to the sale or acquisition of the Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
registration statement or prospectus for the Trust (or any
amendment or supplement thereto) (collectively, "Trust
Documents" for the purposes of this Article V), or arise out of
or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this indemnity shall not apply as to any
Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and was
accurately derived from written information furnished to the
Distributor or the Trust by or on behalf of the Company for use
in Trust Documents or otherwise for use in connection with the
sale of the Contracts or Trust shares and; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately
derived from Company Documents) or wrongful conduct of the
Distributor or persons under its control, with respect to the
sale or acquisition of the Contracts or Portfolio shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Company
Documents or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading if such statement or
omission was made in reliance upon and accurately derived from
written information furnished to the Company by or on behalf of
the Trust; or
(d) arise out of or result from any failure by the Distributor or
the Trust to provide the services or furnish the materials
required under the terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Distributor or the
Trust in this Agreement or arise out of or result from any other
material breach of this Agreement by the Distributor or the
Trust.
5.3. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any Losses incurred or assessed against an Indemnified
Party that arise from such Indemnified Party's willful misfeasance, bad
faith or negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement.
5.4. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any claim made against an Indemnified party unless such
Indemnified Party shall have notified the other party in writing within a
reasonable time after the summons, or other first written notification,
giving information of the nature of the claim shall have been served upon
or otherwise received by such Indemnified Party (or after such
Indemnified Party shall have received notice of service upon or other
notification to any designated agent), but failure to notify the party
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against whom indemnification is sought of any such claim shall not
relieve that party from any liability which it may have to the
Indemnified Party in the absence of Sections 5.1 and 5.2.
5.5. In case any such action is brought against an Indemnified Party, the
indemnifying party shall be entitled to participate, at its own expense,
in the defense of such action. The indemnifying party also shall be
entitled to assume the defense thereof, with counsel reasonably
satisfactory to the party named in the action. After notice from the
indemnifying party to the Indemnified Party of an election to assume such
defense, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the indemnifying party will not be
liable to the Indemnified Party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
ARTICLE VI.
TERMINATION
6.1. This Agreement shall terminate:
(a) at the option of any party upon 60 days advance written notice
to the other parties, unless a shorter time is agreed to by the
parties; or
(b) at the option of the Trust or the Distributor if the Contracts
issued by the Company cease to qualify as annuity contracts or
life insurance contracts, as applicable, under the Code or if
the Contracts are not registered, issued or sold in accordance
with applicable state and/or federal law; or
(c) at the option of any party upon a determination by a majority of
the Trustees of the Trust, or a majority of its disinterested
Trustees, that a material irreconcilable conflict exists; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust or the Distributor by the NASD,
the SEC, or any state securities or insurance department or any
other regulatory body regarding the Trust's or the Distributor's
duties under this Agreement or related to the sale of Trust
shares or the operation of the Trust; or
(e) at the option of the Company if the Trust or a Portfolio fails
to meet the diversification requirements specified in Section
3.6 hereof; or
(f) at the option of the Company if shares of the Series are not
reasonably available to meet the requirements of the Variable
Contracts issued by the Company, as determined by the Company,
and upon prompt notice by the Company to the other parties; or
(g) at the option of the Company in the event any of the shares of
the Portfolio are not registered, issued or sold in accordance
with applicable state and/or federal law, or such law precludes
the use of such shares as the underlying investment media of the
Variable Contracts issued or to be issued by the Company; or
(h) at the option of the Company, if the Portfolio fails to qualify
as a Regulated Investment Company under Subchapter M of the
Code; or
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(i) at the option of the Distributor if it shall determine in its
sole judgment exercised in good faith, that the Company and/or
its affiliated companies has suffered a material adverse change
in its business, operations, financial condition or prospects
since the date of this Agreement or is the subject of material
adverse publicity.
6.2. Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares
of any Portfolio and redeem shares of any Portfolio pursuant to the terms
and conditions of this Agreement for all Contracts in effect on the
effective date of termination of this Agreement.
6.3. The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.9 shall survive
the termination of this Agreement as long as shares of the Trust are held
on behalf of Contract owners in accordance with Section 6.2.
ARTICLE VIII.
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust or its Distributor:
Fred Alger Management, Inc.
30 Montgomery Street
Jersey City, NJ 07302
Attn: Gregory S. Duch
If to the Company:
---------------------
----------------------
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ARTICLE VIII.
MISCELLANEOUS
8.1. The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
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8.2. This Agreement may be executed in two or more counterparts, each of
which taken together shall constitute one and the same instrument.
8.3. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
8.4. This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York. It
shall also be subject to the provisions of the federal securities laws
and the rules and regulations thereunder and to any orders of the
Commission granting exemptive relief therefrom and the conditions of
such orders. Copies of any such orders shall be promptly forwarded by
the Trust to the Company.
8.5. All liabilities of the Trust arising, directly or indirectly, under this
Agreement, of any and every nature whatsoever, shall be satisfied solely
out of the assets of the Trust and no Trustee, officer, agent or holder
of shares of beneficial interest of the Trust shall be personally liable
for any such liabilities.
8.6. Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Commission,
the National Association of Securities Dealers, Inc. and state insurance
regulators) and shall permit such authorities reasonable access to its
books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled
to under state and federal laws.
8.8. This Agreement shall not be exclusive in any respect.
8.9. Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other
party.
8.10. No provisions of this Agreement may be amended or modified in any manner
except by a written agreement properly authorized and executed by both
parties.
8.11. Each party hereto shall, except as required by law or otherwise
permitted by this Agreement, treat as confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto, and
shall not disclose such confidential information without the written
consent of the affected party unless such information has become
publicly available.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers to
execute this Participation Agreement as of the date and year first above
written.
Fred Alger and Company, Incorporated
By:
-----------------------------------
PAGE 13
<PAGE> 14
Name:
Title:
Alger American Fund
By:
------------------------------------
Name:
Title:
---------------------------------------
By:
--------------------------------------
Name:
Title:
PAGE 14
<PAGE> 1
EXHIBIT 1(A)(11)
December 1995
DESCRIPTION OF ISSUANCE,
TRANSFER AND REDEMPTION PROCEDURES FOR POLICIES
PURSUANT TO RULE 6e-3(T)(b)(12)(iii)
FOR FLEXIBLE PREMIUM LIFE INSURANCE POLICIES
ISSUED BY
NATIONAL LIFE INSURANCE COMPANY
This document sets forth the administrative procedures that will be followed by
National Life Insurance Company ("National Life") in connection with the
issuance of its flexible premium variable adjustable benefit life insurance
policy ("Policy" or "Policies"), the transfer of assets held thereunder, and
the redemption by Policy owners ("Owners") of their interests in those
Policies. Capitalized terms used herein have the same meaning as in the
prospectus for the Policy that is included in the current registration
statement on Form S-6 for the Policy as filed with the Securities and Exchange
Commission ("Commission" or "SEC").
I. PROCEDURES RELATING TO PURCHASE AND ISSUANCE OF THE POLICIES AND
ACCEPTANCE OF PREMIUMS
A. OFFER OF THE POLICIES, APPLICATIONS, INITIAL NET PREMIUMS, AND
ISSUANCE
1. Offer of the Policies. The Policies will be offered and sold
subject to established cost of insurance schedules and underwriting
standards in accordance with state insurance laws. Insurance charges
will not be the same for all Owners selecting the same Face Amount.
Insurance is based on the principle of pooling and distribution of
mortality risks, which assumes that each Owner pays insurance charges
commensurate with the Insured's mortality risk as actuarially
determined utilizing factors such as age, sex and health and
occupation. A uniform insurance charge for all Insureds would
discriminate unfairly in favor of those Insureds representing greater
risk. Although there will be no uniform insurance charges for all
Insureds, there will be a uniform insurance rate for all Insureds of
the same Rate Class, age, sex and Policy size. A description of the
Monthly Deduction under the Policy, which includes charges for cost
of insurance, for the Monthly Administrative Charge and for
supplemental benefits, is at Appendix A to this memorandum.
2. Application. Persons wishing to purchase a Policy must complete
an application and submit it to National Life through a National Life
authorized agent. This agent will also be a registered
representative of a securities broker-dealer registered with the U.S.
Securities and Exchange Commission, which broker-dealer will normally
be Equity Services, Inc., an indirect wholly-owned subsidiary of
National Life. The applicant must specify the Insured, and provide
certain required information about the Insured. The applicant will
also specify a plan for paying Planned Periodic Premiums, which are
level premiums of a specified amount at specified intervals, either
quarterly, semi-annually or annually, and may request that National
Life send reminder notices at the appropriate intervals. Also, under
the Check-O-Matic plan, the Owner can
- 1 -
<PAGE> 2
select a monthly payment schedule pursuant to which premium payments
will be automatically deducted from a bank account or other source,
rather than being "billed." An application will not be deemed to be
complete unless all required information, including without
limitation age, sex, and medical and other background information,
has been provided in the application.
3. Minimum Initial Premium. An applicant for a new Policy must pay
at least a Minimum Initial Premium, which if not submitted with the
application or during the underwriting period, must be submitted when
the Policy is delivered. (Policy coverage does not become effective
until the application has been accepted and the initial premium is
received in good order at National Life's home office ("Home
Office")). National Life may specify the form in which a premium
payment must be made in order for the premium to be in "good order."
Ordinarily, a check will be deemed to be in good order upon receipt,
although National Life may require that the check first be converted
into federal funds. In addition, for a premium to be received in
"good order," it must be accompanied by all required supporting
documentation, in whatever form required.
The Minimum Initial Premium is equal to two times the Minimum
Monthly Premium.. The Minimum Monthly Premium depends on a number of
factors, such as the Insured's sex, Issue Age, Rate Class, Death
Benefit Option, requested Initial Face Amount and any optional
benefits selected. The Minimum Monthly Premium is the monthly amount
used to determine the Minimum Guarantee Premium. The Minimum
Guarantee Premium is used for purposes of determining whether, during
the first five Policy Years or, if the optional Guaranteed Death
Benefit Rider has been purchased, prior to age 70, or 20 years from
the Date of Issue of the Policy, if longer, the Policy will not lapse
regardless of investment performance. During the period a death
benefit guarantee is in effect under a Policy, the Minimum Guarantee
Premium is the sum of the Minimum Monthly Premiums in effect on each
Monthly Policy Date, plus all Withdrawals and outstanding Policy
loans and accrued interest. The Minimum Monthly Premium may change
if, for example, a Face Amount Change or Death Benefit Option Change
is elected by the Owner.
4. Minimum Face Amount. The minimum Face Amount for which National
Life will issue a Policy is generally $50,000; however, exceptions
may be made for employee benefit plans.
5. Receipt of Application and Underwriting. Upon receipt of a
completed application in good order from an applicant, National Life
will follow certain insurance underwriting (risk evaluation)
procedures designed to determine whether the proposed Insured is
insurable. This process may involve such verification procedures as
medical examinations and may require that further information be
provided about the proposed Insured before a determination can be
made.
The underwriting process determines the Rate Class to which the
Insured is assigned. This original Rate Class applies to the Initial
Face Amount. The Rate Class may change upon an increase in Face
Amount, as to the increase (see Death Benefits below).
- 2 -
<PAGE> 3
A Policy cannot be issued until the initial underwriting
procedure has been completed, and any supplemental beneficiary forms
and forms required in accordance with state insurance laws have been
received. The Date of Issue occurs when the above steps have been
completed, the application has been accepted, the Minimum Initial
Premium has been received, and the computerized issue system has
generated a printed Policy.
National Life reserves the right to reject an application for
any reason permitted by law. If an application is rejected, any
premium received will be returned, without interest.
6. Acceptance of Application and Date of Issue. If an application
is accepted, insurance coverage under the Policy is effective as of
the Date of Issue. The Date of Issue is set forth in the Policy.
From the time the application for a Policy is signed until the time
the Policy is issued, an applicant can, subject to National Life's
underwriting rules, obtain temporary insurance protection, pending
issuance of the Policy, by answering "no" to the Health Questions of
the Receipt & Temporary Life Insurance Agreement and submitting (a) a
complete application including any medical questionnaire required,
and (b) payment of the Minimum Initial Premium.
The Date of Issue is used to determine Policy Years and Monthly
Policy Dates, as well as to measure suicide and contestability
periods.
B. ADDITIONAL PREMIUMS
1. Additional Premiums Permitted. Additional premiums may be paid
in any amount, frequency and time period, subject to the following
limits:
- A premium must be at least $50 and must be sent to the Home
Office. National Life may require satisfactory evidence of
insurability before accepting any premium if it increases the
Unadjusted Death Benefit more than it increases the Accumulated
Value.
- Total premiums paid on a cumulative basis also may not exceed
guideline premium limitations for life insurance set forth in
the Internal Revenue Code.
- No premium will be accepted after the Insured reaches Attained
Age 99 (although loan payments will be permitted after Attained
Age 99).
- National Life will monitor Policies and will attempt to notify
an owner on a timely basis if the Owner's Policy is in jeopardy
of becoming a modified endowment contract under the Internal
Revenue Code.
2. Refund of Excess Premium Amounts. If at any time a premium is
paid that would result in total premiums exceeding limits established
by law to qualify a Policy as a life insurance policy, National Life
will only accept that portion of the premium that would make total
premiums equal the maximum amount that may be paid under the Policy.
The excess will be promptly
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<PAGE> 4
refunded, and if paid by check, after such check has cleared. If
there is an outstanding loan on the Policy, the excess may instead be
applied as a loan repayment. Excess amounts under $3 will not be
refunded.
3. Planned Premiums. At the time of application, each Owner will
select a Planned Periodic Premium schedule, based on annual,
semi-annual, or quarterly payments. The Owner may request National
Life to send a premium reminder notice from National Life at the
specified interval. The Owner may change the Planned Periodic
Premium frequency and amount by notification to National Life at its
Home Office or to a National life authorized agent. Also, under the
Check-O-Matic plan, the Owner can select a monthly payment schedule
pursuant to which premium payments will be automatically deducted
from a bank account or other source, rather than being "billed."
4. Crediting Additional Premiums
Premiums will be credited to the Policy and the Net Premiums will be
invested as requested on the Valuation Date that the premium is
received in good order by the Home Office in accordance with the
procedures described below in Section I.F. National Life may specify
the form in which a premium payment must be made in order for the
premium to be in "good order." Ordinarily, a check will be deemed to
be in good order upon receipt, although National Life may require
that the check first be converted into federal funds. In addition,
for an additional premium to be received in "good order," it must be
accompanied by all required supporting documentation in whatever form
required.
C. OVERPAYMENTS AND UNDERPAYMENTS. In accordance with industry
practice, National Life will establish procedures to handle errors in
initial and additional premium payments to refund overpayments and
collect underpayments, except for amounts under $3, or such other
threshold as may be established from time to time.
D. SPECIAL PREMIUMS -- PREMIUMS UPON INCREASE IN FACE AMOUNT, DURING A
GRACE PERIOD, OR UPON REINSTATEMENT
1. Upon Increase in Face Amount. Depending on the Accumulated
Value at the time of an increase in the Face Amount and the amount of
the increase requested, an additional premium or change in the amount
of Planned Periodic Premiums may be advisable. National Life will
notify the Owner if a premium is necessary or a change appropriate.
2. During a Grace Period. If the Cash Surrender Value is
insufficient to cover the Monthly Deductions and other charges under
the Policy and the Grace Period (as described below) expires without
a sufficient payment, the Policy will lapse. During the first five
Policy Years, however, the Policy will not lapse if the Minimum
Guarantee Premium has been paid. In addition, if the Owner has
elected at issue the Guaranteed Death Benefit Rider, and has paid
premiums at all times at least equal to the Minimum Guarantee
Premium, the Policy will not lapse prior to the Insured's Attained
Age 70, or 20 years from
- 4 -
<PAGE> 5
the Date of Issue of the Policy if longer, regardless of whether the
Cash Surrender Value is sufficient to cover the Monthly Deductions.
- The Policy provides for a 61-day Grace Period that is measured
from the date on which notice is sent by National Life. Thus,
the Policy does not lapse, and the insurance coverage continues,
until the expiration of this Grace Period.
- In order to prevent lapse, the Owner must, during the Grace
Period, make a premium payment equal to the sum of any amount by
which the past Monthly Deductions have been in excess of Cash
Surrender Value, plus three times the Monthly Deduction due the
date the Grace period began. This amount will be identified in
the notice sent out pursuant to the immediately preceding
paragraph.
- Failure to make a sufficient payment within the Grace Period
will result in lapse of the Policy without value.
3. Upon Reinstatement. A Policy that lapses without value may be
reinstated at any time within five years (or longer period if
required in a particular state) after the beginning of the Grace
Period by submitting evidence of the Insured's insurability
satisfactory to National Life and payment of an amount sufficient to
provide for two times the Monthly Deduction due on the date the Grace
Period began plus three times the Monthly Deduction due on the
effective date of reinstatement. The effective date of the
reinstatement will be the Monthly Policy Date on or next following
the date the reinstatement application is approved.
- Upon reinstatement, the Accumulated Value will be based upon the
premium paid to reinstate the Policy and the Policy will be
reinstated with the same Date of Issue as it had prior to the
lapse.
- Neither the five year no lapse guarantee nor the Guaranteed
Death Benefit Rider may be reinstated.
E. REPAYMENT OF A POLICY LOAN
1. Loan Repayments Permitted. While the Insured is living, the
Owner may repay all or a portion of a loan and accrued interest.
2. Repayment Crediting and Allocation. National Life will assume
that any payments made while there is an outstanding loan on the
Policy are premium payments, rather than loan repayments, unless it
receives written instructions that a payment is a loan repayment. In
the event of a loan repayment, the amount held as collateral in the
General Account will be reduced by an amount equal to the repayment,
and such amount will be transferred to the Subaccounts of the
Separate Account and to the non-loaned portion of the General Account
based on the net premium allocations in effect at the time of the
repayment.
F. ALLOCATIONS OF PREMIUMS AMONG THE ACCOUNTS
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<PAGE> 6
1. The Separate Account, Subaccounts, and General Account. The
variable benefits under the Policies are supported by National
Variable Life Insurance Account (the "Separate Account"). The
Separate Account currently consists of eleven Subaccounts, the
assets of which are used to purchase shares of a designated
corresponding mutual fund Portfolio that is part of one of the
following Funds: the Market Street Fund, the Variable Insurance
Products Fund, and the Alger American Fund. Each Fund is
registered under the Investment Company Act of 1940 as an open-
end management investment company. Owners also may allocate Net
Premiums to National Life's General Account. Additional
Subaccounts may be added from time to time to invest in
portfolios of the Market Street Fund, Variable Insurance
Products Fund, Alger American Fund, or any other investment
company.
2. Allocations Among the Accounts. Net Premiums are allocated to
the Subaccounts and the General Account in accordance with the
following procedures.
a. General. The Net Premium equals the premium paid less the
Premium Tax Charge. In the application for the Policy, the
Owner will indicate how Net Premiums should be allocated among
the Subaccounts of the Separate Account and/or the General
Account. Such allocations may be changed at any time by the
Owner by written notice to National Life at the Home Office, or
if the telephone transaction privilege has been elected, by
telephone instructions. The percentages of each Net Premium
that may be allocated to any Subaccount must be a whole number
not less than 5%, and the sum of the allocation percentages must
be 100%.
b. Initial Premiums. Any portion of the initial Net Premium
and any subsequent premiums received by National Life before
National Life receives at the Home Office a signed delivery
receipt for the Policy or before expiration of a 10 day period
beginning with the date of such signed delivery receipt, that
are to be allocated to the Separate Account will be allocated to
the Money Market Subaccount. At the end of such period,
National Life will allocate the amount in the Money Market
Subaccount to each of the Subaccounts selected in the
application based on the proportion that the allocation
percentage for such Subaccount bears to the sum of the Separate
Account premium allocation percentages.
c. Additional Premiums. Additional Net Premiums will be
allocated to the Accounts in accordance with the allocation
percentages then in effect on the Valuation Date that the
premium is received in good order at the Home Office, unless
other instructions accompany the premium, in which case the net
premium will be allocated in accordance with those instructions.
If those instructions do not comply with National Life's
allocation rules, crediting and allocation will not be
implemented until further instructions are received from Owners.
II. TRANSFERS AMONG SUB-ACCOUNTS
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<PAGE> 7
A. TRANSFERS AMONG THE ACCOUNTS. The Owner may transfer the Accumulated
Value between and among the Subaccounts of the Separate Account and
the General Account by making a written transfer request to National
Life, or if the telephone transaction privilege has been elected, by
telephone instructions to National Life. Transfers between and among
the Subaccounts of the Separate Account and the General Account are
made as of the Valuation Day that the request for transfer is
received at the Home Office. The Owner may, at any time, transfer
all or part of the amount in one of the Subaccounts of the Separate
Account to another Subaccount and/or to the General Account.
One transfer in each Policy Year is allowed from the General
Account to any or all of the Subaccounts of the Separate Account.
The amount transferred from the General Account may not exceed the
greater of 25% of the value of such account at the time of transfer,
or $1,000. The transfer will be made as of the date National Life
receives the written or telephone request at its Home Office.
Currently, an unlimited number of transfers are permitted
without charge, and National Life has no current intent to impose a
transfer charge in the foreseeable future. However, National Life
reserves the right to change this policy so as to deduct a $25
transfer charge from each transfer in excess of the fifth transfer
during any one Policy Year. If such a charge is adopted in the
future, the following transfers will not be subject to a transfer
charge and will not count against the five free transfers in any
Policy Year: (1) transfers resulting from Policy loans, (2) the
exercise of the special transfer whereby the Owner may transfer the
entire Accumulated Value in the Separate Account to the General
Account during the first two years following the Policy issue without
regard to limits on free transfers, (3) the special transfer right
whereby an Owner may transfer the portion of the Accumulated Value in
a Subaccount the investment policy of which is changed, without
regard to any limits on transfers or free transfers, and (4) the
reallocation from the Money Market Subaccount following the 10-day
period after the Date of Issue. All transfers requested during one
Valuation Period are treated as one transfer transaction.
B. DOLLAR COST AVERAGING
This feature permits an Owner to automatically transfer funds from
the Money Market Subaccount to any other Subaccounts on a monthly
basis.
1. Election of Dollar Cost Averaging. Dollar Cost Averaging may be
elected at issue by marking the appropriate box on the initial
application and completing the appropriate instructions, or, after
issue, by filling out similar information on a change request form
and sending it by mail to the Home Office.
2. Operation of the Program. If this feature is elected, the
amount to be transferred will be taken from the Money Market
Subaccount and transferred to the Subaccount or Subaccounts
designated to receive the funds, each month on the Monthly Policy
Date (starting with the Monthly Policy Date next following the date
that the reallocation of the Accumulated Value out of the Money
Market Subaccount and into the other Subaccounts would normally have
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<PAGE> 8
occurred after expiration of the 10-day free look period after the
Owner receives the Policy), until the amount in the Money Market Fund
is depleted. The minimum monthly transfer by Dollar Cost Averaging
is $100, except for the transfer that reduces the amount in the Money
Market Subaccount to zero. An Owner may discontinue Dollar Cost
Averaging at any time by sending an appropriate change request form
to the Home Office.
C. PORTFOLIO REBALANCING
This feature permits an Owner to automatically rebalance the value in
the Subaccounts on a semi-annual basis, based on the Owner's premium
allocation percentages in effect at the time of the rebalancing.
1. Election of Portfolio Rebalancing. Portfolio rebalancing may be
elected at issue by marking the appropriate box on the initial
application, or, after issue, by completing a change request form and
sending it by mail to the Home Office.
2. Operation of the Program. In Policies utilizing Portfolio
Rebalancing from the Date of Issue, an automatic transfer will take
place that causes the percentages of the current values in each
Subaccount to match the current premium allocation percentages,
starting with the Monthly Policy Date six months after the Date of
Issue, and then on each Policy Anniversary, and each Monthly Policy
Date six months thereafter. Policies electing Portfolio Rebalancing
after issue will have the first automated transfer occur as of the
Valuation Date on or next following the date that the election is
received at the Home Office, and subsequent rebalancing transfers
will occur every six months from such date. An Owner may discontinue
Portfolio Rebalancing at any time by submitting an appropriate change
request form to the Home Office by mail.
In the event that an Owner changes the Policy's premium
allocation percentages, Portfolio Rebalancing will automatically be
discontinued unless the Owner specifically directs otherwise.
III. "REDEMPTION" PROCEDURES: SURRENDERS, WITHDRAWALS, DEATH BENEFITS, AND
LOANS
A. "FREE-LOOK" PERIOD
The Policy provides for an initial "free-look" period. The Owner may
cancel the Policy before the latest of: (a) 45 days after Part A of
the application for the Policy is signed; (b) 10 days after the Owner
receives the Policy; and (c) 10 days after National Life mails or
personally delivers a Notice of Withdrawal Right described in Section
III.B. below to the Owner. Upon returning the Policy to National Life
or to an agent of National Life within such time with a written
request for cancellation, the Owner will receive a refund equal to
the gross premiums paid on the Policy.
B. NOTICE OF WITHDRAWAL RIGHT REQUIRED BY RULE 6e-3(T)(b)(13)(viii)
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<PAGE> 9
Upon issuance of a Policy, National Life will send by first class
mail or personal delivery to the Policy Owner a written document
containing (i) a notice of the right to return the Policy to National
Life or to an agent of National Life before the latest of: (a) 45
days after Part A of the application for the Policy is signed; (b) 10
days after the Owner receives the Policy; and (c) 10 days after
National Life mails such notice of the right to return the Policy to
the Owner; (ii) a statement of Policy fees and other charges; and
(iii) a form of request for refund of gross premiums paid on the
Policy setting forth (a) instructions as to the manner in which a
refund may be obtained, including the address to which the request
form should be mailed; and (b) spaces necessary to indicate the date
of such request, the Policy number, and the signature of the Policy
Owner. In a separate document, National Life will provide the Policy
Owner with an illustration of Planned Periodic Premiums, death
benefits and cash surrender values applicable to the age, sex, and
Rate Class of the Insured.
C. REQUEST FOR CASH SURRENDER VALUE
1. Requests for Cash Surrender Value Permitted. At any time before
the death of the Insured, the Owner may surrender the Policy for its
Cash Surrender Value. The Cash Surrender Value is the Accumulated
Value minus any Policy loan and accrued interest and less any
applicable Surrender Charge. The Cash Surrender Value will be
determined by National Life on the date it receives, at the Home
Office, a written surrender request signed by the Owner, and the
Policy. A surrender may not be requested over the telephone.
Coverage under the Policy will end on the day the Owner mails or
otherwise sends the written surrender request and the Policy to
National Life. Surrender proceeds will ordinarily be mailed by
National Life to the Owner within seven days of receipt of the
request, unless a payment option was selected (see Section III.H.
below).
2. Surrender of Policy -- Surrender Charges. A Surrender Charge,
which consists of a Deferred Administrative Charge and a Deferred
Sales Charge, is imposed if the Policy is surrendered or lapses at
any time before the end of the fifteenth Policy Year. This Surrender
Charge is designed partially to compensate National Life for the cost
of administering and selling the Policy, including agent sales
commissions, the cost of printing the prospectuses and sales
literature, and any advertising and underwriting costs.
a. Deferred Administrative Charge. The Deferred
Administrative Charge varies by Issue Age, and is based on
Initial Face Amount. After the first five Policy Years, it
declines linearly by Policy Month until the end of Policy Year
15, when it becomes zero. Charges per $1,000 of Face Amount for
sample Issue Ages are shown below:
<TABLE>
<CAPTION>
Sample
Issue Age Charge per $1000 of Initial Face Amount
--------- ---------------------------------------
<S> <C>
0-5 None
10 $0.50
15 $1.00
20 $1.50
25-85 $2.00
</TABLE>
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<PAGE> 10
For Issue Ages not shown, the charge will increase by a
ratable portion for each full year.
b. Deferred Sales Charge. The Deferred Sales Charge will not
exceed the Maximum Deferred Sales Charge specified in the
Policy. During Policy Years 1 through 5, this maximum equals 50%
of the Surrender Charge target premium (which is an amount,
based on the Initial Face Amount, Issue Age, sex and Rate Class
of the Insured, used solely for the purpose of calculating the
Deferred Sales Charge) for the Face Amount. Thereafter, the 50%
amount declines linearly by month until the end of Policy Year
15, after which it is zero. The Maximum Deferred Sales Charge
will also be subject to the maximum imposed by New York State
law, where applicable. The Deferred Sales Charge actually
imposed will equal the lesser of this maximum and an amount
equal to 30% of the premiums actually received up to one
Surrender Charge target premium, plus 10% of all premiums paid
in excess of this amount but not greater than twice this amount,
plus 9% of all premiums paid in excess of twice this amount.
D. REQUEST FOR WITHDRAWALS
1. When Withdrawals are Permitted. At any time before the death of
the Insured and, except for employee benefit plans, after the first
Policy Anniversary, the Owner may withdraw a portion of the Policy's
Cash Surrender Value, subject to the following conditions:
- The minimum amount which may be withdrawn is $500, except for
employee benefit plans, where the minimum is $100.
- The maximum Withdrawal is the Cash Surrender Value minus three
times the Monthly Deduction for the most recent Monthly Policy
Date. A Withdrawal Charge will be deducted from the amount of
the Withdrawal.
- Withdrawals may be requested only by sending a written request,
signed by the Owner, to National Life at its Home Office. A
Withdrawal may not be requested over the telephone.
2. Withdrawal Charge. At the time of a Withdrawal, National Life
will assess a charge equal to the lesser of 2% of the Withdrawal
amount and $25. This Withdrawal Charge will be deducted from the
Withdrawal amount.
3. Allocation of Withdrawals. The Withdrawal will be taken from
the Subaccounts of the Separate Account based upon the instructions
of the Owner at the time of the Withdrawal. If specific allocation
instructions have not been received from the Owner, the Withdrawal
will be allocated to the Subaccounts based on the proportion that
each Subaccount's value bears to the total Accumulated Value in the
Separate Account. If the Accumulated Value in one or more
Subaccounts is insufficient to carry out the Owner's instructions,
the Withdrawal will not be processed until further instructions are
received from the
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<PAGE> 11
Owner. Withdrawals will be taken from the General Account only to
the extent that Accumulated Value in the Separate Account is
insufficient.
4. Effect of a Withdrawal on Face Amount. The effect of a
Withdrawal on the Death Benefit and Face Amount will vary depending
upon the Death Benefit Option in effect and whether the Unadjusted
Death Benefit is based on the applicable percentage of Accumulated
Value.
a. Option A. If the Face Amount divided by the applicable
percentage of Accumulated Value exceeds the Accumulated Value
just after the Withdrawal, a Withdrawal will reduce the Face
Amount and the Unadjusted Death Benefit by the lesser of such
excess and the amount of the Withdrawal, effective on the date
of the Withdrawal. If the Face Amount divided by the applicable
percentage of Accumulated Value does not exceed the Accumulated
Value just after the Withdrawal, then the Face Amount is not
reduced. The Unadjusted Death Benefit will be reduced by an
amount equal to the reduction in Accumulated Value times the
applicable percentage (or equivalently, the Unadjusted Death
Benefit is equal to the new Accumulated Value times the
applicable percentage).
b. Option B. The Face Amount will never be decreased by a
Withdrawal. A Withdrawal will, however, always decrease the
Death Benefit. If the Unadjusted Death Benefit equals the Face
Amount plus the Accumulated Value, a Withdrawal will reduce the
Accumulated Value by the amount of the Withdrawal, and thus the
Unadjusted Death Benefit will also be reduced by the amount of
the Withdrawal. If the Unadjusted Death Benefit immediately
prior to the Withdrawal is based on the applicable percentage of
Accumulated Value, the Unadjusted Death Benefit will be reduced
to equal the greater of (a) the Face Amount plus the Accumulated
Value after deducting the amount of the Withdrawal and (b) the
applicable percentage of Accumulated Value after deducting the
amount of the Withdrawal.
5. Other Effects of Withdrawals. Any decrease in Face Amount due
to a Withdrawal will first reduce the most recent increase in Face
Amount, then the most recent increases, successively, and lastly, the
Initial Face Amount. Because a Withdrawal can affect the Face Amount
(or increase in Face Amount) and the Unadjusted Death Benefit as
described above, a Withdrawal may also affect the Net Amount(s) at
Risk that is used to calculate the Cost of Insurance Charge(s) under
the Policy. Since a Withdrawal reduces the Accumulated Value, the
Cash Surrender Value of the Policy is reduced, thereby increasing the
likelihood that the Policy will lapse.
6. When a Withdrawal Is Not Permitted. A request for Withdrawal
may not be allowed if such Withdrawal would reduce the Face Amount
below the Minimum Face Amount for the Policy. Also, if a Withdrawal
would result in cumulative premiums exceeding the maximum premium
limitations applicable under the Code for life insurance, National
Life will not allow the Withdrawal.
E. MONTHLY DEDUCTIONS
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<PAGE> 12
On the Date of Issue and on each Monthly Policy Date, a redemption
will be made from Accumulated Value for the Monthly Deduction, which
is a charge compensating National Life for administrative expenses
and for the insurance coverage provided by the Policy. The Monthly
Deduction consists of three components - (a) the Cost of Insurance
Charge, (b) the Monthly Administrative Charge, and (c) the cost of
any additional benefits provided by rider. These charges are
discussed in more detail in Appendix A hereto. Because portions of
the Monthly Deduction, such as the Cost of Insurance Charge, can vary
from month to month, the Monthly Deduction may vary in amount from
month to month. The Monthly Deduction will be deducted on a pro rata
basis from the Subaccounts of the Separate Account and the General
Account, unless the Owner has elected at the time of application, or
later requests in writing, that the Monthly Deduction be made from
the Money Market Subaccount. If a Monthly Deduction cannot be made
from the Money Market Subaccount, when that has been elected, the
amount of the deduction in excess of the Accumulated Value available
in the Money Market Subaccount will be made on a pro rata basis from
the Subaccounts of the Separate Account and the General Account.
F. DEATH BENEFITS
1. Payment of Death Benefit. As long as the Policy remains in
force, the Death Benefit of the Policy will, upon the Company's
receipt of due proof of the Insured's death and a Claimant's
Statement signed by or on behalf of the Beneficiary, as well as any
other necessary documentation, be paid to the named Beneficiary in
accordance with the designated Death Benefit Option, unless the claim
is contestable in accordance with the terms of the Policy. The
proceeds may be paid in cash or under one of the Settlement Options
set forth in the Policy. The amount payable under the designated
Death Benefit Option will be increased by any additional benefits,
any dividend payable, and by interest from the date of the Insured's
death to the payment date at a National Life declared interest rate
or any higher legal requirement, and will be decreased by any
outstanding Policy loan and accrued interest and by any unpaid
Monthly Deductions.
2. Death Benefit Options. The Policy provides two Death Benefit
Options: Option A and Option B. The Owner designates the Death
Benefit Option in the application and may change it as described
below. At Attained Age 99, Option B automatically becomes Option A.
a. Option A. The Unadjusted Death Benefit is equal to the
greater of (a) the Face Amount of the Policy and (b) the
Accumulated Value on the Valuation Date on or next following the
Insured's date of death multiplied by the specified percentage
shown in the table below. For Attained Ages not shown, the
percentages will decrease by a ratable portion of each full
year.
<TABLE>
<CAPTION>
Attained Age Percentage
------------ ----------
<S> <C>
40 and under 250%
45 215%
</TABLE>
- 12 -
<PAGE> 13
<TABLE>
<S> <C>
50 185%
55 150%
60 130%
65 120%
70 115%
75 and over 105%
</TABLE>
b. Option B. The Unadjusted Death Benefit is equal to the
greater of (a) the Face Amount of the Policy plus the
Accumulated Value and (b) the Accumulated Value on the Valuation
Date on or next following the Insured's date of death multiplied
by the specified percentage shown in the table above.
3. Change in Death Benefit Option. After the first Policy Year,
the Death Benefit Option in effect may be changed by sending National
Life a written request. No charges will be imposed to make a change
in the Death Benefit Option. The effective date of any such change
will be the Monthly Policy Date on or next following the date
National Life receives the written request. Only one change in Death
Benefit Option is permitted in any one Policy Year.
- If the Death Benefit Option is changed from Option A to
Option B, on the effective date of the change, the Death
Benefit will not change but the Face Amount will be
decreased by the Accumulated Value on that date. However,
this change may not be made if it would reduce the Face
Amount to less than the Minimum Face Amount.
- If the Death Benefit Option is changed from Option B to
Option A, on the effective date of the change, the Death
Benefit will not change but the Face Amount will be
increased by the Accumulated Value on that date.
- A change in the Death Benefit Option may affect the Net
Amount at Risk over time which, in turn, would affect the
monthly Cost of Insurance Charge. Changing from Option A
to Option B will generally result in a Net Amount at Risk
that remains level. Such a change will result in a
relative increase in the Cost of Insurance Charges over
time because the Net Amount at Risk will, unless the
Unadjusted Death Benefit is based on the applicable
percentage of Accumulated Value, remain level as cost of
insurance rates increase over time, rather than the Net
Amount at Risk decreasing as the Accumulated Value
increases. Changing from Option B to Option A will, if the
Accumulated Value increases, decrease the Net Amount at
Risk over time, thereby partially offsetting the effect of
increases and over time in the Cost of Insurance Charge to
the extent the decrease in Net Amount at Risk more than
offsets the increase in rates as the Insured ages.
- If a change in the Death Benefit Option would result in
cumulative premiums exceeding the maximum premium
- 13 -
<PAGE> 14
limitations under the Internal Revenue Code for life
insurance, National Life will not effect the change.
4. How the Death Benefit May Vary. The amount of the Death Benefit
may vary with the Accumulated Value. The Death Benefit under Option
A will vary with the Accumulated Value whenever the specified
percentage of Accumulated Value exceeds the Face Amount of the
Policy. The Death Benefit under Option B will always vary with the
Accumulated Value because the Unadjusted Death Benefit equals the
greater of (a) the Face Amount plus the Accumulated Value and (b) the
Accumulated Value multiplied by the specified percentage.
5. Ability to Adjust Face Amount. Subject to certain limitations,
an Owner may generally, at any time after the first Policy Year,
increase or decrease the Policy's Face Amount by submitting a written
application to National Life. The effective date of an increase will
be the Monthly Policy Date on or next following National Life's
approval of the request, and the effective date of a decrease is the
Monthly Policy Date on or next following the date that National Life
receives the written request. Employee benefit plan Policies may
adjust the Face Amount even in Policy Year 1. The effect of changes
in Face Amount on Policy charges, as well as other considerations,
are described below.
a. Increase. A request for an increase in Face Amount may not
be for less than $25,000, or such lesser amount required in a
particular state (except that the minimum for employee benefit
plans is $2,000). The Owner may not increase the Face Amount
after the Insured's Attained Age 85. To obtain the increase,
the Owner must submit an application for the increase and
provide evidence satisfactory to National Life of the Insured's
insurability.
On the effective date of an increase, and taking the
increase into account, the Cash Surrender Value must be equal to
the Monthly Deductions then due. If the Cash Surrender Value is
not sufficient, the increase will not take effect until the
Owner makes a sufficient additional premium payment to increase
the Cash Surrender Value to the required level.
An increase in the Face Amount will generally have the
effect of increasing the total Net Amount at Risk, which in turn
will increase the monthly Cost of Insurance Charges. In
addition, the Insured may be in a different Rate Class as to the
increase in insurance coverage.
b. Decrease. The amount of the Face Amount after a decrease
(a) cannot be less than 75% of the largest Face Amount in force
at any time in the twelve months immediately preceding National
Life's receipt of the request and (b) may not be less than the
Minimum Face Amount, which is generally $50,000. To the extent
a decrease in the Face Amount could result in cumulative
premiums exceeding the maximum premium limitations applicable
for life insurance under the Internal Revenue Code, National
Life will not effect the decrease.
- 14 -
<PAGE> 15
A decrease in the Face Amount generally will decrease the
total Net Amount at Risk, which generally will decrease an
Owner's monthly Cost of Insurance Charges.
For purposes of determining the Cost of Insurance Charge,
any decrease in the Face Amount will reduce the Face Amount in
the following order: (a) the Face Amount provided by the most
recent increase; (b) the next most recent increases,
successively; and (c) the Initial Face Amount.
G. LOANS
1. When Loans are Permitted. An Owner may at any time after the
first anniversary of the Date of Issue borrow money from National
Life using the Policy as the only security for the loan. The Owner
may obtain Policy loans in an amount not exceeding the Policy's Cash
Surrender Value on the date of the loan, minus three times the
Monthly Deduction for the most recent Monthly Policy Date. While the
Insured is living, the Owner may repay all or a portion of a loan and
accrued interest. Loans may be taken by making a written request to
National Life at the Home Office, or, if the telephone transaction
privilege has been elected, by providing telephone instructions to
National Life at the Home Office. National Life limits the amount of
a Policy loan taken pursuant to telephone instructions to $10,000.
2. Interest Rate Charged. The interest rate charged on Policy
loans will be at the fixed rate of 6% per year. Interest is charged
from the date of the loan and is due at the end of each Policy Year.
If interest is not paid when due, it will be added to the loan
balance and bear interest at the same rate.
3. Allocation of Loans and Collateral. When a Policy loan is
taken, Accumulated Value is transferred to and held in the General
Account as Collateral for the Policy loan. Accumulated Value to be
held as Collateral is taken from the Subaccounts of the Separate
Account based upon the instructions of the Owner at the time the loan
is taken. If specific allocation instructions have not been received
from the Owner, Accumulated Value to be held as Collateral will taken
from the Subaccounts based on the proportion that each Subaccount's
value bears to the total Accumulated Value in the Separate Account.
If the Accumulated Value in one or more of the Subaccounts is
insufficient to carry out the Owner's instructions, the loan will not
be processed until further instructions are received from the Owner.
Non-loaned Accumulated Value in the General Account will become
Collateral for a loan only to the extent that the Accumulated Value
in the Separate Account is insufficient. Any loan interest due and
unpaid will be allocated among and transferred first from the
Subaccounts of the Separate Account in proportion to the Accumulated
Values held in the Subaccounts, and then from the General Account.
The Collateral for a Policy loan will initially be equal to the
loan amount. Any loan interest due and unpaid will be added to the
Collateral for the Policy loan. National Life will take additional
Collateral for the loan interest so added pro rata from the
Subaccounts of the Separate Account, and
- 15 -
<PAGE> 16
then, if the amounts in the Separate Account are insufficient, from
the portion of the General Account not held as Collateral, and hold
the Collateral in the General Account. At any time, the amount of
the outstanding loan under a Policy equals the sum of all loans
(including due and unpaid interest added to the loan balance) minus
any loan repayments.
4. Interest Credited to Amounts Held as Collateral. As long as the
Policy is in force, National Life will credit the amount in the
General Account as Collateral with interest at effective annual rates
it determines, but not less than 4% or such higher minimum rate
required under state law. The rate will apply to the calendar year
that follows the date of determination.
5. Bonus. In Policy Years 11 and thereafter, National Life
currently intends to credit interest on the amount in the General
Account as Collateral at a rate 0.50% per annum higher than for
similar amounts for Policies still in their first ten Policy Years.
Continuation of this bonus loan interest crediting is not guaranteed,
however.
6. Preferred Policy Loans. National Life currently intends, but is
not obligated to continue, to make preferred Policy loans available,
on the later of the Insured's Attained Age 65 and the beginning of
Policy Year 21, in maximum amounts of 5% of Accumulated Value per
year, subject to a cumulative maximum of 50% of Accumulated Value.
For such preferred Policy loans, amounts held as Collateral in the
General Account will be credited with interest at an annual rate of
6%. If both preferred and non- preferred loans exist at the same
time, any loan repayment will be applied first to the non-preferred
loan.
7. Effect of Policy Loan. Policy loans, whether or not repaid,
will have a permanent effect on the Accumulated Value and the Cash
Surrender Value, and may permanently affect the Death Benefit under
the Policy. The effect on the Accumulated Value and Death Benefit
could be favorable or unfavorable, depending on whether the
investment performance of the Subaccounts and the interest credited
to the non- loaned Accumulated Value in the General Account is less
than or greater than the interest being credited on the amounts held
as Collateral in the General Account while the loan is outstanding.
Compared to a Policy under which no loan is made, values under a
Policy will be lower when the credited interest rate is less than the
investment experience of assets held in the Separate Account and
interest credited to the non-loaned Accumulated Value in the General
Account. The longer a loan is outstanding, the greater the effect a
Policy loan is likely to have. The Death Benefit will be reduced by
the amount of any outstanding Policy loan.
H. SETTLEMENT OPTIONS
In lieu of a single sum payment on death or surrender, an election
may be made to apply the amount under any one of the fixed benefit
Settlement Options provided in the Policy.
I. DELAY IN REDEMPTIONS OR TRANSFERS
- 16 -
<PAGE> 17
Any amounts payable as a result of surrender, Withdrawal, or Policy
loan will ordinarily be paid within seven days of receipt of written
request at National Life's Home Office in a form satisfactory to
National Life. Generally, the amount of a payment will be determined
as of the date of receipt by National Life of all required documents.
However, National Life may defer the determination or payment of such
amounts if the date for determining such amounts falls within any
period during which: (1) the disposal or valuation of a Subaccount's
assets is not reasonably practicable because the New York Stock
Exchange is closed or conditions are such that, under the SEC's rules
and regulations, trading is restricted or an emergency is deemed to
exist; or (2) the SEC by order permits postponement of such actions
for the protection of National Life policyholders. National Life
also may defer the determination or payment of amounts from the
General Account for up to six months. National Life may postpone any
payment under the Policy derived from an amount paid by check or
draft until National Life is satisfied that the check or draft has
been paid by the bank upon which it was drawn.
J. 24-MONTH CONVERSION RIGHT
The conversion right required by Rule 6e-3(T)(b)(13)(v)(B) is
provided by permitting Policy Owners during the first two years
following Policy issue and on one occasion, to transfer the entire
Accumulated Value in the Separate Account to the General Account,
without regard to any limits on transfers or free transfers. Since a
new policy, under which payments (or charges), dividends, and cash
values could vary from those under the existing Policy, will not be
issued, no adjustment in payments and cash values under the Policy
would be required to address such variances.
- 17 -
<PAGE> 18
APPENDIX A
Charges will be deducted from the Accumulated Value on the Date of
Issue and on each Monthly Policy Date to compensate National Life for
administrative expenses and for the insurance coverage provided by the Policy.
The Monthly Deduction consists of three components - (a) the Cost of Insurance
Charge, (b) the Monthly Administrative Charge, and (c) the cost of any
additional benefits provided by rider. Because portions of the Monthly
Deduction, such as the Cost of Insurance Charge, can vary from month to month,
the Monthly Deduction may vary in amount from month to month. The Monthly
Deduction will be deducted on a pro rata basis from the Subaccounts of the
Separate Account and the General Account, unless the Owner has elected at the
time of application, or later requests in writing, that the Monthly Deduction
be made from the Money Market Subaccount. If a Monthly Deduction cannot be
made from the Money Market Subaccount, when that has been elected, the amount
of the deduction in excess of the Accumulated Value available in the Money
Market Subaccount will be made on a pro rata basis from the Subaccounts of the
Separate Account and the General Account.
Cost of Insurance Charge. Because the Cost of Insurance Charge
depends upon several variables, the Cost of Insurance Charge payable on each
Monthly Policy Date can vary. National Life will determine the monthly Cost of
Insurance Charge by multiplying the applicable cost of insurance rate or rates
by the corresponding Net Amount at Risk for each Policy Month.
The Net Amount at Risk on any Monthly Policy Date is the amount by
which the Unadjusted Death Benefit on the Monthly Policy Date adjusted by a
factor exceeds the Accumulated Value. This factor is 1.00327234, and is used
to reduce the Net Amount at Risk, solely for purposes of computing the Cost of
Insurance Charge, by taking into account assumed monthly earnings at an annual
rate of 4.0%. The Net Amount at Risk is determined separately for the Initial
Face Amount and any increases in Face Amount. In determining the Net Amount at
Risk for each increment of Face Amount, the Accumulated Value is first
considered part of the Initial Face Amount. If the Accumulated Value exceeds
the Initial Face Amount, it is considered as part of any increases in Face
Amount in the order such increases took effect.
The applicable cost of insurance rate depends on the Rate Class to
which the Insured was assigned. A Rate Class for any increase may differ from
that for the initial Face Amount. The rate for the Rate Class on the Date of
Issue is applied to the Net Amount at Risk for the Initial Face Amount. For
each increase in Face Amount, the rate for the Rate Class applicable to the
increase is used. If, however, the Unadjusted Death Benefit is calculated as
the Accumulated Value times the specified percentage, the rate for the Rate
Class for the Initial Face Amount will be used for the amount of the Unadjusted
Death Benefit in excess of the total Face Amount.
Cost of Insurance Rate. The cost of insurance rate will be based on
the Issue Age, sex, Rate Class of the Insured, Policy Duration and Policy size.
In addition, any change in the Net Amount at Risk will affect the total Cost of
Insurance Charges paid by the Owner. The actual monthly cost of insurance
rates ("current rates") will be based on National Life's expectations as to
future mortality and expense experience. They will not, however, be greater
<PAGE> 19
than the guaranteed maximum cost of insurance rates set forth in the Policy.
These guaranteed maximum rates are based on the Insured's Attained Age, sex,
Rate Class, and the 1980 Commissioners Standard Ordinary Smoker/Nonsmoker
Mortality Table. For Policies issued in states which require "unisex" policies
or in conjunction with employee benefit plans, the maximum Cost of Insurance
Charge depends only on the Insured's Attained Age, Rate Class and the 1980
Commissioners Standard Ordinary Mortality Tables NB and SB. Any change in the
cost of insurance rates will apply to all persons of the same Issue Age, sex,
and Rate Class, Policy Duration and Policy size.
Policies may also be issued on a guaranteed issue basis, where no
medical underwriting is required prior to issuance of a Policy. Current cost
of insurance rates for Policies issued on a guaranteed issue basis may be
higher than current cost of insurance rates for healthy Insureds who undergo
medical underwriting.
Rate Class. The Rate Class of the Insured will affect the guaranteed
and current cost of insurance rates. National Life currently places Insureds
into preferred nonsmoker, standard nonsmoker, smoker, juvenile classes, and
substandard classes, which reflect higher mortality risks.
Since the nonsmoker designation is not available for Insureds under
Attained Age 20, shortly before an Insured attains age 20, National Life will
notify the Insured about possible classification as a nonsmoker and direct the
Insured to his or her agent to initiate a change in Rate Class. If the Insured
either does not initiate a change in Rate Class or does not qualify as a
nonsmoker, guaranteed cost of insurance rates will remain as shown in the
Policy. However, if the Insured qualifies as a nonsmoker, the guaranteed and
current cost of insurance rates will be changed to reflect the nonsmoker
classification.
Current cost of insurance rates will also vary by Policy size, in the
following bands: those with Unadjusted Death Benefits less than $250,000;
those with Unadjusted Death Benefits between $250,000 and $999,999, inclusive;
and those with Unadjusted Death Benefits of $1,000,000 and over. Cost of
insurance rates will be lower as the Policy size band is larger.
Monthly Administrative Charge. National Life administers the Policy
and the Separate Account and, therefore, will incur certain ordinary
administrative expenses. National Life therefore assesses a Monthly
Administrative Charge. The Monthly Administrative Charge of $7.50 will be
deducted from the Accumulated Value on the Date of Issue and each Monthly
Policy Date as part of the Monthly Deduction. This charge is intended to
reimburse National Life for ordinary administrative expenses expected to be
incurred, including record keeping, processing claims and certain Policy
changes, preparing and mailing reports, and overhead costs. National Life does
not expect to make a profit on this charge.
Optional Benefit Charges. The Monthly Deduction will include charges
for any additional benefits added to the Policy. The monthly charges will be
specified in the applicable Rider. The following optional benefits, which are
subject to the restrictions and limitations set forth in the applicable Policy
Riders, may be included in a Policy at the option of the Owner:
Waiver of Monthly Deductions. The Waiver of Monthly Deductions
Rider will waive Monthly Deductions against the Policy if the Insured becomes
totally disabled, before age 65 and for at least 120 days. If total disability
occurs after age 60 and
<PAGE> 20
before age 65, then Monthly Deductions will be waived only until the Insured
reaches Attained Age 65, or for a period of two years, if longer. The monthly
cost of this Rider is based on sex-distinct rates multiplied by the Monthly
Deduction on the Policy, and will be added to the Monthly Deduction on the
Policy.
Accidental Death Benefit. The Accidental Death Rider provides
for an increased Death Benefit in the event that the Insured dies in an
accident.
Guaranteed Insurability Option. This Rider will permit the
Owner to increase the Face Amount of the Policy, within certain limits, without
being required to submit satisfactory proof of insurability at the time of the
request for the increase.
Guaranteed Death Benefit. If this Rider is elected, National
Life will guarantee that the Policy will not lapse prior to the Insured's
Attained Age 70, or 20 years from the Date of Issue of the Policy, if longer,
regardless of the Policy's investment performance. To keep this Rider in
force, cumulative premiums paid must be greater than the Minimum Guarantee
Premium from the Date of Issue. The Policy will be tested monthly for this
qualification, and if not met, a notice will be sent to the Owner, who will
have 61 days from the date the notice is mailed to pay a premium sufficient to
keep the Rider in force. The premium required will be the Minimum Guarantee
Premium from the Date of Issue, plus two times the Minimum Monthly Premium,
minus premiums previously paid. The Rider will be cancelled if a sufficient
premium is not paid during that 61-day period.
The cost of the Guaranteed Death Benefit Rider is $0.01 per
thousand of Face Amount per month. This Rider is available only at issue, and
only for Issue Ages 0-65.
If while the Guaranteed Death Benefit Rider is in force, the
Accumulated Value of the Policy is not sufficient to cover the Monthly
Deductions, Monthly Deductions will be made until the Accumulated Value of the
Policy is exhausted, and will thereafter be deferred, and collected at such
time as the Policy has positive Accumulated Value.
If the Face Amount of a Policy subject to the Guaranteed Death
Benefit Rider is increased, the Rider's guarantee will extend to the increased
Face Amount. This will result in an increased Minimum Guarantee Premium.
If both the Waiver of Monthly Deductions Rider and the
Guaranteed Death Benefit Rider apply to a Policy and Monthly Deductions are
waived because of total disability, then Minimum Guarantee Premium required to
keep the Guaranteed Death Benefit Rider in force will be waived during the
period that Monthly Deductions are being waived.
For Policies with the Guaranteed Death Benefit Rider,
Withdrawals and Policy loans will be limited to the excess of premiums paid
over the Minimum Guarantee premium, if the Owner wishes to keep the Rider in
force. If a Policy loan or Withdrawal for an amount greater than such excess
is desired, the Guaranteed Death Benefit Rider will enter a 61-day
lapse-pending notification period, and will be cancelled if a sufficient
premium is not paid.
Bonus. National Life currently intends to reduce the Monthly
Deduction starting in Policy Year 11 by an amount equal to 0.50% per annum of
the Accumulated Value in the Separate Account. Accumulated Value in the
General Account not held as Collateral will also be credited with interest at a
rate 0.50% higher than the interest rate otherwise
<PAGE> 21
applicable, starting in Policy Year 11. This bonus is not guaranteed, however,
and will only be continued if National Life's mortality and expense experience
with the Policies justifies continuation of the bonus.
<PAGE> 1
EXHIBIT 2
[NATIONAL LIFE OF VERMONT LETTERHEAD]
December 27, 1995
National Life Insurance Company
National Life Drive
Montpelier, Vermont 05604
Dear Sirs:
This opinion is furnished in connection with the filing of a Registration
Statement on Form S-6 ("Registration Statement") under the Securities Act of
1933, as amended, of National Variable Life Insurance Account (the "Separate
Account") and National Life Insurance Company ("National Life"), covering an
indefinite amount of premiums expected to be received under certain flexible
premium adjustable benefit individual variable life insurance policies
("Policies") to be offered by National Life. Under the Policies, amounts will
be allocated by National Life to the Separate Account as described in the
prospectus included in the Registration Statement to support reserves for such
Policies.
In my capacity as Senior Vice President and General Counsel of National
Life, I have examined all such corporate records of National Life and such
other documents and laws as I consider appropriate as a basis for the opinion
hereinafter expressed. Based upon such examination, I am of the opinion that:
1. National Life is a corporation duly organized and validly existing
under the laws of the State of Vermont.
2. The Separate Account has been duly created and is validly existing as
a separate account pursuant to Title 8, Vermont Statutes Annotated, Sections
3855 to 3859.
3. The portion of the assets to be held in the Separate Account equal to
the reserves and other liabilities under the Policies is not chargeable with
liabilities arising out of any other business National Life may conduct.
4. The Policies have been duly authorized by National Life and, when
issued as contemplated by the Registration Statement, will constitute legal,
validly issued and binding obligations of National Life in accordance with
their terms.
I hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to my name under the heading "Legal
Matters" in the prospectus.
Very truly yours,
/s/ JOHN L. STOTLER
-------------------
John L. Stotler
Senior Vice President
and General Counsel
<PAGE> 1
EXHIBIT 6
[NATIONAL LIFE OF VERMONT LETTERHEAD]
December 27, 1995
Ladies and Gentlemen:
In my capacity as Senior Vice President - Product of National Life
Insurance Company, I have provided actuarial advice concerning: (a) the
preparation of a registration statement for National Variable Life Insurance
Account filed on Form S-6 with the Securities and Exchange Commission under the
Securities Act of 1933 (the "Registration Statement") regarding the offer and
sale of Flexible Premium Adjustable Benefit Variable Life Insurance Policies
(the "Policies"); and (b) the preparation of policy forms for the Policies
described in the Registration Statement.
It is my professional opinion that:
(1) The "sales load," as defined in paragraph (c)(4) of Rule 6e-3(T)
under the Investment Company Act of 1940, shall not exceed 9 per centum of the
payments made under the Policies, in conformance with paragraphs (b)(13)(i)(B)
and (c)(7) of Rule 6e-3(T).
(2) The illustrations of Death Benefits, Cash Surrender Values, and
accumulated premiums in Appendix A of the prospectus (the "Prospectus")
contained in the Registration Statement, based on the assumptions stated in the
illustrations, are consistent with the assumptions stated in the Policies. The
rate structure of the Policies has not been designed so as to make the
relationship between premiums and benefits as shown in the illustrations,
appear to be correspondingly more favorable to the prospective purchasers of
Policies, who are male non-smokers age 40 in the preferred rate class, than to
prospective purchasers of Policies for males or females at other ages.
(3) The information contained in the examples in the section of the
prospectus entitled "Policy Benefits," based on the assumptions stated in the
examples, is consistent with the provisions of the Policies.
I hereby consent to the filing of this opinion as an exhibit to
Pre-Effective Amendment No. 1 to the Registration Statement and the use of my
name under the heading "Experts" in the prospectus contained in the
Registration Statement.
Sincerely,
/s/ CRAIG A. SMITH
------------------
Craig A. Smith
Senior Vice President - Product
<PAGE> 1
EXHIBIT 7(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Pre-effective Amendment No. 1 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated February 17, 1995, relating to
the consolidated financial statements of National Life Insurance Company, which
appear in such Prospectus. We also consent to the reference to us under the
heading "Experts" in the Prospectus.
PRICE WATERHOUSE LLP
Hartford, Connecticut
December 28, 1995
<PAGE> 1
EXHIBIT 7(b)
[SUTHERLAND, ASBILL & BRENNAN LETTERHEAD]
December 22, 1995
The National Life Insurance Company
One National Life Life Drive
Montpelier, Vermont 05604
Gentlemen:
We hereby consent to the reference to our name under the caption
"Legal Matters" in the Prospectus filed as part of Pre-Effective Amendment No.
1 to Form S-6 (File No. 33-91938) for National Variable Life Insurance Account
of The National Life Insurance Company. In giving this consent, we do not
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN
By /s/ STEPHEN E. ROTH
-----------------------------
Stephen E. Roth
<PAGE> 1
EXHIBIT 9
UNDERTAKING PURSUANT TO
RULE 27D-2 UNDER
THE INVESTMENT COMPANY ACT OF 1940
Pursuant to Rule 27d-2 under the Investment Company Act of 1940 (the "Act"),
National Life Insurance Company (the "Company") hereby undertakes, with respect
to certain variable life insurance policies (the "Policies") supported by
National Variable Life Insurance Account (the "Account") and covered by a
Registration Statement on Form S-6 (File No. 33-91938) filed with the
Securities and Exchange Commission, to guarantee the performance of all
obligations of the depositor of the Account, namely, the Company, and the
principal underwriter of the Account, namely, Equity Services, Inc., under
Section 27(f) and Rule 6e-3(T) of the Act to refund charges with respect to any
payments made to Policyowners upon a return of a Policy within the period
provided for such return in Rule 6e-3(T)(b)(13)(viii) under the Act.
NATIONAL LIFE INSURANCE COMPANY
By: /s/ JOHN L. STOTLER
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John L. Stotler
Senior Vice President
and General Counsel
Date: December 27, 1995
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