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VARITRAK
VARIABLE UNIVERSAL LIFE INSURANCE
P R O S P E C T U S
DATED MAY 1, 2000, AS AMENDED DECEMBER 1, 2000
NATIONAL LIFE INSURANCE COMPANY Home Office: National Life Drive, Montpelier, Vermont 05604
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT Telephone: (800) 537-7003
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This prospectus describes the VariTrak policy, a variable universal
life insurance policy offered by National Life Insurance Company. This Policy
combines insurance and investment features. The policy's primary purpose is to
provide insurance protection on the life of the insured person. You 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.
We deduct certain charges from premium payments. Then these premium
payments go to the National Variable Life Insurance Account, a separate account
of National Life, or to the general account, or a combination of the two. The
general account pays interest at rates guaranteed to be at least 4%. The
separate account currently has twenty-eight subaccounts. Each subaccount buys
shares of a specific fund portfolio. The available funds are:
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SENTINEL VARIABLE PRODUCTS ALGER AMERICAN FUND AMERICAN CENTURY VARIABLE DREYFUS SOCIALLY RESPONSIBLE
TRUST PORTFOLIOS, INC. GROWTH FUND, INC.
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COMMON STOCK FUND GROWTH PORTFOLIO VP INCOME & GROWTH PORTFOLIO SOCIALLY RESPONSIBLE GROWTH
MID CAP GROWTH FUND LEVERAGED ALLCAP PORTFOLIO VP VALUE PORTFOLIO FUND, INC.
SMALL COMPANY FUND SMALL CAPITALIZATION PORTFOLIO
GROWTH INDEX FUND .
MONEY MARKET FUND
Managed by National Life Investment Managed by Fred Alger Managed by American Century Managed by The Dreyfus
Management Company, Inc. Management, Inc Investment Management, Inc. Corporation
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FIDELITY VARIABLE INSURANCE FIDELITY VARIABLE INSURANCE INVESCO VARIABLE
PRODUCTS FUND PRODUCTS FUND II INSURANCE FUNDS, INC. J.P. MORGAN SERIES TRUST II
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EQUITY-INCOME PORTFOLIO CONTRAFUND PORTFOLIO VIF - DYNAMICS FUND INTERNATIONAL OPPORTUNITIES
GROWTH PORTFOLIO INDEX 500 PORTFOLIO VIF - HEALTH SCIENCES FUND PORTFOLIO
HIGH INCOME PORTFOLIO INVESTMENT GRADE BOND PORTFOLIO VIF - TECHNOLOGY FUND SMALL COMPANY PORTFOLIO
OVERSEAS PORTFOLIO
Managed by INVESCO Group Managed by J. P. Morgan
Managed by Fidelity Investments Managed by Fidelity Investments Funds, Inc. Investment Management, Inc.
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MARKET STREET FUND, INC. NEUBERGER BERMAN ADVISERS STRONG VARIABLE INSURANCE STRONG OPPORTUNITY FUND
MANAGEMENT TRUST FUNDS, INC. II.
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BOND PORTFOLIO PARTNERS PORTFOLIO MID CAP GROWTH FUND II OPPORTUNITY FUND II
MANAGED PORTFOLIO
Managed by Sentinel Advisors Managed by Neuberger Berman Managed by Strong Capital Managed by Strong Capital
Company Management, Inc. Management, Inc. Management, Inc.
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The value of your policy will depend upon the investment results of the
funds you select. You bear the entire investment risk for all amounts
allocated to the separate account; 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 options. They describe the investment
objectives and the risks of the funds.
The value of your policy will also reflect our charges. These include a
premium tax charge, cost of insurance charges, a mortality and expense
risk charge, an administrative 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. You should keep it to refer to later.
Investments in these contracts are not deposits or obligations of, and
are not guaranteed or endorsed by, adviser of any of the underlying funds
identified above, the U.S. government, or any bank or bank affiliate.
Investments are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other governmental agency.
It may not be advantageous to purchase a policy as a replacement for
another type of life insurance or as a means to obtain additional
insurance protection if you already own another variable universal life
insurance policy.
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.
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TABLE OF CONTENTS
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Summary Description of the Policy.....................................................................1
The Policy ................................................................................1
The Separate Account.......................................................................2
Availability of Policy.....................................................................2
The Death Benefit..........................................................................2
Flexibility to Adjust Amount of Death Benefit..............................................2
Accumulated Value..........................................................................3
Allocation of Net Premiums.................................................................3
Transfers..................................................................................3
Free-Look Privilege........................................................................4
Charges Assessed in Connection with the Policy.............................................4
Loan Privilege.............................................................................7
Withdrawal of Cash Surrender Value.........................................................8
Surrender of the Policy....................................................................8
Available Automated Fund Management Features...............................................8
Tax Treatment..............................................................................8
Other Policies.............................................................................9
Illustrations..............................................................................9
Questions..................................................................................9
National Life Insurance Company, The Separate Account, and The Funds..................................10
National Life Insurance Company............................................................10
The Separate Account.......................................................................10
Sentinel Variable Products Trust...........................................................10
Alger American Fund........................................................................11
American Century Variable Portfolios, Inc..................................................12
Dreyfus Socially Responsible Growth Fund, Inc..............................................12
Fidelity Variable Insurance Products Fund and Fidelity Variable Insurance
Products Fund II........................................................................13
INVESCO Variable Insurance Funds, Inc......................................................14
J. P. Morgan Series Trust II...............................................................15
Market Street Fund, Inc....................................................................15
Neuberger Berman Advisers Management Trust.................................................16
Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund II, Inc..................17
Other Information..........................................................................17
The General Account........................................................................18
Detailed Description of Policy Provisions.............................................................18
Death Benefit..............................................................................18
Ability to Adjust Face Amount..............................................................20
How the Duration of the Policy May Vary....................................................21
Accumulated Value..........................................................................21
Payment and Allocation of Premiums.........................................................22
Charges and Deductions................................................................................27
Premium Tax Charge.........................................................................27
Surrender Charge...........................................................................27
Monthly Deductions.........................................................................29
Mortality and Expense Risk Charge..........................................................31
Withdrawal Charge..........................................................................31
Transfer Charge............................................................................31
Projection Report Charge...................................................................32
Other Charges..............................................................................32
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Policy Rights and Privileges..........................................................................32
Loan Privileges............................................................................32
Surrender Privilege........................................................................34
Withdrawal of Cash Surrender Value.........................................................34
Free-Look Privilege........................................................................36
Telephone Transaction Privilege............................................................36
Other Transfer Rights......................................................................37
Available Automated Fund Management Features...............................................37
Policy Rights Under Certain Plans..........................................................38
The General Account...................................................................................38
Minimum Guaranteed and Current Interest Rates..............................................38
Transfers from General Account.............................................................39
Other Policy Provisions...............................................................................39
Optional Benefits.....................................................................................43
Federal Income Tax Considerations.....................................................................45
Introduction...............................................................................45
Tax Status of the Policy...................................................................45
Tax Treatment of Policy Benefits...........................................................46
Special Rules for Employee Benefit Plans...................................................47
Possible Tax Law Changes...................................................................48
Possible Charges for National Life's Taxes.................................................48
Policies Issued in Conjunction with Employee Benefit Plans............................................48
Legal Developments Regarding Unisex Actuarial Tables..................................................48
Voting Rights.........................................................................................49
Changes in Applicable Law, Funding and Otherwise......................................................49
Officers and Directors of National Life...............................................................50
Distribution of Policies..............................................................................52
Policy Reports........................................................................................53
State Regulation......................................................................................53
Insurance Marketplace Standards Association...........................................................54
Experts...............................................................................................54
Legal Matters.........................................................................................54
Financial Statements..................................................................................54
Glossary..............................................................................................55
Appendix A-Illustration of Death Benefits, Accumulated Values and Cash Surrender Values...............A-1
Appendix B-Surrender Charge Target Premiums and Maximum Deferred Sales Charges........................B-1
Financial Statements..................................................................................F-1
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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.
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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 person is alive. The precise meanings of the
few capitalized terms used in this summary can be found in the Glossary, on
Pages 55 to 57.
THE POLICY
National Life Insurance Company issues the VariTrak variable universal
life insurance policy. This life insurance policy allows you, within limits, 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 which will provide a death benefit on the
death of the named insured person;
(2) A cash surrender value;
(3) Surrender and withdrawal rights and policy loan privileges; and
(4) A variety of additional insurance benefits (where provided by
optional riders, so long as those riders remain in force).
This policy is designed to help lessen the economic loss resulting
from the death of the insured person. 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, although you may
establish a schedule of planned periodic premiums. You may also, after a year
and within limits, increase or decrease the policy's face amount, and you may
change the death benefit option. The policy's value and death benefit will
fluctuate based on the investment results of the chosen fund portfolios, the
crediting of interest to the general account, and the deduction of charges.
Lapse. The policy will not lapse simply because you do not pay any
particular amounts of premiums. However, 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, if at
least specified amounts of premiums have been paid (these amounts are defined in
the Glossary as the Minimum Guarantee Premium). See "How the Duration of the
Policy May Vary," Page 21.
Optional Guaranteed Death Benefit Rider. In addition, if you buy the
optional Guaranteed Death Benefit Rider, your policy will not lapse even if its
value is not enough to pay the monthly charges, if you have paid at least the
Minimum Guarantee Premium, until the later of 20 years from the date the policy
is issued or the insured person attains age 70. See "Optional Benefits -
Guaranteed Death Benefit Rider," Page 44.
If you already have life insurance, you should consider whether or
not changing or adding to existing coverage would be advantageous. It may not be
advisable to purchase another policy as a replacement for an existing policy.
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THE SEPARATE ACCOUNT
The separate account is divided into subaccounts, 28 of which are
available under this policy. Each of these subaccounts buys shares of a
corresponding fund portfolio. See "National Life Insurance Company, the Separate
Account, and the Funds," Page 10.
We cannot give any assurance that any portfolio will achieve its
investment objectives. You bear the entire investment risk on the value of your
policy which you allocate to the separate account.
AVAILABILITY OF POLICY
We will issue this policy for insured persons from ages 0 to 85. The
minimum face amount is generally $50,000, although exceptions to this minimum
may be made for employee benefit plans. Before issuing a policy, we will require
that the proposed insured person meet certain underwriting standards. We will
assign the insured person to one of the following types of rate classes:
- Elite Preferred Nonsmoker
- Preferred Nonsmoker
- Standard Nonsmoker
- Preferred Smoker
- Standard Smoker
- Juvenile, or
- Substandard.
See "Issuance of a Policy," Page 22.
THE DEATH BENEFIT
As long as your policy remains in force, we will pay the death
benefit to your beneficiary, when we receive due proof of the death of the
insured person. The death benefit will be increased by any additional benefits
provided by a supplementary benefit rider. The death benefit will be reduced by
any outstanding policy loans and accrued interest, and any unpaid monthly
deductions.
There are two death benefit options available, which we call Option A
and Option B. You may choose which option will apply to your policy.
If you choose death benefit Option A, the death benefit will be based on
the greater of:
(a) face amount, or
(b) the Accumulated Value multiplied by a factor specified by federal
income tax law.
If you choose death benefit Option B, the death benefit will be based
on the greater of:
(a) the face amount plus the Accumulated Value, or
(b) the Accumulated Value multiplied by the same factor that applies to
option A.
See "Death Benefit Options," Page 18.
FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
After a year, you may adjust the death benefit by changing the death
benefit option or by increasing or decreasing the face amount of your policy.
(See "Change in Death Benefit Option," Page 20, and "Ability to Adjust Face
Amount," Page 20.)
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Any change in death benefit option or in the face amount may affect
the charges under your policy. If you increase the face amount, your monthly
charges will increase. A decrease in face amount may decrease the monthly
charges. (See "Cost of Insurance Charge," Page 29.)
If you request a decrease in face amount which would cause the policy
not to qualify as life insurance under federal tax law, we will not allow the
decrease.
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held in the policy
at any time. It equals the sum of the amounts held in the separate account and
the general account. (See "Calculation of Accumulated Value," Page 22.)
The Accumulated Value in the separate account will reflect:
- the investment performance of your chosen funds
- premiums paid
- transfers
- withdrawals
- policy loans
- loan repayments
- loan interest charged, and
- the charges assessed in connection with the policy.
We pay interest on Accumulated Value in the general account at rates
we declare in advance for specific periods. We guarantee that these rates will
be at least 4%. (See "The General Account," Page 38.)
The Accumulated Value will likely impact both the death benefit and
the cost of insurance charges.
ALLOCATION OF PREMIUMS
You will specify, in the application for your policy, the percentages
of premium to go to each subaccount of the separate account or to the general
account. You may change these percentages whenever you like. You may choose
among all 28 available subaccounts of the separate account. However, we may
limit the number of different subaccounts, other than the money market
subaccount, used in your policy over its entire life to 16.
We will allocate all premiums, after reduction for premium taxes,
received during the free-look period that are to go to the separate account to
the money market subaccount. At the end of the free look period, we will move
the amount in the money market subaccount (including investment experience) to
your chosen subaccounts. For this purpose, we will assume that the free-look
period ends 20 days after the date the policy is issued. Premiums received after
the free look period ends will be allocated directly to your chosen subaccounts.
(See "Allocation of Net Premiums," Page 25)
TRANSFERS
You may transfer the amounts in the subaccounts and the general
account. Transfers between the subaccounts or from the separate account into the
general account will be made on the day we receive the request. We limit
transfers out of the general account to the greater of $1000 or 25% of the
Accumulated Value in the general account. We also allow only one transfer out of
the general account per year. See "Transfers," Page 25.
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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 you paid.
This free-look period ends on the latest of:
(a) 45 days after you sign Part A of your application for the Policy
(b) 10 days after you receive the Policy, and
(c) 10 days after we mail or personally deliver to you a Notice of Withdrawal
Right,
or, in each case, any longer period provided by state law. To cancel your
policy, you must return the Policy to us or to our agent within such time with a
written request for cancellation. (See "Free-Look Privilege," Page 36.)
CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Summary of Policy Expenses.
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TRANSACTION EXPENSES
Premium Tax (as a percentage of premiums paid)......3.25%
Sales Load Imposed on Purchases.....................NONE
Surrender Charge....................................See Page 27
Withdrawal Charge................................... Lesser of 2% of amounts withdrawn or $25
Transfer Charge.....................................NONE*
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*We currently have no transfer charge, but we reserve the right to charge up to
$25 for each transfer in excess of five transfers in any one year.
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SEPARATE ACCOUNT AND POLICY CHARGES
Mortality and Expense Risk Charge (deducted daily)....................0.90% (as a percentage of separate account
Accumulated Value)
Cost of Insurance Charge (deducted monthly)...........................Varies by age, sex, Rate Class, policy size
and duration of the policy-See Pages 29
Administrative Charge (deducted monthly)..............................$90 per year
Rider Charges (deducted monthly)......................................See "Optional Benefits" on Page 43 for
charges for optional riders you may choose
to include in your policy
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ANNUAL EXPENSES OF UNDERLYING FUNDS(1) (for the year ended December 31, 1999):
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Management Other Total
Fee, after Expenses, Expenses,
expense
reimbursement after expense after expense
reimbursement reimbursement
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Sentinel Variable Products Trust
Common Stock Fund 0.00% 0.48% 0.48%
Mid Cap Growth Fund 0.19% 0.52% 0.71%
Small Company Fund 0.05% 0.52% 0.57%
Growth Index Fund 0.04% 0.56% 0.60%
Money Market Fund 0.00% 0.40% 0.40%
Alger:
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Leveraged AllCap Portfolio 0.85% 0.08% 0.93%
Alger American Small Capitalization 0.85% 0.05% 0.90%
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American Century Variable Portfolios, Inc.
VP Value Portfolio 1.00% 0.00% 1.00%
VP Income & Growth Portfolio 0.70% 0.00% 0.70%
Dreyfus Socially Responsible Growth Fund, Inc.
Socially Responsible Growth Fund, Inc. 0.75% 0.04% 0.79%
Fidelity: Variable Insurance Products Fund I
Equity Income Portfolio 0.48% 0.08% 0.56%
Growth Portfolio 0.58% 0.07% 0.65%
High Income Portfolio 0.58% 0.11% 0.69%
Overseas Portfolio 0.73% 0.14% 0.87%
Fidelity: Variable Insurance Products Fund II
Contrafund Portfolio 0.58% 0.07% 0.65%
Index 500 Portfolio 0.24% 0.04% 0.28%
Investment Grade Bond Portfolio 0.43% 0.11% 0.54%
INVESCO Variable Insurance Funds, Inc.
VIF Dynamics Fund 0.75% 0.51% 1.26%
VIF Health Sciences Fund 0.75% 0.73% 1.48%
VIF Technology Fund 0.75% 0.56% 1.31%
J.P. Morgan Series Trust II
International Opportunities Portfolio 0.60% 0.60% 1.20%
Small Company Portfolio 0.60% 0.55% 1.15%
Market Street Fund, Inc.:
Bond Portfolio 0.35% 0.17% 0.52%
Managed Portfolio 0.40% 0.16% 0.57%
Neuberger Berman Advisers Management Trust
Partners Portfolio 0.80% 0.07% 0.87%
Strong Variable Insurance Funds, Inc.
Mid Cap Growth Fund II 1.00% 0.10% 1.10%
Strong Opportunity Fund II 1.00% 0.10% 1.10%
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(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:
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MANAGEMENT OTHER TOTAL MUTUAL
FEES EXPENSES FUND EXPENSES
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Sentinel Variable Products Trust:
Common Stock Fund 0.47% 0.52% 0.99%
Mid Cap Growth Fund 0.49% 0.52% 1.01%
Small Company Fund 0.50% 0.52% 1.02%
Growth Index Fund 0.30% 0.56% 0.86%
Money Market Fund 0.25% 0.52% 0.77%
Fidelity VIP Fund-Equity Income Portfolio 0.48% 0.09% 0.57%
Fidelity VIP Fund-Growth Portfolio 0.58% 0.08% 0.66%
Fidelity VIP Fund-Overseas Portfolio 0.73% 0.18% 0.91%
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Fidelity VIP Fund II-Contrafund Portfolio 0.58% 0.09% 0.67%
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.10% 0.34%
INVESCO Variable Insurance Funds, Inc.:
VIF Dynamics Fund 0.75% 1.53% 2.28%
VIF Health Sciences Fund 0.75% 2.11% 2.86%
VIF Technology Fund 0.75% 0.78% 1.53%
J.P. Morgan International Opportunities 0.60% 1.38% 1.98%
J.P. Morgan Small Company 0.60% 1.97% 2.57%
Strong Mid Cap Growth Fund II 1,00% 0.20% 1.20%
Strong Opportunity Fund II 1.00% 0.20% 1.20%
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We expect these reimbursement arrangements to continue, but there are no legal
obligations to continue these arrangements for any particular period of time; if
they are terminated, the affected Portfolios' expenses may increase.
Premium Tax Charge. We deduct a premium tax charge from each premium
payment, to cover the cost of state and local premium taxes, and the federal DAC
tax. This charge is 3.25% of each premium. For qualified employee benefit plans,
the charge will be 2.00% of each premium rather than 3.25%. We may change the
amount of the charge deducted from future premiums if the applicable law
changes. (See "Premium Tax Charge," Page 27.)
Monthly Deductions. On the date of issue and each month thereafter,
we will take a deduction from the Accumulated Value equal to the sum of:
(a) the monthly cost of insurance charge
(b) the monthly administrative charge, and
(c) if applicable, a charge for any additional benefits added by rider.
We calculate the monthly cost of insurance charge by multiplying the
net amount at risk (that is, the unadjusted death benefit less the policy's
Accumulated Value) by the applicable cost of insurance rate(s). These rates will
depend upon the age, sex, and rate class of the insured person, the time the
coverage has been in force, your policy size, and on our expectations of future
mortality and expense experience. Our cost of insurance rates cannot exceed the
guaranteed maximum cost of insurance rates set forth in your policy. These
guaranteed maximum rates are based on the insured person's age, sex, rate class,
and the "1980 Commissioners Standard Ordinary Smoker and Nonsmoker Mortality
Table." (See "Cost of Insurance Charge," Page 29.)
The monthly administrative charge is $7.50. (See "Monthly
Administrative Charge," Page 31.)
After 10 years, we currently intend to apply a bonus under which the
Monthly Deductions will be reduced by 0.50% per annum of the Accumulated Value
in the separate account. (See "Bonus," Page 31.) However, we do not guarantee
such a bonus, except as required by the state of issue.
Surrender Charge. We impose a surrender charge if you surrender your
policy or it lapses at any time during the first 15 years after the policy issue
date or the date of any face amount increase. The surrender charge consists of a
deferred administrative charge and a deferred sales charge. (See "Surrender
Charge," Page 27.)
The deferred administrative charge is generally initially $2 per
$1,000 of initial face amount and of each subsequent face amount increase. The
charge is lower for coverage issued to insureds younger than 25 at issue. After
the first five years from the issue or increase date, the deferred
administrative charge declines linearly by month until the end of the fifteenth
year from issue date or increase date, when it becomes zero.
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The deferred sales charge is based on the initial face amount as well
as the face amount of any subsequent face amount increase, and the age, sex, and
rate class of the insured person. The initial face amount and each subsequent
face amount increase will each be unique coverage segments. For each coverage
segment the deferred sales charge will be level for the first five years after
the issue of the coverage segment, and then will decline linearly by month
through the end of the fifteenth year of the coverage segment as measured from
the coverage segment issue date. The deferred sales charge at issue will be
shown in your Policy.
Appendix B to this Prospectus contains a table showing the deferred
sales charge for male and female nonsmokers and smokers at each age at the time
a policy is issued, expressed as a dollar amount per $1,000 of initial face
amount.
Daily Charge Against the Separate Account (Mortality and Expense Risk
Charge). We assess a daily charge for assuming certain mortality and expense
risks incurred in connection with the policies. This charge is currently 0.90%
annually of the average daily net assets of the separate account. (See
"Mortality and Expense Risk Charge," Page 31.)
Withdrawal Charge. If you make a withdrawal from your policy, we assess a
withdrawal charge equal to the lesser of 2% of the amount withdrawn or $25. (See
"Withdrawal Charge," Page 31.)
Transfer Charge. You may transfer value among the subaccounts on any
business day, without charge. We have no current intent to impose a transfer
charge in the foreseeable future; however, we may impose in the future a charge
of $25 for each transfer in excess of five transfers in any one year. (See
"Transfer Charge," Page 31.)
Projection Report Charge. If you request a projection report, we may
impose a charge. (See "Projection Report Charge," Page 32.)
Other Charges. Shares of the Portfolios are purchased by the subaccounts
at net asset value, which reflects management fees and expenses deducted from
the assets of the Portfolios. These management fees and expenses are shown above
under "Annual Charges of Underlying Funds".
LOAN PRIVILEGE
After a year, you may borrow against your policy. The maximum amount
of all loans is the Cash Surrender Value less three times the most recent
monthly deduction. Policy loans may be taken, or repayments made, on any
business day.
We charge interest on Policy loans at a fixed rate of 6% per year.
Interest is added to the loan balance at the end of each policy year. 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 Accumulated Value in the general account as collateral for the policy
loan. We credit interest on amounts held in the general account as collateral
for policy loans at rates we declare prior to each calendar year. This rate will
be at least 4%.
We currently plan to credit interest on Accumulated Value held as
collateral for loans in the general account for policies that are more than 10
years old at rates which are 0.50% per annum higher than those that apply to
policies still in their first ten years. This bonus is not guaranteed, however,
except as required by the state of issue. We may decide, in our sole discretion,
upon prior notice to policy owners, not to credit the bonus. We also currently
plan to make preferred loans available when a policy is 10 years old. These
preferred loans will be limited in amount. For these preferred policy loans, we
will credit interest on the amount held in the general account as collateral at
an annual rate of 6%. However, we are not obligated to continue to make
preferred loans
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<PAGE> 11
available, and we will make these loans available in our sole discretion. (See
"Loan Privileges," Page 32.)
Loans may cause a policy to lapse, depending on investment
performance and the amount of the loan. If a policy is not a Modified Endowment
Contract, lapse with policy loans outstanding may result in adverse tax
consequences. (See "Tax Treatment of Policy Benefits," Page 46.)
WITHDRAWAL OF CASH SURRENDER VALUE
After a year, you may request a withdrawal of Cash Surrender Value.
Withdrawals must be at least $500 (except that we may permit smaller withdrawals
for employee benefit plans). Withdrawals cannot be more than the Cash Surrender
Value minus three times the most recent monthly deduction. We will take the
withdrawal amount from the subaccounts based on your instructions. If you do not
provide instructions, we will take the withdrawal from the subaccount in
proportion to the values in the subaccounts. If the values in the subaccounts
will not allow us to carry out your instructions, we will not process the
withdrawal until you provide further instructions. You may not allocate
withdrawals to the general account until all the value in the separate account
has been exhausted. (See "Withdrawal of Cash Surrender Value," Page 34)
SURRENDER OF THE POLICY
You may surrender your policy at any time and receive the cash
surrender value, if any. The cash surrender value will equal the Accumulated
Value less any policy loan with accrued interest and any surrender charge. (See
"Surrender Privilege," Page 34.)
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer, at no charge to you, two automated fund management
programs, Dollar Cost Averaging and Portfolio Rebalancing. For a description of
these features, see "Available Automated Fund Management Features," Page 37.
TAX TREATMENT
Life insurance contracts receive tax-favored treatment under current
federal income tax law. Assuming that your policy qualifies as a life insurance
contract for federal income tax purposes, you should not be taxed on any
increase in cash surrender value while your policy remains in force. Also, your
beneficiary generally should not be taxed on death benefit proceeds. 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, particularly if you pay the full amount of premiums permitted under
the policy. (See "Tax Status of the Policy," Page 45.)
A policy may be treated as a "Modified Endowment Contract" in some
situations. If your policy is a Modified Endowment Contract, then certain
pre-death distributions, including policy loans, will be treated first as a
distribution of taxable income and then as a return of basis or investment in
the contract. In addition, prior to age 59-1/2 any such distributions generally
will be subject to a 10% penalty tax. (For further discussion on the
circumstances under which a Policy will be treated as a Modified Endowment
Contract, See "Tax Treatment of Policy Benefits," Page 46.
If your 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. Loans will not be treated as
distributions. Neither distributions nor loans from a policy that is not a
Modified Endowment Contract are subject to the 10% penalty tax. (See
"Distributions Other Than Death Benefits from Policies that are not Modified
Endowment Contracts," Page 46.)
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<PAGE> 12
OTHER POLICIES
We offer other variable life insurance policies which also invest in the
same portfolios of the funds. These policies may have different charges that
could affect the value of the subaccounts and may offer different benefits more
suitable to your needs. To obtain more information about these policies, you may
write or call us at National Life Drive, Montpelier, Vermont 05604, (800)
537-7003.
ILLUSTRATIONS
Illustrations of how investment performance of the subaccounts may
cause the death benefit, the Accumulated Value and the cash surrender value to
vary are included in Appendix A commencing on Page A-1.
These illustrations of hypothetical values may help you understand
the long-term effects of different levels of investment performance, of charges
and deductions, and of electing one or the other death benefit option. They may
also be useful in 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.
QUESTIONS
If you have questions, you may write or call us at National Life Drive,
Montpelier, Vermont 05604, (800) 537-7003.
9
<PAGE> 13
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 its outstanding stock 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 Contracts, are voting members of National Life Holding Company.
National Life assumes all insurance risks under the Policy and its assets
support the Policy's benefits. On December 31, 1999, National Life's
consolidated assets were over $9.4 billion. (See "Financial Statements," Page
F-1.)
THE SEPARATE ACCOUNT
We established the Separate Account on February 1, 1985 under Vermont
law. It is a separate investment account to which we allocate assets to support
the benefits payable under the policies, other policies we currently issue, and
other variable life insurance policies we may issue in the future.
The Separate Account's assets are the property of National Life. 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 exposed to liabilities arising out of any other business
that we may conduct. The portion of the Separate Account's assets equal to the
reserves and other liabilities under the Policies may, however, be exposed to
liabilities arising from other subaccounts of the Separate Account that fund
other variable life insurance policies. The Separate Account may also include
amounts derived from expenses we have charged to the Policies (and other
policies) which we currently hold in the Separate Account, and amounts held to
support other variable life insurance policies we may issue. From time to time
we may move these additional amounts to our 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,
we may limit the number of different Subaccounts, other than the Money Market
Subaccount, used in any one Policy over its entire life to 16.
SENTINEL VARIABLE PRODUCTS TRUST
The Common Stock, Mid Cap Growth, Small Company, Growth Index and Money
Market Subaccounts of the Variable Account invest in shares of Sentinel Variable
Products Trust, a "series" type of mutual fund which is registered with the SEC
under the 1940 Act as a diversified open-end management investment company. Each
series of Sentinel Variable Products Trust shares represents an interest in a
separate portfolio within the Trust. They are purchased and redeemed by the
corresponding Subaccounts of the Variable Account. Sentinel Variable Products
Trust sells and redeems its shares at net asset value without a sales charge.
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<PAGE> 14
The investment objectives of Sentinel Variable Products Trust's Funds are
set forth below. The investment experience of each of the Subaccounts of the
Variable Account depends on the investment performance of the corresponding
Fund. There is no assurance that any Fund will achieve its stated objective.
The Common Stock Fund. The Common Stock Fund seeks a combination of
growth of capital, current income, growth of income and relatively low risk as
compared with the stock market as a whole, by investing in a diverse group of
common stocks of well-established companies.
The Mid Cap Growth Fund. The Mid Cap Growth Fund seeks growth of capital,
by focusing its investments on common stocks of mid-sized growing companies.
Income is not a factor in selecting stocks.
The Small Company Fund. The Small Company Fund seeks growth of capital,
by investing mainly in common stocks of small companies that National Life
Investment Management believes have attractive growth potential and are
attractively valued. Income is not a factor in selecting stocks.
The Growth Index Fund. The Growth Index Fund seeks to match, as closely
as possible before expenses, the performance of the S&P 500/BARRA Growth Index,
by investing in common stocks of the companies comprising the Index in
approximately the same weightings as the Index.
The Money Market Fund. The Money Market Fund seeks as high a level of
current income as is consistent with stable principal values and liquidity by
investing exclusively in dollar-denominated money market instruments, including
U.S. government securities, bank obligations, repurchase agreements, commercial
paper, and other corporate debt obligations.
National Life Investment Management Company, Inc. ("NLIMC") manages each
of the Funds of Sentinel Variable Products Trust. NLIMC is registered with the
SEC as an investment adviser under the Investment Advisers Act of 1940. NLIMC is
a wholly owned subsidiary of National Life.
A full description of Sentinel Variable Products Trust, its investment
objectives and policies, its risks, expenses, and other aspects of its operation
is contained in the attached Prospectus for Sentinel Variable Products Trust,
which you should read together with this Prospectus.
ALGER AMERICAN FUND
The Separate Account has three Subaccounts which invest exclusively in
shares of Portfolios of the Alger American 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. 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 either Portfolio will achieve its stated
objective.
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.
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<PAGE> 15
Alger American Leveraged AllCap Portfolio. This Portfolio seeks long-term
capital appreciation. It invests in the equity securities of companies of any
size which demonstrate promising growth potential. This Portfolio can leverage,
that is, borrow money, up to one-third of its total assets to buy additional
securities.
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. A small capitalization
company is one that has a market capitalization within the range of the
Russell(R) 2000 Growth Index or the S&P(R) SmallCap 600 Index.
The Alger American Alger American Growth Portfolio, the Alger American
Leveraged AllCap Portfolio and the Alger American Samll Capitalization 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 other aspects of their
operation is contained in the attached Prospectuses for the Alger American Small
Capitalization Portfolio, the Alger American Growth Portfolio and the Alger
American Leveraged AllCap Portfolio.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Separate 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.
Shares of these Portfolios will be purchased and redeemed by the Separate
Account at net asset value without a sales charge.
The investment objectives of the Portfolios of American Century Variable
Portfolios, Inc. in which the Subaccounts are expected to invest are set forth
below. The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that either
Portfolio will achieve its stated objective.
VP Value. To seek long-term capital growth. Income is a secondary
objective. The Portfolio will seek to achieve its investment objective by
investing in securities that management believes to be undervalued at the time
of purchase.
VP Income & Growth. To seek dividend growth, current income and capital
appreciation. The Portfolio will seek to achieve its investment objective by
investing in common stocks.
The VP Value Portfolio and the VP Income & Growth Portfolio of the
American Century Variable Portfolios, Inc. are managed by American Century
Investment Management, Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and other aspects of
their operation is contained in the attached Prospectuses for VP Value and VP
Income & Growth.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of The Dreyfus Socially Responsible Growth Fund, Inc. This Fund is
registered with the SEC as a diversified open-end management investment company.
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<PAGE> 16
The investment objective of The Dreyfus Socially Responsible Growth Fund,
Inc. is set forth below. The investment experience of each Subaccount depends
upon the investment performance of the underlying Fund. There is no assurance
that the Fund will achieve its stated objective.
The Dreyfus Socially Responsible Growth Fund, Inc. The Fund seeks to
provide capital growth, with current income as a secondary goal. To pursue these
goals, the Fund invests primarily in the common stock of companies that, in the
opinion of the Fund's management, meet traditional investment standards and
conduct their business in a manner that contributes to the enhancement of the
quality of life in America.
The Dreyfus Socially Responsible Growth Fund, Inc. is managed by The
Dreyfus Corporation. A full description of this Fund, its investment objectives
and policies, and the risks, expenses and other aspects of its operation is
contained in the attached Prospectus for The Dreyfus Socially Responsible Growth
Fund, Inc.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND
II
The Separate Account has four Subaccounts which invest exclusively in
shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund")
and three Subaccounts which invest exclusively in shares of Portfolios of the
Variable Insurance Products Fund II ("VIP Fund II"). Like the Market Street
Fund, the VIP Fund and the VIP II Fund are "series" type mutual funds registered
with the SEC as diversified open-end management investment companies issuing a
number of series or classes of shares, each of which represents an interest in a
Portfolio of the VIP Fund or VIP Fund II. Shares of these Portfolios are
purchased and redeemed by the Separate Account at net asset value without a
sales charge.
The Equity-Income, Growth, High Income, and Overseas Portfolios of the
VIP Fund and the Contrafund, Index 500 and Investment Grade Bond Portfolios of
the VIP Fund II are managed by Fidelity Management and Research Company ("FMR").
Bankers Trust Company currently serves as sub-advisor to the Index 500
Portfolio. FMR has entered into sub-advisory agreements with FMR U.K., FMR Far
East, and Fidelity International Investment Advisors for the Overseas Portfolio.
The investment objectives of the Portfolios of the VIP Fund and the VIP
Fund II in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
corresponding Portfolio. There is no assurance that any Portfolio will achieve
its stated objective.
Equity-Income Portfolio. This Portfolio seeks reasonable income. The
Portfolio will also consider the potential for capital appreciation. The
Portfolio seeks a yield which exceeds the composite yield on the securities
comprising the Standard and Poor's 500 Composite Index of 500 Stocks ("S&P
500"). FMR normally invests at least 65% of the Portfolio's assets in
income-producing equity securities.
Growth Portfolio. This Portfolio seeks capital appreciation. FMR normally
invests the Portfolio's assets primarily in common stocks. FMR invests the
Portfolio's assets in companies FMR believes have above-average growth
potential.
High Income Portfolio. This Portfolio seeks a high level of current
income while also considering growth of capital. FMR normally invests at least
65% of the Portfolio's total assets in income producing debt securities,
preferred stocks, and convertible securities, with an emphasis on lower-quality
debt securities. The risks of investing in these high-yielding, high-risk
securities is described in the attached Prospectus for the VIP Fund, which
should be read carefully before investing.
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<PAGE> 17
Overseas Portfolio. This Portfolio seeks long term growth of capital. FMR
normally invests at least 65% of the Portfolio's total assets in foreign
securities. FMR normally invests the Portfolio's assets primarily in common
stocks.
Contrafund Portfolio. This Portfolio seeks long-term capital
appreciation. FMR normally invests the Portfolio's assets primarily in common
stocks. FMR invests the Portfolio's assets in securities of companies whose
value FMR believes is not fully recognized by the public.
Index 500 Portfolio. This Portfolio seeks investment results that
correspond to the total return of common stocks publicly traded in the United
States, as represented by the S&P 500. Bankers Trust Company normally invests at
least 80% of the Portfolio's assets in common stocks included in the S&P 500.
Investment Grade Bond Portfolio. This Portfolio seeks as high a level of
current income as is consistent with the preservation of capital. It normally
invests in U.S. dollar-denominated investment-grade bonds (those of medium and
high quality).
A full description of the VIP Fund and VIP Fund II, the investment
objectives and policies of the Portfolios, the risks, expenses and other aspects
of their operation is contained in the attached Prospectuses for the VIP Fund
and VIP Fund II.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
The Variable Account has three Subaccounts which invests exclusively in
shares of the following three series of INVESCO Variable Investment Funds, Inc.:
INVESCO VIF - Dynamics Fund
INVESCO VIF - Health Sciences Fund
INVESCO VIF - Technology Fund
INVESCO Variable Investment Funds, Inc. is a mutual fund registered with
the SEC as a diversified open-end management investment company issuing shares
of a number of Funds. Shares of these Funds are purchased and redeemed by the
Variable Account at net asset value without a sales charge.
The investment objectives of the INVESCO Variable Investment Funds, Inc.
Funds in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
underlying Fund. There is no assurance that any of these Funds will achieve its
stated objective.
INVESCO VIF - Dynamics Fund. This Fund seeks to make an investment grow.
It is actively managed. The Fund invests primarily in equity securities that
INVESCO believes will rise in price faster than other securities, as well as in
options and other investments whose values are based upon the values of equity
securities. The Fund invests primarily in common stocks of mid-sized U.S.
companies - those with market capitalizations between $2 billion and $15 billion
at the time of purchase - but also has the flexibility to invest in other types
of securities, including preferred stocks, convertible securities and bonds.
INVESCO VIF - Health Sciences Fund. This Fund seeks to make an investment
grow. It is aggressively managed. Although the Fund can invest in debt
securities, it primarily invests in equity securities that INVESCO believes will
rise in price faster than other securities, as well as in options and other
investments whose values are based upon the values of equity securities. The
Fund invests primarily in equity securities of companies that develop, produce
or distribute products or services related to health care. These companies
include, but are not limited to, medical equipment or supplies, pharmaceuticals,
health care facilities, and applied research and development of new products or
services.
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<PAGE> 18
INVESCO VIF - Technology Fund. This Fund seeks to make an investment
grow. It is aggressively managed. Although the Fund can invest in debt
securities, it primarily invests in equity securities that INVESCO believes will
rise in price faster than other securities, as well as in options and other
investments whose values are based upon the values of equity securities. The
Fund invests primarily in equity securities of companies engaged in
technology-related industries. These include, but are not limited to, applied
technology, biotechnology, communications, computers, electronics, Internet, IT
services and consulting, oceanography, office and factory automation,
networking, robotics, and video.
The INVESCO VIF Dynamics Fund, Health Sciences Fund and Technology Fund
are managed by INVESCO Funds Group, Inc. A full description of these Funds,
their investment objectives and policies, and the risks, expenses and other
aspects of their operation is contained in the attached Prospectuses for the
INVESCO VIF - Dynamics Fund, the INVESCO VIF - Health Sciences Fund, and the
INVESCO VIF - Technology Fund.
J.P. MORGAN SERIES TRUST II
The Separate 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. Shares of these Portfolios will be purchased and redeemed by
the Separate 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 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.
THE MARKET STREET FUND
The Bond and Managed 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. Each series of Market Street Fund shares
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<PAGE> 19
represents an interest in a separate portfolio within the Fund. They are
purchased and redeemed by the corresponding Subaccounts of the Separate Account.
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 you
may choose for your Policy 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 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.
Sentinel Advisors Company ("SAC") manages the Bond and Managed
Portfolios. SAC is registered 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. It is expected that SAC will be replaced as investment advisor
to these two Portfolios in the near future.
A full description of the Market Street Fund, its investment objectives
and policies, its risks, expenses, and other aspects of its operation is
contained in the attached Prospectus for the Market Street Fund, which you
should read together with this Prospectus.
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
The Separate 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 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 other aspects of its operation is
contained in the attached Prospectus for the Partners Portfolio of Neuberger
Berman Advisers Management Trust.
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<PAGE> 20
STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC.
The Separate Account has one Subaccount which invests exclusively in
shares of the Mid Cap Growth Fund II 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, and Strong
Opportunity Fund II is a single series mutual fund also registered with the SEC
as a diversified open-end management investment company. Shares of these Funds
will be purchased and redeemed by the Separate 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 Fund II. This Portfolio seeks capital growth. It invests
primarily in equity securities that the advisor believes have above-average
growth prospects.
Strong Opportunity Fund II, Inc. This Fund seeks capital appreciation
through investments in a diversified portfolio of equity securities.
The Mid Cap Growth Fund II series of Strong Variable Insurance Funds,
Inc., and Strong Opportunity Fund, Inc. are managed by Strong Capital
Management, Inc.
A full description of the Mid Cap Growth Fund II series of Strong
Variable Insurance Funds, Inc., and Strong Opportunity Fund, Inc. their
investment objectives and policies, and the risks, expenses and other aspects of
their operation is contained in the attached Prospectuses for the Mid Cap Growth
Fund II and Strong Opportunity Fund II, Inc.
OTHER INFORMATION
Contractual Arrangements. We have entered into or may enter into
agreements with Funds pursuant to which the advisor or distributor pays us a fee
based upon an annual percentage of the average net asset amount we invest on
behalf of the Separate Account and our other separate accounts. These
percentages may differ, and we may be paid a greater percentage by some
investment advisors or distributors than other advisors or distributors. These
agreements reflect administrative services provided by us. National Life
receives compensation from the adviser or distributor of the Funds in connection
with administration, distribution, or other services provided with respect to
the Fund and its availability through the Policy. The amount of this
compensation with respect to the Policy during 1999, which is based upon the
indicated percentages of assets of each Fund attributable to the Policy, is
shown below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Portfolios of the % of Assets Revenues National Life
Received During 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Fund 0.10% $12,728.64
-----------------------------------------------------------------------------------------------
American Century Variable Portfolios, Inc. 0.20% 1,160.23
-----------------------------------------------------------------------------------------------
Neuberger Berman Advisers Management Trust 0.15% 271.61
-----------------------------------------------------------------------------------------------
Strong VIF and Opportunity Fund II 0.20% 1,255.07
-----------------------------------------------------------------------------------------------
</TABLE>
With respect to Fidelity VIPF and VIPF II Funds, an agreement was reached
during 2000 under which National Life would receive compensation equal to 0.10%
of assets (except 0.05% with respect to the Index 500 Portfolio). National Life
will receive compensation equal to 0.20% for assets in Dreyfus Socially
Responsible Growth Fund, Inc. and equal to 0.25% for assets in INVESCO Variable
Insurance Funds, Inc. These arrangements may change from time to time, and may
include more Funds in the future.
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<PAGE> 21
Investment Results. The investment objectives and policies of certain
Portfolios are similar to the investment objectives and policies of mutual fund
portfolios other than the Portfolios that may be managed by the investment
adviser or manager. The investment results of the Portfolios, however, may be
higher or lower than the results of such other portfolios. There can be no
assurance, and no representation is made, that the investment results of any of
the Funds will be comparable to the investment results of any other portfolio,
even if the other portfolio has the same investment adviser or manager.
Resolving Material Conflicts. The participation agreements under which
the Funds sell their shares to Subaccounts of the Separate Account contain
varying termination provisions. In general, each party may terminate 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 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 us has not been
terminated. Should a Fund or Portfolio of such Fund decide not to sell its
shares to us, 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 with Accumulated Value allocated to
the Separate Account and the owners of life insurance policies and variable
annuities issued by such other companies whose values are allocated to one or
more other separate accounts investing in any one of the Funds.
In the event of a material conflict, we will take any necessary
steps, including removing the Separate Account from that Fund, to resolve the
matter. The Board of Directors or Trustees of the Funds intend to monitor events
in order to identify any material conflicts that possibly may arise and to
determine what action, if any, should be taken in response to those events or
conflicts. See the individual Fund Prospectuses for more information.
THE GENERAL ACCOUNT
For information on the General Account, see Page 38.
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, we will pay the Death
Benefit of the Policy, after due proof of the Insured's death (and fulfillment
of certain other requirements), to the named Beneficiary, unless the claim is
contestable in accordance with the terms of the Policy. You may choose to have
the proceeds paid in cash or under one of the available Settlement Options. (See
"Payment of Policy Benefits," Page 39.) The Death Benefit payable will be the
Unadjusted Death Benefit under the Death Benefit Option that is in effect,
increased by any additional benefits, and decreased by any outstanding Policy
loan and accrued interest and any unpaid Monthly Deductions.
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<PAGE> 22
Death Benefit Options. The Policy provides two Death Benefit Options:
Option A and Option B. You select the Death Benefit Option in the application
and may change it as described in "Change in Death Benefit Option," Page 20.
Option A. The Unadjusted Death Benefit is equal to the greater of:
(a) the Face Amount of the Policy, and
(b) the Accumulated Value multiplied by the specified percentage shown in the
table below:
<TABLE>
<CAPTION>
Attained Age Percentage Attained Age Percentage
------------ ---------- ------------ ----------
<S> <C> <C> <C>
40 and under 250% 60 130%
45 215% 65 120%
50 185% 70 115%
55 150% 75 and over 105%
</TABLE>
For Attained Ages not shown, the percentages will decrease by a ratable portion
of each full year.
Illustration of Option A -- For purposes of this illustration, assume
that the Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will generally
have an Unadjusted Death Benefit of $200,000. The specified percentage for an
Insured under Attained Age 40 on the Policy Anniversary prior to the date of
death is 250%. Because the Unadjusted Death Benefit must be equal to or greater
than 2.50 times the Accumulated Value, any time the Accumulated Value exceeds
$80,000 the Unadjusted Death Benefit will exceed the Face Amount. Each
additional dollar added to the Accumulated Value will increase the Unadjusted
Death Benefit by $2.50. Thus, a 35 year old Insured with an Accumulated Value of
$90,000 will have an Unadjusted Death Benefit of $225,000 (2.50 x $90,000), and
an Accumulated Value of $150,000 will have an Unadjusted Death Benefit of
$375,000 (2.50 x $150,000). Similarly, any time the Accumulated Value exceeds
$80,000, each dollar taken out of the Accumulated Value will reduce the
Unadjusted Death Benefit by $2.50. If at any time, however, the Accumulated
Value multiplied by the specified percentage is less than the Face Amount, the
Unadjusted Death Benefit will be the Face Amount of the Policy.
Option B. The Unadjusted Death Benefit is equal to the greater of:
(a) the Face Amount of the Policy plus the Accumulated Value, and
(b) the Accumulated Value multiplied by the specified percentage shown in the
table above.
Illustration of Option B -- For purposes of this illustration, assume
that the Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option B, a Policy with a face amount of $200,000 will generally
have an Unadjusted Death Benefit of $200,000 plus the Accumulated Value. Thus,
for example, a Policy with a $50,000 Accumulated Value will have an Unadjusted
Death Benefit of $250,000 ($200,000 plus $50,000). Since the specified
percentage is 250%, the Unadjusted Death Benefit will be at least 2.50 times the
Accumulated Value. As a result, if the Accumulated Value exceeds $133,333, the
Unadjusted Death Benefit will be greater than the Face Amount plus the
Accumulated Value. Each additional dollar added to the Accumulated Value above
$133,333 will increase the Unadjusted Death Benefit by $2.50. An Insured with an
Accumulated Value of $150,000 will have an Unadjusted Death Benefit of $375,000
(2.50 x $150,000), and an Accumulated Value of $200,000 will yield an Unadjusted
Death Benefit of $500,000 (2.50 x $200,000). Similarly, any time the Accumulated
Value exceeds $133,333, each dollar taken out of the Accumulated Value will
reduce the Unadjusted Death Benefit by $2.50. If at any time, however, the
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<PAGE> 23
Accumulated Value multiplied by the specified percentage is less than the Face
Amount plus the Accumulated Value, the Unadjusted Death Benefit will be the Face
Amount plus the Accumulated Value.
At Attained Age 99, Option B automatically becomes Option A.
Which Death Benefit Option to Choose. If you prefer to have premium
payments and favorable investment performance reflected partly in the form of an
increasing Death Benefit, you should choose Option B. If you are satisfied with
the amount of the Insured's existing insurance coverage and prefer to have
premium payments and favorable investment performance reflected to the maximum
extent in the Accumulated Value, you should choose Option A.
Change in Death Benefit Option. After the first Policy Year, you may
change the Death Benefit Option in effect by sending us a written request. There
is no charge to change the Death Benefit Option. The effective date of a change
will be the Monthly Policy Date 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 Accumulated Value. In the case of a change from
Option A to Option B, the Face Amount must be decreased by the Accumulated
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, Accumulated 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, Accumulated Value, Net Amount at Risk and Cost of
Insurance Charges will be different than if the change had not been made. In
determining whether a change is appropriate for you, the considerations
described in "Which Death Benefit Option to Choose" above.
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, 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 46.)
How the Death Benefit May Vary. The amount of the Death Benefit may vary
with the Accumulated Value. The Death Benefit under Option A will vary with the
Accumulated Value whenever the specified percentage of Accumulated Value exceeds
the Face Amount of the Policy. The Death Benefit under Option B will always vary
with the Accumulated Value because the Unadjusted Death Benefit equals the
greater of (a) the Face Amount plus the Accumulated Value and (b) the
Accumulated Value multiplied by the specified percentage.
ABILITY TO ADJUST FACE AMOUNT
You may, at any time after the first Policy Year, increase or decrease
the Policy's Face Amount by submitting a written application to us. There are
some limits on your ability to effect increases or decreases, which are
discussed below. The effective date of an increase will be the Monthly Policy
Date on or next following our approval of your request. The effective date of a
decrease is the Monthly Policy Date on or next following the date that we
receive your written request. Employee benefit plan Policies may adjust the Face
Amount even in Policy Year 1. An increase or decrease in Face Amount may have
federal tax consequences. (See "Tax Treatment Of Policy Benefits," Page 46.) The
effect of changes in Face Amount on Policy charges, as well as other
considerations, are described below.
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<PAGE> 24
Increase. A request for an increase in Face Amount may not be for less
than $25,000, or such lesser amount required in a particular state (except that
the minimum for employee benefit plans is $2000). You may not increase the Face
Amount after the Insured's Attained Age 85. To obtain the increase, you must
submit an application for the increase and provide evidence satisfactory to us
of the Insured's insurability.
On the effective date of an increase, and taking the increase into
account, the Cash Surrender Value must be at least equal to the Monthly
Deductions then due. If the Cash Surrender Value is not sufficient, the increase
will not take effect until you pay a sufficient additional premium payment to
increase the Cash Surrender Value.
An increase in the Face Amount will generally affect the total Net Amount
at Risk. This will normally 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 29).
Each increase in face amount will begin a new period of surrender charges
in effect for 15 years from the date of the increase. This additional surrender
charge is based on the face amount of the increase only. This additional
surrender charge is described in detail in the Surrender Charge section on page
27.
Decrease. The amount of the Face Amount after a decrease cannot be less
than 75% of the largest Face Amount in force at any time in the twelve months
immediately preceding our receipt of your request for the decrease. The Face
Amount after any decrease may not be less than the Minimum Face Amount, which is
generally currently $50,000. If a decrease in the Face Amount would result in
cumulative premiums exceeding the maximum premium limitations applicable for
life insurance under the Internal Revenue Code, we will not allow the decrease.
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) first, the increase in Face Amount provided by the most recent
increase;
(b) then the next most recent increases, in inverse chronological order;
and finally
(c) the Initial Face Amount.
HOW THE DURATION OF THE POLICY MAY VARY
Your Policy will remain in force as long as the Cash Surrender Value
of the Policy is sufficient to pay the Monthly Deductions and the charges under
the Policy. When the Cash Surrender Value is insufficient to pay the charges and
the Grace Period expires without an adequate premium payment by you, the Policy
will lapse and terminate without value. However, during the first five Policy
Years the Policy will not lapse, if you have paid the Minimum Guarantee Premium.
You have certain rights to reinstate your Policy, if it should lapse. (See
"Reinstatement," Page 26.)
In addition, an optional Guaranteed Death Benefit Rider is available
which will guarantee that the Policy will not lapse prior to age 70, or 20 years
from the Date of Issue of the Policy, if longer, regardless of investment
performance, if you have paid the Minimum Guarantee Premium as of each Monthly
Policy Date.
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held under the
Policy at any time. It is equal to the sum of the Policy's values in the
Separate Account and the General Account. The Accumulated
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<PAGE> 25
Value minus any applicable Surrender Charge, and minus any outstanding Policy
loans and accrued interest, is equal to the Cash Surrender Value. There is no
guaranteed minimum for the portion of the Accumulated Value in any of the
Subaccounts of the Separate Account. Because the Accumulated Value on any future
date depends upon a number of variables, it cannot be predetermined.
The Accumulated Value and Cash Surrender Value will reflect:
- the Net Premiums paid
- the investment performance of the Portfolios you have chosen
- the crediting of interest on non-loaned Accumulated Value in the
General Account and amounts held as Collateral in the General Account
- any transfers
- any Withdrawals
- any loans
- any loan repayments
- any loan interest charged, and
- charges assessed on the Policy.
Determination of Number of Units for the Separate Account. Amounts
allocated, transferred or added to a Subaccount of the Separate Account under a
Policy are used to purchase units of that Subaccount; units are redeemed when
amounts are deducted, transferred or withdrawn. The number of units a Policy has
in a Subaccount equals the number of units purchased minus the number of units
redeemed up to such time. For each Subaccount, the number of units purchased or
redeemed in connection with a particular transaction is determined by dividing
the dollar amount by the unit value.
Determination of Unit Value. The unit value of a Subaccount is equal
to the unit value on the immediately preceding Valuation Day multiplied by the
Net Investment Factor for that Subaccount on that Valuation Day.
Net Investment Factor. Each Subaccount of the Separate Account has
its own Net Investment Factor. The Net Investment Factor measures the daily
investment performance of the Subaccount. The factor will increase or decrease,
as appropriate, to reflect net investment income and capital gains or losses,
realized and unrealized, for the securities of the underlying portfolio or
series.
The asset charge for mortality and expense risks will be deducted in
determining the applicable Net Investment Factor. (See "Charges and Deductions -
Mortality and Expense Risk Charge," Page 31.)
Calculation of Accumulated Value. The Accumulated Value is determined
first on the Date of Issue and thereafter on each Valuation Day. On the Date of
Issue, the Accumulated Value will be the Net Premiums received, plus any
earnings prior to the Date of Issue, less any Monthly Deductions due on the Date
of Issue. On each Valuation Day after the Date of Issue, the Accumulated Value
will be:
(1) The aggregate of the values attributable to the Policy in
the Separate Account, determined by multiplying the number
of units the Policy has in each Subaccount of the Separate
Account by such Subaccount's unit value on that date; plus
(2) The value attributable to the Policy in the General Account
(See "The General Account," Page 38.)
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. If you do not pay the Minimum Initial Premium with your written
22
<PAGE> 26
application, it must be paid when the Policy is delivered. If the premium paid
is less than the Minimum Initial Premium, the balance of the Minimum Initial
Premium must be received within five days, or all premiums will be refunded.
The Minimum Face Amount of a Policy under our rules is generally $50,000;
however, exceptions may be made for employee benefit plans. We may revise our
rules from time to time to specify a different Minimum Face Amount for
subsequently issued policies. A Policy will be issued only on Insureds who have
an Issue Age of 85 or less and who provide us with satisfactory evidence of
insurability. Acceptance is subject to our underwriting rules. We may reject an
application for any reason permitted by law. (See "Distribution of Policies,"
Page 52.) A tax-favored arrangement, including qualified pension plans, should
carefully consider the costs and benefits of the Policy (such as asset
diversification) before purchasing a Policy since the tax-favored arrangement
itself provides for tax-sheltered growth.
From the time the application for a Policy is signed until the time the
Policy is issued, you can, subject to our underwriting rules, obtain temporary
insurance protection, pending issuance of the Policy, if you are able to answer
"no" to the Health Questions of the Receipt & Temporary Life Insurance Agreement
and submitting (a) a complete Application including any medical questionnaire
required, and (b) payment of the Minimum Initial Premium.
The amount of coverage under the Receipt & Temporary Life Insurance
Agreement is the lesser of the Face Amount applied for or $1,000,000 ($100,000
in the case of proposed Insureds age 70 or over). Coverage under the agreement
will end on the earliest of:
(a) the 90th day from the date of the agreement;
(b) the date that insurance takes effect under the Policy;
(c) the date a policy, other than as applied for, is offered to you;
(d) three days from the date we mail a notice of termination of coverage;
(e) the time you first learn that we have terminated the temporary life
insurance; or
(f) the time you withdraw the application for life insurance.
We offer a one time credit on conversions of eligible National Life term
insurance policies to a VariTrak Policy. If the term policy being converted has
been in force for at least twelve months, the amount of the credit is 12% of a
target amount used to determine commission payments. If the term policy being
converted has been in force for less than twelve months, the credit will be
prorated based on the number of months the term policy has been outstanding at
the time of conversion. For GRT term policies, the credit will be 18% of the
target amount used to determine commission payments if the GRT term policy has
been in force for at least two years but not more than five years. For GRT term
policies in force for less than two years, the credit is 0.5% per month for each
month in the first year, and 1.0% per month for each month in the second year.
For GRT policies in force more than five years, the credit decreases from 18% by
0.5% for each month beyond five years, until it becomes zero at the end of year
eight.
The amount of the credit will be added to the initial premium payment, if
any, you pay and will be treated as part of the Initial Premium for the Policy.
Thus, the credit will be included in premium payments for purposes of
calculating and deducting the Premium Tax Charge. If you surrender your Policy,
we will not recapture the credit. We will not include the amount of the credit
for purposes of calculating agent compensation for the sale of the Policy.
We also offer a one time credit to Home Office employees who purchase a
VariTrak Policy, as both Owner and Insured. This one time credit is calculated
differently from the credit described above; in particular, the amount of the
credit will be 50% of the target premium used in the calculation of commissions
on the Policy. Otherwise, the credit will be treated in the same manner as the
credit described above.
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<PAGE> 27
Amount and Timing of Premiums. Each premium payment must be at least $50.
You have considerable flexibility in determining the amount and frequency of
premium payments, within the limits discussed below.
You will at the time of application 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 premium reminder notice at the specified
interval. You may change the Planned Periodic Premium frequency and amount.
Also, under an Automatic Payment Plan, you can select a monthly payment schedule
pursuant to which premium payments will be automatically deducted from a bank
account or other source, rather than being "billed." We may allow, in certain
situations, Automatic Payment Plan payments of less than $50. We may require
that Automatic Payment Plans be set up for at least the Minimum Monthly Premium.
You are not required to pay the Planned Periodic Premiums in accordance
with the specified schedule. You may pay premiums whenever you like, and in any
amount (subject to the $50 minimum and the limitations described in the next
section). Payment of the Planned Periodic Premiums will not, however, guarantee
that the Policy will remain in force. Instead, the duration of the Policy
depends upon the Policy's Cash Surrender Value. Thus, even if you pay the
Planned Periodic Premiums, the Policy will lapse whenever the Cash Surrender
Value is insufficient to pay the Monthly Deductions and any other charges under
the Policy and if a Grace Period expires without an adequate payment by you
(unless the Policy is in its first five years, or you have purchased the
Guaranteed Death Benefit Rider, in either case so long as you have paid the
Minimum Guarantee Premium).
Any payments you make while there is an outstanding Policy loan will be
applied as premium payments rather than loan repayments, unless you notify us in
writing that the amount is to be applied as a loan repayment. You may not make
premium payments after the Insured reaches Attained Age 99. However, we permit
loan repayments after Attained Age 99.
Higher premium payments under Death Benefit Option A, until the
applicable percentage of Accumulated Value exceeds the Face Amount, will
generally result in a lower Net Amount at Risk. This will produce lower Cost of
Insurance Charges against the Policy. Conversely, lower premium payments in this
situation will result in a higher Net Amount at Risk, which will result in
higher Cost of Insurance Charges under the Policy.
Under Death Benefit Option B, until the applicable percentage of
Accumulated Value exceeds the Face Amount plus the Accumulated Value, the level
of premium payments will not affect the Net Amount at Risk. However, both the
Accumulated Value and Death Benefit will be higher if premium payments are
higher, and lower if premium payments are lower.
Under either Death Benefit Option, if the Unadjusted Death Benefit is
the applicable percentage of Accumulated Value, then higher premium payments
will result in a higher Net Amount at Risk, and higher Cost of Insurance
Charges. Lower premium payments will result in a lower Net Amount at Risk, and
lower Cost of Insurance Charges.
Premium Limitations. 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 these limits. If at any time you pay a
premium which would result in total premiums exceeding the 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. We will promptly refund the
excess to you. In cases of premiums paid by check, we will wait until your check
has cleared. If you have an outstanding loan, we may instead apply the payment
as a loan repayment. Even if total premiums were to exceed the maximum premium
limitations established by the Code, the excess of (a) a Policy's Unadjusted
Death Benefit over (b) the Policy's Cash Surrender Value plus outstanding Policy
loans and accrued interest, would still be excludable from gross income under
the Code.
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<PAGE> 28
The maximum premium limitations set forth in the Code depend in part
upon the amount of the Unadjusted Death Benefit at any time. As a result, any
Policy changes which affect the amount of the Unadjusted Death Benefit may
affect whether cumulative premiums paid under the Policy exceed the maximum
premium limitations. To the extent that any such change would result in
cumulative premiums exceeding the maximum premium limitations, we will not
effect the change. (See "Federal Income Tax Considerations," Page 45)
Unless the Insured provides satisfactory evidence of insurability, we
may limit the amount of any premium payment if it increases the Unadjusted Death
Benefit more than it increases the Accumulated Value.
Allocation of Net Premiums. The Net Premium equals the premium paid
less the Premium Tax Charge. In your application for the Policy, you will
indicate how Net Premiums should be allocated among the Subaccounts of the
Separate Account and/or the General Account. You may change these allocations at
any time by giving us written notice at our Home Office, or if you have elected
the telephone transaction privilege, by telephone instructions (See "Telephone
Transaction Privilege," Page36) You must make allocations in whole number
percentages of at least 5%, and the sum of the allocation percentages must be
100%. We will allocate Net Premiums as of the Valuation Date we receive the
premium at our Home Office, based on the allocation percentages then in effect,
except during the free look period.
We will allocate any portion of the Initial Premium and any
subsequent premiums we receive before the end of the free look period which are
to be allocated to the Separate Account, to the Money Market Subaccount. For
this purpose, we will assume that the free look period will end 20 days after
the date the Policy is issued. On the first Valuation Date following 20 days
after issue of the Policy, we will allocate the amount in the Money Market
Subaccount to each of the Subaccounts selected in the application based on your
instructions.
For example, assume a Policy was issued with Net Premiums to be
allocated 25% to the Managed Subaccount, 25% to the Bond Subaccount and 50% to
the General Account. During the period stated above, 50% (25% + 25%) of the Net
Premiums will be allocated to the Money Market Subaccount. At the end of such
period, 50% (25% / 50%) of the amount in the Money Market Subaccount will be
transferred to the Managed Subaccount and 50% to the Bond Subaccount.
The values of the Subaccounts will vary with their investment
experience. 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 Accumulated Value between and among
the Subaccounts of the Separate Account and the General Account by sending us a
written transfer request, or if you have elected the telephone transaction
privilege, by telephone instructions to us. (See "Telephone Transaction
Privilege," Page 36) Transfers between and among the Subaccounts of the Separate
Account and the General Account are made as of the Valuation Day that the
request for transfer is received at the Home Office. You may, at any time,
transfer all or part of the amount in one of the Subaccounts of the Separate
Account to another Subaccount and/or to the General Account. For transfers from
the General Account to the Separate Account, see "Transfers from General
Account," Page 39.
Currently an unlimited number of transfers are permitted without
charge. We have no current intent to impose a transfer charge in the foreseeable
future. However, we may, after giving you prior notice, change this policy so as
to deduct a $25 transfer charge from each transfer in excess of the fifth
transfer during any one Policy Year. All transfers requested during one
Valuation Period are treated as one transfer transaction. If a transfer charge
is adopted in the future, these types of transfers would not be subject to a
transfer charge and would not count against the five free transfers in any
Policy Year:
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<PAGE> 29
- transfers resulting from Policy loans
- transfers resulting from the operation of the dollar cost averaging
or portfolio rebalancing features
- transfers resulting from the exercise of the transfer rights
described on Page 25 (see "Policy Rights - Other Transfer Rights,"
Page 37), and
- the reallocation from the Money Market Subaccount following the free
look period.
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. A Policy will lapse only when the Cash Surrender Value
is insufficient to cover the Monthly Deductions and other charges under the
Policy and the Grace Period expires without a sufficient payment. During the
first five Policy Years, the Policy will not lapse so long as you pay the
Minimum Guarantee Premium.
In addition, if you purchase the Guaranteed Death Benefit Rider, and pay
the Minimum Guarantee Premium as of each Monthly Policy Date, your Policy will
not lapse prior to the Insured's Attained Age 70, or 20 years from the Date of
Issue of the Policy if longer, regardless of whether the Cash Surrender Value is
sufficient to cover the Monthly Deductions. If you purchase the Guaranteed Death
Benefit Rider, your Minimum Guarantee Premium will be higher than if you do not
purchase the Guaranteed Death Benefit Rider. (See "Optional Benefits -
Guaranteed Death Benefit," Page 44.)
The Policy provides for a 61-day Grace Period that is measured from
the date we send a lapse notice. The Policy does not lapse, and the insurance
coverage continues, until the expiration of this Grace Period. To prevent lapse,
you must during the Grace Period pay a premium equal to the sum of any amount by
which the past Monthly Deductions have been in excess of Cash Surrender Value,
plus three times the Monthly Deduction due the date the Grace Period began. Our
notice will specify the payment required to keep the Policy in force. Failure to
make a payment at least equal to the required amount within the Grace Period
will result in lapse of the Policy without value.
Reinstatement. A Policy that lapses without value may be reinstated
at any time within five years (or longer period required in a particular state)
after the beginning of the Grace Period. To do so, you must submit evidence of
the Insured's insurability satisfactory to us and pay an amount sufficient to
provide for two times the Monthly Deduction due on the date the Grace Period
began plus three times the Monthly Deduction due on the effective date of
reinstatement. The effective date of reinstatement, unless otherwise required by
state law, will be the Monthly Policy Date on or next following the date your
reinstatement application is approved. Upon reinstatement, the Accumulated Value
will be based upon the premium paid to reinstate the Policy. The Policy will be
reinstated with the same Date of Issue as it had prior to the lapse. Neither the
five year no lapse guarantee nor the Death Benefit Guarantee Rider may be
reinstated.
Specialized Uses of the Policy. Because the Policy provides for an
accumulation of cash value as well as a death benefit, the Policy can be used
for various individual and business financial planning purposes. Purchasing the
Policy in part for such purposes entails certain risks. For example, if the
investment performance of the chosen Subaccounts is poorer than expected or if
sufficient premiums are not paid, the Policy may lapse or may not accumulate
sufficient Accumulated Value or Cash Surrender Value to fund the purpose for
which the Policy was purchased. Withdrawals and Policy loans may significantly
affect current and future Accumulated Value, Cash Surrender Value, or Death
Benefit proceeds. Depending upon Subaccount investment performance and the
amount of a Policy loan, the loan may cause a Policy to lapse. Because the
Policy is designed to provide benefits on a long-term basis, before purchasing a
Policy for a specialized purpose you should consider whether the long-term
nature of the Policy is consistent with your purpose. Using a Policy for a
specialized purpose may have tax consequences. (See "Federal Income Tax
Considerations," Page 45.)
For Policies that are intended to be used in multiple employer
welfare benefit plans established under Section 419A(f)(6) of the Internal
Revenue Code, you should be aware that there is a risk that the intended tax
consequences of such a plan may not be realized. Congress is currently
considering legislation that might remove some or all of the tax advantage of
these plans and the Internal Revenue Service has raised
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<PAGE> 30
questions about certain of these arrangements under existing law. We do not
guarantee any particular tax consequences of any use of the Policies, including
but not limited to use in these so-called "Section 419 plans." We recommend that
you seek independent tax advice with respect to applications in which you seek
particular tax consequences.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate us
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.
We may realize a profit from any charges. We may use any profit for any
purpose, including payment of distribution expenses. We may also realize a
profit on one or more of these charges. We may use any profits for any corporate
purpose, including sales expenses.
PREMIUM TAX CHARGE
We will deduct 3.25% from each premium payment prior to allocation of Net
Premiums, to cover state premium taxes and the federal DAC Tax. For qualified
employee benefit plans, we will deduct 2.0% of each premium rather than 3.25%.
The federal DAC Tax is a tax attributable to certain "policy acquisition
expenses" under Internal Revenue Code Section 848. Section 848 in effect
accelerates the realization of income we receive from the Policies, and
therefore the payment of federal income taxes on that income. The economic
consequence of Section 848 is, therefore, an increase in the tax burden borne by
us that is attributable to the Policies.
SURRENDER CHARGE
We impose a Surrender Charge, which consists of a Deferred
Administrative Charge and a Deferred Sales Charge, if the Policy is surrendered
or lapses at any time before the end of the fifteenth Policy Year following
issue or a face amount increase.
Deferred Administrative Charge. The Deferred Administrative Charge
varies by Issue Age, and is based on the Initial Face Amount and the Face Amount
of any increase. After the first five Policy years since issue or increase, it
declines linearly by Policy Month through the end of Policy Year 15 following
issue or increase, after which it is zero. Charges per $1,000 of Face Amount for
sample issue ages are shown below:
<TABLE>
<CAPTION>
Sample Charge per $1000
Issue Age of Face Amount
--------- --------------
<S> <C>
0 - 5 None
10 $0.50
15 $1.00
20 $1.50
25 - 85 $2.00
</TABLE>
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<PAGE> 31
For Issue Ages not shown, the charge will increase by a ratable
portion for each full year. The Deferred Administrative Charge has been designed
to cover actual expenses for the issue and underwriting of Policies, and is not
intended to produce a profit.
Deferred Sales Charge. The Deferred Sales Charges are presented in
Appendix B to this Prospectus. Appendix B expresses the Deferred Sales Charge as
a dollar amount per $1,000 of initial face amount. There will be a deferred
sales charge associated with the initial policy face amount as well as with each
subsequent face amount increase. Each such portion of the deferred sales charge
will have a duration of fifteen policy years as measured from the issue date of
the corresponding face amount. Each portion of the deferred sales charge will be
level for the first five policy years then decrease linearly by Policy Month
until the end of the fifteenth policy year.
To illustrate the calculation of a Policy's Surrender Charge, assume
that the Policy is issued to a male nonsmoker, Issue Age 45, with a
Face Amount of $100,000. This example will illustrate surrenders in
the first five Policy Years and in the first month of the eighth
Policy Year.
Deferred Administrative Charge. The Deferred Administrative Charge
for the first five Policy Years is $200. This is calculated by
applying the charge of $2.00 per $1,000 of Face Amount for Issue Age
45 from the schedule above to the Face Amount of $100,000 ($2.00 x
(100,000/1,000)). The Deferred Administrative Charge reduces linearly
by Policy Month in Policy Years 6 through 15. Linear reduction is
equivalent to a reduction each month of 1/121st of the initial
charge. For example, the Deferred Administrative Charge in the first
month of the eighth Policy Year (the 25th month after the end of the
5th Policy Year) will be $158.68 ($200 - ($200 x (25/121)). After
completion of the 15th Policy Year, the Deferred Administrative
Charge is zero. The schedule of Deferred Administrative Charges in
effect for the first fifteen Policy Years is shown in the Policy.
Deferred Sales Charge. The Deferred Sales Charge in effect for the
first five Policy Years is $826. This is calculated by applying the
charge of $8.26 per $1,000 of Face Amount for Issue Age 45 found in
Appendix B to the Face Amount of $100,000 ($8.26 x (100,000 /
1,000)). The Deferred Sales Charge reduces linearly by month in
Policy Years 6 through 15. Linear reduction is equivalent to a
reduction each month of 1/121st of the initial charge. For example,
the Deferred Sales Charge in the first month of the 8th Policy Year
(the 25th month after the end of the 5th Policy Year) will be $655.34
($826 - ($826 x (25/121))). After the completion of the 15th Policy
Year, the Deferred Sales Charge is $0. The schedule of Deferred Sales
Charges in effect for the first fifteen Policy Years is shown in the
Policy.
Surrender Charges for Policies Issued Prior to the Effective Date of
this Prospectus. For policies issued before the effective date of
this prospectus (or later date if not approved in your state by the
effective date of the prospectus), your surrender charge will differ
from the surrender charges described above in two respects.
1) Your Deferred Sales Charge will be the lessor of the Deferred
Sales Charge described above and an amount equal to the sum of the
following:
(i) 30% of the premiums actually received up to one Surrender
Charge target premium, plus
(ii) 10% of all the premiums paid in excess of this amount but
not greater than twice this amount, plus
(iii) 9% of all the premiums paid in excess of twice this amount.
Appendix B to this Prospectus contains the Surrender Charge target
premiums per $1,000 of initial face amount.
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<PAGE> 32
2) There will be no Deferred Administrative Charge or Deferred Sales
Charge with respect to increases in face amount.
MONTHLY DEDUCTIONS
We will deduct charges from the Accumulated Value on the Date of Issue
and on each Monthly Policy Date. The Monthly Deduction consists of three
components:
(a) the Cost of Insurance Charge
(b) the Monthly Administrative Charge, and
(c) the cost of any additional benefits provided by Rider.
The Monthly Deduction may vary in amount from Policy Month to Policy
Month. We will take the Monthly Deduction on a pro rata basis from the
Subaccounts of the Separate Account and the General Account, unless you have
requested at the time of application, or later request in writing, that we take
the Monthly Deductions from the Money Market Subaccount. If we cannot take a
Monthly Deduction from the Money Market Subaccount, where you have so asked, we
will take the amount of the deduction in excess of the Accumulated Value
available in the Money Market Subaccount on a pro rata basis from Accumulated
Value in the Subaccounts of the Separate Account and the General Account.
Cost of Insurance Charge. We calculate the monthly Cost of Insurance
Charge by multiplying the applicable cost of insurance rate or rates by the Net
Amount at Risk for each Policy Month. Because both the Net Amount at Risk and
the variables that determine the cost of insurance rate, such as the age of the
Insured and the Duration of the Policy, may vary, the Cost of Insurance Charge
will likely be different from month to month.
Net Amount at Risk. The Net Amount at Risk on any Monthly
Policy Date is approximately the amount by which the Unadjusted Death
Benefit on that Monthly Policy Date exceeds the Accumulated Value. It
measures the amount National Life would have to pay in excess of the
Policy's Value if the Insured died. The actual calculation uses the
Unadjusted Death Benefit divided by 1.00327234, to take into account
assumed monthly earnings at an annual rate of 4%. We calculate the
Net Amount at Risk separately for the Initial Face Amount and any
increases in Face Amount. In determining the Net Amount at Risk for
each increment of Face Amount, we first consider the Accumulated
Value part of the Initial Face Amount. If the Accumulated Value
exceeds the Initial Face Amount, we consider it as part of any
increases in Face Amount in the order such increases took effect.
Any change in the Net Amount at Risk will affect the total
Cost of Insurance Charges paid by the Owner.
Guaranteed Maximum Cost of Insurance Rates. The guaranteed
maximum cost of insurance rates will be set forth in your Policy, and
will depend on:
- the Insured's Attained Age
- the Insured's sex
- the Insured's Rate Class, and
- the 1980 Commissioners Standard Ordinary Smoker/Nonsmoker
Mortality Table.
For Policies issued in states which require "unisex"
policies or in conjunction with employee benefit plans, the
guaranteed maximum cost of insurance rate will use the 1980
Commissioners Standard Ordinary Mortality Tables NB and SB.
Current Cost of Insurance Rates and How They are
Determined. The actual cost of insurance rates used ("current rates")
will depend on:
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<PAGE> 33
- the Insured's Issue Age
- the Insured's sex
- the Insured's Rate Class
- the Policy's Duration, and
- the Policy's size.
Generally, the current cost of insurance rate for a given
Attained Age will be less for an Insured whose Policy was issued more
than 10 years ago, than for an Insured whose Policy was issued less
than 10 years ago, other factors being equal. We periodically review
the adequacy of our current cost of insurance rates and may adjust
their level. However, the current rates will never exceed guaranteed
maximum cost of insurance rates. Any change in the current cost of
insurance rates will apply to all persons of the same Issue Age, sex,
and Rate Class, and with Policies of the same Duration and size.
We use separate cost of insurance rates for the Initial
Face Amount and any increases in Face Amount. For the Initial Face
Amount we use the rate for the Insured's Rate Class on the Date of
Issue. For each increase in Face Amount, we use the rate for the
Insured's Rate Class at the time of the increase. If the Unadjusted
Death Benefit is calculated as the Accumulated Value times the
specified percentage, we use the rate for the Rate Class for the
Initial Face Amount for the amount of the Unadjusted Death Benefit in
excess of the total Face Amount for Option A, and in excess of the
total Face Amount plus the Accumulated Value for Option B.
Death benefit added through the use of the Additional
Protection Benefit Rider can offer a cost savings over base policy
death benefit because the current cost of insurance rates for the
rider are less than or equal to the current cost of insurance rates
for the base policy. See the description of the rider under "Optional
Benefits" on page 43.
We may also issue Policies on a guaranteed issue basis,
where no medical underwriting is required prior to issuance of a
Policy. Current cost of insurance rates for Policies issued on a
guaranteed issue basis may be higher than current cost of insurance
rates for healthy Insureds who undergo medical underwriting.
Rate Class. The Rate Class of the Insured will affect both
the guaranteed and current cost of insurance rates. We currently
place Insureds into the following rate classes (some states may not
have approved all rate classes):
- elite preferred nonsmoker
- preferred nonsmoker
- standard nonsmoker
- preferred smoker
- standard smoker
- juvenile, and
- substandard
Smoker and substandard classes reflect higher mortality
risks. In an otherwise identical Policy, an Insured in an elite,
preferred or standard class will have a lower Cost of Insurance
Charge than an Insured in a substandard class with higher mortality
risks. Nonsmoking Insureds will generally incur lower cost of
insurance rates than Insureds who are classified as smokers.
The nonsmoker designation is not available for Insureds
under Attained Age 20. Shortly before an Insured attains age 20, we
will notify the Insured about possible classification as a nonsmoker
and direct the Insured to his or her agent to initiate a change in
Rate Class. If the Insured qualifies as a nonsmoker, we will change
the current cost of insurance rates to reflect the nonsmoker
classification.
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<PAGE> 34
Current cost of insurance rates will also vary by Policy size, in the
following bands:
- those with Face Amounts less than $250,000
- those with Face Amounts between $250,000 and $999,999, inclusive; and
- those with Face Amounts of $1,000,000 and over.
Cost of insurance rates will be lower as the Policy size band is
larger.
Monthly Administrative Charge. We deduct a Monthly Administrative Charge
of $7.50 from the Accumulated Value on the Date of Issue and each Monthly Policy
Date as part of the Monthly Deduction to help defray the expenses incurred in
administering the Policy. In Texas, the Monthly Administrative Charge may be
increased, but is guaranteed never to exceed $7.50 plus $0.07 per $1,000 of Face
Amount.
Optional Benefit Charges. The Monthly Deduction will include charges for
any additional benefits added to the Policy. The monthly charges will be
specified in the applicable Rider. The available Riders are listed under
"Optional Benefits", on Page 43 below.
Bonus. We currently intend to reduce the Monthly Deductions starting in
the eleventh Policy Year by an amount equal to 0.50% per annum of the
Accumulated Value in the Separate Account. This bonus is not guaranteed (except
as required by the state of issue), however. It will only be continued if our
mortality and expense experience with the Policies justifies it. We may notify
you before the commencement of the eleventh Policy Year that we intend to
discontinue the bonus.
The bonus is calculated on each Monthly Policy Date as .041572% (the
monthly equivalent of 0.50% per annum) of the Accumulated Value in the Separate
Account on the just prior Monthly Policy Date. For example, if the Accumulated
Value in the Separate Account on the just prior Monthly Policy Date is $10,000,
then the bonus calculated for the current Monthly Policy Date will be $4.16
($10,000 X .00041572). To calculate the Monthly Deduction for the current
Monthly Policy Date, we net the $4.16 bonus against the Monthly Deductions for
Cost of Insurance, the Monthly Administrative Charge, and charges for any
Optional Benefits.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from the Separate Account at an annual rate of
0.90% (or a daily rate of .0024548%) of the average daily net assets of each
Subaccount of the Separate Account. This charge compensates us for the mortality
and expense risks assumed in connection with the Policy. The mortality risk we
assume is that insured persons may live for a shorter time than projected. This
means we would pay greater death benefits than expected in relation to the
amount of premiums received. The expense risk we assume is that expenses
incurred in issuing and administering the Policies will exceed the
administrative charges deducted from the Policy.
WITHDRAWAL CHARGE
We will assess on each Withdrawal a charge equal to the lesser of 2% of
the Withdrawal amount and $25. We will deduct this Withdrawal Charge from the
Withdrawal amount.
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts, or
from the Separate Account to the General Account. Transfers from the General
Account to the Separate Account are permitted within the limits described on
Page 39. Currently there is no charge for any transfers. We have no present
intention to impose a transfer charge in the foreseeable future. However, we may
impose in the future a transfer charge of $25 on each transfer in excess of five
transfers in any Policy Year. The Transfer Charge
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<PAGE> 35
would be imposed to compensate us for the costs of processing such transfers,
and would not be designed to produce a profit.
If we impose a transfer charge in the future, we will deduct it from the
amount being transferred. We would treat all transfers requested on the same
Valuation Date as one transfer transaction. Any future transfer charge will not
apply to transfers resulting from:
- Policy loans
- the exercise of the transfer rights described on Page 37
- the initial reallocation of account values from the Money Market
Subaccount to other Subaccounts and
- any transfers made pursuant to the Dollar Cost Averaging and
Portfolio Rebalancing features.
The transfers listed above also will not count against the five free transfers
in any Policy Year.
PROJECTION REPORT CHARGE
We may impose a charge for each projection report you request. This
report will project future values and future Death Benefits for the Policy. We
will notify you in advance of the amount of the charge. You may elect to pay the
charge in advance. If not paid in advance, we will deduct this charge from the
Subaccounts of the Separate Account and/or the General Account in proportion to
their Accumulated Values on the date of the deduction.
OTHER CHARGES
The Separate Account purchases shares of the Funds at net asset
value. The net asset value of those shares reflect management fees and expenses
already deducted from the assets of the Funds' Portfolios. Historical expense
ratio information for the Funds is presented in the "Summary of Policy Expenses"
section on Page 4 above. More detailed information is contained in the Funds'
Prospectuses which accompany this Prospectus.
POLICY RIGHTS AND PRIVILEGES
LOAN PRIVILEGES
General. You may at any time after the first year (and during the
first year where required by law) borrow money from us using the Policy as the
only security for the loan. The maximum amount you may borrow is the Policy's
Cash Surrender Value on the date we receive your loan request, minus three times
the Monthly Deduction for the most recent Monthly Policy Date. You may repay all
or a portion of a loan and accrued interest at any time, if the Insured is
alive. To take a loan, you should send us a written request at our Home Office.
If you have elected the telephone transaction privilege, you may also request a
loan over the telephone. We limit the amount of a Policy loan you can take by
telephone to $25,000. (See "Telephone Transaction Privilege," Page 36) We will
normally pay loan proceeds within seven days of a valid loan request.
Interest Rate Charged. We charge interest on Policy loans at the
fixed rate of 6% per year. We charge interest from the date of the loan and add
it to the loan balance at the end of the Policy Year. When this interest is
added to the loan balance, it bears interest at the same rate.
Allocation of Loans and Collateral. When you take a Policy loan, we
hold Accumulated Value in the General Account as Collateral for the Policy loan.
You may specify how you would like the Accumulated Value to be taken from the
Subaccounts of the Separate Account to serve as Collateral. If you do not so
specify, we will allocate the Policy loan to the Subaccounts in proportion to
the Accumulated Value in the Subaccounts. If the Accumulated Value in one or
more of the Subaccounts is insufficient to carry out your instructions, we will
not process the loan until we receive further instructions from you.
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<PAGE> 36
Non-loaned Accumulated Value in the General Account will become Collateral for a
loan only to the extent that the Accumulated Value in the Separate Account is
insufficient
The Collateral for a Policy loan will initially be the loan amount.
Loan interest will be added to the Policy loan. We will take additional
Collateral for the loan interest pro rata from the Subaccounts of the Separate
Account, and then, if the amounts in the Separate Account are insufficient, from
the non-loaned portion of the General Account. At any time, the amount of the
outstanding loan under a Policy equals the sum of all loans (including due and
unpaid interest added to the loan balance) minus any loan repayments.
Interest Credited to Amounts Held as Collateral. As long as the
Policy is in force, we will credit the amount held in the General Account as
Collateral with interest at effective annual rates we declare, but not less than
4% or such higher minimum rate required under state law. The rate will apply to
the calendar year which follows the date of determination.
Preferred Policy Loans. We currently intend to make preferred Policy
loans available at the beginning of the eleventh Policy Year. The maximum amount
of the preferred loans will be 50% of the Accumulated Value. For these preferred
Policy loans, the amounts held as Collateral in the General Account will be
credited with interest at an annual rate of 6%. All outstanding loan amounts up
to 50% of the Accumulated Value will be treated as preferred loans. Any
outstanding loan amounts in excess of 50% of the Accumulated Value will be
treated as non-preferred loans. If both preferred and non-preferred loans exist
at the same time, we will first apply any loan repayment to the non-preferred
loan. We are not obligated to make preferred loans available, and will make such
loans available at our sole discretion. We may also at our discretion, upon
prior notice to Owners, adjust the credited rate on amounts held as Collateral
in the General Account for preferred loans. Preferred loans may not be treated
as indebtedness for federal income tax purposes.
Bonus on Non-preferred Policy Loans Beginning in Policy Year 11. In
Policy Year 11 and thereafter, for loans that do not qualify as preferred loans,
we currently intend to credit interest on amounts held in the General Account as
Collateral at a rate 0.50% per annum higher than for similar amounts for
Policies still in their first ten Policy Years. This bonus is not guaranteed,
however. This bonus will only be credited to Collateral for non-preferred policy
loans. Upon prior notice to Owners we may, in our sole discretion, decide not to
credit the bonus.
Effect of Policy Loan. Policy loans, whether or not repaid, will have
a permanent effect on the Accumulated Value and the Cash Surrender Value, and
may permanently affect the Death Benefit of your Policy. The effect on the
Accumulated Value and Death Benefit could be favorable or unfavorable. It will
depend on whether the investment performance of the Subaccounts, and the
interest credited to the non-loaned Accumulated Value in the General Account, is
less than or greater than the interest being credited on the amounts held as
Collateral in the General Account. Compared to a Policy under which no loan is
made, values under a Policy will be lower when the credited interest rate on
Collateral is less than the investment experience of assets held in the Separate
Account and interest credited to the non-Collateral Accumulated Value in the
General Account. The longer a loan is outstanding, the greater the effect a
Policy loan is likely to have. The Death Benefit will be reduced by the amount
of any outstanding Policy loan.
Loan Repayments. We will assume that any payments you make while
there is an outstanding Policy loan are premium payments, rather than loan
repayments, unless you specify in writing that a payment is a loan repayment. In
the event of a loan repayment, the amount held as Collateral in the General
Account will be reduced by an amount equal to the repayment, and such amount
will be transferred to the Subaccounts of the Separate Account and to the
non-loaned portion of the General Account based on the Net Premium allocations
in effect at the time of the repayment.
Lapse With Loans Outstanding. The amount of an outstanding loan under
a Policy plus any accrued interest on outstanding loans is not part of Cash
Surrender Value. Therefore, the larger the amount of an outstanding loan, the
more likely it is that the Policy could lapse. (See "How the Duration of the
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<PAGE> 37
Policy May Vary," Page 21 and "Policy Lapse," Page 26.) 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 46.)
IRC Section 1035 Exchanges of Policies with Existing Policy Loans. We
will accept transfers of existing policy loans on Policies that qualify as
Section 1035 exchanges. The loan will be limited to 50% of the Accumulation
Value of the transfer. The Accumulation Value held as collateral for the loan
will be placed in the General Account.
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 Other Than Death
Benefits from Modified Endowment Contracts," Page 47.)
SURRENDER PRIVILEGE
You may surrender your Policy for its Cash Surrender Value at any
time before the death of the Insured. The Cash Surrender Value is the
Accumulated Value minus any Policy loan and accrued interest and less any
Surrender Charge. We will calculate the Cash Surrender Value on the Valuation
Day we receive, at our Home Office, your signed written surrender request, and
the Policy. You may not request a surrender over the telephone. Coverage under
the Policy will end on the day you mail or otherwise send your written surrender
request and the Policy to us. We will ordinarily mail surrender proceeds to you
within seven days of when we receive your request. (See "Other Policy Provisions
- Payment of Policy Benefits", Page 39.)
A surrender may have Federal income tax consequences. (See "Tax Treatment
of Policy Benefits," Page 46.)
WITHDRAWAL OF CASH SURRENDER VALUE
You may withdraw a portion of your Policy's Cash Surrender Value at
any time before the death of the Insured and, except for employee benefit plans,
after the first Policy Anniversary. The minimum amount which you may withdraw is
$500, except for employee benefit plans, where the minimum is $100. The maximum
Withdrawal is the Cash Surrender Value on the date of receipt of the Withdrawal
request, minus three times the Monthly Deduction for the most recent Monthly
Policy Date. A Withdrawal Charge will be deducted from the amount of the
Withdrawal. For a discussion of the Withdrawal Charge, see "Charges and
Deductions - Withdrawal Charge" on Page 31.
You may specify how you would like us to take a Withdrawal from the
Subaccounts of the Separate Account. If you do not so specify, we will take the
Withdrawal from the Subaccounts in proportion to the Accumulated Value in each
Subaccount. If the Accumulated Value in one or more Subaccounts is insufficient
to carry out your instructions, we will not process the Withdrawal until we
receive further instructions from you. You may take Withdrawals from the General
Account only after the Accumulated Value in the Separate Account has been
exhausted.
The effect of a Withdrawal on the Death Benefit and Face Amount will
vary depending upon the Death Benefit Option in effect and whether the
Unadjusted Death Benefit is based on the applicable percentage of Accumulated
Value. (See "Death Benefit Options," Page 19.)
Option A. The effect of a Withdrawal on the Face Amount and
Unadjusted Death Benefit under Option A can be described as follows:
If the Face Amount divided by the applicable percentage of
Accumulated Value exceeds the Accumulated Value just after the
Withdrawal, a Withdrawal will reduce the Face Amount and the
Unadjusted Death Benefit by the lesser of such excess and the
amount of the Withdrawal.
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For the purposes of this illustration (and the following
illustrations of Withdrawals), assume that the Attained Age of the
Insured is under 40 and there is no indebtedness. The applicable
percentage is 250% for an Insured with an Attained Age under 40.
Under Option A, a Policy with a Face Amount of $300,000 and
an Accumulated Value of $30,000 will have an Unadjusted Death
Benefit of $300,000. Assume that you take a Withdrawal of $10,000.
The Withdrawal Charge will be $25 and the amount we pay you will be
$9,975. The Withdrawal will reduce the Accumulated Value to $20,000
($30,000 - $10,000) after the Withdrawal. The Face Amount divided
by the applicable percentage is $120,000 ($300,000 / 2.50), which
exceeds the Accumulated Value after the Withdrawal by $100,000
($120,000 - $20,000). The lesser of this excess and the amount of
the Withdrawal is $10,000, the amount of the Withdrawal. Therefore,
the Unadjusted Death Benefit and Face Amount will be reduced by
$10,000 to $290,000.
If the Face Amount divided by the applicable percentage of
Accumulated Value does not exceed the Accumulated Value just after
the Withdrawal, then the Face Amount is not reduced. The Unadjusted
Death Benefit will be reduced by an amount equal to the reduction
in Accumulated Value times the applicable percentage (or
equivalently, the Unadjusted Death Benefit is equal to the new
Accumulated Value times the applicable percentage).
Under Option A, a policy with a Face Amount of $300,000 and
an Accumulated Value of $150,000 will have an Unadjusted Death
Benefit of $375,000 ($150,000 x 2.50). Assume that you take a
Withdrawal of $10,000. The Withdrawal Charge will be $25 and the
amount we pay to you will be $9,975. The Withdrawal will reduce the
Accumulated Value to $140,000 ($150,000 - $10,000). The Face Amount
divided by the applicable percentage is $120,000, which does not
exceed the Accumulated Value after the withdrawal. Therefore, the
Face Amount stays at $300,000 and the Unadjusted Death Benefit is
$350,000 ($140,000 x 2.50).
Option B. The Face Amount will never be decreased by a Withdrawal. A
Withdrawal will, however, always decrease the Death Benefit.
If the Unadjusted Death Benefit equals the Face Amount plus
the Accumulated Value, a Withdrawal will reduce the Accumulated
Value by the amount of the Withdrawal and thus the Unadjusted Death
Benefit will also be reduced by the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and
an Accumulated Value of $90,000 will have an Unadjusted Death
Benefit of $390,000 ($300,000 + $90,000). Assume you take a
Withdrawal of $20,000. The Withdrawal Charge will be $25 and the
amount we pay to you will be $19,975. The Withdrawal will reduce
the Accumulated Value to $70,000 ($90,000 - $20,000) and the
Unadjusted Death Benefit to $370,000 ($300,000 + $70,000). The Face
Amount is unchanged.
If the Unadjusted Death Benefit immediately prior to the
Withdrawal is based on the applicable percentage of Accumulated
Value, the Unadjusted Death Benefit will be reduced to equal the
greater of (a) the Face Amount plus the Accumulated Value after
deducting the amount of the Withdrawal and Withdrawal Charge and
(b) the applicable percentage of Accumulated Value after deducting
the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and
an Accumulated Value of $210,000 will have an Unadjusted Death
Benefit of $525,000 ($210,000 X 2.5). Assume you take a Withdrawal of
$60,000. The Withdrawal Charge will be $25 and the amount we pay to
you will be $59,975. The Withdrawal will reduce the Accumulated Value
to $150,000 ($210,000 - $60,000), and the Unadjusted Death Benefit to
the greater of (a) the Face Amount plus the Accumulated Value, or
$450,000 ($300,000 + $150,000) and (b) the Unadjusted Death Benefit
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based on the applicable percentage of the Accumulated Value, or
$375,000 ($150,000 X 2.50). Therefore, the Unadjusted Death Benefit
will be $450,000. The Face Amount is unchanged.
Any decrease in Face Amount due to a Withdrawal will first reduce the
most recent increase in Face Amount, then the most recent increases,
successively, and lastly, the Initial Face Amount.
Because a Withdrawal can affect the Face Amount and the Unadjusted
Death Benefit as described above, a Withdrawal may also affect the Net Amount at
Risk which is used to calculate the Cost of Insurance Charge under the Policy.
(See "Cost of Insurance Charge," Page 29.) Since a Withdrawal reduces the
Accumulated Value, the Cash Surrender Value of the Policy is reduced, thereby
increasing the likelihood that the Policy will lapse. (See "Policy Lapse," Page
26.) 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, we will not allow the
Withdrawal.
You may request a Withdrawal only by sending a signed written request
to us at our Home Office. You may not request a Withdrawal over the telephone.
We will ordinarily pay a Withdrawal within seven days of receiving at our Home
Office a valid Withdrawal request.
A Withdrawal of Cash Surrender Value may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 46.)
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 latest of:
(a) 45 days after Part A of the application for the Policy is signed
(b) 10 days after you receive the Policy
(c) 10 days after we mail the Notice of Withdrawal Right to you, or
(d) any longer period provided by state law.
To cancel your Policy, you must return it to us or to our agent within the free
look period with a written request for cancellation.
TELEPHONE TRANSACTION PRIVILEGE
If you elect the telephone transaction privilege, either on the
application for the Policy or thereafter by written authorization, you may
effect changes in premium allocation, transfers, and loans of up to $25,000, and
initiate or make changes in Dollar Cost Averaging or Portfolio Rebalancing by
providing instructions to us at our Home Office over the telephone. We may
suspend telephone transaction privileges at any time, for any reason, if we deem
such suspension to be in the best interests of Policy Owners. You may, on the
application or by a written authorization, authorize your National Life agent to
provide telephone instructions on your behalf.
We will employ reasonable procedures to confirm that instructions we
receive by telephone are genuine. If we follow these procedures, we will not be
liable for any losses due to unauthorized or fraudulent instructions. We may be
liable for any such losses if we do not follow these reasonable procedures. The
procedures to be followed for telephone transfers will include one or more of
the following:
- requiring some form of personal identification prior to acting on
instructions received by telephone
- providing written confirmation of the transaction, and
- making a tape recording of the instructions given by telephone.
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OTHER TRANSFER RIGHTS
Transfer Right for Policy. During the first two years following Policy
issue, you may, on one occasion, transfer the entire Accumulated Value in the
Separate Account to the General Account, without regard to any limits on
transfers or free transfers.
Transfer Right for Change in Investment Policy. If the investment policy
of a Subaccount of the Separate Account is materially changed, you may transfer
the portion of the Accumulated Value in that Subaccount to another Subaccount or
to the General Account, without regard to any limits on transfers or free
transfers.
Exchange Right for Connecticut Residents. For eighteen months after the
Date of Issue, Connecticut residents may exchange the Policy for any flexible
premium adjustable benefit life insurance policy offered for sale by us, the
benefits of which policy do not vary with the investment performance of a
separate account. Evidence of insurability will not be required to effect this
exchange.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer, at no charge to you, two automated fund management
features. Only one of these features may be active for any single Policy at any
time. We are not legally obligated to continue to offer these features. Although
we have no current intention to do so, we may cease offering one or both these
features at any time, after providing 60 days prior written notice to all Owners
who are then utilizing the features being discontinued
Dollar Cost Averaging. This feature permits you to automatically transfer
funds from the Money Market Subaccount to any other Subaccounts on a monthly
basis. You may elect Dollar Cost Averaging at issue by marking the appropriate
box on the initial application, and completing the appropriate instructions. You
may also begin a Dollar Cost Averaging program after issue by filling out
similar information on a change request form and sending it to us at our Home
Office.
If you elect this feature, we will take the amount to be transferred from
the Money Market Subaccount and transfer it to the Subaccount or Subaccounts
designated to receive the funds, each month on the Monthly Policy Date. If you
elect Dollar Cost Averaging on your application for the Policy, it will start
with the Monthly Policy Date after the date that is 20 days after issue. If you
begin a Dollar Cost Averaging program after the free look period is over, it
will start on the next Monthly Policy Date. Dollar Cost Averaging will continue
until the amount in the Money Market Subaccount is depleted. The minimum monthly
transfer by Dollar Cost Averaging is $100, except for the transfer which reduces
the amount in the Money Market Subaccount to zero. You may discontinue Dollar
Cost Averaging at any time by sending an appropriate change request form to the
Home Office. You may not use the dollar cost averaging feature to transfer
Accumulated Value to the General Account.
Dollar Cost Averaging allows you to move funds into the various
investment types on a more gradual and systematic basis than the frequency on
which you pay premiums. The dollar cost averaging method of investment is
designed to reduce the risk of making purchases only when the price of units is
high. The periodic investment of the same amount will result in higher numbers
of units being purchased when unit prices are lower, and lower numbers of units
being purchased when unit prices are higher. This technique will not, however,
assure a profit or protect against a loss in declining markets. Moreover, for
the dollar cost averaging technique to be effective, amounts should be available
for allocation from the Money Market Subaccount through periods of low price
levels as well as higher price levels.
Portfolio Rebalancing. This feature permits you to automatically
rebalance the value in the Subaccounts on a semi-annual basis, based on your
premium allocation percentages in effect at the time of the rebalancing. You may
elect it at issue by marking the appropriate box on the application, or, after
issue, by completing a change request form and sending it to our Home Office.
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In Policies utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer will take place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages,
starting with the Monthly Policy Date six months after the Date of Issue, and
then on each Monthly Policy Date six months thereafter. Policies electing
Portfolio Rebalancing after issue will have the first automated transfer occur
as of the Monthly Policy Date on or next following the date we receive the
election at our Home Office, and subsequent rebalancing transfers will occur
every six months from that date. You may discontinue Portfolio Rebalancing at
any time by submitting an appropriate change request form to us at our Home
Office.
If you change your Policy's premium allocation percentages, Portfolio
Rebalancing will automatically be discontinued unless you specifically direct
otherwise.
Portfolio Rebalancing will result in periodic transfers out of
Subaccounts that have had relatively favorable investment performance in
relation to the other Subaccounts to which a Policy allocates premiums, and into
Subaccounts which have had relatively unfavorable investment performance in
relation to the other Subaccounts to which the Policy allocates premiums.
Portfolio rebalancing does not guarantee a profit or protect against a loss.
POLICY RIGHTS UNDER CERTAIN PLANS
Policies may be purchased in connection with a plan sponsored by an
employer. In such cases, all rights under the Policy rest with the Policy Owner,
which may be the employer or other obligor under the plan, and benefits
available to participants under the plan will be governed solely by the
provisions of the plan. Accordingly, some of the options and elections under the
Policy may not be available to participants under the provisions of the plan. In
such cases, participants should contact their employers for information
regarding the specifics of the plan.
THE GENERAL ACCOUNT
You may allocate some or all of your Net Premiums, and transfer some or
all of the Accumulated Value of your Policy to our General Account. We credit
interest on Net Premiums and Accumulated Value allocated to the General Account
at rates we declare. These rates will not be less than 4%. The principal, after
deductions, is also guaranteed. The General Account supports National Life 's
insurance and annuity obligations. All assets in the General Account are subject
to National Life's general liabilities from business operations.
The General Account has not, and is not required to be, registered with
the SEC under the Securities Act of 1933. The General Account has not been
registered as an investment company under the Investment Company Act of 1940.
Therefore, the General Account and the interests therein are generally not
subject to regulation under the 1933 Act or the 1940 Act. The disclosures
relating to this account which are included in this Prospectus are for your
information and have not been reviewed by the SEC. However, such disclosures may
be subject to certain generally applicable provisions of the Federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Accumulated Value not held as Collateral in the General Account is
guaranteed to accumulate at a minimum effective annual interest rate of 4%. We
may credit the non-loaned Accumulated Value in the General Account with current
rates in excess of the minimum guarantee, but we are not obligated to do so. We
have no specific formula for determining current interest rates. Since we
anticipate changing the current interest rate from time to time, in our sole
discretion, allocations to the General Account made
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at different times are likely to be credited with different current interest
rates. We will declare an interest rate each month to apply to amounts allocated
or transferred to the General Account in that month. The rate declared on such
amounts will remain in effect for twelve months. At the end of the 12-month
period, we may declare a new current interest rate on such amounts and accrued
interest thereon (which may be a different current interest rate than the
current interest rate on new allocations to the General Account on that date).
We will determine any interest credited on the amounts in the General Account in
excess of the minimum guaranteed rate of 4% per year in our sole discretion. You
assume the risk that interest credited may not exceed the guaranteed minimum
rate. Amounts allocated to the General Account will not share in the investment
performance of our General Account.
Amounts deducted from the non-loaned Accumulated Value in the General
Account for Withdrawals, Policy loans, transfers to the Separate Account,
Monthly Deductions or other charges are, for the purpose of crediting interest,
accounted for on a last in, first out ("LIFO") method.
We may change the method of crediting interest from time to time,
provided that such changes do not have the effect of reducing the guaranteed
rate of interest below 4% per annum or shortening the period for which the
interest rate applies to less than 12 months.
Bonus Interest. We currently intend to credit interest on non-loaned
Accumulated Value in the General Account for Policies in Policy Year 11 and
thereafter at rates which are 0.50% per annum higher than those that apply to
Policies still in their first ten Policy Years. This bonus is not guaranteed,
however, except as required by the state of issue. We may in our sole
discretion, upon prior notice to Owners, decide not to credit the bonus.
Calculation of Non-loaned Accumulated Value in the General Account.
The non-loaned Accumulated Value in the General Account at any time is equal to
amounts allocated and transferred to it plus interest credited to it, minus
amounts deducted, transferred or withdrawn from it.
TRANSFERS FROM GENERAL ACCOUNT
We allow only one transfer in each Policy Year from the amount of
non-loaned Accumulated Value in the General Account to any or all of the
Subaccounts of the Separate Account. The amount you transfer from the General
Account may not exceed the greater of 25% of the value of the non-loaned
Accumulated Value in such account at the time of transfer, or $1000. We will
make the transfer as of the Valuation Day we receive your written or telephone
request at our Home Office.
OTHER POLICY PROVISIONS
Indefinite Policy Duration. The Policy can remain in force indefinitely
(in Texas and Maryland, however, the Policy matures at Attained Age 99 at which
time we will pay the Cash Surrender Value to you in one sum unless you have
chosen a Payment Option, and the Policy will terminate). However, for a Policy
to remain in force after the Insured reaches Attained Age 99, if the Face Amount
is greater than the Accumulated Value, the Face Amount will automatically be
decreased to the current Accumulated Value. Also, at Attained Age 99 Option B
automatically becomes Option A. No premium payments are allowed after Attained
Age 99, although loan repayments are allowed. The tax treatment of a Policy's
Accumulated Value after Age 100 is unclear, and you may wish to discuss this
treatment with a tax advisor.
Payment of Policy Benefits. You may decide the form in which we pay Death
Benefit proceeds. 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 Cash Surrender Value. If you
do not make an election, 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, we will ordinarily pay the Death
Benefit to the Beneficiary within seven days after we receive proof of the
Insured's death at our Home Office, and all other requirements are satisfied. If
paid under a
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Settlement Option, we will apply the Death Benefit to the Settlement Option
within seven days after we receive proof of the Insured's death at our Home
Office, and all other requirements are satisfied.
We will pay interest on the Death Benefit from the date of death until
payment is made. The interest rate will be the highest of (a) 4% per annum, (b)
any higher rate we declare, or (c) any higher rate required by law.
We will normally pay proceeds of a surrender, Withdrawal, or Policy loan
within seven days of when we receive your written request at our Home Office in
a form satisfactory to us.
We will generally determine the amount of a payment on the Valuation Day
we receive all required documents. However, we 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 our policyholders.
We also may defer the determination or payment of amounts from the
General Account for up to six months.
Transactions will not be processed on the following days: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, the day after Thanksgiving and Christmas Day. In addition, Premium
Payments will not be allocated and transactions will not be effected to the
Money Market Subaccount on Columbus Day and Veterans Day.
We may postpone any payment under the Policy derived from an amount paid
by check or draft until we are satisfied that the check or draft has been paid
by the bank upon which it was drawn.
The Contract. The Policy and the application are the entire contract.
Only statements made in the application can be used to void the Policy or deny a
claim. The statements are considered representations and not warranties. Only
one of National Life's duly authorized officers or registrars can agree to
change or waive any provisions of the Policy, and only in writing. As a result
of differences in applicable state laws, certain provisions of the Policy may
vary from state to state.
Ownership. The Owner is the Insured unless a different Owner is named in
the application or thereafter changed. While the Insured is living, the Owner is
entitled to exercise any of the rights stated in the Policy or otherwise granted
by us. If the Insured and Owner are not the same, and the Owner dies before the
Insured, these rights will vest in the estate of the Owner, unless otherwise
provided.
Beneficiary. You designate the Beneficiary in the application for the
Policy. You may change the Beneficiary during the Insured's lifetime by sending
us a written notice. The interest of any Beneficiary who dies before the Insured
shall vest in you unless you otherwise provide.
Change of Owner and Beneficiary. As long as the Policy is in force, you
may change the Owner or Beneficiary by sending us an acceptable written request.
The change will take effect as of the date the request is signed, whether or not
the Insured is living when we receive the request. We will not be responsible
for any payment made or action taken before we receive the written request.
Split Dollar Arrangements. You may enter into a Split Dollar Arrangement
among the Owners or other persons under which the payment of premiums and the
right to receive the benefits under the Policy (i.e., Cash Surrender Value or
Death Benefit) are split between the parties. There are different ways of
allocating such rights.
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For example, an employer and employee might agree that under a Policy on
the life of the employee, the employer will pay the premiums and will have the
right to receive the Cash Surrender Value. The employee may designate the
Beneficiary to receive any Death Benefit in excess of the Cash Surrender Value.
If the employee dies while such an arrangement is in effect, the employer would
receive from the Death Benefit the amount which the employer would have been
entitled to receive upon surrender of the Policy and the employee's Beneficiary
would receive the balance of the proceeds.
No transfer of Policy rights pursuant to a Split Dollar Arrangement will
be binding on us unless it is in writing and received by us. We do not assess
any specific charge for 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 your rights under the Policy. We
are not bound by an assignment unless it is in writing and we receive it at our
Home Office. We assume no responsibility for determining whether an assignment
is valid, or the extent of the assignee's interest. All assignments will be
subject to any Policy loan. The interest of any Beneficiary or other person will
be subordinate to any assignment. A payee who is not also the Owner may not
assign or encumber Policy benefits, and to the extent permitted by applicable
law, such benefits are not subject to any legal process for the payment of any
claim against the payee.
Misstatement of Age and Sex. If the age or sex of the Insured at the Date
of Issue has been misstated in the application, we will adjust the Accumulated
Value of the Policy to be the amount that it would have been had the Cost of
Insurance Charges deducted been based on the correct age and sex, or as
otherwise required by state law. The adjustment will take place on the Monthly
Policy Date on or after the date on which we have proof to our satisfaction of
the misstatement. If the Insured has died, we will adjust the Accumulated Value
as of the last Monthly Policy Date prior to the Insured's death; however, if the
Accumulated Value is insufficient for that adjustment, the amount of the
Unadjusted Death Benefit will also be adjusted.
Suicide. If the Insured dies by 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), our liability is limited to the
payment to the Beneficiary of a sum equal to the premiums paid less any Policy
loan and accrued interest and any Withdrawals (since the date of reinstatement,
in the case of a suicide within two years of the effective date of a
reinstatement), or other reduced amount provided by state law.
If the Insured commits suicide within two years (or shorter period
required by state law) from the effective date of any Policy change which
increases the Unadjusted Death Benefit and for which an application is required,
the amount which we 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.
Arbitration. Except where otherwise required by state law, the Policy
provides that any controversy under the Policy shall be settled by arbitration
in the state of residence of the Owner, in accordance with the rules of the
American Arbitration Association or any similar rules to which the parties
agree. Any award rendered through arbitration will be final on all parties, and
the award may be enforced in court.
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The purpose of the arbitration is to provide an alternative dispute
resolution mechanism for investors that may be more efficient and less costly
than court litigation. You should be aware, however, that arbitration is, as
noted above, final and binding on all parties, and that the right to seek
remedies in court is waived, including the right to jury trial. Pre-arbitration
discovery is generally more limited than and different from court discovery
procedures, and the arbitrator's award is not required to include factual
findings or legal reasoning. Any party's right to appeal or to seek modification
of rulings by the arbitrators is strictly limited.
Dividends. The Policy is participating; however, no dividends are
expected to be paid on the Policy. If dividends are ever declared, they will be
paid in cash. 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 is deemed to have been sent to
you if mailed to you at your last address known to us.
Settlement Options. In lieu of a single sum payment on death or
surrender, you may elect 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. We will pay interest at a rate of 3.5%
per year on the amount of the proceeds retained by us. 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. We will make equal monthly payments,
based on an interest rate of 3.5% per annum, for the number of years you
select.
Payments for Life. We will make equal monthly payments, based on an
interest rate of 3.5% per annum, for a guaranteed period and thereafter
during the life of a chosen person. You may elect guaranteed payment
periods 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. We will make equal monthly payments
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. We will make equal monthly payments 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 our then current
settlement rates on the date the proceeds become payable. No additional
interest will be paid.
Joint and Two Thirds Annuity. We will make equal monthly payments,
based on an interest rate of 3.5% per year, 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. We will make equal monthly payments, based on
an interest rate of 3.5% per year, 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.
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OPTIONAL BENEFITS
You may include the following benefits, which are subject to the
restrictions and limitations set forth in the applicable Policy Riders, in your
Policy at your option. Election of any of these optional benefits involves an
additional cost.
Additional Protection Benefit. If this rider has been approved in your
state, the Additional Protection Benefit Rider may be used to provide a death
benefit in addition to the death benefit provided on the Insured by the base
policy.
We will issue this rider for insured persons from ages 0 to 85. This
rider is available at issue, or after issue by submitting an application to us
with evidence satisfactory to us of insurability. The Additional Protection
Benefit amount must be at least $25,000 (at least $5,000 for employee benefit
plans), and cannot exceed three times the coverage of the base policy.
If the Additional Protection Benefit Rider is elected, the definition of
the Unadjusted Death Benefit described on page 57 will be modified.
Under Option A the Unadjusted Death Benefit will equal the greater of:
(a) Face Amount of the base policy plus the Additional Protection
Benefit amount; and
(b) The Accumulated Value multiplied by the specified percentages.
The Unadjusted Death Benefit under Option B will equal the greater of:
(a) Face Amount of the base policy plus the Additional Protection
Benefit amount plus the Accumulated Value; and
(b) The Accumulated Value multiplied by the specified percentages.
The monthly cost of this rider is the Additional Protection Benefit
amount times a monthly cost of insurance rate that varies by the Insured's Issue
Age, sex, Rate Class and duration since issue. We will add this cost to the
Monthly Deduction on the Policy.
Decreases in coverage apply to coverage segments based on effective date
in reverse chronological order as described on page 21. With respect to base
coverage and Additional Protection Benefit coverage with the same effective
date, decreases will be performed against the Additional Protection Benefit
amount first.
Adding death benefit coverage to the Policy through the use of the
Additional Protection Benefit Rider can offer a cost savings over adding
coverage to the base policy. Specifically, there is no surrender charge
associated with this rider and the current cost of insurance rates associated
with this rider are less than or equal to the current cost of insurance rates
for the base policy. The guaranteed cost of insurance rates associated with this
rider equal the guaranteed cost of insurance rates for the base policy.
Waiver of Monthly Deductions. If you elect the Waiver of Monthly
Deductions Rider, we will waive Monthly Deductions against the Policy if the
Insured becomes totally disabled, before age 65 and for at least 120 days. If
total disability occurs after age 60 and before age 65, then we will waive
Monthly Deductions only until the Insured reaches Attained Age 65, or for a
period of two years, if longer. The monthly cost of this Rider is based on
sex-distinct rates (except for Policies issued in states which require "unisex"
policies or in conjunction with employee benefit plans, where the cost of this
Rider will not vary by sex) multiplied by the Monthly Deduction on the Policy.
We will add this cost to the Monthly Deduction on the Policy.
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Accidental Death Benefit. The Accidental Death Rider provides for an
increased Death Benefit in the event that the Insured dies in an accident. If
you elect this Rider, we will add the monthly cost of this Rider to the Monthly
Deduction on the Policy.
Guaranteed Insurability Option. This Rider permits you to increase the
Face Amount of the Policy, within certain limits, without being required to
submit satisfactory proof of insurability at the time of the request for the
increase. Again, if you elect this Rider, we will add the monthly cost of this
Rider to the Monthly Deduction on the Policy.
Guaranteed Death Benefit. If you choose this Rider, we will guarantee
that the Policy will not lapse prior to the Insured's Attained Age 70, or 20
years from the Date of Issue of the Policy, if longer, regardless of the
Policy's investment performance. To keep this Rider in force, you must pay
cumulative premiums greater than the Minimum Guarantee Premium from the Date of
Issue. The Minimum Guarantee Premium for Policies with the Guaranteed Death
Benefit Rider will be higher than for those without the Guaranteed Death Benefit
Rider, all other things being equal. We will test the Policy monthly for this
qualification, and if not met, we will send you a notice, and you will have 61
days from the date we mailed the notice to pay a premium sufficient to keep the
Rider in force. The premium required will be the Minimum Guarantee Premium from
the Date of Issue, plus two times the Minimum Monthly Premium, minus premiums
previously paid. The Rider will be cancelled if a sufficient premium is not paid
during that 61-day period. If cancelled, the Rider cannot be reinstated.
The cost of the Guaranteed Death Benefit Rider is $0.01 per thousand of
Face Amount per month. This Rider is available only at issue, and only for Issue
Ages 0-65.
If while the Guaranteed Death Benefit Rider is in force, the Accumulated
Value of the Policy is not sufficient to cover the Monthly Deductions, Monthly
Deductions will be made until the Accumulated Value of the Policy is exhausted,
and will thereafter be deferred, and collected at such time as the Policy has
positive Accumulated Value.
If you increase the Face Amount of a Policy subject to the Guaranteed
Death Benefit Rider, the Rider's guarantee will extend to the increased Face
Amount. This will result in increased Minimum Guarantee Premiums.
If you have elected both the Waiver of Monthly Deductions Rider and the
Guaranteed Death Benefit Rider, and Monthly Deductions are waived because of
total disability, then we will also waive the Minimum Guarantee Premiums
required to keep the Guaranteed Death Benefit Rider in force during the period
that Monthly Deductions are being waived.
If you wish to keep this Rider in force, you must limit Withdrawals and
Policy loans to the excess of premiums paid over the sum of the Minimum Monthly
Premiums in effect since the Date of Issue. If you take a Policy loan or
Withdrawal for an amount greater than such excess, the Guaranteed Death Benefit
Rider will enter a 61-day lapse-pending notification period, and will be
cancelled if you do not pay a sufficient premium.
THE GUARANTEED DEATH BENEFIT RIDER IS NOT AVAILABLE IN TEXAS OR
MASSACHUSETTS.
Rider for Disability Benefit - Payment of Mission Costs. If you are
buying your policy through a registered representative who is an agent of
Beneficial Life Insurance Company, you may at your option include in your policy
the Rider for Disability - Payment of Mission Costs. Election of this benefit
involves additional cost.
This Rider, which is subject to the restrictions and limitations set
forth in the Rider, provides a monthly benefit equal to the expenses of any
dependent children (under age 30) participating in voluntary mission service, up
to a maximum of $375 per month per child, while the Insured is totally disabled.
The
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<PAGE> 48
maximum benefit duration is 24 months for each child. The maximum benefit will
be adjusted for inflation at an annual rate of 3%.
Benefits will be paid when the insured has been continuously disabled for
a period of six months due to disabilities occurring prior to age 65. After six
months of continuous disability, benefit payments are retroactive to the
beginning of the period. Coverage ceases at age 65. For Insureds disabled prior
to age 65, benefit eligibility continues until disability ends.
The monthly cost of this Rider is level, and varies by the age at issue
and the sex of the insured (except for Policies issued in states which require
"unisex" Policies, where the cost of this Rider will not vary by sex). The cost
of the Rider does not vary by the number of dependent children. Depending on the
age and sex of the Insured, the monthly cost of the Rider will range from $1.65
to $4.25. The monthly cost oft his Rider will be added to the Monthly Deduction
on the Policy.
Accelerated Benefits Rider. This Rider pays a reduced benefit prior to
the death of the Insured, in certain circumstances where a terminal or chronic
illness creates a need for access to the death benefit. This Rider is not
available in all states, and its terms may vary by state. There is no cost for
this Rider. It can be included in a Policy at issue, or can be added after
issue, for Insureds ages 0-85. The maximum amount payable under the Rider is
$500,000. An Insured who has a chronic illness, as defined in the Rider, at the
time the Rider is issued, may not receive benefits under the Rider for five
years after its issue.
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 tax 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 understanding of the present
Federal income tax laws. No representation is made as to the likelihood of
continuation of the present Federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for Federal income
tax purposes and to receive the tax treatment normally accorded life insurance
contracts under Federal tax law, a life insurance policy must satisfy certain
requirements which are set forth in the Internal Revenue Code. Guidance as to
how these requirements are to be applied is limited. Nevertheless, National Life
believes that a Policy issued on the basis of a standard rate class should
satisfy the applicable requirements. There is less guidance, however, with
respect to a policy issued on a substandard basis (i.e., a rate class involving
higher than standard mortality risk) and it is not clear whether such a policy
will in all cases satisfy the applicable requirements, particularly if the Owner
pays the full amount of premiums permitted under the Policy. Nevertheless,
National Life believes it reasonable to conclude that such a Policy should be
treated as a life insurance contract for Federal income tax purposes. If it is
subsequently determined that a Policy does not satisfy the applicable
requirements, National Life may take appropriate steps to bring the policy into
compliance with such requirements and National Life reserves the right to modify
the policy as necessary in order to do so.
In certain circumstances, owners of variable life insurance policies
have been considered for Federal income tax purposes to be the owners of the
assets of separate accounts supporting their contracts due to their ability to
exercise investment control over those assets. Where this is the case, the
policyowners have been currently taxed on income and gains attributable to
separate account assets. There is little guidance in this area, and some
features of the policy, such as the flexibility of Policy Owners to allocate
premium payments and Accumulated Values, have not been explicitly addressed in
published rulings. While National Life believes that the policy does not give
Policy Owners investment control over
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<PAGE> 49
Separate Account assets, we reserve the right to modify the policy as necessary
to prevent the Policy Owner from being treated as the owner of the Separate
Account assets supporting the Policy.
In addition, the Code requires that the investments of the Separate
Account be "adequately diversified" in order for the policy to be treated as a
life insurance contract for Federal income tax purposes. It is intended that the
Separate Account, through the Funds, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a
life insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
In General. National Life believes that the death benefit under a
Policy should be excludible from the gross income of the beneficiary. Federal,
state and local estate, inheritance, transfer, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy Owner or beneficiary. A tax advisor should be consulted on these
consequences.
Depending on the circumstances, the exchange of a Policy, an increase
or decrease of a Policy's Face Amount, 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. A tax
advisor should be consulted before effecting any of these policy changes.
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 upon 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. Under the Internal Revenue Code,
certain life insurance contracts are classified as "Modified Endowment
Contracts," with less favorable tax treatment than other life insurance
contracts. Due to the flexibility of the Policy as to premium payments and
benefits, the individual circumstances of each Policy will determine whether it
is classified as a Modified Endowment Contract. The rules are too complex to be
summarized here, but generally depend on the amount of premium payments made
during the first seven policy years. Certain changes in a policy after it is
issued could also cause it to be classified as a Modified Endowment Contract. A
current or prospective Policy Owner should consult with a competent advisor to
determine whether a policy transaction will cause the Policy to be classified as
a Modified Endowment Contract.
Distributions Other Than Death Benefits from Modified Endowment
Contracts. Policies classified as Modified Endowment Contracts are subject to
the following tax rules:
(1) All distributions other than death benefits from a Modified
Endowment Contract, including distributions upon surrender
and withdrawals, will be treated first as distributions of
gain taxable as ordinary income and as tax-free recovery of
the Policy Owner's investment in the Policy only after all
gain has been distributed.
(2) Loans taken from or secured by a Policy classified as a
Modified Endowment Contract are treated as distributions
and taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount
subject to tax except where the distribution or loan is
made when the Policy Owner has attained age 59 1/2 or is
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disabled, or where the distribution is part of a series of
substantially equal periodic payments for the life (or life
expectancy) of the Policy Owner or the joint lives (or
joint life expectancies) of the Policy Owner and the Policy
Owner's beneficiary or designated beneficiary.
If a Contract becomes a modified endowment contract, distributions
that occur during the contract year will be taxed as distributions from a
modified endowment contract. In addition, distributions from a Contract within
two years before it becomes a modified endowment contract will be taxed in this
manner. This means that a distribution made from a Contract that is not a
modified endowment contract could later become taxable as a distribution from a
modified endowment contract.
Distributions Other Than Death Benefits from Policies that are not
Modified Endowment Contracts. Distributions other than death benefits from a
Policy that is not classified as a Modified Endowment Contract are generally
treated first as a recovery of the Policy Owner's investment in the policy and
only after the recovery of all investment in the policy as taxable income.
However, certain distributions which must be made in order to enable the Policy
to continue to qualify as a life insurance contract for Federal income tax
purposes if policy benefits are reduced during the first 15 policy years may be
treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not classified as a
Modified Endowment Contract are generally not treated as distributions. However,
the tax consequences associated with preferred Policy loans is less clear and a
tax adviser should be consulted about such loans.
Finally, neither distributions from nor loans from or secured by a
Policy that is not a Modified Endowment Contract are subject to the 10 percent
additional income tax.
Investment in the Policy. Your investment in the Policy is generally
your aggregate premium payments. When a distribution is taken from the Policy,
your investment in the Policy is reduced by the amount of the distribution that
is tax-free.
Policy Loan Interest. In general, interest paid on any loan under a
Policy will not be deductible.
Multiple Policies. All Modified Endowment Contracts that are issued
by National Life (or its affiliates) to the same Policy Owner during any
calendar year are treated as one Modified Endowment Contract for purposes of
determining the amount includible in the Policy Owner's income when a taxable
distribution occurs.
Business Uses of the Policy. Businesses can use the Policy in various
arrangements, including nonqualified deferred compensation or salary continuance
plans, split dollar insurance plans, executive bonus plans, tax exempt and
nonexempt welfare benefit plans, retiree medical benefit plans and others. The
tax consequences of such plans may vary depending on the particular facts and
circumstances. If you are purchasing the Policy for any arrangement the value of
which depends in part on its tax consequences, you should consult a qualified
tax adviser. In recent years, moreover, 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 adviser.
Continuation Beyond Age 100. The tax consequences of continuing the
Policy beyond the Insured's 100th year are unclear. You should consult a tax
adviser if you intend to keep the Policy in force beyond the Insured's 100th
year.
SPECIAL RULES FOR EMPLOYEE BENEFIT PLANS
If a trustee under a pension or profit-sharing plan, or similar
deferred compensation arrangement, owns a Policy, the Federal and state income
and estate tax consequences could differ. A tax adviser should be consulted with
respect to such consequences. Policies owned under these types of plans may
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also be subject to restrictions under the Employee Retirement Income Security
Act of 1974 ("ERISA"). You should consult a qualified adviser regarding ERISA.
The amounts of life insurance that may be purchased on behalf of a
participant in a pension or profit-sharing plan are limited.
The current cost of insurance for the net amount at risk is treated
as a "current fringe benefit" and must be included annually in the plan
participant's gross income. We report this cost (generally referred to as the
"P.S. 58" cost) to the participant annually.
If the plan participant dies while covered by the plan and the Policy
proceeds are paid to the participant's beneficiary, then the excess of the death
benefit over the Accumulated Value is not taxable. However, the Accumulated
Value will generally be taxable to the extent it exceeds the participant's cost
basis in the Policy.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the policy could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Policy.
POSSIBLE CHARGES FOR NATIONAL LIFE'S TAXES
At the present time, National Life makes no charge for any Federal,
state or local taxes (other than the charge for state premium taxes and the DAC
tax) that may be attributable to the Subaccounts or to the policies. National
Life reserves the right to charge the Subaccounts for any future taxes or
economic burden National Life may incur.
POLICIES ISSUED IN CONJUNCTION WITH EMPLOYEE BENEFIT PLANS
Policies may be acquired in conjunction with employee benefit plans,
including the funding of qualified pension plans meeting the requirements of
Section 401 of the Code.
For employee benefit plan Policies, the maximum cost of insurance rates
used to determine the monthly Cost of Insurance Charge are based on the
Commissioners' 1980 Standard Ordinary Mortality Tables NB and SB. Under these
Tables, mortality rates are the same for male and female Insureds of a
particular Attained Age and Rate Class. (See "Cost of Insurance Charge," Page
29.)
Illustrations reflecting the premiums and charges for employee benefit
plan Policies will be provided upon request to purchasers of such Policies.
There is no provision for misstatement of sex in the employee benefit
plan Policies. (See "Misstatement of Age and Sex," Page 41.) Also, the rates
used to determine the amount payable under a particular Settlement Option will
be the same for male and female Insureds. (See "Settlement Options," Page 42.)
LEGAL DEVELOPMENTS REGARDING UNISEX ACTUARIAL TABLES
In 1983, the United States Supreme Court held in Arizona Governing
Committee v. Norris that optional annuity benefits provided under an employee's
deferred compensation plan could not, under Title VII of the Civil Rights Act of
1964, vary between men and women on the basis of sex. In that case, the Court
applied its decision only to benefits derived from contributions made on or
after August 1, 1983. Subsequent decisions of lower federal courts indicate that
in other factual circumstances the Title VII prohibition of sex-distinct
benefits may apply at an earlier date. In addition, legislative, regulatory, or
decisional authority of some states may prohibit use of sex-distinct mortality
tables under certain
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circumstances. The Policies offered by this Prospectus, other than Policies
issued in states which require "unisex" policies (currently Montana) and
employee benefit plan Policies (see "Policies Issued in Conjunction with
Employee Benefit Plans," Page 48) are based upon actuarial tables which
distinguish between men and women and, thus, the Policy provides different
benefits to men and women of the same age. Accordingly, employers and employee
organizations should consider, in consultation with legal counsel, the impact of
these authorities on any employment-related insurance or benefits program before
purchasing the Policy and in determining whether an employee benefit plan Policy
is appropriate.
VOTING RIGHTS
We will invest all of the assets held in the Subaccounts of the Separate
Account 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 to be approved or ratified by the shareholders of a mutual fund.
We are the legal owner of Fund shares and as such have 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 of Policy Owners. We will vote Fund
shares held in each Subaccount of the Separate Account for which Owners do not
send timely instructions in the same proportion as those shares in that
Subaccount for which instructions are received.
If you have a voting interest, we will send you proxy material and a form
for giving voting instructions. You may vote, by proxy or in person, only as to
the Portfolios that correspond to the Subaccounts in which your Policy values
are allocated. We will determine the number of shares held in each Subaccount
attributable to a Policy for which you may provide voting instructions by
dividing the Policy's Accumulated Value in that account by the net asset value
of one share of the corresponding Portfolio as of the record date for the
shareholder meeting. We will count fractional shares. 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 provide voting instructions.
If required by state insurance officials, we may disregard voting
instructions if they 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, we may disregard voting instructions in favor of
certain changes initiated by an Owner or the Fund's Board of Directors if our
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 us. If we disregard voting instructions, we will
advise you of that action and our reasons in the next semi-annual report to
Owners.
Shares of the Funds are currently being offered to variable life
insurance and variable annuity separate accounts of life insurance companies
other than National Life that are not affiliated with National Life. National
Life understands that shares of these Funds also will be voted by such other
life insurance companies in accordance with instructions from their
policyholders invested in such separate accounts. This will dilute the effect of
your voting instructions.
CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under
applicable Federal securities laws. If changes in these laws or regulations
eliminate the necessity to solicit your voting instructions or restrict such
voting rights, we may proceed in accordance with these laws or regulations.
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We may also take the steps listed below, if we feel such an action is
reasonably necessary. In doing so we would comply with all applicable laws,
including approval of Owners, if so required:
(1) to make changes in the form of the Separate Account, if in our
judgment such changes would serve the interests of Owners or would be
appropriate in carrying out the purposes of the Policies, for example:
(i) operating the Separate Account as a management company
under the 1940 Act
(ii) deregistering the Separate Account under the 1940 Act if
registration is no longer required
(iii) combining or substituting separate accounts
(iv) transferring the assets of the Separate Account to another
separate account or to the General Account
(v) making changes necessary to comply with, obtain or
continue any exemptions from the 1940 Act; or
(vi) making other technical changes in the Policy to conform
with any action described herein;
(2) if in our 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;
(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 our 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 Accumulated Value in a Subaccount that is eliminated,
we will give you at least 30 days notice before the elimination, and will
request that you name the Subaccount or Subaccounts (or the General Account) to
which the Accumulated Value in that Subaccount should be transferred. If you do
not name a new Subaccount, then we will use the Money Market Subaccount. In any
case, if in the future we impose a transfer charge or establish limits on the
number of transfers or free transfers, no charge will be made for this transfer,
and it will not count toward any limit on transfers or free transfers.
OFFICERS AND DIRECTORS OF NATIONAL LIFE
The officers and directors of National Life, as well as their principal
occupations during the past five years, are listed below.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION DURING THE PAST FIVE YEARS
----------------- --------------------------
<S> <C>
Patrick E. Welch 1997 to present - Chairman of the 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.
</TABLE>
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<PAGE> 54
<TABLE>
<S> <C>
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.
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
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 & Financial Officer; 1994 to 1998 - Vice President and
Chief Financial Officer Controller, American Express Financial Advisors; 1991 to
1994 - Vice President and Chief Financial Officer of
ACUMA, Ltd.
Rodney A. Buck 2000 to present - Executive Vice President and Chief
Executive Vice President and Investment Officer; 1996 to 2000 - Senior Vice
Chief Investment Officer President and Chief Investment Officer; 1996 to present -
Chairman, President & Chief Executive Officer, National
Life Investment Management Company, Inc. ("NLIMC");
1998 to present - Chief Executive Office - Sentinel
Advisors Company ("SAC"); 1987 to 1997 - Senior Vice
President - SAC.
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
Michele S. Gatto 1999 to present: Senior Vice President & General
Senior Vice President & Counsel; 1997 to 1999 - Vice President, General Counsel
General 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 2000 to present: Senior Vice President - Marketing
Senior Vice President - Marketing Development and Operations; 1997 to 2000: Senior Vice
Development and Operations President - Sales and Distribution; 1993 to 1997: - Vice
President -Agency Financial Planning & Services
</TABLE>
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<PAGE> 55
<TABLE>
<S> <C>
Wade H. Mayo 2000 to present: Senior Vice President; 1993 to
Senior Vice President present: President and Chief Executive Officer - Life
Insurance Company of the Southwest ("LSW"); 1996 to
present: President - LSW National Holdings, Inc.1989 to
present: President & Director - Insurance Investors Life
Insurance Company
Joseph A. Miller 2000 to present: Senior Vice President; 1997 to
Senior Vice President 2000: Vice President & Director of Agencies;
1990 to 1997: Vice President - Southern Regional Office
Michael A. Tahan 1998 to present: Senior Vice President & Chief
Senior Vice President & Information Officer; 1991 to 1998 - First Vice President Chief
Information Officer & Chief Information Officer-Merrill Lynch Asset
Management
</TABLE>
DISTRIBUTION OF POLICIES
We sell Policies through agents who are licensed by state insurance
authorities to sell our variable life insurance policies, and who are also
registered representatives of Equity Services, Inc. ("ESI") or registered
representatives of broker/dealers who have Selling Agreements with ESI. ESI,
whose address is National Life Drive, Montpelier, Vermont 05604, is a registered
broker/dealer under the Securities Exchange Act of 1934 (the "1934 Act") and a
member of the National Association of Securities Dealers, Inc. (the "NASD"). ESI
is an indirect wholly-owned subsidiary of National Life, formed on October 7,
1968. 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 has sought 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.
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 and Chief
Executive Officer of ESI. ESI's other officers are:
Kenneth R. Ehinger President & Chief Operating Officer
John M. Grab, Jr. Senior Vice President & Chief Financial Officer
Stephen A. Englese Senior 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
The principal business address of all these individuals is National Life
Drive, Montpelier, Vermont 05604.
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<PAGE> 56
We do the insurance underwriting , determine a proposed Insured's Rate
Class, and determine whether to accept or reject an application for a Policy. We
will refund any premiums paid if a Policy ultimately is not issued or will
refund the applicable amount if the Policy is returned under the free look
provision.
Agents who are ESI registered representatives are compensated for sales
of the Policies on a commission basis and with other forms of compensation.
During the first Policy Year, agent commissions will not be more than 50% of the
premiums paid up to a target amount (which is a function of Face Amount, and
which is used primarily to determine commission payments) and 3% of the premiums
paid in excess of that amount. For Policy Years 2 through 10, the agent
commissions will not be more than 4% of the premiums paid up to the target
amount, and 3% of premiums paid in excess of that amount. For Policy year 11 and
thereafter, agent commissions will be 1.5% of all premiums paid. For premiums
received in the year following an increase in Face Amount and attributable to
the increase, agent commissions will not be more than 48.5% up to the target
amount for the increase. Full time agents of National Life who achieve specified
annual sales goals may be eligible for compensation in addition to the amounts
stated above.
Dealers other than ESI will receive gross dealer concessions during the
first Policy Year of 85% of the premiums paid up to the target amount and 4% of
the premiums paid in excess of that amount. For Policy Years 2 through 10, the
gross dealer concession will not be more than 4% of the premiums paid. For
Policy Year 11 and thereafter, the gross dealer concession will be 1.5% of all
premiums paid. For premiums received in the year following an increase in Face
Amount and attributable to the increase, the gross dealer concession will not be
more than 50% up to the target amount for the increase. The aggregate amounts of
sales load received by ESI in connection with the Policies in 1997, 1998 and
1999 were $31,525.99, $189,078.86 and $239,093.31, respectively.
POLICY REPORTS
Once each Policy Year, we will send you a statement describing the status
of the Policy, including setting forth:
- the Face Amount
- the current Death Benefit
- any Policy loans and accrued interest
- the current Accumulated Value
- the non-loaned Accumulated Value in the General Account
- the amount held as Collateral in the General Account
- the value in each Subaccount of the Separate Account
- premiums paid since the last report
- charges deducted since the last report
- any Withdrawals since the last report, and
- the current Cash Surrender Value.
In addition, we will send you a statement showing the status of the
Policy following the transfer of amounts from one Subaccount of a Separate
Account to another, the taking out of a loan, a repayment of a loan, a
Withdrawal and the payment of any premiums (excluding those paid by bank draft
or otherwise under the Automatic Payment Plan).
We will send you a semi-annual report containing the financial statements
of each Fund in which your Policy has Accumulated Value, as required by the 1940
Act.
STATE REGULATION
We are subject to regulation and supervision by the Department of
Banking, Insurance, Securities and Health Care Administration of the State of
Vermont, which periodically examines our affairs. We are
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<PAGE> 57
also subject to the insurance laws and regulations of all jurisdictions where we
are authorized to do business. We have filed a copy of the Policy form with, and
where required obtained an approval by, insurance officials in each jurisdiction
where the Policies are sold. We are required to submit annual statements of our
operations, including financial statements, to the insurance departments of the
various jurisdictions in which we do business for the purposes of determining
solvency and compliance with local insurance laws and regulations.
INSURANCE MARKETPLACE STANDARDS ASSOCIATION
National Life Insurance Company is a member of the Insurance
Marketplace Standards Association ("IMSA"), and as such may include the IMSA
logo and information about IMSA membership in its advertisements. Companies that
belong to IMSA subscribe to a set of ethical standards covering the various
aspects of sales and service for individually sold life insurance and annuities.
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
Elizabeth H. MacGowan, F.S.A. MAAA, Actuary - Product Development of National
Life.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice
on legal matters relating to certain aspects of Federal securities law
applicable to the issue and sale of the Policies. Matters of Vermont law
pertaining to the Policies, including National Life's right to issue the
Policies and its qualification to do so under applicable laws and regulations
issued thereunder, have been passed upon by Michele S. Gatto, Senior Vice
President and General Counsel of National Life.
The Separate Account is not a party to any litigation. There are
no material legal proceedings involving National Life which are likely to have a
material adverse effect upon the Separate Account or upon the ability of
National Life to meet its obligations under the Policies. ESI is not engaged in
any litigation of any material nature. The Company, like other life insurance
companies, is involved in lawsuits, including class action lawsuits. In some
class action and other lawsuits involving insurance companies, substantial
damages have been sought and/or material settlement payments have been made.
Although the Company cannot predict the outcome of any litigation with
certainty, the Company believes that at the present time, there are no pending
or threatened lawsuits that are reasonably likely to have a material adverse
impact on it or the Variable Account.
FINANCIAL STATEMENTS
The financial statements of National Life and of the relevant Subaccounts
of the Separate Account appear on the following pages. The financial statements
of National Life should be distinguished from the financial statements of the
Separate Account and should be considered only as bearing upon National Life's
ability to meet its obligations under the Policies.
54
<PAGE> 58
GLOSSARY
ACCUMULATED VALUE The sum of the Policy's values in the
Separate Account and the General Account.
ATTAINED AGE The Issue Age of the Insured plus the number
of full Policy Years which have passed since
the Date of Issue.
BENEFICIARY The person(s) or entity(ies) designated to
receive all or some of the Death Benefit
when the Insured dies. The Beneficiary is
designated in the application or if
subsequently changed, as shown in the latest
change filed with National Life. The
interest of any Beneficiary who dies before
the Insured shall vest in the Owner unless
otherwise stated.
CASH SURRENDER VALUE The Accumulated Value minus any applicable
Surrender Charge, and minus any outstanding
Policy loans and accrued interest on such
loans.
COLLATERAL The portion of the Accumulated Value in the
General Account which secures the amount of
any Policy loan.
DAC TAX A tax attributable to Specified Policy
Acquisition Expenses under Internal Revenue
Code Section 848.
DATE OF ISSUE The date on which the Policy is issued,
which is set forth in the Policy. It is used
to determine Policy Years, Policy Months and
Monthly Policy Dates, as well as to measure
suicide and contestable periods.
DEATH BENEFIT The Policy's Unadjusted Death Benefit, plus
any relevant additional benefits provided by
a supplementary benefit Rider, less any
outstanding Policy loan and accrued
interest, and less any unpaid Monthly
Deductions.
DURATION The number of full years the insurance has
been in force; for the Initial Face Amount,
measured from the Date of Issue; for any
increase in Face Amount, measured from the
effective date of such increase.
FACE AMOUNT The Initial Face Amount plus any increases
in Face Amount and minus any decreases in
Face Amount.
GENERAL ACCOUNT The account which holds the assets of
National Life which are available to support
its insurance and annuity obligations.
GRACE PERIOD A 61-day period measured from the date on
which notice of pending lapse is sent by
National Life, during which the Policy will
not lapse and insurance coverage continues.
To prevent lapse, the Owner must during the
Grace Period make a premium payment equal to
the sum of any amount by which the past
Monthly Deductions have been in excess of
Cash Surrender Value, plus three times the
Monthly Deduction due the date the Grace
Period began.
55
<PAGE> 59
GUARANTEED DEATH BENEFIT RIDER An optional Rider that will guarantee that
the Policy will not lapse prior to Attained
Age 70, or 20 years from the Policy's Date
of Issue, if longer, regardless of
investment performance, if the Minimum
Guarantee Premium has been paid as of each
Monthly Policy Date.
HOME OFFICE National Life's Home Office at National Life
Drive, Montpelier, Vermont 05604.
INITIAL FACE AMOUNT The Face Amount of the Policy on the Date of
Issue. The Face Amount may be increased or
decreased after the first Policy Year.
INSURED The person upon whose life the Policy is
issued.
ISSUE AGE The age of the Insured at his or her
birthday nearest the Date of Issue. The
Issue Age is stated in the Policy.
MINIMUM FACE AMOUNT The Minimum Face Amount is generally
$50,000. However, exceptions may be made in
employee benefit plan cases.
MINIMUM GUARANTEE PREMIUM The sum of the Minimum Monthly Premiums in
effect on each Monthly Policy Date since the
Date of Issue (including the current month),
plus all Withdrawals and outstanding Policy
loans and accrued interest.
MINIMUM INITIAL PREMIUM The minimum premium required to issue a
Policy. It is equal to the Minimum Monthly
Premium.
MINIMUM MONTHLY PREMIUM The monthly amount used to determine the
Minimum Guarantee Premium. This amount,
which includes any substandard charges and
any applicable Rider charges, is determined
separately for each Policy, based on the
requested Initial Face Amount, and the Issue
Age, sex and Rate Class of the Insured, and
the Death Benefit Option and any optional
benefits selected. It is stated in each
Policy.
MONTHLY ADMINISTRATIVE CHARGE A charge of $7.50 per month included in the
Monthly Deduction, which is intended to
reimburse National Life for ordinary
administrative expenses.
MONTHLY DEDUCTION The amount deducted from the Accumulated
Value on each Monthly Policy Date. It
includes the Monthly Administrative Charge,
the Cost of Insurance Charge, and the
monthly cost of any benefits provided by
Riders.
MONTHLY POLICY DATE The day in each calendar month which is the
same day of the month as the Date of Issue,
or the last day of any month having no such
date, except that whenever the Monthly
Policy Date would otherwise fall on a date
other than a Valuation Day, the Monthly
Policy Date will be deemed to be the next
Valuation Day.
NET AMOUNT AT RISK The amount by which the Unadjusted Death
Benefit exceeds the Accumulated Value.
56
<PAGE> 60
NET PREMIUM The remainder of a premium after the
deduction of the Premium Tax Charge.
OWNER The person(s) or entity(ies) entitled to
exercise the rights granted in the Policy.
PLANNED PERIODIC PREMIUM The premium amount which the Owner plans to
pay at the frequency selected. The Owner may
request a reminder notice and may change the
amount of the Planned Periodic Premium. The
Owner is not required to pay the designated
amount.
POLICY ANNIVERSARY The same day and month as the Date of Issue
in each later year.
POLICY YEAR A year that starts on the Date of Issue or
on a Policy Anniversary.
PREMIUM TAX CHARGE A charge deducted from each premium payment
to cover the cost of state and local premium
taxes, and the federal DAC Tax.
RATE CLASS The classification of the Insured for cost
of insurance purposes. The Rate Classes are:
elite preferred nonsmoker; preferred
nonsmoker; standard nonsmoker; preferred
smoker; standard smoker; juvenile; and
substandard.
RIDERS Optional benefits that an Owner may elect to
add to the Policy at an additional cost.
SURRENDER CHARGE The amount deducted from the Accumulated
Value of the Policy upon lapse or surrender
during the first 15 Policy Years or the
first 15 years following an increase in
coverage. The Surrender Charge is shown in
the Policy.
UNADJUSTED DEATH BENEFIT Under Option A, the greater of the Face
Amount or the applicable percentage of the
Accumulated Value on the date of death;
under Option B, the greater of the Face
Amount plus the Accumulated Value on the
date of death, or the applicable percentage
of the Accumulated Value on the date of
death. The Death Benefit Option is selected
at time of application but may be later
changed.
VALUATION DAY Each day that the New York Stock Exchange is
open for business other than the day after
Thanksgiving and any day on which trading is
restricted by directive of the Securities
and Exchange Commission. Unless otherwise
indicated, whenever under a Policy an event
occurs or a transaction is to be effected on
a day that is not a Valuation Date, it will
be deemed to have occurred on the next
Valuation Date.
VALUATION PERIOD The time between two successive Valuation
Days. Each Valuation Period includes a
Valuation Day and any non-Valuation Day or
consecutive non-Valuation Days immediately
preceding it.
WITHDRAWAL A payment made at the request of the Owner
pursuant to the right in the Policy to
withdraw a portion of the Cash Surrender
Value of the Policy. The Withdrawal Charge
will be deducted from the Withdrawal Amount.
57
<PAGE> 61
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Accumulated
Values and Cash Surrender Values of a Policy may change with the investment
experience of the Separate Account. The tables show how the Death Benefits,
Accumulated Values and Cash Surrender Values of a Policy issued to an Insured of
a given age, sex and Rate Class would vary over time if the investment return on
the assets held in each Portfolio of each of the Funds were a uniform, gross,
annual rate of 0%, 6% and 12%.
The tables on Pages A-2 to A-7 illustrate a Policy issued to a male
Insured, Age 40 in the Elite Preferred Nonsmoker Rate Class with a Face Amount
of $250,000 and Planned Periodic Premiums of $3,000 for Death Benefit Option A,
and $4,000 for Death Benefit Option B, in each case paid at the beginning of
each Policy Year. The Death Benefits, Accumulated Values and Cash Surrender
Values would be lower if the Insured was in a standard nonsmoker, smoker or
substandard class since the cost of insurance charges are higher for these
classes. Also, the values would be different from those shown if the gross
annual investment returns averaged 0%, 6% and 12% over a period of years, but
fluctuated above and below those averages for individual Policy Years. The net
annual rate of return shown in the tables is the gross annual rate reduced to
reflect the average investment advisory fee and average operating expenses of
the Funds after reimbursement and the Mortality and Expense Risk Charge.
The second column of the tables show the amount to which the premiums
would accumulate if an amount equal to those premiums were invested to earn
interest, after taxes, at 5% compounded annually. The columns shown under the
heading "Guaranteed" assume that throughout the life of the policy, the monthly
charge for cost of insurance is based on the maximum level permitted under the
Policy (based on the 1980 CSO Smoker/Nonsmoker Table); the columns under the
heading "Current" assume that throughout the life of the Policy, the monthly
charge for cost of insurance is based on the current cost of insurance rate, and
for Policy Years after year 10, a bonus under which the Monthly Deductions are
reduced by 0.50% per annum.
The amounts shown in all tables reflect an averaging of certain other
asset charges described below that may be assessed under the Policy, depending
upon how premiums are allocated. The total of the asset charges reflected in the
Current and Guaranteed illustrations, including the Mortality and Expense Risk
Charge of 0.90%, is 1.71%. This total charge is based on an assumption that an
Owner allocates the Policy values equally among the Subaccounts of the Separate
Account.
These asset charges reflect an investment advisory fee of 0.56%, which
represents a simple average of the fees incurred by the Portfolios during 1999
and expenses of 0.25%, which is based on a simple average of the actual expenses
incurred by the Portfolios during 1999, adjusted, as appropriate, to take into
account expense reimbursement arrangements expected to be in place for 2000. In
the absence of the reimbursement arrangements for some of the Portfolios, the
total asset charges reflected in the Current and Guaranteed Illustrations,
including the Mortality and Expense Risk Charge, would have totaled an average
of 1.96%. If the reimbursement arrangements were discontinued, the Accumulated
Values and 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 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 Accounts. If such a charge
is made in the future, it would take a higher gross annual rate of return to
produce the same Policy values.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums are paid and allocated as
indicated, no amounts are allocated to the General Account, and no Policy loans
are made. The tables are also based on the assumption that the Owner has not
requested an increase or decrease in the Face Amount, that no Withdrawals have
been made and no transfers have been made in any Policy Year.
Upon request, National Life will provide a comparable illustration based
upon the proposed Insured's Age and Rate Class, the Death Benefit Option, Face
Amount, Planned Periodic Premiums and Riders requested.
A-1
<PAGE> 62
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.71%)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
End of Accumulated Cash Cash
Policy at 5% Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,204 107 250,000 2,329 231 250,000
2 6,458 4,332 2,234 250,000 4,603 2,505 250,000
3 9,930 6,385 4,288 250,000 6,815 4,718 250,000
4 13,577 8,358 6,261 250,000 8,963 6,866 250,000
5 17,406 10,254 8,156 250,000 11,044 8,946 250,000
6 21,426 12,064 10,175 250,000 13,060 11,171 250,000
7 25,647 13,786 12,105 250,000 14,999 13,317 250,000
8 30,080 15,418 13,944 250,000 16,856 15,383 250,000
9 34,734 16,957 15,691 250,000 18,637 17,371 250,000
10 39,620 18,395 17,338 250,000 20,338 19,280 250,000
11 44,751 19,732 18,883 250,000 22,299 21,449 250,000
12 50,139 20,953 20,312 250,000 24,189 23,548 250,000
13 55,796 22,045 21,611 250,000 26,009 25,575 250,000
14 61,736 22,996 22,771 250,000 27,752 27,527 250,000
15 67,972 23,791 23,773 250,000 29,415 29,397 250,000
16 74,521 24,415 24,415 250,000 30,994 30,994 250,000
17 81,397 24,853 24,853 250,000 32,482 32,482 250,000
18 88,617 25,096 25,096 250,000 33,871 33,871 250,000
19 96,198 25,132 25,132 250,000 35,147 35,147 250,000
20 104,158 24,934 24,934 250,000 36,290 36,290 250,000
25 150,340 19,315 19,315 250,000 39,843 39,843 250,000
30 209,282 1,390 1,390 250,000 38,851 38,851 250,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-2
<PAGE> 63
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.19%)
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------- ------------------------------------------
End of Accumulated Cash Cash
Policy at 5% Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,355 257 250,000 2,483 386 250,000
2 6,458 4,768 2,671 250,000 5,055 2,958 250,000
3 9,930 7,245 5,148 250,000 7,713 5,615 250,000
4 13,577 9,781 7,683 250,000 10,455 8,358 250,000
5 17,406 12,379 10,282 250,000 13,282 11,185 250,000
6 21,426 15,035 13,145 250,000 16,201 14,311 250,000
7 25,647 17,747 16,065 250,000 19,200 17,518 250,000
8 30,080 20,515 19,041 250,000 22,278 20,805 250,000
9 34,734 23,338 22,073 250,000 25,445 24,179 250,000
10 39,620 26,212 25,154 250,000 28,700 27,642 250,000
11 44,751 29,136 28,287 250,000 32,434 31,584 250,000
12 50,139 32,100 31,458 250,000 36,303 35,662 250,000
13 55,796 35,092 34,659 250,000 40,314 39,881 250,000
14 61,736 38,105 37,879 250,000 44,469 44,244 250,000
15 67,972 41,122 41,105 250,000 48,772 48,755 250,000
16 74,521 44,135 44,135 250,000 53,229 53,229 250,000
17 81,397 47,130 47,130 250,000 57,843 57,843 250,000
18 88,617 50,102 50,102 250,000 62,616 62,616 250,000
19 96,198 53,040 53,040 250,000 67,546 67,546 250,000
20 104,158 55,924 55,924 250,000 72,627 72,627 250,000
25 150,340 68,654 68,654 250,000 100,642 100,642 250,000
30 209,282 75,035 75,035 250,000 134,070 134,070 250,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
<PAGE> 64
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.08%)
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------- -------------------------------------------
End of Accumulated Cash Cash
Policy at 5% Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,505 408 250,000 2,638 541 250,000
2 6,458 5,224 3,126 250,000 5,527 3,429 250,000
3 9,930 8,177 6,080 250,000 8,685 6,587 250,000
4 13,577 11,385 9,288 250,000 12,136 10,038 250,000
5 17,406 14,874 12,777 250,000 15,906 13,808 250,000
6 21,426 18,666 16,777 250,000 20,031 18,141 250,000
7 25,647 22,790 21,108 250,000 24,533 22,852 250,000
8 30,080 27,277 25,804 250,000 29,449 27,975 250,000
9 34,734 32,165 30,899 250,000 34,826 33,560 250,000
10 39,620 37,489 36,432 250,000 40,709 39,652 250,000
11 44,751 43,296 42,447 250,000 47,608 46,759 250,000
12 50,139 49,626 48,985 250,000 55,211 54,570 250,000
13 55,796 56,527 56,094 250,000 63,599 63,165 250,000
14 61,736 64,055 63,830 250,000 72,854 72,629 250,000
15 67,972 72,271 72,254 250,000 83,073 83,055 250,000
16 74,521 81,247 81,247 250,000 94,364 94,364 250,000
17 81,397 91,066 91,066 250,000 106,848 106,848 250,000
18 88,617 101,832 101,832 250,000 120,660 120,660 250,000
19 96,198 113,657 113,657 250,000 135,950 135,950 250,000
20 104,158 126,669 126,669 250,000 152,887 152,887 250,000
25 150,340 215,691 215,691 263,143 269,504 269,504 328,795
30 209,282 359,551 359,551 417,079 461,090 461,090 534,864
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
<PAGE> 65
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.71%%)
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------- --------------------------------------------
End of Accumulated Cash Cash
Policy at 5% Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,149 1,052 253,149 3,275 1,178 253,275
2 8,610 6,200 4,103 256,200 6,475 4,377 256,475
3 13,241 9,155 7,057 259,155 9,592 7,495 259,592
4 18,103 12,007 9,909 262,007 12,624 10,527 262,624
5 23,208 14,758 12,661 264,758 15,568 13,470 265,568
6 28,568 17,401 15,511 267,401 18,426 16,537 268,426
7 34,196 19,932 18,250 269,932 21,184 19,502 271,184
8 40,106 22,348 20,874 272,348 23,838 22,364 273,838
9 46,312 24,646 23,380 274,646 26,392 25,126 276,392
10 52,827 26,818 25,761 276,818 28,843 27,786 278,843
11 59,669 28,862 28,013 278,862 31,599 30,750 281,599
12 66,852 30,762 30,121 280,762 34,265 33,623 284,265
13 74,395 32,504 32,071 282,504 36,838 36,405 286,838
14 82,314 34,076 33,850 284,076 39,314 39,089 289,314
15 90,630 35,457 35,440 285,457 41,685 41,668 291,685
16 99,361 36,635 36,635 286,635 43,948 43,948 293,948
17 108,530 37,592 37,592 287,592 46,095 46,095 296,095
18 118,156 38,320 38,320 288,320 48,114 48,114 298,114
19 128,264 38,806 38,806 288,806 49,989 49,989 299,989
20 138,877 39,025 39,025 289,025 51,696 51,696 301,696
25 200,454 35,029 35,029 285,029 57,502 57,502 307,502
30 279,043 18,842 18,842 268,842 57,713 57,713 307,713
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
<PAGE> 66
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.19%)
<TABLE>
<CAPTION>
Guaranteed Current
Premiums -------------------------------------------- --------------------------------------------
End of Accumulated Cash Cash
Policy at 5% Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,356 1,259 253,356 3,486 1,389 253,486
2 8,610 6,808 4,710 256,808 7,099 5,001 257,099
3 13,241 10,357 8,260 260,357 10,834 8,736 260,834
4 18,103 14,002 11,905 264,002 14,692 12,595 264,692
5 23,208 17,746 15,649 267,746 18,674 16,577 268,674
6 28,568 21,584 19,694 271,584 22,787 20,898 272,787
7 34,196 25,513 23,831 275,513 27,019 25,338 277,019
8 40,106 29,532 28,059 279,532 31,370 29,896 281,370
9 46,312 33,642 32,376 283,642 35,846 34,581 285,846
10 52,827 37,834 36,776 287,834 40,449 39,392 290,449
11 59,669 42,107 41,258 292,107 45,667 44,817 295,667
12 66,852 46,447 45,806 296,447 51,071 50,430 301,071
13 74,395 50,839 50,406 300,839 56,668 56,235 306,668
14 82,314 55,270 55,045 305,270 62,460 62,235 312,460
15 90,630 59,718 59,701 309,718 68,448 68,431 318,448
16 99,361 64,167 64,167 314,167 74,637 74,637 324,637
17 108,530 68,595 68,595 318,595 81,024 81,024 331,024
18 118,156 72,990 72,990 322,990 87,608 87,608 337,608
19 128,264 77,332 77,332 327,332 94,379 94,379 344,379
20 138,877 81,588 81,588 331,588 101,318 101,318 351,318
25 200,454 100,115 100,115 350,115 138,535 138,535 388,535
30 279,043 108,497 108,497 358,497 179,361 179,361 429,361
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE> 67
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.08%)
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------------- -------------------------------------------
End of Accumulated Cash Cash
Policy at 5% Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,564 1,466 253,564 3,698 1,600 253,698
2 8,610 7,440 5,343 257,440 7,748 5,650 257,748
3 13,241 11,660 9,562 261,660 12,177 10,080 262,177
4 18,103 16,250 14,153 266,250 17,019 14,922 267,019
5 23,208 21,248 19,151 271,248 22,310 20,213 272,310
6 28,568 26,685 24,795 276,685 28,098 26,209 278,098
7 34,196 32,599 30,917 282,599 34,415 32,733 284,415
8 40,106 39,033 37,559 289,033 41,308 39,834 291,308
9 46,312 46,035 44,769 296,035 48,839 47,573 298,839
10 52,827 53,651 52,593 303,651 57,066 56,008 307,066
11 59,669 61,938 61,088 311,938 66,653 65,803 316,653
12 66,852 70,945 70,304 320,945 77,199 76,557 327,199
13 74,395 80,728 80,294 330,728 88,802 88,369 338,802
14 82,314 91,347 91,121 341,347 101,569 101,344 351,569
15 90,630 102,864 102,846 352,864 115,614 115,597 365,614
16 99,361 115,351 115,351 365,351 131,068 131,068 381,068
17 108,530 128,885 128,885 378,885 148,071 148,071 398,071
18 118,156 143,559 143,559 393,559 166,773 166,773 416,773
19 128,264 159,469 159,469 409,469 187,338 187,338 437,338
20 138,877 176,708 176,708 426,708 209,934 209,934 459,934
25 200,454 286,598 286,598 536,598 361,488 361,488 611,488
30 279,043 447,875 447,875 697,875 605,807 605,807 855,807
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-7
<PAGE> 68
APPENDIX B
SURRENDER CHARGE TARGET PREMIUMS ("SCTP") AND
DEFERRED SALES CHARGES ("DSC")
(ANNUAL RATES PER $1,000 OF FACE AMOUNT)
<TABLE>
<CAPTION>
MALE FEMALE
ISSUE NONSMOKER SMOKER NONSMOKER SMOKER
AGE SCTP DSC SCTP DSC SCTP DSC SCTP DSC
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 2.85 1.43 2.85 1.43 2.24 1.12 2.24 1.12
1 2.78 1.39 2.78 1.39 2.20 1.10 2.20 1.10
2 2.87 1.44 2.87 1.44 2.27 1.14 2.27 1.14
3 2.97 1.49 2.97 1.49 2.35 1.18 2.35 1.18
4 3.08 1.54 3.08 1.54 2.43 1.22 2.43 1.22
5 3.19 1.60 3.19 1.60 2.52 1.26 2.52 1.26
6 3.32 1.66 3.32 1.66 2.61 1.31 2.61 1.31
7 3.45 1.73 3.45 1.73 2.71 1.36 2.71 1.36
8 3.59 1.80 3.59 1.80 2.82 1.41 2.82 1.41
9 3.74 1.87 3.74 1.87 2.93 1.47 2.93 1.47
10 3.90 1.95 3.90 1.95 3.05 1.53 3.05 1.53
11 4.08 2.04 4.08 2.04 3.17 1.59 3.17 1.59
12 4.25 2.13 4.25 2.13 3.31 1.66 3.31 1.66
13 4.44 2.22 4.44 2.22 3.45 1.73 3.45 1.73
14 4.63 2.32 4.63 2.32 3.59 1.80 3.59 1.80
15 4.82 2.41 4.82 2.41 3.74 1.87 3.74 1.87
16 5.01 2.51 5.01 2.51 3.90 1.95 3.90 1.95
17 5.21 2.61 5.21 2.61 4.06 2.03 4.06 2.03
18 5.40 2.70 5.40 2.70 4.23 2.12 4.23 2.12
19 5.61 2.81 5.61 2.81 4.41 2.21 4.41 2.21
20 5.18 2.59 6.89 3.45 4.36 2.18 5.19 2.60
21 5.37 2.69 7.15 3.58 4.54 2.27 5.41 2.71
22 5.58 2.79 7.43 3.72 4.73 2.37 5.65 2.83
23 5.80 2.90 7.73 3.87 4.94 2.47 5.90 2.95
24 6.04 3.02 8.05 4.03 5.15 2.58 6.16 3.08
25 6.29 3.15 8.39 4.20 5.38 2.69 6.43 3.22
26 6.56 3.28 8.76 4.38 5.62 2.81 6.73 3.37
27 6.85 3.43 9.16 4.58 5.87 2.94 7.04 3.52
28 7.16 3.58 9.58 4.79 6.14 3.07 7.36 3.68
29 7.49 3.75 10.04 5.02 6.42 3.21 7.70 3.85
30 7.84 3.92 10.52 5.26 6.71 3.36 8.07 4.04
31 8.21 4.11 11.04 5.52 7.03 3.52 8.45 4.23
32 8.61 4.31 11.59 5.80 7.36 3.68 8.85 4.43
33 9.03 4.52 12.17 6.09 7.71 3.86 9.28 4.64
34 9.47 4.74 12.79 6.40 8.08 4.04 9.73 4.87
35 9.95 4.98 13.44 6.72 8.47 4.24 10.21 5.11
36 10.45 5.23 14.14 7.07 8.88 4.44 10.71 5.36
37 10.98 5.49 14.88 7.44 9.32 4.66 11.24 5.62
38 11.54 5.77 15.66 7.83 9.77 4.89 11.80 5.90
39 12.14 6.07 16.49 8.25 10.26 5.13 12.38 6.19
40 12.77 6.39 17.36 8.68 10.77 5.39 12.99 6.50
41 13.43 6.72 18.28 9.14 11.30 5.65 13.63 6.82
42 14.14 7.07 19.26 9.63 11.86 5.93 14.30 7.15
43 14.89 7.45 20.28 10.14 12.45 6.23 14.99 7.50
</TABLE>
B-1
<PAGE> 69
<TABLE>
<CAPTION>
MALE FEMALE
ISSUE NONSMOKER SMOKER NONSMOKER SMOKER
AGE SCTP DSC SCTP DSC SCTP DSC SCTP DSC
<S> <C> <C> <C> <C> <C> <C> <C> <C>
44 15.68 7.84 21.37 10.69 13.07 6.54 15.72 7.86
45 16.52 8.26 22.51 11.26 13.73 6.87 16.49 8.25
46 17.42 8.71 23.72 11.86 14.43 7.22 17.29 8.65
47 18.37 9.19 25.00 12.50 15.16 7.58 18.14 9.07
48 19.38 9.69 26.35 13.18 15.94 7.97 19.03 9.52
49 20.46 10.23 27.79 13.90 16.77 8.39 19.98 9.99
50 21.61 10.81 29.32 14.66 17.65 8.83 20.97 10.49
51 22.83 11.42 30.94 15.47 18.57 9.29 22.02 11.01
52 24.14 12.07 32.65 16.33 19.56 9.78 23.13 11.57
53 25.53 12.77 34.48 17.24 20.61 10.31 24.30 12.15
54 27.02 13.51 36.40 18.20 21.72 10.86 25.54 12.77
55 28.60 14.30 38.44 19.22 22.90 11.45 26.84 13.42
56 30.29 15.15 40.59 20.30 24.15 12.08 28.23 14.12
57 32.08 16.04 42.87 21.44 25.49 12.75 29.70 14.85
58 34.01 17.01 45.29 22.65 26.92 13.46 31.26 15.63
59 36.07 18.04 47.85 23.93 28.46 14.23 32.95 16.48
60 38.27 19.14 50.59 25.30 30.12 15.06 34.77 17.39
61 40.63 20.32 53.51 26.76 31.91 15.96 36.73 18.37
62 43.16 21.58 56.62 28.31 33.85 16.93 38.84 19.42
63 45.88 22.94 59.92 29.96 35.92 17.96 41.11 20.56
64 48.78 24.39 63.42 31.71 38.15 19.08 43.53 21.77
65 51.89 25.95 67.11 33.56 40.54 20.27 46.11 23.06
66 55.21 27.61 71.01 35.51 43.09 21.55 48.84 24.42
67 58.77 29.39 75.13 37.57 45.84 22.92 51.77 25.89
68 62.59 31.30 79.52 37.75 48.81 24.41 54.92 27.46
69 66.71 33.36 84.20 37.75 52.04 26.02 58.36 29.18
70 71.16 35.58 89.20 37.75 55.57 27.79 62.10 31.05
71 75.96 36.00 94.56 37.75 59.43 29.72 66.20 33.10
72 81.04 36.00 100.28 37.75 63.65 31.83 70.68 35.00
73 86.57 36.00 106.35 37.75 68.25 34.00 75.53 35.00
74 92.47 36.00 112.74 37.75 73.23 34.00 80.75 35.00
75 98.73 36.00 119.44 37.75 78.61 34.00 86.34 35.00
76 105.38 36.00 126.39 37.75 84.42 34.00 92.32 35.00
77 112.45 36.00 133.62 37.75 90.68 34.00 98.70 35.00
78 120.00 36.00 141.17 37.75 97.47 34.00 105.57 35.00
79 128.12 36.00 149.15 37.75 104.88 34.00 113.00 35.00
80 136.88 36.00 157.63 37.75 112.98 34.00 121.09 35.00
81 146.36 36.00 166.67 37.75 121.85 34.00 129.91 35.00
82 156.57 36.00 176.28 37.75 131.55 34.00 139.51 35.00
83 167.52 36.00 186.39 37.75 142.10 34.00 149.91 35.00
84 179.12 36.00 196.88 37.75 153.50 34.00 161.12 35.00
85 191.34 36.00 207.71 37.75 165.78 34.00 172.98 35.00
</TABLE>
Unisex policies will have surrender charge target premiums and maximum deferred
sales charges that are higher than those for females above but lower than those
for males.
B-2
<PAGE> 70
-UNAUDITED-
--------------------------------------------------------------------------------
On January 1, 1999, National Life Insurance Company (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, a mutual insurance
holding company created for this purpose. Policyholders of National Life with
policies issued after December 31, 1998 also become members of National Life
Holding Company.
As part of this reorganization, National Life established and began operating a
closed block (the Closed Block) on January 1, 1999. The Closed Block was
established pursuant to regulatory requirements as part of the reorganization,
and was established for the benefit of policyholders of participating policies
inforce at December 31, 1998. Notes 2, 11 and 13 of National Life's financial
statements provide additional information about the Closed Block.
Under current accounting guidance, National Life's assets, liabilities, pre-tax
net income and cash flows associated with the Closed Block were reclassified
into single line net presentations within National Life Insurance Company and
Subsidiaries' financial statements, and excluded from many of the disclosures
contained in the corresponding notes to those financial statements.
The American Institute of Certified Public Accountants has proposed changes to
the accounting treatment for Closed Blocks. Included in the proposal is the
presentation of Closed Block assets, liabilities, pre-tax net income and cash
flows in their normal categories, instead of the current single line net
presentations. It is currently anticipated that this proposal will be adopted
retroactively for all presented periods beginning with December 31, 2000
reporting.
Management of National Life has therefore elected to also include consolidated
financial statements prepared at the National Life Holding Company level. These
financial statements do not reflect the closed block single line net
presentation, and therefore should provide more comparable year to year
information for the reader.
--------------------------------------------------------------------------------
F-1
<PAGE> 71
NATIONAL LIFE GROUP
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-2
<PAGE> 72
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of
National Life Holding 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 Holding Company and its subsidiaries (the National
Life Group) at December 31, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of National Life Group'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 auditing standards
generally accepted in the United States 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 13 to the financial statements, 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. Members'
voting and liquidation rights in National Life were transferred to National Life
Holding Company as part of this reorganization.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 10, 2000
F-3
<PAGE> 73
NATIONAL LIFE GROUP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 296,468 $ 347,949
Available-for-sale debt and equity securities 5,110,272 5,438,784
Trading equity securities 11,793 -
Mortgage loans 1,162,956 1,098,504
Policy loans 761,235 776,363
Real estate investments 86,003 75,566
Other invested assets 150,963 113,696
-----------------------------------------------------------------------------------------------------
Total cash and invested assets 7,579,690 7,850,862
Deferred policy acquisition costs 538,127 416,733
Accrued investment income 118,273 119,249
Premiums and fees receivable 22,033 21,044
Deferred income taxes 101,183 21,541
Amounts recoverable from reinsurers 302,607 253,651
Present value of future profits of insurance acquired 113,851 45,539
Property and equipment, net 45,609 59,503
Other assets 130,081 133,702
Separate account assets 404,030 283,948
-----------------------------------------------------------------------------------------------------
Total assets $ 9,355,484 $ 9,205,772
=====================================================================================================
LIABILITIES:
Policy benefit liabilities $ 4,039,966 $ 3,907,114
Policyholders' accounts 3,503,328 3,348,132
Policyholders' deposits 46,189 38,520
Policy claims payable 39,262 31,900
Policyholders' dividends 53,552 54,757
Amounts payable to reinsurers 19,213 35,481
Collateral held on loaned securities 115,524 193,491
Other liabilities and accrued expenses 274,172 307,036
Debt 76,092 78,088
Separate account liabilities 400,867 264,421
-----------------------------------------------------------------------------------------------------
Total liabilities 8,568,165 8,258,940
-----------------------------------------------------------------------------------------------------
MINORITY INTERESTS 12,331 64,529
EQUITY:
Retained earnings 832,688 776,060
Accumulated other comprehensive (loss) income (57,700) 106,243
-----------------------------------------------------------------------------------------------------
Total equity 774,988 882,303
-----------------------------------------------------------------------------------------------------
Total liabilities, minority interests and equity $ 9,355,484 $ 9,205,772
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 74
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 383,395 $ 386,260
Policy and contract charges 54,624 48,463
Net investment income 565,818 550,339
Net investment gains 3,140 8,450
Mutual fund commission and fee income 56,232 49,670
Other income 19,847 17,271
-----------------------------------------------------------------------------------------
Total revenues 1,083,056 1,060,453
-----------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 112,923 98,252
Policy benefits 330,334 346,779
Policyholders' dividends 106,858 107,102
Interest credited to policyholders' accounts 207,736 208,505
Operating expenses 164,899 141,242
Sales practice remediation costs - 40,575
Policy acquisition expenses, net 76,862 90,323
-----------------------------------------------------------------------------------------
Total benefits and expenses 999,612 1,032,778
-----------------------------------------------------------------------------------------
Income before income taxes and minority interests 83,444 27,675
Income tax expense (benefit) 17,380 (1,020)
-----------------------------------------------------------------------------------------
Income before minority interests 66,064 28,695
Minority interests 9,436 8,507
-----------------------------------------------------------------------------------------
NET INCOME 56,628 20,188
OTHER COMPREHENSIVE INCOME, NET
Unrealized (losses) gains on securities, net (163,943) 21,226
-----------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE (LOSS) INCOME $ (107,315) $ 41,414
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 75
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAINED EARNINGS:
Balance at January 1 $ 776,060 $ 755,872
Net income 56,628 20,188
-----------------------------------------------------------------------------------------------------
Balance at December 31 $ 832,688 $ 776,060
=====================================================================================================
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Balance at January 1 $ 106,243 $ 85,017
Unrealized (losses) gains on available-for-sale securities, net (163,943) 21,226
-----------------------------------------------------------------------------------------------------
Balance at December 31 $ (57,700) $ 106,243
=====================================================================================================
TOTAL EQUITY:
Balance at December 31 $ 774,988 $ 882,303
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 76
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,628 $ 20,188
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Accrued investment income 976 6,541
Policy liabilities 82,699 87,367
Deferred policy acquisition costs (36,857) (7,580)
Policyholders' dividends (1,205) 1,362
Deferred income taxes 9,883 (13,330)
Net investment gains (3,140) (8,450)
Depreciation 7,339 6,977
Other 4,767 12,714
--------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 121,090 105,789
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 1,576,457 2,020,526
Cost of investments acquired (1,778,511) (2,236,001)
Acquisition of remaining interest in LSWNH, Inc. (61,632) -
Other 14,788 14,656
--------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (248,898) (200,819)
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' deposits, including interest credited 579,795 563,606
Policyholders' withdrawals, including policy charges (424,599) (452,184)
Net decrease in borrowings under repurchase agreements - (234,570)
Net (decrease) increase in securities lending liabilities (77,967) 173,726
Other (902) 20,221
--------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 76,327 70,799
--------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (51,481) (24,231)
CASH AND CASH EQUIVALENTS:
Beginning of year 347,949 372,180
--------------------------------------------------------------------------------------------------------------
End of year $ 296,468 $ 347,949
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 77
NATIONAL LIFE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Life Holding Company and its subsidiaries and affiliates (the National
Life Group) offer a broad range of financial products and services, including
life insurance, annuities, disability income insurance, mutual funds, and
investment advisory and administration services. The flagship company of the
organization, National Life Insurance Company (National Life), was chartered in
1848, and is also known by its registered trade name "National Life of Vermont".
National Life Group employs about 900 people, primarily concentrated in
Montpelier, Vermont and Dallas, Texas. On January 1, 1999, pursuant to a mutual
holding company reorganization, National Life converted from a mutual to a stock
life insurance company. All of National Life's outstanding shares are currently
held by its parent, NLV Financial Corp, which is the wholly-owned subsidiary of
National Life Holding Company. See Note 13 for more information.
The insurance operations within National Life Group develop and distribute
individual life insurance and annuity products. National Life Group markets this
diverse product portfolio to small business owners, professionals and other
middle to upper income individuals. National Life Group provides financial
solutions in the form of estate, business succession and retirement planning,
deferred compensation and other key executive fringe benefit plans, and asset
management. Insurance and annuity products are primarily distributed through
about 32 general agencies in major metropolitan areas, a system of managing
general agents, and independent brokers throughout the United States. National
Life Group has in excess of 300,000 policyholders and through its member
companies is licensed to do business in all 50 states and the District of
Columbia. About 26% of National Life Group's total collected premiums and
deposits are from residents of New York and California.
Members of the National Life Group also distribute and provide investment
advisory and administrative services to the Sentinel Group Funds, Inc. The
Sentinel Funds' $3.1 billion of net assets represent fourteen mutual funds
managed on behalf of about 117,000 individual, corporate and institutional
shareholders worldwide.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of National Life Group have
been prepared in conformity with accounting principles generally accepted in the
United States (GAAP).
The consolidated financial statements include the accounts of National Life
Group, which consists of National Life HoIding Company and its subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation. Certain reclassifications have been made to conform prior periods
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.
F-8
<PAGE> 78
Available-for-sale and trading debt 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 net investment losses.
Mortgage loans are reported at amortized cost, less valuation allowances for the
excess, if any, of the amortized cost of impaired loans over the estimated fair
value of the related collateral. Changes in valuation allowances are included in
net investment 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.
Investments in joint ventures and limited partnerships are generally carried at
cost.
Net realized investment gains and losses are recognized using the specific
identification method and are reported as net investment gains and losses.
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. Changes in the fair value of
trading equity securities are reflected in net investment gains and losses.
POLICY ACQUISITION EXPENSES
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 other comprehensive income, net of related income
taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance are 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.
GOODWILL
Goodwill is amortized over 20 years using the straight line method and is
periodically evaluated for recoverability.
F-9
<PAGE> 79
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
primarily depreciated over 39.5 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.
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. See additional information below
on dividends on contracts within the Closed Block.
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.
F-10
<PAGE> 80
FEDERAL INCOME TAXES
National Life Holding Company will file a consolidated tax return for the tax
year ended December 31, 1999. The income tax return will include all members
within the National Life Group except Life Insurance Company of the Southwest
(LSW) and Insurance Investors Life Insurance Company (IIL). LSW and IIL will
file a separate tax return due to tax regulatory requirements. 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.
MINORITY INTERESTS
Minority interests at December 31, 1999 represent minority partners interests in
entities within the National Life Group. Minority interests attributable to
common stockholders are carried on the equity method. Those attributable to
preferred stockholders are carried on the cost method, with dividends paid
reflected as minority interests within the consolidated financial statements.
CLOSED BLOCK
National Life established and began operating a closed block (the Closed Block)
on January 1, 1999. The Closed Block was established pursuant to regulatory
requirements as part of the reorganization into a mutual holding company
corporate structure. This Closed Block was established for the benefit of
policyholders of participating policies inforce at December 31, 1998. Included
in the block are traditional dividend paying life insurance policies, certain
participating term insurance policies, dividend paying flex premium annuities,
and other related liabilities. The Closed Block was established to protect the
policy dividend expectations related to these policies. The Closed Block is
expected to remain in effect until all policies within the Closed Block are no
longer inforce. Assets assigned to the Closed Block at January 1, 1999, together
with projected future premiums and investment returns, are reasonably expected
to be sufficient to pay out all future Closed Block policy benefits. Such
benefits include dividends paid out under the current dividend scale, adjusted
to reflect future changes in the underlying experience. See Note 11 for
additional information on the Closed Block's financial position and results of
operations.
F-11
<PAGE> 81
NOTE 3 - INVESTMENTS
DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair values of available-for-sale debt and
equity securities at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1999 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS) debt and equity
securities:
U.S. government obligations $ 281,194 $ 3,232 $ 19,020 $ 265,406
Government agencies, authorities
and subdivisions 118,459 4,010 3,100 119,369
Public utilities 380,253 10,687 17,275 373,665
Corporate 2,462,499 23,937 94,932 2,391,504
Private placements 735,597 9,818 30,172 715,243
Mortgage-backed securities 1,112,382 2,432 37,065 1,077,749
------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,090,384 54,116 201,564 4,942,936
Preferred stocks 134,852 2,708 8,109 129,451
Common stocks 33,032 7,169 2,316 37,885
------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity
securities $ 5,258,268 $ 63,993 $ 211,989 $ 5,110,272
========================================================================================================================
<CAPTION>
1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AFS debt and equity securities:
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
========================================================================================================================
</TABLE>
F-12
<PAGE> 82
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>
1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized (losses) gains on available-for-sale securities $ (399,066) $ 20,136
Net unrealized (losses) gains on separate accounts (2,652) 1,543
Related minority interests 8,672 (1,786)
Related deferred policy acquisition costs 116,725 17,139
Related present value of future profits of insurance acquired 16,353 (3,048)
Related deferred income taxes 96,025 (12,758)
-------------------------------------------------------------------------------------------------------------
(Decrease) increase in net unrealized gains (163,943) 21,226
Balance, beginning of year 106,243 85,017
-------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=============================================================================================================
<CAPTION>
1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, end of year includes:
Net unrealized (losses) gains on available-for-sale securities $ (147,996) $ 251,070
Net unrealized gains on separate accounts 3,163 5,815
Related minority interests - (8,672)
Related deferred policy acquisition costs 39,186 (77,539)
Related present value of future profits on insurance acquired 14,806 (1,547)
Related deferred income taxes 33,141 (62,884)
-------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=============================================================================================================
</TABLE>
Net other comprehensive (loss) income for 1999 and 1998 of $(163.9) million and
$21.2 million is presented net of reclassifications to net income for gross
gains realized during the period of $13.9 million and $9.0 million and net of
tax and deferred acquisition cost offsets of $9.4 million and $6.6 million,
respectively.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1999 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 $ 125,445 $ 125,798
Due after one year through five years 1,386,200 1,355,240
Due after five years through ten years 1,607,586 1,545,609
Due after ten years 858,770 838,540
Mortgage-backed securities 1,112,383 1,077,749
--------------------------------------------------------------------------------------------------------------
Total $ 5,090,384 $ 4,942,936
==============================================================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 is shown below (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 921,594 $ 1,167,190
Gross realized gains $ 40,496 $ 22,969
Gross realized losses $ 24,312 $ 16,578
</TABLE>
F-13
<PAGE> 83
On January 1, 1999, National Life Group reclassified certain mutual fund
investments from an available-for-sale to a trading classification. The
cumulative gross unrealized gain reclassified into net investment gains was $0.6
million. For the year ended December 31, 1999, these securities recorded $0.9
million net investment income and $(0.5) million investment losses. Cost of
trading securities held at December 31, 1999 was $12.1 million. National Life
Group held no securities classified as trading prior to January 1, 1999.
National Life Group 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 were $115.5 million and $193.5 million at December 31, 1999 and
1998, respectively.
National Life Group 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, 1999 or 1998.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
<S> <C> <C>
GEOGRAPHIC REGION
-----------------
New England 5.4% 3.8%
Middle Atlantic 9.1 9.7
East North Central 10.1 9.3
West North Central 5.4 4.5
South Atlantic 24.7 25.7
East South Central 5.6 5.0
West South Central 10.1 10.3
Mountain 15.9 17.7
Pacific 13.7 14.0
----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
======================================================================================================================
PROPERTY TYPE
-------------
Residential 0.1% 0.2%
Apartment 24.6 24.2
Retail 11.0 12.2
Office Building 34.9 35.0
Industrial 26.4 26.2
Hotel/Motel 1.8 0.8
Other Commercial 1.2 1.4
----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
======================================================================================================================
Total mortgage loans and real estate
(in thousands) $ 1,248,959 $ 1,174,070
======================================================================================================================
</TABLE>
F-14
<PAGE> 84
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 1,148,526 $ 1,077,637
Impaired loans without valuation allowances 6,943 11,757
-----------------------------------------------------------------------------------------------------------------
Subtotal 1,155,469 1,089,394
-----------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowances 10,600 10,244
Related valuation allowances (3,113) (1,134)
-----------------------------------------------------------------------------------------------------------------
Subtotal 7,487 9,110
-----------------------------------------------------------------------------------------------------------------
Total $ 1,162,956 $ 1,098,504
=================================================================================================================
Impaired loans:
Average recorded investment $ 19,771 $ 27,755
Interest income recognized $ 2,137 $ 3,124
Interest received $ 2,092 $ 2,818
</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>
1999 1998
===================================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,993 $ 1,564
Impairment losses charged to valuation allowances - (2,217)
Changes to previously established valuation allowances (14) (2,642)
---------------------------------------------------------------------------------------------------
Increase/decrease in valuation allowances 1,979 (3,295)
Balance, beginning of year 1,134 4,429
---------------------------------------------------------------------------------------------------
Balance, end of year $ 3,113 $ 1,134
===================================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 404,195 $ 405,184
Equity securities dividends 2,385 6,380
Mortgage loan interest 94,258 90,991
Policy loan interest 46,393 47,189
Real estate income 11,698 12,802
Other investment income 29,943 12,363
------------------------------------------------------------------------------------------------------------------
Gross investment income 588,872 574,909
Less: investment expenses 23,054 24,570
------------------------------------------------------------------------------------------------------------------
Net investment income $ 565,818 $ 550,339
==================================================================================================================
</TABLE>
DERIVATIVES
National Life Group 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
F-15
<PAGE> 85
increases in equity indexed product account values. When the S&P 500 index
decreases, National Life Group's loss is the decrease in the fair value of
futures and is limited to the premium paid for the options.
National Life Group purchases options only from highly rated counterparties.
However, in the event a counterparty failed to perform, National Life Group'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>
1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 166,858 $ 79,754
Futures $ 5,439 $ 28,835
================================================================================================
Book values:
Options: Net amortized cost $ 17,800 $ 5,514
Intrinsic value 18,894 18,953
------------------------------------------------------------------------------------------------
Book value 36,694 24,467
Futures at fair value 890 463
------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 37,584 $ 24,930
================================================================================================
</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>
1999 1998
---------------------------------------------------------------------------------------------------------------------------------
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 296,468 $ 296,468 $ 347,949 $ 347,949
Available-for-sale debt and equity securities 5,110,272 5,110,272 5,438,784 5,438,784
Trading equity securities 11,793 11,793 - -
Mortgage loans 1,162,956 1,177,342 1,098,504 1,180,630
Policy loans 761,235 724,953 776,363 743,687
Derivatives 37,584 35,528 24,930 28,496
Investment products 2,770,295 2,740,443 2,507,012 2,522,940
Debt 76,092 62,615 78,088 75,141
</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).
F-16
<PAGE> 86
For variable rate policy loans the unpaid balance approximates fair value. Fixed
rate policy loan fair values are estimated based on discounted cash flows using
the current variable policy loan rate (including appropriate provisions for
mortality and repayments).
Derivatives estimated fair values are based on quoted values.
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 Group reinsures certain risks assumed in the normal course of
business. For individual life products, National Life Group 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 agreements.
Disability income products are significantly reinsured under coinsurance and
modified coinsurance agreements.
National Life Group remains liable in the event any reinsurer is unable to meet
its assumed obligations. National Life Group 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.
Transactions between the open and Closed Block (see Notes 11 and 13) have been
excluded from the following schedule.
The effects of reinsurance for the years ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 439,562 $ 453,859
Reinsurance assumed 4,731 898
Reinsurance ceded (60,898) (68,497)
-----------------------------------------------------------------------------------------------------------
$ 383,395 $ 386,260
===========================================================================================================
Other income:
Direct $ 6,960 $ 3,694
Reinsurance ceded 12,887 13,577
-----------------------------------------------------------------------------------------------------------
$ 19,847 $ 17,271
===========================================================================================================
Increase in policy liabilities:
Direct increase in policy liabilities $ 129,448 $ 94,949
Reinsurance assumed - (4)
Reinsurance ceded (16,525) 3,307
-----------------------------------------------------------------------------------------------------------
$ 112,923 $ 98,252
===========================================================================================================
</TABLE>
F-17
<PAGE> 87
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Policy benefits:
Direct policy benefits $ 393,216 $ 416,919
Reinsurance assumed (2,479) 1,286
Reinsurance ceded (60,403) (71,426)
-----------------------------------------------------------------------------------------------------------
$ 330,334 $ 346,779
===========================================================================================================
Policyholders' dividends:
Direct policyholders' dividends $ 110,793 $ 110,630
Reinsurance ceded (3,935) (3,528)
-----------------------------------------------------------------------------------------------------------
$ 106,858 $ 107,102
===========================================================================================================
</TABLE>
NOTE 5 - DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes in the deferred policy acquisition costs
asset (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 416,733 $ 392,014
Acquisition costs deferred 73,648 57,318
Amortization to expense during the year (36,791) (49,738)
Adjustment to equity during the year 116,725 17,139
Purchase GAAP effect on purchase of LSWNH (Note 12) (32,188) -
---------------------------------------------------------------------------------------------------
Balance, end of year $ 538,127 $ 416,733
===================================================================================================
</TABLE>
NOTE 6 - FEDERAL INCOME TAXES
The components of federal income taxes and a reconciliation of the expected and
actual federal income taxes and income tax rates for the years ended December 31
were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 7,497 $ 17,144
Deferred 9,883 (18,164)
------------------------------------------------------------------- --------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Expected income taxes $ 29,206 35.0% $ 9,686 35.0%
Differential earnings amount (2,058) (2.5) (7,953) (28.7)
Affordable housing tax credit (6,509) (7.8) (6,638) (24.0)
Net change in tax reserves 2,033 2.4 5,035 18.2
Other, net (5,292) (6.3) (1,150) (4.2)
----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Effective federal income tax rate 20.8% (3.7)%
==================================================== ===================== =====================
</TABLE>
National Life Group received net federal income tax refunds of $9.4 million in
1999 and paid federal income taxes of $13.3 million in 1998.
F-18
<PAGE> 88
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Net unrealized loss on available-for-sale securities $ 33,141 -
Debt and equity securities 15,456 -
Policy liabilities 179,008 $ 185,294
Other liabilities and accrued expenses 51,609 67,291
Other 490 4,761
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 279,704 257,346
--------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 125,842 126,380
Present value of future profits of insurance acquired 37,908 17,683
Net unrealized gain on available-for-sale securities - 62,884
Debt and equity securities - 16,947
Other 14,771 11,911
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 178,521 235,805
--------------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 101,183 $ 21,541
==========================================================================================================================
</TABLE>
Management believes it is more likely than not that National Life Group 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 National Life's tax returns through 1995 and is currently
examining the years 1996 - 1998. In management's opinion adequate tax
liabilities have been established for all open years.
NOTE 7 - BENEFIT PLANS
National Life sponsors a qualified defined benefit pension plan covering
substantially all employees. The plan is administered by National Life's
Benefits Committee and is non-contributory, with benefits based on an employee's
retirement age, years of service and compensation near retirement. Plan assets
are primarily bonds and common stocks held in a National Life separate account
and funds invested in a group 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 Group
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. Some of the plan participants
elected to defer their lump sum payouts until 1998, which also deferred
recognition of the related settlement gain until 1998.
F-19
<PAGE> 89
The status of the defined benefit plans at December 31 was as follows (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 189,524 $ 162,986 $ 27,883 $ 24,759
Service cost (benefits earned during the current period) 4,194 2,849 581 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Actuarial (gains) losses (26,832) 34,444 (3,937) 1,939
Benefits paid (12,002) (22,185) (1,170) (1,061)
----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 167,144 $ 189,524 $ 25,233 $ 27,883
==================================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 100,045 $ 108,884
Actual return on plan assets 9,952 7,200
Benefits paid (5,747) (16,039)
------------------------------------------------------------------------------------------------
Plan assets, end of year $ 104,250 $ 100,045
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FUNDED STATUS:
Benefit obligation $ 167,144 $ 189,524 $ 25,233 $ 27,883
Plan assets (104,250) (100,045)
-------------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 62,894 89,479 25,233 27,883
Unrecognized actuarial gains (losses) 18,309 (11,259) 6,397 2,526
Unrecognized prior service cost (1,080) (1,152)
---------------------------------------------------------------------
Accrued benefit cost at September 30 81,203 78,220 30,550 29,257
Payments subsequent to measurement date (1,638) (1,518)
-------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost at December 31 $ 79,565 $ 76,702 $ 30,550 $ 29,257
===============================================================================================================================
</TABLE>
The components of net periodic benefit cost for the years ended December 31 were
as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 4,194 $ 2,849 $ 581 $ 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Expected return on plan assets (8,745) (9,078)
Net amortization and deferrals 281 (1,167) (66) (83)
Amortization of prior service cost 72 72
Settlement gains from 1997 early retirement program (3,131)
-----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating
expenses) $ 7,990 $ 903 $ 2,463 $ 2,235
=============================================================================================================================
</TABLE>
The total projected benefit obligation for non-qualified defined benefit pension
plans was $70.9 million and $81.4 million at December 31, 1999 and 1998,
respectively. The total accumulated benefit obligation (APBO) for these plans
was $67.7 million and $75.2 million at December 31, 1999 and 1998, respectively.
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.75% 6.75% 7.75% 6.75%
Rate of increase in future compensation levels 6.00% 5.00%
Expected long term return on plan assets 9.00% 9.00%
</TABLE>
F-20
<PAGE> 90
Health care cost trend rates grade to 5% in year 2000 and remain level
thereafter. Increasing the assumed health care trend rates by one percentage
point in each year would increase the APBO by about $2.4 million and the 1999
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 $2.0 million and
the 1999 service and interest cost components of net periodic postretirement
benefit cost by about $0.1 million. National Life Group 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. Employees below specified levels of
compensation also receive a foundation contribution of 1.5% of compensation.
Additional employee voluntary contributions may be made to the plans up to a set
maximum. Vesting and withdrawal privilege schedules are attached to the
Company's contributions.
National Life also provides a 401(k) plan for it's regular full-time agents
whereby accumulated funds may be invested by the agent in a group annuity
contract with National Life or in mutual funds sponsored by an affiliate of
National Life. Total annual contributions can not exceed certain limits that
vary based on total agent compensation. No National Life contributions are made
to the plan.
Life Insurance Company of the Southwest (LSW), an indirectly held wholly-owned
subsidiary of National Life, provides a 401(k) to its employees. Additional
voluntary employee contributions may be made to the plan subject to certain
limits. LSW's contributions to these plans generally vest within two years.
NOTE 8 - DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,692 $ 69,688
$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: 6,400 8,400
$6.4 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 $ 76,092 $ 78,088
===========================================================================================================================
</TABLE>
The aggregate annual scheduled maturities of debt for the next five years are as
follows (in thousands):
2000 2,000
2001 2,000
2002 2,400
2003 -
2004 -
F-21
<PAGE> 91
Interest paid was $6.3 million and $6.2 million in 1999 and 1998, respectively.
NOTE 9 - CONTINGENCIES
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. Qualifying members may also
opt out of the class action and pursue litigation separately against National
Life. Most of the alternative dispute resolution cases were settled by December
31, 1999. Management believes that while the ultimate cost of this litigation
(including those opting out of the class action) is still uncertain, it is
unlikely, after considering existing provisions, to have a material adverse
effect on National Life's financial position.
In late 1999, two lawsuits were filed against National Life and the State of
Vermont in Vermont related to National Life's conversion to a mutual holding
company structure. National Life and the State of Vermont specifically deny any
wrongdoing and intend to defend these cases vigorously. In the opinion of
National Life Group's management, based on advice from legal counsel, the
ultimate resolution of these lawsuits will not have a material effect on
National Life Group's financial position. However, liabilities related to these
lawsuits could be established in the near term if estimates of the ultimate
resolution of these proceedings are revised.
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 was originally effective for fiscal years beginning after June 15,
1999. In June, 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 (FAS 137). FAS 137 requires the application of FAS 133 for fiscal years
beginning after June 15, 2000. National Life Group is currently assessing the
impact of the adoption of FAS 133.
NOTE 11 - CLOSED BLOCK
Included within the financial statement categories in the 1999 Consolidated
Statement of Operations and Comprehensive Income is a net pre-tax contribution
from the Closed Block of $24.4 million. The Closed Block was established on
January 1, 1999 as part of the conversion to a mutual holding company corporate
structure (see Note 13). Summarized financial information for the Closed Block
effects included in the consolidated financial statements as of December 31,
1999 and for the year then ended is as follows (in thousands):
F-22
<PAGE> 92
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Cash and cash equivalents $ 122,982
Available-for-sale debt securities (amortized cost of $1,800.1 million) 1,771,494
Mortgage loans 380,986
Policy loans 640,490
Accrued investment income 53,387
Premiums and fees receivable 18,864
Deferred policy acquisition costs 312,588
Other assets 123,690
---------------------------------------------------------------------------------------------------------------------------------
Total assets $3,424,481
=================================================================================================================================
LIABILITIES:
Policy liabilities and accruals $3,629,560
Other liabilities 69,186
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities $3,698,746
=================================================================================================================================
<CAPTION>
1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES:
Premiums and other income $ 325,445
Net investment income 216,432
Realized investment gain 8,720
---------------------------------------------------------------------------------------------------------------------------------
Total revenues 550,597
---------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 66,324
Policy benefits 283,598
Policyholders' dividends 107,941
Interest credited to policyholders' accounts 13,294
Operating expenses 17,407
Policy acquisition expenses, net 37,662
---------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 526,226
---------------------------------------------------------------------------------------------------------------------------------
Pre-tax contribution from the Closed Block $ 24,371
=================================================================================================================================
</TABLE>
There were no mortgage valuation allowances on Closed Block mortgage loans at
December 31, 1999. Many expenses related to Closed Block operations are charged
to operations outside the Closed Block; accordingly, the contribution from the
Closed Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside the Closed Block are therefore
disproportionate to the actual business outside the Closed Block.
F-23
<PAGE> 93
NOTE 12 - ACQUISITION
On July 2, 1999, National Life Group acquired the outstanding one-third interest
in LSW National Holdings, Inc., (LSWNH) the parent of Dallas, Texas-based Life
Insurance Company of the Southwest (LSW), a financial services company
specializing in the sale of annuities. National Life Group had previously
purchased a two-thirds interest in the company in February, 1996.
The purchase price was $61.6 million in cash. Purchasing the remaining one-third
interest eliminated the ongoing provision for minority interests for the last
six months of 1999. The effect of the cash purchase on the consolidated
financial statements was to reduce minority interests by $39.7 million and
record net purchase GAAP adjustments of $21.9 million, which included intangible
assets for the present value of future profits of insurance acquired of $59.4
million and goodwill of $3.0 million.
Had the one-third purchase been made at January 1, 1998, pro-forma consolidated
net income would have increased by about $3.1 million and $2.2 million in 1999
and 1998, respectively. These pro-forma consolidated results are not necessarily
indicative of the actual results which might have occurred had National Life
Group owned all of LSWNH since that date. (unaudited)
NOTE 13 - REORGANIZATION INTO A MUTUAL HOLDING COMPANY
CORPORATE STRUCTURE
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, a mutual insurance holding company created for this purpose.
National Life Holding Company currently owns all the outstanding shares of NLV
Financial, a stock holding company created for this purpose, which in turn
currently owns all the outstanding shares of National Life. National Life
Holding Company currently has no other assets, liabilities or operations other
than that related to its ownership of NLV Financial's outstanding stock.
Similarly, NLV Financial currently has no other assets, liabilities or
operations other than that related to its ownership of National Life's
outstanding stock. Under the terms of the reorganization, National Life Holding
Company must always hold a majority of the voting shares of NLV Financial.
This reorganization was approved by policyowners of National Life and was
completed with the approval of the Commissioner of the Vermont Department of
Banking, Insurance, Securities, and Health Care Administration (the
"Commissioner").
Under the provisions of the reorganization, National Life issued 2.5 million
common stock $1 par shares to its parent, NLV Financial as a transfer from
retained earnings. There were no dividends paid or declared in 1999 by National
Life. Dividends declared by National Life in excess of ten percent of statutory
surplus (see Note 14 for statutory information) require pre-approval by the
Commissioner.
F-24
<PAGE> 94
NOTE 14 - 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's statutory surplus to GAAP equity at December
31 and statutory net income to GAAP net income for the years ended December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
Surplus/ Surplus/
Equity Net Income Equity Net Income
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 408,086 $ 25,923 $ 373,063 $ 67,841
Asset valuation reserve 79,207 69,994
Interest maintenance reserve 58,507 5,681 52,826 (4,114)
Surplus notes (70,716) (70,700)
Non-admitted assets 2,101 17,033
Investments 30,149 5,916 650 (4,471)
Deferred policy acquisition costs 445,704 17,250 428,453 (9,479)
Deferred income taxes 45,587 (3,837) 74,132 15,555
Policy liabilities (202,061) 10,063 (203,832) (6,476)
Policyholders' dividends 67,494 3,289 64,205 529
Benefit plans (29,475) (1,571) (27,904) 6,730
Sales remediation costs (40,575)
Other comprehensive income, net (57,700) 106,243
Other changes, net (1,895) (6,086) (1,860) (5,352)
----------------------------------------------------------------------------------------------------------------------------
GAAP equity/net income $ 774,988 $ 56,628 $ 882,303 $ 20,188
============================================================================================================================
</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.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance (Codification), which
will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC has recommended an
effective date of January 1, 2001. The Codification provides guidance for areas
which promulgated statutory accounting principles had not previously addressed,
and changes current promulgated guidance in other areas.
The Vermont Department of Banking, Insurance, Securities, and Health Care
Administration has adopted Codification effective January 1, 2001. The
Department may make changes to the promulgated guidance prior to the effective
date. National Life has not estimated the potential effect of the Codification
guidance on its reported results.
F-25
<PAGE> 95
NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-26
<PAGE> 96
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
Report of Independent Accountants
To the Board of Directors and Stockholder 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 (National
Life) at December 31, 1999 and 1998, and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of National Life'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 auditing standards
generally accepted in the United States 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 13 to the financial statements, 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. Members'
voting and liquidation rights in National Life were transferred to National Life
Holding Company, the upstream parent of National Life, as part of this
reorganization.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 10, 2000
F-27
<PAGE> 97
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 173,485 $ 347,949
Available-for-sale debt and equity securities 3,338,777 5,438,784
Trading equity securities 11,793 -
Mortgage loans 781,970 1,098,504
Policy loans 120,745 776,363
Real estate investments 86,003 75,566
Other invested assets 151,044 113,696
----------------------------------------------------------------------------------------------------------------
Total cash and invested assets 4,663,817 7,850,862
Deferred policy acquisition costs 225,539 416,733
Accrued investment income 64,886 119,249
Premiums and fees receivable 3,168 21,044
Deferred income taxes 49,989 21,541
Amounts recoverable from reinsurers 302,607 253,651
Present value of future profits of insurance acquired 113,851 45,539
Property and equipment, net 45,609 59,503
Other assets 57,507 133,702
Closed block assets 3,424,481 -
Separate account assets 404,030 283,948
----------------------------------------------------------------------------------------------------------------
Total assets $ 9,355,484 $ 9,205,772
================================================================================================================
LIABILITIES:
Policy benefit liabilities $ 731,006 $ 3,907,114
Policyholders' accounts 3,258,761 3,348,132
Policyholders' deposits 42,468 38,520
Policy claims payable 16,419 31,900
Policyholders' dividends 325 54,757
Amounts payable to reinsurers 19,213 35,481
Collateral held on loaned securities 48,375 193,491
Other liabilities and accrued expenses 275,893 307,036
Debt 76,092 78,088
Closed block liabilities 3,698,746 -
Separate account liabilities 400,867 264,421
----------------------------------------------------------------------------------------------------------------
Total liabilities 8,568,165 8,258,940
----------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 12,331 64,529
STOCKHOLDER'S EQUITY:
Common stock (authorized 2.5 million shares at $1 par value, 2.5 million
shares issued and outstanding) 2,500 -
Additional paid in capital 5,000 -
Retained earnings 825,188 776,060
Accumulated other comprehensive (loss) income (57,700) 106,243
----------------------------------------------------------------------------------------------------------------
Total stockholder's equity 774,988 882,303
----------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and equity $ 9,355,484 $ 9,205,772
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 98
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 57,950 $ 386,260
Policy and contract charges 54,624 48,463
Net investment income 349,385 550,339
Net investment (losses) gains (5,580) 8,450
Mutual fund commission and fee income 56,232 49,670
Closed block income 24,371 -
Other income 19,862 17,271
----------------------------------------------------------------------------------------------------------------
Total revenue 556,844 1,060,453
----------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 46,599 98,252
Policy benefits 46,736 346,779
Policyholders' dividends (1,083) 107,102
Interest credited to policyholders' accounts 194,442 208,505
Operating expenses 147,505 141,242
Sales practice remediation costs - 40,575
Net deferral of policy acquisition costs 39,201 90,323
----------------------------------------------------------------------------------------------------------------
Total benefits and expenses 473,400 1,032,778
----------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 83,444 27,675
Income tax expense (benefit) 17,380 (1,020)
----------------------------------------------------------------------------------------------------------------
Income before minority interests 66,064 28,695
Minority interests 9,436 8,507
----------------------------------------------------------------------------------------------------------------
NET INCOME 56,628 20,188
OTHER COMPREHENSIVE (LOSS) INCOME, NET
Unrealized (losses) gains on securities, net (163,943) 21,226
----------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE (LOSS) INCOME $ (107,315) $ 41,414
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 99
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK:
Balance at January 1 $ - $ -
2.5 million shares at $1 par issued via equity transfer from retained
earnings pursuant to mutual holding company reorganization 2,500 -
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 2,500 $ -
================================================================================================================
ADDITIONAL PAID IN CAPITAL:
Balance at January 1 $ - $ -
Capital contributed via equity transfer from retained earnings
pursuant to mutual holding company reorganization 5,000 -
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 5,000 $ -
================================================================================================================
RETAINED EARNINGS:
Balance at January 1 $ 776,060 $ 755,872
Transfer to common stock pursuant to mutual holding company
reorganization (2,500)
Transfer to additional paid in capital pursuant to mutual holding company
reorganization (5,000)
Net income 56,628 20,188
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 825,188 $ 776,060
================================================================================================================
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Balance at January 1 $ 106,243 $ 85,017
Unrealized (losses) gains on available-for-sale securities, net (163,943) 21,226
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ (57,700) $ 106,243
================================================================================================================
TOTAL STOCKHOLDER'S EQUITY:
Balance at December 31 $ 774,988 $ 882,303
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 100
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,628 $ 20,188
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Accrued investment income (67) 6,541
Policy liabilities (7,845) 87,367
Deferred policy acquisition costs (59,780) (7,580)
Policyholders' dividends 2,589 1,362
Deferred income taxes 21,134 (13,330)
Net realized investment gains 5,580 (8,450)
Depreciation 7,339 6,977
Other 9,463 12,714
-------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 35,041 105,789
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 1,063,475 2,020,526
Cost of available-for-sale investments acquired (1,241,086) (2,236,001)
Acquisition of remaining interest in LSWNH, Inc. (61,632) -
Other 2,648 14,656
-------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (236,595) (200,819)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' deposits, including interest credited 558,115 563,606
Policyholders' withdrawals, including policy charges (379,233) (452,184)
Net decrease in borrowings under repurchase agreements - (234,570)
Net (decrease) increase in securities lending liabilities (126,342) 173,726
Other (906) 20,221
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 51,634 70,799
-------------------------------------------------------------------------------------------------------------------
CLOSED BLOCK ACTIVITY, NET (24,544) -
-------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (174,464) (24,231)
CASH AND CASH EQUIVALENTS:
Beginning of year 347,949 372,180
-------------------------------------------------------------------------------------------------------------------
End of year $ 173,485 $ 347,949
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 101
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Life Insurance Company and its subsidiaries and affiliates (the
Company) offer a broad range of financial products and services, including life
insurance, annuities, disability income insurance, mutual funds, and investment
advisory and administration services. The flagship company of the organization,
National Life Insurance Company (National Life), was chartered in 1848, and is
also known by its registered trade name "National Life of Vermont". The Company
employs about 900 people, primarily concentrated in Montpelier, Vermont and
Dallas, Texas. On January 1, 1999, pursuant to a mutual holding company
reorganization, National Life converted from a mutual to a stock life insurance
company. All of National Life's outstanding shares are currently held by its
parent, NLV Financial Corp, which is the wholly-owned subsidiary of National
Life Holding Company. See Note 13 for more information.
The insurance operations within the Company develop and distribute individual
life insurance and annuity products. The Company markets this diverse product
portfolio to small business owners, professionals and other middle to upper
income individuals. The Company provides financial solutions in the form of
estate, business succession and retirement planning, deferred compensation and
other key executive fringe benefit plans, and asset management. Insurance and
annuity products are primarily distributed through about 32 general agencies in
major metropolitan areas, a system of managing general agents, and independent
brokers throughout the United States. The Company has in excess of 300,000
policyholders and through its member companies is licensed to do business in all
50 states and the District of Columbia. About 26% of the Company's total
collected premiums and deposits are from residents of New York and California.
Members of the Company also distribute and provide investment advisory and
administrative services to the Sentinel Group Funds, Inc. The Sentinel Funds'
$3.1 billion of net assets represent fourteen mutual funds managed on behalf of
about 117,000 individual, corporate and institutional shareholders worldwide.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have been
prepared in conformity with accounting principles generally accepted in the
United States (GAAP).
The consolidated financial statements include the accounts of National Life and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. Certain reclassifications have been made to
conform prior periods 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.
F-32
<PAGE> 102
Available-for-sale and trading debt 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 net investment losses.
Mortgage loans are reported at amortized cost, less valuation allowances for the
excess, if any, of the amortized cost of impaired loans over the estimated fair
value of the related collateral. Changes in valuation allowances are included in
net investment 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.
Investments in joint ventures and limited partnerships are generally carried at
cost.
Net realized investment gains and losses are recognized using the specific
identification method and are reported as net investment gains and losses.
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. Changes in the fair value of
trading equity securities are reflected in net investment gains and losses.
POLICY ACQUISITION EXPENSES
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 other comprehensive income, net of related income
taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance are 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.
GOODWILL
Goodwill is amortized over 20 years using the straight line method and is
periodically evaluated for recoverability.
F-33
<PAGE> 103
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
primarily depreciated over 39.5 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.
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. See additional information below
on dividends on contracts within the Closed Block.
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.
F-34
<PAGE> 104
FEDERAL INCOME TAXES
National Life Holding Company will file a consolidated tax return for the tax
year ended December 31, 1999. The income tax return will include all members
within the Company except Life Insurance Company of the Southwest (LSW) and
Insurance Investors Life Insurance Company (IIL). LSW and IIL will file a
separate tax return due to tax regulatory requirements. 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.
MINORITY INTERESTS
Minority interests at December 31, 1999 represent minority partners interests in
entities within the Company. Minority interests attributable to common
stockholders are carried on the equity method. Those attributable to preferred
stockholders are carried on the cost method, with dividends paid reflected as
minority interests within the consolidated financial statements.
CLOSED BLOCK
National Life established and began operating a closed block (the Closed Block)
on January 1, 1999. The Closed Block was established pursuant to regulatory
requirements as part of the reorganization into a mutual holding company
corporate structure. This Closed Block was established for the benefit of
policyholders of participating policies inforce at December 31, 1998. Included
in the block are traditional dividend paying life insurance policies, certain
participating term insurance policies, dividend paying flex premium annuities,
and other related liabilities. The Closed Block was established to protect the
policy dividend expectations related to these policies. The Closed Block is
expected to remain in effect until all policies within the Closed Block are no
longer inforce. Assets assigned to the Closed Block at January 1, 1999, together
with projected future premiums and investment returns, are reasonably expected
to be sufficient to pay out all future Closed Block policy benefits. Such
benefits include dividends paid out under the current dividend scale, adjusted
to reflect future changes in the underlying experience. See Note 11 for
additional information on the Closed Block's financial position and results of
operations.
F-35
<PAGE> 105
NOTE 3 - INVESTMENTS
DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair values of available-for-sale debt and
equity securities at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1999 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS) debt and equity securities:
U.S. government obligations $ 185,524 $ 2,768 $ 14,925 $ 173,367
Government agencies, authorities
and subdivisions 61,524 1,095 2,035 60,584
Public utilities 295,172 8,447 15,371 288,248
Corporate 1,611,713 9,845 70,987 1,550,571
Private placements 449,531 2,763 20,307 431,987
Mortgage-backed securities 686,868 656 20,840 666,684
------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 3,290,332 25,574 144,465 3,171,441
Preferred stocks 134,852 2,708 8,109 129,451
Common stocks 33,032 7,169 2,316 37,885
------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 3,458,216 $ 35,451 $ 154,890 $ 3,338,777
========================================================================================================================
<CAPTION>
1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AFS debt and equity securities:
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
========================================================================================================================
</TABLE>
F-36
<PAGE> 106
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>
1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized (losses) gains on available-for-sale securities $ (399,066) $ 20,136
Net unrealized (losses) gains on separate accounts (2,652) 1,543
Related minority interests 8,672 (1,786)
Related deferred policy acquisition costs 116,725 17,139
Related present value of future profits of insurance acquired 16,353 (3,048)
Related deferred income taxes 96,025 (12,758)
-----------------------------------------------------------------------------------------------------------------------
(Decrease) increase in net unrealized gains (163,943) 21,226
Balance, beginning of year 106,243 85,017
-----------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=======================================================================================================================
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, end of year includes:
Net unrealized (losses) gains on available-for-sale securities $ (147,996) $ 251,070
Net unrealized gains on separate accounts 3,163 5,815
Related minority interests - (8,672)
Related deferred policy acquisition costs 39,186 (77,539)
Related present value of future profits on insurance acquired 14,806 (1,547)
Related deferred income taxes 33,141 (62,884)
-----------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=======================================================================================================================
</TABLE>
Net other comprehensive (loss) income for 1999 and 1998 of $(163.9) million and
$21.2 million is presented net of reclassifications to net income for gross
gains realized during the period of $13.9 million and $9.0 million and net of
tax and deferred acquisition cost offsets of $9.4 million and $6.6 million,
respectively.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1999 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 $ 93,726 $ 93,678
Due after one year through five years 1,035,774 1,003,721
Due after five years through ten years 1,043,650 997,356
Due after ten years 430,312 410,002
Mortgage-backed securities 686,870 666,684
--------------------------------------------------------------------------------------------------------------
Total $ 3,290,332 $ 3,171,441
==============================================================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 is shown below (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 604,226 $ 1,167,190
Gross realized gains $ 25,885 $ 22,969
Gross realized losses $ 17,247 $ 16,578
</TABLE>
F-37
<PAGE> 107
On January 1, 1999, National Life Group reclassified certain mutual fund
investments from an available-for-sale to a trading classification. The
cumulative gross unrealized gain reclassified into net investment gains was $0.6
million. For the year ended December 31, 1999, these securities recorded $0.9
million net investment income and $(0.5) million investment losses. Cost of
trading securities held at December 31, 1999 was $12.1 million. National Life
Group held no securities classified as trading prior to January 1, 1999.
National Life Group 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 closed block assets) and the
corresponding liability for collateral held (closed block portion included in
closed block liabilities) were $115.5 million and $193.5 million at December 31,
1999 and 1998, respectively.
National Life Group 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, 1999 or 1998.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------
<S> <C> <C>
GEOGRAPHIC REGION
-----------------
New England 4.3% 3.8%
Middle Atlantic 10.7 9.7
East North Central 8.7 9.3
West North Central 2.8 4.5
South Atlantic 24.1 25.7
East South Central 7.0 5.0
West South Central 12.9 10.3
Mountain 15.1 17.7
Pacific 14.4 14.0
-------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===================================================================================================================
PROPERTY TYPE
-------------
Residential 0.1% 0.2%
Apartment 19.7 24.2
Retail 9.5 12.2
Office Building 37.4 35.0
Industrial 29.4 26.2
Hotel/Motel 2.6 0.8
Other Commercial 1.3 1.4
-------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===================================================================================================================
Total mortgage loans and real estate
(in thousands) $ 867,973 $ 1,174,070
===================================================================================================================
</TABLE>
F-38
<PAGE> 108
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 767,540 $ 1,077,637
Impaired loans without valuation allowances 6,943 11,757
-----------------------------------------------------------------------------------------------------------------
Subtotal 774,483 1,089,394
-----------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowances 10,600 10,244
Related valuation allowances (3,113) (1,134)
-----------------------------------------------------------------------------------------------------------------
Subtotal 7,487 9,110
-----------------------------------------------------------------------------------------------------------------
Total $ 781,970 $ 1,098,504
=================================================================================================================
Impaired loans:
Average recorded investment $ 19,771 $ 27,755
Interest income recognized $ 2,137 $ 3,124
Interest received $ 2,092 $ 2,818
</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>
1999 1998
============================================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,993 $ 1,564
Impairment losses charged to valuation allowances - (2,217)
Changes to previously established valuation allowances (14) (2,642)
------------------------------------------------------------------------------------------------------------
Increase/decrease in valuation allowances 1,979 (3,295)
Balance, beginning of year 1,134 4,429
------------------------------------------------------------------------------------------------------------
Balance, end of year $ 3,113 $ 1,134
============================================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 255,721 $ 405,184
Equity securities dividends 2,385 6,380
Mortgage loan interest 63,196 90,991
Policy loan interest 6,426 47,189
Real estate income 11,698 12,802
Other investment income 29,915 12,363
------------------------------------------------------------------------------------------------------------
Gross investment income 369,341 574,909
Less: investment expenses 19,956 24,570
------------------------------------------------------------------------------------------------------------
Net investment income $ 349,385 $ 550,339
============================================================================================================
</TABLE>
F-39
<PAGE> 109
DERIVATIVES
The Company 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, the
Company's loss is the decrease in the fair value of futures and is limited to
the premium paid for the options.
The Company purchases options only from highly rated counterparties. However, in
the event a counterparty failed to perform, the Company'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>
1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 166,858 $ 79,754
Futures $ 5,439 $ 28,835
==============================================================================================================
Book values:
Options: Net amortized cost $ 17,800 $ 5,514
Intrinsic value 18,894 18,953
--------------------------------------------------------------------------------------------------------------
Book value 36,694 24,467
Futures at fair value 890 463
--------------------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 37,584 $ 24,930
==============================================================================================================
</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>
1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 173,485 $ 173,485 $ 347,949 $ 347,949
Available-for-sale debt and equity securities 3,338,777 3,338,777 5,438,784 5,438,784
Trading equity securities 11,793 11,793 - -
Mortgage loans 781,970 790,190 1,098,504 1,180,630
Policy loans 120,745 115,330 776,363 743,687
Derivatives 37,584 35,528 24,930 28,496
Investment products 2,600,657 2,578,402 2,507,012 2,522,940
Debt 76,092 62,615 78,088 75,141
</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.
F-40
<PAGE> 110
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).
Mortgage loan fair values are estimated as the average of discounted cash flows
under different scenarios of future mortgage interest rates (including
appropriate provisions for default losses and borrower prepayments).
For variable rate policy loans the unpaid balance approximates fair value. Fixed
rate policy loan fair values are estimated based on discounted cash flows using
the current variable policy loan rate (including appropriate provisions for
mortality and repayments).
Derivatives estimated fair values are based on quoted values.
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
The Company reinsures certain risks assumed in the normal course of business.
For individual life products, The Company 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 agreements. Disability income products are
significantly reinsured under coinsurance and modified coinsurance agreements.
The Company remains liable in the event any reinsurer is unable to meet its
assumed obligations. The Company 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.
,
Transactions between the open and Closed Block (see Notes 11 and 13) have been
excluded from the following schedule. Reinsurance flows with outside parties
remain within the open block.
The effects of reinsurance for the years ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 114,117 $ 453,859
Reinsurance assumed 4,731 898
Reinsurance ceded (60,898) (68,497)
---------------------------------------------------------------------------------------------------------------
$ 57,950 $ 386,260
===============================================================================================================
Other income:
Direct $ 6,975 $ 3,694
Reinsurance ceded 12,887 13,577
---------------------------------------------------------------------------------------------------------------
$ 19,862 $ 17,271
===============================================================================================================
</TABLE>
F-41
<PAGE> 111
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in policy liabilities:
Direct increase in policy liabilities $ 63,124 $ 94,949
Reinsurance assumed - (4)
Reinsurance ceded (16,525) 3,307
---------------------------------------------------------------------------------------------------------------
$ 46,599 $ 98,252
===============================================================================================================
Policy benefits:
Direct policy benefits $ 109,618 $ 416,919
Reinsurance assumed (2,479) 1,286
Reinsurance ceded (60,403) (71,426)
---------------------------------------------------------------------------------------------------------------
$ 46,736 $ 346,779
===============================================================================================================
Policyholders' dividends:
Direct policyholders' dividends $ 2,852 $ 110,630
Reinsurance ceded (3,935) (3,528)
---------------------------------------------------------------------------------------------------------------
$ (1,083) $ 107,102
===============================================================================================================
</TABLE>
NOTE 5 - DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes in the deferred policy acquisition costs
asset (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 416,733 $ 392,014
Acquisition costs deferred 73,648 57,318
Amortization to expense during the year (36,791) (49,738)
Adjustment to equity during the year 116,725 17,139
Included in Closed Block assets (312,588) -
Purchase GAAP effect on purchase of LSWNH (Note 12) (32,188) -
----------------------------------------------------------------------------------------------
Balance, end of year $ 225,539 $ 416,733
==============================================================================================
</TABLE>
NOTE 6 - FEDERAL INCOME TAXES
The components of federal income taxes and a reconciliation of the expected and
actual federal income taxes and income tax rates for the years ended December 31
were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 7,497 $ 17,144
Deferred 9,883 (18,164)
------------------------------------------------------------------- --------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Expected income taxes $ 29,206 35.0% $ 9,686 35.0%
Differential earnings amount (2,058) (2.5) (7,953) (28.7)
Affordable housing tax credit (6,509) (7.8) (6,638) (24.0)
Net change in tax reserves 2,033 2.4 5,035 18.2
Other, net (5,292) (6.3) (1,150) (4.2)
----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Effective federal income tax rate 20.8% (3.7)%
==================================================== ===================== =====================
</TABLE>
F-42
<PAGE> 112
The Company received net federal income tax refunds of $9.4 million in 1999 and
paid federal income taxes of $13.3 million in 1998.
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Net unrealized loss on available-for-sale securities $ 29,383 -
Debt and equity securities 17,419 -
Policy liabilities 32,408 $ 185,294
Other liabilities and accrued expenses 51,609 67,291
Other 490 4,761
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 131,309 257,346
--------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 28,635 126,380
Present value of future profits of insurance acquired 37,908 17,683
Net unrealized gain on available-for-sale securities - 62,884
Debt and equity securities - 16,947
Other 14,777 11,911
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 81,320 235,805
--------------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 49,989 $ 21,541
==========================================================================================================================
</TABLE>
Management believes it is more likely than not that the Company 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 National Life's tax returns through 1995 and is currently
examining the years 1996 - 1998. In management's opinion adequate tax
liabilities have been established for all open years.
NOTE 7 - BENEFIT PLANS
National Life sponsors a qualified defined benefit pension plan covering
substantially all employees. The plan is administered by National Life's
Benefits Committee and is non-contributory, with benefits based on an employee's
retirement age, years of service and compensation near retirement. Plan assets
are primarily bonds and common stocks held in a National Life separate account
and funds invested in a group 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 Group
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
F-43
<PAGE> 113
the pro-rata recognition of actuarial gains on lump sum settlements of pension
benefit obligations. Some of the plan participants elected to defer their lump
sum payouts until 1998, which also deferred recognition of the related
settlement gain until 1998.
The status of the defined benefit plans at December 31 was as follows (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-----------------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 189,524 $ 162,986 $ 27,883 $ 24,759
Service cost (benefits earned during the current period) 4,194 2,849 581 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Actuarial (gains) losses (26,832) 34,444 (3,937) 1,939
Benefits paid (12,002) (22,185) (1,170) (1,061)
---------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 167,144 $ 189,524 $ 25,233 $ 27,883
=================================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 100,045 $ 108,884
Actual return on plan assets 9,952 7,200
Benefits paid (5,747) (16,039)
-----------------------------------------------------------------------------------------------
Plan assets, end of year $ 104,250 $ 100,045
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FUNDED STATUS:
Benefit obligation $ 167,144 $ 189,524 $ 25,233 $ 27,883
Plan assets (104,250) (100,045)
------------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 62,894 89,479 25,233 27,883
Unrecognized actuarial gains (losses) 18,309 (11,259) 6,397 2,526
Unrecognized prior service cost (1,080) (1,152)
----------------------------------------------------------------------
Accrued benefit cost at September 30 81,203 78,220 30,550 29,257
Payments subsequent to measurement date (1,638) (1,518)
------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost at December 31 $ 79,565 $ 76,702 $ 30,550 $ 29,257
==============================================================================================================================
</TABLE>
The components of net periodic benefit cost for the years ended December 31 were
as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 4,194 $ 2,849 $ 581 $ 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Expected return on plan assets (8,745) (9,078)
Net amortization and deferrals 281 (1,167) (66) (83)
Amortization of prior service cost 72 72
Settlement gains from 1997 early retirement program (3,131)
-----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating
expenses) $ 7,990 $ 903 $ 2,463 $ 2,235
=============================================================================================================================
</TABLE>
The total projected benefit obligation for non-qualified defined benefit pension
plans was $70.9 million and $81.4 million at December 31, 1999 and 1998,
respectively. The total accumulated benefit obligation (APBO) for these plans
was $67.7 million and $75.2 million at December 31, 1999 and 1998, respectively.
F-44
<PAGE> 114
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.75% 6.75% 7.75% 6.75%
Rate of increase in future compensation levels 6.00% 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 $2.4 million and the 1999
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 $2.0 million and
the 1999 service and interest cost components of net periodic postretirement
benefit cost by about $0.1 million. National Life Group 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. Employees below specified levels of
compensation also receive a foundation contribution of 1.5% of compensation.
Additional employee voluntary contributions may be made to the plans up to a set
maximum. Vesting and withdrawal privilege schedules are attached to the
Company's contributions.
National Life also provides a 401(k) plan for it's regular full-time agents
whereby accumulated funds may be invested by the agent in a group annuity
contract with National Life or in mutual funds sponsored by an affiliate of
National Life. Total annual contributions can not exceed certain limits that
vary based on total agent compensation. No National Life contributions are made
to the plan.
Life Insurance Company of the Southwest (LSW), an indirectly held wholly-owned
subsidiary of National Life, provides a 401(k) to its employees. Additional
voluntary employee contributions may be made to the plan subject to certain
limits. LSW's contributions to these plans generally vest within two years.
NOTE 8 - DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,692 $ 69,688
$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: 6,400 8,400
$6.4 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 $ 76,092 $ 78,088
=============================================================================================================================
</TABLE>
F-45
<PAGE> 115
The aggregate annual scheduled maturities of debt for the next five years are as
follows (in thousands):
2000 $ 2,000
2001 2,000
2002 2,400
2003 -
2004 -
Interest paid was $6.3 million and $6.2 million in 1999 and 1998, respectively.
NOTE 9 - CONTINGENCIES
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. Qualifying members may also
opt out of the class action and pursue litigation separately against National
Life. Most of the alternative dispute resolution cases were settled by December
31, 1999. Management believes that while the ultimate cost of this litigation
(including those opting out of the class action) is still uncertain, it is
unlikely, after considering existing provisions, to have a material adverse
effect on National Life's financial position.
In late 1999, two lawsuits were filed against National Life and the State of
Vermont in Vermont related to National Life's conversion to a mutual holding
company structure. National Life and the State of Vermont specifically deny any
wrongdoing and intend to defend these cases vigorously. In the opinion of
National Life Group's management, based on advice from legal counsel, the
ultimate resolution of these lawsuits will not have a material effect on
National Life Group's financial position. However, liabilities related to these
lawsuits could be established in the near term if estimates of the ultimate
resolution of these proceedings are revised.
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 was originally effective for fiscal years beginning after June 15,
1999. In June, 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 (FAS 137). FAS 137 requires the application of FAS 133 for fiscal years
beginning after June 15, 2000. The Company is currently assessing the impact of
the adoption of FAS 133.
F-46
<PAGE> 116
NOTE 11 - CLOSED BLOCK
The Closed Block was established on January 1, 1999 as part of the conversion to
a mutual holding company corporate structure (see Note 13).
Summarized financial information for the Closed Block effects as of December 31,
1999 and for the year then ended is as follows (in thousands):
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Cash and cash equivalents $ 122,982
Available-for-sale debt securities (amortized cost of $1,800.1 million) 1,771,494
Mortgage loans 380,986
Policy loans 640,490
Accrued investment income 53,387
Premiums and fees receivable 18,864
Deferred policy acquisition costs 312,588
Other assets 123,690
----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,424,481
==================================================================================================================================
LIABILITIES:
Policy liabilities and accruals $ 3,629,560
Other liabilities 69,186
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 3,698,746
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES:
Premiums and other income $ 325,445
Net investment income 216,432
Realized investment gain 8,720
----------------------------------------------------------------------------------------------------------------------------------
Total revenues 550,597
----------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 66,324
Policy benefits 283,598
Policyholders' dividends 107,941
Interest credited to policyholders' accounts 13,294
Operating expenses 17,407
Policy acquisition expenses, net 37,662
----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 526,226
----------------------------------------------------------------------------------------------------------------------------------
Pre-tax contribution from the Closed Block $ 24,371
==================================================================================================================================
</TABLE>
There were no mortgage valuation allowances on Closed Block mortgage loans at
December 31, 1999. Many expenses related to Closed Block operations are charged
to operations outside the Closed Block; accordingly, the contribution from the
Closed Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside the Closed Block are therefore
disproportionate to the actual business outside the Closed Block.
F-47
<PAGE> 117
The Consolidated Statement of Cash Flows for 1999 is presented net of cash flows
and adjustments to operating cash flows attributable to the Closed Block cash
and short term investments of $(24.5) million. The Closed Block was initially
funded on January 1, 1999 with cash and securites totalling $2.2 billion.
NOTE 12 - ACQUISITION
On July 2, 1999, the Company acquired the outstanding one-third interest in LSW
National Holdings, Inc., (LSWNH) the parent of Dallas, Texas-based Life
Insurance Company of the Southwest (LSW), a financial services company
specializing in the sale of annuities. The Company had previously purchased a
two-thirds interest in the company in February, 1996.
The purchase price was $61.6 million in cash. Purchasing the remaining one-third
interest eliminated the ongoing provision for minority interests for the last
six months of 1999. The effect of the cash purchase on the consolidated
financial statements was to reduce minority interests by $39.7 million and
record net purchase GAAP adjustments of $21.9 million, which included intangible
assets for the present value of future profits of insurance acquired of $59.4
million and goodwill of $3.0 million.
Had the one-third purchase been made at January 1, 1998, pro-forma consolidated
net income would have increased by about $3.1 million and $2.2 million in 1999
and 1998, respectively. These pro-forma consolidated results are not necessarily
indicative of the actual results which might have occurred had the Company owned
all of LSWNH since that date. (unaudited)
NOTE 13 - REORGANIZATION INTO A MUTUAL HOLDING COMPANY
CORPORATE STRUCTURE
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, a mutual insurance holding company created for this purpose.
National Life Holding Company currently owns all the outstanding shares of NLV
Financial, a stock holding company created for this purpose, which in turn
currently owns all the outstanding shares of National Life. National Life
Holding Company currently has no other assets, liabilities or operations other
than that related to its ownership of NLV Financial's outstanding stock.
Similarly, NLV Financial currently has no other assets, liabilities or
operations other than that related to its ownership of National Life's
outstanding stock. Under the terms of the reorganization, National Life Holding
Company must always hold a majority of the voting shares of NLV Financial.
This reorganization was approved by policyowners of National Life and was
completed with the approval of the Commissioner of the Vermont Department of
Banking, Insurance, Securities, and Health Care Administration (the
"Commissioner").
Under the provisions of the reorganization, National Life issued 2.5 million
common stock $1 par shares to its parent, NLV Financial as a transfer from
retained earnings and also transferred $5 million from retained earnings into
additional paid in capital. There were no dividends paid or declared in 1999 by
National Life. Dividends declared by National Life in excess of ten percent of
statutory surplus (see Note 14 for statutory information) require pre-approval
by the Commissioner.
F-48
<PAGE> 118
NOTE 14 - 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's statutory surplus to GAAP equity at December
31 and statutory net income to GAAP net income for the years ended December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
Surplus/ Surplus/
Equity Net Income Equity Net Income
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 408,086 $ 25,923 $ 373,063 $ 67,841
Asset valuation reserve 79,207 69,994
Interest maintenance reserve 58,507 5,681 52,826 (4,114)
Surplus notes (70,716) (70,700)
Non-admitted assets 2,101 17,033
Investments 30,149 5,916 650 (4,471)
Deferred policy acquisition costs 445,704 17,250 428,453 (9,479)
Deferred income taxes 45,587 (3,837) 74,132 15,555
Policy liabilities (202,061) 10,063 (203,832) (6,476)
Policyholders' dividends 67,494 3,289 64,205 529
Benefit plans (29,475) (1,571) (27,904) 6,730
Sales remediation costs (40,575)
Other comprehensive income, net (57,700) 106,243
Other changes, net (1,895) (6,086) (1,860) (5,352)
-----------------------------------------------------------------------------------------------------------------------------
GAAP equity/net income $ 774,988 $ 56,628 $ 882,303 $ 20,188
=============================================================================================================================
</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.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance (Codification), which
will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC has recommended an
effective date of January 1, 2001. The Codification provides guidance for areas
which promulgated statutory accounting principles had not previously addressed,
and changes current promulgated guidance in other areas.
The Vermont Department of Banking, Insurance, Securities, and Health Care
Administration has adopted Codification effective January 1, 2001. The
Department may make changes to the promulgated guidance prior to the effective
date. National Life has not estimated the potential effect of the Codification
guidance on its reported results.
F-49
<PAGE> 119
NATIONAL VARIABLE
LIFE INSURANCE ACCOUNT
(VARITRAK SEGMENT)
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999
F-50
<PAGE> 120
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of National Life Insurance Company
and Policyholders of National Variable Life Insurance Account -- Varitrak
Segment
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of each of the sub-accounts
constituting the National Variable Life Insurance Account -- Varitrak Segment
(a segment within a Separate Account of National Life Insurance Company) (the
Segment) at December 31, 1999, and the results of each of their operations
and each of their changes in net assets for each of the three years then
ended, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Segment's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted
in the United States which require that we plan and perform the audits 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, which included confirmation of securities at
December 31, 1999 by correspondence with the funds, provide a reasonable
basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
March 31, 2000
F-51
<PAGE> 121
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
POLICYHOLDER
ACCOUNT
VALUES
---------------
<S> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value
(policyholder accumulation units and unit value):
Market Street Fund Money Market (457,700.93 accumulation units at $11.71 unit value) $ 5,358,457
Market Street Fund Growth (785,636.12 accumulation units at $16.45 unit value) 12,919,844
Market Street Fund Aggressive Growth (118,770.59 accumulation units at $16.72 unit value) 1,985,760
Market Street Fund Managed (137,184.85 accumulation units at $14.53 unit value) 1,992,873
Market Street Fund Bond (151,215.28 accumulation units at 11.47 unit value) 1,734,440
Market Street Fund International (186,695.40 accumulation units at $16.71 unit value) 3,119,576
Market Street Fund Sentinel Growth (141,722.47 accumulation units at $22.71 unit value) 3,218,517
Alger American Fund Growth (380,350.42 accumulation units at $25.93 unit value) 9,860,929
Alger American Fund Small Capitalization (445,440.10 accumulation units at $18.06 unit value) 8,045,531
VIPF Equity Income Portfolio (303,914.15 accumulation units at $35.19 unit value) 10,694,428
VIPF Overseas Portfolio (147,357.59 accumulation units at $29.39 unit value) 4,331,372
VIPF Growth Portfolio (239,691.23 accumulation units at $57.59 unit value) 13,802,814
VIPF High Income Portfolio (92,780.05 accumulation units at $29.11 unit value) 2,700,605
VIPF Contrafund Portfolio (238,927.92 accumulation units at $19.45 unit value) 4,646,129
VIPF Index 500 Portfolio (511,054.93 accumulation units at $35.78 unit value) 18,284,795
American Century Variable Portfolios VP Value (21,371.41 accumulation units at $10.25 unit value) 218,998
American Century Variable Portfolios VP Income & Growth (79,083.88 accumulation units at $12.85 unit value) 1,016,274
JP Morgan Series Trust II International Opportunities (25,101.23 accumulation units at $13.15 unit value) 330,095
JP Morgan Series Trust II Small Company (14,240.28 accumulation units at $14.31 unit value) 203,838
Strong Opportunity Fund II(43,769.74 accumulation units at $13.93 unit value) 609,810
Strong Variable Insurance Funds Mid Cap Growth (75,292.18 accumulation units at $21.30 unit value) 1,603,929
Neuberger Berman Advisers Management Trust Partners Portfolio (25,882.53 accumulation units at $10.87 unit value) 281,245
Goldman Sachs Variable Insurance Trust International Equity (17,860.81 accumulation units at $13.24 unit value) 236,418
Goldman Sachs Variable Insurance Trust Global Income (3,631.05 accumulation units at $10.22 unit value) 37,096
Goldman Sachs Variable Insurance Trust CORE Small Cap Equity (6,687.30 accumulation units at $11.03 unit value) 73,789
Goldman Sachs Variable Insurance Trust Mid Cap Value (14,285.28 accumulation units at $9.72 unit value) 138,821
------------
Total Net Assets $107,446,383
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 122
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET FUND
---------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL
------------ ----------- ------------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 224,222 $ 244,886 $ 180,507 $ 71,210 $ 24,621 $ 134,771
EXPENSES:
Mortality and expense risk
charges 41,721 107,429 14,087 15,752 11,973 21,719
---------------------------------------------------------------------------------
Net investment income 182,501 137,457 166,420 55,458 12,648 113,052
---------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold - 79,013 (29,873) 37,402 (5,840) 32,890
Net unrealized (depreciation)
appreciation on investments - (15,120) 120,658 (98,893) (56,125) 500,650
---------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments - 63,893 90,785 (61,491) (61,965) 533,540
---------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 182,501 $ 201,350 $ 257,205 $ (6,033) $ (49,317) $ 646,592
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
ALGER AMERICAN FUND
---------- ---------------------------
SENTINEL
GROWTH GROWTH SMALL CAP
--------- ---------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 70,274 $ 583,780 $ 687,887
EXPENSES:
Mortality and expense risk
charges 18,499 61,216 50,956
-----------------------------------------------
Net investment income 51,775 522,564 636,931
-----------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 65,850 577,304 93,301
Net unrealized (depreciation)
appreciation on investments 682,680 1,024,377 1,596,167
-----------------------------------------------
Net realized and unrealized
gain (loss) on investments 748,530 1,601,681 1,689,468
-----------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 800,305 $ 2,124,245 $ 2,326,399
===============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 123
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY HIGH
INCOME OVERSEAS GROWTH INCOME CONTRAFUND
----------- -------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 424,670 $ 100,811 $ 847,889 $ 217,914 $ 80,833
EXPENSES:
Mortality and expense risk charges 89,153 27,018 86,698 23,116 26,335
-------------------------------------------------------------------------------------
Net investment income (loss) 335,517 73,793 761,191 194,798 54,498
-------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 361,515 86,245 677,291 (146,982) 193,124
Net unrealized (depreciation)
appreciation on investments (217,244) 1,039,168 1,869,134 116,488 469,976
-------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 144,271 1,125,413 2,546,425 (30,494) 663,100
-------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 479,788 $1,199,206 $3,307,616 $ 164,304 $ 717,598
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY
VIPF VARIABLE PORTFOLIOS
----------- --------------------------------
INDEX VP INCOME &
500 VP VALUE GROWTH
---------- ------------ --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 112,837 $ 5,747 $ 40
EXPENSES:
Mortality and expense risk charges 102,705 1,010 4,209
---------------------------------------------
Net investment income (loss) 10,132 4,737 (4,169)
---------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 823,410 (2,164) 24,948
Net unrealized (depreciation)
appreciation on investments 1,421,745 (14,728) 77,756
---------------------------------------------
Net realized and unrealized
gain (loss) on investments 2,245,155 (16,892) 102,704
---------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $2,255,287 $ (12,155) $ 98,535
=============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 124
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECMEBER 31, 1999
<TABLE>
<CAPTION>
JP MORGAN STRONG VARIABLE NEUBERGER
SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
--------------------------------- -------------- ------------------ ------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND GROWTH PORTFOLIO
----------------- ------------- -------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 9,965 $ 4,932 $ 3,110 $ 155 $ 3,906
EXPENSES:
Mortality and expense risk charges 632 865 1,447 4,044 1,657
--------------------------------------------------------------------------------------
Net investment income (loss) 9,333 4,067 1,663 (3,889) 2,249
--------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 1,579 21,966 4,649 73,685 4,890
Net unrealized appreciation
(depreciation) on investments 33,198 34,479 63,891 391,256 2,086
--------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 34,777 56,445 68,540 464,941 6,976
--------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 44,110 $ 60,512 $ 70,203 $ 461,052 $ 9,225
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
-------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
-------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 17,323 $ 1,386 $ 148 $ 662 $ 4,054,486
EXPENSES:
Mortality and expense risk charges 1,055 131 445 346 714,218
---------------------------------------------------------------------------------------
Net investment income (loss) 16,268 1,255 (297) 316 3,340,268
---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 8,182 (42) 2,815 1,831 2,986,989
Net unrealized appreciation
(depreciation) on investments 21,079 (1,337) 7,437 (3,555) 9,065,223
---------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 29,261 (1,379) 10,252 (1,724) 12,052,212
---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 45,529 $ (124) $ 9,955 $ (1,408) $15,392,480
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 125
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECMEBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
-------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
----------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 174,631 $ 828,642 $ 54,654 $ 82,717 $ 35,739
EXPENSES:
Mortality and expense risk charges 29,369 72,436 8,545 10,475 6,127
-------------------------------------------------------------------------------------
Net investment income 145,262 756,206 46,109 72,242 29,612
-------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized (loss) gain from
shares sold - (125,406) 12,423 54,347 5,728
Net unrealized appreciation
on investments - 371,666 27,969 5,509 10,575
-------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 246,260 40,392 59,856 16,303
-------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 145,262 $ 1,002,466 $ 86,501 $ 132,098 $ 45,915
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
---------------------------------- -------------------------------
SENTINAL
INTERNATINAL GROWTH GROWTH SMALL CAP
---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 71,101 $ 126,914 $ 520,351 $ 477,358
EXPENSES:
Mortality and expense risk charges 12,891 9,352 30,787 33,154
--------------------------------------------------------------------
Net investment income 58,210 117,562 489,564 444,204
--------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized (loss) gain from
shares sold 3,127 (39,825) 133,365 (9,041)
Net unrealized appreciation
on investments 33,776 83,638 759,665 156,309
--------------------------------------------------------------------
Net realized and unrealized
gain on investments 36,903 43,813 893,030 147,268
--------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 95,113 $ 161,375 $ 1,382,594 $ 591,472
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 126
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
-----------------------------------------------------------------------------------
EQUITY HIGH
INCOME OVERSEAS GROWTH INCOME CONTRAFUND
----------- ------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 332,243 $ 106,077 $ 508,477 $ 154,838 $ 30,797
EXPENSES:
Mortality and expense risk charges 61,108 16,784 45,640 15,314 9,280
-----------------------------------------------------------------------------------
Net investment income (loss) 271,135 89,293 462,837 139,524 21,517
-----------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 183,982 11,052 144,728 (30,566) 18,665
Net unrealized appreciation
(depreciation) on investments 230,682 81,094 1,154,458 (220,695) 264,772
-----------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 414,664 92,146 1,299,186 (251,261) 283,437
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 685,799 $ 181,439 $1,762,023 $ (111,737) $ 304,954
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY
VIPF VARIABLE PORTFOLIOS
------------- --------------------------------
INDEX VP INCOME &
500 VP VALUE GROWTH
------------- ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 48,516 $ - $ 356
EXPENSES:
Mortality and expense risk charges 27,146 65 119
-------------------------------------------------
Net investment income (loss) 21,370 (65) 237
-------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 117,440 968 1,528
Net unrealized appreciation
(depreciation) on investments 659,903 1,426 7,468
-------------------------------------------------
Net realized and unrealized
gain (loss) on investments 777,343 2,394 8,996
-------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 798,713 $ 2,329 $ 9,233
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 127
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
JP MORGAN STRONG VARIABLE NEUBERGER
SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
--------------------------- -------------- --------------- ----------
INTERNATIONAL SMALL OPPORTUNITY II MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
------------- ----------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ - $ 185 $ 10 $ - $ -
EXPENSES:
Mortality and expense risk charges 1 10 2 5 66
-------------------------------------------------------------------------
Net investment (loss) income (1) 175 8 (5) (66)
-------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 70 28 30 43 565
Net unrealized appreciation
on investments 56 427 198 686 2,769
-------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 126 455 228 729 3,334
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 125 $ 630 $ 236 $ 724 $ 3,268
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
------------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 170 $ 93 $ 65 $ 115 $3,554,049
EXPENSES:
Mortality and expense risk charges 36 6 25 28 388,771
-------------------------------------------------------------------------
Net investment (loss) income 134 87 40 87 3,165,278
-------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 164 (160) 96 54 483,405
Net unrealized appreciation
on investments 1,643 23 1,929 1,693 3,637,639
-------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1,807 (137) 2,025 1,747 4,121,044
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,941 $ (50) $ 2,065 $ 1,834 $7,286,322
=========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 128
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Market Street Fund
----------------------------------------------------------------------------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth
--------- -------- ---------- --------- ------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 131,394 $ 139,288 $ 1,211 $ 23,450 $ 9,403 $ 19,573 $ 434
EXPENSES:
Mortality and expense risk charges 22,402 24,951 3,114 5,910 1,833 5,158 2,431
----------------------------------------------------------------------------------------
Net investment income (loss) 108,992 114,337 (1,903) 17,540 7,570 14,415 (1,997)
----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold - 106,196 12,533 13,707 483 6,441 16,851
Net unrealized appreciation
on investments - 353,473 51,230 85,995 11,666 2,281 44,338
----------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 459,669 63,763 99,702 12,149 8,722 61,189
----------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 108,992 $ 574,006 $ 61,860 $ 117,242 $ 19,719 $ 23,137 $ 59,192
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Alger American Fund
-------------------------
Growth Small Cap
---------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 9,832 $ 54,467
EXPENSES:
Mortality and expense risk charges 11,355 15,072
-------------------------
Net investment income (loss) (1,523) 39,395
-------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 48,393 29,498
Net unrealized appreciation
on investments 176,680 141,467
-------------------------
Net realized and unrealized
gain on investments 225,073 170,965
-------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 223,550 $ 210,360
=========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 129
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
VIPF
--------------------------------------------------------------------------
EQUITY HIGH INDEX
INCOME OVERSEAS GROWTH INCOME CONTRAFUND 500 TOTAL
---------- ----------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 146,791 $ 22,598 $ 30,327 $ 17,180 $ - $ - $ 605,948
EXPENSES:
Mortality and expense risk charges 25,535 6,281 17,476 5,215 812 984 148,529
------------------------------------------------------------------------------------------
Net investment income (loss) 121,256 16,317 12,851 11,965 (812) (984) 457,419
------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 77,167 9,870 48,614 10,903 2,592 1,900 385,148
Net unrealized appreciation
(depreciation) on 428,283 (475) 280,065 62,794 5,500 15,881 1,659,178
------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 505,450 9,395 328,679 73,697 8,092 17,781 2,044,326
------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $ 341,530 $ 85,662 $ 7,280 $ 16,797 $ 2,501,745
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 130
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET FUND
-------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- -------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 182,501 $ 201,350 $ 257,205 $ (6,033) $(49,317)
-------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 18,682,585 3,472,661 502,580 450,497 517,217
Transfers between investment
sub-accounts and general account, net (17,513,159) 441,371 116,341 315,228 428,435
Surrenders and lapses (129,543) (642,850) (60,070) (39,263) (42,491)
Death benefits - (17,717) - - -
Loan collateral interest received 6,164 4,077 1,290 2,872 11
Transfers for policy loans 36,797 (122,318) (21,898) 222,748 (3,291)
Cost of insurance and administrative charges (1,012,392) (1,071,664) (155,432) (192,739) (118,739)
Miscellaneous 10,796 (2,509) 202 3,717 263
-------------------------------------------------------------------------------
Total capital transactions 81,248 2,061,051 383,013 763,060 781,405
-------------------------------------------------------------------------------
Increase in net assets 263,749 2,262,401 640,218 757,027 732,088
Net assets, beginning of period 5,094,708 10,657,443 1,345,542 1,235,846 1,002,352
-------------------------------------------------------------------------------
Net assets, end of period $ 5,358,457 $ 12,919,844 $ 1,985,760 $1,992,873 $ 1,734,440
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
------------------------------- -----------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 646,592 $ 800,305 $ 2,124.245 $ 2,326,399
--------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 687,287 639,909 2,019,518 1,495,117
Transfers between investment
sub-accounts and general account, net 133,338 478,416 1,708,558 126,6009
Surrenders and lapses (47,051) (19,197) (218,945) (216,2798)
Death benefits (5,597) - - (1686)
Loan collateral interest received 301 985 4,566 2,8369
Transfers for policy loans (9,989) (11,042) (152,859) (127,5694)
Cost of insurance and administrative charges (216,417) (194,166) (592,963) (458,654)
Miscellaneous 2,715 (973) 1,537 (1,656)
--------------------------------------------------------------
Total capital transactions 544,587 893,932 2,769,412 820,227
--------------------------------------------------------------
Increase in net assets 1,191,179 1,694,237 4,893,657 3,146,626
Net assets, beginning of period 1,928,397 1,524,280 4,967,272 4,898,905
--------------------------------------------------------------
Net assets, end of period $ 3,119,576 $ 3,218,517 $ 9,860.929 $ 8,045,531
==============================================================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-61
<PAGE> 131
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- -------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 479,788 $ 1,199,206 $ 3,307,616 $ 164,304 $ 717,598
-------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 2,589,209 830,581 2,642,108 668,099 1,053,960
Transfers between investment
sub-accounts and general account, net 434,075 321,622 1,897,474 224,167 1,497,929
Surrenders and lapses (338,308) (116,132) (369,618) (254,614) (165,080)
Death benefits (15,977) (890) (18,064) - (391)
Loan collateral interest received 5,410 1,079 5,360 1,059 2,169
Transfers for policy loans (150,436) (37,314) (53,981) 15,738 (39,618)
Cost of insurance and administrative
charges (896,278) (241,330) (782,269) (218,356) (273,807)
Miscellaneous (558) 2,519 2,059 224 766
-------------------------------------------------------------------------------------
Total capital transactions 1,627,137 760,135 3,323,069 436,317 2,075,928
-------------------------------------------------------------------------------------
Increase in net assets 2,106,925 1,959,341 6,630,685 600,621 2,793,528
Net assets, beginning of period 8,587,503 2,372,031 7,172,129 2,099,984 1,852,603
-------------------------------------------------------------------------------------
Net assets, end of period 10,694,428 $ 4,331,372 $ 13,802,814 $ 2,700,605 $ 4,646,129
=====================================================================================
<CAPTION>
AMERICAN CENTURY VARIABLE
VIPF PORTFOLIOS
------------- ----------------------------------
VP INCOME &
INDEX 500 VP VALUE GROWTH
------------- ---------------- ----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,255,287 $ (12,155) $ 98,535
-------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 4,757,826 95,324 250,364
Transfers between investment
sub-accounts and general account, net 6,525,053 118,104 636,747
Surrenders and lapses (144,754) (335) (2,017)
Death benefits (278) - -
Loan collateral interest received 1,475 30 30
Transfers for policy loans (74,165) (1,615) (1,652)
Cost of insurance and administrative
charges (1,205,701) (16,178) (64,083)
Miscellaneous (7,881) 1,020 (528)
-------------------------------------------------
Total capital transactions 9,851,575 196,350 818,861
-------------------------------------------------
Increase in net assets 12,106,862 184,195 917,396
Net assets, beginning of period 6,177,933 34,803 98,878
-------------------------------------------------
Net assets, end of period $ 18,284,795 $ 218,998 $ 1,016,274
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 132
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
STRONG VARIABLE
INSURANCE NEUBERGER
JP MORGAN SERIES TRUST II STRONG FUNDS BERMAN
----------------------------------- ----------------- ------------------ ----------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
----------------- ---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 44,110 $ 60,512 $ 70,203 $ 461,052 $ 9,225
---------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 33,152 96,651 104,505 283,781 116,821
Transfers between investment
sub-accounts and general
account, net 255,894 57,937 446,411 907,034 128,937
Surrenders and lapses (222) (942) (1,323) (962) (835)
Death benefits - - - - -
Loan collateral interest received - - 30 15 -
Transfers for policy loans (790) (2,271) (39) (178) (1,542)
Cost of insurance and
administrative charges (5,688) (16,273) (15,424) (50,854) (22,504)
Miscellaneous (26) 326 145 (648) 1,049
---------------------------------------------------------------------------------------------
Total capital transactions 282,320 135,428 534,305 1,138,188 221,926
---------------------------------------------------------------------------------------------
Increase in net assets 326,430 195,940 604,508 1,599,240 231,151
Net assets, beginning of period 3,665 7,898 5,302 4,889 50,094
---------------------------------------------------------------------------------------------
Net assets, end of period $ 330,095 $ 203,838 $ 609,810 $ 1,603,929 $ 281,245
=============================================================================================
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
--------------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
------------------ ----------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 45,529 $ (124) $ 9,955 $ (1,408) $ 15,392,480
----------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 73,810 11,385 20,290 25,462 42,120,899
Transfers between investment
sub-accounts and general
account, net 99,089 18,795 31,986 107,309 (56,309)
Surrenders and lapses (1,016) - (2,114) (217) (2,814,178)
Death benefits - - - - (59,082)
Loan collateral interest received - - - - 39,759
Transfers for policy loans - - (2,265) - (539,549)
Cost of insurance and
administrative charges (16,831) (1,588) (5,138) (7,755) (7,853,223)
Miscellaneous 13 (73) 29 48 12,576
----------------------------------------------------------------------------------------------
Total capital transactions 155,065 28,519 42,788 124,847 30,850,693
----------------------------------------------------------------------------------------------
Increase in net assets 200,594 28,395 52,743 123,439 46,243,173
Net assets, beginning of period 35,824 8,701 21,046 15,382 61,203,210
----------------------------------------------------------------------------------------------
Net assets, end of period $ 236,418 $ 37,096 $ 73,789 $ 138,821 $ 107,446,383
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 133
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
----------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 145,262 $ 1,002,466 $ 86,501 $ 132,098 $ 45,915
----------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 16,065,276 3,354,679 445,159 398,177 196,330
Transfers between investment
sub-accounts and general
account, net (14,045,451) 2,034,966 311,097 221,558 398,322
Surrenders and lapses (68,115) (132,734) (21,255) (69,168) (5,455)
Death benefits - (7,259) - - -
Loan collateral interest received 2,566 938 33 65 -
Transfers for policy loans (126,218) (85,328) (8,932) (269,851) (183)
Cost of insurance and
administrative charges (740,562) (856,845) (109,134) (146,025) (64,998)
Miscellaneous (81,958) 3,632 (360) 2,239 942
----------------------------------------------------------------------------------------
Total capital transactions 1,005,538 4,312,049 616,608 136,995 524,958
----------------------------------------------------------------------------------------
Increase in net assets 1,150,800 5,314,515 703,109 269,093 570,873
Net assets, beginning of period 3,943,908 5,342,928 642,433 966,753 431,479
----------------------------------------------------------------------------------------
Net assets, end of period $ 5,094,708 $ 10,657,443 $ 1,345,542 $ 1,235,846 $ 1,002,352
========================================================================================
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
-------------------------------- ---------------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 95,113 $ 161,375 $ 1,382,594 $ 591,472
-----------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 559,764 459,162 1,209,427 1,436,433
Transfers between investment
sub-accounts and general
account, net 561,436 384,776 742,149 634,727
Surrenders and lapses (27,026) (6,365) (55,449) (90,129)
Death benefits - (74) (3,477) -
Loan collateral interest received 63 18 789 905
Transfers for policy loans (9,095) (4,451) (60,399) (45,307)
Cost of insurance and
administrative charges (156,931) (106,073) (326,928) (380,014)
Miscellaneous (262) 9,459 702 1,507
-----------------------------------------------------------------------
Total capital transactions 927,949 736,452 1,506,814 1,558,122
-----------------------------------------------------------------------
Increase in net assets 1,023,062 897,827 2,889,408 2,149,594
Net assets, beginning of period 905,335 626,453 2,077,864 2,749,311
-----------------------------------------------------------------------
Net assets, end of period $ 1,928,397 $ 1,524,280 $ 4,967,272 $ 4,898,905
=======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE> 134
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- -------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS $ 685,799 $ 181,439 $ 1,762,023 $ (111,737) $ 304,954
RESULTING FROM OPERATIONS
-------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 2,326,536 743,468 1,759,391 581,195 415,042
Transfers between investment
sub-accounts and general account, net 1,742,916 449,158 960,014 702,770 833,579
Surrenders and lapses (76,821) (58,543) (122,190) (21,495) (5,561)
Death benefits (6,548) - - - -
Loan collateral interest received 1,619 493 1,166 216 90
Transfers for policy loans (102,818) (22,119) (116,207) (49,108) (6,944)
Cost of insurance and administrative
charges (700,287) (185,158) (501,069) (157,515) (106,990)
Miscellaneous 6,609 2,008 2,116 (345) 1,387
-------------------------------------------------------------------------------------
Total capital transactions 3,191,206 929,307 1,983,221 1,055,718 1,130,603
-------------------------------------------------------------------------------------
Increase in net assets 3,877,005 1,110,746 3,745,244 943,981 1,435,557
Net assets, beginning of period 4,710,498 1,261,285 3,426,885 1,156,003 417,046
-------------------------------------------------------------------------------------
Net assets, end of period $ 8,587,503 $ 2,372,031 $ 7,172,129 $ 2,099,984 $ 1,852,603
=====================================================================================
<CAPTION>
AMERICAN CENTURY VARIABLE
VIPF PORTFOLIOS
------------- ----------------------------------
VP INCOME &
INDEX 500 VP VALUE GROWTH
------------- ---------------- ----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS $ 798,713 $ 2,329 $ 9,233
RESULTING FROM OPERATIONS
-------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,365,857 15,989 19,753
Transfers between investment
sub-accounts and general account, net 3,838,930 18,383 71,190
Surrenders and lapses (6,581) - -
Death benefits - - -
Loan collateral interest received 820 - -
Transfers for policy loans (28,549) - -
Cost of insurance and administrative
charges (339,911) (1,892) (1,301)
Miscellaneous 4,244 (6) 3
-------------------------------------------------
Total capital transactions 4,834,810 32,474 89,645
-------------------------------------------------
Increase in net assets 5,633,523 34,803 98,878
Net assets, beginning of period 544,410 - -
-------------------------------------------------
Net assets, end of period $ 6,177,933 $ 34,803 $ 98,878
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE> 135
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
STRONG VARIABLE
INSURANCE NEUBERGER
JP MORGAN SERIES TRUST II STRONG FUNDS BERMAN
----------------------------------- ----------------- ----------------- ---------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
----------------- ---------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 125 $ 630 $ 236 $ 724 $ 3,268
------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 116 898 565 378 11,133
Transfers between investment
sub-accounts and general
account, net 3,456 6,594 4,661 3,673 37,275
Surrenders and lapses - - - - -
Death benefits - - - - -
Loan collateral interest received - - - - -
Transfers for policy loans - - - - -
Cost of insurance and
administrative charges (33) (285) (157) (82) (1,557)
Miscellaneous 1 61 (3) (4) (25)
------------------------------------------------------------------------------------------
Total capital transactions 3,540 7,268 5,066 3,965 46,826
------------------------------------------------------------------------------------------
Increase in net assets 3,665 7,898 5,302 4,689 50,094
Net assets, beginning of period - - - - -
------------------------------------------------------------------------------------------
Net assets, end of period $ 3,665 $ 7,898 $ 5,302 $ 4,689 $ 50,094
==========================================================================================
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
----------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
---------------- --------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,941 $ (50) $ 2,065 $ 1,834 $ 7,286,322
----------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,395 346 664 122 31,367,255
Transfers between investment
sub-accounts and general
account, net 33,060 8,465 18,678 13,988 (9,630)
Surrenders and lapses - - - - (766,887)
Death benefits - - - - (17,358)
Loan collateral interest received - - - - 9,781
Transfers for policy loans - - - - (935,509)
Cost of insurance and
administrative charges (580) (127) (362) (562) (4,885,378)
Miscellaneous 8 67 1 - (47,977)
----------------------------------------------------------------------------------------
Total capital transactions 33,883 8,751 18,981 13,548 24,714,297
----------------------------------------------------------------------------------------
Increase in net assets 35,824 8,701 21,046 15,382 32,000,619
Net assets, beginning of period - - - - 29,202,591
----------------------------------------------------------------------------------------
Net assets, end of period $ 35,824 $ 8,701 $ 21,046 $ 15,382 $ 61,203,210
========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE> 136
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARKET STREET FUND
---------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 108,992 $ 574,006 $ 61,860 $ 117,242 $ 19,719
---------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 14,928,533 1,666,786 226,537 291,903 117,811
Transfers between investment
sub-accounts and general
account, net (11,556,251) 2,658,992 304,863 252,090 250,863
Surrenders and lapses (35,239) (16,526) (3,762) (7,277) (2,819)
Death benefits - (16,352) - - -
Loan collateral interest received - 62 - - -
Transfers for policy loans - (12,082) (47) - -
Cost of insurance and
administrative charges (632,456) (368,354) (52,706) (103,982) (33,934)
Miscellaneous (1,308) 4,519 158 (328) (11)
---------------------------------------------------------------------------------------
Total capital transactions 2,703,279 3,917,045 475,043 432,406 331,910
---------------------------------------------------------------------------------------
Increase in net assets 2,812,271 4,491,051 536,903 549,648 351,629
Net assets, beginning of period 1,131,637 851,877 105,530 417,105 79,850
---------------------------------------------------------------------------------------
Net assets, end of period $ 3,943,908 $ 5,342,928 $ 642,433 $ 966,753 $ 431,479
=======================================================================================
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
-------------------------------- --------------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 23,137 $ 59,192 $ 223,550 $ 210,360
----------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 333,866 200,093 726,590 1,015,432
Transfers between investment
sub-accounts and general
account, net 372,293 310,212 755,142 1,179,593
Surrenders and lapses (3,213) (1,141) (6,060) (19,896)
Death benefits - - - (830)
Loan collateral interest received - 9 91 93
Transfers for policy loans (845) (437) (9,340) (14,708)
Cost of insurance and
administrative charges (82,909) (37,403) (174,005) (238,728)
Miscellaneous (1,222) 3,791 246 (388)
----------------------------------------------------------------------
Total capital transactions 617,970 475,124 1,292,664 1,920,568
----------------------------------------------------------------------
Increase in net assets 641,107 534,316 1,516,214 2,130,928
Net assets, beginning of period 264,228 92,137 561,650 618,383
----------------------------------------------------------------------
Net assets, end of period $ 905,335 $ 626,453 $ 2,077,864 $ 2,749,311
======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE> 137
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
VIPF
---------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $ 341,530 $ 85,662 $ 7,280
---------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,350,368 421,824 1,240,642 273,306 90,825
Transfers between investment
sub-accounts and general account, net 1,824,653 715,582 1,471,895 690,283 331,696
Surrenders and lapses (15,710) (3,305) (15,336) (2,774) (489)
Death benefits - (295) (879) - -
Loan collateral interest received 390 101 115 12 -
Transfers for policy loans (27,151) (8,820) (15,684) (1,157) (201)
Cost of insurance and administrative
charges (363,378) (92,839) (274,427) (61,178) (12,527)
Miscellaneous 89 2,820 1,042 511 462
---------------------------------------------------------------------------------------
Total capital transactions 2,769,261 1,035,068 2,407,368 899,003 409,766
---------------------------------------------------------------------------------------
Increase in net assets 3,395,967 1,060,780 2,748,898 984,665 417,046
Net assets, beginning of period 1,314,531 200,505 677,987 171,338 -
---------------------------------------------------------------------------------------
Net assets, end of period $ 4,710,498 $ 1,261,285 $ 3,426,885 $ 1,156,003 $ 417,046
=======================================================================================
<CAPTION>
VIPF
-------------
INDEX 500 TOTAL
------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 16,797 $ 2,501,745
---------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 112,247 22,996,763
Transfers between investment
sub-accounts and general account, net 436,969 (1,125)
Surrenders and lapses (322) (133,869)
Death benefits - (18,356)
Loan collateral interest received - 873
Transfers for policy loans - (90,472)
Cost of insurance and administrative
charges (19,167) (2,547,993)
Miscellaneous (2,114) 8,267
---------------------------------
Total capital transactions 527,613 20,214,088
---------------------------------
Increase in net assets 544,410 22,715,833
Net assets, beginning of period - 6,486,758
---------------------------------
Net assets, end of period $ 544,410 $ 29,202,591
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE> 138
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Variable Life Insurance Account (the Variable Account) began operations
on March 11, 1996 and is registered as a unit investment trust under the
Investment Company Act of 1940, as amended. The operations of the Variable
Account are part of National Life Insurance Company (National Life). The
Variable Account was established by National Life as a separate investment
account to invest the net premiums received from the sale of certain variable
life insurance products. Equity Services, Inc., an indirect wholly-owned
subsidiary of National Life, is the principal underwriter for the variable life
insurance policies issued by National Life. Sentinel Advisors Company, an
indirectly-owned subsidiary of National Life, provides investment advisory
services for certain Market Street Fund, Inc. mutual fund portfolios.
National Life maintains three segments within the Variable Account. The Varitrak
Segment (the Segment) within the Variable Account was established on March 11,
1996 and is used exclusively for National Life's flexible premium variable life
insurance products known collectively as Varitrak. On May 1, 1998, National Life
established the Estate Provider Segment within the Variable Account to be used
exclusively for National Life's flexible premium variable life insurance
products known collectively as Estate Provider. On February 12, 1999, National
Life established the Benefit Provider Segment within the Variable Account to be
used exclusively for National Life's flexible premium variable universal life
policy known collectively as Benefit Provider.
The Segment invests the accumulated policyholder account values in shares of
mutual fund portfolios within Market Street Fund, Inc., Alger American Fund,
Variable Insurance Products Fund and Variable Insurance Products fund II (VIPF),
American Century Variable Portfolios, JP Morgan Series Trust II, Strong Variable
Insurance Funds, Strong Opportunity Fund II, Neuberger Berman Advisers
Management Trust and Goldman Sachs Variable Insurance Trust. Net premiums
received by the Segment are deposited in investment portfolios as designated by
the policyholder, except for initial net premiums on new policies which are
first invested in the Market Street Fund Money Market Portfolio. Policyholders
may also direct the allocations of their account value between the various
investment portfolios within the Segment and a declared interest account (within
the General Account of National Life) through participant transfers.
There are Twenty-six sub-accounts within the Segment. Each sub-account, which
invests exclusively in the shares of the corresponding portfolio, comprises the
accumulated policyholder account values of the underlying variable life
insurance policies investing in the sub-account.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States (GAAP). The preparation of
financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
in the preparation of the Segment's financial statements.
INVESTMENTS
The mutual fund portfolios consist of the Market Street Fund Money Market,
Market Street Fund Growth, Market Street Fund Aggressive Growth, Market Street
Fund Managed, Market Street Fund Bond, Market Street Fund International, Market
Street Fund Sentinel Growth, Alger American Fund Growth, Alger American Fund
Small Capitalization, VIPF Equity Income, VIPF Overseas, VIPF Growth, VIPF High
Income, VIPF Contra, VIPF Index 500, American Century Variable Portfolios VP
Value, American Century
F-69
<PAGE> 139
Variable Portfolios VP Income & Growth, JP Morgan Series Trust II International
Opportunities, JP Morgan Series Trust II Small Company, Strong Opportunity Fund
II, Strong Variable Insurance Funds Mid Cap Growth, Neuberger Berman Advisers
Management Trust Partners Portfolio, Goldman Sachs Variable Insurance Trust
International Equity, Goldman Sachs Variable Insurance Trust Global Income,
Goldman Sachs Variable Insurance Trust CORE Small Cap Equity, and Goldman Sachs
Variable Insurance Trust Mid Cap Value (formerly Goldman Sachs Variable
Insurance Trust Mid Cap Equity) (the Portfolios). The assets of each portfolio
are held separate from the assets of the other portfolios and each has different
investment objectives and policies. Each portfolio operates separately and the
gains or losses in one portfolio have no effect on the investment performance of
the other portfolios.
INVESTMENT VALUATION
The investments in the Portfolios are valued at the closing net asset value per
share as determined by the portfolio at the end of each period. The change in
the difference between cost and market value is reflected as unrealized gain
(loss) in the Statement of Operations.
INVESTMENT TRANSACTIONS
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed) and dividend income (including capital gain
distributions) are recorded on the ex-dividend date. The cost of investments
sold was determined using the average cost method prior to 1998. Effective
January 1, 1998, the Variable Account changed its method of calculating the cost
of investments sold from the average cost method to the first in, first out
method (FIFO). Management believes FIFO better matches policyholder and
sub-account investment activity. Management also believes it would be
impractical to calculate the cumulative effect of this change on previously
reported realized and unrealized gains and losses; however, during 1998 the
change increased net realized gains by $ 176,300 and decreased net unrealized
gains by the same amount.
FEDERAL INCOME TAXES
The operations of the Segment are part of, and taxed with, the total operations
of National Life. Under existing federal income tax law, investment income and
capital gains attributable to the Segment are not taxed.
NOTE 3 - CHARGES AND EXPENSES
National Life deducts a daily charge from the Segment based on an annual rate of
.9% of each sub-account's net asset value for its assumption of mortality and
expense risks. The mortality risk assumed is that the insureds under the
policies may die sooner than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the policies may exceed expected
levels.
Cost of insurance charges are deducted monthly from each policyholder's
accumulated account value for the insurance protection provided and are remitted
to National Life. These charges vary based on the net amount at risk, attained
age of the insured, and other factors. As partial compensation for
administrative services provided, National Life also deducts a monthly
administrative charge from each policyholder's accumulated account value.
Certain deferred administrative and sales charges are deducted from the
policyholder's accumulated account value if the underlying variable life
insurance policy is surrendered or lapsed prior to the end of the fifteenth
policy year.
F-70
<PAGE> 140
NOTE 4 - INVESTMENTS
The number of shares held and cost for each of the portfolios at December 31,
1999 are set forth below:
<TABLE>
<CAPTION>
Portfolio Shares Cost
--------- --------- ------------
<S> <C> <C>
Market Street Fund
Money Market 5,358,457 $5,358,457
Growth 682,146 12,175,244
Aggressive Growth 90,385 1,781,021
Managed 118,694 1,999,930
Bond 163,936 1,767,570
International 187,025 2,575,305
Sentinel Growth 180,917 2,402,248
Alger American Fund
Growth 153,168 7,879,902
Small Capitalization 145,885 6,150,958
VIPF
Equity Income 415,964 10,198,642
Overseas 157,849 3,202,915
Growth 251,280 10,482,207
High Income 238,780 2,738,276
Contrafund 159,387 3,905,880
Index 500 109,222 16,187,265
American Century Variable Portfolios
VP Value 36,806 232,301
VP Income & Growth 127,034 931,049
JP Morgan Series Trust II
International Opportunities 23,868 296,841
Small Company 12,184 168,933
Strong Opportunity Fund II 23,463 545,722
Strong Variable Insurance Funds
Mid Cap Growth 52,813 1,211,986
Neuberger & Berman Partners Portfolio 14,320 276,390
Goldman Sachs Variable Insurance Trust
International Equity 16,339 213,696
Global Income 3,774 38,411
CORE Small Cap Equity 6,961 64,424
Mid Cap Value 16,487 140,683
-----------
Total $92,926,256
===========
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-71
<PAGE> 141
NOTE 5 - PURCHASES AND SALES OF PORTFOLIO SHARES
Purchases and proceeds from sales of shares in the portfolios for the period
ended December 31, 1999 aggregated the following:
<TABLE>
<CAPTION>
Portfolio Purchases Proceeds
--------- ------------ ------------
<S> <C> <C>
Market Street Fund
Money Market $ 30,017,749 $ 29,754,001
Growth 5,906,146 3,707,638
Aggressive Growth 1,012,942 463,509
Managed 1,601,669 783,151
Bond 1,237,707 443,654
International 1,373,865 716,226
Sentinel Growth 1,530,288 584,581
Alger American Fund
Growth 5,246,454 1,954,478
Small Capitalization 3,299,916 1,842,757
VIPF
Equity Income 4,653,458 2,690,803
Overseas 1,653,898 819,970
Growth 6,794,360 2,710,100
High Income 1,636,086 1,004,971
Contra Fund 3,173,362 1,042,936
Index 500 14,975,545 5,113,839
American Century Variable Portfolios
VP Value 247,551 46,463
VP Income & Growth Fund 1,087,652 272,961
JP Morgan Series Trust II
International Opportunities 303,830 12,176
Small Company 291,978 152,482
Strong Opportunity Fund II 616,948 80,979
Strong Variable Insurance Funds
Mid Cap Growth 1,479,359 345,061
Neuberger Berman Advisers Management Trust
Partners Portfolio 341,053 116,879
Goldman Sachs Variable Insurance Trust
International Equity 288,345 117,011
Global Income 32,872 3,098
CORE Small Cap Equity 76,961 34,469
Mid Cap Value 143,810 18,647
</TABLE>
NOTE 6 - LOANS
Policyholders may obtain loans after the first policy year as outlined in the
variable life insurance policy. At the time a loan is granted, accumulated value
equal to the amount of the loan is designated as collateral and transferred from
the Segment to the General Account of National Life. Interest is credited by
National Life at predetermined rates on collateral held in the General Account.
This interest is periodically transferred to the Segment.
NOTE 7 - DISTRIBUTION OF NET INCOME
The Segment does not expect to declare dividends to policyholders from
accumulated net income. The accumulated net income will be distributed to
policyholders as withdrawals (in the form of death benefits, surrenders or
policy loans) in excess of the policyholders' net contributions to the Segment.
F-72
<PAGE> 142
NOTE 8 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (IRC), a
variable universal life insurance contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
a variable universal life insurance contract for federal income tax purposes for
any period for which the investments of the segregated asset account on which
the contract is based are not adequately diversified. The IRC provides that the
adequately diversified requirement may be met if the underlying investments
satisfy either a statutory safe harbor test or diversification requirements set
forth in regulations issued by the Secretary of the Treasury.
National Life believes that the Segment satisfies the current requirements of
the regulations, and it intends that the Segment will continue to meet such
requirements.
F-73
<PAGE> 143
VARITRAK
VARIABLE UNIVERSAL LIFE INSURANCE
P R O S P E C T U S
DATED MAY 1, 2000, AS AMENDED DECEMBER 1, 2000
<TABLE>
<S> <C>
NATIONAL LIFE INSURANCE COMPANY Home Office: National Life Drive, Montpelier, Vermont 05604
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT Telephone: (800) 537-7003
</TABLE>
This prospectus describes the VariTrak policy, a variable universal life
insurance policy offered by National Life Insurance Company. This Policy
combines insurance and investment features. The policy's primary purpose is to
provide insurance protection on the life of the insured person. You 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. This
Prospectus offers the policy only in the State of New York.
We deduct certain charges from premium payments. Then these premium payments go
to the National Variable Life Insurance Account, a separate account of National
Life, or to the general account, or a combination of the two. The general
account pays interest at rates guaranteed to be at least 4%. The separate
account currently has twenty-eight subaccounts. Each subaccount buys shares of a
specific fund portfolio. The available funds are:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
SENTINEL VARIABLE PRODUCTS TRUST ALGER AMERICAN FUND
--------------------------------
---------------------------------------------------------------------
<S> <C>
COMMON STOCK FUND GROWTH PORTFOLIO
MID CAP GROWTH FUND LEVERAGED ALLCAP PORTFOLIO
SMALL COMPANY FUND SMALL CAPITALIZATION PORTFOLIO
GROWTH INDEX FUND .
MONEY MARKET FUND
Managed by National Life Managed by Fred Alger
Investment Management Company, Inc. Management, Inc
---------------------------------------------------------------------
FIDELITY VARIABLE INSURANCE FIDELITY VARIABLE INSURANCE
--------------------------- ---------------------------
PRODUCTS FUND PRODUCTS FUND II
------------- ----------------
---------------------------------------------------------------------
EQUITY-INCOME PORTFOLIO CONTRAFUND PORTFOLIO
GROWTH PORTFOLIO INDEX 500 PORTFOLIO
HIGH INCOME PORTFOLIO INVESTMENT GRADE BOND PORTFOLIO
OVERSEAS PORTFOLIO
Managed by Fidelity Investments Managed by Fidelity Investments
---------------------------------------------------------------------
MARKET STREET FUND, INC. NEUBERGER BERMAN ADVISERS
------------------------ -------------------------
MANAGEMENT TRUST
----------------
---------------------------------------------------------------------
BOND PORTFOLIO PARTNERS PORTFOLIO
MANAGED PORTFOLIO
Managed by Sentinel Advisors Managed by Neuberger Berman
Company Management, Inc.
---------------------------------------------------------------------
<CAPTION>
----------------------------------------------------------------
AMERICAN CENTURY VARIABLE DREYFUS SOCIALLY RESPONSIBLE
------------------------- ----------------------------
PORTFOLIOS, INC. GROWTH FUND, INC.
---------------- -----------------
----------------------------------------------------------------
<S> <C>
VP INCOME & GROWTH PORTFOLIO SOCIALLY RESPONSIBLE GROWTH
VP VALUE PORTFOLIO FUND, INC.
Managed by American Century Managed by The Dreyfus
Investment Management, Inc. Corporation
----------------------------------------------------------------
INVESCO VARIABLE INSURANCE
--------------------------
FUNDS, INC. J.P. MORGAN SERIES TRUST II
----------- ---------------------------
----------------------------------------------------------------
VIF - DYNAMICS FUND INTERNATIONAL OPPORTUNITIES
VIF - HEALTH SCIENCES FUND PORTFOLIO
VIF - TECHNOLOGY FUND SMALL COMPANY PORTFOLIO
Managed by INVESCO Group Managed by J. P. Morgan
Funds, Inc. Investment Management, Inc.
----------------------------------------------------------------
STRONG VARIABLE INSURANCE FUNDS, STRONG OPPORTUNITY FUND II.
-------------------------------- ---------------------------
INC.
----
----------------------------------------------------------------
MID CAP GROWTH FUND II OPPORTUNITY FUND II
Managed by Strong Capital Managed by Strong Capital
Management, Inc. Management, Inc.
----------------------------------------------------------------
</TABLE>
The value of your policy will depend upon the investment results of the funds
you select. You bear the entire investment risk for all amounts allocated to the
separate account; 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 options.
They describe the investment objectives and the risks of the funds.
The value of your policy will also reflect our charges. These include a premium
tax charge, cost of insurance charges, a mortality and expense risk charge, an
administrative 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. You should keep it to refer to later.
Investments in these contracts are not deposits or obligations of, and are not
guaranteed or endorsed by, adviser of any of the underlying funds identified
above, the U.S. government, or any bank or bank affiliate. Investments are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency.
It may not be advantageous to purchase a policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if you already own another variable universal life insurance policy.
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> 144
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary Description of the Policy.........................................................................1
The Policy ......................................................................................1
The Separate Account.............................................................................2
Availability of Policy...........................................................................2
The Death Benefit................................................................................2
Flexibility to Adjust Amount of Death Benefit....................................................3
Accumulated Value................................................................................3
Allocation of Net Premiums.......................................................................3
Transfers........................................................................................4
Free-Look Privilege..............................................................................4
Charges Assessed in Connection with the Policy...................................................4
Loan Privilege...................................................................................8
Withdrawal of Cash Surrender Value...............................................................8
Surrender of the Policy..........................................................................8
Available Automated Fund Management Features.....................................................9
Tax Treatment....................................................................................9
Other Policies...................................................................................9
Illustrations....................................................................................9
Questions........................................................................................10
National Life Insurance Company, The Separate Account, and The Funds......................................11
National Life Insurance Company..................................................................11
The Separate Account.............................................................................11
Sentinel Variable Products Trust.................................................................11
Alger American Fund..............................................................................12
American Century Variable Portfolios, Inc........................................................13
Dreyfus Socially Responsible Growth Fund, Inc....................................................14
Fidelity Variable Insurance Products Fund and Fidelity Variable Insurance
Products Fund II..............................................................................14
INVESCO Variable Insurance Funds, Inc............................................................15
J. P. Morgan Series Trust II.....................................................................16
Market Street Fund, Inc..........................................................................17
Neuberger Berman Advisers Management Trust.......................................................17
Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund II, Inc........................18
Other Information................................................................................18
The General Account..............................................................................22
Detailed Description of Policy Provisions.................................................................22
Death Benefit....................................................................................22
Ability to Adjust Face Amount....................................................................24
How the Duration of the Policy May Vary..........................................................25
Accumulated Value................................................................................25
Payment and Allocation of Premiums...............................................................26
Charges and Deductions....................................................................................30
Premium Tax Charge...............................................................................30
Surrender Charge.................................................................................31
Monthly Deductions...............................................................................32
Mortality and Expense Risk Charge................................................................35
Withdrawal Charge................................................................................35
Transfer Charge..................................................................................35
Projection Report Charge.........................................................................35
Other Charges....................................................................................35
</TABLE>
<PAGE> 145
<TABLE>
<CAPTION>
PAGE
<S> <C>
Policy Rights and Privileges..............................................................................36
Loan Privileges..................................................................................36
Surrender Privilege..............................................................................37
Withdrawal of Cash Surrender Value...............................................................38
Free-Look Privilege..............................................................................40
Telephone Transaction Privilege..................................................................40
Other Transfer Rights............................................................................40
Available Automated Fund Management Features.....................................................40
Policy Rights Under Certain Plans................................................................41
The General Account.......................................................................................42
Minimum Guaranteed and Current Interest Rates....................................................42
Transfers from General Account...................................................................43
Other Policy Provisions...................................................................................43
Optional Benefits.........................................................................................46
Federal Income Tax Considerations.........................................................................47
Introduction.....................................................................................47
Tax Status of the Policy.........................................................................48
Tax Treatment of Policy Benefits.................................................................48
Special Rules for Employee Benefit Plans.........................................................50
Possible Tax Law Changes.........................................................................50
Possible Charges for National Life's Taxes.......................................................50
Policies Issued in Conjunction with Employee Benefit Plans................................................51
Legal Developments Regarding Unisex Actuarial Tables......................................................51
Voting Rights.............................................................................................51
Changes in Applicable Law, Funding and Otherwise..........................................................52
Officers and Directors of National Life...................................................................53
Distribution of Policies..................................................................................54
Policy Reports............................................................................................56
State Regulation..........................................................................................56
Insurance Marketplace Standards Association...............................................................56
Experts...................................................................................................56
Legal Matters.............................................................................................57
Financial Statements......................................................................................57
Glossary..................................................................................................58
Appendix A-Illustration of Death Benefits, Accumulated Values and
Cash Surrender Values............................................................................A-1
Appendix B-Surrender Charge Target Premiums and Maximum Deferred Sales Charges............................B-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.
<PAGE> 146
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 person is alive. The precise meanings of the
few capitalized terms used in this summary can be found in the Glossary, on
Pages 58 to 60.
THE POLICY
National Life Insurance Company issues the VariTrak variable universal
life insurance policy. This life insurance policy allows you, within limits, 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 which will provide a death benefit
on the death of the named insured person;
(2) A cash surrender value;
(3) Surrender and withdrawal rights and policy loan privileges;
and
(4) A variety of additional insurance benefits (where provided
by optional riders, so long as those riders remain in
force).
This policy is designed to help lessen the economic loss resulting
from the death of the insured person. You should consider your need for
insurance coverage and the policy's investment potential on a long-term basis.
The policy matures, resulting in payment of cash surrender value, when the
insured reaches age 99.
There is no fixed schedule for premium payments, although you may
establish a schedule of planned periodic premiums. You may also, after a year
and within limits, increase or decrease the policy's face amount, and you may
change the death benefit option. The policy's value and death benefit will
fluctuate based on the investment results of the chosen fund portfolios, the
crediting of interest to the general account, and the deduction of charges.
Lapse. The policy will not lapse simply because you do not pay any
particular amounts of premiums. However, 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, if at
least specified amounts of premiums have been paid (these amounts are defined in
the Glossary as the Minimum Guarantee Premium). See "How the Duration of the
Policy May Vary," Page 25.
Optional Guaranteed Death Benefit Rider. In addition, if you buy
the optional Guaranteed Death Benefit Rider, your policy will not lapse even if
its value is not enough to pay the monthly charges, if you have paid at least
the Minimum Guarantee Premium, until the later of 20 years from the date the
policy is issued or the insured person attains age 70. See "Optional Benefits -
Guaranteed Death Benefit Rider," Page 47.
If you already have life insurance, you should consider whether or
not changing or adding to existing coverage would be advantageous. It may not be
advisable to purchase another policy as a replacement for an existing policy.
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<PAGE> 147
THE SEPARATE ACCOUNT
The separate account is divided into subaccounts, 28 of which are
available under this policy. Each of these subaccounts buys shares of a
corresponding fund portfolio. See "National Life Insurance Company, the Separate
Account, and the Funds," Page 11.
We cannot give any assurance that any portfolio will achieve its
investment objectives. You bear the entire investment risk on the value of your
policy which you allocate to the separate account.
AVAILABILITY OF POLICY
We will issue this policy for insured persons from ages 0 to 85.
The minimum face amount is generally $50,000, although exceptions to this
minimum may be made for employee benefit plans. Before issuing a policy, we will
require that the proposed insured person meet certain underwriting standards. We
will assign the insured person to one of the following types of rate classes:
- Elite Preferred Nonsmoker
- Preferred Nonsmoker
- Standard Nonsmoker
- Preferred Smoker
- Standard Smoker
- Juvenile, or
- Substandard.
See "Issuance of a Policy," Page 26.
THE DEATH BENEFIT
As long as your policy remains in force, we will pay the death
benefit to your beneficiary, when we receive due proof of the death of the
insured person. The death benefit will be increased by any additional benefits
provided by a supplementary benefit rider. The death benefit will be reduced by
any outstanding policy loans and accrued interest, and any unpaid monthly
deductions.
There are two death benefit options available, which we call
Option A and Option B. You may choose which option will apply to your policy.
If you choose death benefit Option A, the death benefit will be
based on the greater of :
(a) the face amount, or
(b) the Accumulated Value multiplied by a factor specified by
federal income tax law.
If you choose death benefit Option B, the death benefit will be
based on the greater of:
(a) the face amount plus the Accumulated Value, or
(b) the Accumulated Value multiplied by the same factor that
applies to option A.
See "Death Benefit Options," Page 22.
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FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
After a year, you may adjust the death benefit by changing the
death benefit option or by increasing or decreasing the face amount of your
policy. (See "Change in Death Benefit Option," Page 23, and "Ability to Adjust
Face Amount," Page 24.)
Any change in death benefit option or in the face amount may
affect the charges under your policy. If you increase the face amount, your
monthly charges will increase. A decrease in face amount may decrease the
monthly charges. (See "Cost of Insurance Charge," Page 33.)
If you request a decrease in face amount which would cause the
policy not to qualify as life insurance under federal tax law, we will not allow
the decrease.
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held in the
policy at any time. It equals the sum of the amounts held in the separate
account and the general account. (See "Calculation of Accumulated Value," Page
26.)
The Accumulated Value in the separate account will reflect:
- the investment performance of your chosen funds
- premiums paid
- transfers
- withdrawals
- policy loans
- loan repayments
- loan interest charged, and
- the charges assessed in connection with the policy.
We pay interest on Accumulated Value in the general account at
rates we declare in advance for specific periods. We guarantee that these rates
will be at least 4%. (See "The General Account," Page 42.)
The Accumulated Value will likely impact both the death benefit
and the cost of insurance charges.
ALLOCATION OF PREMIUMS
You will specify, in the application for your policy, the
percentages of premium to go to each subaccount of the separate account or to
the general account. You may change these percentages whenever you like. You may
choose among all 28 available subaccounts of the separate account. However, we
may limit the number of different subaccounts, other than the money market
subaccount, used in your policy over its entire life to 16.
We will allocate all premiums, after reduction for premium taxes,
received during the free-look period that are to go to the separate account to
the money market subaccount. At the end of the free look period, we will move
the amount in the money market subaccount (including investment experience) to
your chosen subaccounts. For this purpose, we will assume that the free-look
period ends 20 days after the date the policy is issued. Premiums received after
the free look period ends will be allocated directly to your chosen subaccounts.
(See "Allocation of Net Premiums," Page 28.)
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<PAGE> 149
TRANSFERS
You may transfer the amounts in the subaccounts and the general
account. Transfers between the subaccounts or from the separate account into the
general account will be made on the day we receive the request. We limit
transfers out of the general account to the greater of $1000 or 25% of the
Accumulated Value in the general account. We also allow only one transfer out of
the general account per year. See "Transfers," Page 29.
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 you
paid. This free-look period ends on the latest of:
(a) 45 days after you sign Part A of your application for the Policy
(b) 10 days after you receive the Policy, and
(c) 10 days after we mail or personally deliver to you a Notice of Withdrawal
Right,
or, in each case, any longer period provided by state law. To cancel your
policy, you must return the Policy to us or to our agent within such time with a
written request for cancellation. (See "Free-Look Privilege," Page 40.)
CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Summary of Policy Expenses.
<TABLE>
<CAPTION>
TRANSACTION EXPENSES
<S> <C>
Premium Tax (as a percentage of premiums paid).............3.25%
Sales Load Imposed on Purchases............................NONE
Surrender Charge...........................................See Page 31
Withdrawal Charge..........................................Lesser of 2% of amounts withdrawn or $25
Transfer Charge............................................NONE*
</TABLE>
----------------------------------
* We currently have no transfer charge, but we reserve the right to charge up to
$25 for each transfer in excess of twelve transfers in any one year.
<TABLE>
<CAPTION>
SEPARATE ACCOUNT AND POLICY CHARGES
<S> <C>
Mortality and Expense Risk Charge (deducted daily).........0.90% (as a percentage of separate
account Accumulated Value)
Cost of Insurance Charge (deducted monthly)................Varies by age, sex, Rate Class, policy size
and duration of the policy- See Pages 33
and 34
Administrative Charge (deducted monthly)...................$90 per year
Rider Charges (deducted monthly)...........................See "Optional Benefits" on Page 46 for
charges for optional riders you may
choose to include in your policy
</TABLE>
4
<PAGE> 150
ANNUAL EXPENSES OF UNDERLYING FUNDS(1) (for the year ended December 31, 1999):
<TABLE>
<CAPTION>
Management Other Total
Fee, after Expenses, Expenses,
expense after expense after expense
reimbursement reimbursement reimbursement
<S> <C> <C> <C>
Sentinel Variable Products Trust
Common Stock Fund 0.00% 0.48% 0.48%
Mid Cap Growth Fund 0.19% 0.52% 0.71%
Small Company Fund 0.05% 0.52% 0.57%
Growth Index Fund 0.04% 0.56% 0.60%
Money Market Fund 0.00% 0.40% 0.40%
Alger:
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Leveraged AllCap
Portfolio 0.85% 0.08% 0.93%
Alger American Small Capitalization 0.85% 0.05% 0.90%
American Century Variable Portfolios, Inc.
VP Value Portfolio 1.00% 0.00% 1.00%
VP Income & Growth Portfolio 0.70% 0.00% 0.70%
Dreyfus Socially Responsible Growth Fund, Inc.
Socially Responsible Growth Fund, Inc. 0.75% 0.04% 0.79%
Fidelity: Variable Insurance Products Fund I
Equity Income Portfolio 0.48% 0.08% 0.56%
Growth Portfolio 0.58% 0.07% 0.65%
High Income Portfolio 0.58% 0.11% 0.69%
Overseas Portfolio 0.73% 0.14% 0.87%
Fidelity: Variable Insurance Products Fund II
Index 500 Portfolio 0.24% 0.04% 0.28%
Contrafund Portfolio 0.58% 0.07% 0.65%
Investment Grade Bond Portfolio 0.43% 0.11% 0.54%
INVESCO Variable Insurance Funds, Inc.
VIF Dynamics Fund 0.75% 0.51% 1.26%
VIF Health Sciences Fund 0.75% 0.73% 1.48%
VIF Technology Fund 0.75% 0.56% 1.31%
J.P. Morgan Series Trust II
International Opportunities Portfolio 0.60% 0.60% 1.20%
Small Company Portfolio 0.60% 0.55% 1.15%
Market Street Fund, Inc.
Bond Portfolio 0.35% 0.17% 0.52%
Managed Portfolio 0.40% 0.17% 0.57%
Neuberger Berman Advisers Management Trust
Partners Portfolio 0.80% 0.07% 0.87%
Strong Variable Insurance Funds, Inc.
Mid Cap Growth Fund II 1.00% 0.10% 1.10%
Strong Opportunity Fund II 1.00% 0.10% 1.10%
</TABLE>
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<PAGE> 151
(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>
Sentinel Variable Products Trust:
Common Stock Fund 0.47% 0.52% 0.99%
Mid Cap Growth Fund 0.49% 0.52% 1.01%
Small Company Fund 0.50% 0.52% 1.02%
Growth Index Fund 0.30% 0.56% 0.86%
Money Market Fund 0.25% 0.52% 0.77%
Fidelity VIP Fund-Equity Income Portfolio 0.48% 0.09% 0.57%
Fidelity VIP Fund-Growth Portfolio 0.58% 0.08% 0.66%
Fidelity VIP Fund-Overseas Portfolio 0.73% 0.18% 0.91%
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.10% 0.34%
Fidelity VIP Fund II-Contrafund Portfolio 0.58% 0.09% 0.67%
Strong Mid Cap Growth Fund II 1.00% 0.20% 1.20%
Strong Opportunity Fund II 1.00% 0.20% 1.20%
INVESCO Variable Insurance Funds, Inc.:
VIF Dynamics Fund 0.75% 1.53% 2.28%
VIF Health Sciences Fund 0.75% 2.11% 2.86%
VIF Technology Fund 0.75% 0.78% 1.53%
J.P. Morgan International Opportunities 0.60% 1.38% 1.98%
J.P. Morgan Small Company 0.60% 1.97% 2.57%
</TABLE>
We expect these reimbursement arrangements to continue, but there
are no legal obligations to continue these arrangements for any particular
period of time; if they are terminated, the affected Portfolios' expenses may
increase.
Premium Tax Charge. We deduct a premium tax charge from each
premium payment, to cover the cost of state and local premium taxes, and the
federal DAC tax. This charge is 3.25% of each premium. For qualified employee
benefit plans, the charge will be 2.00% of each premium rather than 3.25%. We
may change the amount of the charge deducted from future premiums if the
applicable law changes. (See "Premium Tax Charge," Page 30.)
Monthly Deductions. On the date of issue and each month
thereafter, we will take a deduction from the Accumulated Value equal to the sum
of:
(a) the monthly cost of insurance charge
(b) the monthly administrative charge, and
(c) if applicable, a charge for any additional benefits added by rider.
We calculate the monthly cost of insurance charge by multiplying
the net amount at risk (that is, the unadjusted death benefit less the policy's
Accumulated Value) by the applicable cost of insurance rate(s). These rates will
depend upon the age, sex, and rate class of the insured person, the time the
coverage has been in force, your policy size, and on our expectations of future
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<PAGE> 152
mortality and expense experience. Our cost of insurance rates cannot exceed the
guaranteed maximum cost of insurance rates set forth in your policy. These
guaranteed maximum rates are based on the insured person's age, sex, rate class,
and the "1980 Commissioners Standard Ordinary Smoker and Nonsmoker Mortality
Table." (See "Cost of Insurance Charge," Page 33.)
The monthly administrative charge is currently $7.50. (See
"Monthly Administrative Charge," Page 34.)
After 10 years, we will credit a separate account enhancement
under which the Monthly Deductions are reduced by 0.50% per annum of the
Accumulated Value in the separate account. (See "Separate Account Enhancement,"
Page 35.) The separate account enhancement is guaranteed.
Surrender Charge. We impose a surrender charge if you surrender your
policy or it lapses at any time during the first 15 years after the policy issue
date or the date of any face amount increase. The surrender charge consists of a
deferred administrative charge and a deferred sales charge. (See "Surrender
Charge," Page 31.)
The deferred administrative charge is generally initially $2 per $1,000 of
initial face amount and of each subsequent face amount increase. The charge is
lower for coverage issued to insureds younger than 25 at issue. After the first
five years from the issue or increase date, the deferred administrative charge
declines linearly by month until the end of the fifteenth year from issue date
or increase date, when it becomes zero.
The deferred sales charge is based on the initial face amount as well as
the face amount of any subsequent face amount increase, and the age, sex, and
rate class of the insured person. The initial face amount and each subsequent
face amount increase will each be unique coverage segments. For each coverage
segment the deferred sales charge will be level for the first five years after
the issue of the coverage segment, and then will decline linearly by month
through the end of the fifteenth year of the coverage segment as measured from
the coverage segment issue date. The deferred sales charge at issue will be
shown in your Policy.
Appendix B to this Prospectus contains a table showing the deferred sales
charge for male and female nonsmokers and smokers at each age at the time a
policy is issued, expressed as a dollar amount per $1,000 of initial face
amount.
Daily Charge Against the Separate Account (Mortality and Expense Risk
Charge). We assess a daily charge for assuming certain mortality and expense
risks incurred in connection with the policies. This charge is currently 0.90%
annually of the average daily net assets of the separate account. (See
"Mortality and Expense Risk Charge," Page 35.)
Withdrawal Charge. If you make a withdrawal from your policy, we assess a
withdrawal charge equal to the lesser of 2% of the amount withdrawn or $25. (See
"Withdrawal Charge," Page 35.)
Transfer Charge. You may transfer value among the subaccounts on any
business day, without charge. We have no current intent to impose a transfer
charge in the foreseeable future; however, we may impose in the future a charge
of $25 for each transfer in excess of twelve transfers in any one year. (See
"Transfer Charge," Page 35.)
Projection Report Charge. If you request a projection report, we may
impose a charge, not to exceed $25. (See "Projection Report Charge," Page 35.)
7
<PAGE> 153
Other Charges. Shares of the Portfolios are purchased by the subaccounts
at net asset value, which reflects management fees and expenses deducted from
the assets of the Portfolios. These management fees and expenses are shown above
under "Annual Charges of Underlying Funds".
LOAN PRIVILEGE
After a year, you may borrow against your policy. The maximum
amount of all loans is the Cash Surrender Value less three times the most recent
monthly deduction. Policy loans may be taken, or repayments made, on any
business day.
We charge interest on Policy loans at a fixed rate of 6% per year.
Interest is added to the loan balance at the end of each policy year. 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 Accumulated Value in the general account as collateral for the policy
loan. We credit interest on amounts held in the general account as collateral
for policy loans at rates we declare prior to each calendar year. This rate will
be at least 4%.
We will credit interest on Accumulated Value held as collateral
for loans in the general account for policies that are more than 10 years old at
rates which are 0.50% per annum higher than those that apply to policies still
in their first ten years. We also currently plan to make preferred loans
available when a policy is 10 years old. These preferred loans will be limited
in amount. For these preferred policy loans, we will credit interest on the
amount held in the general account as collateral at an annual rate of 6%.
However, we are not obligated to continue to make preferred loans available, and
we will make these loans available in our sole discretion. (See "Loan
Privileges," Page 36.)
Loans may cause a policy to lapse, depending on investment
performance and the amount of the loan. If a policy is not a Modified Endowment
Contract, lapse with policy loans outstanding may result in adverse tax
consequences. (See "Tax Treatment of Policy Benefits," Page 48.)
WITHDRAWAL OF CASH SURRENDER VALUE
After a year, you may request a withdrawal of Cash Surrender
Value. Withdrawals must be at least $500 (except that we may permit smaller
withdrawals for employee benefit plans). Withdrawals cannot be more than the
Cash Surrender Value minus three times the most recent monthly deduction. We
will take the withdrawal amount from the subaccounts based on your instructions.
If you do not provide instructions, we will take the withdrawal from the
subaccount in proportion to the values in the subaccounts. If the values in the
subaccounts will not allow us to carry out your instructions, we will not
process the withdrawal until you provide further instructions. You may not
allocate withdrawals to the general account until all the value in the separate
account has been exhausted. (See "Withdrawal of Cash Surrender Value," Page 38.)
SURRENDER OF THE POLICY
You may surrender your policy at any time and receive the cash
surrender value, if any. The cash surrender value will equal the Accumulated
Value less any policy loan with accrued interest and any surrender charge. (See
"Surrender Privilege," Page 37.)
8
<PAGE> 154
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer, at no charge to you, two automated fund management
programs, Dollar Cost Averaging and Portfolio Rebalancing. For a description of
these features, see "Available Automated Fund Management Features," Page 40.
TAX TREATMENT
Life insurance contracts receive tax-favored treatment under
current federal income tax law. Assuming that your policy qualifies as a life
insurance contract for federal income tax purposes, you should not be taxed on
any increase in cash surrender value while your policy remains in force. Also,
your beneficiary generally should not be taxed on death benefit proceeds. 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, particularly if you pay the full amount of premiums
permitted under the policy. (See "Tax Status of the Policy," Page 48.)
A policy may be treated as a "Modified Endowment Contract" in some
situations. If your policy is a Modified Endowment Contract, then certain
pre-death distributions, including policy loans, will be treated first as a
distribution of taxable income and then as a return of basis or investment in
the contract. In addition, prior to age 59-1/2 any such distributions generally
will be subject to a 10% penalty tax. (For further discussion on the
circumstances under which a Policy will be treated as a Modified Endowment
Contract, See "Tax Treatment of Policy Benefits," Page 48.)
If your 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. Loans will not be treated as
distributions. Neither distributions nor loans from a policy that is not a
Modified Endowment Contract are subject to the 10% penalty tax. (See
"Distributions Other Than Death Benefits from Policies that are not Modified
Endowment Contracts," Page 49.)
OTHER POLICIES
We offer other variable life insurance policies which also invest in the
same portfolios of the funds. These policies may have different charges that
could affect the value of the subaccounts and may offer different benefits more
suitable to your needs. To obtain more information about these policies, you may
write or call us at National Life Drive, Montpelier, Vermont 05604, (800)
537-7003.
ILLUSTRATIONS
Illustrations of how investment performance of the subaccounts may
cause the death benefit, the Accumulated Value and the cash surrender value to
vary are included in Appendix A commencing on Page A-1.
These illustrations of hypothetical values may help you understand
the long-term effects of different levels of investment performance, of charges
and deductions, and of electing one or the other death benefit option. They may
also be useful in 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
9
<PAGE> 155
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.
QUESTIONS
If you have questions, you may write or call us at National Life Drive,
Montpelier, Vermont 05604, (800) 537-7003.
10
<PAGE> 156
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 its outstanding stock 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 Contracts, are voting members of National Life Holding Company.
National Life assumes all insurance risks under the Policy and its assets
support the Policy's benefits. On December 31, 1999, National Life's
consolidated assets were over $9.4 billion. (See "Financial Statements," Page
F-1.)
THE SEPARATE ACCOUNT
We established the Separate Account on February 1, 1985 under
Vermont law. It is a separate investment account to which we allocate assets to
support the benefits payable under the policies, other policies we currently
issue, and other variable life insurance policies we may issue in the future.
The Separate Account's assets are the property of National Life.
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 exposed to liabilities arising out of any other business
that we may conduct. The portion of the Separate Account's assets equal to the
reserves and other liabilities under the Policies may, however, be exposed to
liabilities arising from other subaccounts of the Separate Account that fund
other variable life insurance policies. The Separate Account may also include
amounts derived from expenses we have charged to the Policies (and other
policies) which we currently hold in the Separate Account, and amounts held to
support other variable life insurance policies we may issue. From time to time
we may move these additional amounts to our 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, we may limit the number of different Subaccounts, other than the Money
Market Subaccount, used in any one Policy over its entire life to 16.
SENTINEL VARIABLE PRODUCTS TRUST
The Common Stock, Mid Cap Growth, Small Company, Growth Index and Money
Market Subaccounts of the Variable Account invest in shares of Sentinel Variable
Products Trust, a "series" type of mutual fund which is registered with the SEC
under the 1940 Act as a diversified open-end management investment company. Each
series of Sentinel Variable Products Trust shares represents an interest in a
separate portfolio within the Trust. They are purchased and redeemed by the
corresponding
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<PAGE> 157
Subaccounts of the Variable Account. Sentinel Variable Products Trust sells and
redeems its shares at net asset value without a sales charge.
The investment objectives of Sentinel Variable Products Trust's Funds are
set forth below. The investment experience of each of the Subaccounts of the
Variable Account depends on the investment performance of the corresponding
Fund. There is no assurance that any Fund will achieve its stated objective.
The Common Stock Fund. The Common Stock Fund seeks a combination of
growth of capital, current income, growth of income and relatively low risk as
compared with the stock market as a whole, by investing in a diverse group of
common stocks of well-established companies.
The Mid Cap Growth Fund. The Mid Cap Growth Fund seeks growth of capital,
by focusing its investments on common stocks of mid-sized growing companies.
Income is not a factor in selecting stocks.
The Small Company Fund. The Small Company Fund seeks growth of capital,
by investing mainly in common stocks of small companies that National Life
Investment Management believes have attractive growth potential and are
attractively valued. Income is not a factor in selecting stocks.
The Growth Index Fund. The Growth Index Fund seeks to match, as closely
as possible before expenses, the performance of the S&P 500/BARRA Growth Index,
by investing in common stocks of the companies comprising the Index in
approximately the same weightings as the Index.
The Money Market Fund. The Money Market Fund seeks as high a level
of current income as is consistent with stable principal values and liquidity by
investing exclusively in dollar-denominated money market instruments, including
U.S. government securities, bank obligations, repurchase agreements, commercial
paper, and other corporate debt obligations.
National Life Investment Management Company, Inc. ("NLIMC")
manages each of the Funds of Sentinel Variable Products Trust. NLIMC is
registered with the SEC as an investment adviser under the Investment Advisers
Act of 1940. NLIMC is a wholly owned subsidiary of National Life.
A full description of Sentinel Variable Products Trust, its investment
objectives and policies, its risks, expenses, and other aspects of its operation
is contained in the attached Prospectus for Sentinel Variable Products Trust,
which you should read together with this Prospectus.
ALGER AMERICAN FUND
The Separate Account has three Subaccounts which invest exclusively in
shares of Portfolios of the Alger American 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. 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 either Portfolio will achieve its stated
objective.
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
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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.
Alger American Leveraged AllCap Portfolio. This Portfolio seeks long-term
capital appreciation. It invests in the equity securities of companies of any
size which demonstrate promising growth potential. This Portfolio can leverage,
that is, borrow money, up to one-third of its total assets to buy additional
securities.
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. A small capitalization
company is one that has a market capitalization within the range of the
Russell(R) 2000 Growth Index or the S&P(R) SmallCap 600 Index.
The Alger American Alger American Growth Portfolio, the Alger American
Leveraged AllCap Portfolio and the Alger American Samll Capitalization 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 other aspects of their
operation is contained in the attached Prospectuses for the Alger American Small
Capitalization Portfolio, the Alger American Growth Portfolio and the Alger
American Leveraged AllCap Portfolio.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Separate 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.
Shares of these Portfolios will be purchased and redeemed by the Separate
Account at net asset value without a sales charge.
The investment objectives of the Portfolios of American Century Variable
Portfolios, Inc. in which the Subaccounts are expected to invest are set forth
below. The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that either
Portfolio will achieve its stated objective.
VP Value. To seek long-term capital growth. Income is a secondary
objective. The Portfolio will seek to achieve its investment objective by
investing in securities that management believes to be undervalued at the time
of purchase.
VP Income & Growth. To seek dividend growth, current income and capital
appreciation. The Portfolio will seek to achieve its investment objective by
investing in common stocks.
The VP Value Portfolio and the VP Income & Growth Portfolio of the
American Century Variable Portfolios, Inc. are managed by American Century
Investment Management, Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and other aspects of
their operation is contained in the attached Prospectuses for VP Value and VP
Income & Growth.
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<PAGE> 159
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of The Dreyfus Socially Responsible Growth Fund, Inc. This Fund is
registered with the SEC as a diversified open-end management investment company.
The investment objective of The Dreyfus Socially Responsible Growth Fund,
Inc. is set forth below. The investment experience of each Subaccount depends
upon the investment performance of the underlying Fund. There is no assurance
that the Fund will achieve its stated objective.
The Dreyfus Socially Responsible Growth Fund, Inc. The Fund seeks to
provide capital growth, with current income as a secondary goal. To pursue these
goals, the Fund invests primarily in the common stock of companies that, in the
opinion of the Fund's management, meet traditional investment standards and
conduct their business in a manner that contributes to the enhancement of the
quality of life in America.
The Dreyfus Socially Responsible Growth Fund, Inc. is managed by The
Dreyfus Corporation. A full description of this Fund, its investment objectives
and policies, and the risks, expenses and other aspects of its operation is
contained in the attached Prospectus for The Dreyfus Socially Responsible Growth
Fund, Inc.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND
II
The Separate Account has four Subaccounts which invest exclusively in
shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund")
and three Subaccounts which invest exclusively in shares of Portfolios of the
Variable Insurance Products Fund II ("VIP Fund II"). Like the Market Street
Fund, the VIP Fund and the VIP II Fund are "series" type mutual funds registered
with the SEC as diversified open-end management investment companies issuing a
number of series or classes of shares, each of which represents an interest in a
Portfolio of the VIP Fund or VIP Fund II. Shares of these Portfolios are
purchased and redeemed by the Separate Account at net asset value without a
sales charge.
The Equity-Income, Growth, High Income, and Overseas Portfolios of the
VIP Fund and the Contrafund, Index 500 and Investment Grade Bond Portfolios of
the VIP Fund II are managed by Fidelity Management and Research Company ("FMR").
Bankers Trust Company currently serves as sub-advisor to the Index 500
Portfolio. FMR has entered into sub-advisory agreements with FMR U.K., FMR Far
East, and Fidelity International Investment Advisors for the Overseas Portfolio.
The investment objectives of the Portfolios of the VIP Fund and the VIP
Fund II in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
corresponding Portfolio. There is no assurance that any Portfolio will achieve
its stated objective.
Equity-Income Portfolio. This Portfolio seeks reasonable income. The
Portfolio will also consider the potential for capital appreciation. The
Portfolio seeks a yield which exceeds the composite yield on the securities
comprising the Standard and Poor's 500 Composite Index of 500 Stocks ("S&P
500"). FMR normally invests at least 65% of the Portfolio's assets in
income-producing equity securities.
Growth Portfolio. This Portfolio seeks capital appreciation. FMR normally
invests the Portfolio's assets primarily in common stocks. FMR invests the
Portfolio's assets in companies FMR believes have above-average growth
potential.
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<PAGE> 160
High Income Portfolio. This Portfolio seeks a high level of current
income while also considering growth of capital. FMR normally invests at least
65% of the Portfolio's total assets in income producing debt securities,
preferred stocks, and convertible securities, with an emphasis on lower-quality
debt securities. The risks of investing in these high-yielding, high-risk
securities is described in the attached Prospectus for the VIP Fund, which
should be read carefully before investing.
Overseas Portfolio. This Portfolio seeks long term growth of capital. FMR
normally invests at least 65% of the Portfolio's total assets in foreign
securities. FMR normally invests the Portfolio's assets primarily in common
stocks.
Contrafund Portfolio. This Portfolio seeks long-term capital
appreciation. FMR normally invests the Portfolio's assets primarily in common
stocks. FMR invests the Portfolio's assets in securities of companies whose
value FMR believes is not fully recognized by the public.
Index 500 Portfolio. This Portfolio seeks investment results that
correspond to the total return of common stocks publicly traded in the United
States, as represented by the S&P 500. Bankers Trust Company normally invests at
least 80% of the Portfolio's assets in common stocks included in the S&P 500.
Investment Grade Bond Portfolio. This Portfolio seeks as high a level of
current income as is consistent with the preservation of capital. It normally
invests in U.S. dollar-denominated investment-grade bonds (those of medium and
high quality).
A full description of the VIP Fund and VIP Fund II, the investment
objectives and policies of the Portfolios, the risks, expenses and other aspects
of their operation is contained in the attached Prospectuses for the VIP Fund
and VIP Fund II.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
The Variable Account has three Subaccounts which invests exclusively in
shares of the following three series of INVESCO Variable Investment Funds, Inc.:
INVESCO VIF - Dynamics Fund
INVESCO VIF - Health Sciences Fund
INVESCO VIF - Technology Fund
INVESCO Variable Investment Funds, Inc. is a mutual fund registered with
the SEC as a diversified open-end management investment company issuing shares
of a number of Funds. Shares of these Funds are purchased and redeemed by the
Variable Account at net asset value without a sales charge.
The investment objectives of the INVESCO Variable Investment Funds, Inc.
Funds in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
underlying Fund. There is no assurance that any of these Funds will achieve its
stated objective.
INVESCO VIF - Dynamics Fund. This Fund seeks to make an investment grow.
It is actively managed. The Fund invests primarily in equity securities that
INVESCO believes will rise in price faster than other securities, as well as in
options and other investments whose values are based upon the values of equity
securities. The Fund invests primarily in common stocks of mid-sized U.S.
companies - those with market capitalizations between $2 billion and $15 billion
at the time of purchase - but also has the flexibility to invest in other types
of securities, including preferred stocks, convertible securities and bonds.
15
<PAGE> 161
INVESCO VIF - Health Sciences Fund. This Fund seeks to make an investment
grow. It is aggressively managed. Although the Fund can invest in debt
securities, it primarily invests in equity securities that INVESCO believes will
rise in price faster than other securities, as well as in options and other
investments whose values are based upon the values of equity securities. The
Fund invests primarily in equity securities of companies that develop, produce
or distribute products or services related to health care. These companies
include, but are not limited to, medical equipment or supplies, pharmaceuticals,
health care facilities, and applied research and development of new products or
services.
INVESCO VIF - Technology Fund. This Fund seeks to make an investment
grow. It is aggressively managed. Although the Fund can invest in debt
securities, it primarily invests in equity securities that INVESCO believes will
rise in price faster than other securities, as well as in options and other
investments whose values are based upon the values of equity securities. The
Fund invests primarily in equity securities of companies engaged in
technology-related industries. These include, but are not limited to, applied
technology, biotechnology, communications, computers, electronics, Internet, IT
services and consulting, oceanography, office and factory automation,
networking, robotics, and video.
The INVESCO VIF Dynamics Fund, Health Sciences Fund and Technology Fund
are managed by INVESCO Funds Group, Inc. A full description of these Funds,
their investment objectives and policies, and the risks, expenses and other
aspects of their operation is contained in the attached Prospectuses for the
INVESCO VIF - Dynamics Fund, the INVESCO VIF - Health Sciences Fund, and the
INVESCO VIF - Technology Fund.
J.P. MORGAN SERIES TRUST II
The Separate 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. Shares of these Portfolios will be purchased and redeemed by
the Separate 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 other
16
<PAGE> 162
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.
THE MARKET STREET FUND
The Bond and Managed 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. Each series of Market Street Fund shares represents an
interest in a separate portfolio within the Fund. They are purchased and
redeemed by the corresponding Subaccounts of the Separate Account. 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
you may choose for your Policy 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 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.
Sentinel Advisors Company ("SAC") manages the Bond and Managed
Portfolios. SAC is registered 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. It is expected that SAC will be replaced as investment advisor
to these two Portfolios in the near future.
A full description of the Market Street Fund, its investment objectives
and policies, its risks, expenses, and other aspects of its operation is
contained in the attached Prospectus for the Market Street Fund, which you
should read together with this Prospectus.
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
The Separate 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 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
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<PAGE> 163
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 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 Separate Account has one Subaccount which invests exclusively in
shares of the Mid Cap Growth Fund II 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, and Strong
Opportunity Fund II is a single series mutual fund also registered with the SEC
as a diversified open-end management investment company. Shares of these Funds
will be purchased and redeemed by the Separate 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 Fund II . This Portfolio seeks capital growth. It invests
primarily in equity securities that the advisor believes have above-average
growth prospects.
Strong Opportunity Fund II, Inc. This Fund seeks capital appreciation
through investments in a diversified portfolio of equity securities.
The Mid Cap Growth Fund II series of Strong Variable Insurance Funds,
Inc., and Strong Opportunity Fund, Inc. are managed by Strong Capital
Management, Inc.
A full description of the Mid Cap Growth Fund II series of Strong
Variable Insurance Funds, Inc., and Strong Opportunity Fund, Inc. their
investment objectives and policies, and the risks, expenses and other aspects of
their operation is contained in the attached Prospectuses for the Mid Cap Growth
Fund II and Strong Opportunity Fund II, Inc.
OTHER INFORMATION
Contractual Arrangements. We have entered into or may enter into
agreements with Funds pursuant to which the advisor or distributor pays us a fee
based upon an annual percentage of the average net asset amount we invest on
behalf of the Separate Account and our other separate accounts. These
percentages may differ, and we may be paid a greater percentage by some
investment advisors or distributors than other advisors or distributors. These
agreements reflect administrative services provided by us. National Life
receives compensation from the adviser or distributor of the Funds in connection
with administration, distribution, or other services provided with respect to
the Fund and its availability through the Policy. The amount of this
compensation with respect to the Policy during 1999, which is based upon the
indicated percentages of assets of each Fund attributable to the Policy, is
shown below:
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<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Revenues National Life Received
Portfolios of the % of Assets During 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Fund 0.10% $12,728.64
----------------------------------------------------------------------------------------------------------------------
American Century Variable Portfolios, Inc. 0.20% 1,160.23
----------------------------------------------------------------------------------------------------------------------
J.P. Morgan Series Trust II 0.20% 345.85
----------------------------------------------------------------------------------------------------------------------
Neuberger Berman Advisers Management Trust 0.15% 271.61
----------------------------------------------------------------------------------------------------------------------
Strong VIF and Opportunity Fund II 0.20% 1,255.07
----------------------------------------------------------------------------------------------------------------------
</TABLE>
With respect to Fidelity VIPF and VIPF II Funds, an agreement was reached
during 2000 under which National Life would receive compensation equal to 0.10%
of assets (except 0.05% with respect to the Index 500 Portfolio). National Life
will receive compensation equal to 0.20% for assets in Dreyfus Socially
Responsible Growth Fund, Inc. and equal to 0.25% for assets in INVESCO Variable
Insurance Funds, Inc. These arrangements may change from time to time, and may
include more Funds in the future.
Investment Results. The investment objectives and policies of certain
Portfolios are similar to the investment objectives and policies of mutual fund
portfolios other than the Portfolios that may be managed by the investment
adviser or manager. The investment results of the Portfolios, however, may be
higher or lower than the results of such other portfolios. There can be no
assurance, and no representation is made, that the investment results of any of
the Funds will be comparable to the investment results of any other portfolio,
even if the other portfolio has the same investment adviser or manager.
Resolving Material Conflicts. The participation agreements under which
the Funds sell their shares to Subaccounts of the Separate Account contain
varying termination provisions. In general, each party may terminate 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 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 us has not been
terminated. Should a Fund or Portfolio of such Fund decide not to sell its
shares to us, 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 with Accumulated Value allocated to
the Separate Account and the owners of life insurance policies and variable
annuities issued by such other companies whose values are allocated to one or
more other separate accounts investing in any one of the Funds.
In the event of a material conflict, we 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.
Net Investment Return of the Separate Account. The chart below is
included to comply with Part 54, Section 54.9 of the Codes, Rules and
Regulations of the State of New York. The chart shows the
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<PAGE> 165
year-by-year net investment returns of the Subaccounts of the Separate Account
since the inception of the Subaccounts through December 31, 1999. With respect
to the Subaccounts of the Market Street Fund, (other than the Growth and
Sentinel Growth Portfolios) the Variable Insurance Products Fund and the Alger
American Fund, the inception date of the Subaccounts is March 13, 1996, the date
that the Policies were first offered. With respect to the Subaccounts of the
Growth and Sentinel Growth Portfolios, the inception date of the Subaccounts is
March 18, 1996. With respect to the Subaccounts of the Variable Insurance
Products Fund II, the inception date of the Subaccounts is May 1, 1997. With
respect to the Subaccounts of 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, the Strong Variable Insurance Funds,
Inc. and the Strong Opportunity Fund II, Inc., the inception date of the
Subaccounts is August 3, 1998.
The net investment returns reflect investment income and capital gains
and losses less investment management fees and expenses and the Mortality and
Expense Risk Charge. The returns do not reflect the Cost of Insurance Charge,
the Premium Tax Charge, the Monthly Administrative Charge, the charge for any
optional benefits, or potential Surrender Charges which will significantly
reduce the returns.
Returns are not annualized for periods under one year.
20
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<TABLE>
<CAPTION>
Subaccount
Effective
Date 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sentinel Variable Products Trust
Common Stock 3/18/1996 2.04% 12.49% 26.32% 13.41% N/A N/A N/A N/A N/A N/A
Mid Cap Growth 3/18/1996 37.57% 14.43% 30.41% 10.62% N/A N/A N/A N/A N/A N/A
Money Market 3/13/1996 3.97% 4.39% 4.39% 3.36% N/A N/A N/A N/A N/A N/A
Small Company 3/13/1996 14.88% 6.93% 20.13% 13.29% N/A N/A N/A N/A N/A N/A
Growth Index 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Alger
Alger American Growth Portfolio 3/13/1996 32.55% 46.75% 24.63% 6.94% N/A N/A N/A N/A N/A N/A
Alger American Small
Capitalization 3/13/1996 42.14% 14.50% 10.40% 0.53% N/A N/A N/A N/A N/A N/A
Leveraged All Cap 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
American Century Variable Portfolios,
Inc.
VP Value Portfolio 8/3/1998 -1.73% 4.28% N/A N/A N/A N/A N/A N/A N/A N/A
VP Income & Growth Portfolio 8/3/1998 16.97% 9.86% N/A N/A N/A N/A N/A N/A N/A N/A
Dreyfus
Dreyfus Socially Responsible
Growth 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Fidelity: Variable Insurance Products
Fund I
Equity Income 3/13/1996 5.38% 10.63% 26.97% 10.18% N/A N/A N/A N/A N/A N/A
Growth 3/13/1996 36.21% 38.25% 22.38% 9.09% N/A N/A N/A N/A N/A N/A
High Income 3/13/1996 7.19% -5.18% 16.62% 9.61% N/A N/A N/A N/A N/A N/A
Overseas 3/13/1996 41.36% 11.75% 10.56% 11.54% N/A N/A N/A N/A N/A N/A
Fidelity: Variable Insurance Products
Fund II
Contrafund 5/1/1997 23.15% 28.82% 22.58% N/A N/A N/A N/A N/A N/A N/A
Index 500 5/1/1997 19.44% 27.18% 21.91% N/A N/A N/A N/A N/A N/A N/A
Investment Grade Bond 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
INVESCO Variable Investment Funds
Dynamics Fund 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Health Sciences Fund 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Technology Fund 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
J.P. Morgan Series Trust II
International Opportunities
Portfolio 8/3/1998 35.44% -2.91% N/A N/A N/A N/A N/A N/A N/A N/A
Small Company Portfolio 8/3/1998 43.11% 0.03% N/A N/A N/A N/A N/A N/A N/A N/A
Market Street Fund, Inc.
Bond Portfolio 3/13/1996 -4.17% 7.26% 8.53% 2.82% N/A N/A N/A N/A N/A N/A
Managed Portfolio 3/13/1996 0.00% 11.50% 20.16% 8.43% N/A N/A N/A N/A N/A N/A
Neuberger Berman Advisers Management
Trust
Partners Portfolio 8/3/1998 6.41% 2.11% N/A N/A N/A N/A N/A N/A N/A N/A
Strong Variable Insurance Funds, Inc.
Mid Cap Growth Fund 8/3/1998 88.19% 13.20% N/A N/A N/A N/A N/A N/A N/A N/A
Strong Opportunity Fund II 8/3/1998 33.70% 4.20% N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
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<PAGE> 167
THE GENERAL ACCOUNT
For information on the General Account, see Page 42.
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, we will pay the
Death Benefit of the Policy, after due proof of the Insured's death (and
fulfillment of certain other requirements), to the named Beneficiary,
unless the claim is contestable in accordance with the terms of the
Policy. You may choose to have the proceeds paid in cash or under one of
the available Settlement Options. (See "Payment of Policy Benefits," Page
43.) The Death Benefit payable will be the Unadjusted Death Benefit under
the Death Benefit Option that is in effect, increased by any additional
benefits, and decreased by any outstanding Policy loan and accrued
interest and any unpaid Monthly Deductions.
Death Benefit Options. The Policy provides two Death Benefit
Options: Option A and Option B. You select the Death Benefit Option in the
application and may change it as described in "Change in Death Benefit Option,"
Page 23.
Option A. The Unadjusted Death Benefit is equal to the greater of:
(a) the Face Amount of the Policy, and
(b) the Accumulated Value multiplied by the specified percentage shown in the
table below:
<TABLE>
<CAPTION>
Attained Age Percentage Attained Age Percentage
------------ ---------- ------------ ----------
<S> <C> <C> <C>
40 and under 250% 60 130%
45 215% 65 120%
50 185% 70 115%
55 150% 75 and over 105%
</TABLE>
For Attained Ages not shown, the percentages will decrease by a ratable portion
of each full year.
Illustration of Option A -- For purposes of this illustration,
assume that the Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will
generally have an Unadjusted Death Benefit of $200,000. The specified percentage
for an Insured under Attained Age 40 on the Policy Anniversary prior to the date
of death is 250%. Because the Unadjusted Death Benefit must be equal to or
greater than 2.50 times the Accumulated Value, any time the Accumulated Value
exceeds $80,000 the Unadjusted Death Benefit will exceed the Face Amount. Each
additional dollar added to the Accumulated Value will increase the Unadjusted
Death Benefit by $2.50. Thus, a 35 year old Insured with an Accumulated Value of
$90,000 will have an Unadjusted Death Benefit of $225,000 (2.50 x $90,000, and
an Accumulated Value of $150,000 will have an Unadjusted Death Benefit of
$375,000 (2.50 x $150,000).
Similarly, any time the Accumulated Value exceeds $80,000, each
dollar taken out of the Accumulated Value will reduce the Unadjusted Death
Benefit by $2.50. If at any time, however, the
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<PAGE> 168
Accumulated Value multiplied by the specified percentage is less than the Face
Amount, the Unadjusted Death Benefit will be the Face Amount of the Policy.
Option B. The Unadjusted Death Benefit is equal to the greater of:
(a) the Face Amount of the Policy plus the Accumulated Value, and
(b) the Accumulated Value multiplied by the specified percentage shown in the
table above.
Illustration of Option B -- For purposes of this illustration, assume
that the Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option B, a Policy with a face amount of $200,000 will generally
have an Unadjusted Death Benefit of $200,000 plus the Accumulated Value. Thus,
for example, a Policy with a $50,000 Accumulated Value will have an Unadjusted
Death Benefit of $250,000 ($200,000 plus $50,000). Since the specified
percentage is 250%, the Unadjusted Death Benefit will be at least 2.50 times the
Accumulated Value. As a result, if the Accumulated Value exceeds $133,333, the
Unadjusted Death Benefit will be greater than the Face Amount plus the
Accumulated Value. Each additional dollar added to the Accumulated Value above
$133,333 will increase the Unadjusted Death Benefit by $2.50. An Insured with an
Accumulated Value of $150,000 will have an Unadjusted Death Benefit of $375,000
(2.50 x $150,000), and an Accumulated Value of $200,000 will yield an Unadjusted
Death Benefit of $500,000 (2.50 x $200,000). Similarly, any time the Accumulated
Value exceeds $133,333, each dollar taken out of the Accumulated Value will
reduce the Unadjusted Death Benefit by $2.50. If at any time, however, the
Accumulated Value multiplied by the specified percentage is less than the Face
Amount plus the Accumulated Value, the Unadjusted Death Benefit will be the Face
Amount plus the Accumulated Value.
Which Death Benefit Option to Choose. If you prefer to have premium
payments and favorable investment performance reflected partly in the form of an
increasing Death Benefit, you should choose Option B. If you are satisfied with
the amount of the Insured's existing insurance coverage and prefer to have
premium payments and favorable investment performance reflected to the maximum
extent in the Accumulated Value, you should choose Option A.
Change in Death Benefit Option. After the first Policy Year, you may
change the Death Benefit Option in effect by sending us a written request. There
is no charge to change the Death Benefit Option. The effective date of a change
will be the Monthly Policy Date 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 Accumulated Value. In the case of a change
from Option A to Option B, the Face Amount must be decreased by the Accumulated
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, Accumulated 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, Accumulated Value, Net Amount at Risk and Cost of Insurance Charges
will be different than if the change had not been made. In determining whether a
change is appropriate for you, the considerations described in "Which Death
Benefit Option to Choose" above will apply.
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, we will not effect the change.
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<PAGE> 169
A change in the Death Benefit Option may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 48.)
How the Death Benefit May Vary. The amount of the Death Benefit may vary
with the Accumulated Value. The Death Benefit under Option A will vary with the
Accumulated Value whenever the specified percentage of Accumulated Value exceeds
the Face Amount of the Policy. The Death Benefit under Option B will always vary
with the Accumulated Value because the Unadjusted Death Benefit equals the
greater of (a) the Face Amount plus the Accumulated Value and (b) the
Accumulated Value multiplied by the specified percentage.
ABILITY TO ADJUST FACE AMOUNT
You may, at any time after the first Policy Year, increase or decrease
the Policy's Face Amount by submitting a written application to us. There are
some limits on your ability to effect increases or decreases, which are
discussed below. The effective date of an increase will be the Monthly Policy
Date on or next following our approval of your request. The effective date of a
decrease is the Monthly Policy Date on or next following the date that we
receive your written request. Employee benefit plan Policies may adjust the Face
Amount even in Policy Year 1. An increase or decrease in Face Amount may have
federal tax consequences. (See "Tax Treatment Of Policy Benefits," Page 48.) The
effect of changes in Face Amount on Policy charges, as well as other
considerations, are described below.
Increase. A request for an increase in Face Amount may not be for less
than $25,000, or such lesser amount required in a particular state (except that
the minimum for employee benefit plans is $2000). You may not increase the Face
Amount after the Insured's Attained Age 85. To obtain the increase, you must
submit an application for the increase and provide evidence satisfactory to us
of the Insured's insurability.
On the effective date of an increase, and taking the increase into
account, the Cash Surrender Value must be at least equal to the Monthly
Deductions then due. If the Cash Surrender Value is not sufficient, the increase
will not take effect until you pay a sufficient additional premium payment to
increase the Cash Surrender Value.
An increase in the Face Amount will generally affect the total Net Amount
at Risk. This will normally 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 33.)
Each increase in face amount will begin a new period of surrender charges
in effect for 15 years from the date of the increase. This additional surrender
charge is based on the face amount of the increase only. This additional
surrender charge is described in detail in the Surrender Charge section on page
27.
Decrease. The amount of the Face Amount after a decrease cannot be less
than 75% of the largest Face Amount in force at any time in the twelve months
immediately preceding our receipt of your request for the decrease. The Face
Amount after any decrease may not be less than the Minimum Face Amount, which is
generally currently $50,000. If a decrease in the Face Amount would result in
cumulative premiums exceeding the maximum premium limitations applicable for
life insurance under the Internal Revenue Code, we will not allow the decrease.
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:
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<PAGE> 170
(a) first, the increase in Face Amount provided by the most recent
increase;
(b) then the next most recent increases, in inverse chronological
order; and finally
(c) the Initial Face Amount.
HOW THE DURATION OF THE POLICY MAY VARY
Your Policy will remain in force as long as the Cash Surrender
Value of the Policy is sufficient to pay the Monthly Deductions and the charges
under the Policy. When the Cash Surrender Value is insufficient to pay the
charges and the Grace Period expires without an adequate premium payment by you,
the Policy will lapse and terminate without value. However, during the first
five Policy Years the Policy will not lapse, if you have paid the Minimum
Guarantee Premium. You have certain rights to reinstate your Policy, if it
should lapse. (See "Reinstatement," Page 29.)
In addition, an optional Guaranteed Death Benefit Rider is
available which will guarantee that the Policy will not lapse prior to age 70,
or 20 years from the Date of Issue of the Policy, if longer, regardless of
investment performance, if you have paid the Minimum Guarantee Premium as of
each Monthly Policy Date.
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held under the
Policy at any time. It is equal to the sum of the Policy's values in the
Separate Account and the General Account. The Accumulated Value minus any
applicable Surrender Charge, and minus any outstanding Policy loans and accrued
interest, is equal to the Cash Surrender Value. There is no guaranteed minimum
for the portion of the Accumulated Value in any of the Subaccounts of the
Separate Account. Because the Accumulated Value on any future date depends upon
a number of variables, it cannot be predetermined.
The Accumulated Value and Cash Surrender Value will reflect:
- the Net Premiums paid
- the investment performance of the Portfolios you have chosen
- the crediting of interest on non-loaned Accumulated Value in the
General Account and amounts held as Collateral in the General
Account
- any transfers
- any Withdrawals
- any loans
- any loan repayments
- any loan interest charged, and
- charges assessed on the Policy.
Determination of Number of Units for the Separate Account. Amounts
allocated, transferred or added to a Subaccount of the Separate Account under a
Policy are used to purchase units of that Subaccount; units are redeemed when
amounts are deducted, transferred or withdrawn. The number of units a Policy has
in a Subaccount equals the number of units purchased minus the number of units
redeemed up to such time. For each Subaccount, the number of units purchased or
redeemed in connection with a particular transaction is determined by dividing
the dollar amount by the unit value.
Determination of Unit Value. The unit value of a Subaccount is
equal to the unit value on the immediately preceding Valuation Day multiplied by
the Net Investment Factor for that Subaccount on that Valuation Day.
Net Investment Factor. Each Subaccount of the Separate Account has
its own Net Investment Factor. The Net Investment Factor measures the daily
investment performance of the Subaccount. The
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<PAGE> 171
factor will increase or decrease, as appropriate, to reflect net investment
income and capital gains or losses, realized and unrealized, for the securities
of the underlying portfolio or series.
The asset charge for mortality and expense risks will be deducted
in determining the applicable Net Investment Factor. (See "Charges and
Deductions - Mortality and Expense Risk Charge," Page 35.)
Calculation of Accumulated Value. The Accumulated Value is
determined first on the Date of Issue and thereafter on each Valuation Day. On
the Date of Issue, the Accumulated Value will be the Net Premiums received, plus
any earnings prior to the Date of Issue, less any Monthly Deductions due on the
Date of Issue. On each Valuation Day after the Date of Issue, the Accumulated
Value will be:
(1) The aggregate of the values attributable to the Policy in
the Separate Account, determined by multiplying the number
of units the Policy has in each Subaccount of the Separate
Account by such Subaccount's unit value on that date; plus
(2) The value attributable to the Policy in the General Account
(See "The General Account," Page 42.)
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. If you do not pay the Minimum Initial Premium with your written
application, it must be paid when the Policy is delivered. If the premium paid
is less than the Minimum Initial Premium, the balance of the Minimum Initial
Premium must be received within five days, or all premiums will be refunded.
The Minimum Face Amount of a Policy under our rules is generally
$50,000; however, exceptions may be made for employee benefit plans. We may
revise our rules from time to time to specify a different Minimum Face Amount
for subsequently issued policies. A Policy will be issued only on Insureds who
have an Issue Age of 85 or less and who provide us with satisfactory evidence of
insurability. Acceptance is subject to our underwriting rules. We may reject an
application for any reason permitted by law. (See "Distribution of Policies,"
Page 54.) A tax-favored arrangement, including qualified pension plans, should
carefully consider the costs and benefits of the Policy (such as asset
diversification) before purchasing a Policy since the tax-favored arrangement
itself provides for tax-sheltered growth.
From the time the application for a Policy is signed until the
time the Policy is issued, you can, subject to our underwriting rules, obtain
temporary insurance protection, pending issuance of the Policy, if you are able
to answer "no" to the Health Questions of the Receipt & Temporary Life Insurance
Agreement and submitting (a) a complete Application including any medical
questionnaire required, and (b) payment of the Minimum Initial Premium.
The amount of coverage under the Receipt & Temporary Life
Insurance Agreement is the lesser of the Face Amount applied for or $1,000,000
($100,000 in the case of proposed Insureds age 70 or over). Coverage under the
agreement will end on the earliest of:
(a) the 90th day from the date of the agreement;
(b) the date that insurance takes effect under the Policy;
(c) the date a policy, other than as applied for, is offered to you;
(d) five days from the date we mail a notice of termination of coverage;
(e) the time you first learn that we have terminated the temporary life
insurance; or
(f) the time you withdraw the application for life insurance.
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<PAGE> 172
We offer a one time credit on conversions of eligible National
Life term insurance policies to a VariTrak Policy. If the term policy being
converted has been in force for at least twelve months, the amount of the credit
is 12% of a target amount used to determine commission payments. If the term
policy being converted has been in force for less than twelve months, the credit
will be prorated based on the number of months the term policy has been
outstanding at the time of conversion. For GRT term policies, the credit will be
18% of the target amount used to determine commission payments if the GRT term
policy has been in force for at least two years but not more than five years.
For GRT term policies in force for less than two years, the credit is 0.5% per
month for each month in the first year, and 1.0% per month for each month in the
second year. For GRT policies in force more than five years, the credit
decreases from 18% by 0.5% for each month beyond five years, until it becomes
zero at the end of year eight.
The amount of the credit will be added to the initial premium
payment, if any, you pay and will be treated as part of the Initial Premium for
the Policy. Thus, the credit will be included in premium payments for purposes
of calculating and deducting the Premium Tax Charge. If you surrender your
Policy, we will not recapture the credit. We will not include the amount of the
credit for purposes of calculating agent compensation for the sale of the
Policy.
We also offer a one time credit to Home Office employees who
purchase a VariTrak Policy, as both Owner and Insured. This one time credit is
calculated differently from the credit described above; in particular, the
amount of the credit will be 50% of the target premium used in the calculation
of commissions on the Policy. Otherwise, the credit will be treated in the same
manner as the credit described above.
Amount and Timing of Premiums. Each premium payment must be at
least $50. You have considerable flexibility in determining the amount and
frequency of premium payments, within the limits discussed below.
You will at the time of application 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 premium reminder notice at the
specified interval. You may change the Planned Periodic Premium frequency and
amount. Also, under an Automatic Payment Plan, you can select a monthly payment
schedule pursuant to which premium payments will be automatically deducted from
a bank account or other source, rather than being "billed." We may allow, in
certain situations, Automatic Payment Plan payments of less than $50. We may
require that Automatic Payment Plans be set up for at least the Minimum Monthly
Premium.
You are not required to pay the Planned Periodic Premiums in
accordance with the specified schedule. You may pay premiums whenever you like,
and in any amount (subject to the $50 minimum and the limitations described in
the next section). Payment of the Planned Periodic Premiums will not, however,
guarantee that the Policy will remain in force. Instead, the duration of the
Policy depends upon the Policy's Cash Surrender Value. Thus, even if you pay the
Planned Periodic Premiums, the Policy will lapse whenever the Cash Surrender
Value is insufficient to pay the Monthly Deductions and any other charges under
the Policy and if a Grace Period expires without an adequate payment by you
(unless the Policy is in its first five years, or you have purchased the
Guaranteed Death Benefit Rider, in either case so long as you have paid the
Minimum Guarantee Premium).
Any payments you make while there is an outstanding Policy loan
will be applied as premium payments rather than loan repayments, unless you
notify us in writing that the amount is to be applied as a loan repayment.
Higher premium payments under Death Benefit Option A, until the
applicable percentage of Accumulated Value exceeds the Face Amount, will
generally result in a lower Net Amount at Risk. This will produce lower Cost of
Insurance Charges against the Policy. Conversely, lower premium payments in
27
<PAGE> 173
this situation will result in a higher Net Amount at Risk, which will result in
higher Cost of Insurance Charges under the Policy.
Under Death Benefit Option B, until the applicable percentage of
Accumulated Value exceeds the Face Amount plus the Accumulated Value, the level
of premium payments will not affect the Net Amount at Risk. However, both the
Accumulated Value and Death Benefit will be higher if premium payments are
higher, and lower if premium payments are lower.
Under either Death Benefit Option, if the Unadjusted Death Benefit
is the applicable percentage of Accumulated Value, then higher premium payments
will result in a higher Net Amount at Risk, and higher Cost of Insurance
Charges. Lower premium payments will result in a lower Net Amount at Risk, and
lower Cost of Insurance Charges.
Premium Limitations. 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 these limits. If at any time you pay
a premium which would result in total premiums exceeding the 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. We will promptly refund
the excess to you. In cases of premiums paid by check, we will wait until your
check has cleared. If you have an outstanding loan, we may instead apply the
payment as a loan repayment. Even if total premiums were to exceed the maximum
premium limitations established by the Code, the excess of (a) a Policy's
Unadjusted Death Benefit over (b) the Policy's Cash Surrender Value plus
outstanding Policy loans and accrued interest, would still be excludable from
gross income under the Code.
The maximum premium limitations set forth in the Code depend in
part upon the amount of the Unadjusted Death Benefit at any time. As a result,
any Policy changes which affect the amount of the Unadjusted Death Benefit may
affect whether cumulative premiums paid under the Policy exceed the maximum
premium limitations. To the extent that any such change would result in
cumulative premiums exceeding the maximum premium limitations, we will not
effect the change. (See "Federal Income Tax Considerations," Page 47.)
Unless the Insured provides satisfactory evidence of insurability,
we may limit the amount of any premium payment if it increases the Unadjusted
Death Benefit more than it increases the Accumulated Value.
Allocation of Net Premiums. The Net Premium equals the premium
paid less the Premium Tax Charge. In your application for the Policy, you will
indicate how Net Premiums should be allocated among the Subaccounts of the
Separate Account and/or the General Account. You may change these allocations at
any time by giving us written notice at our Home Office, or if you have elected
the telephone transaction privilege, by telephone instructions (See "Telephone
Transaction Privilege," Page 40.) You must make allocations in whole number
percentages of at least 5%, and the sum of the allocation percentages must be
100%. We will allocate Net Premiums as of the Valuation Date we receive the
premium at our Home Office, based on the allocation percentages then in effect,
except during the free look period.
We will allocate any portion of the Initial Premium and any
subsequent premiums we receive before the end of the free look period which are
to be allocated to the Separate Account, to the Money Market Subaccount. For
this purpose, we will assume that the free look period will end 20 days after
the date the Policy is issued. On the first Valuation Date following 20 days
after issue of the Policy, we will allocate the amount in the Money Market
Subaccount to each of the Subaccounts selected in the application based on your
instructions.
28
<PAGE> 174
For example, assume a Policy was issued with Net Premiums to be
allocated 25% to the Managed Subaccount, 25% to the Bond Subaccount and 50% to
the General Account. During the period stated above, 50% (25% + 25%) of the Net
Premiums will be allocated to the Money Market Subaccount. At the end of such
period, 50% (25% / 50%) of the amount in the Money Market Subaccount will be
transferred to the Managed Subaccount and 50% to the Bond Subaccount.
The values of the Subaccounts will vary with their investment
experience. 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 Accumulated Value between and
among the Subaccounts of the Separate Account and the General Account by sending
us a written transfer request, or if you have elected the telephone transaction
privilege, by telephone instructions to us. (See "Telephone Transaction
Privilege," Page 40.) Transfers between and among the Subaccounts of the
Separate Account and the General Account are made as of the Valuation Day that
the request for transfer is received at the Home Office. You may, at any time,
transfer all or part of the amount in one of the Subaccounts of the Separate
Account to another Subaccount and/or to the General Account. For transfers from
the General Account to the Separate Account, see "Transfers from General
Account," Page 43.
Currently an unlimited number of transfers are permitted without
charge. We have no current intent to impose a transfer charge in the foreseeable
future. However, we may, after giving you prior notice, change this policy so as
to deduct a $25 transfer charge from each transfer in excess of the twelfth
transfer during any one Policy Year. All transfers requested during one
Valuation Period are treated as one transfer transaction. If a transfer charge
is adopted in the future, these types of transfers would not be subject to a
transfer charge and would not count against the twelve free transfers in any
Policy Year:
- transfers resulting from Policy loans
- transfers resulting from the operation of the dollar cost
averaging or portfolio rebalancing features
- transfers resulting from the exercise of the transfer rights
described on Page 40 (see "Policy Rights - Other Transfer Rights,"
Page 40), and
- the reallocation from the Money Market Subaccount following the
free look period.
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. A Policy will lapse only when the Cash Surrender
Value is insufficient to cover the Monthly Deductions and other charges under
the Policy and the Grace Period expires without a sufficient payment. During the
first five Policy Years, the Policy will not lapse so long as you pay the
Minimum Guarantee Premium.
In addition, if you purchase the Guaranteed Death Benefit Rider, and pay
the Minimum Guarantee Premium as of each Monthly Policy Date, your Policy will
not lapse prior to the Insured's Attained Age 70, or 20 years from the Date of
Issue of the Policy if longer, regardless of whether the Cash Surrender Value is
sufficient to cover the Monthly Deductions. If you purchase the Guaranteed Death
Benefit Rider, your Minimum Guarantee Premium will be higher than if you do not
purchase the Guaranteed Death Benefit Rider. (See "Optional Benefits -
Guaranteed Death Benefit," Page 47.)
The Policy provides for a 61-day Grace Period that is measured
from the date we send a lapse notice. The Policy does not lapse, and the
insurance coverage continues, until the expiration of this Grace Period. To
prevent lapse, you must during the Grace Period pay a premium equal to the sum
of any amount by which the past Monthly Deductions have been in excess of Cash
Surrender Value, plus three times the Monthly Deduction due the date the Grace
Period began. Our notice will specify the payment required to keep the Policy in
force. Failure to make a payment at least equal to the required amount within
the Grace Period will result in lapse of the Policy without value.
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<PAGE> 175
Reinstatement. A Policy that lapses without value may be
reinstated at any time within five years (or longer period required in a
particular state) after the beginning of the Grace Period. To do so, you must
submit evidence of the Insured's insurability satisfactory to us and pay an
amount sufficient to provide for two times the Monthly Deduction due on the date
the Grace Period began plus three times the Monthly Deduction due on the
effective date of reinstatement. The effective date of reinstatement, unless
otherwise required by state law, will be the Monthly Policy Date on or next
following the date your reinstatement application is approved. Upon
reinstatement, the Accumulated Value will be based upon the premium paid to
reinstate the Policy. The Policy will be reinstated with the same Date of Issue
as it had prior to the lapse. Neither the five year no lapse guarantee nor the
Death Benefit Guarantee Rider may be reinstated.
Specialized Uses of the Policy. Because the Policy provides for an
accumulation of cash value as well as a death benefit, the Policy can be used
for various individual and business financial planning purposes. Purchasing the
Policy in part for such purposes entails certain risks. For example, if the
investment performance of the chosen Subaccounts is poorer than expected or if
sufficient premiums are not paid, the Policy may lapse or may not accumulate
sufficient Accumulated Value or Cash Surrender Value to fund the purpose for
which the Policy was purchased. Withdrawals and Policy loans may significantly
affect current and future Accumulated Value, Cash Surrender Value, or Death
Benefit proceeds. Depending upon Subaccount investment performance and the
amount of a Policy loan, the loan may cause a Policy to lapse. Because the
Policy is designed to provide benefits on a long-term basis, before purchasing a
Policy for a specialized purpose you should consider whether the long-term
nature of the Policy is consistent with your purpose. Using a Policy for a
specialized purpose may have tax consequences. (See "Federal Income Tax
Considerations," Page 47.)
For Policies that are intended to be used in multiple employer welfare
benefit plans established under Section 419A(f)(6) of the Internal Revenue Code,
you should be aware that there is a risk that the intended tax consequences of
such a plan may not be realized. Congress is currently considering legislation
that might remove some or all of the tax advantage of these plans and the
Internal Revenue Service has raised questions about certain of these
arrangements under existing law. We do not guarantee any particular tax
consequences of any use of the Policies, including but not limited to use in
these so-called "Section 419 plans." We recommend that you seek independent tax
advice with respect to applications in which you seek particular tax
consequences.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate us
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.
We may realize a profit from any charges. We may use any profit for any
purpose, including payment of distribution expenses. We may also realize a
profit on one or more of these charges. We may use any profits for any corporate
purpose, including sales expenses.
PREMIUM TAX CHARGE
We will deduct 3.25% from each premium payment prior to allocation of Net
Premiums, to cover state premium taxes and the federal DAC Tax. For qualified
employee benefit plans, we will deduct 2.0% of each premium rather than 3.25%.
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The federal DAC Tax is a tax attributable to certain "policy acquisition
expenses" under Internal Revenue Code Section 848. Section 848 in effect
accelerates the realization of income we receive from the Policies, and
therefore the payment of federal income taxes on that income. The economic
consequence of Section 848 is, therefore, an increase in the tax burden borne by
us that is attributable to the Policies.
SURRENDER CHARGE
We impose a Surrender Charge, which consists of a Deferred
Administrative Charge and a Deferred Sales Charge, if the Policy is surrendered
or lapses at any time before the end of the fifteenth Policy Year following
issue or a face amount increase.
Deferred Administrative Charge. The Deferred Administrative Charge
varies by Issue Age, and is based on the Initial Face Amount and the Face Amount
of any increase. After the first five Policy years since issue or increase, it
declines linearly by Policy Month through the end of Policy Year 15 following
issue or increase, after which it is zero. Charges per $1,000 of Face Amount for
sample issue ages are shown below:
<TABLE>
<CAPTION>
Sample Charge per $1000
Issue Age of Face Amount
--------- --------------
<S> <C>
0 - 5 None
10 $0.50
15 $1.00
20 $1.50
25 - 85 $2.00
</TABLE>
For Issue Ages not shown, the charge will increase by a ratable
portion for each full year. The Deferred Administrative Charge has been designed
to cover actual expenses for the issue and underwriting of Policies, and is not
intended to produce a profit.
Deferred Sales Charge. The Deferred Sales Charges are presented in
Appendix B to this Prospectus. Appendix B expresses the Deferred Sales Charge as
a dollar amount per $1,000 of initial face amount. There will be a deferred
sales charge associated with the initial policy face amount as well as with each
subsequent face amount increase. Each such portion of the deferred sales charge
will have a duration of fifteen policy years as measured from the issue date of
the corresponding face amount. Each portion of the deferred sales charge will be
level for the first five policy years then decrease linearly by Policy Month
until the end of the fifteenth policy year.
To illustrate the calculation of a Policy's Surrender Charge,
assume that the Policy is issued to a male nonsmoker, Issue Age
45, with a Face Amount of $100,000. This example will illustrate
surrenders in the first five Policy Years and in the first month
of the eighth Policy Year.
Deferred Administrative Charge. The Deferred Administrative Charge
for the first five Policy Years is $200. This is calculated by
applying the charge of $2.00 per $1,000 of Face Amount for Issue
Age 45 from the schedule above to the Face Amount of $100,000
($2.00 x (100,000/1,000)). The Deferred Administrative Charge
reduces linearly by Policy Month in Policy Years 6 through 15.
Linear reduction is equivalent to a reduction each month of
1/121st of the initial charge. For example, the Deferred
Administrative Charge in the first month of the eighth Policy Year
(the 25th month after the end of the 5th Policy Year) will be
$158.68 ($200 - ($200 x (25/121)). After completion of the 15th
Policy Year, the Deferred Administrative Charge is zero. The
schedule of Deferred Administrative Charges in effect for the
first fifteen Policy Years is shown in the Policy.
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Deferred Sales Charge. The Deferred Sales Charge in effect for the
first five Policy Years is $826. This is calculated by applying
the charge of $8.26 per $1,000 of Face Amount for Issue Age 45
found in Appendix B to the Face Amount of $100,000 ($8.26 x
(100,000 / 1,000)). The Deferred Sales Charge reduces linearly by
month in Policy Years 6 through 15. Linear reduction is equivalent
to a reduction each month of 1/121st of the initial charge. For
example, the Deferred Sales Charge in the first month of the 8th
Policy Year (the 25th month after the end of the 5th Policy Year)
will be $655.34 ($826 - ($826 x (25/121))). After the completion
of the 15th Policy Year, the Deferred Sales Charge is $0. The
schedule of Deferred Sales Charges in effect for the first fifteen
Policy Years is shown in the Policy.
Surrender Charges for Policies Issued Prior to the Effective Date
of this Prospectus. For policies issued before the effective date
of this prospectus (or later date if not approved in your state by
the effective date of the prospectus), your surrender charge will
differ from the surrender charges described above in two respects.
1) Your Deferred Sales Charge will be the lesser of the
Deferred Sales Charge described above and an amount equal
to the sum of the following:
(i) 30% of the premiums actually received up to one
Surrender Charge target premium, plus
(ii) 10% of all the premiums paid in excess of this
amount but not greater than twice this amount, plus
(iii) 9% of all the premiums paid in excess of twice this
amount.
Appendix B to this Prospectus contains the Surrender Charge target
premiums per $1,000 of initial face amount.
2) There will be no Deferred Administrative Charge or Deferred
Sales Charge with respect to increases in face amount.
MONTHLY DEDUCTIONS
We will deduct charges from the Accumulated Value on the Date of Issue
and on each Monthly Policy Date. The Monthly Deduction consists of three
components:
(a) the Cost of Insurance Charge
(b) the Monthly Administrative Charge, and
(c) the cost of any additional benefits provided by Rider.
The Monthly Deduction may vary in amount from Policy Month to Policy
Month. We will take the Monthly Deduction on a pro rata basis from the
Subaccounts of the Separate Account and the General Account, unless you have
requested at the time of application, or later request in writing, that we take
the Monthly Deductions from the Money Market Subaccount. If we cannot take a
Monthly Deduction from the Money Market Subaccount, where you have so asked, we
will take the amount of the deduction in excess of the Accumulated Value
available in the Money Market Subaccount on a pro rata basis from Accumulated
Value in the Subaccounts of the Separate Account and the General Account.
Cost of Insurance Charge. We calculate the monthly Cost of
Insurance Charge by multiplying the applicable cost of insurance rate or rates
by the Net Amount at Risk for each Policy Month. Because both the Net Amount at
Risk and the variables that determine the cost of insurance rate, such as the
age of the Insured and the Duration of the Policy, may vary, the Cost of
Insurance Charge will likely be different from month to month.
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<PAGE> 178
Net Amount at Risk. The Net Amount at Risk on any
Monthly Policy Date is approximately the amount by which the
Unadjusted Death Benefit on that Monthly Policy Date exceeds the
Accumulated Value. It measures the amount National Life would have
to pay in excess of the Policy's Value if the Insured died. The
actual calculation uses the Unadjusted Death Benefit divided by
1.00327234, to take into account assumed monthly earnings at an
annual rate of 4%. We calculate the Net Amount at Risk separately
for the Initial Face Amount and any increases in Face Amount. In
determining the Net Amount at Risk for each increment of Face
Amount, we first consider the Accumulated Value part of the
Initial Face Amount. If the Accumulated Value exceeds the Initial
Face Amount, we consider it as part of any increases in Face
Amount in the order such increases took effect.
Any change in the Net Amount at Risk will affect the
total Cost of Insurance Charges paid by the Owner.
Guaranteed Maximum Cost of Insurance Rates. The
guaranteed maximum cost of insurance rates will be set forth in
your Policy, and will depend on:
- the Insured's Attained Age
- the Insured's sex
- the Insured's Rate Class, and
- the 1980 Commissioners Standard Ordinary
Smoker/Nonsmoker Mortality Table.
For Policies issued in conjunction with employee
benefit plans, the guaranteed maximum cost of insurance rate will
use the 1980 Commissioners Standard Ordinary Mortality Tables NB
and SB.
Current Cost of Insurance Rates and How They are
Determined. The actual cost of insurance rates used ("current
rates") will depend on:
- the Insured's Issue Age
- the Insured's sex
- the Insured's Rate Class
- the Policy's Duration, and
- the Policy's size.
Generally, the current cost of insurance rate for a
given Attained Age will be less than for an Insured whose Policy
was issued more than 10 years ago, than for an Insured whose
Policy was issued less than 10 years ago, other factors being
equal. We periodically review the adequacy of our current cost of
insurance rates and may adjust their level. However, the current
rates will never exceed guaranteed maximum cost of insurance
rates. Any change in the current cost of insurance rates will
apply to all persons of the same Issue Age, sex, and Rate Class,
and with Policies of the same Duration and size.
We use separate cost of insurance rates for the
Initial Face Amount and any increases in Face Amount. For the
Initial Face Amount we use the rate for the Insured's Rate Class
on the Date of Issue. For each increase in Face Amount, we use the
rate for the Insured's Rate Class at the time of the increase. If
the Unadjusted Death Benefit is calculated as the Accumulated
Value times the specified percentage, we use the rate for the Rate
Class for the Initial Face Amount for the amount of the Unadjusted
Death Benefit in excess of the total Face Amount for Option A, and
in excess of the total Face Amount plus the Accumulated Value for
Option B.
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Rate Class. The Rate Class of the Insured will
affect both the guaranteed and current cost of insurance rates. We
currently place Insureds into the following rate classes:
- elite preferred nonsmoker
- preferred nonsmoker
- standard nonsmoker
- preferred smoker
- standard smoker
- smoker
- juvenile, and
- substandard.
Smoker, juvenile, and substandard classes reflect
higher mortality risks. In an otherwise identical Policy, an
Insured in an elite, preferred or standard class will have a lower
Cost of Insurance Charge than an Insured in a substandard class
with higher mortality risks. Nonsmoking Insureds will generally
incur lower cost of insurance rates than Insureds who are
classified as smokers.
The nonsmoker designation is not available for
Insureds under Attained Age 20. Shortly before an Insured attains
age 20, we will notify the Insured about possible classification
as a nonsmoker and direct the Insured to his or her agent to
initiate a change in Rate Class. If the Insured qualifies as a
nonsmoker, we will change the current cost of insurance rates to
reflect the nonsmoker classification.
Current cost of insurance rates will also vary by
Policy size, in the following bands:
- those with Face Amounts less than $250,000
- those with Face Amounts between $250,000 and
$999,999, inclusive; and
- those with Face Amounts of $1,000,000 and over.
Cost of insurance rates will be lower as the Policy
size band is larger.
Monthly Administrative Charge. We deduct a Monthly Administrative
Charge from the Accumulated Value on the Date of Issue and each Monthly Policy
Date as part of the Monthly Deduction to help defray the expenses incurred in
administering the Policy. The Monthly Administrative Charge is currently $7.50.
The monthly charge is guaranteed not to exceed $7.50 plus $0.07 per $1000 of
Face Amount.
Optional Benefit Charges. The Monthly Deduction will include
charges for any additional benefits added to the Policy. The monthly charges
will be specified in the applicable Rider. The available Riders are listed under
"Optional Benefits", on Page 46.
Separate Account Enhancement. We will reduce the Monthly
Deductions starting in the eleventh Policy Year by an amount equal to 0.50% per
annum of the Accumulated Value in the Separate Account.
The separate account enhancement is calculated on each Monthly
Policy Date as .041572% (the monthly equivalent of 0.50% per annum) of the
Accumulated Value in the Separate Account on the just prior Monthly Policy Date.
For example, if the Accumulated Value in the Separate Account on the just prior
Monthly Policy Date is $10,000, then the separate account enhancement calculated
for the current Monthly Policy Date will be $4.16 ($10,000 X .00041572). To
calculate the Monthly Deduction for the current Monthly Policy Date, we net the
$4.16 separate account enhancement against the Monthly Deductions for Cost of
Insurance, the Monthly Administrative Charge, and charges for any Optional
Benefits.
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MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from the Separate Account at an annual rate of
0.90% (or a daily rate of .0024548%) of the average daily net assets of each
Subaccount of the Separate Account. This charge compensates us for the mortality
and expense risks assumed in connection with the Policy. The mortality risk we
assume is that insured persons may live for a shorter time than projected. This
means we would pay greater death benefits than expected in relation to the
amount of premiums received. The expense risk we assume is that expenses
incurred in issuing and administering the Policies will exceed the
administrative charges deducted from the Policy.
WITHDRAWAL CHARGE
We will assess on each Withdrawal a charge equal to the lesser of 2% of
the Withdrawal amount and $25. We will deduct this Withdrawal Charge from the
Withdrawal amount.
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts, or
from the Separate Account to the General Account. Transfers from the General
Account to the Separate Account are permitted within the limits described on
Page 43. Currently there is no charge for any transfers. We have no present
intention to impose a transfer charge in the foreseeable future. However, we may
impose in the future a transfer charge of $25 on each transfer in excess of
twelve transfers in any Policy Year. The Transfer Charge would be imposed to
compensate us for the costs of processing such transfers, and would not be
designed to produce a profit.
If we impose a transfer charge in the future, we will deduct it from the
amount being transferred. We would treat all transfers requested on the same
Valuation Date as one transfer transaction. Any future transfer charge will not
apply to transfers resulting from:
- Policy loans
- the exercise of the transfer rights described on Page 40
- the initial reallocation of account values from the Money Market
Subaccount to other Subaccounts, and
- any transfers made pursuant to the Dollar Cost Averaging and
Portfolio Rebalancing features.
The transfers listed above also will not count against the twelve free transfers
in any Policy Year.
PROJECTION REPORT CHARGE
We may impose a charge, not to exceed $25, for each projection report you
request. This report will project future values and future Death Benefits for
the Policy. We will notify you in advance of the amount of the charge. You may
elect to pay the charge in advance. If not paid in advance, we will deduct this
charge from the Subaccounts of the Separate Account and/or the General Account
in proportion to their Accumulated Values on the date of the deduction.
OTHER CHARGES
The Separate Account purchases shares of the Funds at net asset
value. The net asset value of those shares reflect management fees and expenses
already deducted from the assets of the Funds' Portfolios. Historical expense
ratio information for the Funds is presented in "Charges Assessed in Connection
with the Policy" on Pages 5 and 6 above. More detailed information is contained
in the Funds' Prospectuses which accompany this Prospectus.
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POLICY RIGHTS AND PRIVILEGES
LOAN PRIVILEGES
General. You may at any time after the first year (and during the
first year where required by law) borrow money from us using the Policy as the
only security for the loan. The maximum amount you may borrow is the Policy's
Cash Surrender Value on the date we receive your loan request, minus three times
the Monthly Deduction for the most recent Monthly Policy Date. You may repay all
or a portion of a loan and accrued interest at any time, if the Insured is
alive. To take a loan, you should send us a written request at our Home Office.
If you have elected the telephone transaction privilege, you may also request a
loan over the telephone. We limit the amount of a Policy loan you can take by
telephone to $25,000. (See "Telephone Transaction Privilege," Page 40.) We will
normally pay loan proceeds within seven days of a valid loan request.
Interest Rate Charged. We charge interest on Policy loans at the
fixed rate of 6% per year. We charge interest from the date of the loan and add
it to the loan balance at the end of the Policy Year. When this interest is
added to the loan balance, it bears interest at the same rate.
Allocation of Loans and Collateral. When you take a Policy loan,
we hold Accumulated Value in the General Account as Collateral for the Policy
loan. You may specify how you would like the Accumulated Value to be taken from
the Subaccounts of the Separate Account to serve as Collateral. If you do not so
specify, we will allocate the Policy loan to the Subaccounts in proportion to
the Accumulated Value in the Subaccounts. If the Accumulated Value in one or
more of the Subaccounts is insufficient to carry out your instructions, we will
not process the loan until we receive further instructions from you. Non-loaned
Accumulated Value in the General Account will become Collateral for a loan only
to the extent that the Accumulated Value in the Separate Account is
insufficient.
The Collateral for a Policy loan will initially be the loan
amount. Loan interest will be added to the Policy loan. We will take additional
Collateral for the loan interest pro rata from the Subaccounts of the Separate
Account, and then, if the amounts in the Separate Account are insufficient, from
the non-loaned portion of the General Account. At any time, the amount of the
outstanding loan under a Policy equals the sum of all loans (including due and
unpaid interest added to the loan balance) minus any loan repayments.
Interest Credited to Amounts Held as Collateral. As long as the
Policy is in force, we will credit the amount held in the General Account as
Collateral with interest at effective annual rates we declare, but not less than
4% or such higher minimum rate required under state law. The rate will apply to
the calendar year which follows the date of determination.
Preferred Policy Loans. We currently intend to make preferred Policy
loans available at the beginning of the eleventh Policy Year. The maximum amount
of the preferred loans will be 50% of the Accumulated Value. For these preferred
Policy loans, the amounts held as Collateral in the General Account will be
credited with interest at an annual rate of 6%. All outstanding loan amounts up
to 50% of the Accumulated Value will be treated as preferred loans. Any
outstanding loan amounts in excess of 50% of the Accumulated Value will be
treated as non-preferred loans. If both preferred and non-preferred loans exist
at the same time, we will first apply any loan repayment to the non-preferred
loan. We are not obligated to make preferred loans available, and will make such
loans available at our sole discretion. Preferred loans may not be treated as
indebtedness for federal income tax purposes.
Enhancement on Non-preferred Policy Loans Beginning in Policy Year 11. In
Policy Year 11 and thereafter, for loans that do not qualify as preferred loans,
we will credit interest on amounts held in the General Account as Collateral at
a rate 0.50% per annum higher than for similar amounts for Policies still
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in their first ten Policy Years. This enhancement will only be credited to
Collateral for non-preferred policy loans.
Effect of Policy Loan. Policy loans, whether or not repaid, will
have a permanent effect on the Accumulated Value and the Cash Surrender Value,
and may permanently affect the Death Benefit of your Policy. The effect on the
Accumulated Value and Death Benefit could be favorable or unfavorable. It will
depend on whether the investment performance of the Subaccounts, and the
interest credited to the non-loaned Accumulated Value in the General Account, is
less than or greater than the interest being credited on the amounts held as
Collateral in the General Account. Compared to a Policy under which no loan is
made, values under a Policy will be lower when the credited interest rate on
Collateral is less than the investment experience of assets held in the Separate
Account and interest credited to the non-Collateral Accumulated Value in the
General Account. The longer a loan is outstanding, the greater the effect a
Policy loan is likely to have. The Death Benefit will be reduced by the amount
of any outstanding Policy loan.
Loan Repayments. We will assume that any payments you make while
there is an outstanding Policy loan are premium payments, rather than loan
repayments, unless you specify in writing that a payment is a loan repayment. In
the event of a loan repayment, the amount held as Collateral in the General
Account will be reduced by an amount equal to the repayment, and such amount
will be transferred to the Subaccounts of the Separate Account and to the
non-loaned portion of the General Account based on the Net Premium allocations
in effect at the time of the repayment.
Lapse With Loans Outstanding. The amount of an outstanding loan
under a Policy plus any accrued interest on outstanding loans is not part of
Cash Surrender Value. Therefore, the larger the amount of an outstanding loan,
the more likely it is that the Policy could lapse. (See "How the Duration of the
Policy May Vary," Page 25 and "Policy Lapse," Page 29.) 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 48.)
IRC Section 1035 Exchanges of Policies with Existing Policy Loans. We
will accept transfers of existing policy loans on Policies that qualify as
Section 1035 exchanges. The loan will be limited to 50% of the Accumulation
Value of the transfer. The Accumulation Value held as collateral for the loan
will be placed in the General Account.
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 Other Than Death
Benefits from Modified Endowment Contracts," Page 49.)
SURRENDER PRIVILEGE
You may surrender your Policy for its Cash Surrender Value at any
time before the death of the Insured. The Cash Surrender Value is the
Accumulated Value minus any Policy loan and accrued interest and less any
Surrender Charge. We will calculate the Cash Surrender Value on the Valuation
Day we receive, at our Home Office, your signed written surrender request, and
the Policy. You may not request a surrender over the telephone. Coverage under
the Policy will end on the day you mail or otherwise send your written surrender
request and the Policy to us. We will ordinarily mail surrender proceeds to you
within seven days of when we receive your request. (See "Other Policy Provisions
- Payment of Policy Benefits", Page 43.)
A surrender may have Federal income tax consequences. (See "Tax Treatment
of Policy Benefits," Page 48).
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WITHDRAWAL OF CASH SURRENDER VALUE
You may withdraw a portion of your Policy's Cash Surrender Value
at any time before the death of the Insured and, except for employee benefit
plans, after the first Policy Anniversary. The minimum amount which you may
withdraw is $500, except for employee benefit plans, where the minimum is $100.
The maximum Withdrawal is the Cash Surrender Value on the date of receipt of the
Withdrawal request, minus three times the Monthly Deduction for the most recent
Monthly Policy Date. A Withdrawal Charge will be deducted from the amount of the
Withdrawal. For a discussion of the Withdrawal Charge, see "Charges and
Deductions - Withdrawal Charge" on Page 35.
You may specify how you would like us to take a Withdrawal from
the Subaccounts of the Separate Account. If you do not so specify, we will take
the Withdrawal from the Subaccounts in proportion to the Accumulated Value in
each Subaccount. If the Accumulated Value in one or more Subaccounts is
insufficient to carry out your instructions, we will not process the Withdrawal
until we receive further instructions from you. You may take Withdrawals from
the General Account only after the Accumulated Value in the Separate Account has
been exhausted.
The effect of a Withdrawal on the Death Benefit and Face Amount
will vary depending upon the Death Benefit Option in effect and whether the
Unadjusted Death Benefit is based on the applicable percentage of Accumulated
Value. (See "Death Benefit Options," Page 22.)
Option A. The effect of a Withdrawal on the Face Amount and
Unadjusted Death Benefit under Option A can be described as follows:
If the Face Amount divided by the applicable percentage of
Accumulated Value exceeds the Accumulated Value just after the
Withdrawal, a Withdrawal will reduce the Face Amount and the
Unadjusted Death Benefit by the lesser of such excess and the
amount of the Withdrawal.
For the purposes of this illustration (and the following
illustrations of Withdrawals), assume that the Attained Age of the
Insured is under 40 and there is no indebtedness. The applicable
percentage is 250% for an Insured with an Attained Age under 40.
Under Option A, a Policy with a Face Amount of $300,000 and
an Accumulated Value of $30,000 will have an Unadjusted Death
Benefit of $300,000. Assume that you take a Withdrawal of $10,000.
The Withdrawal Charge will be $25 and the amount we pay you will
be $9,975. The Withdrawal will reduce the Accumulated Value to
$20,000 ($30,000 - $10,000) after the Withdrawal. The Face Amount
divided by the applicable percentage is $120,000 ($300,000 /
2.50), which exceeds the Accumulated Value after the Withdrawal by
$100,000 ($120,000 - $20,000). The lesser of this excess and the
amount of the Withdrawal is $10,000, the amount of the Withdrawal.
Therefore, the Unadjusted Death Benefit and Face Amount will be
reduced by $10,000 to $290,000.
If the Face Amount divided by the applicable percentage of
Accumulated Value does not exceed the Accumulated Value just after
the Withdrawal, then the Face Amount is not reduced. The
Unadjusted Death Benefit will be reduced by an amount equal to the
reduction in Accumulated Value times the applicable percentage (or
equivalently, the Unadjusted Death Benefit is equal to the new
Accumulated Value times the applicable percentage).
Under Option A, a policy with a Face Amount of $300,000 and
an Accumulated Value of $150,000 will have an Unadjusted Death
Benefit of $375,000 ($150,000 x 2.50). Assume that you take a
Withdrawal of $10,000. The Withdrawal Charge will be $25 and the
amount we pay to you will be $9,975. The Withdrawal will reduce
the Accumulated Value to $140,000 ($150,000 - $10,000). The Face
Amount divided by the applicable percentage is $120,000,
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which does not exceed the Accumulated Value after the withdrawal.
Therefore, the Face Amount stays at $300,000 and the Unadjusted
Death Benefit is $350,000 ($140,000 x 2.50).
Option B. The Face Amount will never be decreased by a Withdrawal.
A Withdrawal will, however, always decrease the Death Benefit.
If the Unadjusted Death Benefit equals the Face Amount plus
the Accumulated Value, a Withdrawal will reduce the Accumulated
Value by the amount of the Withdrawal and thus the Unadjusted
Death Benefit will also be reduced by the amount of the
Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and
an Accumulated Value of $90,000 will have an Unadjusted Death
Benefit of $390,000 ($300,000 + $90,000). Assume you take a
Withdrawal of $20,000. The Withdrawal Charge will be $25 and the
amount we pay to you will be $19,975. The Withdrawal will reduce
the Accumulated Value to $70,000 ($90,000 - $20,000) and the
Unadjusted Death Benefit to $370,000 ($300,000 + $70,000). The
Face Amount is unchanged.
If the Unadjusted Death Benefit immediately prior to the
Withdrawal is based on the applicable percentage of Accumulated
Value, the Unadjusted Death Benefit will be reduced to equal the
greater of (a) the Face Amount plus the Accumulated Value after
deducting the amount of the Withdrawal and Withdrawal Charge and
(b) the applicable percentage of Accumulated Value after deducting
the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and
an Accumulated Value of $210,000 will have an Unadjusted Death
Benefit of $525,000 ($210,000 X 2.5). Assume you take a Withdrawal
of $60,000. The Withdrawal Charge will be $25 and the amount we
pay to you will be $59,975. The Withdrawal will reduce the
Accumulated Value to $150,000 ($210,000 - $60,000), and the
Unadjusted Death Benefit to the greater of (a) the Face Amount
plus the Accumulated Value, or $450,000 ($300,000 + $150,000) and
(b) the Unadjusted Death Benefit based on the applicable
percentage of the Accumulated Value, or $375,000 ($150,000 X
2.50). Therefore, the Unadjusted Death Benefit will be $450,000.
The Face Amount is unchanged.
Any decrease in Face Amount due to a Withdrawal will first reduce
the most recent increase in Face Amount, then the most recent increases,
successively, and lastly, the Initial Face Amount.
Because a Withdrawal can affect the Face Amount and the Unadjusted
Death Benefit as described above, a Withdrawal may also affect the Net Amount at
Risk which is used to calculate the Cost of Insurance Charge under the Policy.
(See "Cost of Insurance Charge," Page 33) Since a Withdrawal reduces the
Accumulated Value, the Cash Surrender Value of the Policy is reduced, thereby
increasing the likelihood that the Policy will lapse. (See "Policy Lapse," Page
29.) 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, we will not allow the
Withdrawal.
You may request a Withdrawal only by sending a signed written
request to us at our Home Office. You may not request a Withdrawal over the
telephone. We will ordinarily pay a Withdrawal within seven days of receiving at
our Home Office a valid Withdrawal request.
A Withdrawal of Cash Surrender Value may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 48.)
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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 latest of:
(a) 45 days after Part A of the application for the Policy is signed
(b) 10 days after you receive the Policy
(c) 10 days after we mail the Notice of Withdrawal Right to you, or
(d) any longer period provided by state law.
To cancel your Policy, you must return it to us or to our agent within the free
look period with a written request for cancellation.
TELEPHONE TRANSACTION PRIVILEGE
If you elect the telephone transaction privilege by written
authorization, you may effect changes in premium allocation, transfers, loans of
up to $25,000, and initiate or make changes in Dollar Cost Averaging or
Portfolio Rebalancing, by providing instructions to us at our Home Office over
the telephone. We may suspend telephone transaction privileges at any time, for
any reason, if we deem such suspension to be in the best interests of Policy
Owners. You may, on the application or by a written authorization, authorize
your National Life agent to provide telephone instructions on your behalf.
We will employ reasonable procedures to confirm that instructions we
receive by telephone are genuine. If we follow these procedures, we will not be
liable for any losses due to unauthorized or fraudulent instructions. We may be
liable for any such losses if we do not follow these reasonable procedures. The
procedures to be followed for telephone transfers will include one or more of
the following:
- requiring some form of personal identification prior to acting on
instructions received by telephone
- providing written confirmation of the transaction, and
- making a tape recording of the instructions given by telephone.
OTHER TRANSFER RIGHTS
Transfer Right for Policy. During the first two years following Policy
issue, you may, on one occasion, transfer the entire Accumulated Value in the
Separate Account to the General Account, without regard to any limits on
transfers or free transfers.
Transfer Right for Change in Investment Policy. If the investment policy
of a Subaccount of the Separate Account is materially changed, you may transfer
the portion of the Accumulated Value in that Subaccount to another Subaccount or
to the General Account, without regard to any limits on transfers or free
transfers.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer, at no charge to you, two automated fund management
features. Only one of these features may be active for any single Policy at any
time. We are not legally obligated to continue to offer these features. Although
we have no current intention to do so, we may cease offering one or both these
features at any time, after providing 60 days prior written notice to all Owners
who are then utilizing the features being discontinued
Dollar Cost Averaging. This feature permits you to automatically transfer
funds from the Money Market Subaccount to any other Subaccounts on a monthly
basis. You may elect Dollar Cost Averaging at
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issue by marking the appropriate box on the initial application, and completing
the appropriate instructions. You may also begin a Dollar Cost Averaging program
after issue by filling out similar information on a change request form and
sending it to us at our Home Office.
If you elect this feature, we will take the amount to be transferred from
the Money Market Subaccount and transfer it to the Subaccount or Subaccounts
designated to receive the funds, each month on the Monthly Policy Date. If you
elect Dollar Cost Averaging on your application for the Policy, it will start
with the Monthly Policy Date after the date that is 20 days after issue. If you
begin a Dollar Cost Averaging program after the free look period is over, it
will start on the next Monthly Policy Date. Dollar Cost Averaging will continue
until the amount in the Money Market Subaccount is depleted. The minimum monthly
transfer by Dollar Cost Averaging is $100, except for the transfer which reduces
the amount in the Money Market Subaccount to zero. You may discontinue Dollar
Cost Averaging at any time by sending an appropriate change request form to the
Home Office. You may not use the dollar cost averaging feature to transfer
Accumulated Value to the General Account.
Dollar Cost Averaging allows you to move funds into the various
investment types on a more gradual and systematic basis than the frequency on
which you pay premiums. The dollar cost averaging method of investment is
designed to reduce the risk of making purchases only when the price of units is
high. The periodic investment of the same amount will result in higher numbers
of units being purchased when unit prices are lower, and lower numbers of units
being purchased when unit prices are higher. This technique will not, however,
assure a profit or protect against a loss in declining markets. Moreover, for
the dollar cost averaging technique to be effective, amounts should be available
for allocation from the Money Market Subaccount through periods of low price
levels as well as higher price levels.
Portfolio Rebalancing. This feature permits you to automatically
rebalance the value in the Subaccounts on a semi-annual basis, based on your
premium allocation percentages in effect at the time of the rebalancing. You may
elect it at issue by marking the appropriate box on the application, or, after
issue, by completing a change request form and sending it to our Home Office.
In Policies utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer will take place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages,
starting with the Monthly Policy Date six months after the Date of Issue, and
then on each Monthly Policy Date six months thereafter. Policies electing
Portfolio Rebalancing after issue will have the first automated transfer occur
as of the Monthly Policy Date on or next following the date we receive the
election at our Home Office, and subsequent rebalancing transfers will occur
every six months from that date. You may discontinue Portfolio Rebalancing at
any time by submitting an appropriate change request form to us at our Home
Office.
If you change your Policy's premium allocation percentages, Portfolio
Rebalancing will automatically be discontinued unless you specifically direct
otherwise.
Portfolio Rebalancing will result in periodic transfers out of
Subaccounts that have had relatively favorable investment performance in
relation to the other Subaccounts to which a Policy allocates premiums, and into
Subaccounts which have had relatively unfavorable investment performance in
relation to the other Subaccounts to which the Policy allocates premiums.
Portfolio rebalancing does not guarantee a profit or protect against a loss.
POLICY RIGHTS UNDER CERTAIN PLANS
Policies may be purchased in connection with a plan sponsored by an
employer. In such cases, all rights under the Policy rest with the Policy Owner,
which may be the employer or other obligor under the plan, and benefits
available to participants under the plan will be governed solely by the
provisions of the plan. Accordingly, some of the options and elections under the
Policy may not be available to participants
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under the provisions of the plan. In such cases, participants should contact
their employers for information regarding the specifics of the plan.
THE GENERAL ACCOUNT
You may allocate some or all of your Net Premiums, and transfer some or
all of the Accumulated Value of your Policy to our General Account. We credit
interest on Net Premiums and Accumulated Value allocated to the General Account
at rates we declare. These rates will not be less than 4%. The principal, after
deductions, is also guaranteed. The General Account supports National Life 's
insurance and annuity obligations. All assets in the General Account are subject
to National Life's general liabilities from business operations.
The General Account has not, and is not required to be, registered with
the SEC under the Securities Act of 1933. The General Account has not been
registered as an investment company under the Investment Company Act of 1940.
Therefore, the General Account and the interests therein are generally not
subject to regulation under the 1933 Act or the 1940 Act. The disclosures
relating to this account which are included in this Prospectus are for your
information and have not been reviewed by the SEC. However, such disclosures may
be subject to certain generally applicable provisions of the Federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Accumulated Value not held as Collateral in the General Account is
guaranteed to accumulate at a minimum effective annual interest rate of 4%. We
may credit the non-loaned Accumulated Value in the General Account with current
rates in excess of the minimum guarantee, but we are not obligated to do so. We
have no specific formula for determining current interest rates. Since we
anticipate changing the current interest rate from time to time, in our sole
discretion, allocations to the General Account made at different times are
likely to be credited with different current interest rates. We will declare an
interest rate each month to apply to amounts allocated or transferred to the
General Account in that month. The rate declared on such amounts will remain in
effect for twelve months. At the end of the 12-month period, we may declare a
new current interest rate on such amounts and accrued interest thereon (which
may be a different current interest rate than the current interest rate on new
allocations to the General Account on that date). We will determine any interest
credited on the amounts in the General Account in excess of the minimum
guaranteed rate of 4% per year in our sole discretion. You assume the risk that
interest credited may not exceed the guaranteed minimum rate. Amounts allocated
to the General Account will not share in the investment performance of our
General Account.
Amounts deducted from the non-loaned Accumulated Value in the General
Account for Withdrawals, Policy loans, transfers to the Separate Account,
Monthly Deductions or other charges are, for the purpose of crediting interest,
accounted for on a last in, first out ("LIFO") method.
We may change the method of crediting interest from time to time,
provided that such changes do not have the effect of reducing the guaranteed
rate of interest below 4% per annum or shortening the period for which the
interest rate applies to less than 12 months.
We will credit interest on non-loaned Accumulated Value in the General
Account for Policies in Policy Year 11 and thereafter at rates which are 0.50%
per annum higher than those that apply to Policies still in their first ten
Policy Years.
Calculation of Non-loaned Accumulated Value in the General Account. The
non-loaned Accumulated Value in the General Account at any time is equal to
amounts allocated and transferred to it plus interest credited to it, minus
amounts deducted, transferred or withdrawn from it.
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TRANSFERS FROM GENERAL ACCOUNT
We allow only one transfer in each Policy Year from the amount of
non-loaned Accumulated Value in the General Account to any or all of the
Subaccounts of the Separate Account. The amount you transfer from the General
Account may not exceed the greater of 25% of the value of the non-loaned
Accumulated Value in such account at the time of transfer, or $1000. We will
make the transfer as of the Valuation Day we receive your written or telephone
request at our Home Office.
OTHER POLICY PROVISIONS
Maturity at 99. If the Policy is in force on the Policy Anniversary at
which the Insured is Attained Age 99, we will pay the Cash Surrender Value to
you in one sum unless you have chosen a Payment Option, and the Policy will
terminate.
Reduced Paid -Up Benefit. Prior to maturity, you may elect to continue
the Policy in force as paid-up General Account life insurance coverage. All or a
portion of the Cash Surrender Value of the Policy will be applied to paid-up
life insurance coverage. We will pay in one lump sum any amount of the Cash
Surrender Value which you do not apply toward paid-up life insurance coverage.
You may thereafter surrender any paid-up General Account life insurance at any
time for its value.
Payment of Policy Benefits. You may decide the form in which we pay Death
Benefit proceeds. 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 Cash Surrender Value. If you
do not make an election, 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, we will ordinarily pay the Death
Benefit to the Beneficiary within seven days after we receive proof of the
Insured's death at our Home Office, and all other requirements are satisfied. If
paid under a Settlement Option, we will apply the Death Benefit to the
Settlement Option within seven days after we receive proof of the Insured's
death at our Home Office, and all other requirements are satisfied.
We will pay interest on the Death Benefit from the date of death until
payment is made. The interest rate will be the highest of (a) 4% per annum, (b)
any higher rate we declare, or (c) any higher rate required by law.
We will normally pay proceeds of a surrender, Withdrawal, or Policy loan
within seven days of when we receive your written request at our Home Office in
a form satisfactory to us.
We will generally determine the amount of a payment on the Valuation Day
we receive all required documents. However, we may defer the determination or
payment of such amounts if the date for determining such amounts falls within
any period during which:
(1) the New York Stock Exchange is closed (except for normal holiday
closing); or
(2) an emergency exists, as determined by the Securities and Exchange
Commission, as a result of which it is not reasonably practicable to
dispose of securities or to determine the value of the net assets of the
Separate Account.
Transactions will not be processed on the following days: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, the day after Thanksgiving and Christmas Day. In addition, Premium
Payments will not be allocated and transactions will not be effected to the
Money Market Subaccount on Columbus Day and Veterans Day.
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We may postpone any payment under the Policy derived from an amount paid
by check or draft until we are satisfied that the check or draft has been paid
by the bank upon which it was drawn.
The Policy provides that we may delay payment of any amounts which are
payable as result of a surrender, Withdrawal, or Policy loan and which are
allocated to the General Account for up to six months after receipt of your
request. If we do not mail or deliver the amounts owed to you within ten days of
when we receive your request for payment, we will pay interest on the amount at
the rate then in effect under Payment Option 1 - Payment of Interest Only, from
the date of our receipt of your request for payment to the date we actually make
the payment.
The Contract. The Policy and the application are the entire contract.
Only statements made in the application can be used to void the Policy or deny a
claim. The statements are considered representations and not warranties. Only
one of National Life's duly authorized officers or registrars can agree to
change or waive any provisions of the Policy, and only in writing. As a result
of differences in applicable state laws, certain provisions of the Policy may
vary from state to state.
Ownership. The Owner is the Insured unless a different Owner is named in
the application or thereafter changed. While the Insured is living, the Owner is
entitled to exercise any of the rights stated in the Policy or otherwise granted
by us. If the Insured and Owner are not the same, and the Owner dies before the
Insured, these rights will vest in the estate of the Owner, unless otherwise
provided.
Beneficiary. You designate the Beneficiary in the application for the
Policy. You may change the Beneficiary during the Insured's lifetime by sending
us a written notice. The interest of any Beneficiary who dies before the Insured
shall vest in you unless you otherwise provide.
Change of Owner and Beneficiary. As long as the Policy is in force, you
may change the Owner or Beneficiary by sending us an acceptable written request.
The change will take effect as of the date the request is signed, whether or not
the Insured is living when we receive the request. We will not be responsible
for any payment made or action taken before we receive the written request.
Split Dollar Arrangements. You may enter into a Split Dollar Arrangement
among the Owners or other persons under which the payment of premiums and the
right to receive the benefits under the Policy (i.e., Cash Surrender Value or
Death Benefit) are split between the parties. There are different ways of
allocating such rights.
For example, an employer and employee might agree that under a Policy on
the life of the employee, the employer will pay the premiums and will have the
right to receive the Cash Surrender Value. The employee may designate the
Beneficiary to receive any Death Benefit in excess of the Cash Surrender Value.
If the employee dies while such an arrangement is in effect, the employer would
receive from the Death Benefit the amount which the employer would have been
entitled to receive upon surrender of the Policy and the employee's Beneficiary
would receive the balance of the proceeds.
No transfer of Policy rights pursuant to a Split Dollar Arrangement will
be binding on us unless it is in writing and received by us. We do not assess
any specific charge for 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 your rights under the Policy. We
are not bound by an assignment unless it is in writing and we receive it at our
Home Office. We assume 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
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extent permitted by applicable law, such benefits are not subject to any legal
process for the payment of any claim against the payee.
Misstatement of Age and Sex. If the age or sex of the Insured at the Date
of Issue has been misstated in the application, we will adjust the Accumulated
Value of the Policy to be the amount that it would have been had the Cost of
Insurance Charges deducted been based on the correct age and sex, or as
otherwise required by state law. The adjustment will take place on the Monthly
Policy Date on or after the date on which we have proof to our satisfaction of
the misstatement. If the Insured has died, we will adjust the Accumulated Value
as of the last Monthly Policy Date prior to the Insured's death; however, if the
Accumulated Value is insufficient for that adjustment, the amount of the
Unadjusted Death Benefit will also be adjusted.
Suicide. If the Insured dies by suicide within two years from the Date of
Issue of the Policy, our liability is limited to the payment to the Beneficiary
of a sum equal to the premiums paid less any Policy loan and accrued interest
and any Withdrawals, or other reduced amount provided by state law.
If the Insured commits suicide within two years from the effective date
of any Policy change which increases the Unadjusted Death Benefit and for which
an application is required, the amount which we will pay with respect to the
increase will be the Cost of Insurance Charges previously made for such
increase.
Incontestability. The Policy will be incontestable after it has been in
force during the Insured's lifetime for two years from the Date of Issue.
Similar incontestability will apply to an increase in Face Amount or
reinstatement after it has been in force during the Insured's lifetime for two
years from its effective date.
Before such times, however, 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
used to purchase dividend additions or, at your direction, they may be paid in
cash or left with us to accumulate at interest. 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 is deemed to have been sent to
you if mailed to you at your last address known to us.
Settlement Options. In lieu of a single sum payment on death or
surrender, you may elect 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. We will pay interest at a rate of 3.5%
per year on the amount of the proceeds retained by us. 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. We will make equal monthly payments,
based on an interest rate of 3.5% per annum, for the number of years you
select.
Payments for Life. We will make equal monthly payments, based on
an interest rate of 3.5% per annum, for a guaranteed period and
thereafter during the life of a chosen person. You may elect guaranteed
payment periods for 0, 10, 15, or 20 years, or for a refund period, at
the end of which the total payments will equal the proceeds placed under
the option.
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Payments of a Stated Amount. We will make equal monthly payments
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. We will make equal monthly payments 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 our then current
settlement rates on the date the proceeds become payable. No additional
interest will be paid.
Joint and Two Thirds Annuity. We will make equal monthly payments,
based on an interest rate of 3.5% per year, 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. We will make equal monthly payments, based
on an interest rate of 3.5% per year, 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.
OPTIONAL BENEFITS
You may include the following benefits, which are subject to the
restrictions and limitations set forth in the applicable Policy Riders, in your
Policy at your option. Election of any of these optional benefits involves an
additional cost.
Waiver of Monthly Deductions. If you elect the Waiver of Monthly
Deductions Rider, we will waive Monthly Deductions against the Policy if the
Insured becomes totally disabled, before age 65 and for at least 120 days. If
total disability occurs after age 60 and before age 65, then we will waive
Monthly Deductions only until the Insured reaches Attained Age 65, or for a
period of two years, if longer. The monthly cost of this Rider is based on
sex-distinct rates (except for Policies issued in conjunction with employee
benefit plans, where the cost of this Rider will not vary by sex) multiplied by
the Monthly Deduction on the Policy. We will add this cost to the Monthly
Deduction on the Policy.
Accidental Death Benefit. The Accidental Death Rider provides for an
increased Death Benefit in the event that the Insured dies in an accident. If
you elect this Rider, we will add the monthly cost of this Rider to the Monthly
Deduction on the Policy.
Guaranteed Insurability Option. This Rider permits you to increase the
Face Amount of the Policy, within certain limits, without being required to
submit satisfactory proof of insurability at the time of the request for the
increase. Again, if you elect this Rider, we will add the monthly cost of this
Rider to the Monthly Deduction on the Policy.
Guaranteed Death Benefit. If you choose this Rider, we will guarantee
that the Policy will not lapse prior to the Insured's Attained Age 70, or 20
years from the Date of Issue of the Policy, if longer, regardless of the
Policy's investment performance. To keep this Rider in force, you must pay
cumulative premiums greater than the Minimum Guarantee Premium from the Date of
Issue. The Minimum Guarantee Premium for Policies with the Guaranteed Death
Benefit Rider will be higher than for those without the Guaranteed Death Benefit
Rider, all other things being equal. We will test the Policy monthly for this
qualification, and if not met, we will send you a notice, and you will have 61
days from the date we mailed
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the notice to pay a premium sufficient to keep the Rider in force. The premium
required will be the Minimum Guarantee Premium from the Date of Issue, plus two
times the Minimum Monthly Premium, minus premiums previously paid. The Rider
will be cancelled if a sufficient premium is not paid during that 61-day period.
If cancelled, the Rider cannot be reinstated.
The cost of the Guaranteed Death Benefit Rider is $0.01 per thousand of
Face Amount per month. This Rider is available only at issue, and only for Issue
Ages 0-65.
If while the Guaranteed Death Benefit Rider is in force, the Accumulated
Value of the Policy is not sufficient to cover the Monthly Deductions, Monthly
Deductions will be made until the Accumulated Value of the Policy is exhausted,
and will thereafter be deferred, and collected at such time as the Policy has
positive Accumulated Value.
If you increase the Face Amount of a Policy subject to the Guaranteed
Death Benefit Rider, the Rider's guarantee will extend to the increased Face
Amount. This will result in increased Minimum Guarantee Premiums.
If you have elected both the Waiver of Monthly Deductions Rider and the
Guaranteed Death Benefit Rider, and Monthly Deductions are waived because of
total disability, then we will also waive the Minimum Guarantee Premiums
required to keep the Guaranteed Death Benefit Rider in force during the period
that Monthly Deductions are being waived.
If you wish to keep this Rider in force, you must limit Withdrawals and
Policy loans to the excess of premiums paid over the sum of the Minimum Monthly
Premiums in effect since the Date of Issue. If you take a Policy loan or
Withdrawal for an amount greater than such excess, the Guaranteed Death Benefit
Rider will enter a 61-day lapse-pending notification period, and will be
cancelled if you do not pay a sufficient premium.
Accelerated Benefits Rider. This Rider pays a reduced benefit prior to
the death of the Insured, in certain circumstances where a terminal or chronic
illness creates a need for access to the death benefit. This Rider is not
available in all states, and its terms may vary by state. There is no cost for
this Rider. It can be included in a Policy at issue, or can be added after
issue, for Insureds ages 0-85. The maximum amount payable under the Rider is
$500,000. An Insured who has a chronic illness, as defined in the Rider, at the
time the Rider is issued, may not receive benefits under the Rider for five
years after its issue.
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 tax 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
understanding of the present Federal income tax laws. No representation is made
as to the likelihood of continuation of the present Federal income tax laws or
as to how they may be interpreted by the Internal Revenue Service.
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TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for Federal
income tax purposes and to receive the tax treatment normally accorded life
insurance contracts under Federal tax law, a life insurance policy must satisfy
certain requirements which are set forth in the Internal Revenue Code. Guidance
as to how these requirements are to be applied is limited. Nevertheless,
National Life believes that a Policy issued on the basis of a standard rate
class should satisfy the applicable requirements. There is less guidance,
however, with respect to a policy issued on a substandard basis (i.e., a rate
class involving higher than standard mortality risk) and it is not clear whether
such a policy will in all cases satisfy the applicable requirements,
particularly if the Owner pays the full amount of premiums permitted under the
Policy. Nevertheless, National Life believes it reasonable to conclude that such
a Policy should be treated as a life insurance contract for Federal income tax
purposes. If it is subsequently determined that a Policy does not satisfy the
applicable requirements, National Life may take appropriate steps to bring the
policy into compliance with such requirements and National Life reserves the
right to modify the policy as necessary in order to do so.
In certain circumstances, owners of variable life insurance
policies have been considered for Federal income tax purposes to be the owners
of the assets of separate accounts supporting their contracts due to their
ability to exercise investment control over those assets. Where this is the
case, the policyowners have been currently taxed on income and gains
attributable to separate account assets. There is little guidance in this area,
and some features of the policy, such as the flexibility of Policy Owners to
allocate premium payments and Accumulated Values, have not been explicitly
addressed in published rulings. While National Life believes that the policy
does not give Policy Owners investment control over Separate Account assets, we
reserve the right to modify the policy as necessary to prevent the Policy Owner
from being treated as the owner of the Separate Account assets supporting the
Policy.
In addition, the Code requires that the investments of the
Separate Account be "adequately diversified" in order for the policy to be
treated as a life insurance contract for Federal income tax purposes. It is
intended that the Separate Account, through the Funds, will satisfy these
diversification requirements.
The following discussion assumes that the Policy will qualify as a
life insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
In General. National Life believes that the death benefit under a
Policy should be excludible from the gross income of the beneficiary. Federal,
state and local estate, inheritance, transfer, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy Owner or beneficiary. A tax advisor should be consulted on these
consequences.
Depending on the circumstances, the exchange of a Policy, an
increase or decrease of a Policy's Face Amount, 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. A tax advisor should be consulted before effecting any of these
policy changes.
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 upon 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.
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<PAGE> 194
Modified Endowment Contracts. Under the Internal Revenue Code,
certain life insurance contracts are classified as "Modified Endowment
Contracts," with less favorable tax treatment than other life insurance
contracts. Due to the flexibility of the Policy as to premium payments and
benefits, the individual circumstances of each Policy will determine whether it
is classified as a Modified Endowment Contract. The rules are too complex to be
summarized here, but generally depend on the amount of premium payments made
during the first seven policy years. Certain changes in a policy after it is
issued could also cause it to be classified as a Modified Endowment Contract. A
current or prospective Policy Owner should consult with a competent advisor to
determine whether a policy transaction will cause the Policy to be classified as
a Modified Endowment Contract.
Distributions Other Than Death Benefits from Modified Endowment
Contracts. Policies classified as Modified Endowment Contracts are subject to
the following tax rules:
(1) All distributions other than death benefits from a Modified
Endowment Contract, including distributions upon surrender
and withdrawals, will be treated first as distributions of
gain taxable as ordinary income and as tax-free recovery of
the Policy Owner's investment in the Policy only after all
gain has been distributed.
(2) Loans taken from or secured by a Policy classified as a
Modified Endowment Contract are treated as distributions
and taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount
subject to tax except where the distribution or loan is
made when the Policy Owner has attained age 59 1/2 or is
disabled, or where the distribution is part of a series of
substantially equal periodic payments for the life (or life
expectancy) of the Policy Owner or the joint lives (or
joint life expectancies) of the Policy Owner and the Policy
Owner's beneficiary or designated beneficiary.
If a Contract becomes a modified endowment contract, distributions
that occur during the contract year will be taxed as distributions from a
modified endowment contract. In addition, distributions from a Contract within
two years before it becomes a modified endowment contract will be taxed in this
manner. This means that a distribution made from a Contract that is not a
modified endowment contract could later become taxable as a distribution from a
modified endowment contract.
Distributions Other Than Death Benefits from Policies that are not
Modified Endowment Contracts. Distributions other than death benefits from a
Policy that is not classified as a Modified Endowment Contract are generally
treated first as a recovery of the Policy Owner's investment in the policy and
only after the recovery of all investment in the policy as taxable income.
However, certain distributions which must be made in order to enable the Policy
to continue to qualify as a life insurance contract for Federal income tax
purposes if policy benefits are reduced during the first 15 policy years may be
treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not classified as a
Modified Endowment Contract are generally not treated as distributions. However,
the tax consequences associated with preferred Policy loans is less clear and a
tax adviser should be consulted about such loans.
Finally, neither distributions from nor loans from or secured by a
Policy that is not a Modified Endowment Contract are subject to the 10 percent
additional income tax.
Investment in the Policy. Your investment in the Policy is
generally your aggregate premium payments. When a distribution is taken from the
Policy, your investment in the Policy is reduced by the amount of the
distribution that is tax-free.
Policy Loan Interest. In general, interest paid on any loan under
a Policy will not be deductible.
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<PAGE> 195
Multiple Policies. All Modified Endowment Contracts that are
issued by National Life (or its affiliates) to the same Policy Owner during any
calendar year are treated as one Modified Endowment Contract for purposes of
determining the amount includible in the Policy Owner's income when a taxable
distribution occurs.
Business Uses of the Policy. Businesses can use the Policy in
various arrangements, including nonqualified deferred compensation or salary
continuance plans, split dollar insurance plans, executive bonus plans, tax
exempt and nonexempt welfare benefit plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances. If you are purchasing the Policy for any arrangement
the value of which depends in part on its tax consequences, you should consult a
qualified tax adviser. In recent years, moreover, 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
adviser.
Continuation Beyond Age 100. The tax consequences of continuing
the Policy beyond the Insured's 100th year are unclear. You should consult a tax
adviser if you intend to keep the Policy in force beyond the Insured's 100th
year.
SPECIAL RULES FOR EMPLOYEE BENEFIT PLANS
If a trustee under a pension or profit-sharing plan, or similar
deferred compensation arrangement, owns a Policy, the Federal and state income
and estate tax consequences could differ. A tax adviser should be consulted with
respect to such consequences. Policies owned under these types of plans may also
be subject to restrictions under the Employee Retirement Income Security Act of
1974 ("ERISA"). You should consult a qualified adviser regarding ERISA.
The amounts of life insurance that may be purchased on behalf of a
participant in a pension or profit-sharing plan are limited.
The current cost of insurance for the net amount at risk is
treated as a "current fringe benefit" and must be included annually in the plan
participant's gross income. We report this cost (generally referred to as the
"P.S. 58" cost) to the participant annually.
If the plan participant dies while covered by the plan and the
Policy proceeds are paid to the participant's beneficiary, then the excess of
the death benefit over the Accumulated Value is not taxable. However, the
Accumulated Value will generally be taxable to the extent it exceeds the
participant's cost basis in the Policy.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there
is always the possibility that the tax treatment of the policy could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Policy.
POSSIBLE CHARGES FOR NATIONAL LIFE'S TAXES
At the present time, National Life makes no charge for any
Federal, state or local taxes (other than the charge for state premium taxes and
the DAC tax) that may be attributable to the Subaccounts or to the policies.
National Life reserves the right to charge the Subaccounts for any future taxes
or economic burden National Life may incur.
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<PAGE> 196
POLICIES ISSUED IN CONJUNCTION WITH EMPLOYEE BENEFIT PLANS
Policies may be acquired in conjunction with employee benefit plans,
including the funding of qualified pension plans meeting the requirements of
Section 401 of the Code.
For employee benefit plan Policies, the maximum cost of insurance rates
used to determine the monthly Cost of Insurance Charge are based on the
Commissioners' 1980 Standard Ordinary Mortality Tables NB and SB. Under these
Tables, mortality rates are the same for male and female Insureds of a
particular Attained Age and Rate Class. (See "Cost of Insurance Charge," Page
33.)
Illustrations reflecting the premiums and charges for employee benefit
plan Policies will be provided upon request to purchasers of such Policies.
There is no provision for misstatement of sex in the employee benefit
plan Policies. (See "Misstatement of Age and Sex," Page 45.) Also, the rates
used to determine the amount payable under a particular Settlement Option will
be the same for male and female Insureds. (See "Settlement Options," Page 45.)
LEGAL DEVELOPMENTS REGARDING UNISEX ACTUARIAL TABLES
In 1983, the United States Supreme Court held in Arizona Governing
Committee v. Norris that optional annuity benefits provided under an employee's
deferred compensation plan could not, under Title VII of the Civil Rights Act of
1964, vary between men and women on the basis of sex. In that case, the Court
applied its decision only to benefits derived from contributions made on or
after August 1, 1983. Subsequent decisions of lower federal courts indicate that
in other factual circumstances the Title VII prohibition of sex-distinct
benefits may apply at an earlier date. In addition, legislative, regulatory, or
decisional authority of some states may prohibit use of sex-distinct mortality
tables under certain circumstances. The Policies offered by this Prospectus,
other than employee benefit plan Policies (see "Policies Issued in Conjunction
with Employee Benefit Plans," above) are based upon actuarial tables which
distinguish between men and women and, thus, the Policy provides different
benefits to men and women of the same age. Accordingly, employers and employee
organizations should consider, in consultation with legal counsel, the impact of
these authorities on any employment-related insurance or benefits program before
purchasing the Policy and in determining whether an employee benefit plan Policy
is appropriate.
VOTING RIGHTS
We will invest all of the assets held in the Subaccounts of the Separate
Account 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 to be approved or ratified by the shareholders of a mutual fund.
We are the legal owner of Fund shares and as such have 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 of Policy Owners. We will vote Fund
shares held in each Subaccount of the Separate Account for which Owners do not
send timely instructions in the same proportion as those shares in that
Subaccount for which instructions are received.
If you have a voting interest, we will send you proxy material and a form
for giving voting instructions. You may vote, by proxy or in person, only as to
the Portfolios that correspond to the Subaccounts in which your Policy values
are allocated. We will determine the number of shares held in each Subaccount
attributable to a Policy for which you may provide voting instructions by
dividing the
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<PAGE> 197
Policy's Accumulated Value in that account by the net asset value of one share
of the corresponding Portfolio as of the record date for the shareholder
meeting. We will count fractional shares. 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 provide voting instructions.
If required by state insurance officials, we may disregard voting
instructions if they 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, we may disregard voting instructions in favor of
certain changes initiated by an Owner or the Fund's Board of Directors if our
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 us. If we disregard voting instructions, we will
advise you of that action and our reasons in the next semi-annual report to
Owners.
Shares of the Funds are currently being offered to variable life
insurance and variable annuity separate accounts of life insurance companies
other than National Life that are not affiliated with National Life. National
Life understands that shares of these Funds also will be voted by such other
life insurance companies in accordance with instructions from their
policyholders invested in such separate accounts. This will dilute the effect of
your voting instructions.
CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under
applicable Federal securities laws. If changes in these laws or regulations
eliminate the necessity to solicit your voting instructions or restrict such
voting rights, we may proceed in accordance with these laws or regulations.
We may also take the steps listed below, if we feel such an action is
reasonably necessary. In doing so we would comply with all applicable laws,
including approval of Owners, if so required:
(1) to make changes in the form of the Separate Account, if in our
judgment such changes would serve the interests of Owners or would be
appropriate in carrying out the purposes of the Policies, for example:
(i) operating the Separate Account as a management
company under the 1940 Act
(ii) deregistering the Separate Account under the 1940
Act if registration is no longer required
(iii) combining or substituting separate accounts
(iv) transferring the assets of the Separate Account to
another separate account or to the General Account
(v) making changes necessary to comply with, obtain or
continue any exemptions from the 1940 Act; or
(vi) making other technical changes in the Policy to
conform with any action described herein;
(2) if in our 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;
(2) to eliminate, combine, or substitute Subaccounts and establish new
Subaccounts, if in its judgment marketing needs, tax
considerations, or investment conditions so warrant;
(3) 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
(4) to modify the provisions of the Policies to comply with applicable
laws.
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<PAGE> 198
We have reserved all rights in respect of our 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 Accumulated Value in a Subaccount that is eliminated,
we will give you at least 30 days notice before the elimination, and will
request that you name the Subaccount or Subaccounts (or the General Account) to
which the Accumulated Value in that Subaccount should be transferred. If you do
not name a new Subaccount, then we will use the Money Market Subaccount. In any
case, if in the future we impose a transfer charge or establish limits on the
number of transfers or free transfers, no charge will be made for this transfer,
and it will not count toward any limit on transfers or free transfers.
OFFICERS AND DIRECTORS OF NATIONAL LIFE
The officers and directors of National Life, as well as their principal
occupations during the past five years, are listed below.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION DURING THE PAST FIVE YEARS
----------------- --------------------------
<S> <C>
Patrick E. Welch 1997 to present - Chairman of the 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.
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.
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
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 & Financial Officer; 1994 to 1998 - Vice President and
Chief Financial Officer Controller, American Express Financial Advisors
</TABLE>
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<PAGE> 199
<TABLE>
<S> <C>
Rodney A. Buck 2000 to present - Executive Vice President and Chief
Executive Vice President & Investment Officer; 1996 to 2000 - Senior Vice
Chief Investment Officer President and Chief Investment Officer; 1996 to
present - Chairman, President & Chief Executive Officer,
National Life Investment Management Company, Inc.
("NLIMC"); 1998 to present - Chief Executive Office -
Sentinel Advisors Company ("SAC"); 1987 to 1997 -
Senior Vice President - SAC.
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.
Michele S. Gatto 1999 to present: Senior Vice President & General
Senior Vice President & Counsel; 1997 to 1999 - Vice President, General Counsel
General 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 2000 to present: Senior Vice President - Marketing
Senior Vice President - Marketing Development and Operations; 1997 to 2000:
Development and Operations Senior Vice President - Sales and Distribution;
1993 to 1997: - Vice President -Agency Financial Planning & Services
Wade H. Mayo 2000 to present: Senior Vice President; 1993 to
Senior Vice President present: President and Chief Executive Officer - Life Insurance Company of
the Southwest ("LSW"); 1996 to present: President - LSW National Holdings,
Inc.1989 to present: President & Director - Insurance Investors Life Insurance
Company
Joseph A. Miller 2000 to present: Senior Vice President; 1997 to
Senior Vice President 2000: Vice President & Director of Agencies;
1990 to 1997: Vice President - Southern Regional Office
Michael A. Tahan 1998 to present: Senior Vice President & Chief
Senior Vice President & Information Officer; 1991 to 1998 - First Vice President
Chief Information Officer & Chief Information Officer - Merrill Lynch Asset
Management
</TABLE>
DISTRIBUTION OF POLICIES
We sell Policies through agents who are licensed by state insurance
authorities to sell our variable life insurance policies, and who are also
registered representatives of Equity Services, Inc. ("ESI") or registered
representatives of broker/dealers who have Selling Agreements with ESI. ESI,
whose address is National Life Drive, Montpelier, Vermont 05604, is a registered
broker/dealer under the Securities Exchange Act of 1934 (the "1934 Act") and a
member of the National Association of Securities Dealers, Inc. (the "NASD"). ESI
is an indirect wholly-owned subsidiary of National Life, formed on October 7,
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<PAGE> 200
1968. 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 has sought 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.
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 and Chief
Executive Officer of ESI. ESI's other officers are:
<TABLE>
<S> <C>
Kenneth R. Ehinger President & Chief Operating Officer
John M. Grab, Jr. Senior Vice President & Chief Financial Officer
Stephen A. Englese Senior 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.
We do the insurance underwriting, determine a proposed Insured's Rate
Class, and determine whether to accept or reject an application for a Policy. We
will refund any premiums paid if a Policy ultimately is not issued or will
refund the applicable amount if the Policy is returned under the free look
provision.
Agents who are ESI registered representatives are compensated for sales
of the Policies on a commission basis and with other forms of compensation.
During the first Policy Year, agent commissions will not be more than 50% of the
premiums paid up to a target amount (which is a function of Face Amount, and
which is used primarily to determine commission payments) and 3% of the premiums
paid in excess of that amount. For Policy Years 2 through 10, the agent
commissions will not be more than 4% of the premiums paid up to the target
amount, and 3% of premiums paid in excess of that amount. For Policy year 11 and
thereafter, agent commissions will be 1.5% of all premiums paid. For premiums
received in the year following an increase in Face Amount and attributable to
the increase, agent commissions will not be more than 48.5% up to the target
amount for the increase. Full time agents of National Life who achieve specified
annual sales goals may be eligible for compensation in addition to the amounts
stated above.
Dealers other than ESI will receive gross dealer concessions during the first
Policy Year of 85% of the premiums paid up to the target amount and 4% of the
premiums paid in excess of that amount. For Policy Years 2 through 10, the gross
dealer concession will not be more than 4% of the premiums paid. For Policy Year
11 and thereafter, the gross dealer concession will be 1.5% of all premiums
paid. For premiums received in the year following an increase in Face Amount and
attributable to the increase, the gross dealer concession will not be more than
50% up to the target amount for the increase. The aggregate amounts of sales
load received by ESI in connection with the Policies in 1997, 1998 and 1999 were
$31,525.99, $189,078.86 and $239,093.31, respectively.
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<PAGE> 201
POLICY REPORTS
Once each Policy Year, we will send you a statement describing the status
of the Policy, including setting forth:
- the Face Amount
- the current Death Benefit
- any Policy loans and accrued interest
- the current Accumulated Value
- the non-loaned Accumulated Value in the General Account
- the amount held as Collateral in the General Account
- the value in each Subaccount of the Separate Account
- premiums paid since the last report
- charges deducted since the last report
- any Withdrawals since the last report, and
- the current Cash Surrender Value.
In addition, we will send you a statement showing the status of the
Policy following the transfer of amounts from one Subaccount of a Separate
Account to another, the taking out of a loan, a repayment of a loan, a
Withdrawal and the payment of any premiums (excluding those paid by bank draft
or otherwise under the Automatic Payment Plan).
We will send you a semi-annual report containing the financial statements
of each Fund in which your Policy has Accumulated Value, as required by the 1940
Act.
STATE REGULATION
We are subject to regulation and supervision by the Department of
Banking, Insurance, Securities and Health Care Administration of the State of
Vermont, which periodically examines our affairs. We are also subject to the
insurance laws and regulations of all jurisdictions where we are authorized to
do business. We have filed a copy of the Policy form with, and where required
obtained an approval by, insurance officials in each jurisdiction where the
Policies are sold. We are required to submit annual statements of our
operations, including financial statements, to the insurance departments of the
various jurisdictions in which we do business for the purposes of determining
solvency and compliance with local insurance laws and regulations.
INSURANCE MARKETPLACE STANDARDS ASSOCIATION
National Life Insurance Company is a member of the Insurance Marketplace
Standards Association ("IMSA"), and as such may include the IMSA logo and
information about IMSA membership in its advertisements. Companies that belong
to IMSA subscribe to a set of ethical standards covering the various aspects of
sales and service for individually sold life insurance and annuities.
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
Elizabeth H. MacGowan, F.S.A. MAAA, Actuary - Product Development of National
Life.
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<PAGE> 202
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 Michele S. Gatto, Senior Vice
President and General Counsel of National Life.
The Separate Account is not a party to any litigation.
There are no material legal proceedings involving National Life which are likely
to have a material adverse effect upon the Separate Account or upon the ability
of National Life to meet its obligations under the Policies. ESI is not engaged
in any litigation of any material nature. The Company, like other life insurance
companies, is involved in lawsuits, including class action lawsuits. In some
class action and other lawsuits involving insurance companies, substantial
damages have been sought and/or material settlement payments have been made.
Although the Company cannot predict the outcome of any litigation with
certainty, the Company believes that at the present time, there are no pending
or threatened lawsuits that are reasonably likely to have a material adverse
impact on it or the Variable Account.
FINANCIAL STATEMENTS
The financial statements of National Life and of the relevant Subaccounts
of the Separate Account appear on the pages beginning with F-1 below. The
financial statements of National Life should be distinguished from the financial
statements of the Separate Account and should be considered only as bearing upon
National Life's ability to meet its obligations under the Policies.
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<PAGE> 203
GLOSSARY
ACCUMULATED VALUE The sum of the Policy's values in the
Separate Account and the General Account.
ATTAINED AGE The Issue Age of the Insured plus the number
of full Policy Years which have passed since
the Date of Issue.
BENEFICIARY The person(s) or entity(ies) designated to
receive all or some of the Death Benefit when
the Insured dies. The Beneficiary is
designated in the application or if
subsequently changed, as shown in the latest
change filed with National Life. The interest
of any Beneficiary who dies before the
Insured shall vest in the Owner unless
otherwise stated.
CASH SURRENDER VALUE The Accumulated Value minus any applicable
Surrender Charge, and minus any outstanding
Policy loans and accrued interest on such
loans.
COLLATERAL The portion of the Accumulated Value in the
General Account which secures the amount of
any Policy loan.
DAC TAX A tax attributable to Specified Policy
Acquisition Expenses under Internal Revenue
Code Section 848.
DATE OF ISSUE The date on which the Policy is issued, which
is set forth in the Policy. It is used to
determine Policy Years, Policy Months and
Monthly Policy Dates, as well as to measure
suicide and contestable periods.
DEATH BENEFIT The Policy's Unadjusted Death Benefit, plus
any relevant additional benefits provided by
a supplementary benefit Rider, less any
outstanding Policy loan and accrued interest,
and less any unpaid Monthly Deductions.
DURATION The number of full years the insurance has
been in force; for the Initial Face Amount,
measured from the Date of Issue; for any
increase in Face Amount, measured from the
effective date of such increase.
FACE AMOUNT The Initial Face Amount plus any increases in
Face Amount and minus any decreases in Face
Amount.
GENERAL ACCOUNT The account which holds the assets of
National Life which are available to support
its insurance and annuity obligations.
GRACE PERIOD A 61-day period measured from the date on
which notice of pending lapse is sent by
National Life, during which the Policy will
not lapse and insurance coverage continues.
To prevent lapse, the Owner must during the
Grace Period make a premium payment equal to
the sum of any amount by which the past
Monthly Deductions have been in excess of
Cash Surrender Value, plus three times the
Monthly Deduction due the date the Grace
Period began.
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<PAGE> 204
GUARANTEED DEATH BENEFIT RIDER An optional Rider that will guarantee that
the Policy will not lapse prior to Attained
Age 70, or 20 years from the Policy's Date of
Issue, if longer, regardless of investment
performance, if the Minimum Guarantee Premium
has been paid as of each Monthly Policy Date.
HOME OFFICE National Life's Home Office at National Life
Drive, Montpelier, Vermont 05604.
INITIAL FACE AMOUNT The Face Amount of the Policy on the Date of
Issue. The Face Amount may be increased or
decreased after the first Policy Year.
INSURED The person upon whose life the Policy is
issued.
ISSUE AGE The age of the Insured at his or her birthday
nearest the Date of Issue. The Issue Age is
stated in the Policy.
MINIMUM FACE AMOUNT The Minimum Face Amount is generally $50,000.
However, exceptions may be made in employee
benefit plan cases.
MINIMUM GUARANTEE PREMIUM The sum of the Minimum Monthly Premiums in
effect on each Monthly Policy Date since the
Date of Issue (including the current month),
plus all Withdrawals and outstanding Policy
loans and accrued interest.
MINIMUM INITIAL PREMIUM The minimum premium required to issue a
Policy. It is equal to the Minimum Monthly
Premium.
MINIMUM MONTHLY PREMIUM The monthly amount used to determine the
Minimum Guarantee Premium. This amount, which
includes any substandard charges and any
applicable Rider charges, is determined
separately for each Policy, based on the
requested Initial Face Amount, and the Issue
Age, sex and Rate Class of the Insured, and
the Death Benefit Option and any optional
benefits selected. It is stated in each
Policy.
MONTHLY ADMINISTRATIVE CHARGE A current charge of $7.50 per month included
in the Monthly Deduction, which is intended
to reimburse National Life for ordinary
administrative expenses. On a guaranteed
basis, this charge may not exceed $7.50 per
Policy plus $0.07 per thousand of Face Amount
per month.
MONTHLY DEDUCTION The amount deducted from the Accumulated
Value on each Monthly Policy Date. It
includes the Monthly Administrative Charge,
the Cost of Insurance Charge, and the monthly
cost of any benefits provided by Riders.
MONTHLY POLICY DATE The day in each calendar month which is the
same day of the month as the Date of Issue,
or the last day of any month having no such
date, except that whenever the Monthly Policy
Date would otherwise fall on a date other
than a Valuation Day, the Monthly Policy Date
will be deemed to be the next Valuation Day.
NET AMOUNT AT RISK The amount by which the Unadjusted Death
Benefit exceeds the Accumulated Value.
59
<PAGE> 205
NET PREMIUM The remainder of a premium after the
deduction of the Premium Tax Charge.
OWNER The person(s) or entity(ies) entitled to
exercise the rights granted in the Policy.
PLANNED PERIODIC PREMIUM The premium amount which the Owner plans to
pay at the frequency selected. The Owner may
request a reminder notice and may change the
amount of the Planned Periodic Premium. The
Owner is not required to pay the designated
amount.
POLICY ANNIVERSARY The same day and month as the Date of Issue
in each later year.
POLICY YEAR A year that starts on the Date of Issue or on
a Policy Anniversary.
PREMIUM TAX CHARGE A charge deducted from each premium payment
to cover the cost of state and local premium
taxes, and the federal DAC Tax.
RATE CLASS The classification of the Insured for cost of
insurance purposes. The Rate Classes are:
elite preferred nonsmoker; preferred
nonsmoker; standard nonsmoker; preferred
smoker; standard smoker; juvenile; and
substandard.
RIDERS Optional benefits that an Owner may elect to
add to the Policy at an additional cost.
SURRENDER CHARGE The amount deducted from the Accumulated
Value of the Policy upon lapse or surrender
during the first 15 Policy Years or in the
first 15 years following an increase in
coverage. The Surrender Charge is shown in
the Policy.
UNADJUSTED DEATH BENEFIT Under Option A, the greater of the Face
Amount or the applicable percentage of the
Accumulated Value on the date of death; under
Option B, the greater of the Face Amount plus
the Accumulated Value on the date of death,
or the applicable percentage of the
Accumulated Value on the date of death. The
Death Benefit Option is selected at time of
application but may be later changed.
VALUATION DAY Each day that the New York Stock Exchange is
open for business other than the day after
Thanksgiving and any day on which trading is
restricted by directive of the Securities and
Exchange Commission. Unless otherwise
indicated, whenever under a Policy an event
occurs or a transaction is to be effected on
a day that is not a Valuation Date, it will
be deemed to have occurred on the next
Valuation Date.
VALUATION PERIOD The time between two successive Valuation
Days. Each Valuation Period includes a
Valuation Day and any non-Valuation Day or
consecutive non-Valuation Days immediately
preceding it.
WITHDRAWAL A payment made at the request of the Owner
pursuant to the right in the Policy to
withdraw a portion of the Cash Surrender
Value of the Policy. The Withdrawal Charge
will be deducted from the Withdrawal Amount.
60
<PAGE> 206
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Accumulated
Values and Cash Surrender Values of a Policy may change with the investment
experience of the Separate Account. The tables show how the Death Benefits,
Accumulated Values and Cash Surrender Values of a Policy issued to an Insured of
a given age, sex and Rate Class would vary over time if the investment return on
the assets held in each Portfolio of each of the Funds were a uniform, gross,
annual rate of 0%, 6% and 12%.
The tables on Pages A-2 to A-7 illustrate a Policy issued to a male
Insured, Age 40 in the Elite Preferred Nonsmoker Rate Class with a Face Amount
of $250,000 and Planned Periodic Premiums of $3,000 for Death Benefit Option A,
and $4,000 for Death Benefit Option B, in each case paid at the beginning of
each Policy Year. The Death Benefits, Accumulated Values and Cash Surrender
Values would be lower if the Insured was in a standard nonsmoker, smoker or
substandard class since the cost of insurance charges are higher for these
classes. Also, the values would be different from those shown if the gross
annual investment returns averaged 0%, 6% and 12% over a period of years, but
fluctuated above and below those averages for individual Policy Years. The net
annual rate of return shown in the tables is the gross annual rate reduced to
reflect the average investment advisory fee and average operating expenses of
the Funds after reimbursement and the Mortality and Expense Risk Charge.
The second column of the tables show the amount to which the premiums
would accumulate if an amount equal to those premiums were invested to earn
interest, after taxes, at 5% compounded annually. The columns shown under the
heading "Guaranteed" assume that throughout the life of the Policy, the monthly
charge for cost of insurance is based on the maximum level permitted under the
Policy (based on the 1980 CSO Smoker/Nonsmoker Table), and the guaranteed
maximum Monthly Administrative Charge of $7.50 per Policy plus $0.07 per
thousand of Face Amount applies; the columns under the heading "Current" assume
that throughout the life of the Policy, the monthly charge for cost of insurance
is based on the current cost of insurance rate, and the Monthly Administrative
Charge is set at its current level of $7.50 per Policy.
The amounts shown in all tables reflect an averaging of certain other
asset charges described below that may be assessed under the Policy, depending
upon how premiums are allocated. The total of the asset charges reflected in the
Current and Guaranteed illustrations, including the Mortality and Expense Risk
Charge of 0.90%, is 1.71%. This total charge is based on an assumption that an
Owner allocates the Policy values equally among the Subaccounts of the Separate
Account.
These asset charges reflect an investment advisory fee of 0.56%, which
represents a simple average of the fees incurred by the Portfolios during 1999
and expenses of 0.25% which is based on a simple average of the actual expenses
incurred by the Portfolios during 1999, adjusted, as appropriate, to take into
account expense reimbursement arrangements expected to be in place for 2000. In
the absence of the reimbursement arrangements for some of the Portfolios, the
total asset charges reflected in the Current and Guaranteed Illustrations,
including the Mortality and Expense Risk Charge, would have totaled an average
of 1.96%. If the reimbursement arrangements were discontinued, the Accumulated
Values and 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 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 Accounts. If such a charge
is made in the future, it would take a higher gross annual rate of return to
produce the same Policy values.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums are paid and allocated as
indicated, no amounts are allocated to the General Account, and no Policy loans
are made. The tables are also based on the assumption that the Owner has not
requested an increase or decrease in the Face Amount, that no Withdrawals have
been made and no transfers have been made in any Policy Year.
Upon request, National Life will provide a comparable illustration based
upon the proposed Insured's Age and Rate Class, the Death Benefit Option, Face
Amount, Planned Periodic Premiums and Riders requested.
A-1
<PAGE> 207
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.71%)
<TABLE>
<CAPTION>
Premiums Guaranteed Current Current
Accumulated ---------------------------------------------------------------------------
End of at 5% Cash Cash
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,996 0 250,000 2,329 231 250,000
2 6,458 3,918 1,821 250,000 4,603 2,505 250,000
3 9,930 5,769 3,672 250,000 6,815 4,718 250,000
4 13,577 7,543 5,445 250,000 8,963 6,866 250,000
5 17,406 9,242 7,144 250,000 11,044 8,946 250,000
6 21,426 10,857 8,968 250,000 13,060 11,171 250,000
7 25,647 12,387 10,706 250,000 14,999 13,317 250,000
8 30,080 13,829 12,356 250,000 16,856 15,383 250,000
9 34,734 15,180 13,914 250,000 18,637 17,371 250,000
10 39,620 16,433 15,375 250,000 20,338 19,280 250,000
11 44,751 17,676 16,827 250,000 22,299 21,449 250,000
12 50,139 18,810 18,169 250,000 24,189 23,548 250,000
13 55,796 19,820 19,387 250,000 26,009 25,575 250,000
14 61,736 20,694 20,469 250,000 27,752 27,527 250,000
15 67,972 21,415 21,397 250,000 29,415 29,397 250,000
16 74,521 21,966 21,966 250,000 30,994 30,994 250,000
17 81,397 22,333 22,333 250,000 32,482 32,482 250,000
18 88,617 22,505 22,505 250,000 33,871 33,871 250,000
19 96,198 22,468 22,468 250,000 35,147 35,147 250,000
20 104,158 22,194 22,194 250,000 36,290 36,290 250,000
25 150,340 16,076 16,076 250,000 39,843 39,843 250,000
30 209,282 0 0 0 38,851 38,851 250,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-2
<PAGE> 208
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.19%)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
Accumulated ---------------------------------------------------------------------------
End of at 5% Cash Cash
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,140 42 250,000 2,483 386 250,000
2 6,458 4,329 2,231 250,000 5,055 2,958 250,000
3 9,930 6,571 4,473 250,000 7,713 5,615 250,000
4 13,577 8,861 6,764 250,000 10,455 8,358 250,000
5 17,406 11,203 9,106 250,000 13,282 11,185 250,000
6 21,426 13,590 11,701 250,000 16,201 14,311 250,000
7 25,647 16,021 14,340 250,000 19,200 17,518 250,000
8 30,080 18,495 17,021 250,000 22,278 20,805 250,000
9 34,734 21,009 19,744 250,000 25,445 24,179 250,000
10 39,620 23,559 22,502 250,000 28,700 27,642 250,000
11 44,751 26,277 25,428 250,000 32,434 31,584 250,000
12 50,139 29,038 28,397 250,000 36,303 35,662 250,000
13 55,796 31,830 31,396 250,000 40,314 39,881 250,000
14 61,736 34,644 34,419 250,000 44,469 44,244 250,000
15 67,972 37,467 37,449 250,000 48,772 48,755 250,000
16 74,521 40,286 40,286 250,000 53,229 53,229 250,000
17 81,397 43,088 43,088 250,000 57,843 57,843 250,000
18 88,617 45,869 45,869 250,000 62,616 62,616 250,000
19 96,198 48,615 48,615 250,000 67,546 67,546 250,000
20 104,158 51,306 51,306 250,000 72,627 72,627 250,000
25 150,340 62,989 62,989 250,000 100,642 100,642 250,000
30 209,282 67,850 67,850 250,000 134,070 134,070 250,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
<PAGE> 209
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.08%)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
Accumulated ---------------------------------------------------------------------------
End of at 5% Cash Cash
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,284 186 250,000 2,638 541 250,000
2 6,458 4,757 2,660 250,000 5,527 3,429 250,000
3 9,930 7,441 5,344 250,000 8,685 6,587 250,000
4 13,577 10,351 8,253 250,000 12,136 10,038 250,000
5 17,406 13,511 11,413 250,000 15,906 13,808 250,000
6 21,426 16,938 15,049 250,000 20,031 18,141 250,000
7 25,647 20,659 18,977 250,000 24,533 22,852 250,000
8 30,080 24,700 23,227 250,000 29,449 27,975 250,000
9 34,734 29,095 27,829 250,000 34,826 33,560 250,000
10 39,620 33,872 32,815 250,000 40,709 39,652 250,000
11 44,751 39,270 38,421 250,000 47,608 46,759 250,000
12 50,139 45,176 44,534 250,000 55,211 54,570 250,000
13 55,796 51,636 51,202 250,000 63,599 63,165 250,000
14 61,736 58,708 58,483 250,000 72,854 72,629 250,000
15 67,972 66,453 66,436 250,000 83,073 83,055 250,000
16 74,521 74,945 74,945 250,000 94,364 94,364 250,000
17 81,397 84,268 84,268 250,000 106,848 106,848 250,000
18 88,617 94,527 94,527 250,000 120,660 120,660 250,000
19 96,198 105,838 105,838 250,000 135,950 135,950 250,000
20 104,158 118,331 118,331 250,000 152,887 152,887 250,000
25 150,340 204,913 204,913 250,000 269,504 269,504 328,795
30 209,282 349,570 349,570 405,501 461,090 461,090 534,864
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
<PAGE> 210
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.71%)
<TABLE>
<CAPTION>
Premiums
Accumulated Guaranteed Current
End of at 5% Cash Cash
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,941 844 252,941 3,275 1,178 253,275
2 8,610 5,788 3,690 255,788 6,475 4,377 256,475
3 13,241 8,541 6,444 258,541 9,592 7,495 259,592
4 18,103 11,196 9,098 261,196 12,624 10,527 262,624
5 23,208 13,753 11,655 263,753 15,568 13,470 265,568
6 28,568 16,205 14,315 266,205 18,426 16,537 268,426
7 34,196 18,548 16,866 268,548 21,184 19,502 271,184
8 40,106 20,779 19,306 270,779 23,838 22,364 273,838
9 46,312 22,896 21,631 272,896 26,392 25,126 276,392
10 52,827 24,891 23,833 274,891 28,843 27,786 278,843
11 59,669 26,897 26,047 276,897 31,599 30,750 281,599
12 66,852 28,770 28,128 278,770 34,265 33,623 284,265
13 74,395 30,494 30,060 280,494 36,838 36,405 286,838
14 82,314 32,055 31,830 282,055 39,314 39,089 289,314
15 90,630 33,434 33,417 283,434 41,685 41,668 291,685
16 99,361 34,616 34,616 284,616 43,948 43,948 293,948
17 108,530 35,583 35,583 285,583 46,095 46,095 296,095
18 118,156 36,324 36,324 286,324 48,114 48,114 298,114
19 128,264 36,827 36,827 286,827 49,989 49,989 299,989
20 138,877 37,062 37,062 287,062 51,696 51,696 301,696
25 200,454 33,122 33,122 283,122 57,502 57,502 307,502
30 279,043 16,749 16,749 266,749 57,713 57,713 307,713
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
<PAGE> 211
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.19%)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
Accumulated ---------------------------------------------------------------------------
End of at 5% Cash Cash
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,142 1,044 253,142 3,486 1,389 253,486
2 8,610 6,369 4,272 256,369 7,099 5,001 257,099
3 13,241 9,686 7,588 259,686 10,834 8,736 260,834
4 18,103 13,088 10,990 263,088 14,692 12,595 264,692
5 23,208 16,579 14,482 266,579 18,674 16,577 268,674
6 28,568 20,153 18,263 270,153 22,787 20,898 272,787
7 34,196 23,807 22,126 273,807 27,019 25,338 277,019
8 40,106 27,541 26,067 277,541 31,370 29,896 281,370
9 46,312 31,352 30,086 281,352 35,846 34,581 285,846
10 52,827 35,233 34,176 285,233 40,449 39,392 290,449
11 59,669 39,381 38,532 289,381 45,667 44,817 295,667
12 66,852 43,613 42,971 293,613 51,071 50,430 301,071
13 74,395 47,913 47,480 297,913 56,668 56,235 306,668
14 82,314 52,270 52,045 302,270 62,460 62,235 312,460
15 90,630 56,664 56,646 306,664 68,448 68,431 318,448
16 99,361 61,077 61,077 311,077 74,637 74,637 324,637
17 108,530 65,492 65,492 315,492 81,024 81,024 331,024
18 118,156 69,895 69,895 319,895 87,608 87,608 337,608
19 128,264 74,267 74,267 324,267 94,379 94,379 344,379
20 138,877 78,576 78,576 328,576 101,318 101,318 351,318
25 200,454 97,733 97,733 347,733 138,535 138,535 388,535
30 279,043 107,306 107,306 357,306 179,361 179,361 429,361
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE> 212
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 ELITE PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.08%)
<TABLE>
<CAPTION>
Premiums
Accumulated Guaranteed Current
End of at 5% Cash Cash
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,343 1,245 253,343 3,698 1,600 253,698
2 8,610 6,975 4,878 256,975 7,748 5,650 257,748
3 13,241 10,927 8,829 260,927 12,177 10,080 262,177
4 18,103 15,222 13,124 265,222 17,019 14,922 267,019
5 23,208 19,895 17,798 269,895 22,310 20,213 272,310
6 28,568 24,974 23,084 274,974 28,098 26,209 278,098
7 34,196 30,494 28,812 280,494 34,415 32,733 284,415
8 40,106 36,494 35,021 286,494 41,308 39,834 291,308
9 46,312 43,019 41,753 293,019 48,839 47,573 298,839
10 52,827 50,109 49,052 300,109 57,066 56,008 307,066
11 59,669 58,108 57,259 308,108 66,653 65,803 316,653
12 66,852 66,842 66,201 316,842 77,199 76,557 327,199
13 74,395 76,370 75,937 326,370 88,802 88,369 338,802
14 82,314 86,761 86,536 336,761 101,569 101,344 351,569
15 90,630 98,083 98,066 348,083 115,614 115,597 365,614
16 99,361 110,417 110,417 360,417 131,068 131,068 381,068
17 108,530 123,849 123,849 373,849 148,071 148,071 398,071
18 118,156 138,483 138,483 388,483 166,773 166,773 416,773
19 128,264 154,429 154,429 404,429 187,338 187,338 437,338
20 138,877 171,794 171,794 421,794 209,934 209,934 459,934
25 200,454 284,333 284,333 534,333 361,488 361,488 611,488
30 279,043 454,244 454,244 704,244 605,807 605,807 855,807
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-7
<PAGE> 213
APPENDIX B
SURRENDER CHARGE TARGET PREMIUMS ("SCTP") AND
DEFERRED SALES CHARGES ("MDSC")
(ANNUAL RATES PER $1,000 OF FACE AMOUNT)
<TABLE>
<CAPTION>
MALE FEMALE
ISSUE NONSMOKER SMOKER NONSMOKER SMOKER
AGE SCTP DSC SCTP DSC SCTP DSC SCTP DSC
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 2.85 1.43 2.85 1.43 2.24 1.12 2.24 1.12
1 2.78 1.39 2.78 1.39 2.20 1.10 2.20 1.10
2 2.87 1.44 2.87 1.44 2.27 1.14 2.27 1.14
3 2.97 1.49 2.97 1.49 2.35 1.18 2.35 1.18
4 3.08 1.54 3.08 1.54 2.43 1.22 2.43 1.22
5 3.19 1.60 3.19 1.60 2.52 1.26 2.52 1.26
6 3.32 1.66 3.32 1.66 2.61 1.31 2.61 1.31
7 3.45 1.73 3.45 1.73 2.71 1.36 2.71 1.36
8 3.59 1.80 3.59 1.80 2.82 1.41 2.82 1.41
9 3.74 1.87 3.74 1.87 2.93 1.47 2.93 1.47
10 3.90 1.95 3.90 1.95 3.05 1.53 3.05 1.53
11 4.08 2.04 4.08 2.04 3.17 1.59 3.17 1.59
12 4.25 2.13 4.25 2.13 3.31 1.66 3.31 1.66
13 4.44 2.22 4.44 2.22 3.45 1.73 3.45 1.73
14 4.63 2.32 4.63 2.32 3.59 1.80 3.59 1.80
15 4.82 2.41 4.82 2.41 3.74 1.87 3.74 1.87
16 5.01 2.51 5.01 2.51 3.90 1.95 3.90 1.95
17 5.21 2.61 5.21 2.61 4.06 2.03 4.06 2.03
18 5.40 2.70 5.40 2.70 4.23 2.12 4.23 2.12
19 5.61 2.81 5.61 2.81 4.41 2.21 4.41 2.21
20 5.18 2.59 6.89 3.45 4.36 2.18 5.19 2.60
21 5.37 2.69 7.15 3.58 4.54 2.27 5.41 2.71
22 5.58 2.79 7.43 3.72 4.73 2.37 5.65 2.83
23 5.80 2.90 7.73 3.87 4.94 2.47 5.90 2.95
24 6.04 3.02 8.05 4.03 5.15 2.58 6.16 3.08
25 6.29 3.15 8.39 4.20 5.38 2.69 6.43 3.22
26 6.56 3.28 8.76 4.38 5.62 2.81 6.73 3.37
27 6.85 3.43 9.16 4.58 5.87 2.94 7.04 3.52
28 7.16 3.58 9.58 4.79 6.14 3.07 7.36 3.68
29 7.49 3.75 10.04 5.02 6.42 3.21 7.70 3.85
30 7.84 3.92 10.52 5.26 6.71 3.36 8.07 4.04
31 8.21 4.11 11.04 5.52 7.03 3.52 8.45 4.23
32 8.61 4.31 11.59 5.80 7.36 3.68 8.85 4.43
33 9.03 4.52 12.17 6.09 7.71 3.86 9.28 4.64
34 9.47 4.74 12.79 6.40 8.08 4.04 9.73 4.87
35 9.95 4.98 13.44 6.72 8.47 4.24 10.21 5.11
36 10.45 5.23 14.14 7.07 8.88 4.44 10.71 5.36
37 10.98 5.49 14.88 7.44 9.32 4.66 11.24 5.62
38 11.54 5.77 15.66 7.83 9.77 4.89 11.80 5.90
39 12.14 6.07 16.49 8.25 10.26 5.13 12.38 6.19
40 12.77 6.39 17.36 8.68 10.77 5.39 12.99 6.50
41 13.43 6.72 18.28 9.14 11.30 5.65 13.63 6.82
42 14.14 7.07 19.26 9.63 11.86 5.93 14.30 7.15
43 14.89 7.45 20.28 10.14 12.45 6.23 14.99 7.50
</TABLE>
B-1
<PAGE> 214
<TABLE>
<CAPTION>
MALE FEMALE
ISSUE NONSMOKER SMOKER NONSMOKER SMOKER
AGE SCTP DSC SCTP DSC SCTP DSC SCTP DSC
<S> <C> <C> <C> <C> <C> <C> <C> <C>
44 15.68 7.84 21.37 10.69 13.07 6.54 15.72 7.86
45 16.52 8.26 22.51 11.26 13.73 6.87 16.49 8.25
46 17.42 8.71 23.72 11.86 14.43 7.22 17.29 8.65
47 18.37 9.19 25.00 12.50 15.16 7.58 18.14 9.07
48 19.38 9.69 26.35 13.18 15.94 7.97 19.03 9.52
49 20.46 10.23 27.79 13.90 16.77 8.39 19.98 9.99
50 21.61 10.81 29.32 14.66 17.65 8.83 20.97 10.49
51 22.83 11.42 30.94 15.47 18.57 9.29 22.02 11.01
52 24.14 12.07 32.65 16.33 19.56 9.78 23.13 11.57
53 25.53 12.77 34.48 17.24 20.61 10.31 24.30 12.15
54 27.02 13.51 36.40 18.20 21.72 10.86 25.54 12.77
55 28.60 14.30 38.44 19.22 22.90 11.45 26.84 13.42
56 30.29 15.15 40.59 20.30 24.15 12.08 28.23 14.12
57 32.08 16.04 42.87 21.44 25.49 12.75 29.70 14.85
58 34.01 17.01 45.29 22.65 26.92 13.46 31.26 15.63
59 36.07 18.04 47.85 23.93 28.46 14.23 32.95 16.48
60 38.27 19.14 50.59 25.30 30.12 15.06 34.77 17.39
61 40.63 20.32 53.51 26.76 31.91 15.96 36.73 18.37
62 43.16 21.58 56.62 28.31 33.85 16.93 38.84 19.42
63 45.88 22.94 59.92 29.96 35.92 17.96 41.11 20.56
64 48.78 24.39 63.42 31.71 38.15 19.08 43.53 21.77
65 51.89 25.95 67.11 33.56 40.54 20.27 46.11 23.06
66 55.21 27.61 71.01 35.51 43.09 21.55 48.84 24.42
67 58.77 29.39 75.13 37.57 45.84 22.92 51.77 25.89
68 62.59 31.30 79.52 37.75 48.81 24.41 54.92 27.46
69 66.71 33.36 84.20 37.75 52.04 26.02 58.36 29.18
70 71.16 35.58 89.20 37.75 55.57 27.79 62.10 31.05
71 75.96 36.00 94.56 37.75 59.43 29.72 66.20 33.10
72 81.04 36.00 100.28 37.75 63.65 31.83 70.68 35.00
73 86.57 36.00 106.35 37.75 68.25 34.00 75.53 35.00
74 92.47 36.00 112.74 37.75 73.23 34.00 80.75 35.00
75 98.73 36.00 119.44 37.75 78.61 34.00 86.34 35.00
76 105.38 36.00 126.39 37.75 84.42 34.00 92.32 35.00
77 112.45 36.00 133.62 37.75 90.68 34.00 98.70 35.00
78 120.00 36.00 141.17 37.75 97.47 34.00 105.57 35.00
79 128.12 36.00 149.15 37.75 104.88 34.00 113.00 35.00
80 136.88 36.00 157.63 37.75 112.98 34.00 121.09 35.00
81 146.36 36.00 166.67 37.75 121.85 34.00 129.91 35.00
82 156.57 36.00 176.28 37.75 131.55 34.00 139.51 35.00
83 167.52 36.00 186.39 37.75 142.10 34.00 149.91 35.00
84 179.12 36.00 196.88 37.75 153.50 34.00 161.12 35.00
85 191.34 36.00 207.71 37.75 165.78 34.00 172.98 35.00
</TABLE>
Unisex policies will have surrender charge target premiums and maximum deferred
sales charges that are higher than those for females above but lower than those
for males.
B-2
<PAGE> 215
-UNAUDITED-
--------------------------------------------------------------------------------
On January 1, 1999, National Life Insurance Company (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, a mutual insurance
holding company created for this purpose. Policyholders of National Life with
policies issued after December 31, 1998 also become members of National Life
Holding Company.
As part of this reorganization, National Life established and began operating a
closed block (the Closed Block) on January 1, 1999. The Closed Block was
established pursuant to regulatory requirements as part of the reorganization,
and was established for the benefit of policyholders of participating policies
inforce at December 31, 1998. Notes 2, 11 and 13 of National Life's financial
statements provide additional information about the Closed Block.
Under current accounting guidance, National Life's assets, liabilities, pre-tax
net income and cash flows associated with the Closed Block were reclassified
into single line net presentations within National Life Insurance Company and
Subsidiaries' financial statements, and excluded from many of the disclosures
contained in the corresponding notes to those financial statements.
The American Institute of Certified Public Accountants has proposed changes to
the accounting treatment for Closed Blocks. Included in the proposal is the
presentation of Closed Block assets, liabilities, pre-tax net income and cash
flows in their normal categories, instead of the current single line net
presentations. It is currently anticipated that this proposal will be adopted
retroactively for all presented periods beginning with December 31, 2000
reporting.
Management of National Life has therefore elected to also include consolidated
financial statements prepared at the National Life Holding Company level. These
financial statements do not reflect the closed block single line net
presentation, and therefore should provide more comparable year to year
information for the reader.
--------------------------------------------------------------------------------
F-1
<PAGE> 216
NATIONAL LIFE GROUP
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-2
<PAGE> 217
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of
National Life Holding 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 Holding Company and its subsidiaries (the National
Life Group) at December 31, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of National Life Group'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 auditing standards
generally accepted in the United States 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 13 to the financial statements, 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. Members'
voting and liquidation rights in National Life were transferred to National Life
Holding Company as part of this reorganization.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 10, 2000
F-3
<PAGE> 218
NATIONAL LIFE GROUP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 296,468 $ 347,949
Available-for-sale debt and equity securities 5,110,272 5,438,784
Trading equity securities 11,793 -
Mortgage loans 1,162,956 1,098,504
Policy loans 761,235 776,363
Real estate investments 86,003 75,566
Other invested assets 150,963 113,696
-----------------------------------------------------------------------------------------------------
Total cash and invested assets 7,579,690 7,850,862
Deferred policy acquisition costs 538,127 416,733
Accrued investment income 118,273 119,249
Premiums and fees receivable 22,033 21,044
Deferred income taxes 101,183 21,541
Amounts recoverable from reinsurers 302,607 253,651
Present value of future profits of insurance acquired 113,851 45,539
Property and equipment, net 45,609 59,503
Other assets 130,081 133,702
Separate account assets 404,030 283,948
-----------------------------------------------------------------------------------------------------
Total assets $ 9,355,484 $ 9,205,772
=====================================================================================================
LIABILITIES:
Policy benefit liabilities $ 4,039,966 $ 3,907,114
Policyholders' accounts 3,503,328 3,348,132
Policyholders' deposits 46,189 38,520
Policy claims payable 39,262 31,900
Policyholders' dividends 53,552 54,757
Amounts payable to reinsurers 19,213 35,481
Collateral held on loaned securities 115,524 193,491
Other liabilities and accrued expenses 274,172 307,036
Debt 76,092 78,088
Separate account liabilities 400,867 264,421
-----------------------------------------------------------------------------------------------------
Total liabilities 8,568,165 8,258,940
-----------------------------------------------------------------------------------------------------
MINORITY INTERESTS 12,331 64,529
EQUITY:
Retained earnings 832,688 776,060
Accumulated other comprehensive (loss) income (57,700) 106,243
-----------------------------------------------------------------------------------------------------
Total equity 774,988 882,303
-----------------------------------------------------------------------------------------------------
Total liabilities, minority interests and equity $ 9,355,484 $ 9,205,772
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 219
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 383,395 $ 386,260
Policy and contract charges 54,624 48,463
Net investment income 565,818 550,339
Net investment gains 3,140 8,450
Mutual fund commission and fee income 56,232 49,670
Other income 19,847 17,271
-----------------------------------------------------------------------------------------
Total revenues 1,083,056 1,060,453
-----------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 112,923 98,252
Policy benefits 330,334 346,779
Policyholders' dividends 106,858 107,102
Interest credited to policyholders' accounts 207,736 208,505
Operating expenses 164,899 141,242
Sales practice remediation costs - 40,575
Policy acquisition expenses, net 76,862 90,323
-----------------------------------------------------------------------------------------
Total benefits and expenses 999,612 1,032,778
-----------------------------------------------------------------------------------------
Income before income taxes and minority interests 83,444 27,675
Income tax expense (benefit) 17,380 (1,020)
-----------------------------------------------------------------------------------------
Income before minority interests 66,064 28,695
Minority interests 9,436 8,507
-----------------------------------------------------------------------------------------
NET INCOME 56,628 20,188
OTHER COMPREHENSIVE INCOME, NET
Unrealized (losses) gains on securities, net (163,943) 21,226
-----------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE (LOSS) INCOME $ (107,315) $ 41,414
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 220
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAINED EARNINGS:
Balance at January 1 $ 776,060 $ 755,872
Net income 56,628 20,188
-----------------------------------------------------------------------------------------------------
Balance at December 31 $ 832,688 $ 776,060
=====================================================================================================
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Balance at January 1 $ 106,243 $ 85,017
Unrealized (losses) gains on available-for-sale securities, net (163,943) 21,226
-----------------------------------------------------------------------------------------------------
Balance at December 31 $ (57,700) $ 106,243
=====================================================================================================
TOTAL EQUITY:
Balance at December 31 $ 774,988 $ 882,303
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 221
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,628 $ 20,188
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Accrued investment income 976 6,541
Policy liabilities 82,699 87,367
Deferred policy acquisition costs (36,857) (7,580)
Policyholders' dividends (1,205) 1,362
Deferred income taxes 9,883 (13,330)
Net investment gains (3,140) (8,450)
Depreciation 7,339 6,977
Other 4,767 12,714
--------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 121,090 105,789
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 1,576,457 2,020,526
Cost of investments acquired (1,778,511) (2,236,001)
Acquisition of remaining interest in LSWNH, Inc. (61,632) -
Other 14,788 14,656
--------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (248,898) (200,819)
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' deposits, including interest credited 579,795 563,606
Policyholders' withdrawals, including policy charges (424,599) (452,184)
Net decrease in borrowings under repurchase agreements - (234,570)
Net (decrease) increase in securities lending liabilities (77,967) 173,726
Other (902) 20,221
--------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 76,327 70,799
--------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (51,481) (24,231)
CASH AND CASH EQUIVALENTS:
Beginning of year 347,949 372,180
--------------------------------------------------------------------------------------------------------------
End of year $ 296,468 $ 347,949
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 222
NATIONAL LIFE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Life Holding Company and its subsidiaries and affiliates (the National
Life Group) offer a broad range of financial products and services, including
life insurance, annuities, disability income insurance, mutual funds, and
investment advisory and administration services. The flagship company of the
organization, National Life Insurance Company (National Life), was chartered in
1848, and is also known by its registered trade name "National Life of Vermont".
National Life Group employs about 900 people, primarily concentrated in
Montpelier, Vermont and Dallas, Texas. On January 1, 1999, pursuant to a mutual
holding company reorganization, National Life converted from a mutual to a stock
life insurance company. All of National Life's outstanding shares are currently
held by its parent, NLV Financial Corp, which is the wholly-owned subsidiary of
National Life Holding Company. See Note 13 for more information.
The insurance operations within National Life Group develop and distribute
individual life insurance and annuity products. National Life Group markets this
diverse product portfolio to small business owners, professionals and other
middle to upper income individuals. National Life Group provides financial
solutions in the form of estate, business succession and retirement planning,
deferred compensation and other key executive fringe benefit plans, and asset
management. Insurance and annuity products are primarily distributed through
about 32 general agencies in major metropolitan areas, a system of managing
general agents, and independent brokers throughout the United States. National
Life Group has in excess of 300,000 policyholders and through its member
companies is licensed to do business in all 50 states and the District of
Columbia. About 26% of National Life Group's total collected premiums and
deposits are from residents of New York and California.
Members of the National Life Group also distribute and provide investment
advisory and administrative services to the Sentinel Group Funds, Inc. The
Sentinel Funds' $3.1 billion of net assets represent fourteen mutual funds
managed on behalf of about 117,000 individual, corporate and institutional
shareholders worldwide.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of National Life Group have
been prepared in conformity with accounting principles generally accepted in the
United States (GAAP).
The consolidated financial statements include the accounts of National Life
Group, which consists of National Life HoIding Company and its subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation. Certain reclassifications have been made to conform prior periods
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.
F-8
<PAGE> 223
Available-for-sale and trading debt 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 net investment losses.
Mortgage loans are reported at amortized cost, less valuation allowances for the
excess, if any, of the amortized cost of impaired loans over the estimated fair
value of the related collateral. Changes in valuation allowances are included in
net investment 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.
Investments in joint ventures and limited partnerships are generally carried at
cost.
Net realized investment gains and losses are recognized using the specific
identification method and are reported as net investment gains and losses.
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. Changes in the fair value of
trading equity securities are reflected in net investment gains and losses.
POLICY ACQUISITION EXPENSES
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 other comprehensive income, net of related income
taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance are 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.
GOODWILL
Goodwill is amortized over 20 years using the straight line method and is
periodically evaluated for recoverability.
F-9
<PAGE> 224
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
primarily depreciated over 39.5 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.
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. See additional information below
on dividends on contracts within the Closed Block.
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.
F-10
<PAGE> 225
FEDERAL INCOME TAXES
National Life Holding Company will file a consolidated tax return for the tax
year ended December 31, 1999. The income tax return will include all members
within the National Life Group except Life Insurance Company of the Southwest
(LSW) and Insurance Investors Life Insurance Company (IIL). LSW and IIL will
file a separate tax return due to tax regulatory requirements. 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.
MINORITY INTERESTS
Minority interests at December 31, 1999 represent minority partners interests in
entities within the National Life Group. Minority interests attributable to
common stockholders are carried on the equity method. Those attributable to
preferred stockholders are carried on the cost method, with dividends paid
reflected as minority interests within the consolidated financial statements.
CLOSED BLOCK
National Life established and began operating a closed block (the Closed Block)
on January 1, 1999. The Closed Block was established pursuant to regulatory
requirements as part of the reorganization into a mutual holding company
corporate structure. This Closed Block was established for the benefit of
policyholders of participating policies inforce at December 31, 1998. Included
in the block are traditional dividend paying life insurance policies, certain
participating term insurance policies, dividend paying flex premium annuities,
and other related liabilities. The Closed Block was established to protect the
policy dividend expectations related to these policies. The Closed Block is
expected to remain in effect until all policies within the Closed Block are no
longer inforce. Assets assigned to the Closed Block at January 1, 1999, together
with projected future premiums and investment returns, are reasonably expected
to be sufficient to pay out all future Closed Block policy benefits. Such
benefits include dividends paid out under the current dividend scale, adjusted
to reflect future changes in the underlying experience. See Note 11 for
additional information on the Closed Block's financial position and results of
operations.
F-11
<PAGE> 226
NOTE 3 - INVESTMENTS
DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair values of available-for-sale debt and
equity securities at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1999 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS) debt and equity
securities:
U.S. government obligations $ 281,194 $ 3,232 $ 19,020 $ 265,406
Government agencies, authorities
and subdivisions 118,459 4,010 3,100 119,369
Public utilities 380,253 10,687 17,275 373,665
Corporate 2,462,499 23,937 94,932 2,391,504
Private placements 735,597 9,818 30,172 715,243
Mortgage-backed securities 1,112,382 2,432 37,065 1,077,749
------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,090,384 54,116 201,564 4,942,936
Preferred stocks 134,852 2,708 8,109 129,451
Common stocks 33,032 7,169 2,316 37,885
------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity
securities $ 5,258,268 $ 63,993 $ 211,989 $ 5,110,272
========================================================================================================================
<CAPTION>
1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AFS debt and equity securities:
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
========================================================================================================================
</TABLE>
F-12
<PAGE> 227
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>
1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized (losses) gains on available-for-sale securities $ (399,066) $ 20,136
Net unrealized (losses) gains on separate accounts (2,652) 1,543
Related minority interests 8,672 (1,786)
Related deferred policy acquisition costs 116,725 17,139
Related present value of future profits of insurance acquired 16,353 (3,048)
Related deferred income taxes 96,025 (12,758)
-------------------------------------------------------------------------------------------------------------
(Decrease) increase in net unrealized gains (163,943) 21,226
Balance, beginning of year 106,243 85,017
-------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=============================================================================================================
<CAPTION>
1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, end of year includes:
Net unrealized (losses) gains on available-for-sale securities $ (147,996) $ 251,070
Net unrealized gains on separate accounts 3,163 5,815
Related minority interests - (8,672)
Related deferred policy acquisition costs 39,186 (77,539)
Related present value of future profits on insurance acquired 14,806 (1,547)
Related deferred income taxes 33,141 (62,884)
-------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=============================================================================================================
</TABLE>
Net other comprehensive (loss) income for 1999 and 1998 of $(163.9) million and
$21.2 million is presented net of reclassifications to net income for gross
gains realized during the period of $13.9 million and $9.0 million and net of
tax and deferred acquisition cost offsets of $9.4 million and $6.6 million,
respectively.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1999 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 $ 125,445 $ 125,798
Due after one year through five years 1,386,200 1,355,240
Due after five years through ten years 1,607,586 1,545,609
Due after ten years 858,770 838,540
Mortgage-backed securities 1,112,383 1,077,749
--------------------------------------------------------------------------------------------------------------
Total $ 5,090,384 $ 4,942,936
==============================================================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 is shown below (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 921,594 $ 1,167,190
Gross realized gains $ 40,496 $ 22,969
Gross realized losses $ 24,312 $ 16,578
</TABLE>
F-13
<PAGE> 228
On January 1, 1999, National Life Group reclassified certain mutual fund
investments from an available-for-sale to a trading classification. The
cumulative gross unrealized gain reclassified into net investment gains was $0.6
million. For the year ended December 31, 1999, these securities recorded $0.9
million net investment income and $(0.5) million investment losses. Cost of
trading securities held at December 31, 1999 was $12.1 million. National Life
Group held no securities classified as trading prior to January 1, 1999.
National Life Group 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 were $115.5 million and $193.5 million at December 31, 1999 and
1998, respectively.
National Life Group 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, 1999 or 1998.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
<S> <C> <C>
GEOGRAPHIC REGION
-----------------
New England 5.4% 3.8%
Middle Atlantic 9.1 9.7
East North Central 10.1 9.3
West North Central 5.4 4.5
South Atlantic 24.7 25.7
East South Central 5.6 5.0
West South Central 10.1 10.3
Mountain 15.9 17.7
Pacific 13.7 14.0
----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
======================================================================================================================
PROPERTY TYPE
-------------
Residential 0.1% 0.2%
Apartment 24.6 24.2
Retail 11.0 12.2
Office Building 34.9 35.0
Industrial 26.4 26.2
Hotel/Motel 1.8 0.8
Other Commercial 1.2 1.4
----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
======================================================================================================================
Total mortgage loans and real estate
(in thousands) $ 1,248,959 $ 1,174,070
======================================================================================================================
</TABLE>
F-14
<PAGE> 229
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 1,148,526 $ 1,077,637
Impaired loans without valuation allowances 6,943 11,757
-----------------------------------------------------------------------------------------------------------------
Subtotal 1,155,469 1,089,394
-----------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowances 10,600 10,244
Related valuation allowances (3,113) (1,134)
-----------------------------------------------------------------------------------------------------------------
Subtotal 7,487 9,110
-----------------------------------------------------------------------------------------------------------------
Total $ 1,162,956 $ 1,098,504
=================================================================================================================
Impaired loans:
Average recorded investment $ 19,771 $ 27,755
Interest income recognized $ 2,137 $ 3,124
Interest received $ 2,092 $ 2,818
</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>
1999 1998
===================================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,993 $ 1,564
Impairment losses charged to valuation allowances - (2,217)
Changes to previously established valuation allowances (14) (2,642)
---------------------------------------------------------------------------------------------------
Increase/decrease in valuation allowances 1,979 (3,295)
Balance, beginning of year 1,134 4,429
---------------------------------------------------------------------------------------------------
Balance, end of year $ 3,113 $ 1,134
===================================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 404,195 $ 405,184
Equity securities dividends 2,385 6,380
Mortgage loan interest 94,258 90,991
Policy loan interest 46,393 47,189
Real estate income 11,698 12,802
Other investment income 29,943 12,363
------------------------------------------------------------------------------------------------------------------
Gross investment income 588,872 574,909
Less: investment expenses 23,054 24,570
------------------------------------------------------------------------------------------------------------------
Net investment income $ 565,818 $ 550,339
==================================================================================================================
</TABLE>
DERIVATIVES
National Life Group 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
F-15
<PAGE> 230
increases in equity indexed product account values. When the S&P 500 index
decreases, National Life Group's loss is the decrease in the fair value of
futures and is limited to the premium paid for the options.
National Life Group purchases options only from highly rated counterparties.
However, in the event a counterparty failed to perform, National Life Group'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>
1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 166,858 $ 79,754
Futures $ 5,439 $ 28,835
================================================================================================
Book values:
Options: Net amortized cost $ 17,800 $ 5,514
Intrinsic value 18,894 18,953
------------------------------------------------------------------------------------------------
Book value 36,694 24,467
Futures at fair value 890 463
------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 37,584 $ 24,930
================================================================================================
</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>
1999 1998
---------------------------------------------------------------------------------------------------------------------------------
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 296,468 $ 296,468 $ 347,949 $ 347,949
Available-for-sale debt and equity securities 5,110,272 5,110,272 5,438,784 5,438,784
Trading equity securities 11,793 11,793 - -
Mortgage loans 1,162,956 1,177,342 1,098,504 1,180,630
Policy loans 761,235 724,953 776,363 743,687
Derivatives 37,584 35,528 24,930 28,496
Investment products 2,770,295 2,740,443 2,507,012 2,522,940
Debt 76,092 62,615 78,088 75,141
</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).
F-16
<PAGE> 231
For variable rate policy loans the unpaid balance approximates fair value. Fixed
rate policy loan fair values are estimated based on discounted cash flows using
the current variable policy loan rate (including appropriate provisions for
mortality and repayments).
Derivatives estimated fair values are based on quoted values.
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 Group reinsures certain risks assumed in the normal course of
business. For individual life products, National Life Group 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 agreements.
Disability income products are significantly reinsured under coinsurance and
modified coinsurance agreements.
National Life Group remains liable in the event any reinsurer is unable to meet
its assumed obligations. National Life Group 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.
Transactions between the open and Closed Block (see Notes 11 and 13) have been
excluded from the following schedule.
The effects of reinsurance for the years ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 439,562 $ 453,859
Reinsurance assumed 4,731 898
Reinsurance ceded (60,898) (68,497)
-----------------------------------------------------------------------------------------------------------
$ 383,395 $ 386,260
===========================================================================================================
Other income:
Direct $ 6,960 $ 3,694
Reinsurance ceded 12,887 13,577
-----------------------------------------------------------------------------------------------------------
$ 19,847 $ 17,271
===========================================================================================================
Increase in policy liabilities:
Direct increase in policy liabilities $ 129,448 $ 94,949
Reinsurance assumed - (4)
Reinsurance ceded (16,525) 3,307
-----------------------------------------------------------------------------------------------------------
$ 112,923 $ 98,252
===========================================================================================================
</TABLE>
F-17
<PAGE> 232
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Policy benefits:
Direct policy benefits $ 393,216 $ 416,919
Reinsurance assumed (2,479) 1,286
Reinsurance ceded (60,403) (71,426)
-----------------------------------------------------------------------------------------------------------
$ 330,334 $ 346,779
===========================================================================================================
Policyholders' dividends:
Direct policyholders' dividends $ 110,793 $ 110,630
Reinsurance ceded (3,935) (3,528)
-----------------------------------------------------------------------------------------------------------
$ 106,858 $ 107,102
===========================================================================================================
</TABLE>
NOTE 5 - DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes in the deferred policy acquisition costs
asset (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 416,733 $ 392,014
Acquisition costs deferred 73,648 57,318
Amortization to expense during the year (36,791) (49,738)
Adjustment to equity during the year 116,725 17,139
Purchase GAAP effect on purchase of LSWNH (Note 12) (32,188) -
---------------------------------------------------------------------------------------------------
Balance, end of year $ 538,127 $ 416,733
===================================================================================================
</TABLE>
NOTE 6 - FEDERAL INCOME TAXES
The components of federal income taxes and a reconciliation of the expected and
actual federal income taxes and income tax rates for the years ended December 31
were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 7,497 $ 17,144
Deferred 9,883 (18,164)
------------------------------------------------------------------- --------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Expected income taxes $ 29,206 35.0% $ 9,686 35.0%
Differential earnings amount (2,058) (2.5) (7,953) (28.7)
Affordable housing tax credit (6,509) (7.8) (6,638) (24.0)
Net change in tax reserves 2,033 2.4 5,035 18.2
Other, net (5,292) (6.3) (1,150) (4.2)
----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Effective federal income tax rate 20.8% (3.7)%
==================================================== ===================== =====================
</TABLE>
National Life Group received net federal income tax refunds of $9.4 million in
1999 and paid federal income taxes of $13.3 million in 1998.
F-18
<PAGE> 233
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Net unrealized loss on available-for-sale securities $ 33,141 -
Debt and equity securities 15,456 -
Policy liabilities 179,008 $ 185,294
Other liabilities and accrued expenses 51,609 67,291
Other 490 4,761
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 279,704 257,346
--------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 125,842 126,380
Present value of future profits of insurance acquired 37,908 17,683
Net unrealized gain on available-for-sale securities - 62,884
Debt and equity securities - 16,947
Other 14,771 11,911
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 178,521 235,805
--------------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 101,183 $ 21,541
==========================================================================================================================
</TABLE>
Management believes it is more likely than not that National Life Group 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 National Life's tax returns through 1995 and is currently
examining the years 1996 - 1998. In management's opinion adequate tax
liabilities have been established for all open years.
NOTE 7 - BENEFIT PLANS
National Life sponsors a qualified defined benefit pension plan covering
substantially all employees. The plan is administered by National Life's
Benefits Committee and is non-contributory, with benefits based on an employee's
retirement age, years of service and compensation near retirement. Plan assets
are primarily bonds and common stocks held in a National Life separate account
and funds invested in a group 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 Group
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. Some of the plan participants
elected to defer their lump sum payouts until 1998, which also deferred
recognition of the related settlement gain until 1998.
F-19
<PAGE> 234
The status of the defined benefit plans at December 31 was as follows (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 189,524 $ 162,986 $ 27,883 $ 24,759
Service cost (benefits earned during the current period) 4,194 2,849 581 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Actuarial (gains) losses (26,832) 34,444 (3,937) 1,939
Benefits paid (12,002) (22,185) (1,170) (1,061)
----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 167,144 $ 189,524 $ 25,233 $ 27,883
==================================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 100,045 $ 108,884
Actual return on plan assets 9,952 7,200
Benefits paid (5,747) (16,039)
------------------------------------------------------------------------------------------------
Plan assets, end of year $ 104,250 $ 100,045
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FUNDED STATUS:
Benefit obligation $ 167,144 $ 189,524 $ 25,233 $ 27,883
Plan assets (104,250) (100,045)
-------------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 62,894 89,479 25,233 27,883
Unrecognized actuarial gains (losses) 18,309 (11,259) 6,397 2,526
Unrecognized prior service cost (1,080) (1,152)
---------------------------------------------------------------------
Accrued benefit cost at September 30 81,203 78,220 30,550 29,257
Payments subsequent to measurement date (1,638) (1,518)
-------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost at December 31 $ 79,565 $ 76,702 $ 30,550 $ 29,257
===============================================================================================================================
</TABLE>
The components of net periodic benefit cost for the years ended December 31 were
as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 4,194 $ 2,849 $ 581 $ 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Expected return on plan assets (8,745) (9,078)
Net amortization and deferrals 281 (1,167) (66) (83)
Amortization of prior service cost 72 72
Settlement gains from 1997 early retirement program (3,131)
-----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating
expenses) $ 7,990 $ 903 $ 2,463 $ 2,235
=============================================================================================================================
</TABLE>
The total projected benefit obligation for non-qualified defined benefit pension
plans was $70.9 million and $81.4 million at December 31, 1999 and 1998,
respectively. The total accumulated benefit obligation (APBO) for these plans
was $67.7 million and $75.2 million at December 31, 1999 and 1998, respectively.
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.75% 6.75% 7.75% 6.75%
Rate of increase in future compensation levels 6.00% 5.00%
Expected long term return on plan assets 9.00% 9.00%
</TABLE>
F-20
<PAGE> 235
Health care cost trend rates grade to 5% in year 2000 and remain level
thereafter. Increasing the assumed health care trend rates by one percentage
point in each year would increase the APBO by about $2.4 million and the 1999
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 $2.0 million and
the 1999 service and interest cost components of net periodic postretirement
benefit cost by about $0.1 million. National Life Group 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. Employees below specified levels of
compensation also receive a foundation contribution of 1.5% of compensation.
Additional employee voluntary contributions may be made to the plans up to a set
maximum. Vesting and withdrawal privilege schedules are attached to the
Company's contributions.
National Life also provides a 401(k) plan for it's regular full-time agents
whereby accumulated funds may be invested by the agent in a group annuity
contract with National Life or in mutual funds sponsored by an affiliate of
National Life. Total annual contributions can not exceed certain limits that
vary based on total agent compensation. No National Life contributions are made
to the plan.
Life Insurance Company of the Southwest (LSW), an indirectly held wholly-owned
subsidiary of National Life, provides a 401(k) to its employees. Additional
voluntary employee contributions may be made to the plan subject to certain
limits. LSW's contributions to these plans generally vest within two years.
NOTE 8 - DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,692 $ 69,688
$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: 6,400 8,400
$6.4 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 $ 76,092 $ 78,088
===========================================================================================================================
</TABLE>
The aggregate annual scheduled maturities of debt for the next five years are as
follows (in thousands):
2000 2,000
2001 2,000
2002 2,400
2003 -
2004 -
F-21
<PAGE> 236
Interest paid was $6.3 million and $6.2 million in 1999 and 1998, respectively.
NOTE 9 - CONTINGENCIES
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. Qualifying members may also
opt out of the class action and pursue litigation separately against National
Life. Most of the alternative dispute resolution cases were settled by December
31, 1999. Management believes that while the ultimate cost of this litigation
(including those opting out of the class action) is still uncertain, it is
unlikely, after considering existing provisions, to have a material adverse
effect on National Life's financial position.
In late 1999, two lawsuits were filed against National Life and the State of
Vermont in Vermont related to National Life's conversion to a mutual holding
company structure. National Life and the State of Vermont specifically deny any
wrongdoing and intend to defend these cases vigorously. In the opinion of
National Life Group's management, based on advice from legal counsel, the
ultimate resolution of these lawsuits will not have a material effect on
National Life Group's financial position. However, liabilities related to these
lawsuits could be established in the near term if estimates of the ultimate
resolution of these proceedings are revised.
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 was originally effective for fiscal years beginning after June 15,
1999. In June, 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 (FAS 137). FAS 137 requires the application of FAS 133 for fiscal years
beginning after June 15, 2000. National Life Group is currently assessing the
impact of the adoption of FAS 133.
NOTE 11 - CLOSED BLOCK
Included within the financial statement categories in the 1999 Consolidated
Statement of Operations and Comprehensive Income is a net pre-tax contribution
from the Closed Block of $24.4 million. The Closed Block was established on
January 1, 1999 as part of the conversion to a mutual holding company corporate
structure (see Note 13). Summarized financial information for the Closed Block
effects included in the consolidated financial statements as of December 31,
1999 and for the year then ended is as follows (in thousands):
F-22
<PAGE> 237
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Cash and cash equivalents $ 122,982
Available-for-sale debt securities (amortized cost of $1,800.1 million) 1,771,494
Mortgage loans 380,986
Policy loans 640,490
Accrued investment income 53,387
Premiums and fees receivable 18,864
Deferred policy acquisition costs 312,588
Other assets 123,690
---------------------------------------------------------------------------------------------------------------------------------
Total assets $3,424,481
=================================================================================================================================
LIABILITIES:
Policy liabilities and accruals $3,629,560
Other liabilities 69,186
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities $3,698,746
=================================================================================================================================
<CAPTION>
1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES:
Premiums and other income $ 325,445
Net investment income 216,432
Realized investment gain 8,720
---------------------------------------------------------------------------------------------------------------------------------
Total revenues 550,597
---------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 66,324
Policy benefits 283,598
Policyholders' dividends 107,941
Interest credited to policyholders' accounts 13,294
Operating expenses 17,407
Policy acquisition expenses, net 37,662
---------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 526,226
---------------------------------------------------------------------------------------------------------------------------------
Pre-tax contribution from the Closed Block $ 24,371
=================================================================================================================================
</TABLE>
There were no mortgage valuation allowances on Closed Block mortgage loans at
December 31, 1999. Many expenses related to Closed Block operations are charged
to operations outside the Closed Block; accordingly, the contribution from the
Closed Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside the Closed Block are therefore
disproportionate to the actual business outside the Closed Block.
F-23
<PAGE> 238
NOTE 12 - ACQUISITION
On July 2, 1999, National Life Group acquired the outstanding one-third interest
in LSW National Holdings, Inc., (LSWNH) the parent of Dallas, Texas-based Life
Insurance Company of the Southwest (LSW), a financial services company
specializing in the sale of annuities. National Life Group had previously
purchased a two-thirds interest in the company in February, 1996.
The purchase price was $61.6 million in cash. Purchasing the remaining one-third
interest eliminated the ongoing provision for minority interests for the last
six months of 1999. The effect of the cash purchase on the consolidated
financial statements was to reduce minority interests by $39.7 million and
record net purchase GAAP adjustments of $21.9 million, which included intangible
assets for the present value of future profits of insurance acquired of $59.4
million and goodwill of $3.0 million.
Had the one-third purchase been made at January 1, 1998, pro-forma consolidated
net income would have increased by about $3.1 million and $2.2 million in 1999
and 1998, respectively. These pro-forma consolidated results are not necessarily
indicative of the actual results which might have occurred had National Life
Group owned all of LSWNH since that date. (unaudited)
NOTE 13 - REORGANIZATION INTO A MUTUAL HOLDING COMPANY
CORPORATE STRUCTURE
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, a mutual insurance holding company created for this purpose.
National Life Holding Company currently owns all the outstanding shares of NLV
Financial, a stock holding company created for this purpose, which in turn
currently owns all the outstanding shares of National Life. National Life
Holding Company currently has no other assets, liabilities or operations other
than that related to its ownership of NLV Financial's outstanding stock.
Similarly, NLV Financial currently has no other assets, liabilities or
operations other than that related to its ownership of National Life's
outstanding stock. Under the terms of the reorganization, National Life Holding
Company must always hold a majority of the voting shares of NLV Financial.
This reorganization was approved by policyowners of National Life and was
completed with the approval of the Commissioner of the Vermont Department of
Banking, Insurance, Securities, and Health Care Administration (the
"Commissioner").
Under the provisions of the reorganization, National Life issued 2.5 million
common stock $1 par shares to its parent, NLV Financial as a transfer from
retained earnings. There were no dividends paid or declared in 1999 by National
Life. Dividends declared by National Life in excess of ten percent of statutory
surplus (see Note 14 for statutory information) require pre-approval by the
Commissioner.
F-24
<PAGE> 239
NOTE 14 - 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's statutory surplus to GAAP equity at December
31 and statutory net income to GAAP net income for the years ended December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
Surplus/ Surplus/
Equity Net Income Equity Net Income
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 408,086 $ 25,923 $ 373,063 $ 67,841
Asset valuation reserve 79,207 69,994
Interest maintenance reserve 58,507 5,681 52,826 (4,114)
Surplus notes (70,716) (70,700)
Non-admitted assets 2,101 17,033
Investments 30,149 5,916 650 (4,471)
Deferred policy acquisition costs 445,704 17,250 428,453 (9,479)
Deferred income taxes 45,587 (3,837) 74,132 15,555
Policy liabilities (202,061) 10,063 (203,832) (6,476)
Policyholders' dividends 67,494 3,289 64,205 529
Benefit plans (29,475) (1,571) (27,904) 6,730
Sales remediation costs (40,575)
Other comprehensive income, net (57,700) 106,243
Other changes, net (1,895) (6,086) (1,860) (5,352)
----------------------------------------------------------------------------------------------------------------------------
GAAP equity/net income $ 774,988 $ 56,628 $ 882,303 $ 20,188
============================================================================================================================
</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.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance (Codification), which
will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC has recommended an
effective date of January 1, 2001. The Codification provides guidance for areas
which promulgated statutory accounting principles had not previously addressed,
and changes current promulgated guidance in other areas.
The Vermont Department of Banking, Insurance, Securities, and Health Care
Administration has adopted Codification effective January 1, 2001. The
Department may make changes to the promulgated guidance prior to the effective
date. National Life has not estimated the potential effect of the Codification
guidance on its reported results.
F-25
<PAGE> 240
NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-26
<PAGE> 241
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
Report of Independent Accountants
To the Board of Directors and Stockholder 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 (National
Life) at December 31, 1999 and 1998, and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of National Life'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 auditing standards
generally accepted in the United States 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 13 to the financial statements, 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. Members'
voting and liquidation rights in National Life were transferred to National Life
Holding Company, the upstream parent of National Life, as part of this
reorganization.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 10, 2000
F-27
<PAGE> 242
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 173,485 $ 347,949
Available-for-sale debt and equity securities 3,338,777 5,438,784
Trading equity securities 11,793 -
Mortgage loans 781,970 1,098,504
Policy loans 120,745 776,363
Real estate investments 86,003 75,566
Other invested assets 151,044 113,696
----------------------------------------------------------------------------------------------------------------
Total cash and invested assets 4,663,817 7,850,862
Deferred policy acquisition costs 225,539 416,733
Accrued investment income 64,886 119,249
Premiums and fees receivable 3,168 21,044
Deferred income taxes 49,989 21,541
Amounts recoverable from reinsurers 302,607 253,651
Present value of future profits of insurance acquired 113,851 45,539
Property and equipment, net 45,609 59,503
Other assets 57,507 133,702
Closed block assets 3,424,481 -
Separate account assets 404,030 283,948
----------------------------------------------------------------------------------------------------------------
Total assets $ 9,355,484 $ 9,205,772
================================================================================================================
LIABILITIES:
Policy benefit liabilities $ 731,006 $ 3,907,114
Policyholders' accounts 3,258,761 3,348,132
Policyholders' deposits 42,468 38,520
Policy claims payable 16,419 31,900
Policyholders' dividends 325 54,757
Amounts payable to reinsurers 19,213 35,481
Collateral held on loaned securities 48,375 193,491
Other liabilities and accrued expenses 275,893 307,036
Debt 76,092 78,088
Closed block liabilities 3,698,746 -
Separate account liabilities 400,867 264,421
----------------------------------------------------------------------------------------------------------------
Total liabilities 8,568,165 8,258,940
----------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 12,331 64,529
STOCKHOLDER'S EQUITY:
Common stock (authorized 2.5 million shares at $1 par value, 2.5 million
shares issued and outstanding) 2,500 -
Additional paid in capital 5,000 -
Retained earnings 825,188 776,060
Accumulated other comprehensive (loss) income (57,700) 106,243
----------------------------------------------------------------------------------------------------------------
Total stockholder's equity 774,988 882,303
----------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and equity $ 9,355,484 $ 9,205,772
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 243
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 57,950 $ 386,260
Policy and contract charges 54,624 48,463
Net investment income 349,385 550,339
Net investment (losses) gains (5,580) 8,450
Mutual fund commission and fee income 56,232 49,670
Closed block income 24,371 -
Other income 19,862 17,271
----------------------------------------------------------------------------------------------------------------
Total revenue 556,844 1,060,453
----------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 46,599 98,252
Policy benefits 46,736 346,779
Policyholders' dividends (1,083) 107,102
Interest credited to policyholders' accounts 194,442 208,505
Operating expenses 147,505 141,242
Sales practice remediation costs - 40,575
Net deferral of policy acquisition costs 39,201 90,323
----------------------------------------------------------------------------------------------------------------
Total benefits and expenses 473,400 1,032,778
----------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 83,444 27,675
Income tax expense (benefit) 17,380 (1,020)
----------------------------------------------------------------------------------------------------------------
Income before minority interests 66,064 28,695
Minority interests 9,436 8,507
----------------------------------------------------------------------------------------------------------------
NET INCOME 56,628 20,188
OTHER COMPREHENSIVE (LOSS) INCOME, NET
Unrealized (losses) gains on securities, net (163,943) 21,226
----------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE (LOSS) INCOME $ (107,315) $ 41,414
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 244
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK:
Balance at January 1 $ - $ -
2.5 million shares at $1 par issued via equity transfer from retained
earnings pursuant to mutual holding company reorganization 2,500 -
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 2,500 $ -
================================================================================================================
ADDITIONAL PAID IN CAPITAL:
Balance at January 1 $ - $ -
Capital contributed via equity transfer from retained earnings
pursuant to mutual holding company reorganization 5,000 -
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 5,000 $ -
================================================================================================================
RETAINED EARNINGS:
Balance at January 1 $ 776,060 $ 755,872
Transfer to common stock pursuant to mutual holding company
reorganization (2,500)
Transfer to additional paid in capital pursuant to mutual holding company
reorganization (5,000)
Net income 56,628 20,188
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 825,188 $ 776,060
================================================================================================================
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Balance at January 1 $ 106,243 $ 85,017
Unrealized (losses) gains on available-for-sale securities, net (163,943) 21,226
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ (57,700) $ 106,243
================================================================================================================
TOTAL STOCKHOLDER'S EQUITY:
Balance at December 31 $ 774,988 $ 882,303
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 245
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,628 $ 20,188
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Accrued investment income (67) 6,541
Policy liabilities (7,845) 87,367
Deferred policy acquisition costs (59,780) (7,580)
Policyholders' dividends 2,589 1,362
Deferred income taxes 21,134 (13,330)
Net realized investment gains 5,580 (8,450)
Depreciation 7,339 6,977
Other 9,463 12,714
-------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 35,041 105,789
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 1,063,475 2,020,526
Cost of available-for-sale investments acquired (1,241,086) (2,236,001)
Acquisition of remaining interest in LSWNH, Inc. (61,632) -
Other 2,648 14,656
-------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (236,595) (200,819)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' deposits, including interest credited 558,115 563,606
Policyholders' withdrawals, including policy charges (379,233) (452,184)
Net decrease in borrowings under repurchase agreements - (234,570)
Net (decrease) increase in securities lending liabilities (126,342) 173,726
Other (906) 20,221
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 51,634 70,799
-------------------------------------------------------------------------------------------------------------------
CLOSED BLOCK ACTIVITY, NET (24,544) -
-------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (174,464) (24,231)
CASH AND CASH EQUIVALENTS:
Beginning of year 347,949 372,180
-------------------------------------------------------------------------------------------------------------------
End of year $ 173,485 $ 347,949
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 246
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Life Insurance Company and its subsidiaries and affiliates (the
Company) offer a broad range of financial products and services, including life
insurance, annuities, disability income insurance, mutual funds, and investment
advisory and administration services. The flagship company of the organization,
National Life Insurance Company (National Life), was chartered in 1848, and is
also known by its registered trade name "National Life of Vermont". The Company
employs about 900 people, primarily concentrated in Montpelier, Vermont and
Dallas, Texas. On January 1, 1999, pursuant to a mutual holding company
reorganization, National Life converted from a mutual to a stock life insurance
company. All of National Life's outstanding shares are currently held by its
parent, NLV Financial Corp, which is the wholly-owned subsidiary of National
Life Holding Company. See Note 13 for more information.
The insurance operations within the Company develop and distribute individual
life insurance and annuity products. The Company markets this diverse product
portfolio to small business owners, professionals and other middle to upper
income individuals. The Company provides financial solutions in the form of
estate, business succession and retirement planning, deferred compensation and
other key executive fringe benefit plans, and asset management. Insurance and
annuity products are primarily distributed through about 32 general agencies in
major metropolitan areas, a system of managing general agents, and independent
brokers throughout the United States. The Company has in excess of 300,000
policyholders and through its member companies is licensed to do business in all
50 states and the District of Columbia. About 26% of the Company's total
collected premiums and deposits are from residents of New York and California.
Members of the Company also distribute and provide investment advisory and
administrative services to the Sentinel Group Funds, Inc. The Sentinel Funds'
$3.1 billion of net assets represent fourteen mutual funds managed on behalf of
about 117,000 individual, corporate and institutional shareholders worldwide.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have been
prepared in conformity with accounting principles generally accepted in the
United States (GAAP).
The consolidated financial statements include the accounts of National Life and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. Certain reclassifications have been made to
conform prior periods 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.
F-32
<PAGE> 247
Available-for-sale and trading debt 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 net investment losses.
Mortgage loans are reported at amortized cost, less valuation allowances for the
excess, if any, of the amortized cost of impaired loans over the estimated fair
value of the related collateral. Changes in valuation allowances are included in
net investment 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.
Investments in joint ventures and limited partnerships are generally carried at
cost.
Net realized investment gains and losses are recognized using the specific
identification method and are reported as net investment gains and losses.
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. Changes in the fair value of
trading equity securities are reflected in net investment gains and losses.
POLICY ACQUISITION EXPENSES
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 other comprehensive income, net of related income
taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance are 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.
GOODWILL
Goodwill is amortized over 20 years using the straight line method and is
periodically evaluated for recoverability.
F-33
<PAGE> 248
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
primarily depreciated over 39.5 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.
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. See additional information below
on dividends on contracts within the Closed Block.
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.
F-34
<PAGE> 249
FEDERAL INCOME TAXES
National Life Holding Company will file a consolidated tax return for the tax
year ended December 31, 1999. The income tax return will include all members
within the Company except Life Insurance Company of the Southwest (LSW) and
Insurance Investors Life Insurance Company (IIL). LSW and IIL will file a
separate tax return due to tax regulatory requirements. 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.
MINORITY INTERESTS
Minority interests at December 31, 1999 represent minority partners interests in
entities within the Company. Minority interests attributable to common
stockholders are carried on the equity method. Those attributable to preferred
stockholders are carried on the cost method, with dividends paid reflected as
minority interests within the consolidated financial statements.
CLOSED BLOCK
National Life established and began operating a closed block (the Closed Block)
on January 1, 1999. The Closed Block was established pursuant to regulatory
requirements as part of the reorganization into a mutual holding company
corporate structure. This Closed Block was established for the benefit of
policyholders of participating policies inforce at December 31, 1998. Included
in the block are traditional dividend paying life insurance policies, certain
participating term insurance policies, dividend paying flex premium annuities,
and other related liabilities. The Closed Block was established to protect the
policy dividend expectations related to these policies. The Closed Block is
expected to remain in effect until all policies within the Closed Block are no
longer inforce. Assets assigned to the Closed Block at January 1, 1999, together
with projected future premiums and investment returns, are reasonably expected
to be sufficient to pay out all future Closed Block policy benefits. Such
benefits include dividends paid out under the current dividend scale, adjusted
to reflect future changes in the underlying experience. See Note 11 for
additional information on the Closed Block's financial position and results of
operations.
F-35
<PAGE> 250
NOTE 3 - INVESTMENTS
DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair values of available-for-sale debt and
equity securities at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1999 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS) debt and equity securities:
U.S. government obligations $ 185,524 $ 2,768 $ 14,925 $ 173,367
Government agencies, authorities
and subdivisions 61,524 1,095 2,035 60,584
Public utilities 295,172 8,447 15,371 288,248
Corporate 1,611,713 9,845 70,987 1,550,571
Private placements 449,531 2,763 20,307 431,987
Mortgage-backed securities 686,868 656 20,840 666,684
------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 3,290,332 25,574 144,465 3,171,441
Preferred stocks 134,852 2,708 8,109 129,451
Common stocks 33,032 7,169 2,316 37,885
------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 3,458,216 $ 35,451 $ 154,890 $ 3,338,777
========================================================================================================================
<CAPTION>
1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AFS debt and equity securities:
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
========================================================================================================================
</TABLE>
F-36
<PAGE> 251
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>
1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized (losses) gains on available-for-sale securities $ (399,066) $ 20,136
Net unrealized (losses) gains on separate accounts (2,652) 1,543
Related minority interests 8,672 (1,786)
Related deferred policy acquisition costs 116,725 17,139
Related present value of future profits of insurance acquired 16,353 (3,048)
Related deferred income taxes 96,025 (12,758)
-----------------------------------------------------------------------------------------------------------------------
(Decrease) increase in net unrealized gains (163,943) 21,226
Balance, beginning of year 106,243 85,017
-----------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=======================================================================================================================
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, end of year includes:
Net unrealized (losses) gains on available-for-sale securities $ (147,996) $ 251,070
Net unrealized gains on separate accounts 3,163 5,815
Related minority interests - (8,672)
Related deferred policy acquisition costs 39,186 (77,539)
Related present value of future profits on insurance acquired 14,806 (1,547)
Related deferred income taxes 33,141 (62,884)
-----------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=======================================================================================================================
</TABLE>
Net other comprehensive (loss) income for 1999 and 1998 of $(163.9) million and
$21.2 million is presented net of reclassifications to net income for gross
gains realized during the period of $13.9 million and $9.0 million and net of
tax and deferred acquisition cost offsets of $9.4 million and $6.6 million,
respectively.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1999 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 $ 93,726 $ 93,678
Due after one year through five years 1,035,774 1,003,721
Due after five years through ten years 1,043,650 997,356
Due after ten years 430,312 410,002
Mortgage-backed securities 686,870 666,684
--------------------------------------------------------------------------------------------------------------
Total $ 3,290,332 $ 3,171,441
==============================================================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 is shown below (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 604,226 $ 1,167,190
Gross realized gains $ 25,885 $ 22,969
Gross realized losses $ 17,247 $ 16,578
</TABLE>
F-37
<PAGE> 252
On January 1, 1999, National Life Group reclassified certain mutual fund
investments from an available-for-sale to a trading classification. The
cumulative gross unrealized gain reclassified into net investment gains was $0.6
million. For the year ended December 31, 1999, these securities recorded $0.9
million net investment income and $(0.5) million investment losses. Cost of
trading securities held at December 31, 1999 was $12.1 million. National Life
Group held no securities classified as trading prior to January 1, 1999.
National Life Group 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 closed block assets) and the
corresponding liability for collateral held (closed block portion included in
closed block liabilities) were $115.5 million and $193.5 million at December 31,
1999 and 1998, respectively.
National Life Group 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, 1999 or 1998.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------
<S> <C> <C>
GEOGRAPHIC REGION
-----------------
New England 4.3% 3.8%
Middle Atlantic 10.7 9.7
East North Central 8.7 9.3
West North Central 2.8 4.5
South Atlantic 24.1 25.7
East South Central 7.0 5.0
West South Central 12.9 10.3
Mountain 15.1 17.7
Pacific 14.4 14.0
-------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===================================================================================================================
PROPERTY TYPE
-------------
Residential 0.1% 0.2%
Apartment 19.7 24.2
Retail 9.5 12.2
Office Building 37.4 35.0
Industrial 29.4 26.2
Hotel/Motel 2.6 0.8
Other Commercial 1.3 1.4
-------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===================================================================================================================
Total mortgage loans and real estate
(in thousands) $ 867,973 $ 1,174,070
===================================================================================================================
</TABLE>
F-38
<PAGE> 253
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 767,540 $ 1,077,637
Impaired loans without valuation allowances 6,943 11,757
-----------------------------------------------------------------------------------------------------------------
Subtotal 774,483 1,089,394
-----------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowances 10,600 10,244
Related valuation allowances (3,113) (1,134)
-----------------------------------------------------------------------------------------------------------------
Subtotal 7,487 9,110
-----------------------------------------------------------------------------------------------------------------
Total $ 781,970 $ 1,098,504
=================================================================================================================
Impaired loans:
Average recorded investment $ 19,771 $ 27,755
Interest income recognized $ 2,137 $ 3,124
Interest received $ 2,092 $ 2,818
</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>
1999 1998
============================================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,993 $ 1,564
Impairment losses charged to valuation allowances - (2,217)
Changes to previously established valuation allowances (14) (2,642)
------------------------------------------------------------------------------------------------------------
Increase/decrease in valuation allowances 1,979 (3,295)
Balance, beginning of year 1,134 4,429
------------------------------------------------------------------------------------------------------------
Balance, end of year $ 3,113 $ 1,134
============================================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 255,721 $ 405,184
Equity securities dividends 2,385 6,380
Mortgage loan interest 63,196 90,991
Policy loan interest 6,426 47,189
Real estate income 11,698 12,802
Other investment income 29,915 12,363
------------------------------------------------------------------------------------------------------------
Gross investment income 369,341 574,909
Less: investment expenses 19,956 24,570
------------------------------------------------------------------------------------------------------------
Net investment income $ 349,385 $ 550,339
============================================================================================================
</TABLE>
F-39
<PAGE> 254
DERIVATIVES
The Company 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, the
Company's loss is the decrease in the fair value of futures and is limited to
the premium paid for the options.
The Company purchases options only from highly rated counterparties. However, in
the event a counterparty failed to perform, the Company'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>
1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 166,858 $ 79,754
Futures $ 5,439 $ 28,835
==============================================================================================================
Book values:
Options: Net amortized cost $ 17,800 $ 5,514
Intrinsic value 18,894 18,953
--------------------------------------------------------------------------------------------------------------
Book value 36,694 24,467
Futures at fair value 890 463
--------------------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 37,584 $ 24,930
==============================================================================================================
</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>
1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 173,485 $ 173,485 $ 347,949 $ 347,949
Available-for-sale debt and equity securities 3,338,777 3,338,777 5,438,784 5,438,784
Trading equity securities 11,793 11,793 - -
Mortgage loans 781,970 790,190 1,098,504 1,180,630
Policy loans 120,745 115,330 776,363 743,687
Derivatives 37,584 35,528 24,930 28,496
Investment products 2,600,657 2,578,402 2,507,012 2,522,940
Debt 76,092 62,615 78,088 75,141
</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.
F-40
<PAGE> 255
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).
Mortgage loan fair values are estimated as the average of discounted cash flows
under different scenarios of future mortgage interest rates (including
appropriate provisions for default losses and borrower prepayments).
For variable rate policy loans the unpaid balance approximates fair value. Fixed
rate policy loan fair values are estimated based on discounted cash flows using
the current variable policy loan rate (including appropriate provisions for
mortality and repayments).
Derivatives estimated fair values are based on quoted values.
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
The Company reinsures certain risks assumed in the normal course of business.
For individual life products, The Company 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 agreements. Disability income products are
significantly reinsured under coinsurance and modified coinsurance agreements.
The Company remains liable in the event any reinsurer is unable to meet its
assumed obligations. The Company 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.
,
Transactions between the open and Closed Block (see Notes 11 and 13) have been
excluded from the following schedule. Reinsurance flows with outside parties
remain within the open block.
The effects of reinsurance for the years ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 114,117 $ 453,859
Reinsurance assumed 4,731 898
Reinsurance ceded (60,898) (68,497)
---------------------------------------------------------------------------------------------------------------
$ 57,950 $ 386,260
===============================================================================================================
Other income:
Direct $ 6,975 $ 3,694
Reinsurance ceded 12,887 13,577
---------------------------------------------------------------------------------------------------------------
$ 19,862 $ 17,271
===============================================================================================================
</TABLE>
F-41
<PAGE> 256
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in policy liabilities:
Direct increase in policy liabilities $ 63,124 $ 94,949
Reinsurance assumed - (4)
Reinsurance ceded (16,525) 3,307
---------------------------------------------------------------------------------------------------------------
$ 46,599 $ 98,252
===============================================================================================================
Policy benefits:
Direct policy benefits $ 109,618 $ 416,919
Reinsurance assumed (2,479) 1,286
Reinsurance ceded (60,403) (71,426)
---------------------------------------------------------------------------------------------------------------
$ 46,736 $ 346,779
===============================================================================================================
Policyholders' dividends:
Direct policyholders' dividends $ 2,852 $ 110,630
Reinsurance ceded (3,935) (3,528)
---------------------------------------------------------------------------------------------------------------
$ (1,083) $ 107,102
===============================================================================================================
</TABLE>
NOTE 5 - DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes in the deferred policy acquisition costs
asset (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 416,733 $ 392,014
Acquisition costs deferred 73,648 57,318
Amortization to expense during the year (36,791) (49,738)
Adjustment to equity during the year 116,725 17,139
Included in Closed Block assets (312,588) -
Purchase GAAP effect on purchase of LSWNH (Note 12) (32,188) -
----------------------------------------------------------------------------------------------
Balance, end of year $ 225,539 $ 416,733
==============================================================================================
</TABLE>
NOTE 6 - FEDERAL INCOME TAXES
The components of federal income taxes and a reconciliation of the expected and
actual federal income taxes and income tax rates for the years ended December 31
were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 7,497 $ 17,144
Deferred 9,883 (18,164)
------------------------------------------------------------------- --------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Expected income taxes $ 29,206 35.0% $ 9,686 35.0%
Differential earnings amount (2,058) (2.5) (7,953) (28.7)
Affordable housing tax credit (6,509) (7.8) (6,638) (24.0)
Net change in tax reserves 2,033 2.4 5,035 18.2
Other, net (5,292) (6.3) (1,150) (4.2)
----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Effective federal income tax rate 20.8% (3.7)%
==================================================== ===================== =====================
</TABLE>
F-42
<PAGE> 257
The Company received net federal income tax refunds of $9.4 million in 1999 and
paid federal income taxes of $13.3 million in 1998.
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Net unrealized loss on available-for-sale securities $ 29,383 -
Debt and equity securities 17,419 -
Policy liabilities 32,408 $ 185,294
Other liabilities and accrued expenses 51,609 67,291
Other 490 4,761
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 131,309 257,346
--------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 28,635 126,380
Present value of future profits of insurance acquired 37,908 17,683
Net unrealized gain on available-for-sale securities - 62,884
Debt and equity securities - 16,947
Other 14,777 11,911
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 81,320 235,805
--------------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 49,989 $ 21,541
==========================================================================================================================
</TABLE>
Management believes it is more likely than not that the Company 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 National Life's tax returns through 1995 and is currently
examining the years 1996 - 1998. In management's opinion adequate tax
liabilities have been established for all open years.
NOTE 7 - BENEFIT PLANS
National Life sponsors a qualified defined benefit pension plan covering
substantially all employees. The plan is administered by National Life's
Benefits Committee and is non-contributory, with benefits based on an employee's
retirement age, years of service and compensation near retirement. Plan assets
are primarily bonds and common stocks held in a National Life separate account
and funds invested in a group 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 Group
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
F-43
<PAGE> 258
the pro-rata recognition of actuarial gains on lump sum settlements of pension
benefit obligations. Some of the plan participants elected to defer their lump
sum payouts until 1998, which also deferred recognition of the related
settlement gain until 1998.
The status of the defined benefit plans at December 31 was as follows (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-----------------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 189,524 $ 162,986 $ 27,883 $ 24,759
Service cost (benefits earned during the current period) 4,194 2,849 581 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Actuarial (gains) losses (26,832) 34,444 (3,937) 1,939
Benefits paid (12,002) (22,185) (1,170) (1,061)
---------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 167,144 $ 189,524 $ 25,233 $ 27,883
=================================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 100,045 $ 108,884
Actual return on plan assets 9,952 7,200
Benefits paid (5,747) (16,039)
-----------------------------------------------------------------------------------------------
Plan assets, end of year $ 104,250 $ 100,045
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FUNDED STATUS:
Benefit obligation $ 167,144 $ 189,524 $ 25,233 $ 27,883
Plan assets (104,250) (100,045)
------------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 62,894 89,479 25,233 27,883
Unrecognized actuarial gains (losses) 18,309 (11,259) 6,397 2,526
Unrecognized prior service cost (1,080) (1,152)
----------------------------------------------------------------------
Accrued benefit cost at September 30 81,203 78,220 30,550 29,257
Payments subsequent to measurement date (1,638) (1,518)
------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost at December 31 $ 79,565 $ 76,702 $ 30,550 $ 29,257
==============================================================================================================================
</TABLE>
The components of net periodic benefit cost for the years ended December 31 were
as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 4,194 $ 2,849 $ 581 $ 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Expected return on plan assets (8,745) (9,078)
Net amortization and deferrals 281 (1,167) (66) (83)
Amortization of prior service cost 72 72
Settlement gains from 1997 early retirement program (3,131)
-----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating
expenses) $ 7,990 $ 903 $ 2,463 $ 2,235
=============================================================================================================================
</TABLE>
The total projected benefit obligation for non-qualified defined benefit pension
plans was $70.9 million and $81.4 million at December 31, 1999 and 1998,
respectively. The total accumulated benefit obligation (APBO) for these plans
was $67.7 million and $75.2 million at December 31, 1999 and 1998, respectively.
F-44
<PAGE> 259
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.75% 6.75% 7.75% 6.75%
Rate of increase in future compensation levels 6.00% 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 $2.4 million and the 1999
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 $2.0 million and
the 1999 service and interest cost components of net periodic postretirement
benefit cost by about $0.1 million. National Life Group 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. Employees below specified levels of
compensation also receive a foundation contribution of 1.5% of compensation.
Additional employee voluntary contributions may be made to the plans up to a set
maximum. Vesting and withdrawal privilege schedules are attached to the
Company's contributions.
National Life also provides a 401(k) plan for it's regular full-time agents
whereby accumulated funds may be invested by the agent in a group annuity
contract with National Life or in mutual funds sponsored by an affiliate of
National Life. Total annual contributions can not exceed certain limits that
vary based on total agent compensation. No National Life contributions are made
to the plan.
Life Insurance Company of the Southwest (LSW), an indirectly held wholly-owned
subsidiary of National Life, provides a 401(k) to its employees. Additional
voluntary employee contributions may be made to the plan subject to certain
limits. LSW's contributions to these plans generally vest within two years.
NOTE 8 - DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,692 $ 69,688
$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: 6,400 8,400
$6.4 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 $ 76,092 $ 78,088
=============================================================================================================================
</TABLE>
F-45
<PAGE> 260
The aggregate annual scheduled maturities of debt for the next five years are as
follows (in thousands):
2000 $ 2,000
2001 2,000
2002 2,400
2003 -
2004 -
Interest paid was $6.3 million and $6.2 million in 1999 and 1998, respectively.
NOTE 9 - CONTINGENCIES
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. Qualifying members may also
opt out of the class action and pursue litigation separately against National
Life. Most of the alternative dispute resolution cases were settled by December
31, 1999. Management believes that while the ultimate cost of this litigation
(including those opting out of the class action) is still uncertain, it is
unlikely, after considering existing provisions, to have a material adverse
effect on National Life's financial position.
In late 1999, two lawsuits were filed against National Life and the State of
Vermont in Vermont related to National Life's conversion to a mutual holding
company structure. National Life and the State of Vermont specifically deny any
wrongdoing and intend to defend these cases vigorously. In the opinion of
National Life Group's management, based on advice from legal counsel, the
ultimate resolution of these lawsuits will not have a material effect on
National Life Group's financial position. However, liabilities related to these
lawsuits could be established in the near term if estimates of the ultimate
resolution of these proceedings are revised.
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 was originally effective for fiscal years beginning after June 15,
1999. In June, 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 (FAS 137). FAS 137 requires the application of FAS 133 for fiscal years
beginning after June 15, 2000. The Company is currently assessing the impact of
the adoption of FAS 133.
F-46
<PAGE> 261
NOTE 11 - CLOSED BLOCK
The Closed Block was established on January 1, 1999 as part of the conversion to
a mutual holding company corporate structure (see Note 13).
Summarized financial information for the Closed Block effects as of December 31,
1999 and for the year then ended is as follows (in thousands):
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Cash and cash equivalents $ 122,982
Available-for-sale debt securities (amortized cost of $1,800.1 million) 1,771,494
Mortgage loans 380,986
Policy loans 640,490
Accrued investment income 53,387
Premiums and fees receivable 18,864
Deferred policy acquisition costs 312,588
Other assets 123,690
----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,424,481
==================================================================================================================================
LIABILITIES:
Policy liabilities and accruals $ 3,629,560
Other liabilities 69,186
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 3,698,746
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES:
Premiums and other income $ 325,445
Net investment income 216,432
Realized investment gain 8,720
----------------------------------------------------------------------------------------------------------------------------------
Total revenues 550,597
----------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 66,324
Policy benefits 283,598
Policyholders' dividends 107,941
Interest credited to policyholders' accounts 13,294
Operating expenses 17,407
Policy acquisition expenses, net 37,662
----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 526,226
----------------------------------------------------------------------------------------------------------------------------------
Pre-tax contribution from the Closed Block $ 24,371
==================================================================================================================================
</TABLE>
There were no mortgage valuation allowances on Closed Block mortgage loans at
December 31, 1999. Many expenses related to Closed Block operations are charged
to operations outside the Closed Block; accordingly, the contribution from the
Closed Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside the Closed Block are therefore
disproportionate to the actual business outside the Closed Block.
F-47
<PAGE> 262
The Consolidated Statement of Cash Flows for 1999 is presented net of cash flows
and adjustments to operating cash flows attributable to the Closed Block cash
and short term investments of $(24.5) million. The Closed Block was initially
funded on January 1, 1999 with cash and securites totalling $2.2 billion.
NOTE 12 - ACQUISITION
On July 2, 1999, the Company acquired the outstanding one-third interest in LSW
National Holdings, Inc., (LSWNH) the parent of Dallas, Texas-based Life
Insurance Company of the Southwest (LSW), a financial services company
specializing in the sale of annuities. The Company had previously purchased a
two-thirds interest in the company in February, 1996.
The purchase price was $61.6 million in cash. Purchasing the remaining one-third
interest eliminated the ongoing provision for minority interests for the last
six months of 1999. The effect of the cash purchase on the consolidated
financial statements was to reduce minority interests by $39.7 million and
record net purchase GAAP adjustments of $21.9 million, which included intangible
assets for the present value of future profits of insurance acquired of $59.4
million and goodwill of $3.0 million.
Had the one-third purchase been made at January 1, 1998, pro-forma consolidated
net income would have increased by about $3.1 million and $2.2 million in 1999
and 1998, respectively. These pro-forma consolidated results are not necessarily
indicative of the actual results which might have occurred had the Company owned
all of LSWNH since that date. (unaudited)
NOTE 13 - REORGANIZATION INTO A MUTUAL HOLDING COMPANY
CORPORATE STRUCTURE
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, a mutual insurance holding company created for this purpose.
National Life Holding Company currently owns all the outstanding shares of NLV
Financial, a stock holding company created for this purpose, which in turn
currently owns all the outstanding shares of National Life. National Life
Holding Company currently has no other assets, liabilities or operations other
than that related to its ownership of NLV Financial's outstanding stock.
Similarly, NLV Financial currently has no other assets, liabilities or
operations other than that related to its ownership of National Life's
outstanding stock. Under the terms of the reorganization, National Life Holding
Company must always hold a majority of the voting shares of NLV Financial.
This reorganization was approved by policyowners of National Life and was
completed with the approval of the Commissioner of the Vermont Department of
Banking, Insurance, Securities, and Health Care Administration (the
"Commissioner").
Under the provisions of the reorganization, National Life issued 2.5 million
common stock $1 par shares to its parent, NLV Financial as a transfer from
retained earnings and also transferred $5 million from retained earnings into
additional paid in capital. There were no dividends paid or declared in 1999 by
National Life. Dividends declared by National Life in excess of ten percent of
statutory surplus (see Note 14 for statutory information) require pre-approval
by the Commissioner.
F-48
<PAGE> 263
NOTE 14 - 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's statutory surplus to GAAP equity at December
31 and statutory net income to GAAP net income for the years ended December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
Surplus/ Surplus/
Equity Net Income Equity Net Income
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 408,086 $ 25,923 $ 373,063 $ 67,841
Asset valuation reserve 79,207 69,994
Interest maintenance reserve 58,507 5,681 52,826 (4,114)
Surplus notes (70,716) (70,700)
Non-admitted assets 2,101 17,033
Investments 30,149 5,916 650 (4,471)
Deferred policy acquisition costs 445,704 17,250 428,453 (9,479)
Deferred income taxes 45,587 (3,837) 74,132 15,555
Policy liabilities (202,061) 10,063 (203,832) (6,476)
Policyholders' dividends 67,494 3,289 64,205 529
Benefit plans (29,475) (1,571) (27,904) 6,730
Sales remediation costs (40,575)
Other comprehensive income, net (57,700) 106,243
Other changes, net (1,895) (6,086) (1,860) (5,352)
-----------------------------------------------------------------------------------------------------------------------------
GAAP equity/net income $ 774,988 $ 56,628 $ 882,303 $ 20,188
=============================================================================================================================
</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.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance (Codification), which
will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC has recommended an
effective date of January 1, 2001. The Codification provides guidance for areas
which promulgated statutory accounting principles had not previously addressed,
and changes current promulgated guidance in other areas.
The Vermont Department of Banking, Insurance, Securities, and Health Care
Administration has adopted Codification effective January 1, 2001. The
Department may make changes to the promulgated guidance prior to the effective
date. National Life has not estimated the potential effect of the Codification
guidance on its reported results.
F-49
<PAGE> 264
NATIONAL VARIABLE
LIFE INSURANCE ACCOUNT
(VARITRAK SEGMENT)
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999
F-50
<PAGE> 265
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of National Life Insurance Company
and Policyholders of National Variable Life Insurance Account -- Varitrak
Segment
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of each of the sub-accounts
constituting the National Variable Life Insurance Account -- Varitrak Segment
(a segment within a Separate Account of National Life Insurance Company) (the
Segment) at December 31, 1999, and the results of each of their operations
and each of their changes in net assets for each of the three years then
ended, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Segment's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted
in the United States which require that we plan and perform the audits 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, which included confirmation of securities at
December 31, 1999 by correspondence with the funds, provide a reasonable
basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
March 31, 2000
F-51
<PAGE> 266
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
POLICYHOLDER
ACCOUNT
VALUES
---------------
<S> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value
(policyholder accumulation units and unit value):
Market Street Fund Money Market (457,700.93 accumulation units at $11.71 unit value) $ 5,358,457
Market Street Fund Growth (785,636.12 accumulation units at $16.45 unit value) 12,919,844
Market Street Fund Aggressive Growth (118,770.59 accumulation units at $16.72 unit value) 1,985,760
Market Street Fund Managed (137,184.85 accumulation units at $14.53 unit value) 1,992,873
Market Street Fund Bond (151,215.28 accumulation units at 11.47 unit value) 1,734,440
Market Street Fund International (186,695.40 accumulation units at $16.71 unit value) 3,119,576
Market Street Fund Sentinel Growth (141,722.47 accumulation units at $22.71 unit value) 3,218,517
Alger American Fund Growth (380,350.42 accumulation units at $25.93 unit value) 9,860,929
Alger American Fund Small Capitalization (445,440.10 accumulation units at $18.06 unit value) 8,045,531
VIPF Equity Income Portfolio (303,914.15 accumulation units at $35.19 unit value) 10,694,428
VIPF Overseas Portfolio (147,357.59 accumulation units at $29.39 unit value) 4,331,372
VIPF Growth Portfolio (239,691.23 accumulation units at $57.59 unit value) 13,802,814
VIPF High Income Portfolio (92,780.05 accumulation units at $29.11 unit value) 2,700,605
VIPF Contrafund Portfolio (238,927.92 accumulation units at $19.45 unit value) 4,646,129
VIPF Index 500 Portfolio (511,054.93 accumulation units at $35.78 unit value) 18,284,795
American Century Variable Portfolios VP Value (21,371.41 accumulation units at $10.25 unit value) 218,998
American Century Variable Portfolios VP Income & Growth (79,083.88 accumulation units at $12.85 unit value) 1,016,274
JP Morgan Series Trust II International Opportunities (25,101.23 accumulation units at $13.15 unit value) 330,095
JP Morgan Series Trust II Small Company (14,240.28 accumulation units at $14.31 unit value) 203,838
Strong Opportunity Fund II(43,769.74 accumulation units at $13.93 unit value) 609,810
Strong Variable Insurance Funds Mid Cap Growth (75,292.18 accumulation units at $21.30 unit value) 1,603,929
Neuberger Berman Advisers Management Trust Partners Portfolio (25,882.53 accumulation units at $10.87 unit value) 281,245
Goldman Sachs Variable Insurance Trust International Equity (17,860.81 accumulation units at $13.24 unit value) 236,418
Goldman Sachs Variable Insurance Trust Global Income (3,631.05 accumulation units at $10.22 unit value) 37,096
Goldman Sachs Variable Insurance Trust CORE Small Cap Equity (6,687.30 accumulation units at $11.03 unit value) 73,789
Goldman Sachs Variable Insurance Trust Mid Cap Value (14,285.28 accumulation units at $9.72 unit value) 138,821
------------
Total Net Assets $107,446,383
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 267
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET FUND
---------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL
------------ ----------- ------------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 224,222 $ 244,886 $ 180,507 $ 71,210 $ 24,621 $ 134,771
EXPENSES:
Mortality and expense risk
charges 41,721 107,429 14,087 15,752 11,973 21,719
---------------------------------------------------------------------------------
Net investment income 182,501 137,457 166,420 55,458 12,648 113,052
---------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold - 79,013 (29,873) 37,402 (5,840) 32,890
Net unrealized (depreciation)
appreciation on investments - (15,120) 120,658 (98,893) (56,125) 500,650
---------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments - 63,893 90,785 (61,491) (61,965) 533,540
---------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 182,501 $ 201,350 $ 257,205 $ (6,033) $ (49,317) $ 646,592
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
ALGER AMERICAN FUND
---------- ---------------------------
SENTINEL
GROWTH GROWTH SMALL CAP
--------- ---------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 70,274 $ 583,780 $ 687,887
EXPENSES:
Mortality and expense risk
charges 18,499 61,216 50,956
-----------------------------------------------
Net investment income 51,775 522,564 636,931
-----------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 65,850 577,304 93,301
Net unrealized (depreciation)
appreciation on investments 682,680 1,024,377 1,596,167
-----------------------------------------------
Net realized and unrealized
gain (loss) on investments 748,530 1,601,681 1,689,468
-----------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 800,305 $ 2,124,245 $ 2,326,399
===============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 268
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY HIGH
INCOME OVERSEAS GROWTH INCOME CONTRAFUND
----------- -------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 424,670 $ 100,811 $ 847,889 $ 217,914 $ 80,833
EXPENSES:
Mortality and expense risk charges 89,153 27,018 86,698 23,116 26,335
-------------------------------------------------------------------------------------
Net investment income (loss) 335,517 73,793 761,191 194,798 54,498
-------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 361,515 86,245 677,291 (146,982) 193,124
Net unrealized (depreciation)
appreciation on investments (217,244) 1,039,168 1,869,134 116,488 469,976
-------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 144,271 1,125,413 2,546,425 (30,494) 663,100
-------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 479,788 $1,199,206 $3,307,616 $ 164,304 $ 717,598
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY
VIPF VARIABLE PORTFOLIOS
----------- --------------------------------
INDEX VP INCOME &
500 VP VALUE GROWTH
---------- ------------ --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 112,837 $ 5,747 $ 40
EXPENSES:
Mortality and expense risk charges 102,705 1,010 4,209
---------------------------------------------
Net investment income (loss) 10,132 4,737 (4,169)
---------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 823,410 (2,164) 24,948
Net unrealized (depreciation)
appreciation on investments 1,421,745 (14,728) 77,756
---------------------------------------------
Net realized and unrealized
gain (loss) on investments 2,245,155 (16,892) 102,704
---------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $2,255,287 $ (12,155) $ 98,535
=============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 269
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECMEBER 31, 1999
<TABLE>
<CAPTION>
JP MORGAN STRONG VARIABLE NEUBERGER
SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
--------------------------------- -------------- ------------------ ------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND GROWTH PORTFOLIO
----------------- ------------- -------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 9,965 $ 4,932 $ 3,110 $ 155 $ 3,906
EXPENSES:
Mortality and expense risk charges 632 865 1,447 4,044 1,657
--------------------------------------------------------------------------------------
Net investment income (loss) 9,333 4,067 1,663 (3,889) 2,249
--------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 1,579 21,966 4,649 73,685 4,890
Net unrealized appreciation
(depreciation) on investments 33,198 34,479 63,891 391,256 2,086
--------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 34,777 56,445 68,540 464,941 6,976
--------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 44,110 $ 60,512 $ 70,203 $ 461,052 $ 9,225
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
-------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
-------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 17,323 $ 1,386 $ 148 $ 662 $ 4,054,486
EXPENSES:
Mortality and expense risk charges 1,055 131 445 346 714,218
---------------------------------------------------------------------------------------
Net investment income (loss) 16,268 1,255 (297) 316 3,340,268
---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 8,182 (42) 2,815 1,831 2,986,989
Net unrealized appreciation
(depreciation) on investments 21,079 (1,337) 7,437 (3,555) 9,065,223
---------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 29,261 (1,379) 10,252 (1,724) 12,052,212
---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 45,529 $ (124) $ 9,955 $ (1,408) $15,392,480
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 270
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECMEBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
-------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
----------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 174,631 $ 828,642 $ 54,654 $ 82,717 $ 35,739
EXPENSES:
Mortality and expense risk charges 29,369 72,436 8,545 10,475 6,127
-------------------------------------------------------------------------------------
Net investment income 145,262 756,206 46,109 72,242 29,612
-------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized (loss) gain from
shares sold - (125,406) 12,423 54,347 5,728
Net unrealized appreciation
on investments - 371,666 27,969 5,509 10,575
-------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 246,260 40,392 59,856 16,303
-------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 145,262 $ 1,002,466 $ 86,501 $ 132,098 $ 45,915
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
---------------------------------- -------------------------------
SENTINAL
INTERNATINAL GROWTH GROWTH SMALL CAP
---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 71,101 $ 126,914 $ 520,351 $ 477,358
EXPENSES:
Mortality and expense risk charges 12,891 9,352 30,787 33,154
--------------------------------------------------------------------
Net investment income 58,210 117,562 489,564 444,204
--------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized (loss) gain from
shares sold 3,127 (39,825) 133,365 (9,041)
Net unrealized appreciation
on investments 33,776 83,638 759,665 156,309
--------------------------------------------------------------------
Net realized and unrealized
gain on investments 36,903 43,813 893,030 147,268
--------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 95,113 $ 161,375 $ 1,382,594 $ 591,472
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 271
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
-----------------------------------------------------------------------------------
EQUITY HIGH
INCOME OVERSEAS GROWTH INCOME CONTRAFUND
----------- ------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 332,243 $ 106,077 $ 508,477 $ 154,838 $ 30,797
EXPENSES:
Mortality and expense risk charges 61,108 16,784 45,640 15,314 9,280
-----------------------------------------------------------------------------------
Net investment income (loss) 271,135 89,293 462,837 139,524 21,517
-----------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 183,982 11,052 144,728 (30,566) 18,665
Net unrealized appreciation
(depreciation) on investments 230,682 81,094 1,154,458 (220,695) 264,772
-----------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 414,664 92,146 1,299,186 (251,261) 283,437
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 685,799 $ 181,439 $1,762,023 $ (111,737) $ 304,954
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY
VIPF VARIABLE PORTFOLIOS
------------- --------------------------------
INDEX VP INCOME &
500 VP VALUE GROWTH
------------- ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 48,516 $ - $ 356
EXPENSES:
Mortality and expense risk charges 27,146 65 119
-------------------------------------------------
Net investment income (loss) 21,370 (65) 237
-------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 117,440 968 1,528
Net unrealized appreciation
(depreciation) on investments 659,903 1,426 7,468
-------------------------------------------------
Net realized and unrealized
gain (loss) on investments 777,343 2,394 8,996
-------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 798,713 $ 2,329 $ 9,233
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 272
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
JP MORGAN STRONG VARIABLE NEUBERGER
SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
--------------------------- -------------- --------------- ----------
INTERNATIONAL SMALL OPPORTUNITY II MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
------------- ----------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ - $ 185 $ 10 $ - $ -
EXPENSES:
Mortality and expense risk charges 1 10 2 5 66
-------------------------------------------------------------------------
Net investment (loss) income (1) 175 8 (5) (66)
-------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 70 28 30 43 565
Net unrealized appreciation
on investments 56 427 198 686 2,769
-------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 126 455 228 729 3,334
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 125 $ 630 $ 236 $ 724 $ 3,268
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
------------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 170 $ 93 $ 65 $ 115 $3,554,049
EXPENSES:
Mortality and expense risk charges 36 6 25 28 388,771
-------------------------------------------------------------------------
Net investment (loss) income 134 87 40 87 3,165,278
-------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 164 (160) 96 54 483,405
Net unrealized appreciation
on investments 1,643 23 1,929 1,693 3,637,639
-------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1,807 (137) 2,025 1,747 4,121,044
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,941 $ (50) $ 2,065 $ 1,834 $7,286,322
=========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 273
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Market Street Fund
----------------------------------------------------------------------------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth
--------- -------- ---------- --------- ------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 131,394 $ 139,288 $ 1,211 $ 23,450 $ 9,403 $ 19,573 $ 434
EXPENSES:
Mortality and expense risk charges 22,402 24,951 3,114 5,910 1,833 5,158 2,431
----------------------------------------------------------------------------------------
Net investment income (loss) 108,992 114,337 (1,903) 17,540 7,570 14,415 (1,997)
----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold - 106,196 12,533 13,707 483 6,441 16,851
Net unrealized appreciation
on investments - 353,473 51,230 85,995 11,666 2,281 44,338
----------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 459,669 63,763 99,702 12,149 8,722 61,189
----------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 108,992 $ 574,006 $ 61,860 $ 117,242 $ 19,719 $ 23,137 $ 59,192
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Alger American Fund
-------------------------
Growth Small Cap
---------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 9,832 $ 54,467
EXPENSES:
Mortality and expense risk charges 11,355 15,072
-------------------------
Net investment income (loss) (1,523) 39,395
-------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 48,393 29,498
Net unrealized appreciation
on investments 176,680 141,467
-------------------------
Net realized and unrealized
gain on investments 225,073 170,965
-------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 223,550 $ 210,360
=========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 274
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
VIPF
--------------------------------------------------------------------------
EQUITY HIGH INDEX
INCOME OVERSEAS GROWTH INCOME CONTRAFUND 500 TOTAL
---------- ----------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 146,791 $ 22,598 $ 30,327 $ 17,180 $ - $ - $ 605,948
EXPENSES:
Mortality and expense risk charges 25,535 6,281 17,476 5,215 812 984 148,529
------------------------------------------------------------------------------------------
Net investment income (loss) 121,256 16,317 12,851 11,965 (812) (984) 457,419
------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 77,167 9,870 48,614 10,903 2,592 1,900 385,148
Net unrealized appreciation
(depreciation) on 428,283 (475) 280,065 62,794 5,500 15,881 1,659,178
------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 505,450 9,395 328,679 73,697 8,092 17,781 2,044,326
------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $ 341,530 $ 85,662 $ 7,280 $ 16,797 $ 2,501,745
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 275
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET FUND
-------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- -------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 182,501 $ 201,350 $ 257,205 $ (6,033) $(49,317)
-------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 18,682,585 3,472,661 502,580 450,497 517,217
Transfers between investment
sub-accounts and general account, net (17,513,159) 441,371 116,341 315,228 428,435
Surrenders and lapses (129,543) (642,850) (60,070) (39,263) (42,491)
Death benefits - (17,717) - - -
Loan collateral interest received 6,164 4,077 1,290 2,872 11
Transfers for policy loans 36,797 (122,318) (21,898) 222,748 (3,291)
Cost of insurance and administrative charges (1,012,392) (1,071,664) (155,432) (192,739) (118,739)
Miscellaneous 10,796 (2,509) 202 3,717 263
-------------------------------------------------------------------------------
Total capital transactions 81,248 2,061,051 383,013 763,060 781,405
-------------------------------------------------------------------------------
Increase in net assets 263,749 2,262,401 640,218 757,027 732,088
Net assets, beginning of period 5,094,708 10,657,443 1,345,542 1,235,846 1,002,352
-------------------------------------------------------------------------------
Net assets, end of period $ 5,358,457 $ 12,919,844 $ 1,985,760 $1,992,873 $ 1,734,440
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
------------------------------- -----------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 646,592 $ 800,305 $ 2,124.245 $ 2,326,399
--------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 687,287 639,909 2,019,518 1,495,117
Transfers between investment
sub-accounts and general account, net 133,338 478,416 1,708,558 126,6009
Surrenders and lapses (47,051) (19,197) (218,945) (216,2798)
Death benefits (5,597) - - (1686)
Loan collateral interest received 301 985 4,566 2,8369
Transfers for policy loans (9,989) (11,042) (152,859) (127,5694)
Cost of insurance and administrative charges (216,417) (194,166) (592,963) (458,654)
Miscellaneous 2,715 (973) 1,537 (1,656)
--------------------------------------------------------------
Total capital transactions 544,587 893,932 2,769,412 820,227
--------------------------------------------------------------
Increase in net assets 1,191,179 1,694,237 4,893,657 3,146,626
Net assets, beginning of period 1,928,397 1,524,280 4,967,272 4,898,905
--------------------------------------------------------------
Net assets, end of period $ 3,119,576 $ 3,218,517 $ 9,860.929 $ 8,045,531
==============================================================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-61
<PAGE> 276
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- -------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 479,788 $ 1,199,206 $ 3,307,616 $ 164,304 $ 717,598
-------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 2,589,209 830,581 2,642,108 668,099 1,053,960
Transfers between investment
sub-accounts and general account, net 434,075 321,622 1,897,474 224,167 1,497,929
Surrenders and lapses (338,308) (116,132) (369,618) (254,614) (165,080)
Death benefits (15,977) (890) (18,064) - (391)
Loan collateral interest received 5,410 1,079 5,360 1,059 2,169
Transfers for policy loans (150,436) (37,314) (53,981) 15,738 (39,618)
Cost of insurance and administrative
charges (896,278) (241,330) (782,269) (218,356) (273,807)
Miscellaneous (558) 2,519 2,059 224 766
-------------------------------------------------------------------------------------
Total capital transactions 1,627,137 760,135 3,323,069 436,317 2,075,928
-------------------------------------------------------------------------------------
Increase in net assets 2,106,925 1,959,341 6,630,685 600,621 2,793,528
Net assets, beginning of period 8,587,503 2,372,031 7,172,129 2,099,984 1,852,603
-------------------------------------------------------------------------------------
Net assets, end of period 10,694,428 $ 4,331,372 $ 13,802,814 $ 2,700,605 $ 4,646,129
=====================================================================================
<CAPTION>
AMERICAN CENTURY VARIABLE
VIPF PORTFOLIOS
------------- ----------------------------------
VP INCOME &
INDEX 500 VP VALUE GROWTH
------------- ---------------- ----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,255,287 $ (12,155) $ 98,535
-------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 4,757,826 95,324 250,364
Transfers between investment
sub-accounts and general account, net 6,525,053 118,104 636,747
Surrenders and lapses (144,754) (335) (2,017)
Death benefits (278) - -
Loan collateral interest received 1,475 30 30
Transfers for policy loans (74,165) (1,615) (1,652)
Cost of insurance and administrative
charges (1,205,701) (16,178) (64,083)
Miscellaneous (7,881) 1,020 (528)
-------------------------------------------------
Total capital transactions 9,851,575 196,350 818,861
-------------------------------------------------
Increase in net assets 12,106,862 184,195 917,396
Net assets, beginning of period 6,177,933 34,803 98,878
-------------------------------------------------
Net assets, end of period $ 18,284,795 $ 218,998 $ 1,016,274
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 277
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
STRONG VARIABLE
INSURANCE NEUBERGER
JP MORGAN SERIES TRUST II STRONG FUNDS BERMAN
----------------------------------- ----------------- ------------------ ----------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
----------------- ---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 44,110 $ 60,512 $ 70,203 $ 461,052 $ 9,225
---------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 33,152 96,651 104,505 283,781 116,821
Transfers between investment
sub-accounts and general
account, net 255,894 57,937 446,411 907,034 128,937
Surrenders and lapses (222) (942) (1,323) (962) (835)
Death benefits - - - - -
Loan collateral interest received - - 30 15 -
Transfers for policy loans (790) (2,271) (39) (178) (1,542)
Cost of insurance and
administrative charges (5,688) (16,273) (15,424) (50,854) (22,504)
Miscellaneous (26) 326 145 (648) 1,049
---------------------------------------------------------------------------------------------
Total capital transactions 282,320 135,428 534,305 1,138,188 221,926
---------------------------------------------------------------------------------------------
Increase in net assets 326,430 195,940 604,508 1,599,240 231,151
Net assets, beginning of period 3,665 7,898 5,302 4,889 50,094
---------------------------------------------------------------------------------------------
Net assets, end of period $ 330,095 $ 203,838 $ 609,810 $ 1,603,929 $ 281,245
=============================================================================================
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
--------------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
------------------ ----------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 45,529 $ (124) $ 9,955 $ (1,408) $ 15,392,480
----------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 73,810 11,385 20,290 25,462 42,120,899
Transfers between investment
sub-accounts and general
account, net 99,089 18,795 31,986 107,309 (56,309)
Surrenders and lapses (1,016) - (2,114) (217) (2,814,178)
Death benefits - - - - (59,082)
Loan collateral interest received - - - - 39,759
Transfers for policy loans - - (2,265) - (539,549)
Cost of insurance and
administrative charges (16,831) (1,588) (5,138) (7,755) (7,853,223)
Miscellaneous 13 (73) 29 48 12,576
----------------------------------------------------------------------------------------------
Total capital transactions 155,065 28,519 42,788 124,847 30,850,693
----------------------------------------------------------------------------------------------
Increase in net assets 200,594 28,395 52,743 123,439 46,243,173
Net assets, beginning of period 35,824 8,701 21,046 15,382 61,203,210
----------------------------------------------------------------------------------------------
Net assets, end of period $ 236,418 $ 37,096 $ 73,789 $ 138,821 $ 107,446,383
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 278
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
----------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 145,262 $ 1,002,466 $ 86,501 $ 132,098 $ 45,915
----------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 16,065,276 3,354,679 445,159 398,177 196,330
Transfers between investment
sub-accounts and general
account, net (14,045,451) 2,034,966 311,097 221,558 398,322
Surrenders and lapses (68,115) (132,734) (21,255) (69,168) (5,455)
Death benefits - (7,259) - - -
Loan collateral interest received 2,566 938 33 65 -
Transfers for policy loans (126,218) (85,328) (8,932) (269,851) (183)
Cost of insurance and
administrative charges (740,562) (856,845) (109,134) (146,025) (64,998)
Miscellaneous (81,958) 3,632 (360) 2,239 942
----------------------------------------------------------------------------------------
Total capital transactions 1,005,538 4,312,049 616,608 136,995 524,958
----------------------------------------------------------------------------------------
Increase in net assets 1,150,800 5,314,515 703,109 269,093 570,873
Net assets, beginning of period 3,943,908 5,342,928 642,433 966,753 431,479
----------------------------------------------------------------------------------------
Net assets, end of period $ 5,094,708 $ 10,657,443 $ 1,345,542 $ 1,235,846 $ 1,002,352
========================================================================================
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
-------------------------------- ---------------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 95,113 $ 161,375 $ 1,382,594 $ 591,472
-----------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 559,764 459,162 1,209,427 1,436,433
Transfers between investment
sub-accounts and general
account, net 561,436 384,776 742,149 634,727
Surrenders and lapses (27,026) (6,365) (55,449) (90,129)
Death benefits - (74) (3,477) -
Loan collateral interest received 63 18 789 905
Transfers for policy loans (9,095) (4,451) (60,399) (45,307)
Cost of insurance and
administrative charges (156,931) (106,073) (326,928) (380,014)
Miscellaneous (262) 9,459 702 1,507
-----------------------------------------------------------------------
Total capital transactions 927,949 736,452 1,506,814 1,558,122
-----------------------------------------------------------------------
Increase in net assets 1,023,062 897,827 2,889,408 2,149,594
Net assets, beginning of period 905,335 626,453 2,077,864 2,749,311
-----------------------------------------------------------------------
Net assets, end of period $ 1,928,397 $ 1,524,280 $ 4,967,272 $ 4,898,905
=======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE> 279
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- -------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS $ 685,799 $ 181,439 $ 1,762,023 $ (111,737) $ 304,954
RESULTING FROM OPERATIONS
-------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 2,326,536 743,468 1,759,391 581,195 415,042
Transfers between investment
sub-accounts and general account, net 1,742,916 449,158 960,014 702,770 833,579
Surrenders and lapses (76,821) (58,543) (122,190) (21,495) (5,561)
Death benefits (6,548) - - - -
Loan collateral interest received 1,619 493 1,166 216 90
Transfers for policy loans (102,818) (22,119) (116,207) (49,108) (6,944)
Cost of insurance and administrative
charges (700,287) (185,158) (501,069) (157,515) (106,990)
Miscellaneous 6,609 2,008 2,116 (345) 1,387
-------------------------------------------------------------------------------------
Total capital transactions 3,191,206 929,307 1,983,221 1,055,718 1,130,603
-------------------------------------------------------------------------------------
Increase in net assets 3,877,005 1,110,746 3,745,244 943,981 1,435,557
Net assets, beginning of period 4,710,498 1,261,285 3,426,885 1,156,003 417,046
-------------------------------------------------------------------------------------
Net assets, end of period $ 8,587,503 $ 2,372,031 $ 7,172,129 $ 2,099,984 $ 1,852,603
=====================================================================================
<CAPTION>
AMERICAN CENTURY VARIABLE
VIPF PORTFOLIOS
------------- ----------------------------------
VP INCOME &
INDEX 500 VP VALUE GROWTH
------------- ---------------- ----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS $ 798,713 $ 2,329 $ 9,233
RESULTING FROM OPERATIONS
-------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,365,857 15,989 19,753
Transfers between investment
sub-accounts and general account, net 3,838,930 18,383 71,190
Surrenders and lapses (6,581) - -
Death benefits - - -
Loan collateral interest received 820 - -
Transfers for policy loans (28,549) - -
Cost of insurance and administrative
charges (339,911) (1,892) (1,301)
Miscellaneous 4,244 (6) 3
-------------------------------------------------
Total capital transactions 4,834,810 32,474 89,645
-------------------------------------------------
Increase in net assets 5,633,523 34,803 98,878
Net assets, beginning of period 544,410 - -
-------------------------------------------------
Net assets, end of period $ 6,177,933 $ 34,803 $ 98,878
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE> 280
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
STRONG VARIABLE
INSURANCE NEUBERGER
JP MORGAN SERIES TRUST II STRONG FUNDS BERMAN
----------------------------------- ----------------- ----------------- ---------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
----------------- ---------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 125 $ 630 $ 236 $ 724 $ 3,268
------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 116 898 565 378 11,133
Transfers between investment
sub-accounts and general
account, net 3,456 6,594 4,661 3,673 37,275
Surrenders and lapses - - - - -
Death benefits - - - - -
Loan collateral interest received - - - - -
Transfers for policy loans - - - - -
Cost of insurance and
administrative charges (33) (285) (157) (82) (1,557)
Miscellaneous 1 61 (3) (4) (25)
------------------------------------------------------------------------------------------
Total capital transactions 3,540 7,268 5,066 3,965 46,826
------------------------------------------------------------------------------------------
Increase in net assets 3,665 7,898 5,302 4,689 50,094
Net assets, beginning of period - - - - -
------------------------------------------------------------------------------------------
Net assets, end of period $ 3,665 $ 7,898 $ 5,302 $ 4,689 $ 50,094
==========================================================================================
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
----------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
---------------- --------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,941 $ (50) $ 2,065 $ 1,834 $ 7,286,322
----------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,395 346 664 122 31,367,255
Transfers between investment
sub-accounts and general
account, net 33,060 8,465 18,678 13,988 (9,630)
Surrenders and lapses - - - - (766,887)
Death benefits - - - - (17,358)
Loan collateral interest received - - - - 9,781
Transfers for policy loans - - - - (935,509)
Cost of insurance and
administrative charges (580) (127) (362) (562) (4,885,378)
Miscellaneous 8 67 1 - (47,977)
----------------------------------------------------------------------------------------
Total capital transactions 33,883 8,751 18,981 13,548 24,714,297
----------------------------------------------------------------------------------------
Increase in net assets 35,824 8,701 21,046 15,382 32,000,619
Net assets, beginning of period - - - - 29,202,591
----------------------------------------------------------------------------------------
Net assets, end of period $ 35,824 $ 8,701 $ 21,046 $ 15,382 $ 61,203,210
========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE> 281
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARKET STREET FUND
---------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 108,992 $ 574,006 $ 61,860 $ 117,242 $ 19,719
---------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 14,928,533 1,666,786 226,537 291,903 117,811
Transfers between investment
sub-accounts and general
account, net (11,556,251) 2,658,992 304,863 252,090 250,863
Surrenders and lapses (35,239) (16,526) (3,762) (7,277) (2,819)
Death benefits - (16,352) - - -
Loan collateral interest received - 62 - - -
Transfers for policy loans - (12,082) (47) - -
Cost of insurance and
administrative charges (632,456) (368,354) (52,706) (103,982) (33,934)
Miscellaneous (1,308) 4,519 158 (328) (11)
---------------------------------------------------------------------------------------
Total capital transactions 2,703,279 3,917,045 475,043 432,406 331,910
---------------------------------------------------------------------------------------
Increase in net assets 2,812,271 4,491,051 536,903 549,648 351,629
Net assets, beginning of period 1,131,637 851,877 105,530 417,105 79,850
---------------------------------------------------------------------------------------
Net assets, end of period $ 3,943,908 $ 5,342,928 $ 642,433 $ 966,753 $ 431,479
=======================================================================================
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
-------------------------------- --------------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 23,137 $ 59,192 $ 223,550 $ 210,360
----------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 333,866 200,093 726,590 1,015,432
Transfers between investment
sub-accounts and general
account, net 372,293 310,212 755,142 1,179,593
Surrenders and lapses (3,213) (1,141) (6,060) (19,896)
Death benefits - - - (830)
Loan collateral interest received - 9 91 93
Transfers for policy loans (845) (437) (9,340) (14,708)
Cost of insurance and
administrative charges (82,909) (37,403) (174,005) (238,728)
Miscellaneous (1,222) 3,791 246 (388)
----------------------------------------------------------------------
Total capital transactions 617,970 475,124 1,292,664 1,920,568
----------------------------------------------------------------------
Increase in net assets 641,107 534,316 1,516,214 2,130,928
Net assets, beginning of period 264,228 92,137 561,650 618,383
----------------------------------------------------------------------
Net assets, end of period $ 905,335 $ 626,453 $ 2,077,864 $ 2,749,311
======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE> 282
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
VIPF
---------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $ 341,530 $ 85,662 $ 7,280
---------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,350,368 421,824 1,240,642 273,306 90,825
Transfers between investment
sub-accounts and general account, net 1,824,653 715,582 1,471,895 690,283 331,696
Surrenders and lapses (15,710) (3,305) (15,336) (2,774) (489)
Death benefits - (295) (879) - -
Loan collateral interest received 390 101 115 12 -
Transfers for policy loans (27,151) (8,820) (15,684) (1,157) (201)
Cost of insurance and administrative
charges (363,378) (92,839) (274,427) (61,178) (12,527)
Miscellaneous 89 2,820 1,042 511 462
---------------------------------------------------------------------------------------
Total capital transactions 2,769,261 1,035,068 2,407,368 899,003 409,766
---------------------------------------------------------------------------------------
Increase in net assets 3,395,967 1,060,780 2,748,898 984,665 417,046
Net assets, beginning of period 1,314,531 200,505 677,987 171,338 -
---------------------------------------------------------------------------------------
Net assets, end of period $ 4,710,498 $ 1,261,285 $ 3,426,885 $ 1,156,003 $ 417,046
=======================================================================================
<CAPTION>
VIPF
-------------
INDEX 500 TOTAL
------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 16,797 $ 2,501,745
---------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 112,247 22,996,763
Transfers between investment
sub-accounts and general account, net 436,969 (1,125)
Surrenders and lapses (322) (133,869)
Death benefits - (18,356)
Loan collateral interest received - 873
Transfers for policy loans - (90,472)
Cost of insurance and administrative
charges (19,167) (2,547,993)
Miscellaneous (2,114) 8,267
---------------------------------
Total capital transactions 527,613 20,214,088
---------------------------------
Increase in net assets 544,410 22,715,833
Net assets, beginning of period - 6,486,758
---------------------------------
Net assets, end of period $ 544,410 $ 29,202,591
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE> 283
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Variable Life Insurance Account (the Variable Account) began operations
on March 11, 1996 and is registered as a unit investment trust under the
Investment Company Act of 1940, as amended. The operations of the Variable
Account are part of National Life Insurance Company (National Life). The
Variable Account was established by National Life as a separate investment
account to invest the net premiums received from the sale of certain variable
life insurance products. Equity Services, Inc., an indirect wholly-owned
subsidiary of National Life, is the principal underwriter for the variable life
insurance policies issued by National Life. Sentinel Advisors Company, an
indirectly-owned subsidiary of National Life, provides investment advisory
services for certain Market Street Fund, Inc. mutual fund portfolios.
National Life maintains three segments within the Variable Account. The Varitrak
Segment (the Segment) within the Variable Account was established on March 11,
1996 and is used exclusively for National Life's flexible premium variable life
insurance products known collectively as Varitrak. On May 1, 1998, National Life
established the Estate Provider Segment within the Variable Account to be used
exclusively for National Life's flexible premium variable life insurance
products known collectively as Estate Provider. On February 12, 1999, National
Life established the Benefit Provider Segment within the Variable Account to be
used exclusively for National Life's flexible premium variable universal life
policy known collectively as Benefit Provider.
The Segment invests the accumulated policyholder account values in shares of
mutual fund portfolios within Market Street Fund, Inc., Alger American Fund,
Variable Insurance Products Fund and Variable Insurance Products fund II (VIPF),
American Century Variable Portfolios, JP Morgan Series Trust II, Strong Variable
Insurance Funds, Strong Opportunity Fund II, Neuberger Berman Advisers
Management Trust and Goldman Sachs Variable Insurance Trust. Net premiums
received by the Segment are deposited in investment portfolios as designated by
the policyholder, except for initial net premiums on new policies which are
first invested in the Market Street Fund Money Market Portfolio. Policyholders
may also direct the allocations of their account value between the various
investment portfolios within the Segment and a declared interest account (within
the General Account of National Life) through participant transfers.
There are Twenty-six sub-accounts within the Segment. Each sub-account, which
invests exclusively in the shares of the corresponding portfolio, comprises the
accumulated policyholder account values of the underlying variable life
insurance policies investing in the sub-account.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States (GAAP). The preparation of
financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
in the preparation of the Segment's financial statements.
INVESTMENTS
The mutual fund portfolios consist of the Market Street Fund Money Market,
Market Street Fund Growth, Market Street Fund Aggressive Growth, Market Street
Fund Managed, Market Street Fund Bond, Market Street Fund International, Market
Street Fund Sentinel Growth, Alger American Fund Growth, Alger American Fund
Small Capitalization, VIPF Equity Income, VIPF Overseas, VIPF Growth, VIPF High
Income, VIPF Contra, VIPF Index 500, American Century Variable Portfolios VP
Value, American Century
F-69
<PAGE> 284
Variable Portfolios VP Income & Growth, JP Morgan Series Trust II International
Opportunities, JP Morgan Series Trust II Small Company, Strong Opportunity Fund
II, Strong Variable Insurance Funds Mid Cap Growth, Neuberger Berman Advisers
Management Trust Partners Portfolio, Goldman Sachs Variable Insurance Trust
International Equity, Goldman Sachs Variable Insurance Trust Global Income,
Goldman Sachs Variable Insurance Trust CORE Small Cap Equity, and Goldman Sachs
Variable Insurance Trust Mid Cap Value (formerly Goldman Sachs Variable
Insurance Trust Mid Cap Equity) (the Portfolios). The assets of each portfolio
are held separate from the assets of the other portfolios and each has different
investment objectives and policies. Each portfolio operates separately and the
gains or losses in one portfolio have no effect on the investment performance of
the other portfolios.
INVESTMENT VALUATION
The investments in the Portfolios are valued at the closing net asset value per
share as determined by the portfolio at the end of each period. The change in
the difference between cost and market value is reflected as unrealized gain
(loss) in the Statement of Operations.
INVESTMENT TRANSACTIONS
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed) and dividend income (including capital gain
distributions) are recorded on the ex-dividend date. The cost of investments
sold was determined using the average cost method prior to 1998. Effective
January 1, 1998, the Variable Account changed its method of calculating the cost
of investments sold from the average cost method to the first in, first out
method (FIFO). Management believes FIFO better matches policyholder and
sub-account investment activity. Management also believes it would be
impractical to calculate the cumulative effect of this change on previously
reported realized and unrealized gains and losses; however, during 1998 the
change increased net realized gains by $ 176,300 and decreased net unrealized
gains by the same amount.
FEDERAL INCOME TAXES
The operations of the Segment are part of, and taxed with, the total operations
of National Life. Under existing federal income tax law, investment income and
capital gains attributable to the Segment are not taxed.
NOTE 3 - CHARGES AND EXPENSES
National Life deducts a daily charge from the Segment based on an annual rate of
.9% of each sub-account's net asset value for its assumption of mortality and
expense risks. The mortality risk assumed is that the insureds under the
policies may die sooner than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the policies may exceed expected
levels.
Cost of insurance charges are deducted monthly from each policyholder's
accumulated account value for the insurance protection provided and are remitted
to National Life. These charges vary based on the net amount at risk, attained
age of the insured, and other factors. As partial compensation for
administrative services provided, National Life also deducts a monthly
administrative charge from each policyholder's accumulated account value.
Certain deferred administrative and sales charges are deducted from the
policyholder's accumulated account value if the underlying variable life
insurance policy is surrendered or lapsed prior to the end of the fifteenth
policy year.
F-70
<PAGE> 285
NOTE 4 - INVESTMENTS
The number of shares held and cost for each of the portfolios at December 31,
1999 are set forth below:
<TABLE>
<CAPTION>
Portfolio Shares Cost
--------- --------- ------------
<S> <C> <C>
Market Street Fund
Money Market 5,358,457 $5,358,457
Growth 682,146 12,175,244
Aggressive Growth 90,385 1,781,021
Managed 118,694 1,999,930
Bond 163,936 1,767,570
International 187,025 2,575,305
Sentinel Growth 180,917 2,402,248
Alger American Fund
Growth 153,168 7,879,902
Small Capitalization 145,885 6,150,958
VIPF
Equity Income 415,964 10,198,642
Overseas 157,849 3,202,915
Growth 251,280 10,482,207
High Income 238,780 2,738,276
Contrafund 159,387 3,905,880
Index 500 109,222 16,187,265
American Century Variable Portfolios
VP Value 36,806 232,301
VP Income & Growth 127,034 931,049
JP Morgan Series Trust II
International Opportunities 23,868 296,841
Small Company 12,184 168,933
Strong Opportunity Fund II 23,463 545,722
Strong Variable Insurance Funds
Mid Cap Growth 52,813 1,211,986
Neuberger & Berman Partners Portfolio 14,320 276,390
Goldman Sachs Variable Insurance Trust
International Equity 16,339 213,696
Global Income 3,774 38,411
CORE Small Cap Equity 6,961 64,424
Mid Cap Value 16,487 140,683
-----------
Total $92,926,256
===========
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-71
<PAGE> 286
NOTE 5 - PURCHASES AND SALES OF PORTFOLIO SHARES
Purchases and proceeds from sales of shares in the portfolios for the period
ended December 31, 1999 aggregated the following:
<TABLE>
<CAPTION>
Portfolio Purchases Proceeds
--------- ------------ ------------
<S> <C> <C>
Market Street Fund
Money Market $ 30,017,749 $ 29,754,001
Growth 5,906,146 3,707,638
Aggressive Growth 1,012,942 463,509
Managed 1,601,669 783,151
Bond 1,237,707 443,654
International 1,373,865 716,226
Sentinel Growth 1,530,288 584,581
Alger American Fund
Growth 5,246,454 1,954,478
Small Capitalization 3,299,916 1,842,757
VIPF
Equity Income 4,653,458 2,690,803
Overseas 1,653,898 819,970
Growth 6,794,360 2,710,100
High Income 1,636,086 1,004,971
Contra Fund 3,173,362 1,042,936
Index 500 14,975,545 5,113,839
American Century Variable Portfolios
VP Value 247,551 46,463
VP Income & Growth Fund 1,087,652 272,961
JP Morgan Series Trust II
International Opportunities 303,830 12,176
Small Company 291,978 152,482
Strong Opportunity Fund II 616,948 80,979
Strong Variable Insurance Funds
Mid Cap Growth 1,479,359 345,061
Neuberger Berman Advisers Management Trust
Partners Portfolio 341,053 116,879
Goldman Sachs Variable Insurance Trust
International Equity 288,345 117,011
Global Income 32,872 3,098
CORE Small Cap Equity 76,961 34,469
Mid Cap Value 143,810 18,647
</TABLE>
NOTE 6 - LOANS
Policyholders may obtain loans after the first policy year as outlined in the
variable life insurance policy. At the time a loan is granted, accumulated value
equal to the amount of the loan is designated as collateral and transferred from
the Segment to the General Account of National Life. Interest is credited by
National Life at predetermined rates on collateral held in the General Account.
This interest is periodically transferred to the Segment.
NOTE 7 - DISTRIBUTION OF NET INCOME
The Segment does not expect to declare dividends to policyholders from
accumulated net income. The accumulated net income will be distributed to
policyholders as withdrawals (in the form of death benefits, surrenders or
policy loans) in excess of the policyholders' net contributions to the Segment.
F-72
<PAGE> 287
NOTE 8 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (IRC), a
variable universal life insurance contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
a variable universal life insurance contract for federal income tax purposes for
any period for which the investments of the segregated asset account on which
the contract is based are not adequately diversified. The IRC provides that the
adequately diversified requirement may be met if the underlying investments
satisfy either a statutory safe harbor test or diversification requirements set
forth in regulations issued by the Secretary of the Treasury.
National Life believes that the Segment satisfies the current requirements of
the regulations, and it intends that the Segment will continue to meet such
requirements.
F-73
