<PAGE> 1
As filed with the Securities and Exchange Commission on May 1, 1998.
Registration No. 33-91938
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
POST-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
-----------------------
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
-----------------------
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
- -----------
X on May 1, 1998 pursuant to paragraph (b) of Rule 485
- -----------
60 days after filing pursuant to paragraph (a) of Rule 485
- -----------
on ______________ pursuant to paragraph (a) of Rule 485
- -----------
-----------------------
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. Registrant filed its Rule 24f-2 Notice for the fiscal year
ended December 31, 1997 on or about March 27, 1998.
================================================================================
<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; Variable Insurance Products Fund II;
Alger American Fund; American Century Variable Portfolios, Inc.; Goldman Sachs Variable
Insurance Trust; J. P. Morgan Series Trust II; Neuberger & Berman Advisers Management Trust; Strong
Variable Insurance Funds; Strong Opportunity Fund II
12 The Market Street Fund; Variable Insurance Products Fund; Variable Insurance Products Fund II;
Alger American Fund; American Century Variable Portfolios, Inc.; Goldman Sachs Variable
Insurance Trust; J. P. Morgan Series Trust II; Neuberger & Berman Advisers Management Trust; Strong
Variable Insurance Funds; Strong Opportunity Fund II
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: (800) 537-7003
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 fifteen 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, which is managed by
Providentmutual Investment Management Company, the Variable Insurance Products
Fund and the Variable Insurance Products Fund II, managed by Fidelity
Investments, and the Alger American Fund, managed by Fred Alger Management,
Inc. In addition, it is expected that a total of eleven Portfolios from the
following Funds will be made available under the Policies starting on or before
September 30, 1998: the American Century Variable Portfolios, Inc., managed by
American Century Investment Management, Inc., the Goldman Sachs Variable
Insurance Trust, managed by Goldman Sachs Asset Management and Goldman Sachs
Asset Management International, the J.P. Morgan Series Trust II, managed by
J.P. Morgan Asset Management Inc., the Neuberger & Berman Advisers Management
Trust, managed by Neuberger & Berman Management Incorporated, and the Strong
Variable Insurance Funds, Inc., and Strong Opportunity Fund II, managed by
Strong Capital 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 OR
PROSPECTUS PROFILES 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 POLICIES 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 May 1, 1998
<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 . . . . . . . . . . . . . . . . . . . . . .
Summary of Policy Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 Common Stock Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Aggressive Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . .
The Bond Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Managed Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The International Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Money Market Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable Insurance Products Fund and Variable Insurance Products Fund II . . . . . . . . . 13
Equity-Income Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High Income Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overseas Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index 500 Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contrafund Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alger American Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alger American Small Capitalization Portfolio . . . . . . . . . . . . . . . . . .
Alger American Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . .
American Century Variable Portfolios, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
VP Value Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VP Income & Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . .
Goldman Sachs Variable Insurance Trust . . . . . . . . . . . . . . . . . . . . . . . . . .
International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CORE Small Cap Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid Cap Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J.P. Morgan Series Trust II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Opportunities Portfolio . . . . . . . . . . . . . . . . . . . . . .
Small Company Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neuberger & Berman Advsiers Management Trust . . . . . . . . . . . . . . . . . . . . . . .
Partners Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strong Variable Insurance Funds, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strong Opportunity Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialized Uses of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortality and Expense Risk Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projection Report Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
iii
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
<S> <C>
Policy Rights and Privileges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
Exchange Right for Connecticut Residents . . . . . . . . . . . . . . . . . . . . .
Available Automated Fund Management Features . . . . . . . . . . . . . . . . . . . . . . .
Dollar Cost Averaging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Rebalancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy Rights Under Certain Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . .
Possible Changes in Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preparing for Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. The interest of any
Beneficiary who dies before the Insured shall vest in the Owner unless otherwise stated.
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 is 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.
</TABLE>
2
<PAGE> 12
<TABLE>
<S> <C>
NET AMOUNT AT RISK The amount by which the Unadjusted Death Benefit exceeds the Accumulated Value.
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 the applicable 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.
</TABLE>
3
<PAGE> 13
<TABLE>
<S> <C>
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 Value of the Policy. The Withdrawal Charge
will be deducted from the Withdrawal Amount.
</TABLE>
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 fifteen 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
4
<PAGE> 14
Market Street Fund, the Variable Insurance Products Fund, the Variable
Insurance Products Fund II and the Alger American Fund. In addition, it is
expected that a total of eleven Portfolios from the following Funds will be made
available under the Policies starting on or before September 30, 1998: the
American Century Variable Portfolios, Inc., managed by American Century
Investment Management, Inc., the Goldman Sachs Variable Insurance Trust,
managed by Goldman Sachs Asset Management and Goldman Sachs Asset Management
International, the J.P. Morgan Series Trust II, managed by J.P. Morgan Asset
Management Inc., the Neuberger & Berman Advisers Management Trust, managed by
Neuberger & Berman Management Incorporated, and the Strong Variable Insurance
Funds, Inc., and Strong Opportunity Fund II, managed by Strong Capital
Management, Inc. There is no 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. National Life will reserve the
right to limit the number of Subaccounts used in any one Policy over its
entire life to 17.
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
5
<PAGE> 15
0.50% per annum on the non-loaned portion of the Accumulated Value in the
General Account in each Policy Year beginning with Policy Year 11; however, no
bonus is guaranteed except as required by the state of issue. 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 (or other evidence satisfactory to National Life that delivery has
been completed), and until the date which is ten days after the date of such
delivery, 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 or any longer
period provided by state law. 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
Summary of Policy Expenses.
<TABLE>
<S> <C>
Transaction Expenses
Premium Tax.............................. 3.25%
Sales Loan Imposed on Purchases.......... NONE
Surrender Charge......................... See below
Withdrawal Charge........................ Lesser of 2% or $25
Annual Charges
Mortality and Expense Risk Charge........ 0.90%
Cost of Insurance Charge................. Varies by age, sex, Rate Class-See below
Administrative Charge.................... $90 per year
</TABLE>
Annual Charges of Underlying Funds (for the year ended December 31, 1997
<TABLE>
<CAPTION>
Management Other Total
Funds Available as of May 1, 1998: Fee Expenses Expenses
- ---------------------------------- ---------- -------- --------
<S> <C> <C> <C>
Alger:
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Small Capitalization 0.85% 0.04% 0.89%
Market Street Fund, Inc.:
Money Market Portfolio 0.25% 0.14% 0.39%
Bond Portfolio 0.35% 0.22% 0.57%
Managed Portfolio 0.40% 0.18% 0.58%
Aggressive Growth Portfolio 0.45% 0.18% 0.63%
International Portfolio 0.75% 0.27% 1.02%
Growth Portfolio 0.33% 0.10% 0.43%
Sentinel Growth Portfolio 0.50% 0.40% 0.90%
Fidelity: Variable Insurance Products Fund I:
Equity Income Portfolio 0.50% 0.08% 0.58%
Growth Portfolio 0.60% 0.07% 0.67%
High Income Portfolio 0.59% 0.12% 0.71%
Overseas Portfolio 0.75% 0.17% 0.92%
Fidelity: Variable Insurance Products Fund II:
Index 500 Portfolio 0.24% 0.04% 0.28%
Contrafund Portfolio 0.60% 0.11% 0.71%
<CAPTION>
Funds Expected to be Available on or before September 30, 1998:
- ---------------------------------------------------------------
<S> <C> <C> <C>
American Century Variable Portfolios, Inc.
VP Value Portfolio 1.00% 0 1.00%
VP Income & Growth Portfolio .70% 0 .70%
Goldman Sachs Variable Insurance Trust
International Equity 1.00% .25% 1.25%
Global Income .90% .15% 1.05%
CORE Small Cap Equity .75% .15% .90%
Mid Cap Equity .80% .15% .95%
J.P. Morgan Series Trust II
International Opportunities Portfolio .60% .60% 1.20%
Small Company Portfolio .60% .55% 1.15%
Neuberger & Berman Advisers Management Trust
Partners Portfolio .86% 0 .86%
Strong Variable Insurance Funds, Inc.
Growth Fund II 1.00% .20% 1.20%
Strong Opportunity Fund II 1.00% .15% 1.15%
</TABLE>
National Life has agreed to reimburse a portion of the expenses of the
Market Street Sentinel Growth Portfolio. Without this reimbursement, that
Portfolio's management fee, other expenses and total expenses would have been
0.50%, 0.85% and 1.35% respectively.
Fidelity Investments agreed to reimburse a portion of the Index 500
Portfolios expenses during the period. Without this reimbursement, that
Portfolio's management fee, other expenses and total expenses would have been
0.24%, 0.16% and 0.40% respectively.
Strong Capital Management, Inc. agreed to reimburse a portion of the
Growth Fund II Portfolio's expenses during the period. Without this
reimbursement, that Portfolio's management fee, other expenses and total
expenses would have been 1.00%, 1.00% and 2.00% respectively.
J.P. Morgan Asset Management, Inc. agreed to reimburse a portion of the
International Opportunities Portfolio's expenses and the Small Company
Portfolio's expenses during the period. Without this reimbursement, the
International Opportunities Portfolio's management fee, other expenses and
total expenses would have been 0.60%, 3.65% and 4.25%, respectively, and the
Small Company Portfolio's management fee, other expenses and total expenses
would have been 0.60%, 3.21% and 3.81%, respectively.
It is anticipated that these reimbursement arrangements will continue, but
there are no legal obligations to continue these arrangements for any
particular period of time; if they are terminated, the affected
Portfolios'expenses may increase.
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
6
<PAGE> 16
deducted from future premiums if the applicable law is changed. (See "Premium
Tax Charge," Page ____.)
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. In Texas the Monthly Administrative Charge
may be changed but is guaranteed never to be greater than $7.50 plus $0.07 per
$1,000 of Face Amount. (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 except as required by the state of issue.
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 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).
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 ____.)
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
____.)
7
<PAGE> 17
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
___.)
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
8
<PAGE> 18
ten Policy Years. Except as required by the state of issue, 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 ____.)
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 Policyowners, 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
9
<PAGE> 19
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, 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
December 31, 1997, National Life's consolidated assets were over $8 billion.
(See "Financial Statements," Page F-1.)
THE SEPARATE ACCOUNT
10
<PAGE> 20
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 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.
Owners may choose among the Subaccount options described below.
However, once the new Subaccounts which are expected to be made available on or
before September 30, 1998 are made available, National Life will reserve the
right to limit the number of different Subaccounts used in any one Policy over
its entire life to 17.
THE MARKET STREET FUND
The Growth, Sentinel Growth, 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 seven "series" or
classes of shares, each representing an interest in a separate portfolio within
the Fund, and seven of which are purchased and redeemed by the corresponding
Subaccounts of the Separate Account: the Growth Portfolio, the Sentinel
Growth Portfolio, 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 Growth Portfolio. The Growth Portfolio seeks intermediate and
long-term growth of capital. A reasonable level of income is an important
secondary objective. This Portfolio pursues its objectives by investing
primarily in common stocks of companies believed to offer above-average growth
potential over both the intermediate and the long-term.
The Sentinel Growth Portfolio. The Sentinel Growth Portfolio seeks
long-term growth of capital through equity participation in companies having
growth potential believed by its investment adviser to be more favorable than
the U.S. economy as a whole, with a focus on relatively well-established
companies.
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.
11
<PAGE> 21
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 Growth, Sentinel Growth, Aggressive Growth,
Bond, Managed and Money Market 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
Life Insurance Company ("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.
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. PIMC has employed The Boston Company Asset Management,
Inc. to provide investment advisory services in connection with the Portfolio.
12
<PAGE> 22
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 AND VARIABLE INSURANCE PRODUCTS FUND II
The Separate Account has four Subaccounts which invest exclusively in
shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund")
and two Subaccounts which invest exclusively in shares of Portfolios of the
Variable Insurance Products Fund II ("VIP Fund II"). Like the Market Street
Fund, the VIP Fund and the VIP II Fund are "series" type mutual funds registered
with the SEC as diversified open-end management investment companies issuing a
number of series or classes of shares, each of which represents an interest in
a Portfolio of the VIP Fund or VIP Fund II.
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. The Fidelity Index 500 Subaccount and the Fidelity Contrafund
Subaccount of the Separate Account invest in shares of the Index 500 Portfolio
and the Contrafund Portfolio, respectively, of the VIP Fund II. Shares of these
Portfolios are purchased and redeemed by the Separate Account at net asset
value without a sales charge.
The investment objectives of the Portfolios of the VIP Fund and the VIP
Fund II 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.
Index 500 Portfolio. This portfolio seeks to match the total return of
the Standard & Poors' Composite Index of 500 Stocks ("S&P 500") while keeping
expenses low. This Portfolio normally invests at least 80% of its assets in
equity securities of companies that compose the S&P 500.
Contrafund Portfolio. This Portfolio seeks capital appreciation by
investing primarily in companies that the Fund manager believes to be
undervalued due to an overly pessimistic appraisal by the public. This
strategy can lead to investments in domestic or foreign companies, small and
large, many of which may not be well known. The Fund primarily invests in
common stock and securities convertible into common stock, but it has the
flexibility to invest in any type of security that may produce capital
appreciation.
The Equity-Income, Growth, High Income, and Overseas Portfolios of the VIP
Fund and the Index 500 and Contrafund Portfolios of the VIP Fund II are managed
by Fidelity Management and Research Company ("FMR"). With respect to the Index
500 Portfolio, Bankers Trust Company currently serves as sub-advisor to the
Portfolio and manages the Portfolio.
13
<PAGE> 23
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").
14
<PAGE> 24
A full description of the VIP Fund and the VIP Fund II, the
investment objectives and policies of the Portfolios, the risks, expenses and
all other aspects of their operation is contained in the attached Prospectuses
for the VIP Fund and the VIP Fund II.
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 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
15
<PAGE> 25
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.
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.
It is expected that the Portfolios described below from the American Century
Variable Portfolios, Inc., the Goldman Sachs Variable Insurance Trust, the J.P.
Morgan Series Trust II, the Neuberger & Berman Advisers Management Trust, and
the Strong Variable Insurance Funds, Inc., and Strong Opportunity Fund II, will
be available under the Policies on or before September 30, 1998. National Life
will supplement this Prospectus to disclose when these additional Funds are
available.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Variable Account has one Subaccount which is expected, as of a date on
or before September 30, 1998, to invest exclusively in shares of the VP Value
portfolio, and one Subaccount which is expected, as of a date on or before
September 30, 1998, to invest exclusively in shares of VP Income & Growth
portfolio, each of which are series of American Century Variable Portfolios,
Inc. American Century Variable portfolios, Inc. 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 American Century Variable Portfolios, Inc.
The American Century VP Value Subaccount and the American Century VP
Income & Growth Subaccount of the Variable Account will invest in shares of the
VP Value portfolio and the VP Income & Growth portfolio, respectively, of the
American Century Variable Portfolios, Inc. Shares of these Portfolios will be
purchased and redeemed by the Variable Account at net asset value without a
sales charge.
The investment objectives of the Portfolios of American Century Variable
Portfolios, Inc. in which the Subaccounts are expected to invest are set forth
below. The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that either
Portfolio will achieve its stated objective.
<PAGE> 26
VP Value. To seek long-term capital growth. Income is a secondary
objective. The Portfolio will seek to achieve its investment objective by
investing in securities that management believes to be undervalued at the time
of purchase.
VP Income & Growth. To seek dividend growth, current income and capital
appreciation. The Portfolio will seek to achieve its investment objective by
investing in common stocks.
The VP Value Portfolio and the VP Income & Growth Portfolio of the
American Century Variable Portfolios, Inc. are managed by American Century
Investment Management, Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and all other
aspects of their operation is contained in the attached Prospectuses for VP
Value and VP Income & Growth.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
The Variable Account has four Subaccounts which which are expected, as of a date
on or before September 30, 1998, to invest exclusively in shares of the
following four Portfolios of Goldman Sachs Variable Insurance Trust: the
International Equity Fund, the Global Income Fund, the CORE Small Cap Equity
Fund and the Mid Cap Equity Fund. Goldman Sachs Variable Insurance Trust 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 Goldman Sachs Variable
Insurance Trust.
The Goldman Sachs International Equity Subaccount, the Goldman Sachs
Global Income Subaccount, the Goldman Sachs CORE Small Cap Equity Subaccount and
the Goldman Sachs Mid Cap Equity Subaccount will invest in shares of the the
International Equity Fund, the Global Income Fund, the CORE Small Cap Equity and
the Mid Cap Equity Fund, respectively, of Goldman Sachs Variable Insurance
Trust. Shares of these Portfolios will be purchased and redeemed by the Variable
Account at net asset value without a sales charge.
The investment objectives of the Portfolios of Goldman Sachs Variable
Insurance Trust which the Subaccounts invest are set forth below. The
investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that either
Fund will achieve its stated objective.
Goldman Sachs International Equity Fund. Seeks long-term capital
appreciation through investments in equity securities of companies that are
organized outside the U.S. or whose securities are principally traded outside
the U.S.
Goldman Sachs Global Income Fund. Seeks a high total return, emphasizing
current income and, to a lesser extent, providing opportunities for capital
appreciation. The Portfolio invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and foreign currencies.
Goldman Sachs CORE Small Cap Equity Fund. Seeks long-term growth of
capital through a broadly diversified portfolio of equity securities of U.S.
issuers which are included in the Russell 2000 Index at the time of investment.
<PAGE> 27
Goldman Sachs Mid Cap Equity Fund. Seeks long-term capital appreciation
primarily through investments in equity securities of companies with public
stock market capitalizations of between $500 million and $10 billion at the time
of investment.
The International Equity and Global Income Funds are managed by Goldman
Sachs Asset Management International, and the Core Small Cap Equity and Mid Cap
Equity Funds are managed by Goldman Sachs Asset Management. A full description
of the International Equity Fund, the Global Income Fund, the CORE Small Cap
Equity Fund and the Mid Cap Equity Fund series of Goldman Sachs Variable
Insurance Trust. Their investment objectives and policies, and the risks,
expenses and all other aspects of their operation is contained in the attached
Prospectuses for the Goldman Sachs Variable Insurance Trust.
J.P. MORGAN SERIES TRUST II
The Variable Account has one Subaccount which is expected, as of a date on
or before September 30, 1998, to invest exclusively in shares of the J.P. Morgan
International Opportunities Portfolio, and one Subaccount which is expected, as
of a date on or before September 30, 1998, to invest exclusively in shares of
J.P. Morgan Small Company Portfolio, each of which are series of J.P. Morgan
Series Trust II. J.P. Morgan Series Fund II 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 J.P. Morgan Series Trust II.
The J.P. Morgan International Opportunities Subaccount and the J.P.
Morgan Small Company Subaccount of the Variable Account will invest in shares
of the J.P. Morgan International Opportunities Portfolio and the J.P. Morgan
Small Company Portfolio, respectively, of the J.P. Morgan Series Trust II.
Shares of these Portfolios will be purchased and redeemed by the Variable
Account at net asset value without a sales charge.
The investment objectives of the J.P. Morgan Series Trust II Portfolios in
which the Subaccounts invest are set forth below. The investment experience of
each Subaccount depends upon the investment performance of the underlying
Portfolio. There is no assurance that either Portfolio will achieve its stated
objective.
J.P. Morgan International Opportunities Portfolio. Seeks to provide a high
total return from a portfolio comprised of equity securities of foreign
corporations. The Portfolio is designed for investors with a long-term
investment horizon who want to diversify their investments by adding
international equities and take advantage of investment opportunities outside
the U.S. As an international investment, the Portfolio is subject to foreign
market, political, and currency risks.
J.P. Morgan Small Company Portfolio. Seeks to provide a high total return
from a portfolio comprised of equity securities of small companies. The
Portfolio invests at least 65% of the value of its total assets in the common
stock of small U.S. companies primarily with market capitalizations of less than
$1 billion. The Portfolio is designed for investors who are willing to assume
the somewhat higher risk of investing in small companies in order to seek a
higher return over time than might be expected from a portfolio of large
companies.
The J.P. Morgan International Opportunities Portfolio and the J.P. Morgan
Small Company Portfolio of the J.P. Morgan Series Trust II are managed by J.P.
Morgan Investment Management Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and all other
aspects of their operation is contained in the attached Prospectuses for the
J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small
Company Portfolio.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
The Variable Account has one Subaccount which is expected, as of a date on
or before September 30, 1998, to invest exclusively in shares of the Partners
Portfolio, a series of Neuberger & Berman Advisers Management Trust. Neuberger &
Berman Advisers Management Trust 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 Neuberger & Berman Advisers Management Trust.
The Neuberger & Berman Partners Subaccount of the Variable Account will
invest in shares of the Partners Portfolio of Neuberger & Berman Advisers
Management Trust. Shares of this Portfolio will be purchased and redeemed by the
Variable Account at net asset value without a sales charge.
The investment objectives of the Partners Portfolio are set forth below.
The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that the
Portfolio will achieve its stated objective.
<PAGE> 28
Partners Portfolio. To seek capital growth. This Portfolio will seek to
achieve its objective by investing primarily in the common stock of established
companies. Its investment program seeks securities believed to be undervalued
based on fundamentals such as low price-to-earnings ratios, consistent cash
flows, and support from asset values. The objective of the Partners Portfolio is
not fundamental and can be changed by the Trustees of the Neuberger & Berman
Advisers Management Trust without shareholder approval. Shareholders will,
however, receive at least 30 days prior notice thereof.
The Partners Portfolio of Neuberger & Berman Advisers Management Trust
is managed by Neuberger & Berman Management Incorporated. A full description of
this Portfolio, its investment objectives and policies, and the risks, expenses
and all other aspects of its operation is contained in the attached Prospectus
for the Partners Portfolio of Neuberger & Berman Advisers Management Trust.
STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC.
The Variable Account has one Subaccount which is expected, as of a date on
or before September 30, 1998, to invest exclusively in shares of the Growth Fund
II, a series of Strong Variable Insurance Funds, Inc., and one Subaccount which
is expected, as of a date on or before September 30, 1998, to invest exclusively
in shares of Strong Opportunity Fund II, Inc. Strong Variable Insurance Funds,
Inc. 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 Strong Variable
Insurance Funds, Inc., and Strong Opportunity Fund II is a single series mutual
fund also registered with the SEC as a diversified open-end management
investment company.
The Strong Growth Subaccount and the Strong Opportunity Subaccount of the
Variable Account will invest in shares of the Growth Fund II series of the
Strong Variable Insurance Funds, Inc., and the Strong Opportunity Fund II,
respectively. Shares of these Funds will be purchased and redeemed by the
Variable Account at net asset value without a sales charge.
The investment objectives of the Strong Funds in which the Subaccounts
invest are set forth below. The investment experience of each Subaccount
depends upon the investment performance of the underlying Fund. There is no
assurance that either Portfolio will achieve its stated objective.
Growth Fund II. This Portfolio seeks capital growth. It invests
primarily in equity securities that the advisor believes have above-average
growth prospects.
Strong Opportunity Fund II, Inc. This Fund seeks capital appreciation
through investments in a diversified portfolio of equity securities.
The Growth Fund II series of Strong Variable Insurance Funds, Inc., and
Strong Opportunity Fund, Inc. are managed by Strong Capital Management, Inc.
A full description of the Growth Fund II series of Strong Variable
Insurance Funds, Inc., and Strong Opportunity Fund, Inc. their investment
objectives and policies, and the risks, expenses and all other aspects of their
operation is contained in the attached Prospectuses for the Growth Fund II and
Strong Opportunity Fund II, Inc.
RESOLVING MATERIAL CONFLICTS
The participation agreements pursuant to which the Funds sell their
shares to Subaccounts of the Separate Account contain varying provisions
regarding termination. In general, each party may terminate a participation
agreement at its option with specified advance written notice, and may also
terminate in the event of specific regulatory or business developments.
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<PAGE> 29
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 allocate 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.
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.
National Life has entered into or may enter into agreements with Funds
pursuant to which the adviser or distributor pays National Life a fee based
upon an annual percentage of the average net asset amount invested by National
Life on behalf of the Separate Account and other separate accounts of National
Life. These percentages may differ, and National Life may be paid a greater
percentage by some investment advisers or distributors than other advisers or
distributors. These agreements reflect administrative services provided by
National Life.
The investment objectives and policies of certain Portfolios are
similar to the investment objectives and policies of mutual fund portfolios
other than the Portfolios that may be managed by the investment adviser or
manager. The investment results of the Portfolios, however, may be higher or
lower than the results of such other portfolios. There can be no assurance, and
no representation is made, that the investment results of any of the Funds will
be comparable to the investment results of any other portfolio, even if the
other portfolio has the same investment adviser or manager.
THE GENERAL ACCOUNT
For information on the General Account, see page ____.
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<PAGE> 30
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. (See "Payment
of Policy Benefits," Page __.) 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 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
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<PAGE> 31
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.
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.
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<PAGE> 32
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 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.
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<PAGE> 33
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, if it should
lapse. (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 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:
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<PAGE> 34
(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 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.
National Life will offer a one time credit on conversions of eligible
National Life term insurance policies to a VariTrak Policy. If the term
policy being converted has been in force for at least twelve months, the
amount of the credit is equal to 12% of a target amount used to determine
commission payments. If the term policy being converted has been in force
for less than twelve months, the credit will be prorated based on the number
of months the term policy has been outstanding at the time of conversion. For
GRT term policies, the credit will be 18% of the target amount used to
determine commission payments if the GRT term policy has been in force for at
least two years but not more than five years. For GRT term policies in
force for less than two years, the credit is 0.5% per month for each month in
the first year, and 1.0% per month for each month in the second year. For
GRT policies in force more than five years, the credit decreases from 18% by
0.5% for each month beyond five years, until it becomes zero at the end of
year eight.
The amount of the credit will be added to the initial premium
payment, if any, submitted by the Policy Owner converting the term policy,
and will be treated as part of the Initial Premium for the Policy. Thus, the
credit will be included in premium payments for purposes of calculating and
deducting the Premium Tax Charge. If the Policy is surrendered, the credit
will not be recaptured by National Life. The amount of the credit will not
be included for purposes of calculating agent compensation for the sale of
the Policy.
National Life will also offer a one time credit to Home Office
employees who purchase a VariTrak Policy, as both Owner and Insured. This
one time credit is calculated differently from the credit described above; in
particular, the amount of the credit will be 50% of the target premium used
in the calculation of commissions on the Policy. Otherwise, the credit will
be treated in the same manner as the credit described above.
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." National Life may allow, in certain situations,
Check-O-Matic payments of less than $50. National Life reserves the right
to require that Check-O-Matic be set up for at least the Minimum Monthly
Premium.
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.
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<PAGE> 35
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 a higher Net Amount at Risk, and higher Cost of Insurance
Charges. Lower premium payments will result in a 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 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. These 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
23
<PAGE> 36
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 (or other evidence satisfactory to
National Life that delivery has been completed) and for a 10 day period
beginning with the date of such delivery, which are to be allocated to the
Separate Account will be allocated to the Money Market Subaccount. On the
first Valuation Date at or after 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 then in effect.
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 is 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, 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 ___)."
24
<PAGE> 37
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, unless otherwise required by state law, 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.
Specialized Uses of the Policy. Because the Policy provides for an
accumulation of cash value as well as a death benefit, the Policy can be used
for various individual and business financial planning purposes. Purchasing the
Policy in part for such purposes entails certain risks. For example, if the
investment performance of Subaccounts to which Policy Value is allocated is
poorer than expected or if sufficient premiums are not paid, the Policy may
lapse or may not accumulate sufficient Accumulated Value or Cash Surrender
Value to fund the purpose for which the Policy was purchased. Withdrawals and
Policy loans may significantly affect current and future Accumulated Value,
Cash Surrender Value, or Death Benefit proceeds. Depending upon Subaccount
investment performance and the amount of a Policy loan, the loan may cause a
Policy to lapse. Because the Policy is designed to provide benefits on a
long-term basis, before purchasing a Policy for a specialized purpose a
purchaser should consider whether the long-term nature of the Policy is
consistent with the purpose for which it is being considered. Using a Policy
for a specialized purpose may have tax consequences. (See "Federal Income Tax
Considerations," Page __.)
For Policies that are intended to be used in STEP plans, prospective
purchasers should be aware that there is a risk that the intended tax
consequences of such a plan may not be realized. In two audits, the Internal
Revenue Service has proposed tax treatment less advantageous than intended, and
those matters are currently in litigation. The plans under audit may have
considerable differences from those a prospective Policy Owner may be
considering, and the litigation regarding such plans may or may not be
controlling with respect to STEP Plans of prospective Policy Owners. National
Life does not guarantee any particular tax consequences of any use of the
Policies, including but not limited to use in STEP Plans, and recommends that
prospective purchases of Policies seek independent tax advice with respect to
applications in which particular tax consequences are sought.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate
National Life for (a) providing the insurance and other benefits set forth in
the Policy; (b) administering the Policy; (c) assuming certain mortality and
other risks in connection with the Policy; and (d) incurring expenses in
distributing the Policy including costs associated with prospectuses and sales
literature and sales compensation. National Life may realize a profit from any
charges. Any such profit may be used for any purpose including payment of
distribution expenses.
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 that is attributable to the Policies.
SURRENDER CHARGES
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<PAGE> 38
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.
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 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
26
<PAGE> 39
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>
27
<PAGE> 40
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. 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%.
28
<PAGE> 41
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. Generally, the current cost of insurance rates for a given Attained Age
will be less than for an Insured whose Policy was issued more than 10 years
ago, than for an Insured whose Policy was issued less than 10 years ago, 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.
29
<PAGE> 42
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. In Texas, the Monthly
Administrative Charge may be increased, but is guaranteed never to exceed $7.50
plus $0.07 per $1,000 of Face Amount.
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 (except as required by the state of issue), 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.
MORTALITY AND EXPENSE RISK CHARGE
A daily charge will be deducted from the value of the net assets of
the Separate Account 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.
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.
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
30
<PAGE> 43
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 the deduction.
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 AND PRIVILEGES
LOAN PRIVILEGES
General. The Owner may at any time after the first anniversary of the
Date of Issue (and during the first year where required by law) 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
$25,000.
31
<PAGE> 44
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 will be added to the loan balance at the end of the Policy Year 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 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.
National Life is not obligated to continue to make preferred loans available,
and will make such loans available in its sole discretion. Preferred loans may
not be treated as indebtedness for federal income tax purposes.
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.
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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 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 ___.)
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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.
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.
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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.
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 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 the Notice of
Withdrawal Right to the Owner, or any longer period provided by state law. 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 thereafter by providing a proper written
authorization to National Life, an Owner may effect changes in premium
allocation, transfers, and loans of up to $25,000 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.
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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.
Exchange Right for Connecticut Residents. For eighteen months after the
Date of Issue, Connecticut residents may exchange the Policy for any flexible
premium adjustable benefit life insurance policy offered for sale by National
Life, the benefits of which policy do not vary with the investment performance
of a separate account. Evidence of insurability will not be required to effect
this exchange.
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. Only one of these
features may be active for any single Policy at any time.
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 Subaccount is depleted. When the amount in the Money Market Subaccount
is depleted, the Dollar Cost Averaging program terminates. 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
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Monthly Policy 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 premiums, and into Subaccounts
which have had relatively unfavorable investment performance in relation to the
other Subaccounts to which the Policy allocates premiums.
POLICY RIGHTS UNDER CERTAIN PLANS
Policies may be purchased in connection with a plan sponsored by an
employer. In such cases, all rights under the Policy rest with the Policy
Owner, which may be the employer or other obligor under the plan, and benefits
available to participants under the plan will be governed solely by the
provisions of the plan. Accordingly, some of the options and elections under
the Policy may not be available to participants under the provisions of the
plan. In such cases, participants should contact their employers for
information regarding the specifics of the plan.
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. National Life has no specific formula for determining
current 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 allocated to the General Account will not share in the investment
performance of National Life's General Account or any portion thereof.
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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. Except as required by the state of issue,
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.
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
(in Texas and Maryland, however, the Policy matures at Attained Age 99 at which
time National Life will pay the Cash Surrender Value to the Owner in one sum
unless a Payment Option is chosen, and the Policy will terminate). 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 Owner may decide the form in
which Death Benefit 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. If paid in a lump sum, 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. If paid under a
Settlement Option, the Death Benefit will be applied to the Settlement Option
within seven days after National Life receives proof of the Insured's death at
its Home Office and all other requirements are satisfied.
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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 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. The interest of any Beneficiary who dies
before the Insured shall vest in the Owner unless otherwise stated.
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
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<PAGE> 52
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, or as otherwise required by state law. 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.
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, (unless otherwise required by state law), 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), or other reduced amount
provided by state law.
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 (unless
otherwise required by state law).
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. Except where otherwise required by state law, 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 award 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
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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.
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
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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.
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.
The Guaranteed Death Benefit Rider is not available in Texas or
Massachusetts.
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
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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.
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
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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, you
should be sure to consult a qualified tax advisor regarding the tax attributes
of the particular arrangement. In recent years, Congress has adopted new rules
relating to life insurance owned by businesses. Any business contemplating the
purchase of a new Policy or a change in an existing Policy should consult a tax
advisor.
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 appropriate
interest) will be returned to the Owner. The amount to be refunded will be
deducted from the
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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 59-1/2, is
attributable to the Owner's becoming disabled, or is part of a series of
substantially equal periodic payments for the life (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 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 is not deductible. 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 EMPLOYEE BENEFIT PLANS
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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 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.
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.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is
always the possibility that the tax treatment of the Policies could change by
legislation or other means. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of the Policies. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax adviser
should be consulted with respect to legislative developments and their effect on
the Policy.
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
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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 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 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.
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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.
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>
Patrick E. Welch 1997 to present - Chairman of the
Chairman of the Board, Board and Chief Executive Officer;
Chief Executive Officer, 1992 to 1997 - Chairman of the
and Director Board, Chief Executive Officer
and President of GNA Corporation
Thomas H. MacLeay 1996 to Present - President and Chief
President, Chief Operating Officer; 1993 to 1996 -
Operating Officer, Executive Vice President & Chief
and Director Financial Officer
Robert E. Boardman 1994 to present - Chairman of Hickok &
</TABLE>
48
<PAGE> 61
<TABLE>
<S> <C>
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.
Earle H. Harbison, Jr. 1993 to present: Chairman of
Director Harbison Walker, Inc.; 1986 to
1992 - President and Chief
Operating Officer of Monsanto Company
Roger B. Porter 1985 to present - Professor of Business
Director and Government, Harvard University; 1976 to
present - Member of the President's Commission
on White House Fellowships; 1993 to present,
Senior Scholar, Woodrow Wilson International
Center for Scholars
E. Miles Prentice III 1997 to present - Partner in the law firm of Eaton & Van Winkle;
Director 1996 to 1997 - Partner in the law firm of Bryan Cave L.L.P.;
1993 to 1996 - Partner in the law
firm of Piper & Marbury
Thomas P. Salmon 1997 to present - Partner in the law firm of Salmon & Nostrand;
Director 1991 to 1997 - President, the University of
Vermont; Formerly Governor, State of Vermont
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
Thomas R. Williams 1987 to present - President of the
Director Wales Group, Inc.
Patricia K. Woolf 1990 to present - Author, Consultant,
</TABLE>
49
<PAGE> 62
<TABLE>
<S> <C>
Director and lecturer at the Department of
Molecular Biology at Princeton University
James A. Mallon 1998 to present: Executive Vice President & Chief
Executive Vice President & Marketing Officer; 1996 to 1998: President & Chief
Chief Marketing Officer Executive Officer - Integon Life Insurance Corporation;
1993 to 1996: Senior Vice President & Chief Marketing Officer -
Commercial Union Life Insurance Company of America
Jeffrey P. Johnson 1997 to present - General Counsel;
General Counsel 1992 to present - Partner in the law firm of Primmer & Piper
Rodney A. Buck 1996 to present - Senior Vice
Senior Vice President & President and Chief Investment
Chief Investment Officer Officer; 1993 to 1995 - Senior Vice President - Investments;
1996 to present - Chairman & Chief Executive Officer, National
Life Investment Management Company, Inc. ("NLIMC");
1991 to 1995 - President and Chief Operating Officer, NLIMC;
1998 to present - Chief Executive Officer - Sentinel Advisors Company;
1987 to present - Senior Vice President - Sentinel Advisors Company
Craig A. Smith 1998 to present - Vice President - Corporate Actuarial;
Vice President 1993 to 1998 - Senior Vice
President - Product; 1992 to 1993 -
Vice President - Product Development
</TABLE>
50
<PAGE> 63
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.
Dealers are compensated for sales of the Policies by dealer concessions.
During the first Policy Year, the gross dealer concession will not be more than
85% of the premiums paid up to a target amount (used only to determine
commission payments) and 4% of the premiums paid in excess of that amount. For
Policy Years 2 through 10, the gross dealer concession will not be more than 4%
of the premiums paid. For Policy Year 11 and thereafter, the gross dealer
concession 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, the
gross dealer concession will not be more than 50% up to the target amount for
the increase.
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).
51
<PAGE> 64
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.
PREPARING FOR YEAR 2000
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the year 2000 from the year
1900. Like all financial services providers, National Life utilizes computer
systems that may be effected by Year 2000 transition issues, and National Life
relies on service providers, including the Funds, that also may be affected.
National Life has developed, and is in the process of implementing, a Year 2000
transition plan, and is confirming that its service providers are also so
engaged. The resources that are being devoted to this effort are substantial. It
is difficult to predict with precision whether the amount of resources
ultimately devoted, or the outcome of these efforts, will have any negative
impact on National Life. However, as of the date of this prospectus, it is not
anticipated that any Policy Owners will experience negative effects on their
investment, or on the services provided in connection therewith, as a result of
Year 2000 transition implementation. National Life currently anticipates that
its computer systems will be Year 2000 compliant on or about January 1, 1999,
but there can be no assurance that National Life will be successful, or that
interaction with other service providers will not impair National Life's
services at that time.
EXPERTS
The Financial Statements listed on Page F-1 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
Elizabeth H. MacGowan, F.S.A., MAAA, Associate Actuary - Product Development
of National Life.
LEGAL MATTERS
Sutherland, Asbill & Brennan, LLP 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 Jeffrey P. Johnson, General Counsel
of National Life.
In recent years, life insurance companies have been named as defendants
in lawsuits, including class action lawsuits, relating to life insurance pricing
and sales practices. A number of these lawsuits have resulted in substantial
jury awards or settlements. During 1997 several lawsuits of this nature were
filed against National Life on behalf of purported classes of persons who
purchased certain insurance products from National Life. National Life
does not believe that these lawsuits, whether settled or litigated, will have
any material adverse effect upon its ability to meet its obligations under the
Policies.
National Life is also party to ordinary routine litigation incidental
to the business, none of which is expected to have a material adverse effect
upon its ability to meet its obligations under the Policies.
FINANCIAL STATEMENTS
The financial statements of National Life and of the Separate Account
appear on the following pages. The financial statements of National Life
should be distinguished from the 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.
52
<PAGE> 65
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 Planned Periodic Premiums of $3,000 for Death Benefit Option A,
and $4,000 for Death Benefit Option B, in each case 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 are higher for
these classes. 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 1.72%. 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 0.66%, which
represents an average of the fees incurred by the Portfolios (including the
Portfolios expected to be made available on or before September 30, 1998)
during 1997 and expenses of 0.16% which is based on an average of the actual
expenses incurred by the Portfolios during 1997, adjusted, as appropriate, to
take into account expense reimbursement arrangements expected to be in place
for 1998. For information on Fund expenses, see the prospectuses for the Funds
accompanying this prospectus. 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.
A-1
<PAGE> 66
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ ---------------------------------------------
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 4,544 2,805 250,000
3 9,930 6,383 4,371 250,000 6,723 4,711 250,000
4 13,577 8,357 6,259 250,000 8,838 6,741 250,000
5 17,406 10,251 8,153 250,000 10,882 8,784 250,000
6 21,426 12,060 10,170 250,000 12,855 10,966 250,000
7 25,647 13,781 12,099 250,000 14,748 13,067 250,000
8 30,080 15,411 13,937 250,000 16,557 15,083 250,000
9 34,734 16,948 15,682 250,000 18,285 17,019 250,000
10 39,620 18,385 17,327 250,000 19,927 18,870 250,000
11 44,751 19,720 18,870 250,000 21,843 20,993 250,000
12 50,139 20,939 20,297 250,000 23,684 23,042 250,000
13 55,796 22,027 21,594 250,000 25,450 25,016 250,000
14 61,736 22,977 22,752 250,000 27,134 26,908 250,000
15 67,972 23,769 23,752 250,000 28,731 28,713 250,000
16 74,521 24,390 24,390 250,000 30,238 30,238 250,000
17 81,397 24,826 24,826 250,000 31,647 31,647 250,000
18 88,617 25,067 25,067 250,000 32,947 32,947 250,000
19 96,198 25,100 25,100 250,000 34,119 34,119 250,000
20 104,158 24,900 24,900 250,000 35,146 35,146 250,000
25 150,340 19,269 19,269 250,000 37,910 37,910 250,000
30 209,282 1,335 1,335 250,000 35,645 35,645 250,000
</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> 67
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ --------------------------------------------
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 2,354 954 250,000 2,455 1,055 250,000
2 6,458 4,768 3,029 250,000 4,993 3,255 250,000
3 9,930 7,243 5,231 250,000 7,612 5,600 250,000
4 13,577 9,778 7,680 250,000 10,315 8,218 250,000
5 17,406 12,376 10,278 250,000 13,096 10,998 250,000
6 21,426 15,029 13,139 250,000 15,959 14,070 250,000
7 25,647 17,739 16,057 250,000 18,898 17,216 250,000
8 30,080 20,505 19,031 250,000 21,910 20,436 250,000
9 34,734 23,325 22,059 250,000 25,002 23,737 250,000
10 39,620 26,196 25,138 250,000 28,173 27,115 250,000
11 44,751 29,116 28,266 250,000 31,830 30,981 250,000
12 50,139 32,076 31,434 250,000 35,615 34,974 250,000
13 55,796 35,062 34,629 250,000 39,533 39,100 250,000
14 61,736 38,069 37,844 250,000 43,586 43,360 250,000
15 67,972 41,081 41,064 250,000 47,774 47,757 250,000
16 74,521 44,087 44,087 250,000 52,106 52,106 250,000
17 81,397 47,075 47,075 250,000 56,581 56,581 250,000
18 88,617 50,039 50,039 250,000 61,198 61,198 250,000
19 96,198 52,968 52,968 250,000 65,952 65,952 250,000
20 104,158 55,843 55,843 250,000 70,838 70,838 250,000
25 150,340 68,508 68,508 250,000 97,540 97,540 250,000
30 209,282 74,787 74,787 250,000 128,932 128,932 250,000
</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> 68
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ --------------------------------------------
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 2,505 1,105 250,000 2,609 1,209 250,000
2 6,458 5,223 3,484 250,000 5,461 3,722 250,000
3 9,930 8,175 6,163 250,000 8,576 6,563 250,000
4 13,577 11,382 9,284 250,000 11,979 9,882 250,000
5 17,406 14,820 12,772 250,000 15,692 13,594 250,000
6 21,426 18,659 16,769 250,000 19,747 17,857 250,000
7 25,647 22,779 21,097 250,000 24,169 22,488 250,000
8 30,080 27,263 25,789 250,000 28,993 27,519 250,000
9 34,734 32,146 30,880 250,000 34,263 32,998 250,000
10 39,620 37,464 36,406 250,000 40,024 38,967 250,000
11 44,751 43,264 42,414 250,000 46,798 45,948 250,000
12 50,139 49,586 48,944 250,000 54,259 53,618 250,000
13 55,796 56,475 56,042 250,000 62,485 62,052 250,000
14 61,736 63,991 63,766 250,000 71,557 71,332 250,000
15 67,972 72,193 72,176 250,000 81,568 81,551 250,000
16 74,521 81,152 81,152 250,000 92,626 92,626 250,000
17 81,397 90,952 90,952 250,000 104,846 104,846 250,000
18 88,617 101,694 101,694 250,000 118,360 118,360 250,000
19 96,198 113,492 113,492 250,000 133,314 133,314 250,000
20 104,158 126,472 126,472 250,000 149,875 149,875 250,000
25 150,340 215,240 215,240 262,593 264,014 264,014 322,097
30 209,282 358,658 358,658 416,044 451,398 451,398 523,622
</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> 69
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ ---------------------------------------------
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 4,200 3,149 1,610 253,149 3,248 1,709 253,248
2 8,610 6,200 4,277 256,199 6,413 4,492 256,415
3 13,241 9,153 7,055 259,153 9,498 7,400 259,498
4 18,103 12,004 9,906 262,003 12,496 10,398 262,496
5 23,208 14,754 12,656 264,753 15,400 13,303 265,400
6 28,568 17,395 15,505 267,394 18,213 16,323 268,213
7 34,196 19,924 18,242 269,923 20,923 19,241 270,923
8 40,106 22,337 20,863 272,337 23,524 22,051 273,524
9 46,312 24,633 23,367 274,633 26,022 24,756 276,022
10 52,827 26,803 25,745 276,802 28,410 27,352 278,410
11 59,669 28,844 27,994 278,844 31,116 30,266 281,116
12 66,852 30,742 30,100 280,741 33,727 33,086 283,727
13 74,395 32,480 32,047 282,480 36,242 35,808 286,242
14 82,314 34,048 33,823 284,048 38,651 38,426 288,651
15 90,630 35,426 35,409 285,426 40,949 40,932 290,949
16 99,361 36,601 36,601 286,601 43,133 43,133 293,133
17 108,530 37,555 37,555 287,555 45,191 45,191 295,191
18 118,156 38,280 38,280 288,280 47,109 47,109 297,109
19 128,264 38,762 38,762 288,762 48,868 48,868 298,868
20 138,877 38,977 38,977 288,977 50,444 50,444 300,444
25 200,454 34,966 34,966 284,966 55,375 55,375 305,375
30 279,043 18,770 18,770 268,770 54,241 54,241 304,241
</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> 70
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ --------------------------------------------
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 4,200 3,357 1,818 253,356 3,458 1,920 253,458
2 8,610 6,807 4,884 256,806 7,035 5,113 257,035
3 13,241 10,356 8,258 260,355 10,731 8,633 260,731
4 18,103 13,999 11,901 263,999 14,548 12,450 264,548
5 23,208 17,741 15,643 267,741 18,481 16,384 268,481
6 28,568 21,576 19686 271,575 22535 20,646 272,535
7 34,196 25,502 23,820 275,501 26,703 25,022 276,703
8 40,106 29,518 28,044 279,518 30,981 29,508 280,981
9 46,312 33,623 32,357 283,623 35,377 34,111 285,377
10 52,827 37,811 36,753 287,810 39,887 38,830 289,887
11 59,669 42,079 41,229 292,078 45,020 44,170 295,020
12 66,852 46,413 45,771 296,412 50,330 49,688 300,330
13 74,395 50,797 50,364 300,798 55,823 55,389 305,823
14 82,314 55,221 54,996 305,221 61,497 61,272 311,497
15 90,630 59,661 59,644 309,661 67,354 67,336 317,354
16 99,361 64,101 64,101 314,101 73,396 73,396 323,396
17 108,530 68,519 68,519 318,519 79,620 79,620 329,620
18 118,156 72,903 72,903 322,903 86,019 86,019 336,019
19 128,264 77,233 77,233 327,233 92,578 92,578 342,578
20 138,877 81,477 81,477 331,477 99,279 99,279 349,279
25 200,454 99,926 99,926 349,926 134,840 134,840 384,840
30 279,043 108,205 108,205 358,205 172,966 172,966 422,966
</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> 71
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ --------------------------------------------
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 4,200 3,564 2,025 253,564 3,669 2,130 253,669
2 8,610 7,440 5,517 257,439 7,681 5,758 257,681
3 13,241 11,658 9,560 261,657 12,065 9,968 262,065
4 18,103 16,246 14,148 266,246 16,858 14,760 266,858
5 23,208 21,242 19,144 271,241 22,088 19,991 272,088
6 28,568 26,675 24,785 276,674 27,801 25,911 277,801
7 34,196 32,584 30,902 282,584 34,031 32,350 284,031
8 40,106 39,013 37,539 289,012 40,824 39,350 290,824
9 46,312 46,008 44,742 296,007 48,238 46,972 298,238
10 52,827 53,616 52,558 303,615 56,327 55,270 306,327
11 59,669 61,893 61,043 311,893 65,774 64,925 315,774
12 66,852 70,889 70,247 320,888 76,158 75,517 326,158
13 74,395 80,656 80,223 330,656 87,577 87,143 337,577
14 82,314 91,259 91,034 341,259 100,129 99,904 350,129
15 90,630 102,756 102,739 352,757 113,928 113,910 363,928
16 99,361 115,221 115,221 365,221 129,100 129,100 379,100
17 108,530 128,729 128,729 378,729 145,778 145,778 395,778
18 118,156 143,372 143,372 393,372 164,107 164,107 414,107
19 128,264 159,247 159,247 409,247 184,238 184,238 434,238
20 138,877 176,446 176,446 426,446 206,337 206,337 456,337
25 200,454 286,027 286,027 536,027 354,131 354,131 604,131
30 279,043 446,719 446,719 696,719 591,418 591,418 841,418
</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> 72
NATIONAL LIFE INSURANCE COMPANY
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1997 AND 1996
<PAGE> 73
Report of Independent Accountants
April 7, 1998
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 policyowners' equity, and of cash
flows present fairly, in all material respects, the financial position of
National Life Insurance Company and its subsidiaries at December 31, 1997 and
1996, 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.
PRICE WATERHOUSE, LLP
<PAGE> 74
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 372,180 $ 268,235
Available-for-sale debt and equity securities, at fair value 5,317,427 4,393,046
Held-to-maturity debt securities, at amortized cost - 590,700
Mortgage loans 992,170 907,024
Policy loans 791,753 796,193
Real estate investments 95,926 99,442
Other invested assets 90,520 78,596
- -------------------------------------------------------------------------------------------------------------------
Total cash and invested assets 7,659,976 7,133,236
Deferred policy acquisition costs 392,014 421,584
Due and accrued investment income 125,790 120,753
Premiums and fees receivable 23,458 25,874
Deferred income taxes 17,517 33,514
Amounts recoverable from reinsurers 210,020 190,873
Present value of future profits of insurance acquired 54,444 80,957
Property and equipment, net 59,188 64,302
Other assets 63,967 51,453
Separate account assets 207,425 181,771
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 8,813,799 $ 8,304,317
===================================================================================================================
LIABILITIES:
Policy benefit liabilities $ 3,814,213 $ 3,701,597
Policyowners' accounts 3,236,710 3,051,973
Policyowners' deposits 40,836 37,524
Policy claims payable 26,968 31,217
Policyowners' dividends 53,395 51,792
Other liabilities and accrued expenses 479,483 394,127
Debt 80,085 82,682
Separate account liabilities 187,998 165,234
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 7,919,688 7,516,146
- -------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 53,222 39,263
POLICYOWNERS' EQUITY:
Net unrealized gains on available-for-sale securities 85,017 28,867
Retained earnings 755,872 720,041
- -------------------------------------------------------------------------------------------------------------------
Total policyowners' equity 840,889 748,908
- -------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and policyowners' equity $ 8,813,799 $ 8,304,317
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 75
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND POLICYOWNERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 399,017 $ 406,286
Universal life and investment-type policy fees 45,397 41,745
Net investment income 532,594 517,268
Realized investment gains (losses) 11,887 (2,070)
Mutual fund commission and fee income 51,417 42,256
Other income 17,524 21,278
- -------------------------------------------------------------------------------------------------------------------
Total revenue 1,057,836 1,026,763
- -------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 118,134 166,668
Policy benefits 313,819 297,564
Policyowners' dividends 106,312 105,690
Interest credited to policyowners' accounts 189,776 170,955
Operating expenses 174,709 148,716
Commissions and expense allowances 105,329 95,517
Net deferral of policy acquisition costs (14,617) (13,352)
- -------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 993,462 971,758
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 64,374 55,005
Income taxes 20,907 31,957
- -------------------------------------------------------------------------------------------------------------------
Income before minority interests 43,467 23,048
Minority interests 7,636 5,925
- -------------------------------------------------------------------------------------------------------------------
NET INCOME 35,831 17,123
RETAINED EARNINGS:
Beginning of year 720,041 702,918
- -------------------------------------------------------------------------------------------------------------------
End of year $ 755,872 $ 720,041
===================================================================================================================
NET UNREALIZED GAINS ON AVAILABLE-FOR-SALE SECURITIES:
Beginning of year $ 28,867 $ 77,173
Change during year 56,150 (48,306)
- -------------------------------------------------------------------------------------------------------------------
End of year $ 85,017 $ 28,867
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 76
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,831 $ 17,123
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Due and accrued investment income (5,037) (1,502)
Policy liabilities 74,693 144,723
Deferred policy acquisition costs (14,617) (9,956)
Policyowners' dividends 1,603 4,975
Deferred income taxes (20,747) (13,646)
Realized investment (gains) losses (11,887) 2,070
Depreciation 3,715 4,283
Other 15,774 (12,678)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 79,328 135,392
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 2,385,471 2,497,648
Cost of investments acquired (2,647,628) (2,714,560)
Acquisition of subsidiary, net - (81,551)
Other 7,091 4,793
- ----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (255,066) (293,670)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyowners' deposits, including interest credited 670,780 535,932
Policyowners' withdrawals, including policy charges (495,076) (418,775)
Net increase (decrease) in borrowings under repurchase agreements 234,570 (51,013)
Net (decrease) increase in securities lending liabilities (139,652) 31,717
Other 9,061 17,747
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 279,683 115,608
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 103,945 (42,670)
CASH AND CASH EQUIVALENTS:
Beginning of year 268,235 310,905
- ----------------------------------------------------------------------------------------------------------------------
End of year $ 372,180 $ 268,235
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 77
NATIONAL LIFE INSURANCE COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1996
NOTE 1 - NATURE OF OPERATIONS
National Life Insurance Company (National Life) was chartered in 1848 and is
among the 15 largest mutual life insurance companies in the United States.
National Life is also known by its registered trade name "National Life of
Vermont". National Life employs about 750 people in its home office in
Montpelier, Vermont. As a mutual life insurance company, National Life has no
shareholders. With its affiliates and subsidiaries, National Life offers a
broad range of financial products and services, including life insurance,
annuities, disability income insurance, mutual funds, investment advisory and
administration services.
National Life primarily develops and distributes individual life insurance and
annuity products. National Life markets its products primarily to small
business owners, professionals and high net worth individuals by providing
financial solutions in the form of estate, business succession and retirement
planning, deferred compensation and other key executive fringe benefit plans.
Insurance and annuity products are primarily distributed through about 40
general agencies in major metropolitan areas throughout the United States.
National Life also distributes its products through brokers and banks.
National Life has about 235,000 policyowners and is licensed to do business in
all 50 states and the District of Columbia. About 26% of National Life's total
collected premiums are from residents of New York and California.
Through affiliates National Life also distributes and provides investment
advisory and administrative services to the Sentinel Group Funds, Inc. The
Sentinel Funds' $2.8 billion of net assets represent thirteen mutual funds
managed on behalf of about 107,000 individual, corporate and institutional
shareholders worldwide.
During 1996, National Life acquired a majority interest in Life Insurance
Company of the Southwest (LSW), a Dallas, Texas based financial services
company specializing in annuities. LSW is licensed in all states but New York,
with particular concentration in the west and the southwest. About 50% of LSW's
total collected premiums are from residents of California, Texas and Florida.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of National Life and
subsidiaries have been prepared in conformity with generally accepted
accounting principles (GAAP).
The consolidated financial statements include the accounts of National Life
Insurance Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain
reclassifications have been made to conform prior periods presented to the
current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
INVESTMENTS
Cash and cash equivalents include highly liquid debt instruments purchased with
remaining maturities of three months or less.
4
<PAGE> 78
Debt securities are designated as available-for-sale or held-to-maturity where
the company has the ability and intent to hold securities to maturity.
Available-for-sale debt securities and equity securities are reported at
estimated fair value. Held-to-maturity debt securities are reported at
amortized cost. Debt and equity securities that experience declines in value
that are other than temporary are written down with a corresponding charge to
realized losses.
Mortgage loans are reported at amortized cost, less valuation allowances for
the excess, if any, of the amortized cost of impaired loans over the estimated
fair value of the related collateral. Changes in valuation allowances are
included in realized gains and losses.
Policy loans are reported at their unpaid balance and are fully collateralized
by related cash surrender values.
Real estate investments are reported at depreciated cost. Real estate acquired
in satisfaction of debt is transferred to real estate at the lower of the
recorded investment in the loan, including accrued interest, or estimated fair
value.
Realized investment gains and losses are recognized using the specific
identification method and include changes in valuation allowances. Changes in
the estimated fair values of available-for-sale debt and equity securities are
reflected in policyowners' equity after adjustments for related deferred policy
acquisition costs, present value of future profits of insurance acquired,
income taxes and minority interests.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring new business that vary with and are
primarily related to the production of new business are generally deferred.
Deferred policy acquisition costs for participating life insurance, universal
life insurance and investment-type annuities are amortized in relation to
estimated gross margins or profits. Amortization is adjusted retrospectively
for actual experience and when estimates of future gross margins or profits are
revised. Balances of deferred policy acquisition costs for these products are
adjusted for related unrealized gains and losses on available-for-sale debt and
equity securities through policyowners' equity, net of related income taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance is amortized in relation to premium income using
assumptions consistent with those used in computing policy benefit liabilities.
Balances of deferred policy acquisition costs are regularly evaluated for
recoverability from product margins or profits.
PRESENT VALUE OF FUTURE PROFITS OF INSURANCE ACQUIRED
Present value of future profits of insurance acquired is the
actuarially-determined present value of future projected profits from policies
in force at the date of their acquisition, and is amortized in relation to
gross profits of those policies. Amortization is adjusted retrospectively for
actual experience and when estimates of future profits are revised.
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
depreciated over 40 years using the straight line method. Furniture and
equipment is depreciated using accelerated depreciation methods over 7 years
and 5 years, respectively.
5
<PAGE> 79
SEPARATE ACCOUNTS
Separate accounts are segregated funds relating to certain variable annuity and
variable life policies, and National Life's pension plans. Separate account
assets are primarily common stocks, bonds, mortgage loans, and real estate and
are carried at estimated fair value. Separate account liabilities reflect
separate account policyowners' interests in separate account assets, include
the actual investment performance of the respective accounts and are not
guaranteed. Separate account results relating to these policyowners' interests
are excluded from revenues and expenses.
POLICY LIABILITIES
Policy benefit liabilities for participating life insurance are developed using
the net level premium method, with interest and mortality assumptions used in
calculating policy cash surrender values. Participating life insurance
terminal dividends are accrued in relation to gross margins.
Policy benefit liabilities for non-participating life insurance, disability
income insurance and certain annuities are developed using the net level
premium method, with assumptions for interest, mortality, morbidity,
withdrawals and expenses based principally on company experience.
Policyowners' account balances for universal life insurance and investment-type
annuities represent amounts that inure to the benefit of the policyowners
(before surrender charges).
POLICYOWNERS' DIVIDENDS
Policyowners' dividends are the pro-rata amount of dividends earned that will
be paid or credited at the next policy anniversary. Dividends are based on a
scale that seeks to reflect the relative contribution of each group of policies
to National Life's overall operating results. The dividend scale is approved
annually by National Life's Board of Directors.
RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES
Premiums from traditional life and certain annuities are recognized as revenue
when due from the policyowner. Benefits and expenses are matched with income
by providing for policy benefit liabilities and the deferral and amortization
of policy acquisition costs so as to recognize profits over the life of the
policies.
Premiums from universal life and investment-type annuities are reported as
increases in policyowners' accounts. Revenues for these policies consist of
mortality charges, policy administration fees and surrender charges deducted
from policyowners' accounts. Policy benefits charged to expense include
benefit claims in excess of related policyowners' account balances.
Premiums from disability income policies are recognized as revenue over the
period to which the premiums relate.
FEDERAL INCOME TAXES
National Life files a consolidated federal income tax return that includes all
of its wholly-owned subsidiaries. Current federal income taxes are charged or
credited to operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are recognized based on temporary differences
between financial statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
6
<PAGE> 80
NOTE 3 - ACQUISITION
National Financial Services, Inc., a wholly-owned subsidiary of National Life,
acquired a two-thirds interest in Life Insurance Company of the Southwest (LSW)
located in Dallas, Texas on February 8, 1996. LSW is a financial services
company specializing in annuities that is licensed in all states except New
York.
The acquisition was accomplished by purchasing two-thirds of LSW Holdings
Corporation, the owner of LSW. LSW Holdings Corporation was renamed LSW
National Holdings, Inc. concurrent with the purchase. The purchase price was
about $102 million in cash. The purchase resulted in the recording of an
intangible asset for the present value of future profits of insurance acquired
of $67.2 million.
The minority shareholders have the right to put their shares to National Life
at specified prices in the event of certain contingencies during the first five
years subsequent to closing and generally thereafter. Similarly, National Life
has the right to call the minority shareholders' shares at specified prices.
The specified prices are generally a function of GAAP equity or the original
purchase price.
These consolidated financial statements include the financial position and
operations of LSW National Holdings since the purchase, along with appropriate
adjustments for minority interests, using the purchase method. Pro forma
results had the acquisition occurred as of January 1, 1996 are shown in the
table below (in thousands). These pro forma consolidated results are not
necessarily indicative of the actual results which might have occurred had
National Life owned LSW since that date.
<TABLE>
<CAPTION>
1996
- ---------------------------------------------------------------------------------
<S> <C>
Revenues $ 1,026,763
Net income 17,356
</TABLE>
Noncash investing activities relating to the acquisition that are not reflected
in the 1996 consolidated statement of cash flow were as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired, excluding cash acquired $ 1,144,694
Liabilities assumed (1,063,143)
- ---------------------------------------------------------------------------------
Cash paid (net of cash acquired) $ 81,551
=================================================================================
</TABLE>
7
<PAGE> 81
NOTE 4 - INVESTMENTS
Debt and Equity Securities
The amortized cost and estimated fair values of debt and equity securities at
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1997 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS):
U.S. government obligations $ 284,039 $ 13,515 $ 612 $ 296,942
Government agencies, authorities
and subdivisions 178,986 11,649 793 189,842
Public utilities 389,744 19,246 6,314 402,676
Corporate 2,403,091 133,881 7,069 2,529,903
Private placements 598,144 29,576 2,170 625,550
Mortgage-backed securities 1,196,369 35,308 1,275 1,230,402
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,050,373 243,175 18,233 5,275,315
Preferred stocks 6,482 803 259 7,026
Common stocks 29,638 5,511 63 35,086
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 5,086,493 $ 249,489 $ 18,555 $ 5,317,427
===============================================================================================================
1996
- ---------------------------------------------------------------------------------------------------------------
Available-for-sale (AFS):
U.S. government obligations $ 180,646 $ 3,336 $ 187 $ 183,795
Government agencies, authorities
and subdivisions 222,867 9,165 3,693 228,339
Public utilities 427,426 12,354 7,270 432,510
Corporate 2,176,977 72,482 20,581 2,228,878
Private placements 199,061 4,923 2,349 201,635
Mortgage-backed securities 1,089,434 16,244 10,142 1,095,536
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt securities 4,296,411 118,504 44,222 4,370,693
Preferred stocks 9,719 739 359 10,099
Common stocks 9,705 2,560 11 12,254
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 4,315,835 $ 121,803 $ 44,592 $ 4,393,046
===============================================================================================================
Held-to-maturity (HTM) debt securities:
U.S. government obligations $ 2,052 $ 14 $ 2 $ 2,064
Government agencies, authorities
and subdivisions 20,970 1,264 208 22,026
Public utilities 9,953 359 1 10,311
Corporate 30,669 1,593 40 32,222
Private placements 527,056 21,799 3,061 545,794
- ---------------------------------------------------------------------------------------------------------------
Total HTM debt securities $ 590,700 $ 25,029 $ 3,312 $ 612,417
===============================================================================================================
</TABLE>
8
<PAGE> 82
Unrealized gains and losses on available-for-sale debt and equity securities
included as a component of policyowners' equity and changes therein for the
years ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized gains (losses) on available-for-sale securities $ 153,723 $ (153,543)
Net unrealized gains on separate accounts 3,047 1,225
Related minority interests (9,360) 2,474
Related deferred policy acquisition costs (44,378) 61,726
Related present value of future profits of insurance acquired (10,138) 11,639
Related deferred income taxes (36,744) 28,173
- ----------------------------------------------------------------------------------------------------
Increase (decrease) in net unrealized gains (losses) 56,150 (48,306)
Balance, beginning of year 28,867 77,173
- ----------------------------------------------------------------------------------------------------
Balance, end of year $ 85,017 $ 28,867
====================================================================================================
Balance, end of year includes:
Net unrealized gains on available-for-sale securities $ 230,934 $ 77,211
Net unrealized gains on separate accounts 4,272 1,225
Related minority interests (6,886) 2,474
Related deferred policy acquisition costs (94,678) (50,300)
Related present value of future profits on insurance acquired 1,501 11,639
Related deferred income taxes (50,126) (13,382)
- ----------------------------------------------------------------------------------------------------
Balance, end of year $ 85,017 $ 28,867
====================================================================================================
</TABLE>
In December 1997, National Life transferred all securities designated as
held-to-maturity to available-for-sale. The securities transferred had an
estimated fair value of $618.8 million and an amortized cost of $586.1 million,
resulting in $32.7 million in unrealized gains.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1997 are shown below (in thousands). Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Estimated Fair
Cost Value
- ---------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 82,465 $ 83,291
Due after one year through five years 557,609 575,489
Due after five years through ten years 2,074,439 2,147,536
Due after ten years 1,139,491 1,238,597
Mortgage-backed securities 1,196,369 1,230,402
- ---------------------------------------------------------------------------
Total $ 5,050,373 $ 5,275,315
===========================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 are shown below (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 1,928,055 $ 1,990,175
Gross realized gains $ 27,318 $ 46,092
Gross realized losses $ 16,916 $ 42,759
</TABLE>
9
<PAGE> 83
National Life periodically lends certain U.S. government or corporate bonds to
approved counterparties to enhance the yield of its bond portfolio. National
Life receives cash collateral for at least 105% of the market value of
securities loaned. Collateral adequacy is evaluated daily and periodically
adjusted for changes in the market value of securities loaned. The carrying
values of securities loaned are unaffected by the transaction. Collateral held
(included in cash and cash equivalents) and the corresponding liability for
collateral held (included in other liabilities) were $19.8 million and $159.4
million at December 31, 1997 and 1996, respectively.
National Life also periodically enters into repurchase agreements on U.S.
Treasury securities to enhance the yield of its bond portfolio. These
transactions are accounted for as financings because the securities received at
the end of the repurchase period are identical to the securities transferred.
There were no open transactions at December 31, 1996. The repurchase liability
is included in other liabilities and was $234.6 million at December 31, 1997.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
GEOGRAPHIC REGION
-----------------
New England 4.0% 4.5%
Middle Atlantic 10.3 9.0
East North Central 8.8 10.4
West North Central 4.9 3.6
South Atlantic 29.1 30.2
East South Central 5.0 4.4
West South Central 10.8 13.3
Mountain 16.7 15.9
Pacific 10.4 8.7
- ---------------------------------------------------------------------------------
Total 100.0% 100.0%
=================================================================================
PROPERTY TYPE
-------------
Residential 0.2% 0.3%
Apartment 24.3 21.1
Retail 15.9 18.6
Office Building 34.0 32.6
Industrial 22.2 25.0
Hotel/Motel 0.9 1.0
Other Commercial 2.5 1.4
- ---------------------------------------------------------------------------------
Total 100.0% 100.0%
=================================================================================
Total mortgage loans and real estate $ 1,088,096 $ 1,006,466
=================================================================================
</TABLE>
10
<PAGE> 84
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 965,760 $ 876,994
Impaired loans without valuation allowances 9,413 6,146
- ----------------------------------------------------------------------------
Subtotal 975,173 883,140
- ----------------------------------------------------------------------------
Impaired loans with valuation allowances 21,426 31,167
Related valuation allowances (4,429) (7,283)
- ----------------------------------------------------------------------------
Subtotal 16,997 23,884
- ----------------------------------------------------------------------------
Total $ 992,170 $ 907,024
============================================================================
Impaired loans:
Average recorded investment $ 34,076 $ 40,161
Interest income recognized $ 3,543 $ 5,026
Interest received $ 3,818 $ 5,170
</TABLE>
Impaired loans are mortgage loans where it is not probable that all amounts due
under the contractual terms of the loan will be received. Impaired loans
without valuation allowances are mortgage loans where the estimated fair value
of the collateral exceeds the recorded investment in the loan. For these
impaired loans, interest income is recognized on an accrual basis, subject to
recoverability from the estimated fair value of the loan collateral. For
impaired loans with valuation allowances, interest income is recognized on a
cash basis.
Activity in the valuation allowances for impaired mortgage loans for the years
ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
=========================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,543 $ 3,944
Impairment losses charged to valuation allowances (1,419) (7,559)
Changes to previously established valuation allowances (2,978) 2,423
- -----------------------------------------------------------------------------------------
Decrease in valuation allowances (2,854) (1,192)
Balance, beginning of year 7,283 8,475
- -----------------------------------------------------------------------------------------
Balance, end of year $ 4,429 $ 7,283
=========================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 392,674 $ 385,750
Equity securities dividends 2,765 1,730
Mortgage loan interest 85,782 81,575
Policy loan interest 48,856 49,438
Real estate income 15,822 15,193
Other investment income 13,627 9,016
- ----------------------------------------------------------------------------
Gross investment income 559,526 542,702
Less: investment expenses 26,932 25,434
- ----------------------------------------------------------------------------
Net investment income $ 532,594 $ 517,268
============================================================================
</TABLE>
DERIVATIVES
National Life purchases over-the-counter options and exchange-traded futures on
the Standard & Poor's 500 (S&P 500) index to hedge obligations relating to
equity indexed products. When the S&P 500 index increases, increases in the
intrinsic value of the options and fair value of futures are offset by
increases in equity indexed product account values. When the S&P 500 index
decreases, National Life's loss is the decrease in the fair value of futures
and is limited to the premium paid for the options.
11
<PAGE> 85
National Life purchases options only from highly rated counterparties.
However, in the event a counterparty failed to perform, National Life's loss
would be equal to the fair value of the net options held from that
counterparty.
The option premium is expensed over the term of the option. The amortization
of the option premium, increases in the intrinsic value of options and changes
in the fair value of futures are reflected in investment income. Interest
credited includes amounts that would be credited on the next policy anniversary
based on the S&P 500 index's value at the reporting date.
The notional amounts and net book value of options and futures at December 31,
were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 245,187 $ 61,078
Futures $ 27,892 -
===========================================================================================================
Book values:
Options: Net amortized cost $ 4,058 $ 2,986
Intrinsic value 7,876 3,480
- -----------------------------------------------------------------------------------------------------------
Book value 11,934 6,466
Futures at fair value 630 -
- -----------------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 12,564 $ 6,466
===========================================================================================================
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments at
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Carrying Estimated Fair Carrying Value Estimated Fair
Value Value Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 372,180 $ 372,180 $ 268,235 $ 268,235
Available-for-sale debt and equity securities 5,317,427 5,317,427 4,393,046 4,393,046
Held-to-maturity debt securities - - 590,700 612,417
Mortgage loans 992,170 1,024,582 907,024 924,732
Policy loans 791,753 730,059 796,193 715,914
Derivatives 12,564 11,629 6,466 5,123
Investment products 2,642,511 2,503,727 2,341,273 2,336,171
Debt 80,085 82,314 82,682 80,149
</TABLE>
For cash and cash equivalents carrying value approximates estimated fair value.
Debt and equity securities estimated fair values are based on quoted values
where available. Where quoted values are not available, estimated fair values
are based on discounted cash flows using current interest rates of similar
securities.
Mortgage loan fair values are estimated as the average of discounted cash flows
under different scenarios of future mortgage interest rates (including
appropriate provisions for default losses and borrower prepayments).
For variable rate policy loans the unpaid balance approximates fair value.
Fixed rate policy loan fair values are estimated based on discounted cash flows
using the current variable policy loan rate (including appropriate provisions
for mortality and repayments).
Derivatives estimated fair values are based on quoted values.
12
<PAGE> 86
Investment products include flexible premium annuities, single premium deferred
annuities and supplementary contracts not involving life contingencies.
Investment product fair values are estimated as the average of discounted cash
flows under different scenarios of future interest rates of A-rated corporate
bonds and related changes in premium persistency and surrenders.
Debt fair values are estimated values are based on discounted cash flows using
current interest rates of similar securities.
NOTE 5 - INSURANCE IN-FORCE AND REINSURANCE
National Life reinsures certain risks assumed in the normal course of business.
For individual life products, National Life generally retains no more than $3.0
million of risk on any person (excluding accidental death benefits and dividend
additions). Reinsurance for life products is ceded under yearly renewable
term, coinsurance, and modified coinsurance. Disability income products are
significantly reinsured under coinsurance and modified coinsurance.
National Life remains liable in the event any reinsurer is unable to meet its
assumed obligations. National Life regularly evaluates the financial condition
of its reinsurers and concentrations of credit risk of reinsurers to minimize
its exposure to significant losses from reinsurer insolvencies.
The effects of reinsurance for the years ended December 31, were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 470,853 $ 474,998
Reinsurance assumed 896 959
Reinsurance ceded (72,732) (69,671)
- -------------------------------------------------------------------------------
$ 399,017 $ 406,286
===============================================================================
Increase in policy liabilities:
Direct increase in policy $ 112,577 $ 164,233
liabilities
Reinsurance assumed 17 (20)
Reinsurance ceded 5,540 2,455
- -------------------------------------------------------------------------------
$ 118,134 $ 166,668
===============================================================================
Policy benefits:
Direct policy benefits $ 393,082 $ 363,405
Reinsurance assumed 12 62
Reinsurance ceded (79,275) (65,903)
- -------------------------------------------------------------------------------
$ 313,819 $ 297,564
===============================================================================
Policyowners' dividends:
Direct policyowners' dividends $ 111,617 $ 112,050
Reinsurance ceded (5,305) (6,360)
- -------------------------------------------------------------------------------
$ 106,312 $ 105,690
===============================================================================
</TABLE>
13
<PAGE> 87
NOTE 6 - INCOME TAXES
The components of income taxes and a reconciliation of the expected and actual
income taxes and marginal and effective federal income tax rates for the years
ended December 31 were as follows ($ in thousands):
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 41,654 $ 45,603
Deferred (20,747) (13,646)
- ------------------------------------------------------------------ -----------------
Income taxes $ 20,907 $ 31,957
================================================================== =================
Expected income taxes $ 22,531 35.0% $ 19,252 35.0%
Differential earnings amount 4,581 7.1 6,007 10.9
Affordable housing tax credit (4,318) (6.7) (1,305) (2.4)
Net change in tax reserves 1,298 2.0 10,290 18.7
Other, net (3,185) (4.9) (2,287) (4.1)
- -----------------------------------------------------------------------------------------------------------------
Income taxes $ 20,907 $ 31,957
================================================================= =================
Effective federal income tax rate 32.5% 58.1%
========================================== ============== ==================
</TABLE>
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Policy liabilities $ 172,387 $ 160,933
Other liabilities and accrued expenses 56,946 47,703
Other 4,294 10,495
- -----------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 233,627 219,131
- -----------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 126,914 125,454
Present value of future profits of insurance acquired 20,642 24,262
Net unrealized gain on available-for-sale securities 50,126 13,382
Debt and equity securities 9,253 9,352
Other 9,175 13,167
- -----------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 216,110 185,617
- -----------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 17,517 $ 33,514
=================================================================================================================
</TABLE>
Management believes it is more likely than not that National Life will realize
the benefit of deferred tax assets.
National Life's federal income tax returns are routinely audited by the IRS.
The IRS has examined tax returns through 1993 and is currently examining the
years 1994 and 1995. In management's opinion adequate tax liabilities have been
established for all open years.
NOTE 7 - BENEFIT PLANS
National Life sponsors a qualified defined benefit pension plan covering
substantially all employees. The plan is administered by National Life's
Benefits Committee and is non-contributory, with benefits based on an
employee's retirement age, years of service and compensation near retirement.
Plan assets are primarily bonds and common stocks held in a National Life
separate account and funds invested in an annuity contract issued by National
Life. National Life also sponsors other non-qualified pension plans, including
a non-contributory defined benefit plan for general agents that provides
benefits based on years of service and sales levels, a contributory defined
benefit plan for certain employees, agents and general
14
<PAGE> 88
agents and a non-contributory defined supplemental benefit plan for certain
executives. These non-qualified plans are not funded.
National Life sponsors four defined benefit postretirement plans that provide
medical, dental and life insurance benefits to employees and agents.
Substantially all employees and agents may be eligible for retiree benefits if
they reach normal retirement age and meet certain minimum service requirements
while working for National Life. Most of the plans are contributory, with
retiree contributions adjusted annually, and contain cost sharing features such
as deductibles and copayments. The plans are not funded and National Life pays
for plan benefits on a current basis. The cost of these benefits is recognized
as earned.
During 1997, National Life offered enhanced pension and postretirement benefits
to employees meeting certain defined eligibility requirements. The program
resulted in special termination benefits for the expected present value of the
enhancements to benefits, curtailment gains for reductions in the pension
benefit obligations relating to assumed increases in future compensation levels
and settlement gains for the pro-rata recognition of actuarial gains on lump
sum settlements of pension benefit obligations.
The status of the defined benefit plans at December 31, was as follows (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $180,075 $ 170,740 $ 24,351 $ 23,410
Service cost (benefits earned during the current period) 4,467 4,384 630 667
Interest cost on benefit obligation 13,629 11,788 1,669 1,652
Actuarial gains (19,077) 3,312 (3,587) (592)
Benefits paid (14,557) (10,149) (784) (786)
1997 early retirement program:
Special termination benefits 10,878 - 2,480 -
Curtailment gain (3,630) - - -
Settlement payments (8,799) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 162,986 $ 180,075 $ 24,759 $ 24,351
==============================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 97,566 $ 90,592
Actual return on plan assets 23,337 10,230
Employer contributions 2,502 2,047
Benefits paid (5,722) (5,303)
1997 early retirement program settlement payments (8,799) -
- ------------------------------------------------------------------------------------------------------
Plan assets, end of year $ 108,884 $ 97,566
======================================================================================================
FUNDED STATUS:
Benefit obligation $ 162,986 $ 180,075 $ 24,759 $ 24,351
Plan assets (108,884) (97,566) - -
- ------------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 54,102 82,509 24,759 24,351
Unrecognized actuarial gains (losses) 28,485 (2,376) 4,548 930
Unrecognized prior service cost - - (1,224) (1,296)
- ------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost (included in other liabilities) $ 82,587 $ 80,133 $ 28,083 $ 23,985
==============================================================================================================================
</TABLE>
15
<PAGE> 89
The components of net periodic benefit cost for the years ended December 31,
were as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 4,467 $ 4,384 $ 630 $ 667
Interest cost on benefit obligation 13,629 11,788 1,669 1,652
Expected return on plan assets (8,636) (6,225) - -
Net amortization and deferrals - - 31 -
Amortization of prior service cost - - 72 72
1997 early retirement program:
Special termination benefits 10,878 - 2,480 -
Curtailment gain (3,630) - - -
Settlement gains (2,917) - - -
- ------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating expenses) $ 13,791 $ 9,947 $ 4,882 $ 2,391
==================================================================================================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation $ 69,116 $ 71,511
Accumulated benefit obligation 66,268 67,070
Fair value of plan assets - -
</TABLE>
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.50% 7.00% 7.50% 7.00%
Rate of increase in future compensation levels 3.50% 5.00%
Expected long term return on plan assets 9.00% 7.00%
</TABLE>
Health care cost trend rates grade to 5% in year 2000 and remain level
thereafter. Increasing the assumed health care trend rates by one percentage
point in each year would increase the APBO by about $2.4 million and the 1997
service and interest cost components of net periodic postretirement benefit
cost by about $0.3 million. Decreasing the assumed health care trend rates by
one percentage point in each year would reduce the APBO by about $1.9 million
and the 1997 service and interest cost components of net periodic
postretirement benefit cost by about $0.3 million. National Life uses the
straight-line method of amortization for prior service cost and unrecognized
gains and losses.
National Life provides employee savings and 401(k) plans where up to 3% of an
employee's compensation may be invested by the employee in either plan with
matching funds contributed by the company. National Life also contributes
various amounts 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.
16
<PAGE> 90
NOTE 8 - DEBT
<TABLE>
<CAPTION>
Debt consists of the following (in thousands):
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,685 $ 69,682
$70 million, maturing March 1, 2024 with interest payable
semi-annually on March 1 and September 1. The notes are
unsecured and subordinated to all present and future
indebtedness, policy claims and prior claims. The notes may be
redeemed in whole or in part any time after March 1, 2004 at
predetermined redemption prices. All interest and principal
payments require prior written approval by the State of Vermont
Department of Banking, Insurance, Securities and Health Care
Administration.
6.10% Term Note: 10,400 13,000
maturing March 1, 2000 with interest payable semi-annually on
March 1 and September 1. The note is secured by subsidiary
stock, includes certain restrictive covenants and requires
annual payments of principal (see below).
- ---------------------------------------------------------------------------------------------------------------------------
Total debt $ 80,085 $ 82,682
===========================================================================================================================
</TABLE>
The aggregate annual maturities of debt for the next five years are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 4,400
1999 3,000
2000 3,000
2001 -
2002 -
</TABLE>
In February 1998, the Term Note was renegotiated. Under the new terms,
effective March 1, 1998, the interest rate will be 6.57% with principal
payments of $2.0 million annually for 1998 to 2001 (inclusive) and $2.4 million
in 2002.
NOTE 9 - CONTINGENCIES
During 1997, several class action lawsuits were filed against National Life in
various states relating to the sale of life insurance policies during the
1980's and 1990's. National Life specifically denies any wrongdoing and
intends to defend these cases vigorously. Accordingly, a provision for legal
and administrative costs of defending these lawsuits was established in 1997.
The ultimate outcome of such litigation is uncertain given the complexity and
scope of the issues involved. While management believes that the ultimate
outcome is unlikely to have a material adverse effect on National Life's
financial position (after considering existing provisions), an adverse outcome
could materially affect operating results for a given year.
17
<PAGE> 91
NOTE 10 - STATUTORY INFORMATION
National Life prepares statutory basis financial statements for regulatory
filings with insurance regulators in all 50 states and the District of
Columbia. A reconciliation of National Life Insurance Company's statutory
surplus to GAAP retained earnings at December 31 and statutory net income to
GAAP net income for the years ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------
Surplus/ Surplus/
Retained Retained
Earnings Net Income Earnings Net Income
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 342,614 $ 49,574 $ 305,611 $ 11,684
Asset valuation reserve 67,734 - 57,054 -
Interest maintenance reserve 56,940 (229) 57,169 1,540
Surplus notes (69,685) (3) (69,682) (3)
Non-admitted assets 20,874 - 18,391 -
Investments (944) (18,856) 18,504 290
Deferred policy acquisition costs 437,932 (5,651) 443,583 3,970
Deferred income taxes 72,544 13,807 58,737 9,179
Policy liabilities (186,349) 7,449 (193,798) (9,874)
Policyowners' dividends 64,734 2,206 62,528 (1,142)
Benefit plans (37,826) (1,732) (36,094) 4,403
Other changes, net (12,696) (10,734) (1,962) (2,924)
- --------------------------------------------------------------------------------------------------------------
GAAP retained earnings/net income $ 755,872 $ 35,831 $ 720,041 $ 17,123
==============================================================================================================
</TABLE>
The New York Insurance Department recognizes only statutory accounting
practices for determining and reporting the financial condition and results of
operations of an insurance company and for determining solvency under the New
York Insurance Law. No consideration is given by the Department to financial
statements prepared in accordance with generally accepted accounting principles
in making such determinations.
18
<PAGE> 92
NATIONAL VARIABLE
LIFE INSURANCE ACCOUNT
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1997
F-21
<PAGE> 93
[PRICE WATERHOUSE LLP LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
April 22, 1998
To the Board of Directors of
National Life Insurance Company
and Policyowners of
National Variable Life Insurance Account
In our opinion, the accompanying statement of assets and the related
statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of National Variable Life
Insurance Account (a Separate Account of National Life Insurance Company)
(the Variable Account) at December 31, 1997, and the results of its
operations and the changes in its net assets for year ended December
31, 1997 and the period from March 11, 1996 through December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Variable Account's management;
our responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit of these financial 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 audit provides a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
F-22
<PAGE> 94
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - NATURE OF OPERATIONS
National Variable Life Insurance Account (the Variable Account) began
operations on March 11, 1996 and is registered as a unit investment trust
under the Investment Company Act of 1940, as amended. The operations of
the Variable Account are part of National Life Insurance Company (National
Life). The Variable Account was established by National Life as a
separate investment account to invest the net premiums received from the
sale of certain variable life insurance products. Equity Services, Inc.,
an indirect wholly-owned subsidiary of National Life, is the principal
underwriter for the variable life insurance policies issued by National
Life. Sentinel Advisors Company, an indirectly-owned subsidiary of
National Life, provides investment advisory services for certain Market
Street Fund, Inc. mutual fund portfolios.
The Variable Account invests the accumulated policyowner account values in
shares of mutual fund portfolios within Market Street Fund, Inc., Variable
Insurance Products Fund (VIPF), and Alger American Fund. Net premiums
received by the Variable Account are deposited in investment portfolios as
designated by the policyowner, except for initial net premiums on new
policies which are first invested in the Market Street Fund Money Market
Portfolio. Policyowners may also direct the allocations of their account
value between the various investment portfolios within the Variable
Account and a declared interest account (within the General Account of
National Life) through participant transfers.
There are fifteen sub-accounts within the Variable Account. Each
sub-account, which invests exclusively in the shares of the corresponding
portfolio, comprises the accumulated policyowner account values of the
underlying variable life insurance policies investing in the sub-account.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with generally
accepted accounting principles (GAAP). The preparation of financial
statements in accordance with GAAP requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies consistently
followed in the preparation of the Variable Account's financial statements.
INVESTMENTS
The mutual fund portfolios consist of the Market Street Fund Money Market,
Market Street Fund Growth (formerly Market Street Fund Common Stock),
Market Street Fund Aggressive Growth, Market Street Fund Managed, Market
Street Fund Bond, Market Street Fund International, Market Street Fund
Sentinel Growth, VIPF Equity-Income, VIPF Overseas, VIPF Growth, VIPF High
Income, VIPF Contra, VIPF Index 500, Alger American Growth, Alger American
Small Capitalization (the Portfolios). The VIPF Contra and VIPF Index 500
mutual fund portfolios were added to the Variable Account in 1997. The
assets of each portfolio are held separate from the assets of the other
portfolios and each has different investment objectives and policies.
Each portfolio operates separately and the gains or losses in one
portfolio have no effect on the investment performance of the other
portfolios.
INVESTMENT VALUATION
The investments in the Portfolios are valued at the closing net asset
value per share as determined by the portfolio at the end of each period.
The change in the difference between cost and market value is reflected as
unrealized gain (loss) in the Statement of Operations.
F-32
<PAGE> 95
INVESTMENT TRANSACTIONS
Investment transactions are accounted for on the trade date (date the
order to buy or sell is executed) and dividend income (including capital
gain distributions) are recorded on the ex-dividend date. The cost of
investments sold is determined using the weighted average cost method.
FEDERAL INCOME TAXES
The operations of the Variable Account are part of, and taxed with, the
total operations of National Life. Under existing federal income tax law,
investment income and capital gains attributable to the Variable Account
are not taxed.
NOTE 3 - CHARGES AND EXPENSES
National Life deducts a daily charge from the Variable Account based on an
annual rate of .9% of each sub-account's net asset value for its
assumption of mortality and expense risks. The mortality risk assumed is
that the insureds under the policies may die sooner than anticipated. The
expense risk assumed is that expenses incurred in issuing and
administering the policies may exceed expected levels.
Cost of insurance charges are deducted monthly from each policyowner's
accumulated account value for the insurance protection provided and are
remitted to National Life. These charges vary based on the net amount at
risk, attained age of the insured, and other factors. As partial
compensation for administrative services provided, National Life also
deducts a monthly administrative charge from each policyowner's
accumulated account value.
Certain deferred administrative and sales charges are deducted from the
policyowner's accumulated account value if the underlying variable life
insurance policy is surrendered or lapsed prior to the end of the
fifteenth policy year.
NOTE 4 - INVESTMENTS
The number of shares held and cost for each of the portfolios at December 31,
1997 are set forth below:
<TABLE>
<CAPTION>
Portfolio Shares Cost
- --------- ------ ----
<S> <C> <C>
Market Street Fund Money Market 3,943,908 $ 3,943,908
Market Street Fund Growth 636,350 10,260,180
Market Street Fund Aggressive Growth 28,951 586,320
Market Street Fund Managed 56,668 880,427
Market Street Fund Bond 39,297 419,059
Market Street Fund International 66,520 895,490
Market Street Fund Sentinel Growth 545,281 5,602,736
VIPF Equity-Income 194,007 4,228,149
VIPF Overseas 65,691 1,253,090
VIPF Growth 92,369 3,129,870
VIPF High Income 85,125 1,089,467
VIPF Contra 20,915 411,546
VIPF Index 500 4,759 528,529
Alger American Growth 48,594 1,880,879
Alger American Small Capitalization 62,841 2,607,214
-----------
Total $37,716,864
===========
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-33
<PAGE> 96
NOTE 5 - PURCHASES AND SALES OF PORTFOLIO SHARES
Purchases and proceeds from sales of shares in the portfolios for the period
ended December 31, 1997 aggregated the following:
<TABLE>
<CAPTION>
Portfolio Purchases Proceeds
- --------- ------------- ------------
<S> <C> <C>
Market Street Fund Money Market $ 22,741,388 $ 19,929,117
Market Street Fund Growth 5,581,934 1,245,245
Market Street Fund Aggressive Growth 619,884 146,745
Market Street Fund Managed 662,415 212,469
Market Street Fund Bond 409,686 70,206
Market Street Fund International 830,063 197,678
Market Street Fund Sentinel Growth 667,611 168,249
VIPF Equity-Income 3,882,437 991,921
VIPF Overseas 1,374,157 322,772
VIPF Growth 3,003,178 582,960
VIPF High Income 1,135,782 224,814
VIPF Contra 573,322 164,368
VIPF Index 500 692,398 165,769
Alger American Growth 1,724,350 433,208
Alger American Small Capitalization 2,643,580 683,616
</TABLE>
NOTE 6 - LOANS
Policyowners may obtain loans after the first policy year as outlined in
the variable life insurance policy. At the time a loan is granted,
accumulated value equal to the amount of the loan is designated as
collateral and transferred from the Variable Account to the General
Account of National Life. Interest is credited by National Life at
predetermined rates on collateral held in the General Account. This
interest is periodically transferred to the Variable Account.
NOTE 7 - DISTRIBUTION OF NET INCOME
The Variable Account does not expect to declare dividends to policyowners
from accumulated net income. The accumulated net income will be
distributed to policyowners as withdrawals (in the form of death benefits,
surrenders or policy loans) in excess of the policyowners' net
contributions to the Variable Account.
NOTE 8 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (IRC),
a variable universal life contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be
treated as a variable universal life contract for federal income tax
purposes for any period for which the investments of the segregated asset
account on which the contract is based are not adequately diversified.
The IRC provides that the adequately diversified requirement may be met if
the underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the
Secretary of the Treasury.
National Life believes that the Variable Account satisfies the current
requirements of the regulations, and it intends that the Variable Account
will continue to meet such requirements.
F-34
<PAGE> 97
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF ASSETS
December 31, 1997
<TABLE>
<CAPTION>
Policyowner National Life
Account Insurance
Values Company
---------------------- -------------------
<S> <C> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value
(policyowner accumulation units and unit value):
Market Street Fund Money Market (356,624.12 accumulation units at
$11.06 unit value) $ 3,943,908
Market Street Fund Growth (373,191.56 accumulation units at $14.32
unit value) 5,342,928 $ 7,275,510
Market Street Fund Aggressive Growth (47,206.16 accumulation units at
$13.61 unit value) 642,433
Market Street Fund Managed (74,215.85 accumulation units at
$13.03 unit value) 966,753
Market Street Fund Bond (38,703.43 accumulation units at 11.15 unit value) 431,479
Market Street Fund International (75,825.93 accumulation units
at $11.94 unit value) 905,335
Market Street Fund Sentinel Growth (43,427.93 accumulation units at
$14.43 unit value) 626,453 7,329,199
VIPF Equity-Income (156,267.63 accumulation units at
$30.14 unit value) 4,710,498
VIPF Overseas (67,798.07 accumulation units at $18.60 unit value) 1,261,285
VIPF Growth (112,061.30 accumulation units at $30.58 unit value) 3,426,885
VIPF High Income (40,363.08 accumulation units at $28.64 unit value) 1,156,003
VIPF Contra Fund (34,066.94 accumulation units at $12.24 unit value) 417,046
VIPF Index 500 (23,228.43 accumulation units at $23.44 unit value) 544,410
Alger American Growth (155,907.83 accumulation units at
$13.33 unit value) 2,077,864
Alger American Small Capitalization (247,743.48 accumulation units
at $11.10 unit value) 2,749,311
-------------------------------------
TOTAL ASSETS $ 29,202,591 $ 14,604,709
=====================================
</TABLE>
<TABLE>
<CAPTION>
Total
--------------------
<S> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value
(policyowner accumulation units and unit value):
Market Street Fund Money Market (356,624.12 accumulation units at
$11.06 unit value) $ 3,943,908
Market Street Fund Growth (373,191.56 accumulation units at $14.32
unit value) 12,618,438
Market Street Fund Aggressive Growth (47,206.16 accumulation units at
$13.61 unit value) 642,433
Market Street Fund Managed (74,215.85 accumulation units at
$13.03 unit value) 966,753
Market Street Fund Bond (38,703.43 accumulation units at 11.15 unit value) 431,479
Market Street Fund International (75,825.93 accumulation units
at $11.94 unit value) 905,335
Market Street Fund Sentinel Growth (43,427.93 accumulation units at
$14.43 unit value) 7,955,652
VIPF Equity-Income (156,267.63 accumulation units at
$30.14 unit value) 4,710,498
VIPF Overseas (67,798.07 accumulation units at $18.60 unit value) 1,261,285
VIPF Growth (112,061.30 accumulation units at $30.58 unit value) 3,426,885
VIPF High Income (40,363.08 accumulation units at $28.64 unit value) 1,156,003
VIPF Contra Fund (34,066.94 accumulation units at $12.24 unit value) 417,046
VIPF Index 500 (23,228.43 accumulation units at $23.44 unit value) 544,410
Alger American Growth (155,907.83 accumulation units at
$13.33 unit value) 2,077,864
Alger American Small Capitalization (247,743.48 accumulation units
at $11.10 unit value) 2,749,311
---------------------
TOTAL ASSETS $ 43,807,300
=====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 98
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Policyowner Account Values
----------------------------------------------------------------------------------------
Market Street Fund Alger American
------------------------------------------------------------------- ------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth Growth Small Cap
-------- -------- ------- -------- ----- ------------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $131,394 $139,288 $ 1,211 $ 23,450 $ 9,403 $19,573 $ 434 $ 9,832 $ 54,467
EXPENSES:
Mortality and expense risk charges 22,402 24,951 3,114 5,910 1,833 5,158 2,431 11,355 15,072
----------------------------------------------------------------------------------------
Net investment income (loss) 108,992 114,337 (1,903) 17,540 7,570 14,415 (1,997) (1,523) 39,395
----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold - 106,196 12,533 13,707 483 6,441 16,851 48,393 29,498
Net unrealized appreciation
(depreciation) on investments - 353,473 51,230 85,995 11,666 2,281 44,338 176,680 141,467
----------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 459,669 63,763 99,702 12,149 8,722 61,189 225,073 170,965
----------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $108,992 $574,006 $61,860 $117,242 $19,719 $23,137 $59,192 $223,550 $210,360
========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 99
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Policyowner Account Values National Life Insurance Company
---------------------------------------------------------- ---------------------------------
VIPF Market Street Fund
---------------------------------------------------------- ----------------------
Equity - High Contra Index Sentinel
Income Overseas Growth Income Fund 500 Growth Growth Total
---------- -------- -------- ------- ------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 146,791 $ 22,598 $ 30,327 $17,180 $ - $ - $ 305,307 $ 26,233 $ 937,488
EXPENSES:
Mortality and expense risk charges 25,535 6,281 17,476 5,215 812 984 - - 148,529
---------------------------------------------------------------------------------------------
Net investment income (loss) 121,256 16,317 12,851 11,965 (812) (984) 305,307 26,233 788,959
---------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 77,167 9,870 48,614 10,903 2,592 1,900 - - 385,148
Net unrealized appreciation
(depreciation) on investments 428,283 (475) 280,065 62,794 5,500 15,881 1,315,203 1,732,966 4,707,347
---------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 505,450 9,395 328,679 73,697 8,092 17,781 1,315,203 1,732,966 5,092,495
---------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $341,530 $85,662 $ 7,280 $ 16,797 $1,620,510 $1,759,199 $5,881,454
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 100
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
Policyowner Account Values
------------------------------------------------------------------------
Market Street Fund
------------------------------------------------------------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth
-------- ------- ---------- ------- ------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 29,274 $ 1,900 $ - $ 283 $ 216 $ - $ -
EXPENSES:
Mortality and expense risk charges 5,265 1,828 225 372 141 529 201
------------------------------------------------------------------------
Net investment income (loss) 24,009 72 (225) (89) 75 (529) (201)
------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold - 8,318 828 346 133 1,673 489
Net unrealized
appreciation on investments - 34,582 4,883 331 753 7,565 5,612
------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 42,900 5,711 677 886 9,238 6,101
------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 24,009 $42,972 $ 5,486 $ 588 $ 961 $ 8,709 $ 5,900
========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 101
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
Policyowner Account Values National Life Insurance Company
-------------------------------------------------------- ---------------------------------
VIPF Alger American Market Street Fund
------------------------------------ ----------------- ---------------------
Equity - High Sentinel
Income Overseas Growth Income Growth Small Cap Growth Growth Total
--------- -------- ------ ------- -------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ - $ - $ - $ - $ 326 $ 42 $ - $ - $ 32,041
EXPENSES:
Mortality and expense risk charges 3,061 476 1,503 279 1,425 1,294 - - 16,599
--------------------------------------------------------------------------------------------
Net investment income (loss) (3,061) (476) (1,503) (279) (1,099) (1,252) - - 15,442
--------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 6,031 880 5,445 470 5,700 696 - - 31,009
Net unrealized
appreciation on investments 54,065 8,670 16,949 3,742 20,305 631 655,000 570,000 1,383,088
--------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 60,096 9,550 22,394 4,212 26,005 1,327 655,000 570,000 1,414,097
--------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 57,035 $ 9,074 $ 20,891 $ 3,933 $ 24,906 $ 75 $ 655,000 $ 570,000 $1,429,539
============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 102
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Policyowner Account Values
---------------------------------------------------------------------------------------------
Market Street Fund Alger American
----------------------------------------------------------------------- ---------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth Growth Small Cap
----------- ---------- -------- -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 108,992 $ 574,006 $ 61,860 $117,242 $ 19,719 $ 23,137 $ 59,192 $ 223,550 $ 210,360
---------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 14,928,533 1,666,786 226,537 291,903 117,811 333,866 200,093 726,590 1,015,432
Transfers between investment
sub-accounts and general account,
net (11,556,251) 2,658,992 304,863 252,090 250,863 372,293 310,212 755,142 1,179,593
Surrenders and lapses (35,239) (16,526) (3,762) (7,277) (2,819) (3,213) (1,141) (6,060) (19,896)
Death benefits - (16,352) - - - - - - (830)
Loan collateral interest received - 62 - - - - 9 91 93
Transfers for policy loans - (12,082) (47) - - (845) (437) (9,340) (14,708)
Cost of insurance and
administrative charges (632,456) (368,354) (52,706) (103,982) (33,934) (82,909) (37,403) (174,005) (238,728)
Miscellaneous (1,308) 4,519 158 (328) (11) (1,222) 3,791 246 (388)
---------------------------------------------------------------------------------------------
Total capital transactions 2,703,279 3,917,045 475,043 432,406 331,910 617,970 475,124 1,292,664 1,920,568
---------------------------------------------------------------------------------------------
Increase in net assets 2,812,271 4,491,051 536,903 549,648 351,629 641,107 534,316 1,516,214 2,130,928
Net assets, beginning of period 1,131,637 851,877 105,530 417,105 79,850 264,228 92,137 561,650 618,383
---------------------------------------------------------------------------------------------
Net assets, end of period $ 3,943,908 $5,342,928 $642,433 $966,753 $431,479 $905,335 $626,453 $2,077,864 $2,749,311
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 103
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Policyowner Account Values National Life Insurance Company
------------------------------------------------------------- ---------------------------------
VIPF Market Street Fund
------------------------------------------------------------- ---------------------
Equity- High Contra Index Sentinel
Income Overseas Growth Income Fund 500 Growth Growth Total
---------- ---------- ---------- ---------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $ 341,530 $ 85,662 $ 7,280 $ 16,797 $1,620,510 $1,759,199 $ 5,881,454
-----------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,350,368 421,824 1,240,642 273,306 90,825 112,247 - - 22,996,763
Transfers between investment
sub-accounts and general
account, net 1,824,653 715,582 1,471,895 690,283 331,696 436,969 - - (1,125)
Surrenders and lapses (15,710) (3,305) (15,336) (2,774) (489) (322) - - (133,869)
Death benefits - (295) (879) - - - - - (18,356)
Loan collateral interest
received 390 101 115 12 - - 873
Transfers for policy loans (27,151) (8,820) (15,684) (1,157) (201) - - - (90,472)
Cost of insurance and
administrative charges (363,378) (92,839) (274,427) (61,178) (12,527) (19,167) - - (2,547,993)
Miscellaneous 89 2,820 1,042 511 462 (2,114) - - 8,267
-----------------------------------------------------------------------------------------------
Total capital transactions 2,769,261 1,035,068 2,407,368 899,003 409,766 527,613 - - 20,214,088
-----------------------------------------------------------------------------------------------
Increase in net assets 3,395,967 1,060,780 2,748,898 984,665 417,046 544,410 1,620,510 1,759,199 26,095,542
Net assets, beginning of period 1,314,531 200,505 677,987 171,338 - - 5,655,000 5,570,000 17,711,758
-----------------------------------------------------------------------------------------------
Net assets, end of period $4,710,498 $1,261,285 $3,426,885 $1,156,003 $417,046 $544,410 $7,275,510 $7,329,199 $43,807,300
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 104
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD MARCH 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
Policyowner Account Values
------------------------------------------------------------------------------------------
Market Street Fund
------------------------------------------------------------------------------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth
---------- ---------- ----------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 24,009 $ 42,972 $ 5,486 $ 588 $ 961 $ 8,709 $ 5,900
------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 5,500,094 210,351 40,861 49,310 8,079 65,892 14,470
National Life contributions - - - - - - -
Transfers between investment
sub-accounts, net (4,100,684) 639,915 64,732 369,030 73,513 203,603 77,833
Surrenders and lapses (127) (315) (47) - (51) (56) -
Cost of insurance and
administrative charges (290,783) (41,128) (5,468) (7,856) (2,613) (14,118) (6,068)
Miscellaneous (872) 82 (34) 6,033 (39) 198 2
------------------------------------------------------------------------------------------
Total capital transactions 1,107,628 808,905 100,044 416,517 78,889 255,519 86,237
------------------------------------------------------------------------------------------
Increase in net assets 1,131,637 851,877 105,530 417,105 79,850 264,228 92,137
Net assets, beginning of period - - - - - - -
------------------------------------------------------------------------------------------
Net assets, end of period $1,131,637 $ 851,877 $ 105,530 $ 417,105 $ 79,850 $ 264,228 $ 92,137
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 105
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD MARCH 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
Policyowner Account Values National Life Insurance Company
----------------------------------------------------------- -----------------------------------
VIPF Alger American Market Street Fund
---------------------------------------- ------------------ ----------------------
Equity - High Sentinel
Income Overseas Growth Income Growth Small Cap Growth Growth Total
---------- -------- ------- -------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 57,035 $ 9,074 $ 20,891 $ 3,933 $ 24,906 $ 75 $ 655,000 $ 570,000 $ 1,429,539
------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 230,608 52,178 200,316 51,019 171,670 203,653 - - 6,798,501
National Life contributions - - - - - - 5,000,000 5,000,000 10,000,000
Transfers between investment
sub-accounts, net 1,062,706 149,481 493,808 121,155 394,402 450,506 - - -
Surrenders and lapses (767) (77) (608) (63) (103) (636) - - (2,850)
Cost of insurance and
administrative charges (36,513) (10,135) (37,565) (4,878) (29,318) (34,969) - - (521,412)
Miscellaneous 1,462 (16) 1,145 172 93 (246) - - 7,980
------------------------------------------------------------------------------------------------
Total capital transactions 1,257,496 191,431 657,096 167,405 536,744 618,308 5,000,000 5,000,000 16,282,219
------------------------------------------------------------------------------------------------
Increase in net assets 1,314,531 200,505 677,987 171,338 561,650 618,383 5,655,000 5,570,000 17,711,758
Net assets, beginning of period - - - - - - - - -
Net assets, end of period $1,314,531 $200,505 $677,987 $171,338 $561,650 $618,383 $5,655,000 $5,570,000 $17,711,758
================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 106
(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: (800) 537-7003
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. This
Prospectus offers the Policy only in the state of New York.
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 fifteen 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, which is 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. In addition, it is expected that a total of eleven
Portfolios from the following Funds will be made available under the Policies
starting on or before September 30, 1998: the American Century Variable
Portfolios, Inc., managed by American Century Investment Management, Inc., the
Goldman Sachs Variable Insurance Trust, managed by Goldman Sachs Asset
Management and Goldman Sachs Asset Management International, the J.P. Morgan
Series Trust II, managed by J.P. Morgan Asset Management Inc., the Neuberger &
Berman Advisers Management Trust, managed by Neuberger & Berman Management
Incorporated, and the Strong Variable Insurance Funds, Inc., and Strong
Opportunity Fund II, managed by Strong Capital 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.
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THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY CURRENT PROSPECTUSES OR
PROSPECTUS PORTFOLIO FOR THE FUNDS LISTED ABOVE.
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PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
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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 POLICIES 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 May 1, 1998
<PAGE> 107
TABLE OF CONTENTS
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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 . . . . . . . . . . . . . . . . . . . . . .
Summary of Policy Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of Policy Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium Tax Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monthly Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrender Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Daily Charge Against the Separate Account . . . . . . . . . . . . . . . . . . . .
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 Common Stock Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Growth Portfolio . . . . . . . . . . . . . . . . . . . .. . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index 500 Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contrafund Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alger American Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alger American Small Capitalization Portfolio . . . . . . . . . . . . . . . . . .
Alger American Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . .
American Century Variable Portfolios, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
VP Value Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VP Income & Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goldman Sachs Variable Insurance Trust . . . . . . . . . . . . . . . . . . . . . . . . . .
International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CORE Small Cap Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid Cap Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J.P. Morgan Series Trust II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Opportunities Portfolio . . . . . . . . . . . . . . . . . . . . . .
Small Company Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neuberger & Berman Advsiers Management Trust . . . . . . . . . . . . . . . . . . . . . . .
Partners Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strong Variable Insurance Funds, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strong Opportunity Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
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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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialized Uses of the Policy . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate Account Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortality and Expense Risk Charge . . . . . . . . . . . . . . . . . .
Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projection Report Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Policy Rights and Privileges
Loan Privileges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Rate Charged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocation of Loans and Collateral . . . . . . . . . . . . . . . . . . . . . . . .
Interest Credited to Amounts Held as Collateral . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy Rights Under Certain Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The General Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum Guaranteed and Current Interest Rates . . . . . . . . . . . . . . . . . . . . . .
Calculation of Non-loaned Accumulated Value in the General Account . . . . . . . .
Transfers from General Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Policy Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity at 99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduced Paid-Up Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of Policy Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change of Owner and Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . .
Split Dollar Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Misstatement of Age and Sex . . . . . . . . . . . . . . . . . . . . . . . . . . .
Suicide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incontestability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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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 . . . . . . . . . . . . . . . . . . . . . . . .
Possible Changes in Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preparing for Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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> 111
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. The interest of any
Beneficiary who dies before the Insured shall vest in the Owner unless otherwise stated.
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 is 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> 112
<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 current charge of $7.50 per month included in the Monthly Deduction, which is intended
to reimburse National Life for ordinary administrative expenses. On a guaranteed basis,
this charge may not exceed $7.50 per policy plus $0.07 per thousand of Face Amount per
month.
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.
</TABLE>
2
<PAGE> 113
<TABLE>
<S> <C>
NET AMOUNT AT RISK The amount by which the Unadjusted Death Benefit exceeds the Accumulated Value.
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 the applicable 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.
</TABLE>
3
<PAGE> 114
<TABLE>
<S> <C>
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 Value of the Policy. The Withdrawal Charge
will be deducted from the Withdrawal Amount.
</TABLE>
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 matures resulting in payment of the Cash Surrender Value, when the
Insured reaches Attained Age 99.
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 fifteen 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
4
<PAGE> 115
Market Street Fund, the Variable Insurance Products Fund, the Variable
Insurance Products Fund II and the Alger American Fund. In addition, it is
expected that a total of eleven Portfolios from the following Funds will be made
available under the Policies starting on or before September 30, 1998: the
American Century Variable Portfolios, Inc., managed by American Century
Investment Management, Inc., the Goldman Sachs Variable Insurance Trust,
managed by Goldman Sachs Asset Management and Goldman Sachs Asset Management
International, the J.P. Morgan Series Trust II, managed by J.P. Morgan Asset
Management Inc., the Neuberger & Berman Advisers Management Trust, managed by
Neuberger & Berman Management Incorporated, and the Strong Variable Insurance
Funds, Inc., and Strong Opportunity Fund II, managed by Strong Capital
Management, Inc. There is no 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. National Life will reserve the
right to limit the number of Subaccounts used in any one Policy over its entire
life to 17.
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 credits an additional
5
<PAGE> 116
0.50% per annum on the non-loaned portion of the Accumulated Value in the
General Account in each Policy Year beginning with Policy Year 11. 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 (or other evidence satisfactory to National Life that delivery has
been completed), and until the date which is ten days after the date of such
delivery, 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 twelve 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 or any longer
period provided by state law. 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
Summary of Policy Expenses.
<TABLE>
<S> <C>
Transaction Expenses
Premium Tax.............................. 3.25%
Sales Loan Imposed on Purchases.......... NONE
Surrender Charge......................... See below
Withdrawal Charge........................ Lesser of 2% or $25
Annual Charges
Mortality and Expense Risk Charge........ 0.90%
Cost of Insurance Charge................. Varies by age, sex, Rate Class-See below
Administrative Charge.................... $90 per year
</TABLE>
Annual Charges of Underlying Funds (for the year ended December 31, 1997
<TABLE>
<CAPTION>
Management Other Total
Fee Expenses Expenses
---------- -------- --------
<S> <C> <C> <C>
Alger:
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Small Capitalization 0.85% 0.04% 0.89%
Market Street Fund, Inc.:
Money Market Portfolio 0.25% 0.14% 0.39%
Bond Portfolio 0.35% 0.22% 0.57%
Managed Portfolio 0.40% 0.18% 0.58%
Aggressive Growth Portfolio 0.45% 0.18% 0.63%
International Portfolio 0.75% 0.27% 1.02%
Growth Portfolio 0.33% 0.10% 0.43%
Sentinel Growth Portfolio 0.50% 0.40% 0.90%
Fidelity: Variable Insurance Products Fund I:
Equity Income Portfolio 0.50% 0.08% 0.58%
Growth Portfolio 0.60% 0.07% 0.67%
High Income Portfolio 0.59% 0.12% 0.71%
Overseas Portfolio 0.75% 0.17% 0.92%
Fidelity: Variable Insurance Products Fund II:
Index 500 Portfolio 0.24% 0.04% 0.28%
Contrafund Portfolio 0.60% 0.11% 0.71%
</TABLE>
<TABLE>
Funds Expected to be Available on or before September 30, 1998:
- ---------------------------------------------------------------
<S> <C> <C> <C>
American Century Variable Portfolios, Inc.
VP Value Portfolio 1.00% 0 1.00%
VP Income Growth Portfolio .70% 0 .70%
Goldman Sachs Variable Insurance Trust
International Equity 1.00% .25% 1.25%
Global Income .90% .15% 1.05%
CORE Small Cap Equity .75% .15% .90%
Mid Cap Equity .80% .15% .95%
J.P. Morgan Series Trust II
International Opportunities Portfolio .60% .60% 1.20%
Small Company Portfolio .60% .55% 1.15%
Neuberger & Berman Advisers Management Trust
Partners Portfolio .86% 0 .86%
Strong Variable Insurance Funds, Inc.
Growth Fund II 1.00% .20% 1.20%
Strong Opportunity Fund II 1.00% .15% 1.15%
</TABLE>
National Life has agreed to reimburse a portion of the expenses of the
Market Street Sentinel Growth Portfolio. Without this reimbursement, that
Portfolio's the management fee, other expenses and total expenses would have
been 0.50%, 0.85% and 1.35% respectively.
Fidelity Investments agreed to reimburse a portion of the Index 500
Portfolios expenses during the period. Without this reimbursement, that
Portfolio's management fee, other expenses and total expenses would have been
0.24%, 0.16% and 0.40% respectively.
Strong Capital Management, Inc. agreed to reimburse a portion of the
Growth Fund II Portfolio's expenses during the period. Without this
reimbursement, that Fund's management fee, other expenses and total expenses
would have been 1.00%, 1.00% and 2.00% respectively.
J.P. Morgan Asset Management, Inc. agreed to reimburse a portion of the
International Opportunities Portfolio's expenses and the Small Company
Portfolio's expenses during the period. Without this reimbursement, the
International Opportunities Portfolio's management fee, other expenses and total
expenses would have been 0.60%, 3.65% and 4.25%, respectively, and the Small
Company Portfolio's management fee, other expenses and total expenses would have
been 0.60%, 3.21% and 3.81%, respectively.
It is anticipated that these reimbursement arrangements will continue,
but there are no legal obligations to continue these arrangements for any
particular period of time; if they are terminated, the affected Portfolios'
expenses may increase.
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
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<PAGE> 117
deducted from future premiums if the applicable law is changed. (See "Premium
Tax Charge," Page ____.)
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 currently $7.50. (See "Monthly Administrative Charge,"
Page ____.) Beginning with Policy Year 11, National Life will credit a Separate
Account Enhancement under which the Monthly Deductions are reduced by 0.50% per
annum of the Accumulated Value in the Separate Account. (See "Separate Account
Enhancement," Page ____.) The Separate Account Enhancement 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 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).
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 ____.)
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 twelve transfers in any one Policy Year. (See "Transfer Charge," Page
____.)
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<PAGE> 118
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, not to
exceed $25, for each projection report requested by the Owner. (See "Projection
Report Charge, 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 will 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
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ten Policy Years. 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 ____.)
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 Policyowners, 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
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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, 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 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 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
December 31, 1997, National Life's consolidated assets were over $8 billion.
(See "Financial Statements," Page F-1.)
THE SEPARATE ACCOUNT
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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 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.
Owners may choose among the Subaccount options described below. However,
once the new Subaccounts which are expected to be made available on or
before September 30, 1998 are made available, National Life will reserve
the right to limit the number of different Subaccounts used in any one
Policy over its entire life to 17.
THE MARKET STREET FUND
The Growth, Sentinel Growth, 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 seven "series" or
classes of shares, each representing an interest in a separate portfolio
within the Fund, and seven of which are purchased and redeemed by the
corresponding Subaccounts of the Separate Account: the Growth Portfolio,
the Sentinel Growth Portfolio, 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 Growth Portfolio. The Growth Portfolio seeks intermediate and
long-term growth of capital. A reasonable level of income is an important
secondary objective. This Portfolio pursues its objectives by investing
primarily in common stocks of companies believed to offer above-average growth
potential over both the intermediate and the long term.
The Sentinel Growth Portfolio. The Sentinel Growth Portfolio seeks
long-term growth of capital through equity participation in companies having
growth potential believed by its investment adviser to be more favorable than
the U.S. economy as a whole, with a focus on relatively well-established
companies.
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.
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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 Growth, Sentinel Growth, Aggressive Growth,
Bond, Managed and Money Market 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
Life Insurance Company ("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.
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. PIMC has employed The Boston Company Asset Management,
Inc. to provide investment advisory services in connection with the Portfolio.
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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 AND VARIABLE INSURANCE PRODUCTS FUND II
The Separate Account has four Subaccounts which invest exclusively in
shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund")
and two Subaccounts which invest exclusively in shares of Portfolios of
Variable Insurance Products Fund II ("VIP II"). Like the Market Street Fund,
the VIP Fund and the VIP II Fund are "series" type mutual funds registered
with the SEC as diversified open-end management investment companies issuing a
number of series or classes of shares, each of which represents an interest in
a Portfolio of the VIP Fund or the VIP II 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. The Fidelity Index 500 Subaccount and the Fidelity Contrafund
Subaccount of the Separate Account invest in shares of the Index 500 Portfolio
and the Contrafund Portfolio, respectively, of the VIP Fund II. Shares of these
Portfolios are purchased and redeemed by the Separate Account at net asset
value without a sales charge.
The investment objectives of the Portfolios of the VIP Fund and the VIP
Fund II 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.
Index 500 Portfolio. This portfolio seeks to match the total return of
the Standard & Poors' Composite Index of 500 Stocks ("S&P 500") while keeping
expenses low. This Portfolio normally invests at least 80% of its assets in
equity securities of companies that compose the S&P 500.
Contrafund Portfolio. This Portfolio seeks capital appreciation by
investing primarily in companies that the Fund manager believes to be
undervalued due to an overly pessimistic appraisal by the public. This strategy
can lead to investments in domestic or foreign companies, small and large,
many of which may not be well known. The Fund primarily invests in common stock
and securities convertible into common stock, but it has the flexibility to
invest in any type of security that may produce capital appreciation.
The Equity-Income, Growth, High Income, and Overseas Portfolios of the VIP
Fund and the Index 500 and Contrafund of the VIP Fund II are managed by
Fidelity Management & Research Company ("FMR"). With respect to the Index 500
Portfolio, Bankers Trust Company currently serves as sub-advisor to the
Portfolio and manages the Portfolio.
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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").
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A full description of the VIP Fund and the VIP II Fund, the
investment objectives and policies of the Portfolios, the risks, expenses and
all other aspects of their operation is contained in the attached Prospectuses
for the VIP Fund and VIP II 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 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
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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.
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.
It is expected that the Portfolios described below from the American Century
Variable Portfolios, Inc., the Goldman Sachs Variable Insurance Trust, the J.P.
Morgan Series Trust II, the Neuberger & Berman Advisers Management Trust, and
the Strong Variable Insurance Funds, Inc., and Strong Opportunity Fund II, will
be available under the Policies on or before September 30, 1998. National Life
will supplement this Prospectus to disclose when these additional Funds are
available.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Variable Account has one Subaccount which is expected, as of a date on
or before September 30, 1998, to invest exclusively in shares of the VP Value
Portfolio, and one Subaccount which which is expected, as of a date on or before
September 30, 1998, to invest exclusively in shares of VP Income & Growth
Portfolio each of which are series of American Century Variable Portfolios, Inc.
American Century Variable Portfolios, Inc. 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 American Century Variable Portfolios,
Inc.
The American Century VP Value Subaccount and the American Century VP
Income & Growth Subaccount of the Variable Account will invest in shares of the
VP Value portfolio and the VP Income & Growth portfolio, respectively, of the
American Century Variable Portfolios, Inc. Shares of these Portfolios will be
purchased and redeemed by the Variable Account at net asset value without a
sales charge.
The investment objectives of the Portfolios of American Century Variable
Portfolios, Inc. in which the Subaccounts are expected to invest are set forth
below. The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that either
Portfolio will achieve its stated objective.
VP Value. To seek long-term capital growth. Income is a secondary
objective. The Portfolio will seek to achieve its investment objective by
investing in securities that management believes to be undervalued at the time
of purchase.
VP Income & Growth. To seek dividend growth, current income and capital
appreciation. The Portfolio will seek to achieve its investment objective by
investing in common stocks.
The VP Value Portfolio and the VP Income & Growth Portfolio of the
American Century Variable Portfolios, Inc. are managed by American Century
Investment Management, Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and all other
aspects of their operation is contained in the attached Prospectuses for VP
Value and VP Income & Growth.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
The Variable Account has four Subaccounts which which are expected, as of a date
on or before September 30, 1998, to invest exclusively in shares of the
following four Portfolios of Goldman Sachs Variable Insurance Trust: the
International Equity Fund, the Global Income Fund, the CORE Small Cap Equity
Fund and the Mid Cap Equity Fund. Goldman Sachs Variable Insurance Trust 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 Goldman Sachs Variable
Insurance Trust.
The Goldman Sachs International Equity Subaccount, the Goldman Sachs
Global Income Subaccount, the Goldman Sachs CORE Small Cap Equity Subaccount and
the Goldman Sachs Mid Cap Equity Subaccount will invest in shares of the the
International Equity Fund, the Global Income Fund, the CORE Small Cap Equity and
the Mid Cap Equity Fund, respectively, of Goldman Sachs Variable Insurance
Trust. Shares of these Portfolios will be purchased and redeemed by the Variable
Account at net asset value without a sales charge.
The investment objectives of the Portfolios of Goldman Sachs Variable
Insurance Trust which the Subaccounts invest are set forth below. The
investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that either
Fund will achieve its stated objective.
Goldman Sachs International Equity Fund. Seeks long-term capital
appreciation through investments in equity securities of companies that are
organized outside the U.S. or whose securities are principally traded outside
the U.S.
Goldman Sachs Global Income Fund. Seeks a high total return, emphasizing
current income and, to a lesser extent, providing opportunities for capital
appreciation. The Portfolio invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and foreign currencies.
Goldman Sachs CORE Small Cap Equity Fund. Seeks long-term growth of
capital through a broadly diversified portfolio of equity securities of U.S.
issuers which are included in the Russell 2000 Index at the time of investment.
Goldman Sachs Mid Cap Equity Fund. Seeks long-term capital appreciation
primarily through investments in equity securities of companies with public
stock market capitalizations of between $500 million and $10 billion at the time
of investment.
The International Equity and Global Income Funds are managed by Goldman
Sachs Asset Management International, and the Core Small Cap Equity and Mid Cap
Equity Funds are managed by Goldman Sachs Asset Management. A full description
of the International Equity Fund, the Global Income Fund, the CORE Small Cap
Equity Fund and the Mid Cap Equity Fund series of Goldman Sachs Variable
Insurance Trust. Their investment objectives and policies, and the risks,
expenses and all other aspects of their operation is contained in the attached
Prospectuses for the Goldman Sachs Variable Insurance Trust.
J.P. MORGAN SERIES TRUST II
The Variable Account has one Subaccount which is expected, as of a date on
or before September 30, 1998, to invest exclusively in shares of the J.P. Morgan
International Opportunities Portfolio, and one Subaccount which is expected, as
of a date on or before September 30, 1998, to invest exclusively in shares of
J.P. Morgan Small Company Portfolio, each of which are series of J.P. Morgan
Series Trust II. J.P. Morgan Series Fund II 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 J.P. Morgan Series Trust II.
The J.P. Morgan International Opportunities Subaccount and the J.P.
Morgan Small Company Subaccount of the Variable Account will invest in shares of
the J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small
Company Portfolio, respectively, of the J.P. Morgan Series Trust II. Shares of
these Portfolios will be purchased and redeemed by the Variable Account at net
asset value without a sales charge.
The investment objectives of the J.P. Morgan Series Trust II Portfolios in
which the Subaccounts invest are set forth below. The investment experience of
each Subaccount depends upon the investment performance of the underlying
Portfolio. There is no assurance that either Portfolio will achieve its stated
objective.
J.P. Morgan International Opportunities Portfolio. Seeks to provide a high
total return from a portfolio comprised of equity securities of foreign
corporations. The Portfolio is designed for investors with a long-term
investment horizon who want to diversify their investments by adding
international equities and take advantage of investment opportunities outside
the U.S. As an international investment, the Portfolio is subject to foreign
market, political, and currency risks.
J.P. Morgan Small Company Portfolio. Seeks to provide a high total return
from a portfolio comprised of equity securities of small companies. The
Portfolio invests at least 65% of the value of its total assets in the common
stock of small U.S. companies primarily with market capitalizations of less than
$1 billion. The Portfolio is designed for investors who are willing to assume
the somewhat higher risk of investing in small companies in order to seek a
higher return over time than might be expected from a portfolio of large
companies.
The J.P. Morgan International Opportunities Portfolio and the J.P.
Morgan Small Company Portfolio of the J.P. Morgan Series Trust II are managed by
J.P. Morgan Investment Management Inc. A full description of these Portfolios,
their investment objectives and policies, and the risks, expenses and all other
aspects of their operation is contained in the attached Prospectuses for the
J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small
Company Portfolio.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
The Variable Account has one Subaccount which is expected, as of a date on
or before September 30, 1998, to invest exclusively in shares of the Partners
Portfolio, a series of Neuberger & Berman Advisers Management Trust. Neuberger &
Berman Advisers Management Trust 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 Neuberger & Berman Advisers Management Trust.
The Neuberger & Berman Partners Subaccount of the Variable Account will
invest in shares of the Partners Portfolio of Neuberger & Berman Advisers
Management Trust. Shares of this Portfolio will be purchased and redeemed by the
Variable Account at net asset value without a sales charge.
The investment objectives of the Partners Portfolio are set forth below.
The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that the
Portfolio will achieve its stated objective.
Partners Portfolio. To seek capital growth. This Portfolio will seek to
achieve its objective by investing primarily in the common stock of established
companies. Its investment program seeks securities believed to be undervalued
based on fundamentals such as low price-to-earnings ratios, consistent cash
flows, and support from asset values. The objective of the Partners Portfolio is
not fundamental and can be changed by the Trustees of the Neuberger & Berman
Advisers Management Trust without shareholder approval. Shareholders will,
however, receive at least 30 days prior notice thereof.
The Partners Portfolio of Neuberger & Berman Advisers Management Trust
is managed by Neuberger & Berman Management Incorporated. A full description of
this Portfolio, its investment objectives and policies, and the risks,
expenses and all other aspects of its operation is contained in the attached
Prospectus for the Partners Portfolio of Neuberger & Berman Advisers
Management Trust.
STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC.
The Variable Account has one Subaccount which is expected, as of a date on
or before September 30, 1998, to invest exclusively in shares of the Growth Fund
II, a series of Strong Variable Insurance Funds, Inc., and one Subaccount which
is expected, as of a date on or before September 30, 1998, to invest exclusively
in shares of Strong Opportunity Fund II, Inc. Strong Variable Insurance Funds,
Inc. 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 Strong Variable
Insurance Funds, Inc., and Strong Opportunity Fund II is a single series mutual
fund also registered with the SEC as a diversified open-end management
investment company.
The Strong Growth Subaccount and the Strong Opportunity Subaccount of the
Variable Account will invest in shares of the Growth Fund II series of the
Strong Variable Insurance Funds, Inc., and the Strong Opportunity Fund II,
respectively. Shares of these Funds will be purchased and redeemed by the
Variable Account at net asset value without a sales charge.
The investment objectives of the Strong Funds in which the
Subaccounts invest are set forth below. The investment experience of each
Subaccount depends upon the investment performance of the underlying Fund. There
is no assurance that either Portfolio will achieve its stated objective.
Growth Fund II. This Portfolio seeks capital growth. It invests primarily in
equity securities that the advisor believes have above-average growth prospects.
Strong Opportunity Fund II, Inc. This Fund seeks capital appreciation
through investments in a diversified portfolio of equity securities.
The Growth Fund II series of Strong Variable Insurance Funds, Inc.,
and Strong Opportunity Fund, Inc. are managed by Strong Capital Management, Inc.
A full description of the Growth Fund II series of Strong Variable
Insurance Funds, Inc., and Strong Opportunity Fund, Inc. their investment
objectives and policies, and the risks, expenses and all other aspects of their
operation is contained in the attached Prospectuses for the Growth Fund II and
Strong Opportunity Fund II, Inc.
RESOLVING MATERIAL CONFLICTS
The participation agreements pursuant to which the Funds sell their
shares to Subaccounts of the Separate Account contain varying provisions
regarding termination. In general, each party may terminate a participation
agreement at its option with specified advance written notice, and may also
terminate in the event of specific regulatory or business developments.
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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 allocate 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.
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.
National Life has entered into or may enter into agreements with Funds
pursuant to which the adviser or distributor pays National Life a fee based
upon an annual percentage of the average net asset amount invested by
National Life on behalf of the Separate Account and other separate accounts
of National Life. These percentages may differ, and National Life may be
paid a greater percentage by some investment advisers or distributors than
other advisers or distributors. These agreements reflect administrative
services provided by National Life.
The investment objectives and policies of certain Portfolios are
similar to the investment objectives and policies of mutual fund portfolios
other than the Portfolios that may be managed by the investment adviser or
manager. The investment results of the Portfolios, however, may be higher or
lower than the results of such other portfolios. There can be no assurance,
and no representation is made, that the investment results of any of the
Funds will be comparable to the investment results of any other portfolio,
even if the other portfolio has the same investment adviser or manager.
THE GENERAL ACCOUNT
For information on the General Account, see page ____.
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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. (See "Payment
of Policy Benefits," Page __.) 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 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
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<PAGE> 129
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.
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.
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.
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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 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.
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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, if it should
lapse. (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 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:
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<PAGE> 132
(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) five days from the date National Life mails a notice of 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.
National Life will offer a one time credit on conversions of eligible
National Life term insurance policies to a VariTrak Policy. If the term
policy being converted has been in force for at least twelve months, the
amount of the credit is equal to 12% of a target amount used to determine
commission payments. If the term policy being converted has been in force
for less than twelve months, the credit will be prorated based on the number
of months the term policy has been outstanding at the time of conversion. For
GRT term policies, the credit will be 18% of the target amount used to
determine commission payments if the GRT term policy has been in force for at
least two years but not more than five years. For GRT term policies in
force for less than two years, the credit is 0.5% per month for each month in
the first year, and 1.0% per month for each month in the second year. For
GRT policies in force more than five years, the credit decreases from 18% by
0.5% for each month beyond five years, until it becomes zero at the end of
year eight.
The amount of the credit will be added to the initial premium
payment, if any, submitted by the Policy Owner converting the term policy,
and will be treated as part of the Initial Premium for the Policy. Thus, the
credit will be included in premium payments for purposes of calculating and
deducting the Premium Tax Charge. If the Policy is surrendered, the credit
will not be recaptured by National Life. The amount of the credit will not
be included for purposes of calculating agent compensation for the sale of
the Policy.
National Life will also offer a one time credit to Home Office
employees who purchase a VariTrak Policy, as both Owner and Insured. This
one time credit is calculated differently from the credit described above; in
particular, the amount of the credit will be 50% of the target premium used
in the calculation of commissions on the Policy. Otherwise, the credit will
be treated in the same manner as the credit described above.
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." National Life may allow, in certain situations,
Check-O-Matic payments of less than $50. National Life reserves the right
to require that Check-O-Matic be set up for at least the Minimum Monthly
Premium.
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.
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<PAGE> 133
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.
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 a higher Net Amount at Risk, and higher Cost of Insurance
Charges. Lower premium payments will result in a 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 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. These 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
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<PAGE> 134
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 (or other evidence satisfactory to
National Life that delivery has been completed) and for a 10 day period
beginning with the date of such delivery, which are to be allocated to
the Separate Account will be allocated to the Money Market Subaccount. On
the first Valuation Date at or after 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 then in
effect.
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 is 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, 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 twelfth 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 ___)."
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<PAGE> 135
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, unless otherwise required by state law, 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.
Specialized Uses of the Policy. Because the Policy provides for an
accumulation of cash value as well as a death benefit, the Policy can be used
for various individual and business financial planning purposes. Purchasing the
Policy in part for such purposes entails certain risks. For example, if the
investment performance of Subaccounts to which Policy Value is allocated is
poorer than expected or if sufficient premiums are not paid, the Policy may
lapse or may not accumulate sufficient Accumulated Value or Cash Surrender
Value to fund the purpose for which the Policy was purchased. Withdrawals and
Policy loans may significantly affect current and future Accumulated Value,
Cash Surrender Value, or Death Benefit proceeds. Depending upon Subaccount
investment performance and the amount of a Policy loan, the loan may cause a
Policy to lapse. Because the Policy is designed to provide benefits on a
long-term basis, before purchasing a Policy for a specialized purpose a
purchaser should consider whether the long-term nature of the Policy is
consistent with the purpose for which it is being considered. Using a Policy
for a specialized purpose may have tax consequences. (See "Federal Income Tax
Considerations," Page __.)
For Policies that are intended to be used in STEP plans, prospective
purchasers should be aware that there is a risk that the intended tax
consequences of such a plan may not be realized. In two audits, the Internal
Revenue Service has proposed tax treatment less advantageous than intended, and
those matters are currently in litigation. The plans under audit may have
considerable differences from those a prospective Policy Owner may be
considering, and the litigation regarding such plans may or may not be
controlling with respect to STEP Plans of prospective Policy Owners. National
Life does not guarantee any particular tax consequences of any use of the
Policies, including but not limited to use in STEP Plans, and recommends that
prospective purchases of Policies seek independent tax advice with respect to
applications in which particular tax consequences are sought.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate
National Life for (a) providing the insurance and other benefits set forth in
the Policy; (b) administering the Policy; (c) assuming certain mortality and
other risks in connection with the Policy; and (d) incurring expenses in
distributing the Policy including costs associated with printing prospectuses
and sales literature and sales compensation. National Life may realize a
profit from any charges. Any such profit may be used for any purpose including
payment of distribution expenses.
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 that is attributable to the Policies.
SURRENDER CHARGES
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<PAGE> 136
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.
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 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
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<PAGE> 137
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>
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<PAGE> 138
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. 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%.
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<PAGE> 139
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 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. Generally, the current
cost of insurance rates for a given Attained Age will be less than for an
Insured whose Policy was issued more than 10 years ago, than for an Insured
whose Policy was issued less than 10 years ago, 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.
29
<PAGE> 140
Monthly Administrative Charge. The Monthly Administrative Charge will
be deducted from the Accumulated Value on the Date of Issue and each Monthly
Policy Date as part of the Monthly Deduction.
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.
Separate Account Enhancement. National Life will 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.
The Separate Account Enhancement 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 Separate Account Enhancement
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 Separate Account Enhancement is netted against the Monthly
Deductions for Cost of Insurance, the Monthly Administrative Charge, and
charges for any Optional Benefits.
MORTALITY AND EXPENSE RISK CHARGE
A daily charge will be deducted from the value of the net assets of
the Separate Account 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.
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.
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 twelve 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
30
<PAGE> 141
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, not to exceed $25, 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 the
deduction.
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 AND PRIVILEGES
LOAN PRIVILEGES
General. The Owner may at any time after the first anniversary of the
Date of Issue (and during the first year where required by law) 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
$25,000.
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<PAGE> 142
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 will be added to the loan balance at the end of the Policy Year 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 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.
In Policy Years 11 and thereafter, National Life will 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.
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.
National Life is not obligated to continue to make preferred loans available,
and will make such loans available in its sole discretion. Preferred loans may
not be treated as indebtedness for federal income tax purposes.
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.
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<PAGE> 143
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 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 ___.)
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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.
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.
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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.
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 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 the Notice of
Withdrawal Right to the Owner, or any longer period provided by state law. 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 by providing a
proper written authorization to National Life, an Owner may effect changes in
premium allocation, transfers, and loans of up to $25,000 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.
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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.
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. Only one of these features
may be active for any single Policy at any time.
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 Subaccount is depleted. When the amount in the Money Market Subaccount
is depleted, the Dollars Cost Averaging program terminates. 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
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Monthly Policy 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 premiums, and into Subaccounts
which have had relatively unfavorable investment performance in relation to the
other Subaccounts to which the Policy allocates premiums.
POLICY RIGHTS UNDER CERTAIN PLANS
Policies may be purchased in connection with a plan sponsored by an
employer. In such cases, all rights under the Policy rest with the Policy
Owner, which may be the employer or other obligor under the plan, and benefits
available to participants under the plan will be governed solely by the
provisions of the plan. Accordingly, some of the options and elections under
the Policy may not be available to participants under the provisions of the
plan. In such cases, participants should contact their employers for
information regarding the specifics of the plan.
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. National Life has no specific formula for determining
current 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 allocated to the General Account will not share in the
investment performance of National Life's General Account or any portion
thereof.
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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.
National Life will 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.
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.
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
Maturity at 99. If the Policy is in force on the Policy Anniversary at
which the Insured is Attained Age 99, National Life will pay the Cash Surrender
Value to the Owner in one sum unless a Payment Option is chosen, and the Policy
will terminate.
Reduced Paid-Up Benefit. Prior to maturity, the Owner may elect to
continue the Policy in force as paid-up General Account life insurance
coverage. All or a portion of the Cash Surrender Value of the Policy will be
applied to paid-up life insurance coverage. Any amount of the Cash Surrender
Value that is not applied towards paid-up life insurance coverage will be paid
in one lump sum. The Owner may thereafter surrender any paid-up General
Account life insurance at any time for its value.
Payment of Policy Benefits. The Owner may decide the form in
which Death Benefit 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. If paid in a lump sum, 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. If paid under a
Settlement Option, the Death Benefit will be applied to the Settlement Option
within seven days after National Life receives proof of the Insured's death at
its Home Office and all other requirements are satisfied.
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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 New York
Stock Exchange is closed (except for normal holiday closing); or (2) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which it is not reasonably practicable to dispose of securities or to
determine the value of the net assets of the Separate Account.
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 Policy provides that National Life may delay payment of any
amounts which are payable as a result of a surrender, Withdrawal or Policy loan
and which are allocated to the General Account for up to six months after
receipt of the request therefor. If such amounts are not mailed or delivered to
the Owner within ten days of National Life's receipt of written request for
payment, National Life will pay interest on said amounts at the rate then in
effect under Payment Option 1 - Payment of Interest Only from the date of
National Life's receipt of written request to the date of payment.
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. The interest of any Beneficiary who dies
before the Insured shall vest in the Owner unless otherwise stated.
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
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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, or as otherwise required by state law. 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.
Suicide. In the event of the Insured's suicide, within two years
from the Date of Issue of the Policy, 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 or other reduced amount
provided by state law.
If the Insured commits suicide within two years 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.
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.
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Dividends. The Policy is participating; however, no dividends are
expected to be paid on the Policy. If dividends are ever declared, they will
be used to purchase dividend additions or, at the direction of the Owner, may be
taken in cash or may be left with National Life to accumulate at interest.
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.
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
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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 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.
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
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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.
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
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<PAGE> 154
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,
you should be sure to consult a qualified tax advisor regarding the tax
attributes of the particular arrangement. In recent years, Congress has
adopted new rules relating to life insurance owned by businesses. Any business
contemplating the purchase of a new Policy or a change in an existing Policy
should consult a tax advisor.
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 appropriate
interest) will be returned to the Owner. The amount to be refunded will be
deducted from the
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<PAGE> 155
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 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 is not deductible. 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 EMPLOYEE BENEFIT PLANS
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<PAGE> 156
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 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.
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.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is
always the possibility that the tax treatment of the Policies could change by
legislation or other means. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of the Policies. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax adviser
should be consulted with respect to legislative developments and their effect
on the Policy.
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
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<PAGE> 157
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 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 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.
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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.
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>
Patrick E. Welch 1997 to present - Chairman of the
Chairman of the Board, and Board and Chief Executive Officer;
Chief Executive Officer 1992 to 1997 - Chairman of the Board,
Chief Executive Officer and President
of GNA Corporation
Thomas H. MacLeay 1996 to Present - President and Chief
President, Chief Operating Officer; 1993 to 1996 -
Operating Officer Executive Vice President & Chief
and Director Financial Officer; 1991 to 1993 -
Senior Vice President & Chief Financial
Officer
Robert E. Boardman 1994 to present - Chairman of Hickok &
</TABLE>
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<PAGE> 159
<TABLE>
<S> <C>
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.
Earle H. Harbison, Jr. 1993 to present: Chairman of
Director Harbison Walker, Inc.; 1986 to
1992 - President and Chief
Operating Officer of Monsanto Company
Roger B. Porter 1985 to present - Professor of Business
Director and Government, Harvard University; 1976 to
present - Member of the President's Commission
on White House Fellowships; 1993 to present,
Senior Scholar, Woodrow Wilson International
Center for Scholars
E. Miles Prentice III 1997 to present - Partner in the law firm of
Director Eaton & Van Winkle;
1996 to present - Partner in the law firm of Bryan Cave L.L.P.;
1993 to 1996 - Partner in the law
firm of Piper & Marbury
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
Thomas P. Salmon 1997 to present - Partner in the law firm of
Director Salmon & Nostrand;
1991 to 1997 - President, the University of
Vermont; formerly Governor, State of Vermont
Thomas R. Williams 1987 to present - President of the
Director Wales Group, Inc.
Patricia K. Woolf 1990 to present - Author, Consultant,
</TABLE>
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<PAGE> 160
<TABLE>
<S> <C>
Director and lecturer at the Department of
Molecular Biology at Princeton University
James A. Mallon 1998 to present: Executive Vice President &
Executive Vice President & Chief Marketing Officer; 1996 to 1998: President & Chief Executive
Chief Marketing Officer Officer - Integon Life Insurance Corporation; 1993 to 1996:
Senior Vice President & Chief Marketing Officer - Commercial Union
Life Insurance Company of America
Jeffrey P. Johnson 1997 to present - General Counsel; 1992 to present - Partner
General Counsel in the law firm of Primmer & Piper
Rodney A. Buck 1996 to present - Senior Vice
Senior Vice President & President and Chief Investment
Chief Investment Officer Officer; 1993 to 1995 - Senior Vice President -Investments;
1996 to present - Chairman
& Chief Executive Officer, National
Life Investment Management
Company, Inc. ("NLIMC"); 1991 to 1995 - President and
Chief Operating Officer, NLIMC; 1998 to present - Chief
Executive Officer - Sentinel Advisers Company;
1987 to present - Senior Vice President - Sentinel Advisors Company
Craig A. Smith 1998 to present: Vice President - Corporate Actuarial;
Vice President 1993 to 1998 - Senior Vice President - Product; 1992 to 1993 -
Vice President - Product Development
</TABLE>
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<PAGE> 161
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.
Dealers are compensated for sales of the Policies by dealer
concessions. During the first Policy Year, the gross dealer concession
will not be more than 85% of the premiums paid up to a target amount (used
only to determine commission payments) and 4% of the premiums paid in
excess of that amount. For Policy Years 2 through 10, the gross dealer
concession will not be more than 4% of the premiums paid. For Policy Year
11 and thereafter, the gross dealer concession 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, the gross dealer concession
will not be more than 50% up to the target amount for the increase.
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).
51
<PAGE> 162
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.
PREPARING FOR YEAR 2000
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the year 2000 from the year
1900. Like all financial services providers, National Life utilizes computer
systems that may be effected by Year 2000 transition issues, and National Life
relies on service providers, including the Funds, that also may be affected.
National Life has developed, and is in the process of implementing, a Year 2000
transition plan, and is confirming that its service providers are also so
engaged. The resources that are being devoted to this effort are substantial. It
is difficult to predict with precision whether the amount of resources
ultimately devoted, or the outcome of these efforts, will have any negative
impact on National Life. However, as of the date of this prospectus, it is not
anticipated that any Policy Owners will experience negative effects on their
investment, or on the services provided in connection therewith, as a result of
Year 2000 transition implementation. National Life currently anticipates that
its computer systems will be Year 2000 compliant on or about January 1, 1999,
but there can be no assurance that National Life will be successful, or that
interaction with other service providers will not impair National Life's
services at that time.
EXPERTS
The Financial Statements listed on Page F-1 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
Elizabeth H. MacGowan, F.S.A., MAAA, Associate Actuary - Product Development
of National Life.
LEGAL MATTERS
Sutherland, Asbill & Brennan, LLP 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 Jeffrey P. Johnson, General Counsel
of National Life.
In recent years, life insurance companies have been named as defendants
in lawsuits, including class action lawsuits, relating to life insurance pricing
and sales practices. A number of these lawsuits have resulted in substantial
jury awards or settlements. During 1997 several lawsuits of this nature were
filed against National Life on behalf of purported classes of persons who
purchased certain insurance products from National Life. National Life does
not believe that these lawsuits whether settled or litigated, will have any
material adverse effect upon its ability to meet its obligations under the
Policies.
National Life is also party to ordinary routine litigation incidental
to the business, none of which is expected to have a material adverse effect
upon its ability to meet its obligations under the Policies.
FINANCIAL STATEMENTS
The financial statements of National Life and of the Separate Account
appear on the following pages. The financial statements of National Life
should be distinguished from the 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.
52
<PAGE> 163
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 Planned Periodic Premiums of $3,000 for Death Benefit Option A,
and $4,000 for Death Benefit Option B, in each case 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 are higher for
these classes. 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 guaranteed maximum
Monthly Administrative Charge of $7.50 per policy plus $0.07 per thousand of
Face Amount applies, and Monthly Deductions are reduced by 0.50% per annum for
Policy Years after 10; 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 the Monthly Administrative
Charge is set at its current level of $7.50 per policy.
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 1.72%. 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 0.66%, which
represents an average of the fees incurred by the Portfolios (including the
Portfolios expected to be made available on or before September 30, 1998)
during 1997 and expenses of 0.16% which is based on an average of the actual
expenses incurred by the Portfolios during 1997, adjusted, as appropriate, to
take into account expense reimbursement arrangements expected to be in place
for 1998. For information on Fund expenses, see the prospectuses for the Funds
accompanying this prospectus. 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.
A-1
<PAGE> 164
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ --------------------------------------------
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 1,996 596 250,000 2,302 902 250,000
2 6,458 3,918 2,179 250,000 4,544 2,805 250,000
3 9,930 5,768 3,755 250,000 6,723 4,711 250,000
4 13,577 7,541 5,443 250,000 8,838 6,741 250,000
5 17,406 9,238 7,141 250,000 10,882 8,784 250,000
6 21,426 10,853 8,964 250,000 12,855 10,966 250,000
7 25,647 12,382 10,700 250,000 14,748 13,067 250,000
8 30,080 13,822 12,349 250,000 16,557 15,083 250,000
9 34,734 15,172 13,906 250,000 18,285 17,019 250,000
10 39,620 16,423 15,365 250,000 19,927 18,870 250,000
11 44,751 17,664 16,815 250,000 21,843 20,993 250,000
12 50,139 18,796 18,155 250,000 23,684 23,042 250,000
13 55,796 19,804 19,371 250,000 25,450 25,016 250,000
14 61,736 20,677 20,451 250,000 27,134 26,908 250,000
15 67,972 21,395 21,377 250,000 28,731 28,713 250,000
16 74,521 21,944 21,944 250,000 30,238 30,238 250,000
17 81,397 22,309 22,309 250,000 31,647 31,647 250,000
18 88,617 22,479 22,479 250,000 32,947 32,947 250,000
19 96,198 22,439 22,439 250,000 34,119 34,119 250,000
20 104,158 22,162 22,162 250,000 35,146 35,146 250,000
25 150,340 16,033 16,033 250,000 37,910 37,910 250,000
30 209,282 0 0 0 35,645 35,645 250,000
</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> 165
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ --------------------------------------------
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 2,139 739 250,000 2,455 1,055 250,000
2 6,458 4,328 2,590 250,000 4,993 3,255 250,000
3 9,930 6,569 4,557 250,000 7,612 5,600 250,000
4 13,577 8,859 6,761 250,000 10,315 8,218 250,000
5 17,406 11,199 9,102 250,000 13,096 10,998 250,000
6 21,426 13,585 11,695 250,000 15,959 14,070 250,000
7 25,647 16,014 14,332 250,000 18,898 17,216 250,000
8 30,080 18,485 17,012 250,000 21,910 20,436 250,000
9 34,734 20,997 19,732 250,000 25,002 23,737 250,000
10 39,620 23,544 22,487 250,000 28,173 27,115 250,000
11 44,751 26,259 25,409 250,000 31,830 30,981 250,000
12 50,139 29,015 28,374 250,000 35,615 34,974 250,000
13 55,796 31,802 31,369 250,000 39,533 39,100 250,000
14 61,736 34,612 34,386 250,000 43,586 43,360 250,000
15 67,972 37,428 37,411 250,000 47,774 47,757 250,000
16 74,521 40,241 40,241 250,000 52,106 52,106 250,000
17 81,397 43,037 43,037 250,000 56,581 56,581 250,000
18 88,617 45,809 45,809 250,000 61,198 61,198 250,000
19 96,198 48,547 48,547 250,000 65,952 65,952 250,000
20 104,158 51,229 51,229 250,000 70,838 70,838 250,000
25 150,340 62,849 62,849 250,000 97,540 97,540 250,000
30 209,282 67,608 67,608 250,000 128,932 128,932 250,000
</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> 166
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ --------------------------------------------
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 2,284 884 250,000 2,609 1,209 250,000
2 6,458 4,757 3,018 250,000 5,461 3722 250,000
3 9,930 7,440 5,427 250,000 8,576 6,563 250,000
4 13,577 10,348 8,250 250,000 11,979 9,882 250,000
5 17,406 13,506 11,408 250,000 15,692 13,594 250,000
6 21,426 16,931 15,042 250,000 19,747 17,857 250,000
7 25,647 20,649 18,967 250,000 24,169 22,488 250,000
8 30,080 24,687 23,213 250,000 28,993 27,519 250,000
9 34,734 29,076 27,811 250,000 34,263 32,998 250,000
10 39,620 33,849 32,791 250,000 40,024 38,967 250,000
11 44,751 39,240 38,390 250,000 46,798 45,948 250,000
12 50,139 45,137 44,496 250,000 54,259 53,618 250,000
13 55,796 51,588 51,154 250,000 62,485 62,052 250,000
14 61,736 58,649 58,423 250,000 71,557 71,332 250,000
15 67,972 66,380 66,363 250,000 81,568 81,551 250,000
16 74,521 74,856 74,856 250,000 92,626 92,626 250,000
17 81,397 84,160 84,160 250,000 104,846 104,846 250,000
18 88,617 94,396 94,396 250,000 118,360 118,360 250,000
19 96,198 105,681 105,681 250,000 133,314 133,314 250,000
20 104,158 118,143 118,143 250,000 149,875 149,875 250,000
25 150,340 204,469 204,469 250,000 264,014 264,014 322,097
30 209,282 348,675 348,675 404,463 451,398 451,398 523,622
</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> 167
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ --------------------------------------------
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 4,200 2,941 1,402 252,941 3,248 1,709 253,248
2 8,610 5,787 3,864 255,787 6,415 4,492 256,415
3 13,241 8,539 6,442 258,539 9,498 7,400 259,498
4 18,103 11,192 9,095 261,192 12,496 10,398 262,496
5 23,208 13,748 11,651 263,748 15,400 13,303 265,400
6 28,568 16,198 14,309 266,198 18,213 16,323 268,213
7 34,196 18,540 16,858 268,540 20,923 19,241 270,923
8 40,106 20,769 19,296 270,769 23,524 22,051 273,524
9 46,312 22,884 21,619 272,884 26,022 24,756 276,022
10 52,827 24,876 23,818 274,876 28,410 27,352 278,410
11 59,669 26,879 26,030 276,879 31,116 30,266 281,116
12 66,852 28,750 28,108 278,750 33,727 33,086 283,727
13 74,395 30,470 30,037 280,470 36,242 35,808 286,242
14 82,314 32,029 31,804 282,029 38,651 38,426 288,651
15 90,630 33,405 33,388 283,405 40,949 40,932 290,949
16 99,361 34,583 34,583 284,583 43,133 43,133 293,133
17 108,530 35,547 35,547 285,547 45,191 45,191 295,191
18 118,156 36,285 36,285 286,285 47,109 47,109 297,109
19 128,264 36,784 36,784 286,784 48,868 48,868 298,868
20 138,877 37,016 37,016 287,016 50,444 50,444 300,444
25 200,454 33,060 33,060 283,060 55,375 55,375 305,375
30 279,043 16,677 16,677 266,677 54,241 54,241 304,241
</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> 168
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ --------------------------------------------
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 4,200 3,141 1,603 253,141 3,458 1,920 253,458
2 8,610 6,368 4,446 256,368 7,035 5,113 257,035
3 13,241 9,684 7,586 259,684 10,731 8,633 260,731
4 18,103 13,084 10,987 263,084 14,548 12,450 264,548
5 23,208 16,573 14,476 266,573 18,481 16,384 268,481
6 28,568 20,145 18,255 270,145 22,535 20,646 272,535
7 34,196 23,796 22,115 273,796 26,703 25,022 276,703
8 40,106 27,527 26,053 277,527 30,981 29,508 280,981
9 46,312 31,334 30,068 281,334 35,377 34,111 285,377
10 52,827 35,211 34,153 285,211 39,887 38,830 299,887
11 59,669 39,354 38,505 289,354 45,020 44,170 295,020
12 66,852 43,580 42,938 293,580 50,330 49,688 300,330
13 74,395 47,873 47,440 297,873 55,823 55,389 305,823
14 82,314 52,223 51,998 302,223 61,497 61,272 311,497
15 90,630 56,609 56,591 306,609 67,354 67,336 317,354
16 99,361 61,013 61,013 311,013 73,396 73,396 323,396
17 108,530 65,418 65,418 315,418 79,620 79,620 329,620
18 118,156 69,810 69,810 319,810 86,019 86,019 336,019
19 128,264 74,171 74,171 324,171 92,578 92,578 342,578
20 138,877 78,468 78,468 328,468 99,279 99,279 349,279
25 200,454 97,545 97,545 347,545 134,840 134,840 384,840
30 279,043 107,009 107,009 357,009 172,996 172,966 422,966
</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> 169
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------ --------------------------------------------
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 4,200 3,342 1,804 253,342 3,669 2,130 253,669
2 8,610 6,974 5,052 256,974 3,681 5,758 257,681
3 13,241 10,924 8,827 260,924 12,065 9,968 262,065
4 18,103 15,218 13,120 265,218 16,858 14,760 266,858
5 23,208 19,888 17,791 269,888 22,088 19,991 272,088
6 28,568 24,964 23,074 274,964 27,801 25,911 277,801
7 34,196 30,479 28,798 280,479 34,031 32,350 284,031
8 40,106 36,475 35,001 286,475 40,824 39,350 290,824
9 46,312 42,993 41,728 292,993 48,238 46,972 298,238
10 52,827 50,076 49,018 300,076 56,327 55,270 306,327
11 59,669 58,065 57,216 308,065 65,774 64,925 315,774
12 66,852 66,787 66,146 316,787 65,158 75,517 326,158
13 74,395 76,302 75,868 326,302 87,577 87,143 337,577
14 82,314 86,677 86,451 336,677 100,129 99,904 350,129
15 90,630 97,980 97,962 347,980 113,928 113,910 363,928
16 99,361 110,291 110,291 360,291 129,100 129,100 379,100
17 108,530 123,697 123,697 373,697 145,778 145,778 395,778
18 118,156 138,301 138,301 388,301 164,107 164,107 414,107
19 128,264 154,211 154,211 404,211 184,238 184,238 434,238
20 138,877 171,536 171,536 421,536 206,337 206,337 456,337
25 200,454 283,759 283,759 533,759 354,131 354,131 604,131
30 279,043 453,055 453,055 703,055 591,418 591,418 841,418
</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> 170
NATIONAL LIFE INSURANCE COMPANY
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1997 AND 1996
<PAGE> 171
Report of Independent Accountants
April 7, 1998
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 policyowners' equity, and of cash
flows present fairly, in all material respects, the financial position of
National Life Insurance Company and its subsidiaries at December 31, 1997 and
1996, 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.
PRICE WATERHOUSE, LLP
<PAGE> 172
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 372,180 $ 268,235
Available-for-sale debt and equity securities, at fair value 5,317,427 4,393,046
Held-to-maturity debt securities, at amortized cost - 590,700
Mortgage loans 992,170 907,024
Policy loans 791,753 796,193
Real estate investments 95,926 99,442
Other invested assets 90,520 78,596
- -------------------------------------------------------------------------------------------------------------------
Total cash and invested assets 7,659,976 7,133,236
Deferred policy acquisition costs 392,014 421,584
Due and accrued investment income 125,790 120,753
Premiums and fees receivable 23,458 25,874
Deferred income taxes 17,517 33,514
Amounts recoverable from reinsurers 210,020 190,873
Present value of future profits of insurance acquired 54,444 80,957
Property and equipment, net 59,188 64,302
Other assets 63,967 51,453
Separate account assets 207,425 181,771
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 8,813,799 $ 8,304,317
===================================================================================================================
LIABILITIES:
Policy benefit liabilities $ 3,814,213 $ 3,701,597
Policyowners' accounts 3,236,710 3,051,973
Policyowners' deposits 40,836 37,524
Policy claims payable 26,968 31,217
Policyowners' dividends 53,395 51,792
Other liabilities and accrued expenses 479,483 394,127
Debt 80,085 82,682
Separate account liabilities 187,998 165,234
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 7,919,688 7,516,146
- -------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 53,222 39,263
POLICYOWNERS' EQUITY:
Net unrealized gains on available-for-sale securities 85,017 28,867
Retained earnings 755,872 720,041
- -------------------------------------------------------------------------------------------------------------------
Total policyowners' equity 840,889 748,908
- -------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and policyowners' equity $ 8,813,799 $ 8,304,317
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 173
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND POLICYOWNERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 399,017 $ 406,286
Universal life and investment-type policy fees 45,397 41,745
Net investment income 532,594 517,268
Realized investment gains (losses) 11,887 (2,070)
Mutual fund commission and fee income 51,417 42,256
Other income 17,524 21,278
- -------------------------------------------------------------------------------------------------------------------
Total revenue 1,057,836 1,026,763
- -------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 118,134 166,668
Policy benefits 313,819 297,564
Policyowners' dividends 106,312 105,690
Interest credited to policyowners' accounts 189,776 170,955
Operating expenses 174,709 148,716
Commissions and expense allowances 105,329 95,517
Net deferral of policy acquisition costs (14,617) (13,352)
- -------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 993,462 971,758
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 64,374 55,005
Income taxes 20,907 31,957
- -------------------------------------------------------------------------------------------------------------------
Income before minority interests 43,467 23,048
Minority interests 7,636 5,925
- -------------------------------------------------------------------------------------------------------------------
NET INCOME 35,831 17,123
RETAINED EARNINGS:
Beginning of year 720,041 702,918
- -------------------------------------------------------------------------------------------------------------------
End of year $ 755,872 $ 720,041
===================================================================================================================
NET UNREALIZED GAINS ON AVAILABLE-FOR-SALE SECURITIES:
Beginning of year $ 28,867 $ 77,173
Change during year 56,150 (48,306)
- -------------------------------------------------------------------------------------------------------------------
End of year $ 85,017 $ 28,867
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 174
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,831 $ 17,123
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Due and accrued investment income (5,037) (1,502)
Policy liabilities 74,693 144,723
Deferred policy acquisition costs (14,617) (9,956)
Policyowners' dividends 1,603 4,975
Deferred income taxes (20,747) (13,646)
Realized investment (gains) losses (11,887) 2,070
Depreciation 3,715 4,283
Other 15,774 (12,678)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 79,328 135,392
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 2,385,471 2,497,648
Cost of investments acquired (2,647,628) (2,714,560)
Acquisition of subsidiary, net - (81,551)
Other 7,091 4,793
- ----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (255,066) (293,670)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyowners' deposits, including interest credited 670,780 535,932
Policyowners' withdrawals, including policy charges (495,076) (418,775)
Net increase (decrease) in borrowings under repurchase agreements 234,570 (51,013)
Net (decrease) increase in securities lending liabilities (139,652) 31,717
Other 9,061 17,747
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 279,683 115,608
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 103,945 (42,670)
CASH AND CASH EQUIVALENTS:
Beginning of year 268,235 310,905
- ----------------------------------------------------------------------------------------------------------------------
End of year $ 372,180 $ 268,235
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 175
NATIONAL LIFE INSURANCE COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1996
NOTE 1 - NATURE OF OPERATIONS
National Life Insurance Company (National Life) was chartered in 1848 and is
among the 15 largest mutual life insurance companies in the United States.
National Life is also known by its registered trade name "National Life of
Vermont". National Life employs about 750 people in its home office in
Montpelier, Vermont. As a mutual life insurance company, National Life has no
shareholders. With its affiliates and subsidiaries, National Life offers a
broad range of financial products and services, including life insurance,
annuities, disability income insurance, mutual funds, investment advisory and
administration services.
National Life primarily develops and distributes individual life insurance and
annuity products. National Life markets its products primarily to small
business owners, professionals and high net worth individuals by providing
financial solutions in the form of estate, business succession and retirement
planning, deferred compensation and other key executive fringe benefit plans.
Insurance and annuity products are primarily distributed through about 40
general agencies in major metropolitan areas throughout the United States.
National Life also distributes its products through brokers and banks.
National Life has about 235,000 policyowners and is licensed to do business in
all 50 states and the District of Columbia. About 26% of National Life's total
collected premiums are from residents of New York and California.
Through affiliates National Life also distributes and provides investment
advisory and administrative services to the Sentinel Group Funds, Inc. The
Sentinel Funds' $2.8 billion of net assets represent thirteen mutual funds
managed on behalf of about 107,000 individual, corporate and institutional
shareholders worldwide.
During 1996, National Life acquired a majority interest in Life Insurance
Company of the Southwest (LSW), a Dallas, Texas based financial services
company specializing in annuities. LSW is licensed in all states but New York,
with particular concentration in the west and the southwest. About 50% of LSW's
total collected premiums are from residents of California, Texas and Florida.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of National Life and
subsidiaries have been prepared in conformity with generally accepted
accounting principles (GAAP).
The consolidated financial statements include the accounts of National Life
Insurance Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain
reclassifications have been made to conform prior periods presented to the
current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
INVESTMENTS
Cash and cash equivalents include highly liquid debt instruments purchased with
remaining maturities of three months or less.
4
<PAGE> 176
Debt securities are designated as available-for-sale or held-to-maturity where
the company has the ability and intent to hold securities to maturity.
Available-for-sale debt securities and equity securities are reported at
estimated fair value. Held-to-maturity debt securities are reported at
amortized cost. Debt and equity securities that experience declines in value
that are other than temporary are written down with a corresponding charge to
realized losses.
Mortgage loans are reported at amortized cost, less valuation allowances for
the excess, if any, of the amortized cost of impaired loans over the estimated
fair value of the related collateral. Changes in valuation allowances are
included in realized gains and losses.
Policy loans are reported at their unpaid balance and are fully collateralized
by related cash surrender values.
Real estate investments are reported at depreciated cost. Real estate acquired
in satisfaction of debt is transferred to real estate at the lower of the
recorded investment in the loan, including accrued interest, or estimated fair
value.
Realized investment gains and losses are recognized using the specific
identification method and include changes in valuation allowances. Changes in
the estimated fair values of available-for-sale debt and equity securities are
reflected in policyowners' equity after adjustments for related deferred policy
acquisition costs, present value of future profits of insurance acquired,
income taxes and minority interests.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring new business that vary with and are
primarily related to the production of new business are generally deferred.
Deferred policy acquisition costs for participating life insurance, universal
life insurance and investment-type annuities are amortized in relation to
estimated gross margins or profits. Amortization is adjusted retrospectively
for actual experience and when estimates of future gross margins or profits are
revised. Balances of deferred policy acquisition costs for these products are
adjusted for related unrealized gains and losses on available-for-sale debt and
equity securities through policyowners' equity, net of related income taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance is amortized in relation to premium income using
assumptions consistent with those used in computing policy benefit liabilities.
Balances of deferred policy acquisition costs are regularly evaluated for
recoverability from product margins or profits.
PRESENT VALUE OF FUTURE PROFITS OF INSURANCE ACQUIRED
Present value of future profits of insurance acquired is the
actuarially-determined present value of future projected profits from policies
in force at the date of their acquisition, and is amortized in relation to
gross profits of those policies. Amortization is adjusted retrospectively for
actual experience and when estimates of future profits are revised.
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
depreciated over 40 years using the straight line method. Furniture and
equipment is depreciated using accelerated depreciation methods over 7 years
and 5 years, respectively.
5
<PAGE> 177
SEPARATE ACCOUNTS
Separate accounts are segregated funds relating to certain variable annuity and
variable life policies, and National Life's pension plans. Separate account
assets are primarily common stocks, bonds, mortgage loans, and real estate and
are carried at estimated fair value. Separate account liabilities reflect
separate account policyowners' interests in separate account assets, include
the actual investment performance of the respective accounts and are not
guaranteed. Separate account results relating to these policyowners' interests
are excluded from revenues and expenses.
POLICY LIABILITIES
Policy benefit liabilities for participating life insurance are developed using
the net level premium method, with interest and mortality assumptions used in
calculating policy cash surrender values. Participating life insurance
terminal dividends are accrued in relation to gross margins.
Policy benefit liabilities for non-participating life insurance, disability
income insurance and certain annuities are developed using the net level
premium method, with assumptions for interest, mortality, morbidity,
withdrawals and expenses based principally on company experience.
Policyowners' account balances for universal life insurance and investment-type
annuities represent amounts that inure to the benefit of the policyowners
(before surrender charges).
POLICYOWNERS' DIVIDENDS
Policyowners' dividends are the pro-rata amount of dividends earned that will
be paid or credited at the next policy anniversary. Dividends are based on a
scale that seeks to reflect the relative contribution of each group of policies
to National Life's overall operating results. The dividend scale is approved
annually by National Life's Board of Directors.
RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES
Premiums from traditional life and certain annuities are recognized as revenue
when due from the policyowner. Benefits and expenses are matched with income
by providing for policy benefit liabilities and the deferral and amortization
of policy acquisition costs so as to recognize profits over the life of the
policies.
Premiums from universal life and investment-type annuities are reported as
increases in policyowners' accounts. Revenues for these policies consist of
mortality charges, policy administration fees and surrender charges deducted
from policyowners' accounts. Policy benefits charged to expense include
benefit claims in excess of related policyowners' account balances.
Premiums from disability income policies are recognized as revenue over the
period to which the premiums relate.
FEDERAL INCOME TAXES
National Life files a consolidated federal income tax return that includes all
of its wholly-owned subsidiaries. Current federal income taxes are charged or
credited to operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are recognized based on temporary differences
between financial statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
6
<PAGE> 178
NOTE 3 - ACQUISITION
National Financial Services, Inc., a wholly-owned subsidiary of National Life,
acquired a two-thirds interest in Life Insurance Company of the Southwest (LSW)
located in Dallas, Texas on February 8, 1996. LSW is a financial services
company specializing in annuities that is licensed in all states except New
York.
The acquisition was accomplished by purchasing two-thirds of LSW Holdings
Corporation, the owner of LSW. LSW Holdings Corporation was renamed LSW
National Holdings, Inc. concurrent with the purchase. The purchase price was
about $102 million in cash. The purchase resulted in the recording of an
intangible asset for the present value of future profits of insurance acquired
of $67.2 million.
The minority shareholders have the right to put their shares to National Life
at specified prices in the event of certain contingencies during the first five
years subsequent to closing and generally thereafter. Similarly, National Life
has the right to call the minority shareholders' shares at specified prices.
The specified prices are generally a function of GAAP equity or the original
purchase price.
These consolidated financial statements include the financial position and
operations of LSW National Holdings since the purchase, along with appropriate
adjustments for minority interests, using the purchase method. Pro forma
results had the acquisition occurred as of January 1, 1996 are shown in the
table below (in thousands). These pro forma consolidated results are not
necessarily indicative of the actual results which might have occurred had
National Life owned LSW since that date.
<TABLE>
<CAPTION>
1996
- ---------------------------------------------------------------------------------
<S> <C>
Revenues $ 1,026,763
Net income 17,356
</TABLE>
Noncash investing activities relating to the acquisition that are not reflected
in the 1996 consolidated statement of cash flow were as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired, excluding cash acquired $ 1,144,694
Liabilities assumed (1,063,143)
- ---------------------------------------------------------------------------------
Cash paid (net of cash acquired) $ 81,551
=================================================================================
</TABLE>
7
<PAGE> 179
NOTE 4 - INVESTMENTS
Debt and Equity Securities
The amortized cost and estimated fair values of debt and equity securities at
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1997 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS):
U.S. government obligations $ 284,039 $ 13,515 $ 612 $ 296,942
Government agencies, authorities
and subdivisions 178,986 11,649 793 189,842
Public utilities 389,744 19,246 6,314 402,676
Corporate 2,403,091 133,881 7,069 2,529,903
Private placements 598,144 29,576 2,170 625,550
Mortgage-backed securities 1,196,369 35,308 1,275 1,230,402
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,050,373 243,175 18,233 5,275,315
Preferred stocks 6,482 803 259 7,026
Common stocks 29,638 5,511 63 35,086
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 5,086,493 $ 249,489 $ 18,555 $ 5,317,427
===============================================================================================================
1996
- ---------------------------------------------------------------------------------------------------------------
Available-for-sale (AFS):
U.S. government obligations $ 180,646 $ 3,336 $ 187 $ 183,795
Government agencies, authorities
and subdivisions 222,867 9,165 3,693 228,339
Public utilities 427,426 12,354 7,270 432,510
Corporate 2,176,977 72,482 20,581 2,228,878
Private placements 199,061 4,923 2,349 201,635
Mortgage-backed securities 1,089,434 16,244 10,142 1,095,536
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt securities 4,296,411 118,504 44,222 4,370,693
Preferred stocks 9,719 739 359 10,099
Common stocks 9,705 2,560 11 12,254
- ---------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 4,315,835 $ 121,803 $ 44,592 $ 4,393,046
===============================================================================================================
Held-to-maturity (HTM) debt securities:
U.S. government obligations $ 2,052 $ 14 $ 2 $ 2,064
Government agencies, authorities
and subdivisions 20,970 1,264 208 22,026
Public utilities 9,953 359 1 10,311
Corporate 30,669 1,593 40 32,222
Private placements 527,056 21,799 3,061 545,794
- ---------------------------------------------------------------------------------------------------------------
Total HTM debt securities $ 590,700 $ 25,029 $ 3,312 $ 612,417
===============================================================================================================
</TABLE>
8
<PAGE> 180
Unrealized gains and losses on available-for-sale debt and equity securities
included as a component of policyowners' equity and changes therein for the
years ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized gains (losses) on available-for-sale securities $ 153,723 $ (153,543)
Net unrealized gains on separate accounts 3,047 1,225
Related minority interests (9,360) 2,474
Related deferred policy acquisition costs (44,378) 61,726
Related present value of future profits of insurance acquired (10,138) 11,639
Related deferred income taxes (36,744) 28,173
- ----------------------------------------------------------------------------------------------------
Increase (decrease) in net unrealized gains (losses) 56,150 (48,306)
Balance, beginning of year 28,867 77,173
- ----------------------------------------------------------------------------------------------------
Balance, end of year $ 85,017 $ 28,867
====================================================================================================
Balance, end of year includes:
Net unrealized gains on available-for-sale securities $ 230,934 $ 77,211
Net unrealized gains on separate accounts 4,272 1,225
Related minority interests (6,886) 2,474
Related deferred policy acquisition costs (94,678) (50,300)
Related present value of future profits on insurance acquired 1,501 11,639
Related deferred income taxes (50,126) (13,382)
- ----------------------------------------------------------------------------------------------------
Balance, end of year $ 85,017 $ 28,867
====================================================================================================
</TABLE>
In December 1997, National Life transferred all securities designated as
held-to-maturity to available-for-sale. The securities transferred had an
estimated fair value of $618.8 million and an amortized cost of $586.1 million,
resulting in $32.7 million in unrealized gains.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1997 are shown below (in thousands). Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Estimated Fair
Cost Value
- ---------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 82,465 $ 83,291
Due after one year through five years 557,609 575,489
Due after five years through ten years 2,074,439 2,147,536
Due after ten years 1,139,491 1,238,597
Mortgage-backed securities 1,196,369 1,230,402
- ---------------------------------------------------------------------------
Total $ 5,050,373 $ 5,275,315
===========================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 are shown below (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 1,928,055 $ 1,990,175
Gross realized gains $ 27,318 $ 46,092
Gross realized losses $ 16,916 $ 42,759
</TABLE>
9
<PAGE> 181
National Life periodically lends certain U.S. government or corporate bonds to
approved counterparties to enhance the yield of its bond portfolio. National
Life receives cash collateral for at least 105% of the market value of
securities loaned. Collateral adequacy is evaluated daily and periodically
adjusted for changes in the market value of securities loaned. The carrying
values of securities loaned are unaffected by the transaction. Collateral held
(included in cash and cash equivalents) and the corresponding liability for
collateral held (included in other liabilities) were $19.8 million and $159.4
million at December 31, 1997 and 1996, respectively.
National Life also periodically enters into repurchase agreements on U.S.
Treasury securities to enhance the yield of its bond portfolio. These
transactions are accounted for as financings because the securities received at
the end of the repurchase period are identical to the securities transferred.
There were no open transactions at December 31, 1996. The repurchase liability
is included in other liabilities and was $234.6 million at December 31, 1997.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
GEOGRAPHIC REGION
-----------------
New England 4.0% 4.5%
Middle Atlantic 10.3 9.0
East North Central 8.8 10.4
West North Central 4.9 3.6
South Atlantic 29.1 30.2
East South Central 5.0 4.4
West South Central 10.8 13.3
Mountain 16.7 15.9
Pacific 10.4 8.7
- ---------------------------------------------------------------------------------
Total 100.0% 100.0%
=================================================================================
PROPERTY TYPE
-------------
Residential 0.2% 0.3%
Apartment 24.3 21.1
Retail 15.9 18.6
Office Building 34.0 32.6
Industrial 22.2 25.0
Hotel/Motel 0.9 1.0
Other Commercial 2.5 1.4
- ---------------------------------------------------------------------------------
Total 100.0% 100.0%
=================================================================================
Total mortgage loans and real estate $ 1,088,096 $ 1,006,466
=================================================================================
</TABLE>
10
<PAGE> 182
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 965,760 $ 876,994
Impaired loans without valuation allowances 9,413 6,146
- ----------------------------------------------------------------------------
Subtotal 975,173 883,140
- ----------------------------------------------------------------------------
Impaired loans with valuation allowances 21,426 31,167
Related valuation allowances (4,429) (7,283)
- ----------------------------------------------------------------------------
Subtotal 16,997 23,884
- ----------------------------------------------------------------------------
Total $ 992,170 $ 907,024
============================================================================
Impaired loans:
Average recorded investment $ 34,076 $ 40,161
Interest income recognized $ 3,543 $ 5,026
Interest received $ 3,818 $ 5,170
</TABLE>
Impaired loans are mortgage loans where it is not probable that all amounts due
under the contractual terms of the loan will be received. Impaired loans
without valuation allowances are mortgage loans where the estimated fair value
of the collateral exceeds the recorded investment in the loan. For these
impaired loans, interest income is recognized on an accrual basis, subject to
recoverability from the estimated fair value of the loan collateral. For
impaired loans with valuation allowances, interest income is recognized on a
cash basis.
Activity in the valuation allowances for impaired mortgage loans for the years
ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
=========================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,543 $ 3,944
Impairment losses charged to valuation allowances (1,419) (7,559)
Changes to previously established valuation allowances (2,978) 2,423
- -----------------------------------------------------------------------------------------
Decrease in valuation allowances (2,854) (1,192)
Balance, beginning of year 7,283 8,475
- -----------------------------------------------------------------------------------------
Balance, end of year $ 4,429 $ 7,283
=========================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 392,674 $ 385,750
Equity securities dividends 2,765 1,730
Mortgage loan interest 85,782 81,575
Policy loan interest 48,856 49,438
Real estate income 15,822 15,193
Other investment income 13,627 9,016
- ----------------------------------------------------------------------------
Gross investment income 559,526 542,702
Less: investment expenses 26,932 25,434
- ----------------------------------------------------------------------------
Net investment income $ 532,594 $ 517,268
============================================================================
</TABLE>
DERIVATIVES
National Life purchases over-the-counter options and exchange-traded futures on
the Standard & Poor's 500 (S&P 500) index to hedge obligations relating to
equity indexed products. When the S&P 500 index increases, increases in the
intrinsic value of the options and fair value of futures are offset by
increases in equity indexed product account values. When the S&P 500 index
decreases, National Life's loss is the decrease in the fair value of futures
and is limited to the premium paid for the options.
11
<PAGE> 183
National Life purchases options only from highly rated counterparties.
However, in the event a counterparty failed to perform, National Life's loss
would be equal to the fair value of the net options held from that
counterparty.
The option premium is expensed over the term of the option. The amortization
of the option premium, increases in the intrinsic value of options and changes
in the fair value of futures are reflected in investment income. Interest
credited includes amounts that would be credited on the next policy anniversary
based on the S&P 500 index's value at the reporting date.
The notional amounts and net book value of options and futures at December 31,
were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 245,187 $ 61,078
Futures $ 27,892 -
===========================================================================================================
Book values:
Options: Net amortized cost $ 4,058 $ 2,986
Intrinsic value 7,876 3,480
- -----------------------------------------------------------------------------------------------------------
Book value 11,934 6,466
Futures at fair value 630 -
- -----------------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 12,564 $ 6,466
===========================================================================================================
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments at
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Carrying Estimated Fair Carrying Value Estimated Fair
Value Value Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 372,180 $ 372,180 $ 268,235 $ 268,235
Available-for-sale debt and equity securities 5,317,427 5,317,427 4,393,046 4,393,046
Held-to-maturity debt securities - - 590,700 612,417
Mortgage loans 992,170 1,024,582 907,024 924,732
Policy loans 791,753 730,059 796,193 715,914
Derivatives 12,564 11,629 6,466 5,123
Investment products 2,642,511 2,503,727 2,341,273 2,336,171
Debt 80,085 82,314 82,682 80,149
</TABLE>
For cash and cash equivalents carrying value approximates estimated fair value.
Debt and equity securities estimated fair values are based on quoted values
where available. Where quoted values are not available, estimated fair values
are based on discounted cash flows using current interest rates of similar
securities.
Mortgage loan fair values are estimated as the average of discounted cash flows
under different scenarios of future mortgage interest rates (including
appropriate provisions for default losses and borrower prepayments).
For variable rate policy loans the unpaid balance approximates fair value.
Fixed rate policy loan fair values are estimated based on discounted cash flows
using the current variable policy loan rate (including appropriate provisions
for mortality and repayments).
Derivatives estimated fair values are based on quoted values.
12
<PAGE> 184
Investment products include flexible premium annuities, single premium deferred
annuities and supplementary contracts not involving life contingencies.
Investment product fair values are estimated as the average of discounted cash
flows under different scenarios of future interest rates of A-rated corporate
bonds and related changes in premium persistency and surrenders.
Debt fair values are estimated values are based on discounted cash flows using
current interest rates of similar securities.
NOTE 5 - INSURANCE IN-FORCE AND REINSURANCE
National Life reinsures certain risks assumed in the normal course of business.
For individual life products, National Life generally retains no more than $3.0
million of risk on any person (excluding accidental death benefits and dividend
additions). Reinsurance for life products is ceded under yearly renewable
term, coinsurance, and modified coinsurance. Disability income products are
significantly reinsured under coinsurance and modified coinsurance.
National Life remains liable in the event any reinsurer is unable to meet its
assumed obligations. National Life regularly evaluates the financial condition
of its reinsurers and concentrations of credit risk of reinsurers to minimize
its exposure to significant losses from reinsurer insolvencies.
The effects of reinsurance for the years ended December 31, were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 470,853 $ 474,998
Reinsurance assumed 896 959
Reinsurance ceded (72,732) (69,671)
- -------------------------------------------------------------------------------
$ 399,017 $ 406,286
===============================================================================
Increase in policy liabilities:
Direct increase in policy $ 112,577 $ 164,233
liabilities
Reinsurance assumed 17 (20)
Reinsurance ceded 5,540 2,455
- -------------------------------------------------------------------------------
$ 118,134 $ 166,668
===============================================================================
Policy benefits:
Direct policy benefits $ 393,082 $ 363,405
Reinsurance assumed 12 62
Reinsurance ceded (79,275) (65,903)
- -------------------------------------------------------------------------------
$ 313,819 $ 297,564
===============================================================================
Policyowners' dividends:
Direct policyowners' dividends $ 111,617 $ 112,050
Reinsurance ceded (5,305) (6,360)
- -------------------------------------------------------------------------------
$ 106,312 $ 105,690
===============================================================================
</TABLE>
13
<PAGE> 185
NOTE 6 - INCOME TAXES
The components of income taxes and a reconciliation of the expected and actual
income taxes and marginal and effective federal income tax rates for the years
ended December 31 were as follows ($ in thousands):
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 41,654 $ 45,603
Deferred (20,747) (13,646)
- ------------------------------------------------------------------ -----------------
Income taxes $ 20,907 $ 31,957
================================================================== =================
Expected income taxes $ 22,531 35.0% $ 19,252 35.0%
Differential earnings amount 4,581 7.1 6,007 10.9
Affordable housing tax credit (4,318) (6.7) (1,305) (2.4)
Net change in tax reserves 1,298 2.0 10,290 18.7
Other, net (3,185) (4.9) (2,287) (4.1)
- -----------------------------------------------------------------------------------------------------------------
Income taxes $ 20,907 $ 31,957
================================================================= =================
Effective federal income tax rate 32.5% 58.1%
========================================== ============== ==================
</TABLE>
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Policy liabilities $ 172,387 $ 160,933
Other liabilities and accrued expenses 56,946 47,703
Other 4,294 10,495
- -----------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 233,627 219,131
- -----------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 126,914 125,454
Present value of future profits of insurance acquired 20,642 24,262
Net unrealized gain on available-for-sale securities 50,126 13,382
Debt and equity securities 9,253 9,352
Other 9,175 13,167
- -----------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 216,110 185,617
- -----------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 17,517 $ 33,514
=================================================================================================================
</TABLE>
Management believes it is more likely than not that National Life will realize
the benefit of deferred tax assets.
National Life's federal income tax returns are routinely audited by the IRS.
The IRS has examined tax returns through 1993 and is currently examining the
years 1994 and 1995. In management's opinion adequate tax liabilities have been
established for all open years.
NOTE 7 - BENEFIT PLANS
National Life sponsors a qualified defined benefit pension plan covering
substantially all employees. The plan is administered by National Life's
Benefits Committee and is non-contributory, with benefits based on an
employee's retirement age, years of service and compensation near retirement.
Plan assets are primarily bonds and common stocks held in a National Life
separate account and funds invested in an annuity contract issued by National
Life. National Life also sponsors other non-qualified pension plans, including
a non-contributory defined benefit plan for general agents that provides
benefits based on years of service and sales levels, a contributory defined
benefit plan for certain employees, agents and general
14
<PAGE> 186
agents and a non-contributory defined supplemental benefit plan for certain
executives. These non-qualified plans are not funded.
National Life sponsors four defined benefit postretirement plans that provide
medical, dental and life insurance benefits to employees and agents.
Substantially all employees and agents may be eligible for retiree benefits if
they reach normal retirement age and meet certain minimum service requirements
while working for National Life. Most of the plans are contributory, with
retiree contributions adjusted annually, and contain cost sharing features such
as deductibles and copayments. The plans are not funded and National Life pays
for plan benefits on a current basis. The cost of these benefits is recognized
as earned.
During 1997, National Life offered enhanced pension and postretirement benefits
to employees meeting certain defined eligibility requirements. The program
resulted in special termination benefits for the expected present value of the
enhancements to benefits, curtailment gains for reductions in the pension
benefit obligations relating to assumed increases in future compensation levels
and settlement gains for the pro-rata recognition of actuarial gains on lump
sum settlements of pension benefit obligations.
The status of the defined benefit plans at December 31, was as follows (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $180,075 $ 170,740 $ 24,351 $ 23,410
Service cost (benefits earned during the current period) 4,467 4,384 630 667
Interest cost on benefit obligation 13,629 11,788 1,669 1,652
Actuarial gains (19,077) 3,312 (3,587) (592)
Benefits paid (14,557) (10,149) (784) (786)
1997 early retirement program:
Special termination benefits 10,878 - 2,480 -
Curtailment gain (3,630) - - -
Settlement payments (8,799) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 162,986 $ 180,075 $ 24,759 $ 24,351
==============================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 97,566 $ 90,592
Actual return on plan assets 23,337 10,230
Employer contributions 2,502 2,047
Benefits paid (5,722) (5,303)
1997 early retirement program settlement payments (8,799) -
- ------------------------------------------------------------------------------------------------------
Plan assets, end of year $ 108,884 $ 97,566
======================================================================================================
FUNDED STATUS:
Benefit obligation $ 162,986 $ 180,075 $ 24,759 $ 24,351
Plan assets (108,884) (97,566) - -
- ------------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 54,102 82,509 24,759 24,351
Unrecognized actuarial gains (losses) 28,485 (2,376) 4,548 930
Unrecognized prior service cost - - (1,224) (1,296)
- ------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost (included in other liabilities) $ 82,587 $ 80,133 $ 28,083 $ 23,985
==============================================================================================================================
</TABLE>
15
<PAGE> 187
The components of net periodic benefit cost for the years ended December 31,
were as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 4,467 $ 4,384 $ 630 $ 667
Interest cost on benefit obligation 13,629 11,788 1,669 1,652
Expected return on plan assets (8,636) (6,225) - -
Net amortization and deferrals - - 31 -
Amortization of prior service cost - - 72 72
1997 early retirement program:
Special termination benefits 10,878 - 2,480 -
Curtailment gain (3,630) - - -
Settlement gains (2,917) - - -
- ------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating expenses) $ 13,791 $ 9,947 $ 4,882 $ 2,391
==================================================================================================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation $ 69,116 $ 71,511
Accumulated benefit obligation 66,268 67,070
Fair value of plan assets - -
</TABLE>
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.50% 7.00% 7.50% 7.00%
Rate of increase in future compensation levels 3.50% 5.00%
Expected long term return on plan assets 9.00% 7.00%
</TABLE>
Health care cost trend rates grade to 5% in year 2000 and remain level
thereafter. Increasing the assumed health care trend rates by one percentage
point in each year would increase the APBO by about $2.4 million and the 1997
service and interest cost components of net periodic postretirement benefit
cost by about $0.3 million. Decreasing the assumed health care trend rates by
one percentage point in each year would reduce the APBO by about $1.9 million
and the 1997 service and interest cost components of net periodic
postretirement benefit cost by about $0.3 million. National Life uses the
straight-line method of amortization for prior service cost and unrecognized
gains and losses.
National Life provides employee savings and 401(k) plans where up to 3% of an
employee's compensation may be invested by the employee in either plan with
matching funds contributed by the company. National Life also contributes
various amounts 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.
16
<PAGE> 188
NOTE 8 - DEBT
<TABLE>
<CAPTION>
Debt consists of the following (in thousands):
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,685 $ 69,682
$70 million, maturing March 1, 2024 with interest payable
semi-annually on March 1 and September 1. The notes are
unsecured and subordinated to all present and future
indebtedness, policy claims and prior claims. The notes may be
redeemed in whole or in part any time after March 1, 2004 at
predetermined redemption prices. All interest and principal
payments require prior written approval by the State of Vermont
Department of Banking, Insurance, Securities and Health Care
Administration.
6.10% Term Note: 10,400 13,000
maturing March 1, 2000 with interest payable semi-annually on
March 1 and September 1. The note is secured by subsidiary
stock, includes certain restrictive covenants and requires
annual payments of principal (see below).
- ---------------------------------------------------------------------------------------------------------------------------
Total debt $ 80,085 $ 82,682
===========================================================================================================================
</TABLE>
The aggregate annual maturities of debt for the next five years are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 4,400
1999 3,000
2000 3,000
2001 -
2002 -
</TABLE>
In February 1998, the Term Note was renegotiated. Under the new terms,
effective March 1, 1998, the interest rate will be 6.57% with principal
payments of $2.0 million annually for 1998 to 2001 (inclusive) and $2.4 million
in 2002.
NOTE 9 - CONTINGENCIES
During 1997, several class action lawsuits were filed against National Life in
various states relating to the sale of life insurance policies during the
1980's and 1990's. National Life specifically denies any wrongdoing and
intends to defend these cases vigorously. Accordingly, a provision for legal
and administrative costs of defending these lawsuits was established in 1997.
The ultimate outcome of such litigation is uncertain given the complexity and
scope of the issues involved. While management believes that the ultimate
outcome is unlikely to have a material adverse effect on National Life's
financial position (after considering existing provisions), an adverse outcome
could materially affect operating results for a given year.
17
<PAGE> 189
NOTE 10 - STATUTORY INFORMATION
National Life prepares statutory basis financial statements for regulatory
filings with insurance regulators in all 50 states and the District of
Columbia. A reconciliation of National Life Insurance Company's statutory
surplus to GAAP retained earnings at December 31 and statutory net income to
GAAP net income for the years ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------
Surplus/ Surplus/
Retained Retained
Earnings Net Income Earnings Net Income
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 342,614 $ 49,574 $ 305,611 $ 11,684
Asset valuation reserve 67,734 - 57,054 -
Interest maintenance reserve 56,940 (229) 57,169 1,540
Surplus notes (69,685) (3) (69,682) (3)
Non-admitted assets 20,874 - 18,391 -
Investments (944) (18,856) 18,504 290
Deferred policy acquisition costs 437,932 (5,651) 443,583 3,970
Deferred income taxes 72,544 13,807 58,737 9,179
Policy liabilities (186,349) 7,449 (193,798) (9,874)
Policyowners' dividends 64,734 2,206 62,528 (1,142)
Benefit plans (37,826) (1,732) (36,094) 4,403
Other changes, net (12,696) (10,734) (1,962) (2,924)
- --------------------------------------------------------------------------------------------------------------
GAAP retained earnings/net income $ 755,872 $ 35,831 $ 720,041 $ 17,123
==============================================================================================================
</TABLE>
The New York Insurance Department recognizes only statutory accounting
practices for determining and reporting the financial condition and results of
operations of an insurance company and for determining solvency under the New
York Insurance Law. No consideration is given by the Department to financial
statements prepared in accordance with generally accepted accounting principles
in making such determinations.
18
<PAGE> 190
NATIONAL VARIABLE
LIFE INSURANCE ACCOUNT
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1997
F-21
<PAGE> 191
[PRICE WATERHOUSE LLP LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
April 22, 1998
To the Board of Directors of
National Life Insurance Company
and Policyowners of
National Variable Life Insurance Account
In our opinion, the accompanying statement of assets and the related
statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of National Variable Life
Insurance Account (a Separate Account of National Life Insurance Company)
(the Variable Account) at December 31, 1997, and the results of its
operations and the changes in its net assets for year ended December
31, 1997 and the period from March 11, 1996 through December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Variable Account's management;
our responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit of these financial 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 audit provides a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
F-22
<PAGE> 192
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - NATURE OF OPERATIONS
National Variable Life Insurance Account (the Variable Account) began
operations on March 11, 1996 and is registered as a unit investment trust
under the Investment Company Act of 1940, as amended. The operations of
the Variable Account are part of National Life Insurance Company (National
Life). The Variable Account was established by National Life as a
separate investment account to invest the net premiums received from the
sale of certain variable life insurance products. Equity Services, Inc.,
an indirect wholly-owned subsidiary of National Life, is the principal
underwriter for the variable life insurance policies issued by National
Life. Sentinel Advisors Company, an indirectly-owned subsidiary of
National Life, provides investment advisory services for certain Market
Street Fund, Inc. mutual fund portfolios.
The Variable Account invests the accumulated policyowner account values in
shares of mutual fund portfolios within Market Street Fund, Inc., Variable
Insurance Products Fund (VIPF), and Alger American Fund. Net premiums
received by the Variable Account are deposited in investment portfolios as
designated by the policyowner, except for initial net premiums on new
policies which are first invested in the Market Street Fund Money Market
Portfolio. Policyowners may also direct the allocations of their account
value between the various investment portfolios within the Variable
Account and a declared interest account (within the General Account of
National Life) through participant transfers.
There are fifteen sub-accounts within the Variable Account. Each
sub-account, which invests exclusively in the shares of the corresponding
portfolio, comprises the accumulated policyowner account values of the
underlying variable life insurance policies investing in the sub-account.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with generally
accepted accounting principles (GAAP). The preparation of financial
statements in accordance with GAAP requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies consistently
followed in the preparation of the Variable Account's financial statements.
INVESTMENTS
The mutual fund portfolios consist of the Market Street Fund Money Market,
Market Street Fund Growth (formerly Market Street Fund Common Stock),
Market Street Fund Aggressive Growth, Market Street Fund Managed, Market
Street Fund Bond, Market Street Fund International, Market Street Fund
Sentinel Growth, VIPF Equity-Income, VIPF Overseas, VIPF Growth, VIPF High
Income, VIPF Contra, VIPF Index 500, Alger American Growth, Alger American
Small Capitalization (the Portfolios). The VIPF Contra and VIPF Index 500
mutual fund portfolios were added to the Variable Account in 1997. The
assets of each portfolio are held separate from the assets of the other
portfolios and each has different investment objectives and policies.
Each portfolio operates separately and the gains or losses in one
portfolio have no effect on the investment performance of the other
portfolios.
INVESTMENT VALUATION
The investments in the Portfolios are valued at the closing net asset
value per share as determined by the portfolio at the end of each period.
The change in the difference between cost and market value is reflected as
unrealized gain (loss) in the Statement of Operations.
F-32
<PAGE> 193
INVESTMENT TRANSACTIONS
Investment transactions are accounted for on the trade date (date the
order to buy or sell is executed) and dividend income (including capital
gain distributions) are recorded on the ex-dividend date. The cost of
investments sold is determined using the weighted average cost method.
FEDERAL INCOME TAXES
The operations of the Variable Account are part of, and taxed with, the
total operations of National Life. Under existing federal income tax law,
investment income and capital gains attributable to the Variable Account
are not taxed.
NOTE 3 - CHARGES AND EXPENSES
National Life deducts a daily charge from the Variable Account based on an
annual rate of .9% of each sub-account's net asset value for its
assumption of mortality and expense risks. The mortality risk assumed is
that the insureds under the policies may die sooner than anticipated. The
expense risk assumed is that expenses incurred in issuing and
administering the policies may exceed expected levels.
Cost of insurance charges are deducted monthly from each policyowner's
accumulated account value for the insurance protection provided and are
remitted to National Life. These charges vary based on the net amount at
risk, attained age of the insured, and other factors. As partial
compensation for administrative services provided, National Life also
deducts a monthly administrative charge from each policyowner's
accumulated account value.
Certain deferred administrative and sales charges are deducted from the
policyowner's accumulated account value if the underlying variable life
insurance policy is surrendered or lapsed prior to the end of the
fifteenth policy year.
NOTE 4 - INVESTMENTS
The number of shares held and cost for each of the portfolios at December 31,
1997 are set forth below:
<TABLE>
<CAPTION>
Portfolio Shares Cost
- --------- ------ ----
<S> <C> <C>
Market Street Fund Money Market 3,943,908 $ 3,943,908
Market Street Fund Growth 636,350 10,260,180
Market Street Fund Aggressive Growth 28,951 586,320
Market Street Fund Managed 56,668 880,427
Market Street Fund Bond 39,297 419,059
Market Street Fund International 66,520 895,490
Market Street Fund Sentinel Growth 545,281 5,602,736
VIPF Equity-Income 194,007 4,228,149
VIPF Overseas 65,691 1,253,090
VIPF Growth 92,369 3,129,870
VIPF High Income 85,125 1,089,467
VIPF Contra 20,915 411,546
VIPF Index 500 4,759 528,529
Alger American Growth 48,594 1,880,879
Alger American Small Capitalization 62,841 2,607,214
-----------
Total $37,716,864
===========
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-33
<PAGE> 194
NOTE 5 - PURCHASES AND SALES OF PORTFOLIO SHARES
Purchases and proceeds from sales of shares in the portfolios for the period
ended December 31, 1997 aggregated the following:
<TABLE>
<CAPTION>
Portfolio Purchases Proceeds
- --------- ------------- ------------
<S> <C> <C>
Market Street Fund Money Market $ 22,741,388 $ 19,929,117
Market Street Fund Growth 5,581,934 1,245,245
Market Street Fund Aggressive Growth 619,884 146,745
Market Street Fund Managed 662,415 212,469
Market Street Fund Bond 409,686 70,206
Market Street Fund International 830,063 197,678
Market Street Fund Sentinel Growth 667,611 168,249
VIPF Equity-Income 3,882,437 991,921
VIPF Overseas 1,374,157 322,772
VIPF Growth 3,003,178 582,960
VIPF High Income 1,135,782 224,814
VIPF Contra 573,322 164,368
VIPF Index 500 692,398 165,769
Alger American Growth 1,724,350 433,208
Alger American Small Capitalization 2,643,580 683,616
</TABLE>
NOTE 6 - LOANS
Policyowners may obtain loans after the first policy year as outlined in
the variable life insurance policy. At the time a loan is granted,
accumulated value equal to the amount of the loan is designated as
collateral and transferred from the Variable Account to the General
Account of National Life. Interest is credited by National Life at
predetermined rates on collateral held in the General Account. This
interest is periodically transferred to the Variable Account.
NOTE 7 - DISTRIBUTION OF NET INCOME
The Variable Account does not expect to declare dividends to policyowners
from accumulated net income. The accumulated net income will be
distributed to policyowners as withdrawals (in the form of death benefits,
surrenders or policy loans) in excess of the policyowners' net
contributions to the Variable Account.
NOTE 8 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (IRC),
a variable universal life contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be
treated as a variable universal life contract for federal income tax
purposes for any period for which the investments of the segregated asset
account on which the contract is based are not adequately diversified.
The IRC provides that the adequately diversified requirement may be met if
the underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the
Secretary of the Treasury.
National Life believes that the Variable Account satisfies the current
requirements of the regulations, and it intends that the Variable Account
will continue to meet such requirements.
F-34
<PAGE> 195
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF ASSETS
December 31, 1997
<TABLE>
<CAPTION>
Policyowner National Life
Account Insurance
Values Company
---------------------- -------------------
<S> <C> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value
(policyowner accumulation units and unit value):
Market Street Fund Money Market (356,624.12 accumulation units at
$11.06 unit value) $ 3,943,908
Market Street Fund Growth (373,191.56 accumulation units at $14.32
unit value) 5,342,928 $ 7,275,510
Market Street Fund Aggressive Growth (47,206.16 accumulation units at
$13.61 unit value) 642,433
Market Street Fund Managed (74,215.85 accumulation units at
$13.03 unit value) 966,753
Market Street Fund Bond (38,703.43 accumulation units at 11.15 unit value) 431,479
Market Street Fund International (75,825.93 accumulation units
at $11.94 unit value) 905,335
Market Street Fund Sentinel Growth (43,427.93 accumulation units at
$14.43 unit value) 626,453 7,329,199
VIPF Equity-Income (156,267.63 accumulation units at
$30.14 unit value) 4,710,498
VIPF Overseas (67,798.07 accumulation units at $18.60 unit value) 1,261,285
VIPF Growth (112,061.30 accumulation units at $30.58 unit value) 3,426,885
VIPF High Income (40,363.08 accumulation units at $28.64 unit value) 1,156,003
VIPF Contra Fund (34,066.94 accumulation units at $12.24 unit value) 417,046
VIPF Index 500 (23,228.43 accumulation units at $23.44 unit value) 544,410
Alger American Growth (155,907.83 accumulation units at
$13.33 unit value) 2,077,864
Alger American Small Capitalization (247,743.48 accumulation units
at $11.10 unit value) 2,749,311
-------------------------------------
TOTAL ASSETS $ 29,202,591 $ 14,604,709
=====================================
</TABLE>
<TABLE>
<CAPTION>
Total
--------------------
<S> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value
(policyowner accumulation units and unit value):
Market Street Fund Money Market (356,624.12 accumulation units at
$11.06 unit value) $ 3,943,908
Market Street Fund Growth (373,191.56 accumulation units at $14.32
unit value) 12,618,438
Market Street Fund Aggressive Growth (47,206.16 accumulation units at
$13.61 unit value) 642,433
Market Street Fund Managed (74,215.85 accumulation units at
$13.03 unit value) 966,753
Market Street Fund Bond (38,703.43 accumulation units at 11.15 unit value) 431,479
Market Street Fund International (75,825.93 accumulation units
at $11.94 unit value) 905,335
Market Street Fund Sentinel Growth (43,427.93 accumulation units at
$14.43 unit value) 7,955,652
VIPF Equity-Income (156,267.63 accumulation units at
$30.14 unit value) 4,710,498
VIPF Overseas (67,798.07 accumulation units at $18.60 unit value) 1,261,285
VIPF Growth (112,061.30 accumulation units at $30.58 unit value) 3,426,885
VIPF High Income (40,363.08 accumulation units at $28.64 unit value) 1,156,003
VIPF Contra Fund (34,066.94 accumulation units at $12.24 unit value) 417,046
VIPF Index 500 (23,228.43 accumulation units at $23.44 unit value) 544,410
Alger American Growth (155,907.83 accumulation units at
$13.33 unit value) 2,077,864
Alger American Small Capitalization (247,743.48 accumulation units
at $11.10 unit value) 2,749,311
---------------------
TOTAL ASSETS $ 43,807,300
=====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 196
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Policyowner Account Values
----------------------------------------------------------------------------------------
Market Street Fund Alger American
------------------------------------------------------------------- ------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth Growth Small Cap
-------- -------- ------- -------- ----- ------------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $131,394 $139,288 $ 1,211 $ 23,450 $ 9,403 $19,573 $ 434 $ 9,832 $ 54,467
EXPENSES:
Mortality and expense risk charges 22,402 24,951 3,114 5,910 1,833 5,158 2,431 11,355 15,072
----------------------------------------------------------------------------------------
Net investment income (loss) 108,992 114,337 (1,903) 17,540 7,570 14,415 (1,997) (1,523) 39,395
----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold - 106,196 12,533 13,707 483 6,441 16,851 48,393 29,498
Net unrealized appreciation
(depreciation) on investments - 353,473 51,230 85,995 11,666 2,281 44,338 176,680 141,467
----------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 459,669 63,763 99,702 12,149 8,722 61,189 225,073 170,965
----------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $108,992 $574,006 $61,860 $117,242 $19,719 $23,137 $59,192 $223,550 $210,360
========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 197
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Policyowner Account Values National Life Insurance Company
---------------------------------------------------------- ---------------------------------
VIPF Market Street Fund
---------------------------------------------------------- ----------------------
Equity - High Contra Index Sentinel
Income Overseas Growth Income Fund 500 Growth Growth Total
---------- -------- -------- ------- ------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 146,791 $ 22,598 $ 30,327 $17,180 $ - $ - $ 305,307 $ 26,233 $ 937,488
EXPENSES:
Mortality and expense risk charges 25,535 6,281 17,476 5,215 812 984 - - 148,529
---------------------------------------------------------------------------------------------
Net investment income (loss) 121,256 16,317 12,851 11,965 (812) (984) 305,307 26,233 788,959
---------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 77,167 9,870 48,614 10,903 2,592 1,900 - - 385,148
Net unrealized appreciation
(depreciation) on investments 428,283 (475) 280,065 62,794 5,500 15,881 1,315,203 1,732,966 4,707,347
---------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 505,450 9,395 328,679 73,697 8,092 17,781 1,315,203 1,732,966 5,092,495
---------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $341,530 $85,662 $ 7,280 $ 16,797 $1,620,510 $1,759,199 $5,881,454
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 198
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
Policyowner Account Values
------------------------------------------------------------------------
Market Street Fund
------------------------------------------------------------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth
-------- ------- ---------- ------- ------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 29,274 $ 1,900 $ - $ 283 $ 216 $ - $ -
EXPENSES:
Mortality and expense risk charges 5,265 1,828 225 372 141 529 201
------------------------------------------------------------------------
Net investment income (loss) 24,009 72 (225) (89) 75 (529) (201)
------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold - 8,318 828 346 133 1,673 489
Net unrealized
appreciation on investments - 34,582 4,883 331 753 7,565 5,612
------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 42,900 5,711 677 886 9,238 6,101
------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 24,009 $42,972 $ 5,486 $ 588 $ 961 $ 8,709 $ 5,900
========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 199
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
Policyowner Account Values National Life Insurance Company
-------------------------------------------------------- ---------------------------------
VIPF Alger American Market Street Fund
------------------------------------ ----------------- ---------------------
Equity - High Sentinel
Income Overseas Growth Income Growth Small Cap Growth Growth Total
--------- -------- ------ ------- -------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ - $ - $ - $ - $ 326 $ 42 $ - $ - $ 32,041
EXPENSES:
Mortality and expense risk charges 3,061 476 1,503 279 1,425 1,294 - - 16,599
--------------------------------------------------------------------------------------------
Net investment income (loss) (3,061) (476) (1,503) (279) (1,099) (1,252) - - 15,442
--------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 6,031 880 5,445 470 5,700 696 - - 31,009
Net unrealized
appreciation on investments 54,065 8,670 16,949 3,742 20,305 631 655,000 570,000 1,383,088
--------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 60,096 9,550 22,394 4,212 26,005 1,327 655,000 570,000 1,414,097
--------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 57,035 $ 9,074 $ 20,891 $ 3,933 $ 24,906 $ 75 $ 655,000 $ 570,000 $1,429,539
============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 200
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Policyowner Account Values
---------------------------------------------------------------------------------------------
Market Street Fund Alger American
----------------------------------------------------------------------- ---------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth Growth Small Cap
----------- ---------- -------- -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 108,992 $ 574,006 $ 61,860 $117,242 $ 19,719 $ 23,137 $ 59,192 $ 223,550 $ 210,360
---------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 14,928,533 1,666,786 226,537 291,903 117,811 333,866 200,093 726,590 1,015,432
Transfers between investment
sub-accounts and general account,
net (11,556,251) 2,658,992 304,863 252,090 250,863 372,293 310,212 755,142 1,179,593
Surrenders and lapses (35,239) (16,526) (3,762) (7,277) (2,819) (3,213) (1,141) (6,060) (19,896)
Death benefits - (16,352) - - - - - - (830)
Loan collateral interest received - 62 - - - - 9 91 93
Transfers for policy loans - (12,082) (47) - - (845) (437) (9,340) (14,708)
Cost of insurance and
administrative charges (632,456) (368,354) (52,706) (103,982) (33,934) (82,909) (37,403) (174,005) (238,728)
Miscellaneous (1,308) 4,519 158 (328) (11) (1,222) 3,791 246 (388)
---------------------------------------------------------------------------------------------
Total capital transactions 2,703,279 3,917,045 475,043 432,406 331,910 617,970 475,124 1,292,664 1,920,568
---------------------------------------------------------------------------------------------
Increase in net assets 2,812,271 4,491,051 536,903 549,648 351,629 641,107 534,316 1,516,214 2,130,928
Net assets, beginning of period 1,131,637 851,877 105,530 417,105 79,850 264,228 92,137 561,650 618,383
---------------------------------------------------------------------------------------------
Net assets, end of period $ 3,943,908 $5,342,928 $642,433 $966,753 $431,479 $905,335 $626,453 $2,077,864 $2,749,311
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 201
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Policyowner Account Values National Life Insurance Company
------------------------------------------------------------- ---------------------------------
VIPF Market Street Fund
------------------------------------------------------------- ---------------------
Equity- High Contra Index Sentinel
Income Overseas Growth Income Fund 500 Growth Growth Total
---------- ---------- ---------- ---------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $ 341,530 $ 85,662 $ 7,280 $ 16,797 $1,620,510 $1,759,199 $ 5,881,454
-----------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,350,368 421,824 1,240,642 273,306 90,825 112,247 - - 22,996,763
Transfers between investment
sub-accounts and general
account, net 1,824,653 715,582 1,471,895 690,283 331,696 436,969 - - (1,125)
Surrenders and lapses (15,710) (3,305) (15,336) (2,774) (489) (322) - - (133,869)
Death benefits - (295) (879) - - - - - (18,356)
Loan collateral interest
received 390 101 115 12 - - 873
Transfers for policy loans (27,151) (8,820) (15,684) (1,157) (201) - - - (90,472)
Cost of insurance and
administrative charges (363,378) (92,839) (274,427) (61,178) (12,527) (19,167) - - (2,547,993)
Miscellaneous 89 2,820 1,042 511 462 (2,114) - - 8,267
-----------------------------------------------------------------------------------------------
Total capital transactions 2,769,261 1,035,068 2,407,368 899,003 409,766 527,613 - - 20,214,088
-----------------------------------------------------------------------------------------------
Increase in net assets 3,395,967 1,060,780 2,748,898 984,665 417,046 544,410 1,620,510 1,759,199 26,095,542
Net assets, beginning of period 1,314,531 200,505 677,987 171,338 - - 5,655,000 5,570,000 17,711,758
-----------------------------------------------------------------------------------------------
Net assets, end of period $4,710,498 $1,261,285 $3,426,885 $1,156,003 $417,046 $544,410 $7,275,510 $7,329,199 $43,807,300
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 202
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD MARCH 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
Policyowner Account Values
------------------------------------------------------------------------------------------
Market Street Fund
------------------------------------------------------------------------------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth
---------- ---------- ----------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 24,009 $ 42,972 $ 5,486 $ 588 $ 961 $ 8,709 $ 5,900
------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 5,500,094 210,351 40,861 49,310 8,079 65,892 14,470
National Life contributions - - - - - - -
Transfers between investment
sub-accounts, net (4,100,684) 639,915 64,732 369,030 73,513 203,603 77,833
Surrenders and lapses (127) (315) (47) - (51) (56) -
Cost of insurance and
administrative charges (290,783) (41,128) (5,468) (7,856) (2,613) (14,118) (6,068)
Miscellaneous (872) 82 (34) 6,033 (39) 198 2
------------------------------------------------------------------------------------------
Total capital transactions 1,107,628 808,905 100,044 416,517 78,889 255,519 86,237
------------------------------------------------------------------------------------------
Increase in net assets 1,131,637 851,877 105,530 417,105 79,850 264,228 92,137
Net assets, beginning of period - - - - - - -
------------------------------------------------------------------------------------------
Net assets, end of period $1,131,637 $ 851,877 $ 105,530 $ 417,105 $ 79,850 $ 264,228 $ 92,137
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 203
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(A Separate Account of National Life Insurance Company)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD MARCH 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
Policyowner Account Values National Life Insurance Company
----------------------------------------------------------- -----------------------------------
VIPF Alger American Market Street Fund
---------------------------------------- ------------------ ----------------------
Equity - High Sentinel
Income Overseas Growth Income Growth Small Cap Growth Growth Total
---------- -------- ------- -------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 57,035 $ 9,074 $ 20,891 $ 3,933 $ 24,906 $ 75 $ 655,000 $ 570,000 $ 1,429,539
------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 230,608 52,178 200,316 51,019 171,670 203,653 - - 6,798,501
National Life contributions - - - - - - 5,000,000 5,000,000 10,000,000
Transfers between investment
sub-accounts, net 1,062,706 149,481 493,808 121,155 394,402 450,506 - - -
Surrenders and lapses (767) (77) (608) (63) (103) (636) - - (2,850)
Cost of insurance and
administrative charges (36,513) (10,135) (37,565) (4,878) (29,318) (34,969) - - (521,412)
Miscellaneous 1,462 (16) 1,145 172 93 (246) - - 7,980
------------------------------------------------------------------------------------------------
Total capital transactions 1,257,496 191,431 657,096 167,405 536,744 618,308 5,000,000 5,000,000 16,282,219
------------------------------------------------------------------------------------------------
Increase in net assets 1,314,531 200,505 677,987 171,338 561,650 618,383 5,655,000 5,570,000 17,711,758
Net assets, beginning of period - - - - - - - - -
Net assets, end of period $1,314,531 $200,505 $677,987 $171,338 $561,650 $618,383 $5,655,000 $5,570,000 $17,711,758
================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 204
Part II
<PAGE> 205
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.
REPRESENTATION RELATING TO FEES AND CHARGES
National Life Insurance Company ("the Company") hereby represents that
the fees and charges deducted under the variable life insurance policies
described in the prospectuses contained in this registration statement are, in
the aggregate, reasonable in relationship to the services rendered, the
expenses expected to be incurred, and the risks assumed by the Company.
<PAGE> 206
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents.
The facing sheet.
The prospectuses.
Undertaking to file reports.
Rule 484 undertaking.
Representation relating to fees and charges.
The signatures.
Written consents of the following persons:
(a) Jeffrey P. Johnson
(b) Elizabeth H. MacGowan
(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.*
(f) Specimen VariTrak (New York) Policy Form.*****
(g) Specimen VariTrak (New York-Unisex) Policy
Form.*****
(h) New York Rider for Guaranteed Insurability
Options.*****
(i) New York Rider for Waiver of Monthly
Deductions.*****
(j) New York Rider for Accidental 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 Company) 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.***
(d) Form of Participation Agreement Among
Variable Insurance Products Fund II,
Fidelity Distributors Corporation and
Vermont Life Insurance Company (now National
Life Insurance Company) dated April 1,
1990****
(d)(2) Form of Amendment No 1. to Participation
Agreement Among Variable Insurance Products
Fund II, Fidelity Distributors Corporation,
and National Life Insurance Company (as
successor to Vermont Life Insurance
Company)*****
(e) Form of Shareholder Service Agreement
between NationalLife Insurance Company and
American Century Investment Management,
Inc. ******
(f) Form of Participation Agreement between
National Life Insurance Company and
Neuberger & Berman Advisers Managers
Trust******
(g) Form of Participation Agreement between
National Life Insurance Company and J.
P. Morgan Series Trust II. ******
(h) Form of Participation Agreement between
National Life Insurance Company and
Goldman Sachs Variable Insurance Trust.
******
(i) Form of Participation Agreement between
National Life Insurance Company, Strong
Variable Insurance Funds, Inc. and Strong
Opportunity Fund II. ******
<PAGE> 207
(9) Not Applicable.
(10)(a) VariTrak Application Form.*
(b) VariTrak (New York) Application Form.*****
(11) Memorandum describing issuance, transfer and
redemption procedures.*****
2. Opinion and Consent of Jeffrey P. Johnson, Esq., as to the
legality of the securities being offered.
3. Not Applicable.
4. Not Applicable.
5. Not Applicable.
6. Opinion and Consent of Elizabeth H. MacGowan, 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.*****
A. Robert E. Boardman F. Thomas P. Salmon
B. David R. Coates G. Roger B. Porter
C. Benjamin F. Edwards III H. Thomas R. Williams
D. E. Miles Prentice III I. Patricia K. Woolf
- ------------------
* 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.
*** Incorporated herein by reference to Post Effective Amendment No. 1 to
the Form S-6 Registration Statement (File No. 33-91938) filed March
12, 1996, Accession Number 0000950133-96-000202.
**** 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 Company filed April 30, 1990.
***** Incorporated herein by reference to Post-Effective Amendment No. 2 to
the Form S-6 Regisration Statement filed April 30, 1997
(File No. 33-91938), Accession Number 0000950133-97-001551.
****** Incorporated herein by reference to Pre-Effective Amendment
No. 1 to the Form S-6 Registration Statement filed April 16, 1998
(File No. 333-44723), Accession No. 950133-98-1468.
<PAGE> 208
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, National Variable Life Insurance Account, certifies that it meets
all the requirements for effectiveness of this Registration Statement pursuant
to Rule 485(b) under the Securities Act of 1933, and has duly caused this
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
28th day of April, 1998.
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(Registrant)
By: NATIONAL LIFE INSURANCE COMPANY
Attest: /s/ LISA A. PETTREY By: /s/ PATRICK E. WELCH
--------------------- -----------------------------
Patrick E. Welch
Assistant Secretary Chairman of the Board and
Chief Executive Officer
<PAGE> 209
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, National
Life Insurance Company certifies that it meets all the requirements for
effectiveness of this Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 3
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 28th day of April, 1998.
NATIONAL LIFE INSURANCE COMPANY
(SEAL) (Depositor)
Attest: /s/ LISA A. PETTREY By: /s/ PATRICK E. WELCH
--------------------- -----------------------------
Patrick E. Welch
Assistant Secretary Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 3 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/ PATRICK E. WELCH Chairman of the Board and 4/28/98
- ------------------------ and Chief Executive Officer ------------
Patrick E. Welch
/s/ THOMAS H. MACLEAY President, Chief Operating 4/28/98
- ------------------------ Officer and Director ------------
Thomas H. MacLeay
/s/ JOHN L. LAGUE, JR. Vice President & Controller 4/28/98
- ------------------------ (Chief Accounting Officer) ------------
John L. LaGue, Jr.
Robert E. Boardman* Director
- ------------------ ------------
Robert E. Boardman
David R. Coates* Director
- --------------- ------------
David R. Coates
</TABLE>
<PAGE> 210
<TABLE>
<S> <C> <C>
Benjamin F. Edwards III* Director
- ----------------------- ------------
Benjamin F. Edwards III
Earle H. Harbison, Jr.* Director
- ---------------------- ------------
Earle H. Harbison, Jr.
Roger B. Porter Director
- ---------------------- ------------
Roger B. Porter
E. Miles Prentice, III* Director
- ---------------------- ------------
E. Miles Prentice, III
Thomas P. Salmon* Director
- ---------------- ------------
Thomas P. Salmon
A. Gary Shilling* Director
- ---------------- ------------
A. Gary Shilling
Thomas R. Williams* Director
- ------------------ ------------
Thomas R. Williams
Patricia K. Woolf* Director
- ----------------- ------------
Patricia K. Woolf
*By /s/ PATRICK E. WELCH Date: April 28 1998
-------------------------- -------------
Patrick E. Welch
Pursuant to Power of Attorney
</TABLE>
<PAGE> 211
EXHIBIT INDEX
1.
A.
3. (c) Schedules of Sales Commissions
2. Opinion and Consent of Jeffrey P. Johnson, Esq., as to the
legality of the securities being offered.
6. Opinion and Consent of Elizabeth H. MacGowan, 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.
<PAGE> 1
Exhibit 1.A.(3)(c)
Page 1 of 2
Schedule of Sales Commissions
(Broker-Dealers other than ESI)
Broker-dealers other than ESI are compensated for sales of this Policy on
a gross concession. 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 Gross Concession
- ----------- ----------------
<S> <C>
1 85%
2-10 4%
11+ 1.5%
</TABLE>
Percent of Premium in excess of Commissionable Target Premium:
<TABLE>
<CAPTION>
Policy Year Gross Concession
- ----------- ----------------
<S> <C>
1 4%
2-10 4%
11+ 1.5%
</TABLE>
<PAGE> 2
EXHIBIT 1.A.(3)(c)
Page 2 of 2
Schedule of Sales Commissions
(ESI Registered Representatives)
ESI Registered Representatives 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 50%
2-10 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 2%
2-10 3.0%
11+ 1.5%
</TABLE>
<PAGE> 1
EXHIBIT 2
April 30, 1998
National Life Insurance Company
National Life Drive
Montpelier, Vermont 05604
Dear Sirs:
This opinion is furnished in connection with the filing of a
Post-Effective Amendment No. 2 to 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 prospectuses 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 prospectuses.
Very truly yours,
Jeffrey P. Johnson
General Counsel
<PAGE> 1
EXHIBIT 6
April 30, 1998
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 Post-Effective Amendment No. 2 to 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 illustrations of Death Benefits, Cash Surrender
Values, and accumulated premiums in Appendix A of the prospectuses (the
"Prospectuses") 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 or other rate classes.
(2) The information contained in the examples in the
sections of the prospectuses entitled "Detailed Description of Policy
Provisions," "Charges and Deductions," and "Policy Rights," 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 Post-Effective Amendment No. 2 to the Registration Statement and the use of
my name under the heading "Experts" in the prospectuses contained in the
Registration Statement.
Sincerely,
Elizabeth H. MacGowan
F.S.A., M.A.A.A.
<PAGE> 1
EXHIBIT 7(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No.3 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated April 7, 1998 related to the
financial statements of National Life Insurance Company, as well as our report
dated April 22, 1998 related to the financial statements of the National
Variable Life Insurance Account which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in the Prospectus.
Price Waterhouse LLP
Hartford, Connecticut
April 23, 1998
<PAGE> 1
EXHIBIT 7(b)
[SUTHERLAND, ASBILL & BRENNAN, L.L.P. LETTERHEAD]
April 30, 1998
The National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
Re: National Variable Life Insurance Account
Post-Effective Amendment No. 3 to Form S-6
File No. 033-91938
Gentlemen:
We hereby consent to the reference to our name under the
caption "Legal Matters" in the Prospectus filed as part of Post-Effective
Amendment No. 3 to Form S-6 for National Variable Life Insurance Account which
Prospectus describes certain flexible premium adjustable benefit variable life
insurance policies. 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, L.L.P.
By: /s/ STEPHEN E. ROTH
---------------------------------------
Stephen E. Roth
