<PAGE> 1
As filed with the Securities and Exchange Commission on May 5, 1999.
Registration No. 333-67003
File No. 811-9044
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
-----------------------------
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(Exact name of trust)
NATIONAL LIFE INSURANCE COMPANY
(Name of depositor)
One National Life Drive
Montpelier, Vermont 05604
(Complete address of depositor's principal executive offices)
-----------------------------
D. Russell Morgan
Counsel
National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
(name and complete address of agent for service)
-----------------------------
Copy to:
Stephen E. Roth, Esq.
Sutherland Asbill & Brennan, LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2404
-----------------------------
It is proposed that this filing will become effective:
X on May 5, 1999 pursuant to paragraph (b) of Rule 485
- ----
60 days after filing pursuant to pargraph (a) of Rule 485
- ----
on May 1, 1999 pursuant to paragraph (a) of Rule 485
- ----
------------------------------
<PAGE> 2
SENTINEL BENEFIT PROVIDER
A Variable Universal Life Insurance Policy
Intended Primarily
for the Corporate Market
PROSPECTUS
Dated May 5, 1999
[GRAPHIC]
- --------------------------------------------------------------------------------
National Life Insurance Company - Home Office: National Life Drive, Montpelier,
Vermont 05604 - 1-800-536-5934 National Variable Life Insurance Account
- --------------------------------------------------------------------------------
This Prospectus describes the Sentinel Benefit Provider Policy, a flexible
premium variable universal life insurance policy offered by National Life
Insurance Company. The policy has an insurance component and an investment
component. Owners of policies can make premium payments at various times and in
various amounts. You can also allocate premiums among a number of funds with
different investment objectives and you can increase or decrease the death
benefit payable under your policy. You may also choose between two death benefit
compliance tests at the time your policy is issued.
We make certain deductions from premium payments. Then these premium payments go
to the National Variable Life Insurance Account, a separate account of National
Life. This separate account has twenty-three subaccounts, each of which buys
shares of specific fund portfolios. The available funds are shown below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE GOLDMAN SACHS
MARKET STREET FUND, INC. ALGER AMERICAN FUND PORTFOLIOS, INC. VARIABLE INSURANCE
TRUST
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- - AGGRESSIVE GROWTH PORTFOLIO* - GROWTH PORTFOLIO - VP INCOME & GROWTH - CORE SMALL CAP
PORTFOLIO EQUITY
- - BOND PORTFOLIO* - SMALL CAPITALIZATION PORTFOLIO - VP VALUE PORTFOLIO - GLOBAL INCOME
- - GROWTH PORTFOLIO* - INTERNATIONAL EQUITY
- - INTERNATIONAL PORTFOLIO+ - MID CAP Value
- - MANAGED PORTFOLIO*
- - MONEY MARKET PORTFOLIO*
- - SENTINEL GROWTH PORTFOLIO*
*Managed by Sentinel Advisors Company Managed by Fred Alger Managed by American Century Managed by Goldman Sachs
+Managed by Provident Mutual Management, Inc. Investment Management, Inc. Asset Management &
Investment Management Company Goldman Sachs Asset
Management International
- ------------------------------------------------------------------------------------------------------------------------------------
NEUBERGER BERMAN Strong Variable Insurance BT Insurance
J.P. MORGAN SERIES TRUST II ADVISERS MANAGEMENT TRUST Funds, Inc. Funds Trust
- ------------------------------------------------------------------------------------------------------------------------------------
- - INTERNATIONAL OPPORTUNITIES - PARTNERS PORTFOLIO - Mid Cap Growth -Equity 500 Index Fund
PORTFOLIO -Small Cap Index Fund
- - SMALL COMPANY PORTFOLIO Strong Opportunity Fund II -EAFE(R) Equity Index
------ ----------- ---- -- Fund
Managed by J. P. Morgan Investment Managed by Neuberger & Berman Managed by Strong Capital Managed by Bankers Trust
Management, Inc. Management, Inc. Management, Inc. Company
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The value in each subaccount will depend upon the investment results of the
funds you select. You bear the entire investment risk for all amounts allocated
to the various funds; there is no guaranteed minimum value for any of the funds,
and the value of your policy may be more or less than premiums paid.
You must receive, with this prospectus, current prospectuses for all of the fund
choices. They describe the investment objectives and the risks of the funds.
The value of your policy will also reflects our charges which include cost of
insurance charges, the policy administration charge, the mortality and expense
risk charge, the separate account administration charge, and certain other
charges. During the first five years your policy will remain in force if
specified premiums are paid on time, or if the policy has enough value to pay
the monthly charges as they become due. After the fifth year, the Policy will
remain in force only so long as it has enough value to pay the monthly charges
as they become due.
We recommend that you read this prospectus carefully. It may also be useful to
keep it to refer to later.
The securities and exchange commission has not approved or disapproved the
policy or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary Description of the Policy...................................................................................1
The Policy Offered......................................................................................1
The Separate Account....................................................................................1
Availability of Policy..................................................................................2
The Death Benefit.......................................................................................2
Flexibility to Adjust Amount of Death Benefit...........................................................2
Account Value...........................................................................................2
Allocation of Net Premiums..............................................................................3
Transfers...............................................................................................3
Free-Look Privilege.....................................................................................3
Charges Assessed in Connection with the Policy..........................................................4
Summary of Policy Expenses..................................................................4
Premium Loads...............................................................................6
Monthly Deductions..........................................................................6
Daily Charges Against the Separate Account..................................................6
Transfer Charge.............................................................................7
Other Charges...............................................................................7
Allocation of Charges to the Subaccounts....................................................7
Policy Lapse and Reinstatement..........................................................................7
Loan Privilege..........................................................................................7
Withdrawal of Net Account Value.........................................................................8
Surrender of the Policy.................................................................................8
Tax Treatment...............................................................................8
Illustrations of Death Benefits, Account Value and Net Cash Surrender Value.................9
National Life Insurance Company, The Separate Account, and The Funds................................................10
National Life Insurance Company.........................................................................10
The Separate Account....................................................................................10
The Market Street Fund..................................................................................11
The Growth Portfolio........................................................................11
The Sentinel Growth Portfolio...............................................................11
The Aggressive Growth Portfolio.............................................................11
The Bond Portfolio..........................................................................11
The Managed Portfolio.......................................................................11
The International Portfolio.................................................................11
The Money Market Portfolio..................................................................11
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
<S> <C>
Alger American Fund.....................................................................................12
Alger American Small Capitalization Portfolio...............................................12
Alger American Growth Portfolio.............................................................12
American Century Variable Portfolios, Inc...............................................................12
VP Value Portfolio..........................................................................13
VP Income & Growth Portfolio................................................................13
Goldman Sachs Variable Insurance Trust..................................................................13
International Equity........................................................................13
Global Income...............................................................................13
CORE Small Cap Equity.......................................................................13
Mid Cap Value...............................................................................13
J.P. Morgan Series Trust II.............................................................................14
International Opportunities Portfolio.......................................................14
Small Company Portfolio.....................................................................14
Neuberger Berman Advisers Management Trust..............................................................14
Partners Portfolio..........................................................................15
Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund, Inc..................................15
Mid Cap Growth..............................................................................15
Strong Opportunity Fund II..................................................................15
BT Insurance Funds Trust................................................................................
Equity 500 Index Fund.......................................................................
Small Cap Index Fund........................................................................
EAFE Equity Index Fund......................................................................
Resolving Material Conflicts............................................................................15
Detailed Description of Policy Provisions...............................................................16
Death Benefit...........................................................................................16
General.....................................................................................16
Federal Income Tax Law Compliance Test Options..............................................17
Death Benefit Options.......................................................................17
Option A....................................................................................17
Option B....................................................................................18
Change in Death Benefit Option..............................................................18
How the Death Benefit May Vary..............................................................19
Ability to Adjust Face Amount...........................................................................19
Increase....................................................................................19
Decrease....................................................................................20
How the Duration of the Policy May Vary.................................................................20
Account Value...........................................................................................20
Determination of Number of Units for the Separate Account...................................20
Determination of Unit Value.................................................................21
Net Investment Factor.......................................................................21
Calculation of Account Value................................................................21
Payment and Allocation of Premiums......................................................................21
Issuance of a Policy........................................................................21
Amount and Timing of Premiums...............................................................21
Premium Limitations.........................................................................22
Allocation of Net Premiums..................................................................23
Transfers...................................................................................23
Policy Lapse................................................................................23
Reinstatement...............................................................................24
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
<S> <C>
Charges and Deductions..............................................................................................24
Premium Loads...........................................................................................24
Monthly Deductions......................................................................................24
Cost of Insurance Charge....................................................................24
Cost of Insurance Rate......................................................................25
Rate Class..................................................................................25
Term Rider Charge...........................................................................25
Policy Administration Charge................................................................25
Underwriting Charge.........................................................................25
Mortality and Expense Risk Charge.......................................................................26
Separate Account Administration Charge..................................................................26
Transfer Charge.........................................................................................26
Other Charges...........................................................................................26
Possible Charge for National Life's Taxes...............................................................26
Policy Rights and Privileges........................................................................................27
Loan Privileges.........................................................................................27
General.....................................................................................27
Interest Rate Charged.......................................................................27
Allocation of Loans and Collateral..........................................................27
Interest Credited to Amounts Held as Collateral.............................................27
Effect of Policy Loan.......................................................................27
Loan Repayments.............................................................................27
Lapse With Loans Outstanding................................................................28
Tax Considerations..........................................................................28
Surrender Privilege.....................................................................................28
Withdrawal of Net Account Value.........................................................................28
Option A....................................................................................28
Option B....................................................................................29
Free-Look Privilege.....................................................................................30
Transfer Right for Change in Investment Policy..........................................................30
</TABLE>
iv
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
<S> <C>
Other Policy Provisions.............................................................................................30
Indefinite Policy Duration..................................................................30
Payment of Policy Benefits..................................................................30
The Policy..................................................................................31
Split Dollar Arrangements...................................................................31
Assignments.................................................................................31
Misstatement of Age and Sex.................................................................32
Suicide.....................................................................................32
Incontestability............................................................................32
Dividends...................................................................................32
Correspondence..............................................................................32
Settlement Options..........................................................................32
Payment of Interest Only....................................................................32
Payments for a Stated Time..................................................................32
Payments for Life...........................................................................32
Payments of a Stated Amount.................................................................32
Life Annuity................................................................................32
Joint and Two Thirds Annuity................................................................33
50% Survivor Annuity........................................................................33
Supplemental Term Insurance Rider...................................................................................33
Federal Income Tax Considerations...................................................................................33
Introduction............................................................................................33
Tax Status of the Policy................................................................................33
Tax Treatment of Policy Benefits........................................................................34
In General..................................................................................34
Modified Endowment Contracts................................................................35
Distributions from Policies Classified as Modified Endowment Contracts......................35
Distributions from Policies Not Classified as Modified Endowment Contracts..................35
Policy Loan Interest........................................................................36
Investment in the Policy....................................................................36
Multiple Policies...........................................................................36
Possible Changes in Taxation ...........................................................................36
Voting Rights.......................................................................................................36
Changes in Applicable Law, Funding and Otherwise....................................................................37
Officers and Directors of National Life.............................................................................37
Distribution of Policies............................................................................................39
</TABLE>
v
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
<S> <C>
Policy Reports ............................................................................................40
Third Party Administrator...........................................................................................40
State Regulation....................................................................................................40
Preparing for Year 2000.............................................................................................40
Experts.............................................................................................................41
Legal Matters.......................................................................................................41
Financial Statements................................................................................................41
Glossary............................................................................................................42
Appendix A-Illustration of Death Benefits, Account Values and
Net Cash Surrender Values...............................................................................A-1
Financial Statements................................................................................................F-1
</TABLE>
THE POLICY MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT OFFER
THE POLICY IN ANY STATE IN WHICH WE MAY NOT LEGALLY OFFER THE POLICY. YOU SHOULD
RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. WE DO NOT CLAIM THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
vi
<PAGE> 8
SUMMARY DESCRIPTION OF THE POLICY
You should read this summary of the policy provisions together with the
detailed information appearing later in this Prospectus. Unless otherwise noted,
this Prospectus assumes the Insured is alive. The precise meanings of the few
capitalized terms used in this summary can be found in the Glossary, on pages 42
to 46.
THE POLICY OFFERED
The Sentinel Benefit Provider flexible premium variable universal life
insurance policy offered by this Prospectus is issued by National Life. Its
primary market is the corporate market. The policy allows you, subject to
certain limitations, to make premium payments in any amount and whenever you
like. As long as the policy remains in force, it will provide for:
(1) Life insurance coverage on the named insured person;
(2) A cash surrender value; and
(3) Surrender and withdrawal rights and policy loan privileges; and
(4) A variety of additional insurance benefits.
Life insurance is a long-term investment. You should consider your need
for insurance coverage and the policy's investment potential on a long-term
basis.
There is no fixed schedule for premium payments. You may, within limits,
increase or decrease the Face Amount and, if you have selected the Guideline
Premium Test to determine compliance with federal income tax law (see "Federal
Income Tax Law Compliance Test Options", page 17), you may change the Death
Benefit Option. The policy's value will fluctuate based on the investment
results of the chosen fund portfolios, as well as other factors. The death
benefit may also rise and fall, but not below the face amount as long as the
policy remains in force.
The failure to pay any particular amounts of 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 it does not have enough value to pay the
monthly charges as they become due. During the first five years, the policy will
not lapse even if its value is not enough to pay the monthly charges as they
become due, if at least specified amounts of premiums have been paid (these
amounts are defined in the Glossary as the Cumulative Minimum Monthly Premium).
THE SEPARATE ACCOUNT
The National Variable Life Insurance Account is divided into subaccounts,
twenty-three of which are available under this policy. Each of these subaccounts
purchases shares of a designated corresponding Portfolio that is part of one of
the following Funds: the Market Street Fund, the Alger American Fund, 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, managed by Neuberger Berman Management Incorporated, the Strong Variable
Insurance Funds, Inc., and Strong Opportunity Fund II, managed by Strong Capital
Management, Inc. and the BT Insurance Funds Trust, managed by Bankers Trust
Company. There is no assurance that the investment objectives of a particular
Portfolio will be met. You bear the entire investment risk on the value of your
policy.
1
<PAGE> 9
AVAILABILITY OF POLICY
This Policy can be issued for Insureds with Issue Ages of at least 20.
The insured person must be 85 years old or younger for policies underwritten on
the basis of full medical underwriting (65 or younger for guaranteed issue and
simplified issue). The Minimum Face Amount per Policy is $5000. The Minimum
Initial Premium per set of Policies purchased at the same time and associated
with a corporation or its affiliates, a trust or a partnership, or for a Policy
sold to an individual, is $50,000. The Policies are available on a full medical
underwriting basis, a simplified issue basis, or a guaranteed issue basis.
Before issuing a Policy on a full medical underwriting basis, we will require
that the person to be insured meets certain underwriting standards satisfactory
to us. The rate classes available are Male non-smoker, Female non-smoker,
Unisex non-smoker, Male smoker, Female smoker, Unisex smoker, Male unismoker,
female unismoker, and Unisex unismoker. (See "Issuance of a Policy," Page 21.)
In simplified issue cases, the application will ask 3 medical questions about
the person to be insured.
THE DEATH BENEFIT
As long as the Policy remains in force, we will pay the death benefit to
the beneficiary when we receive proof of the insured person's death. When you
purchase the policy, you must choose between two different death benefit
compliance tests used to qualify the policy as life insurance under the Internal
Revenue Code: the cash value accumulation test or the guideline premium test.
Once chosen, the death benefit compliance test that applies to the Policy cannot
be changed. If the Guideline Premium Test is chosen, then two death benefit
options are available. Option A provides for the greater of (a) the policy's
face amount and (b) the Death Benefit Factor times the Cash Surrender Value.
Option B provides for the greater of (a) the policy's face amount plus the
Account Value and (b) the Death Benefit Factor times the Cash Surrender Value.
(See "Death Benefit Options," Page 17). If the cash value accumulation test is
chosen, only Option A is available. The total death benefit will be the amount
provided for under Option A or Option B, plus any dividends payable and any
coverage provided by the optional term rider, and minus any outstanding policy
loans and accrued interest, and any unpaid monthly charges.
FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
You will have the ability to increase or decrease the face amount of the
policy. If you have elected the guideline premium test to qualify the policy as
life insurance for federal income tax purposes, you will also be able to change
the death benefit option from Option A to Option B, or from Option B to Option
A. (See "Change in Death Benefit Option," Page 18, and "Ability to Adjust Face
Amount," Page 19.)
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 monthly charges, since the policy will be providing more insurance
coverage. A decrease in face amount may also change the monthly deductions. (See
"Cost of Insurance Charge," Page 24.)
If you have elected the guideline premium test and you request a decrease
in face amount that would result in total premiums exceeding the maximum premium
limitations applicable under the Internal Revenue Code for life insurance, we
will not allow the decrease.
ACCOUNT VALUE
The Account Value is the total amount of value held in your policy at any
time. It equals the sum of the amounts held in the subaccounts of the separate
account, plus amounts held in the Loan Account. (See "Calculation of Account
Value," Page 21.)
The Account Value in the separate account will reflect the investment
performance of the chosen funds, any premiums paid, any transfers, any
withdrawals, any loans, any loan repayments, any loan interest charged and any
charges assessed on the policy. You bear the entire investment risk for amounts
in the separate account. There is no guaranteed minimum for the portion of the
Account Value in the separate account. Account Value in
2
<PAGE> 10
the separate account may be more or less than the premiums allocated to the
separate account.
The Account Value in the Loan Account will reflect any amounts
transferred from the separate account as collateral for policy loans, plus
interest at 4%. The Loan Account will be reduced by loan repayments. (See "Loan
Privileges," Page 27.)
The Account Value affects the death benefit and the level of cost of
insurance charges.
ALLOCATION OF NET PREMIUMS
Net premiums (that is, premiums you pay minus the deductions we make from
premium payments) will generally go to the subaccounts of the separate account
in accordance with the percentages you have specified, either in the application
or as subsequently changed. Account Value cannot be allocated to more than ten
subaccounts at any one time.
Any net premiums received before the end of the "free look" period will
go initially to the Money Market Subaccount. For this purpose we will assume
that the free look period will end on the earliest of (a) the end of the tenth
day following receipt of the Policy by you, if we receive at our Home Office a
signed delivery receipt for the Policy on or before that date; (b) the end of
the day on which we receive at the Home Office a signed delivery receipt for
the Policy, if on or between the eleventh and nineteenth days after the date
the Policy is issued; or (c) 20 days after the date the Policy is issued. On
the first Valuation Date on or after the earliest of the dates forth above,
whichever is sooner, the amount in the Money Market Subaccount (including
investment experience) will go to each of the chosen subaccounts based on your
chosen percentages. (See "Allocation of Net Premiums," Page 23.)
TRANSFERS
You may transfer the amounts in the subaccounts of the separate account
among the subaccounts on any business day. Transfer requests must be in writing
and in a form acceptable to us. Currently you are allowed an unlimited number of
transfers without charge. However, we may in the future impose a maximum charge
of $25 on each transfer in excess of twelve transfers in any one year. (See
"Transfers," Page 23.)
FREE-LOOK PRIVILEGE
The policy provides for an initial "free-look" period, during which you
may cancel the policy and receive a refund equal to the premiums paid on your
policy. This free-look period ends on the later of the end of the tenth day
after you receive the policy, or any longer period provided by state law. To
cancel the policy, you must return the policy to National Life or to an agent of
National Life within this period with a written request for cancellation. (See
"Free-Look Privilege," Page 30.)
3
<PAGE> 11
<TABLE>
<CAPTION>
CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Summary of Policy Expenses.
<S> <C>
Transaction Expenses
Premium Loads (as a percentage of premiums paid)...Year 1: 13% of premiums paid up to the Target
Premium, 0.5% of premiums paid in excess of
Target Premium;
Years 2 to 7: 15% of premiums paid up to Target
Premium, 2.5% of premiums paid in excess of
Target Premium; and
Years 8 and thereafter: 5% of premiums paid up
to Target Premium, 2.5% of premiums paid in
excess of Target Premium;
in each case plus an amount equal to the state and
local premium taxes actually assessed by the
jurisdiction in which the insured person resides.
Transfer Charge....................................No current charge(1)
Daily Charges
Mortality and Expense Risk Charge..................For years 1 - 7: 0.35% of Account Value in the
separate account
For years 8 -10: 0.25% of Account Value in the
separate account
For years 11-20: 0.15% of Account Value in the
separate account
For year 21 and thereafter: 0.10% of
Account Value in the separate account(2)
Separate Account Administration
Charge 0.10% of Account Value in the separate account
per year
Monthly Deductions
Cost of Insurance Charge Varies by age, sex, rate class-See below
Policy Administration Charge.......................$66 per year(3)
Underwriting Charge $20 in the first year, $45 in each of years 2 - 5;
only applies to policies issued on the basis of full
medical underwriting.
Supplemental Term Insurance Rider
Charge.............................................Varies by age, sex, rate class-See below
=============================================================================================================================
</TABLE>
(1) We reserve the right to impose in the future a transfer charge of up to $25
for each transfer in excess of twelve transfers in any year.
(2) We reserve the right to increase the Mortality and Expense Risk Charge to
rates up to 0.60% annually of Account Value in the separate account at any time.
(3) We reserve the right to increase the Policy Administration Charge up to an
amount equal to $96 per year.
4
<PAGE> 12
Annual Charges of Underlying Funds (for the year ended December 31, 1998 and
after expense reimbursement.)(1)
<TABLE>
<CAPTION>
Management Other Total
Fee, after Expenses, Expenses,
expense after expense after expense
reimbursement reimbursement reimbursement
<S> <C> <C> <C>
Market Street Fund, Inc.:
Money Market Portfolio 0.25% 0.15% 0.40%
Bond Portfolio 0.35% 0.18% 0.53%
Managed Portfolio 0.40% 0.17% 0.57%
Aggressive Growth Portfolio 0.41% 0.20% 0.61%
International Portfolio 0.75% 0.25% 1.00%
Growth Portfolio 0.32% 0.14% 0.46%
Sentinel Growth Portfolio 0.50% 0.32% 0.82%
Alger:
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Small Capitalization 0.85% 0.04% 0.89%
American Century Variable Portfolios, Inc.
VP Value Portfolio 1.00% 0.00% 1.00%
VP Income & Growth Portfolio 0.70% 0.00% 0.70%
Goldman Sachs Variable Insurance Trust
International Equity Fund 1.00% 0.25% 1.25%
Global Income Fund 0.90% 0.15% 1.05%
CORE Small Cap Equity Fund 0.75% 0.15% 0.90%
Mid Cap Value Fund 0.80% 0.15% 0.95%
J.P. Morgan Series Trust II
International Opportunities Portfolio 0.60% 0.60% 1.20%
Small Company Portfolio 0.60% 0.55% 1.15%
Neuberger Berman Advisers Management Trust
Partners Portfolio 0.78% 0.06% 0.84%
Strong Variable Insurance Funds, Inc.
Mid Cap Growth 1.00% 0.20% 1.20%
Strong Opportunity Fund II 1.00% 0.20% 1.20%
BT Insurance Funds Trust
Equity 500 Index Fund 0.00% 0.30% 0.30%
Small Cap Index Fund 0.00% 0.45% 0.45%
EAFE(R) Equity Index Fund 0.00% 0.65% 0.65%
</TABLE>
(1) The fund expenses shown above are assessed at the underlying fund
level and are not direct charges against the subaccounts. These underlying fund
expenses are taken into consideration in computing each underlying fund's net
asset value, which is the share price used to calculate the unit values of the
subaccounts. The management fees and other expenses are more fully described in
the prospectuses for each individual underlying fund. The information relating
to the underlying fund expenses was provided by the underlying funds. We did not
independently verify it. In the absence of any voluntary fee waivers or expense
reimbursements, the management fees, other expenses, and total expenses of the
funds listed below would have been as follows:
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL MUTUAL
FEES EXPENSES FUND EXPENSES
<S> <C> <C> <C>
Market Street Growth Portfolio 0.32% 0.15% 0.47%
Market Street Sentinel Growth Portfolio 0.50% 0.33% 0.83%
Market Street Aggressive Growth Portfolio 0.41% 0.21% 0.62%
Market Street Managed Portfolio 0.40% 0.18% 0.58%
Market Street Bond Portfolio 0.35% 0.20% 0.55%
Market Street Money Market Portfolio 0.25% 0.17% 0.42%
Strong Mid Cap Growth Fund 1.00% 0.60% 1.60%
Goldman Sachs International Equity 1.00% 1.97% 2.97%
Goldman Sachs Global Income 0.90% 2.40% 3.30%
Goldman Sachs CORE Small Cap Equity 0.75% 3.17% 3.92%
Goldman Sachs Mid Cap Value 0.80% 0.57% 1.37%
J.P. Morgan International Opportunities 0.60% 2.66% 3.26%
J.P. Morgan Small Company 0.60% 2.83% 3.43%
BT Equity 500 Index Fund 0.20% 0.99% 1.19%
BT Small Cap Index Fund 0.35% 1.23% 1.58%
BT EAFE(R) Equity Index Fund 0.45% 1.21% 1.66%
</TABLE>
5
<PAGE> 13
We anticipate 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 Loads. We will deduct a Premium Load from each premium payment.
The Premium Load consists of the Distribution Charge and the Premium Tax Charge.
The Distribution Charge is equal to, in the first year, 13% of the premiums paid
during the year up to the Target Premium, and 0.5% of premiums paid in excess of
the Target Premium. In the second through seventh years, the Distribution Charge
is equal to 15% of premiums paid during a year up to the Target Premium, and
2.5% of premiums paid in excess of the Target Premium in a year. After the
seventh year, the Distribution Charge will be 5% of premiums paid during a year
up to the Target Premium, and 2.5% of premiums paid in excess of the Target
Premium in a year.
The Premium Tax Charge will vary from state to state, and will be equal
to the actual amount of premium tax assessed in the jurisdiction in which the
insured person resides. (See "Premium Loads," Page 24.)
Monthly Deductions. Starting on the day the policy is issued and in each
following month, we will assess the Cost of Insurance Charge, the Policy
Administration Charge, and, for policies issued on the basis of full medical
underwriting, the Underwriting Charge. Any applicable charge for the Term Rider
will also be assessed monthly. The monthly Cost of Insurance Charge will be
determined by multiplying the Net Amount at Risk by the applicable cost of
insurance rate(s). See "Cost of Insurance Charge," Page 31. The Policy
Administration Charge is $5.50 per month, This Charge may be changed but is
guaranteed never to be greater than $8.00 per month. (See "Policy Administration
Charge," Page 25.)
If a policy is issued with full medical underwriting. we will assess an
Underwriting Charge each month in the first five years. The Underwriting Charge
totals $20 in Policy Year 1, and $45 in each of the next four Policy Years.
Policies issued on the basis of guaranteed issue or simplified issue will not be
assessed an Underwriting Charge. (See "Underwriting Charge", page 25).
Daily Charges Against the Separate Account. We will assess a daily charge
for our assumption of certain mortality and expense risks we accept on the
Policy. The current annual rates are set forth below.
For years 1 - 7: 0.35% of Account Value in the separate account
For years 8 -10: 0.25% of Account Value in the separate account
For years 11-20: 0.15% of Account Value in the separate account; and
For year 21 and thereafter: 0.10% of Account Value in the separate
account.
6
<PAGE> 14
We may increase the above rates for the Mortality and Expense Risk Charge, but
the charge is guaranteed not to exceed 0.60% of Account Value in the separate
account at all times. (See "Mortality and Expense Risk Charge," Page 26.)
We also assess a daily separate account administration charge to cover
the expense of separate account administration. The annual rate of this charge
is 0.10% of Account Value in the separate account. (See "Separate Account
Administration Charge", page 26).
Transfer Charge. Currently you are allowed an unlimited number of
transfers without charge. We have no current intent to impose a transfer charge
in the foreseeable future; however, we reserve the right to impose in the future
a charge of up to $25 for each transfer in excess of twelve transfers in any
year. (See "Transfer Charge," Page 26.)
Other Charges. The subaccounts of the separate account purchase shares of
the funds at net asset value, which reflects management fees and expenses
deducted from the assets of the funds.
Allocation of Charges to the Subaccounts. All of the above charges will
be allocated to the subaccounts of the separate account based on the proportion
that each subaccount's value bears to the total Account Value in the separate
account.
POLICY LAPSE AND REINSTATEMENT
During the first five Policy Years, a policy will not lapse if premiums
in a specified amount (defined in the Glossary as the Cumulative Minimum Monthly
Premium) have been paid, no matter what happens to the value of the policy. If,
however, the specified premiums have not been paid or the policy is more than
five years old, and the policy's value is not enough to pay the monthly charges
as they become due, the policy will lapse after a 61-day grace period unless a
sufficient premium is paid.
You may reinstate a lapsed policy at any time within five years after the
beginning of the grace period, if you meet certain conditions, including
providing evidence of insurability satisfactory to us and the payment of a
sufficient premium. (See "Reinstatement," Page 24.)
LOAN PRIVILEGE
You may borrow against the policy. The maximum amount of all loans is the
Net Account Value less three times the next monthly deduction, and less the loan
interest due until the next policy anniversary. Policy loans and repayments may
be taken or made on any business day.
Policy loans will bear interest at the following fixed rates:
For years 1 - 7: 4.60%
For years 8 - 10: 4.50%
For years 11 - 20: 4.40%
For year 21 and thereafter: 4.35%.
Interest is payable at the end of each policy year. If interest is not
paid when due, it will be added to the outstanding loan balance. You may repay
policy loans at any time and in any amount. When the death benefit becomes
payable or the policy is surrendered we will deduct policy loans and accrued
interest from the proceeds otherwise payable.
When you take a policy loan, we will hold Account Value in the Loan
Account as collateral for the Policy loan. We will take Account Value from the
subaccounts of the separate account in proportion to the values in the
subaccounts. Account Value held in the Loan Account as collateral will earn
interest at an effective annual rate of 4%. (See "Loan Privileges," Page 27.)
7
<PAGE> 15
Loans may cause a policy to lapse, depending upon the investment
performance of the Account Value and the amount of the loan. If a policy is not
a Modified Endowment Contract, lapse of a policy with loans outstanding may
result in adverse tax consequences. (See "Tax Treatment of Policy Benefits,"
Page 34.)
WITHDRAWAL OF NET ACCOUNT VALUE
After the first policy anniversary, you may request a withdrawal of Net
Account Value on any business day. The withdrawal amount will be taken from the
subaccounts of the separate account in proportion to the values in the
subaccounts. If the guideline premium test for federal tax law compliance and
death benefit option A are in effect, we will reduce the face amount of the
policy by an amount equal to the lesser of (a) the amount of the withdrawal and
(b) the excess of the face amount plus any term insurance amount provided by the
Term Rider, divided by the Death Benefit Factor, over the Cash Surrender Value
just after the withdrawal, but in any case not less than zero. If death benefit
option B is in effect, the withdrawal will not decrease the face amount. If the
cash value accumulation test is in effect, the withdrawal will result in a
decrease in the face amount plus any term insurance amount provided by the Term
Rider of an amount equal to the withdrawal amount times 1.00327374 (See
"Withdrawal of Net Account Value," Page 28.)
If a requested withdrawal would reduce the face amount below $5000, the
withdrawal will not be allowed.
SURRENDER OF THE POLICY
You may at any time fully surrender your policy and receive the Net Cash
Surrender Value, if any, which will take into account any outstanding policy
loans and accrued interest (See "Surrender Privilege," Page 28.)
TAX TREATMENT
We believe that a Policy issued on a standard rate class basis generally
should meet the Section 7702 definition of a life insurance contract. For
policies 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. Assuming that a policy qualifies as a
life insurance contract for Federal income tax purposes, you should not be
deemed to be in constructive receipt of value under your 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 33.)
Under certain circumstances, a policy may be treated as a "Modified
Endowment Contract." If a 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 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 34.)
If a 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 35.)
8
<PAGE> 16
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUE AND NET CASH SURRENDER VALUE
Illustrations of how investment performance of the separate account may
cause the death benefit, the Account Value and the Net Cash Surrender Value to
vary are included in Appendix A commencing on Page A-1.
These illustrations of hypothetical values may help you to understand the
long-term effects of different levels of investment performance, of charges and
deductions, of electing one or the other death benefit option or death benefit
compliance test, and generally comparing and contrasting this policy to other
life insurance policies. Nonetheless, the illustrations are based on
hypothetical investment rates of return. THEY ARE NOT GUARANTEED. Illustrations
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 differ from those illustrated.
9
<PAGE> 17
The following detailed description of the policy uses certain precise
terms which are capitalized. These terms have the meanings set out in the
Glossary, on pages 42 to 46.
NATIONAL LIFE INSURANCE COMPANY, THE SEPARATE ACCOUNT,
AND THE FUNDS.
NATIONAL LIFE INSURANCE COMPANY
National Life Insurance Company ("National Life", or "we"), is authorized
to transact life insurance and annuity business in Vermont and in 50 other
jurisdictions. National Life was originally chartered as a mutual life
insurance company in 1848 under Vermont law. It is now a stock life insurance
company, all of the outstanding stock of which is indirectly owned by National
Life Holding Company, a mutual insurance holding company established under
Vermont law on January 1, 1999. All policyholders of National Life, including
all the Owners of the Policies, are voting members of National Life Holding
Company. National Life assumes all insurance risks under the Sentinel Benefit
Provider policy offered by this Prospectus (the "Policy") and its assets
support the Policy's benefits. On December 31, 1998, National Life's
consolidated assets were over $9 billion. (See "Financial Statements,"
Page F-1.)
THE SEPARATE ACCOUNT
The National Variable Life Insurance Account (the "Separate Account") was
established by National Life on February 1, 1985 under the provisions of the
Vermont Insurance Law. It is a separate investment account to which assets are
allocated to support the benefits payable under the Policies, other variable
life insurance policies National Life currently issues, and other variable life
insurance policies National Life may issue in the future.
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. The portion of the Separate
Account's assets equal to the reserves and other liabilities under the Policies
may, however, be chargeable with liabilities arising from other subaccounts of
the Separate Account that fund other variable life insurance policies. In
addition to the net assets and other liabilities for the Policies (and other
policies), the Separate Account's net assets include amounts derived from
expenses charged to the Policies (and the other policies) by National Life which
it currently holds in the Separate Account, and may in the future include
amounts held to support other variable life insurance policies issued by
National Life. 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.
You may choose among the Subaccount options described below. However, a
Policy may not allocate Account Value to more than ten Subaccounts at any one
time.
10
<PAGE> 18
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, 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.
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
11
<PAGE> 19
Advisers Act of 1940. PIMC has employed The Boston Company Asset Management,
Inc. to provide investment advisory services in connection with the Portfolio.
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.
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 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 focusing on small, fast-growing companies that
offer innovative products, services or technologies to a rapidly expanding
marketplace. Under normal circumstances, the portfolio invests primarily in the
equity securities of small capitalization companies.
Alger American Growth Portfolio. This Portfolio seeks long-term capital
appreciation by focusing on growing companies that generally have broad product
lines, markets, financial resources and depth of management. Under normal
circumstances, the portfolio invests primarily in the equity securities of large
companies. The portfolio considers a large company to have a market
capitalization of $1 billion or greater.
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.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of the VP Value portfolio, and one Subaccount which invests 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 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.
12
<PAGE> 20
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 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 Value Fund. Goldman Sachs Variable Insurance Trust ("Goldman Sachs VIT") is
registered with the SEC as an open-end management investment company that offers
shares in several investment mutual funds ("Funds"). Each Fund, except the
Global Income Fund, is a diversified investment company. Goldman Sachs Asset
Management acts as investment adviser for the Goldman Sachs VIT CORE Small Cap
Equity and Mid Cap Equity Funds. Goldman Sachs Asset Management International
acts as investment adviser for the Goldman Sachs VIT International Equity and
Global Income Funds.
GOLDMAN SACHS VIT INTERNATIONAL EQUITY FUND
Investment Objective: 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 VIT GLOBAL INCOME FUND
Investment Objective: Seeks a high-total return, emphasizing current
income and, to a lesser extent, providing opportunities for capital
appreciation. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and foreign currencies.
GOLDMAN SACHS VIT CORE SMALL CAP EQUITY FUND
Investment Objective: 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 VIT MID CAP VALUE FUND*
Investment Objective: Seeks long-term capital appreciation primarily
through investments in equity securities of companies with public stock market
capitalizations within the range of the market capitalization of companies
constituting the Russell Midcap Index at the time of investment (currently
between $400 million and $16 billion).
*Effective May 1, 1999 the Goldman Sachs VIT Mid Cap Equity Fund will be renamed
the Goldman Sachs VIT Mid Cap Value Fund
13
<PAGE> 21
J.P. MORGAN SERIES TRUST II
The Variable Account has one Subaccount which invests exclusively in
shares of the J.P. Morgan International Opportunities Portfolio, and one
Subaccount which invests 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 Trust 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 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 invests exclusively in
shares of the Partners Portfolio, a series of Neuberger Berman Advisers
Management Trust. Neuberger Berman Advisers Management Trust ("AMT") is
registered with the SEC as a diversified open-end management investment company.
AMT has nine separate series, which are called Portfolios. Shares of each
Portfolio represent an interest in that Portfolio.
The Neuberger & Berman Partners Subaccount of the Variable Account
invests 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.
14
<PAGE> 22
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 growth of capital. This Portfolio invests
mainly in common stock of mid-to large-capitalization companies. Its investment
co-managers seek securities believed to be undervalued based on fundamentals
such as low price-to-earnings ratios, consistent cash flows, and the company's
track record through all points of the market cycle. The Portfolio generally
considers selling a stock when it reaches the managers' target price, when it
fails to perform as expected, or when other opportunities appear more
attractive. The Portfolio has the ability to change its goal without shareholder
approval, although it does not currently intend to do so.
The Partners Portfolio of Neuberger Berman Advisers Management Trust is
managed by Neuberger Berman Management Inc. Neuberger Berman LLC is the
sub-adviser. 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 invests exclusively in
shares of the Mid Cap Growth, a series of Strong Variable Insurance Funds,
Inc., and one Subaccount which invests 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 invest in shares of the Mid Cap Growth 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 Portfolio. There is no
assurance that either Portfolio will achieve its stated objective.
Mid Cap Growth. 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 Mid Cap Growth series of Strong Variable Insurance Funds, Inc., and
Strong Opportunity Fund, Inc. are managed by Strong Capital Management, Inc.
A full description of the Mid Cap Growth 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 Mid Cap Growth and
Strong Opportunity Fund II, Inc.
BT INSURANCE FUNDS TRUST
The Separate Account has three Subaccounts which invest exclusively in
shares of funds of BT Insurance Funds Trust. BT Insurance Funds Trust is a
"series" type mutual fund registered with the SEC as a diversified open-end
management investment company issuing a number of series of shares, each of
which represents an interest in a fund of BT Insurance Funds Trust.
The BT Equity 500 Index Subaccount, the BT Small Cap Index Subaccount and
the BT EAFE(R) Equity Index Subaccount of the Separate Account invest in shares
of the Equity 500 Index Fund, the Small Cap Index Fund and the EAFE(R) Equity
Index Fund, respectively, of BT Insurance Funds Trust. Shares of these funds are
purchased and redeemed by the Separate Account at net asset value without a
sales charge
The investment objectives of the funds of BT Insurance Funds Trust in
which the Subaccounts invest are set forth below. The investment experience of
each Subaccount depends upon the investment performance of the corresponding
fund. There is no assurance that any fund will achieve its stated objective.
The Equity 500 Index Fund seeks to match, as closely as possible, before
expenses, the performance of the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index"), which emphasizes stocks of large U.S. companies.
The investment adviser invests in a statistically selected sample of the
securities found in the S&P 500 Index.
The Small Cap Index Fund seeks to match, as closely as possible, before
expenses, the performance of the Russell 2000 Small Stock Index (the "Russell
2000 Index"), which emphasizes stocks of small U.S. companies. The investment
adviser invests in a statistically selected sample of the securities found in
the Russell 2000 Index.
The EAFE(R) Equity Index Fund seeks to match, as closely as possible,
before expenses, the performance of the Morgan Stanley Capital International
(MCSI) EAFE(R) Index ("EAFE(R) Index") which emphasizes stocks of companies in
major markets in Europe, Australia and the Far East performance. The investment
adviser attempts to invest in stocks and other securities that are
representative of the EAFE(R) Index as a whole.
The Equity 500 Index Fund, the Small Cap Index Fund and the EAFE(R)
Equity Index Fund,are managed by Bankers Trust Company.
A full description of BT Insurance Funds Trust, the investment objectives
and policies of the funds, the risks, expenses and all other aspects of their
operation is contained in the attached Prospectuses for these funds.
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. Should
an agreement between National Life
15
<PAGE> 23
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, you 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, we will not be able to honor your requests
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 of Policies with Account
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.
OTHER MATTERS RELATING TO THE FUNDS
We have 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 of the Funds
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 Portfolios
will be comparable to the investment results of any other portfolio, even if the
other portfolio has the same investment adviser or manager.
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 30.) The Death Benefit payable under Option A will be the
greater of the Face Amount or the Death Benefit Factor times the Cash Surrender
Value on the date of death; under Option B, the Death Benefit will be the
greater of the Face Amount plus the Account Value on the date of death, or the
Death Benefit Factor times the Cash Surrender Value on the date of death, in
each case, plus any Supplemental Term Insurance Amount, less any outstanding
Policy loan and accrued interest, and less any unpaid Monthly Deductions.
16
<PAGE> 24
Federal Income Tax Law Compliance Test Options. The Policy must satisfy
either of two death benefit compliance tests in order to qualify as life
insurance under section 7702 of the Internal Revenue Code: the Cash Value
Accumulation Test or the Guideline Premium Test. Each test effectively requires
that the Policy's Death Benefit, plus any outstanding Policy loans and accrued
interest, and any unpaid Monthly Deductions, must always be equal to or greater
than the Cash Surrender Value multiplied by a certain percentage (the "Death
Benefit Factor"). Thus, the Policy has been structured so that the Death Benefit
may increase above the Face Amount in order to comply with the applicable test.
The Death Benefit Factor for the Guideline Premium Test varies only by age, as
shown below:
<TABLE>
<CAPTION>
Death Death
Attained Age Benefit Factor Attained Age Benefit Factor
------------ -------------- ------------ --------------
<S> <C> <C> <C>
40 and under 250% 70 115%
45 215% 75-90 105%
50 185% 91 104%
55 150% 92 103%
60 130% 93 102%
65 120% 94 101%
95+ 100%
</TABLE>
For Attained Ages not shown, the percentages will decrease by a ratable portion
of each full year.
The Death Benefit Factor for the Cash Value Accumulation Test varies by
age and sex, and generally such Death Benefit Factors are different from those
for the Guideline Premium Test. The Guideline Premium Test also imposes maximum
premium limits, whereas the Cash Value Accumulation test does not.
You must select and specify on the application which of the two federal
tax death benefit compliance tests will apply. Once the Policy is issued, you
may not change this selection. In general, where maximum accumulation of Account
Value during the initial Policy Years is a primary objective, the Cash Value
Accumulation Test is more appropriate. If your primary objective is the most
economically efficient method of obtaining a specified amount of coverage, the
Guideline Premium Test is generally more appropriate. You should take into
account in considering the Guideline Premium Test that both Option A and Option
B are available, and that it is possible to change from time to time between
Option A and Option B. Since the selection of the federal tax death benefit
compliance test depends on complex factors and may not be changed, prospective
purchasers of the Policy should consult with a qualified tax adviser before
making this election.
Death Benefit Options. The Policy provides two Death Benefit Options:
Option A and Option B. Policies which use the Guideline Premium Test as the
federal tax death benefit compliance test may select either Death Benefit Option
A or Option B. You designate the Death Benefit Option in the application, and
you may change it as described in "Change in Death Benefit Option," Page 18.
Only Option A is available for Policies which use the Cash Value Accumulation
Test as the federal tax death benefit compliance test.
Option A. The Death Benefit is equal to the greater of (a) the Face
Amount of the Policy and (b) the Cash Surrender Value on the Valuation Date on
or next following the Insured's date of death multiplied by the applicable Death
Benefit Factor, in each case less any outstanding Policy loan and accrued
interest thereon, and less any unpaid Monthly Deductions.
Illustration of Option A -- For purposes of this illustration, assume
that the Insured is under Attained Age 40, the Guideline Premium Test has been
elected, and there is no Policy loan outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will generally
have a Death Benefit of $200,000, assuming no Policy loans outstanding and no
unpaid Monthly Deductions. The Death Benefit Factor for an Insured under
Attained Age 40 on the Policy Anniversary prior to the date of death is 250%.
17
<PAGE> 25
Because the Death Benefit must be equal to or greater than 2.50 times the Cash
Surrender Value, any time the Cash Surrender Value exceeds $80,000 the Death
Benefit will exceed the Face Amount. Each additional dollar added to the Cash
Surrender Value will increase the Death Benefit by $2.50. Thus, a 35 year old
Insured with a Cash Surrender Value of $90,000 will have an Death Benefit of
$225,000 (2.50 x $90,000, and a Cash Surrender Value of $150,000 will have an
Death Benefit of $375,000 (2.50 x $150,000).
Similarly, any time the Cash Surrender Value exceeds $80,000, each dollar
taken out of the Cash Surrender Value will reduce the Death Benefit by $2.50. If
at any time, however, the Cash Surrender Value multiplied by the specified
percentage is less than the Face Amount, the Death Benefit will be the Face
Amount of the Policy.
If the Cash Value Accumulation Test for tax compliance applies to a
Policy, the Death Benefit Factors will be different but the above example
otherwise applies.
Option B. The Death Benefit is equal to the greater of (a) the Face
Amount of the Policy plus the Account Value and (b) the Cash Surrender Value on
the Valuation Date on or next following the Insured's date of death multiplied
by the applicable Death Benefit Factor (shown in the table above), in each case
less any outstanding Policy loan and accrued interest thereon, and less any
unpaid Monthly Deductions. As noted above, Option B is only available for
Policies on which the Guideline Premium Test has been elected.
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
have a Death Benefit of $200,000 plus the Cash Surrender Value, assuming no
Policy loans outstanding and no unpaid Monthly Deductions. Thus, for example, a
Policy with a $50,000 Cash Surrender Value will have a Death Benefit of
$250,000 ($200,000 plus $50,000). Since the applicable Death Benefit Factor is
250%, the Death Benefit will be at least 2.50 times the Cash Surrender Value.
As a result, if the Cash Surrender Value exceeds $133,333, the Death Benefit
will be greater than the Face Amount plus the Cash Surrender Value. Each
additional dollar added to the Cash Surrender Value above $133,333 will
increase the Death Benefit by $2.50. An Insured with a Cash Surrender Value of
$150,000 will have a Death Benefit of $375,000 (2.50 x $150,000), and a Cash
Surrender Value of $200,000 will yield a Death Benefit of $500,000 (2.50 x
$200,000). Similarly, any time the Cash Surrender Value exceeds $133,333, each
dollar taken out of the Cash Surrender Value will reduce the Death Benefit by
$2.50. If at any time, however, the Cash Surrender Value multiplied by the
specified percentage is less than the Face Amount plus the Cash Surrender
Value, the Death Benefit will be the Face Amount plus the Cash Surrender Value.
At Attained Age 99, Option B automatically becomes Option A.
Change in Death Benefit Option. After the first Policy Year, the Death
Benefit Option in effect for Policies which have elected the Guideline Premium
Test as the federal tax death benefit compliance test 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
Policy Anniversary on or next following the date we receive the written request.
Only one change in Death Benefit Option is permitted in any one Policy Year.
On the effective date of a change in Death Benefit Option, the Face
Amount is adjusted so that there will be no change in the Death Benefit or the
Net Amount at Risk. In the case of a change from Option B to Option A, the Face
Amount must be increased by the Account Value. In the case of a change from
Option A to Option B, the Face Amount must be decreased by the Account Value.
The change from Option A to Option B will not be allowed if it would reduce the
Face Amount to less than the Minimum Face Amount.
On the effective date of the change, the Death Benefit, Account Value and
Net Amount at Risk (and therefore the Cost of Insurance Charges) are unchanged.
However, after the effective date of the change, the pattern of future Death
Benefits, Account Value, Net Amount at Risk and Cost of Insurance Charges will
be different than if the change had not been made.
18
<PAGE> 26
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 (such limitations apply only to Policies to which the
Guideline Premium Test for federal income tax law compliance has been elected),
we 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 34.)
How the Death Benefit May Vary. The amount of the Death Benefit may vary
with the Account Value in the following circumstances. The Death Benefit under
Option A will vary with the Account Value whenever the Death Benefit Factor
multiplied by the Cash Surrender Value exceeds the Face Amount of the Policy.
The Death Benefit under Option B will always vary with the Account Value because
the Death Benefit equals the greater of (a) the Face Amount plus the Account
Value and (b) the Cash Surrender Value multiplied by the Death Benefit Factor.
ABILITY TO ADJUST FACE AMOUNT
Subject to certain limitations, you may 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 our
approval of the request, and the effective date of a decrease is the Monthly
Policy Date on or next following the date that we receive the written request.
An increase or decrease in Face Amount may have federal tax consequences. (See
"Tax Treatment Of Policy Benefits," Page 34.) The effect of changes in Face
Amount on Policy charges, as well as other considerations, are described below.
The Face Amount, and any change in Face Amount, do not include any coverage
provided by the Term Rider, if it has been elected.
Increase. To obtain an increase in Face Amount, you should submit an
application for the increase. We reserve the right to require evidence
19
<PAGE> 27
satisfactory to us of the Insured's insurability, if the Net Amount at Risk
would increase. For Policies issued on the basis of guaranteed issue
underwriting, increases in Face Amount are limited to a maximum of 10% without
medical underwriting. Automated annual increases in Face Amount of specified
percentages may be elected. You may not increase the Face Amount after the
Insured's Attained Age 85 (Attained Age 65 in the case of guaranteed issue or
simplified issue underwriting).
On the effective date of an increase, and taking the increase into
account, the Net Account Value must be greater than the Monthly Deductions
then due. If the Net Account Value is not sufficient, the increase will not
take effect until you make a sufficient additional premium payment to increase
the Net Account 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 Charge,"
Page 24.)
Decrease. By providing a written request, you may decrease the Face
Amount of the Policy. The Face Amount after any decrease may not be less than
the Minimum Face Amount, which is generally currently $5000, or may not be
less than the minimum amount for which the Policy qualify as life insurance
for federal income tax purposes under the Internal Revenue Code.
A decrease in the Face Amount generally will decrease the total Net
Amount at Risk, which will decrease your 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 Face Amount
on the Date of Issue.
HOW THE DURATION OF THE POLICY MAY VARY
The Policy will remain in force as long as the Net Account Value of the
Policy is sufficient to pay the Monthly Deductions and the charges under the
Policy. When the Net Account Value is insufficient to pay the charges and the
Grace Period expires without an adequate premium payment 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 Net Account Value of the Policy first becomes insufficient to pay the
charges, the Cumulative Minimum Monthly Premium has been paid. You have certain
rights to reinstate the Policy, if it should lapse. (See "Reinstatement," Page
24.)
ACCOUNT VALUE
The Account 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 Loan Account. In Policy Years one and two, the Cash Surrender Value is
the Account Value reflecting the Distribution Charge Refund. After the second
Policy Anniversary, the Cash Surrender Value is equal to the Account Value.
There is no guaranteed minimum for the Account Value in any of the Subaccounts
of the Separate Account and, because the Account Value on any future date
depends upon a number of variables, it cannot be predetermined.
The Net Account Value and Net Cash Surrender Value will reflect the Net
Premiums paid, investment performance of the chosen Subaccounts of the Separate
Account, any transfers, any Withdrawals, any loans, any loan repayments, any
loan interest, 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
20
<PAGE> 28
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 Date multiplied by the Net
Investment Factor for that Subaccount on that Valuation Date.
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 charges for mortality and expense risks and for separate
account administration will be deducted in determining the applicable Net
Investment Factor. (See "Charges and Deductions - Mortality and Expense Risk
Charge," Page 26, and "Charges and Deductions - Separate Account Administration
Charge," Page 26.)
Calculation of Account Value. The Account Value is determined first on
the Date of Issue and thereafter on each Valuation Date. On the Date of Issue,
the Account Value will be the Net Premiums received, plus any earnings prior to
the Date of Issue, less the Monthly Deduction due on the Date of Issue. On each
Valuation Date after the Date of Issue, the Account Value will be:
(1) The aggregate of the values attributable to the Policy in the
Separate Account, determined by multiplying the number of units
the Policy has in each Subaccount of the Separate Account by such
Subaccount's unit value on that date; plus
(2) The value attributable to the Policy in the Loan Account.
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy. To purchase a Policy, you must apply to us 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. The Minimum Initial Premium must be submitted when the Policy
is delivered. The Minimum Face Amount of a Policy is generally $5000. The
Minimum Initial Premium per set of Policies purchased at the same time and
associated with a corporation or its affiliates, a trust or a partnership, or
for a Policy owned by an individual, is $50,000.
This Policy can be issued for Insureds with Issue Ages of at least 20.
The maximum Issue Age for full medical underwriting is 85. The maximum Issue Age
for guaranteed underwriting and simplified issue underwriting is 65. The Minimum
Face Amount is $5000. The Policies are available on a full medical underwriting
basis, a simplified issue basis, or a guaranteed issue basis. Before issuing a
Policy on a full medical underwriting basis, we will require that the proposed
Insured meet certain underwriting standards satisfactory to us. In simplified
issue cases, the application will ask 3 medical questions about the Insured. We
reserve the right to revise our rules from time to time to specify a different
Minimum Face Amount for subsequently issued policies. Acceptance is subject to
our underwriting rules. We reserve the right to reject an application for any
reason permitted by law.
Amount and Timing of Premiums. Each subsequent premium payment must be
at least $300. Subject to certain limitations described below, you have
considerable flexibility in determining the amount and frequency of premium
payments.
At the time of application, you may select a Planned Periodic Premium
schedule, based on a periodic billing mode of annual, semi-annual, or
quarterly payments. You may request us to send a
21
<PAGE> 29
premium reminder notice at the specified interval. You may change the Planned
Periodic Premium frequency and amount. Payments may be made by wire transfer
or by check.
You are not required to pay the Planned Periodic Premiums in accordance
with the specified schedule. You may pay premiums in any amount (subject to
the $300 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 Cumulative Minimum Monthly Premium, then the Policy
will remain in force for at least 5 years). Instead, the duration of the
Policy depends upon the Policy's Net Account Value. Thus, even if Planned
Periodic Premiums are paid, the Policy will lapse whenever the Net Account
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
you (unless the Policy is in its first five years, and the Cumulative Minimum
Monthly 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 we are 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 Death
Benefit Factor times the Cash Surrender 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 Death Benefit Factor times the
Cash Surrender Value exceeds the Face Amount plus the Account Value, the level
of premium payments will not affect the Net Amount at Risk. (However, both the
Account 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 Death Benefit is based on the
Death Benefit Factor times the Cash Surrender 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, in the
case of Policies to which the Guideline Premium Test for federal income tax
law compliance applies, the Internal Revenue Code of 1986 (the "Code")
provides for exclusion of the 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, we 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.
The maximum premium limitations set forth in the Code depend in part upon
the amount of the Death Benefit at any time. As a result, any Policy changes
which affect the amount of the 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, we will not effect such change. (See "Federal
Income Tax Considerations," Page 33.)
Unless the Insured provides satisfactory evidence of insurability, we
reserve the right to limit the amount of any premium payment if it increases
the Net Amount at Risk.
22
<PAGE> 30
For Policies to which the Cash Value Accumulation Test for federal income
tax law compliance applies, the Internal Revenue Code does not provide any
limits on premium payments in determining whether a policy qualifies as life
insurance under the Code.
Allocation of Net Premiums. The Net Premium equals the premium paid less
the Premium Loads. In the application for the Policy, you will indicate how
Net Premiums should be allocated among the Subaccounts of the Separate
Account. You may change these allocations at any time by written notice to the
Third Party Administrator. The percentages of each Net Premium that may be
allocated to any Subaccount must be in whole numbers of not less than 5%, and
the sum of the allocation percentages must be 100%. Except in the
circumstances described in the following paragraph, National Life will
allocate the Net Premiums as of the Valuation Date it receives such premium at
its Home Office or at the office of the Third Party Administrator, based on
the allocation percentages then in effect.
Any portion of the Initial Premium and any subsequent premiums received
by National Life before the end of the free-look period will be allocated to
the Money Market Subaccount. For this purpose, we will assume that the free-
look period will end on the earliest of (a) the end of the tenth day following
receipt of the Policy by you, if we receive at our Home Office a signed
delivery receipt for the Policy on or before that date; (b) the end of the day
on which we receive at the Home Office a signed delivery receipt for the
Policy, if on or between the eleventh and nineteenth days after the date the
Policy is issued; or (c) 20 days after the date the Policy is issued. On the
earliest Valuation Date set forth above, we will allocate the amount in the
Money Market Subaccount to each of the Subaccounts selected in the application
based on the allocation percentage set forth in the application for such
Subaccount.
The values of the Subaccounts will vary with their investment experience.
You bear the entire investment risk. You should periodically review your
allocation percentages in light of market conditions and your overall
financial objectives.
Transfers. You may transfer the Account Value among the Subaccounts of
the Separate Account on any business day by making a written transfer request to
us. Transfer requests must be in a form acceptable to us. Transfers among the
Subaccounts of the Separate Account are made as of the Valuation Date on which
the request for transfer is received at the office of the Third Party
Administrator. You may transfer all or part of the amount in one of the
Subaccounts of the Separate Account to another Subaccount or Subaccounts.
However, Account Value may not be allocated to more than ten Subaccounts at any
one time.
Currently an unlimited number of transfers is permitted without charge,
and we have no current intent to impose a transfer charge in the foreseeable
future. However, we reserve the right, upon prior notice to Policy Owners, to
change this policy so as to deduct a transfer charge of up to $25 from each
transfer in excess of the twelfth transfer during any one Policy Year. All
transfers effected on the same Valuation Date are treated as one transfer
transaction. Transfers resulting from Policy loans, the exercise of the transfer
right for change of investment policy, and the reallocation from the Money
Market Subaccount following the free look period after the Date of Issue, will
not be subject to a transfer charge and will not count against the twelve 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 Net Account 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 Cumulative Minimum
Monthly Premium has been paid.
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, you would have to 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 Net Account 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
23
<PAGE> 31
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 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 Account 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. The
Policy Protection Period may not be reinstated.
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 LOADS
A Premium Load will be deducted from each premium payment. The Premium
Load consists of the Distribution Charge and the Premium Tax Charge.
The Distribution Charge is equal to, in Policy Year 1, 13% of premiums
paid during the Policy Year up to the Target Premium, and 0.5% of premiums paid
in excess of the Target Premium. In Policy Years 2 through 7, the Distribution
Charge is equal to 15% of premiums paid during a Policy Year up to the Target
Premium, and 2.5% of premiums paid in excess of the Target Premium in any such
Policy Year. In Policy Years 8 and thereafter, the Distribution Charge will be
5% of premiums paid during a Policy Year up to the Target Premium, and 2.5% of
premiums paid in excess of the Target Premium in any such Policy Year. For this
purpose, the Target Premium equals 1.25 times the annual whole life premium
which would be calculated for the Policy using the applicable 1980 Commissioners
Standard Ordinary Mortality Table and an interest rate of 3.5%.
The Premium Tax Charge will vary from state to state, and will be equal
to the actual amount of premium tax assessed in the jurisdiction in which the
Policy is sold. Currently all states impose a premium tax on life insurance
policies sold by Vermont-domiciled insurance companies. Premium taxes generally
range from 2% to 3.5%. Premium taxes may range up to 4% for certain cities in
South Carolina and 12% for certain jurisdictions in Kentucky.
MONTHLY DEDUCTIONS
Charges will be deducted from the Account Value on the Date of Issue and
on each Monthly Policy Date. The Monthly Deduction consists of four components -
(a) the Cost of Insurance Charge, (b) the Policy Administration Charge, (c) for
Policies issued on the basis of full medical underwriting, the Underwriting
Charge, and (d) for Policies containing a Term Rider, the charges associated
with the Term 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.
Cost of Insurance Charge. The monthly Cost on Insurance Charge is
calculated by multiplying the cost of insurance rate or rates by the Net Amount
at Risk for each Policy Month. Because both the Net Amount at Risk and the
variables that determine the cost of insurance rate, such as the Insured's age
and the Duration of the Policy, may vary, the Cost of Insurance Charge will
likely be different from month to month.
24
<PAGE> 32
(1) Net Amount At Risk. The Net Amount at Risk on any Monthly
Policy Date is approximately the amount by which the Death Benefit exceeds the
Account Value. It measures the amount that National Life would have to pay in
excess of the Policy's Account Value if the Insured died. The actual
calculation uses the Death Benefit divided by 1.00327234 to take into account
assumed monthly earnings at an annual rate of 4%. The Net Amount at Risk is
determined separately for the Face Amount on the Date of Issue and any
increases in Face Amount. In determining the Net Amount at Risk for each
increment of Face Amount, the Account Value is first applied to the Face Amount
on the Date of Issue. If the Account Value exceeds the Face Amount on the Date
of Issue, the excess is then applied to any increases in Face Amount in the
order such increases took effect.
If the Net Amount at Risk increases, your monthly Cost of Insurance
Charge will increase proportionately. The Net Amount at Risk may increase if,
for example, the Death Benefit is based on the Face Amount and the Account Value
decreases because of negative investment results. The Net Amount at Risk may
also increase if the Death Benefit is based on the Death Benefit Factor times
the Cash Surrender Value and the Account Value rises because of positive
investment results. The Net Amount at Risk may decrease in the opposite
situations, and if it does, your monthly Cost of Insurance Charge will decrease
proportionately.
(2) Cost of Insurance Rate. Policies may be issued
(a) after full medical underwriting of the proposed
Insured,
(b) on a guaranteed issue basis, where no medical
underwriting is required prior to issuance of a Policy, or
(c) on a simplified underwriting basis, under which medical
underwriting is limited to requiring the proposed Insured
to answer three medical questions on the application.
Current cost of insurance rates for Policies issued on a guaranteed issue basis
or a simplified underwriting basis are higher than current standard cost of
insurance rates for healthy Insureds who undergo medical underwriting.
Guaranteed Rates. The guaranteed maximum cost of insurance rates
are set forth in the Policy, and will depend on the Insured's Attained Age, Rate
Class, and the applicable 1980 Commissioners Standard Ordinary
Smoker/Nonsmoker/Unismoker Mortality Table. If you are based in Montana you must
generally select a "unisex" Rate Class.
Current Rates and How They are Determined. The actual cost of
insurance rates used ("current rates") will depend on the Insured's Attained
Age, Rate Class, underwriting method, and Duration. These current cost of
insurance rates are set based on National Life's anticipated mortality
experience. Generally rates are higher for an older Insured, if the Insured is a
smoker, or if the Insured is in a substandard rate class (usually because of a
health issue). Rates may also be higher for a Policy that has a longer Duration,
compared to another Policy with identical characteristics and a shorter
Duration. As noted above, rates for Policies issued on the basis of guaranteed
issue or simplified issue will generally be higher. We periodically review the
adequacy of our current cost of insurance rates and may adjust their level if
our anticipated mortality experience changes. However, our cost of insurance
ratess 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, Rate Class, underwriting method, and with Policies of the same
Duration.
A cost of insurance rate is determined separately for the Face Amount on
the Date of Issue 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 Face Amount on the Date of Issue (see "Rate
Class", below). For each increase in Face Amount, the rate for the Rate Class
applicable to the increase is used. If, however, the Death Benefit is based on
the Cash Surrender Value times the Death Benefit Factor, the rate for the Rate
Class for the Face Amount on the Date of Issue will be used for the amount of
the Death Benefit in excess of the total Face Amount.
Rate Class. The Rate Class of the Insured will affect the guaranteed and
current cost of insurance rates. National Life currently places Insureds into,
for each of guaranteed issue, simplified issue, and full medical underwriting,
male non-smoker, female non-smoker, unisex non-smoker, male smoker, female
smoker, unisex nonsmoker, unisex unismoker, male unismoker, and female unismoker
Rate Classes. For full medical underwriting cases, substandard rate classes may
also apply. Substandard, Smoker, male, guaranteed issue and simplified issue
Rate Classes reflect higher mortality risks. None of the unisex Rate Classes
are available in the state of Florida.
Term Rider Charge. For Policies which include the Term Rider, the charge
for the Term Rider will be the Supplemental Term Insurance Amount, divided by
1.00327234, times the same cost of insurance rates that apply to the Net Amount
at Risk for the Face Amount.
Policy Administration Charge. The Policy Administration Charge, which is
currently $5.50 per month, will be deducted from the Account Value on the Date
of Issue and each Monthly Policy Date as part of the Monthly Deduction. The
Policy Administration Charge may be increased, but is guaranteed never to exceed
$8.00 per month.
Underwriting Charge. Policies issued on the basis on full medical
underwriting will be assessed an Underwriting Charge, deducted monthly as part
of the Monthly Deduction. The Underwriting Charge totals $20 in Policy Year 1,
and $45 in each of the next four Policy Years. Policies issued on the basis of
guaranteed issue or simplified issue will not be assessed an Underwriting
Charge.
25
<PAGE> 33
MORTALITY AND EXPENSE RISK CHARGE
A daily Mortality and Expense Risk Charge will be assessed against the
Separate Account. The current annual rates are set forth below for the various
Policy Years of a Policy.
For Policy Years 1 - 7: 0.35% of Account Value in the Separate Account
For Policy Years 8 -10: 0.25% of Account Value in the Separate Account
For Policy Years 11-20: 0.15% of Account Value in the Separate Account;
and
For Policy Year 21 and thereafter: 0.10% of Account Value in the
Separate Account.
We may increase the above rates for the Mortality and Expense Risk Charge,
but the charge is guaranteed not to exceed 0.60% of Account Value in the
Separate Account at all times.
SEPARATE ACCOUNT ADMINISTRATION CHARGE
A daily Separate Account Administration Charge is assessed against the
Separate Account for our expenses incurred in connection with separate account
administration. This daily charge is assessed at an annual rate of 0.10% of the
Account Value in each Subaccount of the Separate Account. This charge is
guaranteed not to increase.
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts. We
have no present intention to impose a transfer charge in the foreseeable future.
However, we reserve the right to impose in the future a transfer charge of up to
$25 on each transfer in excess of twelve transfers in any Policy Year.
If imposed, the transfer charge will be deducted from the Subaccounts
based on the proportion that each Subaccount's value bears to the total Account
Value in the Separate Account. All transfers effected on the same Valuation Date
would be treated as one transfer transaction. The transfer charge will not apply
to transfers resulting from Policy loans, the exercise the transfer right due
to the change in investment policy of a Subaccount, or the initial reallocation
of Account Values from the Money Market Subaccount to other Subaccounts, These
transfers will not count against the twelve free transfers in any Policy Year.
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
accompany this Prospectus.
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.
26
<PAGE> 34
POLICY RIGHTS AND PRIVILEGES
LOAN PRIVILEGES
General. You may, on any Valuation Date, borrow money from National Life
using the Policy as the only security for the loan. The amount of these loans
may not exceed the Policy's Net Account Value on the date of receipt of the loan
request, minus three times the Monthly Deduction for the next Monthly Policy
Date. While the Insured is living, you may repay all or a portion of a loan and
accrued interest. Loans may be taken by making a written request to the Third
Party Administrator. Loan proceeds will be paid within seven days of the
Valuation Date on which a valid loan request is received at the office of the
Third Party Administrator.
Interest Rate Charged. The interest rate charged on Policy loans will be
as follows:
Policy Years 1 - 7 : 4.60% per year
Policy Years 8 - 10 : 4.50% per year
Policy Years 11 - 20 : 4.40% per year
Policy Years 21 and thereafter: 4.35% 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, Account
Value is held in the Loan Account as Collateral for the Policy loan. Account
Value is taken from the Subaccounts of the Separate Account based upon the
proportion that each Subaccount's value bears to the total Account Value in the
Separate 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. We will take
additional Collateral for such loan interest so added pro rata from the
Subaccounts of the Separate Account, and hold the Collateral in the Loan
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. We will credit the amount
held in the Loan Account as Collateral with interest at an effective annual rate
of 4%.
Effect of Policy Loan. Policy loans, whether or not repaid, will have a
permanent effect on the Account Value, and may permanently affect the Death
Benefit under the Policy. The effect on the Account Value and Death Benefit
could be favorable or unfavorable, depending on whether the investment
performance of the Subaccounts is less than or greater than the interest being
credited on the amounts held as Collateral in the Loan 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. The longer a
loan is outstanding, the greater the effect a Policy loan is likely to have. The
Death Benefit will be reduced by the amount of any outstanding Policy loan.
Loan Repayments. We 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 Loan Account will be reduced by an amount equal to the repayment, and such
amount will be transferred to the Subaccounts of the Separate Account based on
the proportion that each Subaccount's value bears to the total Account Value in
the Separate Account.
27
<PAGE> 35
Lapse With Loans Outstanding. The amount of an outstanding loan under a
Policy plus any accrued interest on outstanding loans is not part of Net Account
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 20 and "Policy Lapse," Page 23.) 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 34.)
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 35.)
SURRENDER PRIVILEGE
At any time before the death of the Insured, you may surrender the Policy
for its Net Cash Surrender Value. The Net Cash Surrender Value will equal the
Cash Surrender Value less any Policy loan and accrued interest. The Net Cash
Surrender Value will be determined by National Life on the Valuation Date it
receives, at its Home Office or at the office of the Third Party Administrator,
a written surrender request signed by the Owner, and the Policy. Coverage under
the Policy will end on the day you mail or otherwise send the written surrender
request and the Policy to National Life. We will ordinarily mail surrender
proceeds to you within seven days of receipt of the request. (See "Other Policy
Provisions - Payment of Policy Benefits", Page 30.)
A surrender may have Federal income tax consequences. (See "Tax Treatment
of Policy Benefits," Page 34).
WITHDRAWAL OF NET ACCOUNT VALUE
Before the death of the Insured and on any Valuation Date after the first
Policy Anniversary, you may withdraw a portion of the Policy's Net Account
Value. The maximum Withdrawal is the Net Account Value on the date of receipt of
the Withdrawal request, minus three times the Monthly Deduction on the most
recent Monthly Policy Date.
The Withdrawal will be taken from the Subaccounts of the Separate Account
based upon the proportion that each Subaccount's value bears to the total
Account Value in the Separate Account.
The effect of a Withdrawal on the Death Benefit and Face Amount will vary
depending upon the Death Benefit Option and federal tax death benefit compliance
test in effect and whether the Death Benefit is based on the applicable Death
Benefit Factor times the Cash Surrender Value. (See "Death Benefit Options,"
Page 17.)
Option A. The effect of a Withdrawal on the Face Amount and Death Benefit
under Option A and the Guideline Premium Test for tax law compliance is as
follows:
If the Face Amount divided by the Death Benefit Factor times the
Cash Surrender Value exceeds the Account Value just after the Withdrawal,
a Withdrawal will reduce the Face Amount 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, there is no indebtedness and there is no Term Insurance
Amount. The applicable Death Benefit Factor is 250% for an Insured with an
Attained Age under 40, if the Guideline Premium Test is in effect as the
federal tax death benefit compliance test.
28
<PAGE> 36
Under Option A, a Policy with a Face Amount of $300,000 and an
Account Value of $30,000 will have a Death Benefit of $300,000. Assume
that the Owner takes a Withdrawal of $10,000 The Withdrawal will reduce
the Account Value to $20,000 ($30,000 - $10,000) after the Withdrawal. The
Face Amount divided by the Death Benefit Factor is $120,000 ($300,000 /
2.50), which exceeds the Account 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 Face
Amount will be reduced by $10,000 to $290,000.
If the Face Amount plus the Term Insurance Amount, divided by the
applicable Death Benefit Factor times the Cash Surrender Value does not
exceed the Cash Surrender Value just after the Withdrawal, then the Face
Amount is not reduced. The Face Amount will be reduced by the lesser of
such excess or the amount of the Withdrawal.
A decrease in total insurance coverage shall apply first to any
Supplemental Term Insurance Amount provided by a Term Rider on this
Policy, then to any increase in Face Amount in reverse order in which they
were made, and then to the Face Amount on the Date of Issue.
Under Option A, a policy with a Face Amount of $300,000, an Account
Value of $150,000, and no Term Insurance Amount will have a Death Benefit
of $375,000 ($150,000 x 2.50). Assume that the Owner takes a Withdrawal of
$10,000. The Withdrawal will reduce the Account Value to $140,000
($150,000 - $10,000). The Face Amount divided by the applicable Death
Benefit Factor is $120,000, which does not exceed the Account Value after
the Withdrawal. Therefore, the Face Amount stays at $300,000 and the 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 Death Benefit plus any outstanding Policy loans and any
unpaid Monthly Deductions equals the Face Amount plus the Account Value, a
Withdrawal will reduce the Account Value by the amount of the Withdrawal
and thus the 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
Account Value of $90,000 will have a Death Benefit of $390,000 ($300,000 +
$90,000), assuming no outstanding Policy loans and no unpaid Monthly
Deductions. Assume the Owner takes a Withdrawal of $20,000. The Withdrawal
will reduce the Account Value to $70,000 ($90,000 - $20,000) and the Death
Benefit to $370,000 ($300,000 + $70,000). The Face Amount is unchanged.
If the Death Benefit immediately prior to the Withdrawal is based
on the applicable Death Benefit Factor times the Cash Surrender Value, the
Death Benefit will be reduced to equal the greater of (a) the Face Amount
plus the Account Value after deducting the amount of the Withdrawal and
Withdrawal Charge and (b) the applicable Death Benefit Factor times the
Cash Surrender Value after deducting the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Account Value of $210,000 will have a Death Benefit of $525,000 ($210,000
X 2.5), assuming no Policy loans outstanding and no unpaid Monthly
Deductions. Assume the Owner takes a Withdrawal of $60,000. The Withdrawal
will reduce the Account Value to $150,000 ($210,000 - $60,000), and the
Death Benefit to the greater of (a) the Face Amount plus the Account
Value, or $450,000 ($300,000 + $150,000) and (b) the Death Benefit based
on the applicable Death Benefit Factor times the Cash Surrender Value, or
$375,000 ($150,000 X 2.50). Therefore, the Death Benefit will be $450,000.
The Face Amount is unchanged.
29
<PAGE> 37
If you have elected the Cash Value Accumulation Test for tax law
compliance, a Withdrawal will decrease Face Amount by an amount equal to the
amount withdrawn times 1.00327374.
Because a Withdrawal can affect the Face Amount and the 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 Charge," Page 24.) Since a Withdrawal reduces the Net Account Value,
the likelihood that the Policy will lapse is increased. (See "Policy Lapse,"
Page 23.) 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 under the Guideline
Premium Test, we will not allow such Withdrawal.
You may request a Withdrawal only by sending a signed written request to the
Third Party Administrator. A Withdrawal will ordinarily be paid within seven
days of the Valuation Date on which a valid Withdrawal request is received.
A Withdrawal of Net Account Value may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 34.)
FREE-LOOK PRIVILEGE
The Policy provides for a "free-look" period, during which you may cancel
the Policy and receive a refund equal to the premiums paid on the Policy. This
free-look period ends on the later of the end of the 10th day after you receive
the Policy, or any longer period provided by state law. To cancel the Policy,
you must return the Policy to National Life or to an agent of National Life
within this period with a written request for cancellation.
TRANSFER RIGHT FOR CHANGE IN INVESTMENT POLICY
If the investment policy of a Subaccount of the Separate Account is materially
changed, you may transfer the portion of the Account Value in such Subaccount to
another Subaccount, without regard to any limits on transfers or free transfers.
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 Net 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 Account Value, the Face Amount will
automatically be decreased to the current Account 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 Account Value after Age 100 is unclear, and you may wish to
discuss this treatment with a tax advisor.
Payment of Policy Benefits. You may decide the form in which Death Benefit
proceeds will be paid. During the Insured's lifetime, you 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 Net 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
30
<PAGE> 38
within seven days after National Life receives proof of the Insured's death at
its Home Office and all other requirements are satisfied.
Interest at the annual rate of 4% or any higher rate declared by us 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, will ordinarily be paid
within seven days of receipt of written request at National Life's Home Office
or the office of the Third Party Administrator in a form satisfactory to
National Life. Any amounts payable as a result of a Withdrawal or Policy loan
will ordinarily be paid within seven days of the Valuation Date on which such
Withdrawal or Policy loan is validly requested.
Generally, the amount of a payment will be determined as of the date of
receipt by National Life or the Third Party Administrator 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.
We may postpone any payment under the Policy derived from an amount paid
by check or draft until we are is satisfied that the check or draft has been
paid by the bank upon which it was drawn.
The Policy. 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.
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., Net 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 Net Cash Surrender Value. The employee may designate the
Beneficiary to receive any Death Benefit in excess of the Net 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.
National Life does not impose any fee with respect to split dollar
arrangements.
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. You may assign any and all rights under the Policy. No
assignment binds National Life unless in writing and received by us. 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.
31
<PAGE> 39
Misstatement of Age and Sex. If it is found that the amount of any benefit
provided by the Policy is incorrect because of misstatement as to age or sex (if
applicable), the Account Value and the Death Benefit will be equitably adjusted
on the basis of the correct facts. When adjusting the Account Value, the
adjustment will take effect on the Monthly Policy Date on or next following the
date we have proof to our satisfaction of such misstatement. When adjusting the
Death Benefit the adjustment shall take effect as of the Monthly Policy Date
preceding the date of death.
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 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, we may contest the validity of the Policy (or
changes) based on material misstatements in the initial or any subsequent
application.
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. At the time of the Insured person's death, the Death Benefit will be
increased by dividends payable, if any.
Correspondence. All correspondence to you will be deemed to have been sent
to you if mailed to you at your 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
to the payee or his or her estate.
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.
32
<PAGE> 40
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. We 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. We
may require proof of the ages of the chosen persons.
We may pay interest in excess of the stated amounts under the first four
options listed above, but not the last three. Under the first two, and fourth
options above, the payee has the right to change options or to withdraw all or
part of the remaining proceeds. For additional information concerning the
payment options, see the Policy.
SUPPLEMENTAL TERM INSURANCE RIDER
At your option, the Term Rider, which is subject to the restrictions and
limitations set forth in the Rider, may be included in a Policy. Election of the
Term Rider will result in the Death Benefit including the Supplemental Term
Insurance Amount. The charge for the Term Rider will be an amount included in
the Monthly Deduction equal to the Supplemental Term Insurance Amount, divided
by 1.00327234, times the cost of insurance rates which apply based on the
Insured's then Attained Age, sex (if applicable) and Rate Class applicable to
the Insured on the date of issue of the Term Rider. At issue, costs can be
decreased by purchasing a higher Supplemental Term Insurance Amount through the
use of the Term Rider, since there is no Target Premium associated with the
Supplemental Term Insurance Amount, which may have the effect of reducing the
Premium Loads. For Policies issued in the State of Florida, the Supplemental
Term Insurance Rider is not available after age 95.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon National Life's
understanding of the present Federal income tax laws as they are currently
interpreted by the Internal Revenue Service (the "Service"). No representation
is made as to the likelihood of continuation of the present Federal income tax
laws or of the current interpretations by the Service.
TAX STATUS OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
Although the Secretary of the Treasury (the "Treasury") is authorized to
prescribe regulations implementing Section 7702, while proposed regulations and
other interim guidance has been issued, final regulations have not been adopted.
Guidance as to how Section 7702 is to be applied is limited. If a Policy were
determined not to be a life insurance contract for purposes of Section 7702,
such Policy would not provide the tax advantages normally provided by a life
insurance policy.
With respect to a Policy issued on the basis of a standard rate class,
National Life believes (largely in reliance on the Service's Notice 88-128 and
the proposed regulations under Section 7702, issued on July 5, 1991) that such a
Policy should meet the Section 7702 definition of a life insurance contract.
With respect to a Policy that is issued on a substandard basis (i.e., a
Rate Class involving higher than standard mortality risk), there is less
guidance. Thus, it is not clear whether or not such a Policy would satisfy
section 7702.
33
<PAGE> 41
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. we believe that the Separate Account will,
thus, meet the diversification requirement, and we 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
Account Value. These differences could result in an Owner being treated as the
owner of a pro rata portion of the assets of the Separate Account. In addition,
National Life does not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. We 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. We believe that as long as the Policy Owner is not Subject to
the Alternative Minimum Tax, the proceeds and cash value increases of a
Policy should be treated in a manner consistent with a fixed-benefit life
insurance policy for Federal income tax purposes. Thus, the Death Benefit under
the Policy should be excludable from the gross income of the Beneficiary under
Section 101(a)(1) of the Code.
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
34
<PAGE> 42
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, as long as you are not subject to the Alternative Minimum Tax,
you will not be deemed to be in constructive receipt of the Account 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
Death Benefit and Account 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, we will notify your 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, we have not heard from you, we will mail a letter
directly to you notifying you of actions that may be taken to prevent the Policy
from becoming a Modified Endowment Contract. If after 30 days from mailing such
notification we have received no response, we will assume you wish to take no
action. If you request a refund of excess premium, the excess premium paid
(with appropriate interest) will be returned to you. The amount to be refunded
will be deducted from the Account Value in the Subaccounts of the Separate
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, you 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 Account
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 you
attain age 59-1/2, is attributable to your becoming disabled, or is part of a
series of substantially equal periodic payments for your life (or life
expectancy) or the joint lives (or joint life expectancies) of you and your
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
35
<PAGE> 43
Policy's 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 you 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
your indebtedness.
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 your
gross income (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 your gross income.
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.
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.
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, we 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 us 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 you may provide voting instructions will be determined by
dividing your Policy's Account Value in that Subaccount 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, we will cast votes, for or against
any matter, in the same proportion as Owners vote.
36
<PAGE> 44
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 we do disregard voting instructions, we will advise you of
that action and its reasons for such action in the next semi-annual report to
you.
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 your voting
instructions.
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; (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 our 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. We have 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 your Policy has Account Value in a Subaccount that is eliminated, we
will give you at least 30 days notice before the elimination, and will request
that you designate the Subaccount or Subaccounts to which the Account 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 Account 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.
37
<PAGE> 45
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION DURING THE PAST FIVE YEARS
- ----------------- --------------------------
<S> <C>
Patrick E. Welch 1997 to present - Chairman of the Board
Chairman of the Board, and Chief Executive Officer; 1992 to 1997 -
Chief Executive Officer 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 &
Director Boardman Financial Network
1967 to present - President of Hickok & Boardman Realty,
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.
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
</TABLE>
38
<PAGE> 46
<TABLE>
<S> <C>
James A. Mallon 1998 to present: Executive Vice President
Executive Vice President & Chief Marketing Officer; 1996 to 1998:
Chief Marketing Officer President & Chief Executive Officer - Integon
Life Insurance Corporation; 1993 to 1996: Senior
Vice President & Chief Marketing Officer - Commercial
Union Life Insurance Company of America.
William A. Smith 1998 to present: Executive Vice President & Chief
Executive Vice President &
Chief Financial Officer
Financial Officer; 1994 to 1998 - Vice President and
Controller, American Express Financial Advisors; 1991 to
1994 - Vice President and Chief Financial Officer of
ACUMA, Ltd.
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; 1987 to 1997 - Senior Vice President -
Sentinel Advisors Company.
Gregory H. Doremus 1998 to present: Senior Vice President -
Senior Vice President - New New Business & Customer Services; 1994 to 1998 -
Business & Customer Services Vice President - Customer Services; 1990 to 1994 -
Second Vice President - Client Services
Michele S. Gatto 1999 to present: Senior Vice President & General
Senior Vice President & Counsel; 1997 to 1999 - Vice President, General
General Counsel Counsel and Secretary, Massachusetts Casualty Insurance
Company; 1986 to 1997 - Vice President, Assistant
General Counsel, Assistant Secretary/Treasurer,
and other legal positions, The Paul Revere Corporation
Charles C. Kittredge 1997 to present: Senior Vice President - Sales
Senior Vice President - Sales and Distribution; 1993 to 1997: - Vice President -
and Distribution Agency Financial Planning & Services
Michael A. Tahan 1998 to present: Senior Vice President & Chief
Senior Vice President & Information Officer; 1991 to 1998 - First Vice
Chief Information Officer President & Chief Information Officer-Merrill Lynch Asset
Management
</TABLE>
DISTRIBUTION OF POLICIES
Applications for the Policies are solicited by agents who are licensed by
state insurance authorities to sell National Life's variable life insurance
policies, and who are also registered representatives of Equity Services, Inc.
("ESI") or registered representatives of broker/dealers who have Selling
Agreements with ESI. ESI, a Vermont corporation formed on October 7, 1968,
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.
National Life is seeking approval to sell the Policies in all states and
the District of Columbia. However, all approvals may not be obtained. The
Policies are offered and sold only in those states where their sale is lawful.
39
<PAGE> 47
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 seven Policy Years, the gross dealer concession will not be
more than 15% of the premiums paid up to the target Premium and 2.5% of the
premiums paid in excess of the Target Premium. For Policy Years after Policy
Year 7, the gross dealer concession will not be more than 5% of the premiums
paid, up to the Target Premium, and 2.5% of the premiums in excess of the Target
Premium. In addition, dealers will be paid amounts equal to 0.10% per annum of
the Account Value in the Separate Account for the first twenty Policy Years, and
0.05% per annum of such amount thereafter.
The directors of ESI are Patrick E. Welch, Thomas H. MacLeay, Rodney A.
Buck, all of whose principal occupations are disclosed under "Directors and
Officers of National Life" above, and Joseph M. Rob, the Chairman, Chief
Executive Officer and President of ESI. ESI's other officers are:
<TABLE>
<S> <C>
John M. Grab, Jr. Senior Vice President & Chief Financial Officer
Stephen A. Englese Vice President - Financial Products
Gregory D. Teese Vice President - Compliance
Budd A. Shedaker Assistant Vice President - Communications
D. Russell Morgan Counsel
Sharon E. Bernard Treasurer & Controller
Lisa A. Pettrey Secretary
JoAnn K. Morissette Assistant Secretary
</TABLE>
The principal business address of all these individuals is National Life Drive,
Montpelier, Vermont 05604.
POLICY REPORTS
Within 30 days after each Policy Anniversary, a statement will be sent to
you describing the status of your Policy, including setting forth the Face
Amount, the current Death Benefit, any Policy loans and accrued interest, the
current Account Value, the amount held as Collateral in the Loan 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 Net Cash Surrender Value. In addition, a statement will
be sent to you showing the status of your 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).
You will receive a semi-annual report containing the financial statements
of each Fund in which your Policy has Account Value, as required by the 1940
Act.
THIRD PARTY ADMINISTRATOR
McCamish Systems, LLC, which is located at 6425 Powers Ferry Road, Third
Floor, Atlanta, Georgia 30339, will act as administrator of the Policies on
behalf of National Life.
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 June 1, 1999,
but there
40
<PAGE> 48
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 PricewaterhouseCoopers 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 Kiri
Parankirinathan, A.S.A., M.A.A.A., President of Life Product Developers, Inc.
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 Michelle S. Gatto, Senior Vice
President and General Counsel of National Life.
In recent years life insurance companies have been named as defendants in
class action lawsuits relating to life insurance pricing and sales practices.
During 1998, National Life settled a group of class action lawsuits of this
nature. While the ultimate cost of the settlement is not yet known, National
Life set aside a reserve during 1998 of $ 40.6 million to account for the cost
of the settlement of these cases.
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 appear on the pages beginning
with page F-1 below. The financial statements of National Life should be
considered only as bearing upon National Life's ability to meet its obligations
under the Policies.
41
<PAGE> 49
GLOSSARY
<TABLE>
<S> <C>
ACCOUNT VALUE The sum of the Policy's values in the Separate Account and the Loan
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 Account Value of the Policy reflecting, in Policy Years 1 and 2, the
Distribution Charge Refund. The Cash Surrender Value is equal to the
Account Value on the second Policy Anniversary and thereafter.
COLLATERAL The Account Value in the Loan Account which secures the amount of any
Policy loan.
CUMULATIVE MINIMUM MONTHLY
PREMIUM The sum of the Minimum Monthly Premiums in effect on each Monthly
Policy Date since the Date of Issue (including the current month).
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 Under Option A, the greater of (a) the Face Amount or (b) the Death
Benefit Factor times the Cash Surrender Value on the date of death;
under Option B, the greater of (a) the Face Amount plus the Account
Value on the date of death, or (b) the Death Benefit Factor times the
Cash Surrender Value on the date of death; in each case plus any
Supplemental Term Insurance Amount, less any outstanding Policy loan
and accrued interest, and less any unpaid Monthly Deductions.
DEATH BENEFIT FACTOR A percentage specified in either the Cash Value Accumulation Test or the
Guideline Premium Test for qualification of a Policy as life insurance
under the Internal Revenue Code, which when multiplied by the Cash
Surrender Value, must always be less than or equal to the Death Benefit
plus any outstanding Policy loans, accrued interest thereon, and any
unpaid Monthly Deductions, and minus
</TABLE>
42
<PAGE> 50
<TABLE>
<S> <C>
any dividends payable and any Supplemental term Insurance Amount.
DEATH BENEFIT STANDARD The Death Benefit Factor multiplied by the Cash Surrender Value of the
Policy on the date of the Insured's death, less the amount of any
Monthly Deductions then due, and less any outstanding Policy loans plus
accrued interest.
DISTRIBUTION CHARGE An amount deducted from each premium to cover the cost of distribution
of the Policy. The Distribution Charge is equal to, in Policy Year 1,
13% of premiums paid during the Policy Year up to the Target Premium,
and 0.5% of premiums paid in excess of the target premium during the
Policy Year. In Policy Years 2 through 7, the Distribution Charge is
equal to 15% of premiums paid during a Policy Year up to the Target
Premium, and 2.5% of premiums paid in excess of the Target Premium in
any such Policy Year. In Policy Years 8 and thereafter, the
Distribution Charge will be 5% of premiums paid during a Policy Year up
to the Target Premium, and 2.5% of premiums paid in excess of the
Target Premium in any such Policy Year.
DISTRIBUTION CHARGE REFUND An amount which will be added to Account Value as of the time of the
applicable first year premium payments, to determine the proceeds
payable to the Owner upon surrender during in Policy Years 1 or 2. Such
amount shall be equal to the lesser of (a) the Premium Loads on all
premiums paid in the first Policy Year, less 2% of such premiums paid in
the first Policy Year, or (b) one third of the Premium Loads paid on all
premiums paid in the first Policy Year, plus 2% of such premiums, less
the Premium Tax Charge. The Distribution Charge Refund is zero at all
times after the first Policy Year.
DURATION The number of full years the insurance has been in force; for the Face
Amount on the Date of Issue, measured from the Date of Issue; for any
increase in Face Amount, measured from the effective date of such
increase.
FACE AMOUNT The Face Amount of the Policy on the Date of Issue plus any increases in
Face Amount and minus any decreases in Face Amount.
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 at least equal to three times
the Monthly Deduction due the date when the Grace Period began, plus any
Premium Loads.
HOME OFFICE National Life's Home Office at National Life Drive, Montpelier, Vermont
05604.
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.
</TABLE>
43
<PAGE> 51
<TABLE>
<S> <C>
LOAN ACCOUNT Account Value which is held in National Life's general account as
Collateral for Policy loans.
MINIMUM FACE AMOUNT The Minimum Face Amount is $5000.
MINIMUM INITIAL PREMIUM The minimum premium required to issue a Policy. The Minimum Initial
Premium per set of Policies purchased at the same time and associated
with a corporation or its affiliates, a trust, or a partnership, is
$50,000.
MINIMUM MONTHLY PREMIUM An amount stated in the Policy, the payment of which each month will
keep the Policy from entering a Grace Period during the Policy
Protection Period.
MONTHLY DEDUCTION The amount deducted in advance from the Account Value on each
Monthly Policy Date. It includes the Policy Administration Charge, the
Cost of Insurance Charge, and, if applicable, the Underwriting Charge
and the charge for the Term Rider.
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 Date, the Monthly Policy Date will be deemed to
be the next Valuation Date.
NET ACCOUNT VALUE The Account Value of a Policy less any outstanding Policy loans and
accrued interest thereon.
NET AMOUNT AT RISK The amount by which (a) the Death Benefit, plus any outstanding Policy
loans and accrued interest, and plus any unpaid Monthly Deductions, and
divided by 1.0032734 (to take into account earnings of 4% per annum
solely for the purpose of computing Net Amount at Risk), exceeds (b) the
Account Value.
NET CASH SURRENDER VALUE The Cash Surrender Value of a policy less any outstanding Policy Loans
and accrued interest thereon.
NET PREMIUM The remainder of a premium after the deduction of the Premium Loads.
OWNER The person(s) or entity(ies) entitled to exercise the rights granted in
the Policy.
POLICY ADMINISTRATION CHARGE A charge currently in the amount of $5.50 per month included in the
Monthly Deduction, which is intended to reimburse National Life for
ordinary administrative expenses. National Life reserves the right to
increase this charge up to an amount equal to $8.00 per month.
POLICY ANNIVERSARY The same day and month as the Date of Issue in each later year.
POLICY PROTECTION PERIOD The first five years after the Date of Issue of a Policy during which
the Policy will not lapse regardless of whether net Account value is
sufficient to cover the Monthly Deductions, provided that premium
</TABLE>
44
<PAGE> 52
<TABLE>
<S> <C>
payments at least equal to the Cumulative Minimum Monthly Premium
have been paid.
POLICY YEAR A year that starts on the Date of Issue or on a Policy Anniversary.
PREMIUM LOADS A charge deducted from each premium payment, which consists of the
Distribution Charge and the applicable Premium Tax Charge
PREMIUM TAX CHARGE A charge deducted from each premium payment to cover the cost of all
applicable state and local premium taxes.
RATE CLASS The classification of the Insured for cost of insurance purposes. The
Rate Classes are: for each of guaranteed issue, simplified issue, and
full medical underwriting, there are male non-smoker, female
non-smoker, unisex non-smoker, male smoker, female smoker, unisex
nonsmoker, unisex unismoker, male unismoker, and female unismoker.
For full medical underwriting cases, substandard rate classes may also
apply.
SUPPLEMENTAL TERM INSURANCE
AMOUNT Additional insurance coverage provided by the Term Rider, equal to,
under Option A, the Term Insurance Amount stated in the Policy less any
excess of (a) the Policy's Death Benefit Standard over (b) the Policy's
Face Amount on the date of the Insured's death, less the amount of any
Monthly Deductions then due, and less any outstanding Policy loans and
accrued interest thereon, but not less than zero. Under Option B, the
Supplemental Term Insurance Amount is equal to the Term Insurance
Amount stated in the Policy less any excess of (a) the Policy's Death
Benefit Standard over (b) the Policy's Face Amount on the date of the
Insured's death, plus the Account Value of the Policy on the date of the
Insured's Death, less the amount of any Monthly Deductions then due,
and less any outstanding Policy loans and accrued interest thereon, but
not less than zero.
TARGET PREMIUM An amount equal to 1.25 times the annual whole life premium which
would apply to a Policy calculated by using the applicable 1980
Commissioners Standard Ordinary Mortality Table and an interest rate of
3.5%.
TERM INSURANCE AMOUNT An amount stated in the Policy on which the Supplemental Term
Insurance Amount is based.
TERM RIDER An optional benefit that may be included in a Policy at the owner's
option, which provides additional insurance coverage in the form of the
Supplemental Term Insurance Amount.
THIRD PARTY ADMINISTRATOR The administrator of the Policy appointed by National Life, McCamish
Systems, LLC, located at 6425 Powers Ferry Road, Third Floor, Atlanta,
Georgia 30339.
VALUATION DATE 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 an event occurs
</TABLE>
45
<PAGE> 53
<TABLE>
<S> <C>
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 Dates. Each Valuation Period
includes a Valuation Date and any non-Valuation Date or consecutive
non-Valuation Dates immediately preceding it.
WITHDRAWAL A payment made at the request of the Owner pursuant to the right in the
Policy to withdraw a portion of the Policy's Net Account Value.
</TABLE>
46
<PAGE> 54
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, ACCOUNT VALUES
AND NET CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Account Values and
Net Cash Surrender Values of a Policy may change with the investment experience
of the Separate Account. The tables show how the Death Benefits, Account Values
and Net 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-10 illustrate a Policy issued to a male
Insured, Age 40 in the full medical underwriting nonsmoker Rate Class with a
Face Amount of $250,000 and Planned Periodic Premiums of $3,000 paid at the
beginning of each Policy Year. The Death Benefits, Account Values and Net Cash
Surrender Values would be lower if the Insured was in a smoker or substandard
class, a guaranteed issue class or a simplified issue 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 applicable 1980 CSO 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 the
Mortality and Expense Risk Charge and the Policy Administration Charge are at
the current rates.
The amounts shown in all tables reflect (1) the Mortality and Expense
Risk Charge, (2) the Separate Account Administration Charge, and (3) an
averaging of certain other asset charges described below that may be assessed
under the Policy. The other asset charges reflected in the Current and
Guaranteed illustrations equal an average of 0.82%. This total is based on an
assumption that an Owner allocates the Policy values equally among the
Subaccounts of the Separate Account. These asset charges take into account
expense reimbursement arrangements expected to be in place for 1999 for some of
the Portfolios. In the absence of the reimbursement arrangements for some of
the Portfolios, the other asset charges would have totalled an average of
1.49%. If the reimbursement agreements were discontinued, the Account Values
and Net Cash Surrender Values of a Policy which allocates Policy Values
equally among the Subaccounts would be lower than those shown in the following
tables. For information on Fund and Portfolio expenses, see the prospectuses
for the Funds accompanying this prospectus.
The tables also reflect the fact that no charges for Federal or state
income taxes are currently made against the Separate Account. 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 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, the
Death Benefit compliance test, Face Amount and Planned Periodic Premiums
requested and the application of the Term Rider, if requested.
A-1
<PAGE> 55
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
CASH VALUE ACCUMULATION TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.50% FOR GUARANTEED CHARGES IN ALL
YEARS. FOR CURRENT CHARGES, -1.25% FOR THE FIRST SEVEN YEARS, -1.16%
FOR THE NEXT THREE YEARS, -1.06% FOR THE NEXT 10 YEARS, AND -1.01% FOR
YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current
Premium ------------------- ----------------------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,835 1,983 250,000 2,307 2,455 250,000
2 6,458 3,519 3,664 250,000 4,469 4,616 250,000
3 9,930 5,138 5,138 250,000 6,570 6,570 250,000
4 13,577 6,686 6,686 250,000 8,613 8,613 250,000
5 17,406 8,165 8,165 250,000 10,595 10,595 250,000
6 21,426 9,612 9,612 250,000 12,561 12,561 250,000
7 25,647 10,978 10,978 250,000 14,461 14,461 250,000
8 30,080 12,557 12,557 250,000 16,608 16,608 250,000
9 34,734 14,045 14,045 250,000 18,689 18,689 250,000
10 39,620 15,436 15,436 250,000 20,700 20,700 250,000
11 44,751 16,727 16,727 250,000 22,662 22,662 250,000
12 50,139 17,903 17,903 250,000 24,541 24,541 250,000
13 55,796 18,951 18,951 250,000 26,329 26,329 250,000
14 61,736 19,859 19,859 250,000 28,016 28,016 250,000
15 67,972 20,609 20,609 250,000 29,596 29,596 250,000
16 74,521 21,186 21,186 250,000 31,066 31,066 250,000
17 81,397 21,576 21,576 250,000 32,432 32,432 250,000
18 88,617 21,767 21,767 250,000 33,685 33,685 250,000
19 96,198 21,746 21,746 250,000 34,817 34,817 250,000
20 104,158 21,485 21,485 250,000 35,808 35,808 250,000
25 150,340 15,391 15,391 250,000 38,559 38,559 250,000
30 209,282 0 0 0 36,442 36,442 250,000
</TABLE>
The Death Benefit may, and the Account Values and Net 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, ACCOUNT VALUE AND NET 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,
ACCOUNT VALUE AND NET 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> 56
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
CASH VALUE ACCUMULATION TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF -1.50% FOR GUARANTEED CHARGES IN ALL
YEARS. FOR CURRENT CHARGES, 4.67% FOR THE FIRST SEVEN YEARS, 4.77%
FOR THE NEXT THREE YEARS, 4.88% FOR THE NEXT 10 YEARS, AND 4.93% FOR
YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current
Premium ----------------- ------------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,964 2,121 250,000 2,451 2,608 250,000
2 6,458 3,886 4,050 250,000 4,896 5,061 250,000
3 9,930 5,853 5,853 250,000 7,420 7,420 250,000
4 13,577 7,860 7,860 250,000 10,030 10,030 250,000
5 17,406 9,910 9,910 250,000 12,726 12,726 250,000
6 21,426 12,042 12,042 250,000 15,558 15,558 250,000
7 25,647 14,210 14,210 250,000 18,482 18,482 250,000
8 30,080 16,727 16,727 250,000 21,838 21,838 250,000
9 34,734 19,292 19,292 250,000 25,314 25,314 250,000
10 39,620 21,900 21,900 250,000 28,914 28,914 250,000
11 44,751 24,550 24,550 250,000 32,674 32,674 250,000
12 50,139 27,229 27,229 250,000 36,561 36,561 250,000
13 55,796 29,926 29,926 250,000 40,573 40,573 250,000
14 61,736 32,631 32,631 250,000 44,711 44,711 250,000
15 67,972 35,328 35,328 250,000 48,975 48,975 250,000
16 74,521 38,005 38,005 250,000 53,371 53,371 250,000
17 81,397 40,647 40,647 250,000 57,914 57,914 250,000
18 88,617 43,245 43,245 250,000 62,607 62,607 250,000
19 96,198 45,788 45,788 250,000 67,453 67,453 250,000
20 104,158 48,251 48,251 250,000 72,447 72,447 250,000
25 150,340 58,321 58,321 250,000 100,247 100,247 250,000
30 209,282 60,292 60,292 250,000 133,664 133,664 250,000
</TABLE>
The Death Benefit may, and the Account Values and Net 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, ACCOUNT VALUE AND NET 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,
ACCOUNT VALUE AND NET 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> 57
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
CASH VALUE ACCUMULATION TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF -1.50% FOR GUARANTEED CHARGES IN ALL
YEARS. FOR CURRENT CHARGES, 10.60% FOR THE FIRST SEVEN YEARS, 10.71%
FOR THE NEXT THREE YEARS, 10.81% FOR THE NEXT 10 YEARS, AND 10.87% FOR
YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current
Premium ----------------- ------------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,094 2,259 250,000 2,595 2,761 250,000
2 6,458 4,269 4,452 250,000 5,341 5,524 250,000
3 9,930 6,630 6,630 250,000 8,340 8,340 250,000
4 13,577 9,187 9,187 250,000 11,625 11,625 250,000
5 17,406 11,963 11,963 250,000 15,223 15,223 250,000
6 21,426 15,021 15,021 250,000 19,214 19,214 250,000
7 25,647 18,340 18,340 250,000 23,589 23,589 250,000
8 30,080 22,276 22,276 250,000 28,749 28,749 250,000
9 34,734 26,563 26,563 250,000 34,426 34,426 250,000
10 39,620 31,230 31,230 250,000 40,674 40,674 250,000
11 44,751 36,318 36,318 250,000 47,602 47,602 250,000
12 50,139 41,862 41,862 250,000 55,235 55,235 250,000
13 55,796 47,901 47,901 250,000 63,645 63,645 250,000
14 61,736 54,482 54,482 250,000 72,918 72,918 250,000
15 67,972 61,657 61,657 250,000 83,149 83,149 250,000
16 74,521 69,486 69,486 250,000 94,452 94,452 250,000
17 81,397 78,041 78,041 250,000 106,961 106,961 250,000
18 88,617 87,410 87,410 250,000 120,816 120,816 255,669
19 96,198 97,689 97,689 250,000 136,090 136,090 279,796
20 104,158 108,985 108,985 250,000 152,867 152,867 305,471
25 150,340 183,830 183,830 320,898 265,612 265,612 463,659
30 209,282 294,503 294,503 455,794 445,787 445,787 689,932
</TABLE>
The Death Benefit may, and the Account Values and Net 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, ACCOUNT VALUE AND NET 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,
ACCOUNT VALUE AND NET 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> 58
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.50% FOR GUARANTEED CHARGES IN ALL
YEARS. FOR CURRENT CHARGES, -1.25% FOR THE FIRST SEVEN YEARS, -1.16%
FOR THE NEXT THREE YEARS, -1.06% FOR THE NEXT 10 YEARS, AND -1.01% FOR
YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current
Premium ----------------- ------------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,835 1,983 250,000 2,307 2,455 250,000
2 6,458 3,519 3,664 250,000 4,469 4,616 250,000
3 9,930 5,138 5,138 250,000 6,570 6,570 250,000
4 13,577 6,686 6,686 250,000 8,613 8,613 250,000
5 17,406 8,165 8,165 250,000 10,595 10,595 250,000
6 21,426 9,612 9,612 250,000 12,561 12,561 250,000
7 25,647 10,978 10,978 250,000 14,461 14,461 250,000
8 30,080 12,557 12,557 250,000 16,608 16,608 250,000
9 34,734 14,045 14,045 250,000 18,689 18,689 250,000
10 39,620 15,436 15,436 250,000 20,700 20,700 250,000
11 44,751 16,727 16,727 250,000 22,662 22,662 250,000
12 50,139 17,903 17,903 250,000 24,541 24,541 250,000
13 55,796 18,951 18,951 250,000 26,329 26,329 250,000
14 61,736 19,859 19,859 250,000 28,016 28,016 250,000
15 67,972 20,609 20,609 250,000 29,596 29,596 250,000
16 74,521 21,186 21,186 250,000 31,066 31,066 250,000
17 81,397 21,576 21,576 250,000 32,432 32,432 250,000
18 88,617 21,767 21,767 250,000 33,685 33,685 250,000
19 96,198 21,746 21,746 250,000 34,817 34,817 250,000
20 104,158 21,485 21,485 250,000 35,808 35,808 250,000
25 150,340 15,391 15,391 250,000 38,559 38,559 250,000
30 209,282 0 0 0 36,442 36,442 250,000
</TABLE>
The Death Benefit may, and the Account Values and Net 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, ACCOUNT VALUE AND NET 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,
ACCOUNT VALUE AND NET 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> 59
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF -1.50% FOR GUARANTEED CHARGES IN ALL
YEARS. FOR CURRENT CHARGES, 4.67% FOR THE FIRST SEVEN YEARS, 4.77%
FOR THE NEXT THREE YEARS, 4.88% FOR THE NEXT 10 YEARS, AND 4.93% FOR
YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current
Premium ----------------- -----------------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,964 2,121 250,000 2,451 2,608 250,000
2 6,458 3,886 4,050 250,000 4,896 5,061 250,000
3 9,930 5,853 5,853 250,000 7,420 7,420 250,000
4 13,577 7,860 7,860 250,000 10,030 10,030 250,000
5 17,406 9,910 9,910 250,000 12,726 12,726 250,000
6 21,426 12,042 12,042 250,000 15,558 15,558 250,000
7 25,647 14,210 14,210 250,000 18,482 18,482 250,000
8 30,080 16,727 16,727 250,000 21,838 21,838 250,000
9 34,734 19,292 19,292 250,000 25,314 25,314 250,000
10 39,620 21,900 21,900 250,000 28,914 28,914 250,000
11 44,751 24,550 24,550 250,000 32,674 32,674 250,000
12 50,139 27,229 27,229 250,000 36,561 36,561 250,000
13 55,796 29,926 29,926 250,000 40,573 40,573 250,000
14 61,736 32,631 32,631 250,000 44,711 44,711 250,000
15 67,972 35,328 35,328 250,000 48,975 48,975 250,000
16 74,521 38,005 38,005 250,000 53,371 53,371 250,000
17 81,397 40,647 40,647 250,000 57,914 57,914 250,000
18 88,617 43,245 43,245 250,000 62,607 62,607 250,000
19 96,198 45,788 45,788 250,000 67,453 67,453 250,000
20 104,158 48,251 48,251 250,000 72,447 72,447 250,000
25 150,340 58,321 58,321 250,000 100,247 100,247 250,000
30 209,282 60,292 60,292 250,000 133,664 133,664 250,000
</TABLE>
The Death Benefit may, and the Account Values and Net 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, ACCOUNT VALUE AND NET 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,
ACCOUNT VALUE AND NET 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> 60
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF -1.50% FOR GUARANTEED CHARGES IN ALL
YEARS. FOR CURRENT CHARGES, 10.60% FOR THE FIRST SEVEN YEARS, 10.71%
FOR THE NEXT THREE YEARS, 10.81% FOR THE NEXT 10 YEARS, AND 10.87% FOR
YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current
Premium ------------------ -------------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,094 2,259 250,000 2,595 2,761 250,000
2 6,458 4,269 4,452 250,000 5,341 5,524 250,000
3 9,930 6,630 6,630 250,000 8,340 8,340 250,000
4 13,577 9,187 9,187 250,000 11,625 11,625 250,000
5 17,406 11,963 11,963 250,000 15,223 15,223 250,000
6 21,426 15,021 15,021 250,000 19,214 19,214 250,000
7 25,647 18,340 18,340 250,000 23,589 23,589 250,000
8 30,080 22,276 22,276 250,000 28,749 28,749 250,000
9 34,734 26,563 26,563 250,000 34,426 34,426 250,000
10 39,620 31,230 31,230 250,000 40,674 40,674 250,000
11 44,751 36,318 36,318 250,000 47,602 47,602 250,000
12 50,139 41,862 41,862 250,000 55,235 55,235 250,000
13 55,796 47,901 47,901 250,000 63,645 63,645 250,000
14 61,736 54,482 54,482 250,000 72,918 72,918 250,000
15 67,972 61,657 61,657 250,000 83,149 83,149 250,000
16 74,521 69,486 69,486 250,000 94,452 94,452 250,000
17 81,397 78,041 78,041 250,000 106,961 106,961 250,000
18 88,617 87,410 87,410 250,000 120,818 120,818 250,000
19 96,198 97,689 97,689 250,000 136,185 136,185 250,000
20 104,158 108,985 108,985 250,000 153,240 153,240 250,000
25 150,340 185,987 185,987 250,000 272,030 272,030 331,877
30 209,282 314,610 314,610 364,947 469,162 469,162 544,228
</TABLE>
The Death Benefit may, and the Account Values and Net 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, ACCOUNT VALUE AND NET 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,
ACCOUNT VALUE AND NET 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> 61
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.50% FOR GUARANTEED CHARGES IN ALL
YEARS. FOR CURRENT CHARGES, -1.25% FOR THE FIRST SEVEN YEARS, -1.16%
FOR THE NEXT THREE YEARS, -1.06% FOR THE NEXT 10 YEARS, AND -1.01% FOR
YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current
Premium ----------------- -------------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,830 1,978 251,830 2,305 2,453 252,305
2 6,458 3,504 3,650 253,504 4,465 4,611 254,465
3 9,930 5,109 5,109 255,109 6,561 6,561 256,561
4 13,577 6,637 6,637 256,637 8,596 8,596 258,596
5 17,406 8,091 8,091 258,091 10,566 10,566 260,566
6 21,426 9,505 9,505 259,505 12,516 12,516 262,516
7 25,647 10,831 10,831 260,831 14,396 14,396 264,396
8 30,080 12,361 12,361 262,361 16,516 16,516 266,516
9 34,734 13,792 13,792 263,792 18,563 18,563 268,563
10 39,620 15,114 15,114 265,114 20,533 20,533 270,533
11 44,751 16,324 16,324 266,324 22,445 22,445 272,445
12 50,139 17,406 17,406 267,406 24,262 24,262 274,262
13 55,796 18,346 18,346 268,346 25,974 25,974 275,974
14 61,736 19,130 19,130 269,130 27,571 27,571 277,571
15 67,972 19,738 19,738 269,738 29,043 29,043 279,043
16 74,521 20,155 20,155 270,155 30,387 30,387 280,387
17 81,397 20,364 20,364 270,364 31,606 31,606 281,606
18 88,617 20,355 20,355 270,355 32,692 32,692 282,692
19 96,198 20,114 20,114 270,114 33,634 33,634 283,634
20 104,158 19,614 19,614 269,614 34,407 34,407 284,407
25 150,340 12,104 12,104 262,104 35,616 35,616 285,616
30 209,282 0 0 0 31,127 31,127 281,127
</TABLE>
The Death Benefit may, and the Account Values and Net 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, ACCOUNT VALUE AND NET 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,
ACCOUNT VALUE AND NET 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-8
<PAGE> 62
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF -1.50% FOR GUARANTEED CHARGES IN ALL
YEARS. FOR CURRENT CHARGES, 4.67% FOR THE FIRST SEVEN YEARS, 4.77%
FOR THE NEXT THREE YEARS, 4.88% FOR THE NEXT 10 YEARS, AND 4.93% FOR
YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current
Premium ---------------- -------------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,959 2,116 251,959 2,450 2,607 252,450
2 6,458 3,870 4,033 253,870 4,892 5,056 254,892
3 9,930 5,819 5,819 255,819 7,410 7,410 257,410
4 13,577 7,801 7,801 257,801 10,009 10,009 260,009
5 17,406 9,817 9,817 259,817 12,690 12,690 262,690
6 21,426 11,903 11,903 261,903 15,501 15,501 265,501
7 25,647 14,012 14,012 264,012 18,396 18,396 268,396
8 30,080 16,454 16,454 266,454 21,711 21,711 271,711
9 34,734 18,924 18,924 268,924 25,134 25,134 275,134
10 39,620 21,413 21,413 271,413 28,666 28,666 278,666
11 44,751 23,918 23,918 273,918 32,339 32,339 282,339
12 50,139 26,420 26,420 276,420 36,114 36,114 286,114
13 55,796 28,901 28,901 278,901 39,985 39,985 289,985
14 61,736 31,346 31,346 281,346 43,945 43,945 293,945
15 67,972 33,730 33,730 283,730 47,987 47,987 297,987
16 74,521 36,031 36,031 286,031 52,108 52,108 302,108
17 81,397 38,225 38,225 288,225 56,318 56,318 306,318
18 88,617 40,294 40,294 290,294 60,609 60,609 310,609
19 96,198 42,216 42,216 292,216 64,972 64,972 314,972
20 104,158 43,951 43,951 293,951 69,384 69,384 319,384
25 150,340 48,164 48,164 298,164 92,194 92,194 342,194
30 209,282 38,654 38,654 288,654 114,745 114,745 364,745
</TABLE>
The Death Benefit may, and the Account Values and Net 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, ACCOUNT VALUE AND NET 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,
ACCOUNT VALUE AND NET 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-9
<PAGE> 63
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
<TABLE>
<CAPTION>
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF -1.50% FOR GUARANTEED CHARGES IN ALL
YEARS. FOR CURRENT CHARGES, 10.60% FOR THE FIRST SEVEN YEARS, 10.71%
FOR THE NEXT THREE YEARS, 10.81% FOR THE NEXT 10 YEARS, AND 10.87% FOR
YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current
Premium ---------------- -------------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,088 2,254 252,088 2,594 2,760 252,594
2 6,458 4,252 4,434 254,252 5,335 5,519 255,335
3 9,930 6,591 6,591 256,591 8,328 8,328 258,328
4 13,577 9,117 9,117 259,117 11,601 11,601 261,601
5 17,406 11,848 11,848 261,848 15,178 15,178 265,178
6 21,426 14,843 14,843 264,843 19,141 19,141 269,141
7 25,647 18,075 18,075 268,075 23,474 23,474 273,474
8 30,080 21,896 21,896 271,896 28,575 28,575 278,575
9 34,734 26,030 26,030 276,030 34,169 34,169 284,169
10 39,620 30,498 30,498 280,498 40,307 40,307 290,307
11 44,751 35,329 35,329 285,329 47,086 47,086 297,086
12 50,139 40,543 40,543 290,543 54,519 54,519 304,519
13 55,796 46,160 46,160 296,160 62,666 62,666 312,666
14 61,736 52,207 52,207 302,207 71,589 71,589 321,589
15 67,972 58,704 58,704 308,704 81,364 81,364 331,364
16 74,521 65,678 65,678 315,678 92,075 92,075 342,075
17 81,397 73,157 73,157 323,157 103,829 103,829 353,829
18 88,617 81,181 81,181 331,181 116,725 116,725 366,725
19 96,198 89,787 89,787 339,787 130,876 130,876 380,876
20 104,158 99,002 99,002 349,002 146,388 146,388 396,388
25 150,340 155,181 155,181 405,181 250,415 250,415 500,415
30 209,282 230,138 230,138 480,138 417,305 417,305 667,305
</TABLE>
The Death Benefit may, and the Account Values and Net 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, ACCOUNT VALUE AND NET 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,
ACCOUNT VALUE AND NET 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-10
<PAGE> 64
NATIONAL LIFE INSURANCE COMPANY
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1998 AND 1997
F-1
<PAGE> 65
Report of Independent Accountants
To the Board of Directors and Policyholders
of National Life Insurance Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive income, changes in
equity, and cash flows present fairly, in all material respects, the financial
position of National Life Insurance Company and its subsidiaries (the Company)
at December 31, 1998 and 1997, 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.
As discussed in Note 10 to the financial statements, the Company changed its
method of accounting in 1998 for the cost of computer software developed or
obtained for internal use.
As discussed in Note 11 to the financial statements, on January 1, 1999,
National Life Insurance Company converted from a mutual to a stock insurance
company as part of a reorganization into a mutual holding company corporate
structure.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 2, 1999
F-2
<PAGE> 66
<TABLE>
<CAPTION>
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 347,949 $ 372,180
Available-for-sale debt and equity securities, at fair value 5,438,784 5,317,427
Mortgage loans 1,098,504 992,170
Policy loans 776,363 791,753
Real estate investments 75,566 95,926
Other invested assets 113,696 90,520
- -------------------------------------------------------------------------------------------------------------------
Total cash and invested assets 7,850,862 7,659,976
Deferred policy acquisition costs 416,733 392,014
Accrued investment income 119,249 125,790
Premiums and fees receivable 21,044 23,458
Deferred income taxes 21,541 17,517
Amounts recoverable from reinsurers 253,651 234,280
Present value of future profits of insurance acquired 45,539 54,444
Property and equipment, net 59,503 59,188
Other assets 133,702 66,259
Separate account assets 283,948 207,425
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 9,205,772 $ 8,840,351
===================================================================================================================
LIABILITIES:
Policy benefit liabilities $ 3,907,114 $ 3,814,213
Policyholders' accounts 3,348,132 3,236,710
Policyholders' deposits 38,520 40,836
Policy claims payable 31,900 26,968
Policyholders' dividends 54,757 53,395
Amounts payable to reinsurers 35,481 24,260
Other liabilities and accrued expenses 500,527 481,775
Debt 78,088 80,085
Separate account liabilities 264,421 187,998
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 8,258,940 7,946,240
- -------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 64,529 53,222
EQUITY:
Retained earnings 776,060 755,872
Accumulated other comprehensive income 106,243 85,017
- -------------------------------------------------------------------------------------------------------------------
Total equity 882,303 840,889
- -------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and equity $ 9,205,772 $ 8,840,351
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 67
<TABLE>
<CAPTION>
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 386,260 $ 399,017
Policy and contract charges 48,463 45,397
Net investment income 550,339 528,197
Net realized investment gains 8,450 11,887
Mutual fund commission and fee income 49,670 42,609
Other income 17,271 17,524
- ----------------------------------------------------------------------------------------------------
Total revenue 1,060,453 1,044,631
- ----------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 98,252 118,134
Policy benefits 346,779 313,819
Policyholders' dividends 107,102 106,312
Interest credited to policyholders' accounts 208,505 185,379
Operating expenses 141,242 158,900
Commissions and expense allowances 97,903 100,430
Sales practice remediation costs 40,575 11,900
Net deferral of policy acquisition costs (7,580) (14,617)
- ----------------------------------------------------------------------------------------------------
Total benefits and expenses 1,032,778 980,257
- ----------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 27,675 64,374
Income tax (benefit) expense (1,020) 20,907
- ----------------------------------------------------------------------------------------------------
Income before minority interests 28,695 43,467
Minority interests 8,507 7,636
- ----------------------------------------------------------------------------------------------------
NET INCOME 20,188 35,831
OTHER COMPREHENSIVE INCOME, NET
Unrealized gains on securities, net 21,226 56,150
- ----------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 41,414 $ 91,981
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 68
<TABLE>
<CAPTION>
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAINED EARNINGS:
Balance at January 1 $ 755,872 $ 720,041
Net income 20,188 35,831
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 776,060 $ 755,872
===============================================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at January 1 $ 85,017 $ 28,867
Unrealized gains on securities, net 21,226 56,150
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 106,243 $ 85,017
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 69
<TABLE>
<CAPTION>
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,188 $ 35,831
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Accrued investment income 6,541 (5,037)
Policy liabilities 87,367 74,693
Deferred policy acquisition costs (7,580) (14,617)
Policyholders' dividends 1,362 1,603
Deferred income taxes (13,330) (20,747)
Net realized investment gains (8,450) (11,887)
Depreciation 6,977 3,715
Other 12,714 15,774
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 105,789 79,328
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 2,020,526 2,385,471
Cost of investments acquired (2,236,001) (2,647,628)
Other 14,656 7,091
- -------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (200,819) (255,066)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' deposits, including interest credited 563,606 670,780
Policyholders' withdrawals, including policy charges (452,184) (495,076)
Net (decrease) increase in borrowings under repurchase agreements (234,570) 234,570
Net increase (decrease) in securities lending liabilities 173,726 (139,652)
Other 20,221 9,061
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 70,799 279,683
- -------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (24,231) 103,945
CASH AND CASH EQUIVALENTS:
Beginning of year 372,180 268,235
- -------------------------------------------------------------------------------------------------------------------------
End of year $ 347,949 $ 372,180
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 70
NATIONAL LIFE INSURANCE COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Life Insurance Company (National Life) was chartered in 1848. 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. 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
224,000 policyholders and is licensed to do business in all 50 states and the
District of Columbia. About 23% 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' $3.1 billion of net assets represent thirteen mutual funds
managed on behalf of about 116,000 individual, corporate and institutional
shareholders worldwide.
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.
Available-for-sale debt securities and equity securities are reported at
estimated fair value. Debt and equity securities that experience declines in
value that are other than temporary are written down with a corresponding charge
to realized losses.
F-7
<PAGE> 71
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
net 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 estimated fair value.
Net 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 comprehensive income 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 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 comprehensive income, 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.
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 policyholders' interests in separate account assets, include
the actual investment performance of the respective accounts and are not
guaranteed. Separate account results relating to these policyholders' interests
are excluded from revenues and expenses.
F-8
<PAGE> 72
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.
Policyholders' account balances for universal life insurance and investment-type
annuities represent amounts that inure to the benefit of the policyholders
(before surrender charges).
POLICYHOLDERS' DIVIDENDS
Policyholders' 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 policyholder. 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 policyholders' accounts. Revenues for these policies consist of
mortality charges, policy administration fees and surrender charges deducted
from policyholders' accounts. Policy benefits charged to expense include benefit
claims in excess of related policyholders' 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.
F-9
<PAGE> 73
NOTE 3 - 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
1998 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS):
U.S. government obligations $ 315,567 $ 17,710 $ 1,024 $ 332,253
Government agencies, authorities
and subdivisions 124,411 13,626 29 138,008
Public utilities 392,211 21,944 678 413,477
Corporate 2,368,814 152,991 18,249 2,503,556
Private placements 670,467 36,929 10,501 696,895
Mortgage-backed securities 1,137,465 41,131 3,359 1,175,237
- -------------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,008,935 284,331 33,840 5,259,426
Preferred stocks 140,932 2,567 3,538 139,961
Common stocks 37,847 2,373 823 39,397
- ------------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 5,187,714 $ 289,271 $ 38,201 $ 5,438,784
==============================================================================================================================
1997
- ------------------------------------------------------------------------------------------------------------------------------
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
==============================================================================================================================
</TABLE>
F-10
<PAGE> 74
Unrealized gains and losses on available-for-sale debt and equity securities
included as a component of accumulated other comprehensive income and changes
therein for the years ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized gains on available-for-sale securities $ 20,136 $ 153,723
Net unrealized gains on separate accounts 1,543 3,047
Related minority interests (1,786) (9,360)
Related deferred policy acquisition costs 17,139 (44,378)
Related present value of future profits of insurance acquired (3,048) (10,138)
Related deferred income taxes (12,758) (36,744)
- --------------------------------------------------------------------------------------------------------------------
Increase in net unrealized gains 21,226 56,150
Balance, beginning of year 85,017 28,867
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 106,243 $ 85,017
====================================================================================================================
Balance, end of year includes:
Net unrealized gains on available-for-sale securities $ 251,070 $ 230,934
Net unrealized gains on separate accounts 5,815 4,272
Related minority interests (8,672) (6,886)
Related deferred policy acquisition costs (77,539) (94,678)
Related present value of future profits on insurance acquired (1,547) 1,501
Related deferred income taxes (62,884) (50,126)
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 106,243 $ 85,017
====================================================================================================================
</TABLE>
Net other comprehensive income for 1998 of $21.2 million is presented net of
reclassifications to net income for gross gains realized during the period of
$9.0 million and net of tax and deferred acquisition cost offsets of $6.6
million.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1998 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 $ 134,111 $ 136,343
Due after one year through five years 798,659 813,326
Due after five years through ten years 1,936,192 2,030,568
Due after ten years 1,002,508 1,103,952
Mortgage-backed securities 1,137,465 1,175,237
- -----------------------------------------------------------------------------------------------------
Total $ 5,008,935 $ 5,259,426
=====================================================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 is shown below (in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 1,167,190 $ 1,928,055
Gross realized gains $ 22,969 $ 27,318
Gross realized losses $ 16,578 $ 16,916
</TABLE>
F-11
<PAGE> 75
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 103% 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 and accrued expenses) were $193.5
million and $19.8 million at December 31, 1998 and 1997, 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, 1998. 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>
1998 1997
---------------------- --------------------
<S> <C> <C>
GEOGRAPHIC REGION
- -----------------
New England 3.8% 4.0%
Middle Atlantic 9.7 10.3
East North Central 9.3 8.8
West North Central 4.5 4.9
South Atlantic 25.7 29.1
East South Central 5.0 5.0
West South Central 10.3 10.8
Mountain 17.7 16.7
Pacific 14.0 10.4
- ---------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===============================================================================================================
PROPERTY TYPE
- -------------
Residential 0.2% 0.2%
Apartment 24.2 24.3
Retail 12.2 15.9
Office Building 35.0 34.0
Industrial 26.2 22.2
Hotel/Motel 0.8 0.9
Other Commercial 1.4 2.5
- ---------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===============================================================================================================
Total mortgage loans and real estate
(in thousands) $ 1,174,070 $ 1,088,096
===============================================================================================================
</TABLE>
F-12
<PAGE> 76
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 1,077,637 $ 965,760
Impaired loans without valuation allowances 11,757 9,413
- ----------------------------------------------------------------------------------------------------------
Subtotal 1,089,394 975,173
- ----------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowances 10,244 21,426
Related valuation allowances (1,134) (4,429)
- ----------------------------------------------------------------------------------------------------------
Subtotal 9,110 16,997
- ----------------------------------------------------------------------------------------------------------
Total $ 1,098,504 $ 992,170
==========================================================================================================
Impaired loans:
Average recorded investment $ 27,755 $ 34,076
Interest income recognized $ 3,124 $ 3,543
Interest received $ 2,818 $ 3,818
</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>
1998 1997
===========================================================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,564 $ 1,543
Impairment losses charged to valuation allowances (2,217) (1,419)
Changes to previously established valuation allowances (2,642) (2,978)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in valuation allowances (3,295) (2,854)
Balance, beginning of year 4,429 7,283
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,134 $ 4,429
===========================================================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 405,184 $ 392,674
Equity securities dividends 6,380 2,765
Mortgage loan interest 90,991 85,782
Policy loan interest 47,189 48,856
Real estate income 12,802 15,822
Other investment income 12,363 9,230
- -----------------------------------------------------------------------------------------------------
Gross investment income 574,909 555,129
Less: investment expenses 24,570 26,932
- -----------------------------------------------------------------------------------------------------
Net investment income $ 550,339 $ 528,197
=====================================================================================================
</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.
F-13
<PAGE> 77
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. Amortization of the
option premium is 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, offset by changes in the intrinsic
value of options held and changes in the fair value of futures. The call options
are included in other invested assets and are carried at amortized cost plus
intrinsic value, if any, of the call options as of the valuation date.
The notional amounts and net book value of options and futures at December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 79,754 $ 245,187
Futures $ 28,835 $ 27,892
====================================================================================================================
Book values:
Options: Net amortized cost $ 5,514 $ 4,058
Intrinsic value 18,953 7,876
- --------------------------------------------------------------------------------------------------------------------
Book value 24,467 11,934
Futures at fair value 463 630
- --------------------------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 24,930 $ 12,564
====================================================================================================================
</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>
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Fair Carrying Estimated Fair
Value Value Value Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 347,949 $ 347,949 $ 372,180 $ 372,180
Available-for-sale debt and equity securities 5,438,784 5,438,784 5,317,427 5,317,427
Mortgage loans 1,098,504 1,180,630 992,170 1,024,582
Policy loans 776,363 743,687 791,753 730,059
Derivatives 24,930 28,496 12,564 11,629
Investment products 2,507,012 2,522,940 2,642,511 2,503,727
Debt 78,088 75,141 80,085 82,314
</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).
F-14
<PAGE> 78
Derivatives estimated fair values are based on quoted values.
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 based on discounted cash flows using current
interest rates of similar securities.
NOTE 4 - 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>
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 453,859 $ 470,853
Reinsurance assumed 898 896
Reinsurance ceded (68,497) (72,732)
- -------------------------------------------------------------------------------------------------------
$ 386,260 $ 399,017
=======================================================================================================
Other income:
Direct $ 3,694 3,543
Reinsurance ceded 13,577 13,981
- -------------------------------------------------------------------------------------------------------
$ 17,271 $ 17,524
=======================================================================================================
Increase in policy liabilities:
Direct increase in policy liabilities $ 94,949 $ 112,577
Reinsurance assumed (4) 17
Reinsurance ceded 3,307 5,540
- -------------------------------------------------------------------------------------------------------
$ 98,252 $ 118,134
=======================================================================================================
Policy benefits:
Direct policy benefits $ 348,672 $ 393,082
Reinsurance assumed 1,286 12
Reinsurance ceded (3,179) (79,275)
- -------------------------------------------------------------------------------------------------------
$ 346,779 $ 313,819
=======================================================================================================
Policyholders' dividends:
Direct policyholders' dividends $ 110,630 $ 111,617
Reinsurance ceded (3,528) (5,305)
- -------------------------------------------------------------------------------------------------------
$ 107,102 $ 106,312
=======================================================================================================
</TABLE>
F-15
<PAGE> 79
NOTE 5 - 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>
1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 17,144 $ 41,654
Deferred (18,164) (20,747)
- ------------------------------------------------------------------- --------------------
Income taxes $ (1,020) $ 20,907
=================================================================== ====================
Expected income taxes $ 9,686 35.0% $ 22,531 35.0%
Differential earnings amount (7,953) (28.7) 4,581 7.1
Affordable housing tax credit (6,638) (24.0) (4,318) (6.7)
Net change in tax reserves 5,035 18.2 1,298 2.0
Other, net (1,150) (4.2) (3,185) (4.9)
- --------------------------------------------------------------------------------------------------------------------------------
Income taxes $ (1,020) $ 20,907
=================================================================== ====================
Effective federal income tax rate (3.7)% 32.5%
=================================================== ===================== ==================
</TABLE>
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Policy liabilities $ 185,294 $ 172,387
Other liabilities and accrued expenses 67,291 56,946
Other 4,761 4,294
- --------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 257,346 233,627
- --------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 126,380 126,914
Present value of future profits of insurance acquired 17,683 20,642
Net unrealized gain on available-for-sale securities 62,884 50,126
Debt and equity securities 16,947 9,253
Other 11,911 9,175
- --------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 235,805 216,110
- --------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 21,541 $ 17,517
==============================================================================================================
</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.
F-16
<PAGE> 80
NOTE 6 - 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 agents and a
non-contributory defined supplemental benefit plan for certain executives.
These non-qualified defined benefit pension 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
---------------------------------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 162,986 $ 180,075 $ 24,759 $ 24,351
Service cost (benefits earned during the current period) 2,849 4,467 547 630
Interest cost on benefit obligation 11,430 13,629 1,699 1,669
Actuarial losses (gains) 34,444 (19,077) 1,939 (3,587)
Benefits paid (22,185) (14,557) (1,061) (784)
1997 early retirement program:
Special termination benefits 10,878 2,480
Curtailment gain (3,630)
Settlement payments (8,799)
- ---------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 189,524 $ 162,986 $ 27,883 $ 24,759
===========================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 108,884 $ 97,566
Actual return on plan assets 7,200 23,337
Employer contributions 2,502
Benefits paid (16,039) (5,722)
1997 early retirement program settlement payments (8,799)
- ------------------------------------------------------------------------------------------------
Plan assets, end of year $ 100,045 $ 108,884
================================================================================================
FUNDED STATUS:
Benefit obligation $ 189,524 $ 162,986 $ 27,883 $ 24,759
Plan assets (100,045) (108,884)
- ---------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 89,479 54,102 27,883 24,759
Unrecognized actuarial gains (losses) (11,259) 28,485 2,526 4,548
Unrecognized prior service cost (1,152) (1,224)
- ---------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost (included in other liabilities) $ 78,220 $ 82,587 $ 29,257 $ 28,083
===========================================================================================================================
</TABLE>
F-17
<PAGE> 81
The components of net periodic benefit cost for the years ended December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 2,849 $ 4,467 $ 547 $ 630
Interest cost on benefit obligation 11,430 13,629 1,699 1,669
Expected return on plan assets (9,078) (8,636)
Net amortization and deferrals (1,167) (83) 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 (3,131) (2,917)
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating expenses) $ 903 $ 13,791 $ 2,235 $ 4,882
==============================================================================================================================
</TABLE>
F-18
<PAGE> 82
The total projected benefit obligation for non-qualified defined benefit pension
plans was $81.4 million and $69.1 million at December 31, 1998 and 1997,
respectively. The total accumulated benefit obligation for these plans was $75.2
million and $66.3 million at December 31, 1998 and 1997, respectively.
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.50% 6.75% 7.50%
Rate of increase in future compensation levels 5.00% 5.00%
Expected long term return on plan assets 9.00% 9.00%
</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 $3.2 million and the 1998
service and interest cost components of net periodic postretirement benefit cost
by about $0.1 million. Decreasing the assumed health care trend rates by one
percentage point in each year would reduce the APBO by about $2.6 million and
the 1998 service and interest cost components of net periodic postretirement
benefit cost by about $0.1 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.
NOTE 7 - DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,688 $ 69,685
$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.
6.57% Term Note: 8,400 10,400
$8.4 million, maturing March 1, 2002 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 $ 78,088 $ 80,085
====================================================================================================================
</TABLE>
F-19
<PAGE> 83
The aggregate annual maturities of debt for the next five years are as follows
(in thousands):
1999 2,000
2000 2,000
2001 2,000
2002 2,400
2003 -
NOTE 8 - SALES PRACTICE REMEDIATION COSTS
During 1997, several class action lawsuits were filed against National Life in
various states related to the sale of life insurance policies during the 1980's
and 1990's. National Life specifically denied any wrongdoing. National Life
agreed to a settlement of these class action lawsuits in June 1998. This
agreement was subsequently approved by the court in October 1998. The settlement
provides class members with various policy enhancement options and new product
purchase discounts. Class members may instead pursue alternative dispute
resolution according to predetermined guidelines. Management believes that while
the ultimate cost of this litigation is still uncertain, it is unlikely (after
considering existing provisions) to have a material adverse effect on National
Life's financial position.
NOTE 9 - 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>
1998 1997
---------------------------------------------------------------
Surplus/ Surplus/
Retained Retained
Earnings Net Income Earnings Net Income
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 373,063 $ 67,841 $ 342,614 $ 49,574
Asset valuation reserve 69,994 - 67,734 -
Interest maintenance reserve 52,826 (4,114) 56,940 (229)
Surplus notes (70,700) (2) (69,685) (3)
Non-admitted assets 17,033 - 20,874 -
Investments 650 13,991 (944) (18,856)
Deferred policy acquisition costs 428,453 (9,479) 437,932 (5,651)
Deferred income taxes 74,132 (1,588) 72,544 13,807
Policy liabilities (203,832) (17,483) (186,349) 7,449
Policyholders' dividends 64,205 529 64,734 2,206
Benefit plans (27,904) 9,922 (37,826) (1,732)
Sales remediation costs - (40,575) - (11,900)
Other changes, net (1,860) 1,146 (12,696) 1,166
- -----------------------------------------------------------------------------------------------------
GAAP retained earnings/net income $ 776,060 $ 20,188 $ 755,872 $ 35,831
=====================================================================================================
</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 New York Insurance Department to
financial statements prepared in accordance with generally accepted accounting
principles in making such determinations.
F-20
<PAGE> 84
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133), which establishes accounting and reporting
standards for derivative instruments. FAS 133 requires that an entity recognize
all derivatives as either assets or liabilities at fair value in the statement
of financial position, and establishes special accounting for the following
three types of hedges: fair value hedges, cash flow hedges, and hedges of
foreign currency exposures of net investments in foreign operations. The
statement is effective for fiscal years beginning after June 15, 1999. National
Life is currently assessing the impact of the adoption of FAS 133.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires that
certain costs incurred in developing internal use computer software be
capitalized and provides guidance for determining whether computer software is
considered to be for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. National Life adopted SOP 98-1 effective
January 1, 1998. The adoption of SOP 98-1 resulted in net after tax
capitalization (after current year amortization) of approximately $2 million in
software costs.
NOTE 11 - SUBSEQUENT EVENTS
On January 1, 1999, National Life converted from a mutual to a stock insurance
company as part of a reorganization into a mutual holding company corporate
structure.
Prior to the conversion, policyowners held policy contractual and membership
rights from National Life. The contractual rights, as defined in the various
insurance and annuity policies, remained with National Life after the
conversion. Membership interests held by policyowners of National Life at
December 31, 1998 were converted to membership interests in National Life
Holding Company, an upstream corporation. National Life Holding Company
currently owns all the outstanding shares of NLV Financial, which in turn
currently owns all the outstanding shares of National Life.
This reorganization was approved by policyowners of National Life and was
completed with the approval of the Vermont Department of Banking, Insurance,
Securities, and Health Care Administration.
F-21
<PAGE> 85
PART II
<PAGE> 86
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> 87
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents.
The facing sheet.
The prospectus consisting of ____ pages.
Undertaking to file reports.(9)
Rule 484 undertaking.(9)
Representation relating to fees and charges.(9)
The signatures.
Written consents of the following persons:
(a) Michelle S. Gatto, Esq.
(b) Kiri Parankirinathan, A.S.A., M.A.A.A.
(c) Sutherland, Asbill & Brennan,LLP.
(d) PricewaterhouseCoopers 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.(10)
(2) Not Applicable.
(3) (a) Form of Distribution Agreement between National Life
Insurance Company and Equity Services, Inc.(4)
(b)(1) Form of Equity Services, Inc. Branch Office Supervisor
Contract(10)
(b)(2) Form of Equity Services, Inc. Registered Representative
Contract(10)
(c) Schedule of Sales Commissions.(9)
(4) Not Applicable.
(5) (a) Specimen Sentinel Estate Provider Policy Form (Sex
Distinct)(8)
(b) Supplemental Term Insurance Rider(8)
(c) Endorsement for Unisex Policies(8)
(6) (a) Amended and Restated Charter of National Life
Insurance Company.(10)
(b) Amended and Restated Bylaws of National Life
Insurance Company.(10)
(7) Not Applicable.
(8) (a) Form of Participation Agreement by and among Market
Street Fund, Inc., National Life Insurance Company and
Equity Services, Inc.(3)
(a)(2) Form of Amendment No. 2 to Participation Agreement
among Market Street Fund, Inc., National Life Insurance
Company and 1717 Capital Management Company (formerly
PML Securities Company(5)
(a)(3) Form of Amendment No. 3 to Participation Agreement
among Market Street Fund, Inc., National Life Insurance
Company and 1717 Capital Management Company (formerly
PML Securities Company) (7)
(a)(4) Form of Amendment No. 4 to Participation Agreement
among Market Street Fund, Inc., National Life Insurance
Company, 1717 Capital Management Company (formerly
PML Securities Company) and LSW(9)
<PAGE> 88
(b) Form of Participation Agreement by and among The Alger
American Fund, National Life Insurance Company and Fred
Alger and Company(3)
(b)(2) Form of Amended Schedule A to the Participation
Agreement by and among The Alger American Fund,
National Life Insurance Company and Fred Alger and
Company(6)
(b)(3) Form of Amendment No. 2 to the Participation Agreement
by and among The Alger American Fund, National Life
Insurance Company and Fred Alger and Company(7)
(b)(4) Form of Amendment No. 3 to the Participation Agreement
by and among The Alger American Fund, National Life
Insurance Company, Fred Alger and Company and LSW(9)
(c) Form of Shareholder Services Agreement by and among
National Life Insurance Company and American Century
Investment Management, Inc.(5)
(d) Form of Participation Agreement by and among National
Life Insurance Company, Goldman Sachs Variable
Insurance Trust and Goldman Sachs & Co.(5)
(d)(1) Form of Amended Schedules to the Participation
Agreement by and among National Life Insurance Company,
Goldman Sachs Variable Insurance Trust and Goldman
Sachs & Co.(5)
(d)(2) Form of Amended Schedules to the Participation
Agreement by and among National Life Insurance Company,
Goldman Sachs Variable Insurance Trust and Goldman
Sachs & Co.(9)
(e) Form of Participation Agreement by and among National
Life Insurance Company and J. P. Morgan Series Trust
II(5)
(f) Form of Participation Agreement by and among
National Life Insurance Company, Neuberger Berman
Advisers Managers Trust, Advisers Managers Trust, and
Neuberger Berman Management Incorporated(5)
(g) Form of Participation Agreement by and between BT
Insurance Funds Trust, Bankers Trust Company and
National Life Insurance Company.
(9) Not Applicable.
(10)(a) Sentinel Benefit Provider Application Form.(8)
(11) Memorandum describing issuance, transfer and redemption
procedures.(9)
2. Opinion and Consent of D. Russell Morgan, as to the legality of the
securities being offered.
3. Not Applicable.
4. Not Applicable.
5. Not Applicable.
<PAGE> 89
6. Opinion and Consent of Kiri Parankirinathan, A.S.A., M.A.A.A., as to
actuarial matters pertaining to the securities being registered.
7. (a) Consent of PricewaterhouseCoopers LLP.
(b) Consent of Sutherland, Asbill & Brennan, LLP.
8. Powers of Attorney for Directors.(8)
A. Robert E. Boardman
B. Earle H. Harbison
C. A. Gary Shilling
- -----------------------------
(2)Incorporated herein by reference to the Form S-6 Registration Statement
(File No. 33-91938) for National Variable Life Insurance Account (VariTrak)
filed on May 5, 1995.
(3)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form
S-6 Registration Statement (File No. 33-91938) for National Variable Life
Insurance Account (VariTrak) filed December 29, 1995.
(4)Incorporated herein by reference to Post-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No.33-91938) for National Variable
Life Insurance Account (VariTrak) filed March 12, 1996, Accession Number
0000950133-96-000202
(5)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No. 333-44723) for National Variable
Life Insurance Account (Sentinel Estate Provider filed April 16, 1998),
Accession Number 0000950133-98-001468
(6)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form
N-4 Registration Statement (file No. 333-19583) for National Variable
Annuity Account II (Sentinel Advantage) filed May 28, 1997.
(7)Incorporated herein by referenced to Pre-Effective Amendment No. 1 to the
Form N-4 Registration Statement (File No. 333-47363 ) for LSW Variable
Annuity Account I (RetireMax) filed July 31, 1998.
(8)Incorporated herein by reference to the S-6 Registration Statement (File No.
333-67003) filed on November 9, 1999.
(9)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No. 333-67003) for National Variable
Life Insurance Account (COLI) filed February 8, 1999.
(10)Incorporated herein by reference to Pre-Effective Amendment No. 2 to the
Form S-6 Registration Statement (File No. 333-67003) for National Variable
Life Insurance Account (COLI) filed February 11, 1999.
<PAGE> 90
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
Post-Effective Amendment No. 1 to the 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 5 day of May, 1999.
NATIONAL VARIABLE LIFE
INSURANCE ACCOUNT (Registrant)
By: NATIONAL LIFE INSURANCE COMPANY
Attest: /s/ Christine M. Bilbrey By: /s/ Patrick E. Welch
------------------------- ---------------------------
Christine M. Bilbrey Patrick E. Welch
Assistant Secretary Chairman of the Board and
Chief Executive Officer
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, National Life
Insurance Company 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. 1
to the Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, and its seal fixed and attested, in the City of
Montpelier and the State of Vermont, on the 5th day of May, 1999.
NATIONAL LIFE INSURANCE COMPANY
(SEAL) (Depositor)
Attest: /s/ Christine M. Bilbrey By: /s/ Patrick E. Welch
------------------------- ---------------------------
Christine M. Bilbrey Patrick E. Welch
Assistant Secretary Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 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 5/5/99
- --------------------- and Chief Executive Officer, ---------
Patrick E. Welch and Director
/s/ Thomas H. MacLeay President & Chief Operating 5/5/99
- ----------------------- Officer, and Director ---------
Thomas H. MacLeay
/s/ William A. Smith Executive Vice President & 5/5/99
- ----------------------- Chief Financial Officer ---------
William A. Smith
Robert E. Boardman* Director
- ------------------ ---------
Robert E. Boardman
</TABLE>
<PAGE> 92
<TABLE>
<S> <C> <C>
Earle H. Harbison, Jr.* Director
- ---------------------- -------------
Earle H. Harbison, Jr.
A. Gary Shilling* Director
- ----------------- -------------
A. Gary Shilling
</TABLE>
*By /s/ Patrick E. Welch Date: May 5, 1999
-----------------------------
Patrick E. Welch
Pursuant to Power of Attorney
<PAGE> 93
Exhibit Index
1.A.(8)(g) - Form of Participation Agreement by and between BT Insurance Funds
Trust, Bankers Trust Company and National Life Insurance Company.
2. Opinion and Consent of Michele S. Gatto, as to the legality of the
securities being offered.
6. Opinion and Consent of Kiri Parankirinathan, A.S.A., M.A.A.A., as to
actuarial matters pertaining to the securities being registered.
7. (a) Consent of PricewaterhouseCoopers LLP
(b) Consent of Sutherland, Asbill & Brennan, LLP
<PAGE> 1
EXHIBIT 2
May 5, 1999
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. 1 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 Sentinel Benefit Provider
variable universal life insurance policies intended primarily for the Corporate
Market ("Policies") to be offered by National Life. Under the Policies, amounts
will be allocated by National Life to the Separate Account as described in the
prospectus included in the Registration Statement to support reserves for such
Policies.
In my capacity as General Counsel and Senior Vice President of National
Life, I have examined all such corporate records of National Life and such
other documents and laws as I consider appropriate as a basis for the opinion
hereinafter expressed. Based upon such examination, I am of the opinion that:
1. National Life is a corporation duly organized and validly existing
under the laws of the State of Vermont.
2. The Separate Account has been duly created and is validly existing as
a separate account pursuant to Title 8, Vermont Statutes Annotated, Sections
3855 to 3859.
3. The portion of the assets to be held in the Separate Account equal to
the reserves and other liabilities under the Policies is not chargeable with
liabilities arising out of any other business National Life may conduct.
4. The Policies have been duly authorized by National Life and, when
issued as contemplated by the Registration Statement, will constitute legal,
validly issued and binding obligations of National Life in accordance with their
terms.
I hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to my name under the heading "Legal
Matters" in the prospectus.
Very truly yours,
Michele S. Gatto
Senior Vice President
and General Counsel.
<PAGE> 1
EXHIBIT 6
May 4, 1999
National Life Insurance Company
National Life Drive
Montpelier, VT 05604
Ladies and Gentlemen:
In my capacity as a consultant to National Life Insurance Company, I have
provided actuarial advice concerning: (a) the preparation of Post Effective
Amendment No. 1 to the registration statement for the 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 the Sentinel Benefit Provider Variable Universal Life
Insurance Policies intended primarily for the Corporate Market (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, Net Cash Surrender Values,
Account Values, and accumulated premiums in Appendix A of the prospectus (the
"Prospectus") contained in the Registration Statement, based on the assumptions
stated in the illustrations, are consistent with the assumptions stated in the
Policies. The rate structure of the Policies has not been designed so as to make
the relationship between premiums and benefits as shown in the illustrations,
appear to be disproportionately more favorable to the prospective purchasers of
Policies, who are male non-smokers age 40 who undergo medical underwriting, 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
prospectus entitled "Detailed Description of Policy Provisions," "Charges and
Deductions," and "Policy Rights and Privileges," 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. 1 to the Registration Statement and the use of my
name under the heading "Experts" in the prospectus contained in the Registration
Statement.
Sincerely,
Kiri Parankirinathan, A.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. 1 to the Registration Statement on Form S-6 of our
report dated March 2, 1999, relating to the consolidated financial statements
of National Life Insurance Company for the years ended 1998 and 1997, which
appear in such Prospectus. We also consent to the reference to us under the
heading "Experts" in the Prospectus.
PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
May 5, 1999
<PAGE> 1
EXHIBIT 7(b)
[SUTHERLAND, ASBILL & BRENNAN LLP LETTERHEAD]
May 5, 1999
STEPHEN E. ROTH
DIRECT LINE: (202) 383-0158
Internet:[email protected]
Board of Directors
National Life Insurance Company
National Life Drive
Montpelier, Vermont 05604
Ladies and 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. 1 to
the registration statement on Form S-6 for the National Variable Life Insurance
Account (File No. 333-67003). 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 LLP
by /s/ Stephen E. Roth
------------------------
Stephen E. Roth
<PAGE> 1
Exhibit 8(g)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT made as of the 26th day of _March____________, 1999 by and
among BT Insurance Funds Trust ("TRUST"), a Massachusetts business trust,
Bankers Trust Company ("ADVISER"), a New York banking corporation, and NATIONAL
LIFE INSURANCE COMPANY ("LIFE COMPANY"), a life insurance company organized
under the laws of the State of Vermont.
WHEREAS, TRUST is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "'40 Act"), as
an open-end, diversified management investment company; and
WHEREAS, TRUST is comprised of several series funds (each a "Portfolio"),
with those Portfolios currently available being listed on Appendix A hereto; and
WHEREAS, TRUST was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable Contracts")
offered by life insurance companies through separate accounts ("Separate
Accounts") of such life insurance companies ("Participating Insurance
Companies"); and
WHEREAS, TRUST may also offer its shares to certain qualified pension and
retirement plans ("Qualified Plans"); and
WHEREAS, TRUST has received an order from the SEC, granting Participating
Insurance Companies and their separate accounts exemptions from the provisions
of Sections 9(a), 13(a), 15(a) and 15(b) of the '40 Act, and Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios of the TRUST to be sold to and held by Variable Contract Separate
Accounts of both affiliated and unaffiliated Participating Insurance Companies
and Qualified Plans ("Exemptive Order"); and
WHEREAS, LIFE COMPANY has established or will establish one or more
Separate Accounts to offer Variable Contracts and is desirous of having TRUST as
one of the underlying funding vehicles for such Variable Contracts; and
WHEREAS, ADVISER is a "bank" as defined in the Investment Advisers Act of
1940, as amended (the "Advisers Act") and as such is excluded from the
definition of "Investment Adviser" and is not required to register as an
investment adviser pursuant to the Advisers Act; and
WHEREAS, ADVISER serves as the TRUST's investment adviser; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, LIFE COMPANY intends to purchase shares of TRUST to fund the
aforementioned Variable Contracts and TRUST is authorized to sell such shares to
LIFE COMPANY at such shares' net asset value;
1
<PAGE> 2
NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY,
TRUST, and ADVISER agree as follows:
Article I. SALE OF TRUST SHARES
1.1 TRUST agrees to make available to the Separate Accounts of LIFE COMPANY
shares of the selected Portfolios as listed on Appendix B for investment of
purchase payments of Variable Contracts allocated to the designated Separate
Accounts as provided in TRUST's Registration Statement.
1.2 TRUST agrees to sell to LIFE COMPANY those shares of the selected
Portfolios of TRUST which LIFE COMPANY orders, executing such orders on a daily
basis at the net asset value next computed after receipt by TRUST or its
designee of the order for the shares of TRUST. For purposes of this Section 1.2,
LIFE COMPANY shall be the designee of TRUST for receipt of such orders from the
designated Separate Account and receipt by such designee shall constitute
receipt by TRUST; provided that LIFE COMPANY receives the order by 4:00 p.m. New
York time and TRUST receives notice from LIFE COMPANY by telephone or facsimile
(or by such other means as TRUST and LIFE COMPANY may agree in writing) of such
order by 9:00 a.m. New York time on the next Business Day. "Business Day" shall
mean any day on which the New York Stock Exchange is open for trading and on
which TRUST calculates its net asset value pursuant to the rules of the SEC.
1.3 TRUST agrees to redeem on LIFE COMPANY's request, any full or
fractional shares of TRUST held by LIFE COMPANY, executing such requests on a
daily basis at the net asset value next computed after receipt by TRUST or its
designee of the request for redemption, in accordance with the provisions of
this Agreement and TRUST's Registration Statement. (In the event of a conflict
between the provisions of this Agreement and the Trust's Registration Statement,
the provisions of the Registration Statement shall govern.) For purposes of this
Section 1.3, LIFE COMPANY shall be the designee of TRUST for receipt of requests
for redemption from the designated Separate Account and receipt by such designee
shall constitute receipt by TRUST; provided that LIFE COMPANY receives the
request for redemption by 4:00 p.m. New York time and TRUST receives notice from
LIFE COMPANY by telephone or facsimile (or by such other means as TRUST and LIFE
COMPANY may agree in writing) of such request for redemption by 9:30 a.m. New
York time on the next Business Day.
1.4 TRUST shall furnish, on or before each ex-dividend date, notice to LIFE
COMPANY of any income dividends or capital gain distributions payable on the
shares of any Portfolio of TRUST. LIFE COMPANY hereby elects to receive all such
income dividends and capital gain distributions as are payable on a Portfolio's
shares in additional shares of the Portfolio. TRUST shall notify LIFE COMPANY or
its designee of the number of shares so issued as payment of such dividends and
distributions.
1.5 TRUST shall make the net asset value per share for the selected
Portfolio(s) available to LIFE COMPANY on a daily basis as soon as reasonably
practicable after the net asset value per
2
<PAGE> 3
share is calculated but shall use its best efforts to make such net asset value
available by 6:30 p.m. New York time. If TRUST provides LIFE COMPANY with
materially incorrect share net asset value information through no fault of LIFE
COMPANY, LIFE COMPANY on behalf of the Separate Accounts, shall be entitled to
an adjustment to the number of shares purchased or redeemed to reflect the
correct share net asset value. Any material error in the calculation of net
asset value per share, dividend or capital gain information shall be reported
promptly upon discovery to LIFE COMPANY.
1.6 At the end of each Business Day, LIFE COMPANY shall use the information
described in Section 1.5 to calculate Separate Account unit values for the day.
Using these unit values, LIFE COMPANY shall process each such Business Day's
Separate Account transactions based on requests and premiums received by it by
the close of trading on the floor of the New York Stock Exchange (currently 4:00
p.m. New York time) to determine the net dollar amount of TRUST shares which
shall be purchased or redeemed at that day's closing net asset value per share.
The net purchase or redemption orders so determined shall be transmitted to
TRUST by LIFE COMPANY by 9:30 a.m. New York Time on the Business Day next
following LIFE COMPANY's receipt of such requests and premiums in accordance
with the terms of Sections 1.2 and 1.3 hereof.
1.7 If LIFE COMPANY's order requests the purchase of TRUST shares, LIFE
COMPANY shall pay for such purchase by wiring federal funds to TRUST or its
designated custodial account on the day the order is transmitted by LIFE
COMPANY. If LIFE COMPANY's order requests a net redemption resulting in a
payment of redemption proceeds to LIFE COMPANY, TRUST shall use its best efforts
to wire the redemption proceeds to LIFE COMPANY by the next Business Day, unless
doing so would require TRUST to dispose of Portfolio securities or otherwise
incur additional costs. In any event, proceeds shall be wired to LIFE COMPANY
within the time period permitted by the '40 Act or the rules, orders or
regulations thereunder, and TRUST shall notify the person designated in writing
by LIFE COMPANY as the recipient for such notice of any delay by 3:00 p.m. New
York Time on the same Business Day that LIFE COMPANY transmits the redemption
order to TRUST. If LIFE COMPANY's order requests the application of redemption
proceeds from the redemption of shares to the purchase of shares of another Fund
advised by ADVISER, TRUST shall so apply such proceeds on the same Business Day
that LIFE COMPANY transmits such order to TRUST.
1.8 TRUST agrees that all shares of the Portfolios of TRUST will be sold
only to Participating Insurance Companies which have agreed to participate in
TRUST to fund their Separate Accounts and/or to Qualified Plans, all in
accordance with the requirements of Section 817(h)(4) of the Internal Revenue
Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of the
TRUST's Portfolios will not be sold directly to the general public.
1.9 TRUST may refuse to sell shares of any Portfolio to any person, or
suspend or terminate the offering of the shares of or liquidate any Portfolio of
TRUST if such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board of Trustees of the TRUST
(the "Board"), acting in good faith and in light of its duties under federal
3
<PAGE> 4
and any applicable state laws, deemed necessary, desirable or appropriate and in
the best interests of the shareholders of such Portfolios.
1.10 Issuance and transfer of Portfolio shares will be by book entry only.
Stock certificates will not be issued to LIFE COMPANY or the Separate Accounts.
Shares ordered from Portfolio will be recorded in appropriate book entry titles
for the Separate Accounts.
Article II. REPRESENTATIONS AND WARRANTIES
2.1 LIFE COMPANY represents and warrants that it is an insurance company
duly organized and in good standing under the laws of Vermont and that it has
legally and validly established each Separate Account as a segregated asset
account under such laws, and that Equity Services, Inc. the principal
underwriter for the Variable Contracts, is registered as a broker-dealer under
the Securities Exchange Act of 1934 (the "'34 Act").
2.2 LIFE COMPANY represents and warrants that it has registered or, prior
to any issuance or sale of the Variable Contracts, will register each Separate
Account as a unit investment trust ("UIT") in accordance with the provisions of
the '40 Act and cause each Separate Account to remain so registered to serve as
a segregated asset account for the Variable Contracts, unless an exemption from
registration is available.
2.3 LIFE COMPANY represents and warrants that the Variable Contracts will
be registered under the Securities Act of 1933 (the "'33 Act") unless an
exemption from registration is available prior to any issuance or sale of the
Variable Contracts, and that the Variable Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
(including all applicable blue sky laws) and further that the sale of the
Variable Contracts shall comply in all material respects with applicable state
insurance law suitability requirements.
2.4 LIFE COMPANY represents and warrants that the Variable Contracts are
currently and at the time of issuance will be treated as life insurance,
endowment or annuity contracts under applicable provisions of the Code, that it
will maintain such treatment and that it will notify TRUST immediately upon
having a reasonable basis for believing that the Variable Contracts have ceased
to be so treated or that they might not be so treated in the future.
2.5 TRUST represents and warrants that the Fund shares offered and sold
pursuant to this Agreement will be registered under the '33 Act and sold in
accordance with all applicable federal laws, and TRUST shall be registered under
the '40 Act prior to and at the time of any issuance or sale of such shares.
TRUST, subject to Section 1.9 above, shall amend its registration statement
under the '33 Act and the '40 Act from time to time as required in order to
effect the continuous offering of its shares. TRUST shall register and qualify
its shares for sale in accordance with the laws of the various states only if
and to the extent deemed advisable by TRUST.
2.6 TRUST represents and warrants that each Portfolio will comply with the
diversification requirements set forth in Section 817(h) of the Code, and the
rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and will notify LIFE COMPANY
4
<PAGE> 5
immediately upon having a reasonable basis for believing any Portfolio has
ceased to comply and will immediately take all reasonable steps to adequately
diversify the Portfolio to achieve compliance.
2.7 TRUST represents and warrants that each Portfolio invested in by the
Separate Account will be treated as a "regulated investment company" under
Subchapter M of the Code, and will notify LIFE COMPANY immediately upon having a
reasonable basis for believing it has ceased to so qualify or might not so
qualify in the future.
2.8 ADVISER represents and warrants that it shall perform its obligations
hereunder in compliance in all material respects with any applicable state and
federal laws.
Article III. PROSPECTUS AND PROXY STATEMENTS
3.1 TRUST shall prepare and be responsible for filing with the SEC and any
state regulators requiring such filing all shareholder reports, notices, proxy
materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of TRUST.
TRUST shall bear the costs of registration and qualification of shares of the
Portfolios, preparation and filing of the documents listed in this Section 3.1
and all taxes and filing fees to which an issuer is subject on the issuance and
transfer of its shares.
3.2 TRUST or its designee shall provide LIFE COMPANY, free of charge, with
as many copies of the current prospectus (or prospectuses), statements of
additional information, annual and semi-annual reports and proxy statements for
the shares of the Portfolios as LIFE COMPANY may reasonably request for
distribution to existing Variable Contract owners whose Variable Contracts are
funded by such shares. TRUST or its designee shall provide LIFE COMPANY, at LIFE
COMPANY's expense, with as many copies of the current prospectus (or
prospectuses) for the shares as LIFE COMPANY may reasonably request for
distribution to prospective purchasers of Variable Contracts. If requested by
LIFE COMPANY, TRUST or its designee shall provide such documentation (including
a "camera ready" copy of the current prospectus (or prospectuses) as set in type
or, at the request of LIFE COMPANY, as a diskette in the form sent to the
financial printer) and other assistance as is reasonably necessary in order for
the parties hereto once a year (or more frequently if the prospectus (or
prospectuses) for the shares is supplemented or amended) to have the prospectus
for the Variable Contracts and the prospectus (or prospectuses) for the TRUST
shares printed together in one document. The expenses of such printing will be
apportioned between LIFE COMPANY and TRUST in proportion to the number of pages
of the Variable Contract and TRUST prospectus, taking account of other relevant
factors affecting the expense of printing, such as covers, columns, graphs and
charts; TRUST shall bear the cost of printing the TRUST prospectus portion of
such document for distribution only to owners of existing Variable Contracts
funded by the TRUST shares and LIFE COMPANY shall bear the expense of printing
the portion of such documents relating to the Separate Account; provided,
however, LIFE COMPANY shall bear all printing expenses of such combined
documents where used for distribution to prospective purchasers or to owners of
existing Variable Contracts not funded by the shares. In the event that LIFE
COMPANY requests that TRUST or its designee provide TRUST's prospectus in a
"camera
5
<PAGE> 6
ready" or diskette format, TRUST shall be responsible for providing the
prospectus (or prospectuses) in the format in which it is accustomed to
formatting prospectuses and shall bear the expense of providing the prospectus
(or prospectuses) in such format (e.g. typesetting expenses), and LIFE COMPANY
shall bear the expense of adjusting or changing the format to conform with any
of its prospectuses.
3.3 TRUST will provide LIFE COMPANY with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to the Portfolios promptly after the
filing of each such document with the SEC or other regulatory authority. LIFE
COMPANY will provide TRUST with at least one complete copy of all prospectuses,
statements of additional information, annual and semi-annual reports, proxy
statements, exemptive applications and all amendments or supplements to any of
the above that relate to a Separate Account promptly after the filing of each
such document with the SEC or other regulatory authority.
Article IV. SALES MATERIALS
4.1 LIFE COMPANY will furnish, or will cause to be furnished, to TRUST and
ADVISER, each piece of sales literature or other promotional material in which
TRUST or ADVISER is named, at least fifteen (15) Business Days prior to its
intended use. No such material will be used if TRUST or ADVISER objects to its
use in writing within ten (10) Business Days after receipt of such material.
4.2 TRUST and ADVISER will furnish, or will cause to be furnished, to LIFE
COMPANY, each piece of sales literature or other promotional material in which
LIFE COMPANY or its Separate Accounts are named, at least fifteen (15) Business
Days prior to its intended use. No such material will be used if LIFE COMPANY
objects to its use in writing within ten (10) Business Days after receipt of
such material.
4.3 TRUST and its affiliates and agents shall not give any information or
make any representations on behalf of LIFE COMPANY or concerning LIFE COMPANY,
the Separate Accounts, or the Variable Contracts issued by LIFE COMPANY, other
than the information or representations contained in a registration statement or
prospectus for such Variable Contracts, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports of
the Separate Accounts or reports prepared for distribution to owners of such
Variable Contracts, or in sales literature or other promotional material
approved by LIFE COMPANY or its designee, except with the written permission of
LIFE COMPANY.
4.4 LIFE COMPANY and its affiliates and agents shall not give any
information or make any representations on behalf of TRUST or concerning TRUST
other than the information or representations contained in a registration
statement or prospectus for TRUST, as such registration statement and prospectus
may be amended or supplemented from time to time, or in sales literature or
other promotional material approved by TRUST or its designee, except with the
written permission of TRUST.
6
<PAGE> 7
4.5 For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without limitation,
advertisements (such as material published, or designed for use, in a newspaper,
magazine or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures or other public media),
sales literature (such as any written communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, or reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees, registration statements,
prospectuses, statements of additional information, shareholder reports and
proxy materials, and any other material constituting sales literature or
advertising under National Association of Securities Dealers, Inc. ("NASD")
rules, the '40 Act, the '33 Act or rules thereunder.
Article V. POTENTIAL CONFLICTS
5.1 The parties acknowledge that TRUST has received an order from the SEC
granting relief from various provisions of the '40 Act and the rules thereunder
to the extent necessary to permit TRUST shares to be sold to and held by
Variable Contract separate accounts of both affiliated and unaffiliated
Participating Insurance Companies and Qualified Plans. The Exemptive Order
requires TRUST and each Participating Insurance Company to comply with
conditions and undertakings substantially as provided in this Section 5. The
TRUST will not enter into a participation agreement with any other Participating
Insurance Company unless it imposes the same conditions and undertakings as are
imposed on LIFE COMPANY hereby.
5.2 The Board will monitor TRUST for the existence of any material
irreconcilable conflict between the interests of Variable Contract owners of all
separate accounts and with participants of Qualified Plans investing in TRUST.
An irreconcilable material conflict may arise for a variety of reasons, which
may include: (a) an action by any state insurance regulatory authority; (b) a
change in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling or any similar action by
insurance, tax or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of TRUST are being managed; (e) a difference in voting instructions
given by Variable Contract owners; (f) a decision by a Participating Insurance
Company to disregard the voting instructions of Variable Contract owners and (g)
if applicable, a decision by a Qualified Plan to disregard the voting
instructions of plan participants.
5.3 LIFE COMPANY will report any potential or existing conflicts of which
it becomes aware to the Board. LIFE COMPANY will be responsible for assisting
the Board in carrying out its duties in this regard by providing the Board with
all information reasonably necessary for the Board to consider any issues
raised. The responsibility includes, but is not limited to, an obligation by the
LIFE COMPANY to inform the Board whenever it has determined to disregard
Variable Contract owner voting instructions. These responsibilities of LIFE
COMPANY will be carried out with a view only to the interests of the Variable
Contract owners.
7
<PAGE> 8
5.4 If a majority of the Board or majority of its disinterested Trustees,
determines that a material irreconcilable conflict exists affecting LIFE
COMPANY, LIFE COMPANY, at its expense and to the extent reasonably practicable
(as determined by a majority of the Board's disinterested Trustees), will take
any steps necessary to remedy or eliminate the irreconcilable material conflict,
including; (a) withdrawing the assets allocable to some or all of the Separate
Accounts from TRUST or any Portfolio thereof and reinvesting those assets in a
different investment medium, which may include another Portfolio of TRUST, or
another investment company; (b) submitting the question as to whether such
segregation should be implemented to a vote of all affected Variable Contract
owners and as appropriate, segregating the assets of any appropriate group
(i.e., variable annuity or variable life insurance Contract owners of one or
more Participating Insurance Companies) that votes in favor of such segregation,
or offering to the affected Variable Contract owners the option of making such a
change; and (c) establishing a new registered management investment company (or
series thereof) or managed separate account. If a material irreconcilable
conflict arises because of LIFE COMPANY's decision to disregard Variable
Contract owner voting instructions, and that decision represents a minority
position or would preclude a majority vote, LIFE COMPANY may be required, at the
election of TRUST, to withdraw the Separate Account's investment in TRUST, and
no charge or penalty will be imposed as a result of such withdrawal. The
responsibility to take such remedial action shall be carried out with a view
only to the interests of the Variable Contract owners.
For the purposes of this Section 5.4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
TRUST or ADVISER (or any other investment adviser of TRUST) be required to
establish a new funding medium for any Variable Contract. Further, LIFE COMPANY
shall not be required by this Section 5.4 to establish a new funding medium for
any Variable Contracts if any offer to do so has been declined by a vote of a
majority of Variable Contract owners materially and adversely affected by the
irreconcilable material conflict.
5.5 The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to LIFE COMPANY.
5.6 No less than annually, LIFE COMPANY shall submit to the Board such
reports, materials or data as the Board may reasonably request so that the Board
may fully carry out its obligations. Such reports, materials, and data shall be
submitted more frequently if deemed appropriate by the Board.
Article VI. VOTING
6.1 LIFE COMPANY will provide pass-through voting privileges to all
Variable Contract owners so long as the SEC continues to interpret the '40 Act
as requiring pass-through voting privileges for Variable Contract owners.
Accordingly, LIFE COMPANY, where applicable, will vote shares of the Portfolio
held in its Separate Accounts in a manner consistent with voting instructions
timely received from its Variable Contract owners. LIFE COMPANY will be
8
<PAGE> 9
responsible for assuring that each of its Separate Accounts that participates in
TRUST calculates voting privileges in a manner consistent with other
Participating Insurance Companies. LIFE COMPANY will vote shares for which it
has not received timely voting instructions, as well as shares it owns, in the
same proportion as its votes those shares for which it has received voting
instructions.
6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if Rule
6e-3 is adopted, to provide exemptive relief from any provision of the '40 Act
or the rules thereunder with respect to mixed and shared funding on terms and
conditions materially different from any exemptions granted in the Exemptive
Order, then TRUST, and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rule 6e-2 and Rule
6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such Rules are
applicable.
Article VII. INDEMNIFICATION
7.1 Indemnification by LIFE COMPANY. LIFE COMPANY agrees to indemnify and
hold harmless TRUST, ADVISER and each of their Trustees, directors, principals,
officers, employees and agents and each person, if any, who controls TRUST or
ADVISER within the meaning of Section 15 of the '33 Act (collectively, the
"Indemnified Parties") against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of LIFE COMPANY,
which consent shall not be unreasonably withheld) or litigation or threatened
litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of TRUST's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement or prospectus for the Variable Contracts or contained in the
Variable Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished in writing to
LIFE COMPANY by or on behalf of TRUST for use in the registration statement
or prospectus for the Variable Contracts or in the Variable Contracts or
sales literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Variable Contracts or TRUST shares; or
(b) arise out of or result from (i) statements or representations
(other than statements or representations contained in the registration
statement, prospectus or sales literature of TRUST not supplied by LIFE
COMPANY, or persons under its control) or (ii) wrongful conduct of LIFE
COMPANY or persons under its control, with respect to the sale or
distribution of the Variable Contracts or TRUST shares; or
9
<PAGE> 10
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, prospectus, or sales
literature of TRUST or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with information
furnished in writing to TRUST by or on behalf of LIFE COMPANY; or
(d) arise as a result of any failure by LIFE COMPANY to provide
substantially the services and furnish the materials under the terms of
this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by LIFE COMPANY in this Agreement or
arise out of or result from any other material breach of this Agreement by
LIFE COMPANY.
7.2 LIFE COMPANY shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party to the extent that such losses, claims,
damages, liabilities or litigation are attributable to such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement.
7.3 LIFE COMPANY shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified LIFE COMPANY in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify LIFE COMPANY of any
such claim shall not relieve LIFE COMPANY from any liability which it may have
to the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against an Indemnified Party, LIFE COMPANY shall be entitled to participate at
its own expense in the defense of such action. LIFE COMPANY also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from LIFE COMPANY to such party of LIFE
COMPANY's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and LIFE
COMPANY will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
7.4 Indemnification by TRUST. TRUST agrees to indemnify and hold harmless
LIFE COMPANY and each of its directors, officers, employees, and agents and each
person, if any, who controls LIFE COMPANY within the meaning of Section 15 of
the '33 Act (collectively, the "Indemnified Parties") against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of TRUST which consent shall not be unreasonably withheld)
or litigation or threatened litigation (including legal and other expenses)
10
<PAGE> 11
to which the Indemnified Parties may become subject under any statute, or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements are
related to the sale or acquisition of TRUST's shares or the Variable Contracts
and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration
statement or prospectus or sales literature of TRUST (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as to
any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished in writing to ADVISER or TRUST by or on behalf of
LIFE COMPANY for use in the registration statement or prospectus for TRUST
or in sales literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Variable Contracts or TRUST shares;
or
(b) arise out of or result from (i) statements or representations
(other than statements or representations contained in the registration
statement, prospectus or sales literature for the Variable Contracts not
supplied by ADVISER or TRUST or persons under its control) or (ii) gross
negligence or wrongful conduct or willful misfeasance of TRUST or persons
under its control, with respect to the sale or distribution of the Variable
Contracts or TRUST shares; or
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, prospectus, or sales
literature covering the Variable Contracts, or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such statement or omission or such
alleged statement or omission was made in reliance upon and in conformity
with information furnished in writing to LIFE COMPANY for inclusion therein
by or on behalf of TRUST; or
(d) arise as a result of (i) a failure by TRUST to provide
substantially the services and furnish the materials under the terms of
this Agreement; or (ii) a failure by a Portfolio(s) invested in by the
Separate Account to comply with the diversification requirements of Section
817(h) of the Code; or (iii) a failure by a Portfolio(s) invested in by the
Separate Account to qualify as a "regulated investment company" under
Subchapter M of the Code; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by TRUST in this Agreement or arise out
of or result from any other material breach of this Agreement by TRUST.
11
<PAGE> 12
7.5 TRUST shall not be liable under this indemnification provision with
respect to any losses, claims, damages, liabilities or litigation incurred or
assessed against an Indemnified Party to the extent that such losses, claims,
damages, liabilities or litigation are attributable to such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations and duties under this Agreement.
7.6 TRUST shall not be liable under this indemnification provision with
respect to any claim made against an Indemnified Party unless such Indemnified
Party shall have notified TRUST in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify TRUST of any such claim shall not relieve TRUST
from any liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified Parties, TRUST shall
be entitled to participate at its own expense in the defense thereof. TRUST also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from TRUST to such party of TRUST's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and TRUST will not
be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
Article VIII. TERM; TERMINATION
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of LIFE COMPANY or TRUST at any time from the date
hereof upon 180 days' notice, unless a shorter time is agreed to by the
parties;
(b) At the option of LIFE COMPANY, if TRUST shares are not reasonably
available to meet the requirements of the Variable Contracts as determined
by LIFE COMPANY. Prompt notice of election to terminate shall be furnished
by LIFE COMPANY, said termination to be effective ten days after receipt of
notice unless TRUST makes available a sufficient number of shares to
reasonably meet the requirements of the Variable Contracts within said
ten-day period;
(c) At the option of LIFE COMPANY, upon the institution of formal
proceedings against TRUST by the SEC, the NASD, or any other regulatory
body, the expected or anticipated ruling, judgment or outcome of which
would, in LIFE COMPANY's reasonable judgment, materially impair TRUST's
ability to meet and perform TRUST's obligations and duties hereunder.
Prompt notice of election to terminate
12
<PAGE> 13
shall be furnished by LIFE COMPANY with said termination to be effective
upon receipt of notice;
(d) At the option of TRUST, upon the institution of formal proceedings
against LIFE COMPANY and/or its broker-dealer affiliates by the SEC, the
NASD, or any other regulatory body, the expected or anticipated ruling,
judgment or outcome of which would, in TRUST's reasonable judgment,
materially impair LIFE COMPANY's ability to meet and perform its
obligations and duties hereunder. Prompt notice of election to terminate
shall be furnished by TRUST with said termination to be effective upon
receipt of notice;
(e) In the event TRUST's shares are not registered, issued or sold in
accordance with applicable state or federal law, or such law precludes the
use of such shares as the underlying investment medium of Variable
Contracts issued or to be issued by LIFE COMPANY. Termination shall be
effective upon such occurrence without notice;
(f) At the option of TRUST if the Variable Contracts cease to qualify
as annuity contracts or life insurance contracts, as applicable, under the
Code, or if TRUST reasonably believes that the Variable Contracts may fail
to so qualify. Termination shall be effective upon receipt of notice by
LIFE COMPANY;
(g) At the option of LIFE COMPANY, upon TRUST's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of LIFE COMPANY within ten days after written notice of such
breach is delivered to TRUST;
(h) At the option of TRUST, upon LIFE COMPANY's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of TRUST within ten days after written notice of such breach
is delivered to LIFE COMPANY;
(i) At the option of TRUST, if the Variable Contracts are not
registered, issued or sold in accordance with applicable federal and/or
state law. Termination shall be effective immediately upon such occurrence
without notice;
In the event this Agreement is assigned without the prior written consent
of LIFE COMPANY, TRUST, and ADVISER, termination shall be effective immediately
upon such occurrence without notice.
8.3 Notwithstanding any termination of this Agreement pursuant to Section
8.2 hereof, TRUST at its option may elect to continue to make available
additional TRUST shares, as provided below, for so long as TRUST desires
pursuant to the terms and conditions of this Agreement, for all Variable
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically, without
limitation, if
13
<PAGE> 14
TRUST so elects to make additional TRUST shares available, the owners of the
Existing Contracts or LIFE COMPANY, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in TRUST, redeem investments in
TRUST and/or invest in TRUST upon the payment of additional premiums under the
Existing Contracts. In the event of a termination of this Agreement pursuant to
Section 8.2 hereof, TRUST and ADVISER, as promptly as is practicable under the
circumstances, shall notify LIFE COMPANY whether TRUST elects to continue to
make TRUST shares available after such termination. If TRUST shares continue to
be made available after such termination, the provisions of this Agreement shall
remain in effect and thereafter either TRUST or LIFE COMPANY may terminate the
Agreement, as so continued pursuant to this Section 8.3, upon sixty (60) days'
prior written notice to the other party.
8.4 Except as necessary to implement Variable Contract owner initiated
transactions, or as required by state insurance laws or regulations, LIFE
COMPANY shall not redeem the shares attributable to the Variable Contracts (as
opposed to the shares attributable to LIFE COMPANY's assets held in the Separate
Accounts), and LIFE COMPANY shall not prevent Variable Contract owners from
allocating payments to a Portfolio that was otherwise available under the
Variable Contracts until thirty (30) days after the LIFE COMPANY shall have
notified TRUST of its intention to do so.
Article IX. NOTICES
Any notice hereunder shall be given by registered or certified mail return
receipt requested to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to TRUST:
BT Insurance Funds Trust
c/o First Data Investor Services Group, Inc.
One Exchange Place
53 State Street, Mail Stop BOS 865
Boston, MA 02109
Attn: Elizabeth Russell, Legal Dep't
and
c/o BT Alex. Brown
One South Street, Mail Stop 1-18-6
Baltimore, MD 21202
Attn: Mutual Fund Services
If to ADVISER:
Bankers Trust Company - U.S. Investment Management
14
<PAGE> 15
130 Liberty Street
New York, NY 10006
Attn.: Vinay Mendiratta, Mail Stop 2355
If to LIFE COMPANY:
National Life Insurance Company
National Life Drive
Montpelier, VT 05604
Attn: General Counsel
Notice shall be deemed given on the date of receipt by the addressee as
evidenced by the return receipt.
Article X. MISCELLANEOUS
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting exemptive
relief therefrom and the conditions of such orders.
10.5 It is understood and expressly stipulated that neither the
shareholders of shares of any Portfolio nor the Trustees or officers of TRUST or
any Portfolio shall be personally liable hereunder. No Portfolio shall be liable
for the liabilities of any other Portfolio. All persons dealing with TRUST or a
Portfolio must look solely to the property of TRUST or that Portfolio,
respectively, for enforcement of any claims against TRUST or that Portfolio. It
is also understood that each of the Portfolios shall be deemed to be entering
into a separate Agreement with LIFE COMPANY so that it is as if each of the
Portfolios had signed a separate Agreement with LIFE COMPANY and that a single
document is being signed simply to facilitate the execution and administration
of the Agreement.
10.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD and
state insurance regulators) and
15
<PAGE> 16
shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby.
10.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
10.8 If the Agreement terminates, the parties agree that Article 7 and
Sections 10.5, 10.6 and 10.7 shall remain in effect after termination.
10.9 No provision of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by TRUST,
ADVISER and the LIFE COMPANY.
10.10 No failure or delay by a party in exercising any right or remedy
under this Agreement will operate as a waiver thereof and no single or partial
exercise of rights shall preclude a further or subsequent exercise. The rights
and remedies provided in this Agreement are cumulative and not exclusive of any
rights or remedies provided by law.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Fund Participation Agreement as of the date and year first above
written.
BT INSURANCE FUNDS TRUST
By:
-----------------------------------------
Name:
Title:
BANKERS TRUST COMPANY
By:
-----------------------------------------
Name:
Title:
NATIONAL LIFE INSURANCE COMPANY
By:
-----------------------------------------
Name:
Title:
16
<PAGE> 17
APPENDIX A
To Participation Agreement by and among BT INSURANCE FUNDS TRUST, BANKERS TRUST
COMPANY and NATIONAL LIFE INSURANCE COMPANY
List of portfolios:
Equity 500 Index Fund
Small Cap Index Fund
EAFE Equity Index Fund
<PAGE> 18
APPENDIX B
To Participation Agreement by and among BT INSURANCE FUNDS TRUST, BANKERS TRUST
COMPANY and NATIONAL LIFE INSURANCE COMPANY
List of variable separate accounts:
National Variable Life Insurance Account
