<PAGE> 1
As filed with the Securities and Exchange Commission on May 1, 2000
Registration No. 333-44723
File No. 811-9044
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
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NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(Exact name of trust)
NATIONAL LIFE INSURANCE COMPANY
(Name of depositor)
One National Life Drive
Montpelier, Vermont 05604
(Complete address of depositor's principal executive offices)
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D. Russell Morgan
Counsel
National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
(Name and complete address of agent for service)
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Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
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It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
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X on May 1, 2000 pursuant to paragraph (b) of Rule 485
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60 days after filing pursuant to paragraph (a) of Rule 485
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on May 1, 1999 pursuant to paragraph (a) of Rule 485
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================================================================================
<PAGE> 2
PART I
Information Required in Prospectus
<PAGE> 3
SENTINEL ESTATE PROVIDER
SURVIVORSHIP VARIABLE UNIVERSAL LIFE
INSURANCE
P R O S P E C T U S
DATED MAY 1, 2000
NATIONAL LIFE INSURANCE COMPANY Home Office: National Life Drive,
Montpelier, Vermont 05604
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT Telephone: (800) 537-7003
This prospectus describes the Sentinel Estate Provider Policy, a
survivorship variable universal life insurance policy offered by National Life
Insurance Company. This Policy combines insurance and investment features. It
provides a death benefit on the death of the last to die of two specified
insured people. 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 fixed account, or a combination of the two. The
fixed account pays interest at rates guaranteed to be at least 4%. The separate
account has twenty-two subaccounts. Each subaccount buys shares of a specific
fund portfolio. The available funds are:
<TABLE>
<CAPTION>
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VARIABLE INSURANCE PRODUCTS AMERICAN CENTURY VARIABLE GOLDMAN SACHS VARIABLE
MARKET STREET FUND, INC. FUND AND VARIABLE INSURANCE PORTFOLIOS, INC. INSURANCE TRUST
PRODUCTS FUND II
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<S> <C> <C> <C>
AGGRESSIVE GROWTH PORTFOLIO* GROWTH PORTFOLIO VP INCOME & GROWTH CORE SMALL CAP
PORTFOLIO EQUITY
BOND PORTFOLIO* HIGH INCOME PORTFOLIO VP VALUE PORTFOLIO GLOBAL INCOME
GROWTH PORTFOLIO* INTERNATIONAL EQUITY
INTERNATIONAL PORTFOLIO+ INDEX 500 PORTFOLIO MID CAP VALUE
MANAGED PORTFOLIO*
MONEY MARKET PORTFOLIO* CONTRAFUND PORTFOLIO
SENTINEL GROWTH PORTFOLIO*
*Managed by Sentinel Advisors Company Managed by Fidelity Investments Managed by American Century Managed by Goldman Sachs
+Managed by Providentmutual Investment Management, Inc. Asset Management &
Investment Management Company Goldman Sachs Asset
Management International
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</TABLE>
<TABLE>
<CAPTION>
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NEUBERGER BERMAN ADVISERS STRONG VARIABLE INSURANCE STRONG OPPORTUNITY FUND II
J.P. MORGAN SERIES TRUST II MANAGEMENT TRUST FUNDS, INC.
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<S> <C> <C> <C>
INTERNATIONAL OPPORTUNITIES PARTNERS PORTFOLIO MID CAP GROWTH FUND II
PORTFOLIO
SMALL COMPANY PORTFOLIO
Managed by J. P. Morgan Managed by Neuberger Berman Managed by Strong Capital Managed by Strong Capital
Investment Management, Inc. Management, Inc. Management, Inc. Management, Inc.
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</TABLE>
We are currently planning to substitute new fund options for all seven of the
Market Street Fund, Inc. portfolios and all four of the Goldman Sachs Variable
Insurance Trust portfolios during 2000. Please see page __ of this Prospectus
for more information.
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
expense charge, cost of insurance charges, the variable account charge, the
monthly 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
<PAGE> 4
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 last survivor 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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary Description of the Policy.......................................
The Policy .......................................................
The Variable Account..............................................
Availability of Policy............................................
The Death Benefit.................................................
Flexibility to Adjust Death Benefit...............................
Accumulated Value.................................................
Allocation of Net Premiums........................................
Transfers.........................................................
Free-Look Privilege...............................................
Charges Assessed in Connection with the Policy....................
Loan Privilege....................................................
Withdrawal of Cash Surrender Value................................
Surrender of the Policy...........................................
Available Automated Fund Management Features......................
Optional Benefits.................................................
Tax Treatment.....................................................
Other Policies....................................................
Illustrations.....................................................
Questions.................................................
National Life Insurance Company, The Variable Account, and The Funds....
National Life Insurance Company...................................
The Variable Account..............................................
The Market Street Fund............................................
American Century Variable Portfolios, Inc.........................
Variable Insurance Products Fund and Variable Insurance Products
Fund II...................................................
Goldman Sachs Variable Insurance Trust............................
J.P. Morgan Series Trust II.......................................
Neuberger Berman Advisers Management Trust........................
Strong Variable Insurance Funds, Inc and Strong Opportunity
Fund II...................................................
Planned Substitutions.............................................
Additional Funds to be Offered in the Future......................
Other Information.................................................
The Fixed Account.................................................
Detailed Description of Policy Provisions...............................
Death Benefit.....................................................
Death Benefit Options.............................................
How the Death Benefit May Vary....................................
Ability to Adjust Face Amount.....................................
How the Duration of the Policy May Vary...........................
Accumulated Value.................................................
Payment and Allocation of Premiums................................
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
Charges and Deductions..................................................
Premium Expense Charge............................................
Surrender Charge..................................................
Monthly Deductions................................................
Withdrawal Charge.................................................
Transfer Charge...................................................
Projection Report Charge..........................................
Other Charges.....................................................
Differences in Charges for Policies Issued in New York............
Policy Rights...........................................................
Loan Privileges...................................................
Surrender Privilege...............................................
Withdrawal of Cash Surrender Value................................
Free-Look Privilege...............................................
Telephone Transaction Privilege...................................
Other Transfer Rights.............................................
Available Automated Fund Management Features......................
The Fixed Account.......................................................
Minimum Guaranteed and Current Interest Rates.....................
Transfers from Fixed Account......................................
Other Policy Provisions.................................................
Optional Benefits.......................................................
Federal Income Tax Considerations.......................................
Introduction......................................................
Tax Status of the Policy..........................................
Tax Treatment of Policy Benefits..................................
Possible Tax Law Changes..........................................
Possible Charges for National Life's Taxes........................
Voting Rights...........................................................
Changes in Applicable Law, Funding and Otherwise........................
Officers and Directors of National Life.................................
Distribution of Policies................................................
Policy Reports..........................................................
State Regulation........................................................
Insurance Marketplace Standards Association
Experts.................................................................
Legal Matters...........................................................
Financial Statements....................................................
Glossary
Appendix A-Illustration of Death Benefits, Accumulated Values and
Cash Surrender Values............................................. A-1
Appendix B-Joint Age Calculation........................................ B-1
Appendix C-New York Surrender Charge Information........................
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> 6
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 at least one of the insured people is alive. The precise
meanings of the few capitalized terms used in this summary can be found in the
Glossary, on pages to .
THE POLICY
National Life Insurance Company issues the Sentinel Estate Provider last
survivor variable universal life insurance policy. This life insurance policy
allows you to make premium payments in any amount and whenever you like, within
limits. 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 last to die of two named insured people;
(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 these riders remain in force).
This policy is designed to help lessen the economic loss resulting from
the deaths of the two insured people. You should consider your need for
survivorship insurance coverage and the policy's investment potential on a
long-term basis. This policy pays its death benefit on the death of the last to
die of two named insured people.
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 cash value and death benefit will
fluctuate based on the investment results of the chosen fund portfolios, and the
crediting of interest to the fixed account, as well as other factors.
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 Cumulative Minimum Monthly Premium). See "How the Duration
of the Policy May Vary," page .
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 at least another set of
specified amounts of premiums have been paid (these amounts are defined in the
Glossary as the Cumulative Guarantee Premium). You may choose to have the
optional Guaranteed Death Benefit Rider cover the entire lifetimes of the two
insured people, or the period prior to the younger insured person's age 81. Of
course, the premiums necessary to keep the rider in force will be higher if you
elect to have the rider cover the entire lifetimes of the two insured people,
rather than until the younger insured person's age 81. See "Optional Benefits,"
page .
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.
1
<PAGE> 7
THE VARIABLE ACCOUNT
The variable account is divided into subaccounts, twenty two of which are
available under this policy. Each of these subaccounts buys shares of a
corresponding fund Portfolio. See "National Life Insurance Company, the Variable
Account and the Funds," page _____.
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 variable account.
AVAILABILITY OF POLICY
We will issue this policy for insured people from ages 0 to 90, as long as
the joint age is 15 to 90. To calculate a joint age for two potential insured
people, see Appendix B to this Prospectus. The minimum amount of basic coverage
for a Policy is $100,000. Before issuing a policy, we will require that the
proposed insured people meet certain underwriting standards.
We will assign insured people to one of these types of rate classes:
- Preferred Nonsmoker
- Nonsmoker
- Preferred Smoker
- Smoker
- Substandard, and
- Uninsurable.
A person may be assigned to an Uninsurable rate class where he or she would not
be insurable for single life coverage. (See "Issuance of a Policy," Page ___.)
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 both of the two
insured people. The death benefit will be increased by any additional benefits
that may be 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 ___.)
There are also two types of coverage available under the Policy - basic
coverage and additional coverage. (See "Death Benefit", Page .)
FLEXIBILITY TO ADJUST 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 ___, and "Ability to Adjust Face
Amount," Page ___.)
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<PAGE> 8
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 ___.)
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 variable account and the
fixed account. (See "Calculation of Accumulated Value," Page ___.)
The Accumulated Value in the variable account will reflect:
- the investment results of the chosen funds
- premiums paid
- transfers
- withdrawals
- loans
- loan repayments
- loan interest charged, and
- our charges on the policy.
We pay interest on Accumulated Value in the fixed account at rates we
declare in advance for specific periods. We guarantee that these rates will be
at least 4%. (See "The Fixed Account," Page ___.)
The Accumulated Value will likely impact both the Death Benefit and the
Monthly Deduction.
ALLOCATION OF PREMIUMS
You will be asked to specify, in the application for your policy, the
percentages of premium to go to each subaccount of the variable account or to
the fixed account. You may change these percentages whenever you like. You may
choose among all twenty-two available subaccounts of the variable 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 deduction for premium expense
charges, received during the free-look period that are to go to the variable
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 ___.)
TRANSFERS
You may transfer the amounts in the subaccounts and fixed account.
Transfers between the subaccounts or from the variable account into the fixed
account will be made on the day we receive the request. We limit transfers out
of the fixed account to the greater of $1000 and 25% of the Accumulated Value in
the fixed account. We also allow only one transfer out of the fixed account per
year. (See "Transfers," Page ___.)
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 gross premiums you paid.
This free-look period ends 10 days after you receive the policy, or at the end
of such longer period provided by state law. To
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<PAGE> 9
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
___.)
CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Summary of Policy Expenses
TRANSACTION EXPENSES
<TABLE>
<S> <C>
Premium Expense Charge (as a
percentage of premiums paid)... 3.40%, plus:
For years 1 to 10: 7%
up to Target Premium,
4% for premiums in excess of Target
Premium
After year 10: 4%(1)
Surrender Charge............... See page
Withdrawal Charge.............. Lesser of 2% of the
amount withdrawn or $25
Transfer Charge ............... NONE(2)
</TABLE>
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(1) We may (except as otherwise required by the state of issue) raise the
Premium Expense Charge to 3.40% plus 7% premiums up to the Target Premium, plus
5% for premiums in excess of the Target Premium. We may also raise the Premium
Expense Charge after Policy Year 10 up to the maximum permitted during the first
10 Policy Years.
(2) 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.
VARIABLE ACCOUNT AND POLICY CHARGES
<TABLE>
<S> <C>
Variable Account Charge (deducted monthly) Years 1-10:
Basic Coverage less than $1 million: annual rate
of 0.90%(3)
Basic Coverage of $1 million to $2,999,999: annual
rate of .80%(3)
Basic Coverage $3 million and over: annual
rate of 0.75%(3)
After year 10:
Basic Coverage less than $1 million: annual rate of 0.35%(4)
Basic Coverage of $1 million to $2,999,999: annual rate of 0.30%(4)
Basic Coverage $3 million and over: annual rate of 0.25%(4)
Cost of Insurance Charge (deducted monthly) Varies by Issue Age, sexes, Rate Class, duration of the
Policy-See page ______.
Administrative Charge (deducted monthly) Years 1 to 10: $15 plus $0.08(5) per $1000 of
Basic Coverage per month(6)
After year 10: $7.50 per month(7)
Rider Charges (deducted monthly) See "Optional Benefits" on page for charges
applicable to optional Riders elected for a Policy
</TABLE>
(3) The charge shown is the annual equivalent of the monthly charge. The
Variable Account Charge applies to Accumulated Value held in the Variable
Account. It does not apply to amounts held in the Fixed Account. We may increase
this charge to an amount up to 0.90% in call cases.
(4) This reduction is not guaranteed, except as required by the state of issue.
(5) This rate is lower for Joint Ages 38 and below.
(6) This charge is increased by $.005 per $1000 of Basic Coverage per month for
each Insured who is a smoker.
(7) We may (except as otherwise required by the state of issue) increase the
Monthly Administrative Charge for years after year 10 up to an amount not to
exceed $15 plus $0.08 per $1000 of Basic Coverage, plus $0.005 per $1000 of
Basic Coverage per month for each smoker. In addition, the $0.08 per $1000 of
Basic Coverage portion of the Monthly Administrative Charge, plus $0.05 per
$1,000 of Basic Coverage per month for each smoker, will apply to increases in
Basic Coverage for 10 years after an increase in Basic Coverage.
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<PAGE> 10
ANNUAL EXPENSES OF UNDERLYING FUNDS(8) (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>
Market Street Fund, Inc.:
Money Market Portfolio 0.25% 0.15% 0.40%
Bond Portfolio 0.35% 0.17% 0.52%
Managed Portfolio 0.40% 0.17% 0.57%
Aggressive growth Portfolio 0.41% 0.16% 0.57%
International Portfolio 0.75% 0.23% 0.98%
Growth Portfolio 0.32% 0.16% 0.48%
Sentinel Growth Portfolio 0.50% 0.21% 0.71%
American Century Variable Portfolios, Inc.
VP Value Portfolio 1.00% 0.00% 1.00%
VP Income & Growth Portfolio 0.70% 0.00% 0.70%
Fidelity: Variable Insurance Products
Fund I
Growth Portfolio 0.58% 0.07% 0.65%
High Income Portfolio 0.58% 0.11% 0.69%
Fidelity: Variable Insurance Products
Fund II
Index 500 Portfolio 0.24% 0.04% 0.28%
Contrafund Portfolio 0.58% 0.07% 0.65%
Goldman Sachs Variable Insurance Trust
International Equity Fund 1.00% 0.35% 1.35%
Global Income Fund 0.90% 0.25% 1.15%
CORE Small Cap Equity Fund 0.75% 0.25% 1.00%
Mid Cap Value Fund 0.80% 0.25% 1.05%
J.P. Morgan Series Trust II
International Opportunities Portfolio 0.60% 0.60% 1.20%
Small Company Portfolio 0.60% 0.55% 1.15%
Neuberger Berman Advisers Management Trust
Partners Portfolio 0.80% 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> 11
(8) 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 Fund and was not
independently verified by National Life. 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>
Fidelity VIP Fund-Growth Portfolio 0.58% 0.08% 0.66%
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%
Goldman Sachs International Equity 1.00% 0.77% 1.77%
Goldman Sachs Global Income 0.90% 1.78% 2.68%
Goldman Sachs CORE Small Cap Equity 0.75% 0.75% 1.50%
Goldman Sachs Mid Cap Value 0.80% 0.42% 1.22%
J.P. Morgan International Opportunities 0.60% 1.38% 1.98%
J.P. Morgan Small Company 0.60% 1.97% 2.57%
</TABLE>
Information with respect to the expenses of certain underlying funds we
anticipate substituting for other funds later in the year is set forth below.
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL MUTUAL
FEES EXPENSES FUND EXPENSES
<S> <C> <C> <C>
Fidelity VIP II Investment Grade Bond Portfolio 0.43% 0.11% 0.54%
Fidelity VIP Fund - Overseas Portfolio 0.73% 0.14% 0.87%
Neuberger Berman AMT Balanced Portfolio 0.85% 0.17% 1.02%
</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 Expense Charge. We deduct a Premium Expense Charge from each
premium payment. One portion of this charge, equal to 3.40% of each premium,
covers the cost of state and local premium taxes, and the federal DAC Tax. We
may change this portion of the charge if the applicable law changes. (See
"Premium Expense Charge," Page ___.)
The remainder of the Premium Expense Charge compensates us for expenses we
incur in selling the policies, including commissions to selling agents. During
the first 10 Years, we will deduct 7.0% of each premium paid up to the Target
Premium, and 4.0% of premiums paid in excess of the Target Premium. We may
increase the charge for premiums in excess of the Target Premium from 4.0% to
5.0% of such premiums. We currently intend to reduce this deduction from
premiums paid after first 10 years to 4.0% of all premiums; however, we will
have the right to deduct amounts up to the maximum permitted during the first
ten years. The Target Premium varies from policy to policy - it will be stated
in your policy and it is discussed in Appendix B to this prospectus.
Surrender Charge. We impose a Surrender Charge if a policy is surrendered
or lapses at any time before the end of the tenth year, or the ten years after
an increase in Basic Coverage. The initial Surrender Charge varies by Joint Age
and is shown in Appendix B to this prospectus. The Surrender Charge is level for
up to five years, and then declines by equal amounts each month until it is zero
at the beginning of year 11. For increases in Basic Coverage, the Surrender
Charge will be determined in the same way. The Surrender Charge will not
decrease in the event of a decrease in Basic Coverage. (See "Surrender Charge,"
Page .)
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 .)
Monthly Deductions. On the date of issue and each month thereafter, we
will deduct from a policy's Accumulated Value an amount equal to the sum of the
monthly Cost of Insurance Charge, Variable Account Charge, Monthly
Administrative Charge, and a charge for any additional benefits added by rider.
Cost of Insurance Charge. The monthly Cost of Insurance Charge will
be determined by multiplying the Net Amount at Risk (that is, the amount
by which the
6
<PAGE> 12
death benefit (before adjustment for policy loans and unpaid monthly
deductions) exceeds Accumulated Value) by the cost of insurance rate(s)
that apply to the two insured people. These rates depend upon:
- the ages of the insured persons when the coverage was issued
- the sexes of the insured persons
- the rate classes of the insured persons
- the time the coverage has been in force
- whether the coverage is Basic Coverage or Additional Coverage, and
- on our expectations as to future mortality experience.
However, these cost of insurance rates will not exceed the guaranteed
maximum cost of insurance rates set forth in your policy based on the
insured peoples' ages when the coverage was issued, sexes, Rate Class,
the time the coverage has been in force, whether the coverage is Basic
Coverage or Additional Coverage, and the "1980 Commissioners Standard
Ordinary Mortality Table." (See "Cost of Insurance Charge," Page ___.).
Variable Account Charge. The Variable Account Charge is a percentage
of the Accumulated Value in the Variable Account, and is not assessed on
Accumulated Value in the Fixed Account. The schedule of percentages that
apply to policies of various sizes and at different times are shown in the
chart provided above. We may raise applicable Variable Account Charge
percentages to annual amounts up to 0.90%. (See "Variable Account
Charge," page ).
Monthly Administrative Charge. The Monthly Administrative Charge
during the first 10 years is $15.00 plus $0.08 per $1000 of Basic
Coverage. This charge is increased by $0.005 per $1000 of Basic Coverage
for each insured person who is a smoker, and is reduced if the Joint Age
of the insured people is 38 or less. After 10 years, we currently intend
to assess a reduced Monthly Administrative Charge of $7.50, with no
additional amount per $1000 of Basic Coverage, but we may increase the
Monthly Administrative Charge after the tenth year to an amount not to
exceed $15 plus $0.08 per $1000 of Basic Coverage, plus $0.005 for each
smoker. The per $1000 of Basic Coverage portion of the Monthly
Administrative Charge will also apply to the increase in Basic Coverage
for 10 years after an increase in Basic Coverage. The per $1000 of Basic
Coverage portion of the Monthly Administrative Charge will not be reduced
for decreases in Basic Coverage. (See "Monthly Administrative Charge,"
Page ___.)
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 ___.)
Projection Report Charge. If you request a projection report, we may
impose a charge. (See "Projection Report Charge," Page __.)
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.
Policy loans will bear interest 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.
7
<PAGE> 13
When you take a policy loan, we will hold Accumulated Value in the fixed
account as collateral for the policy loan. We credit interest on amounts held in
the fixed account as collateral for policy loans at rates we declare prior to
each calendar year. This rate will be at least 4%.
We currently intend to make preferred loans available starting after a
policy is 10 years old. We plan to charge an interest rate of 4.25% per annum on
preferred loans, and credit interest on collateral for preferred loans at 4.0%
per annum. We are not obligated to make preferred loans available at any time.
(See "Loan Privileges," Page ___.)
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 ___.)
WITHDRAWAL OF CASH SURRENDER VALUE
After a year, you may request a withdrawal of Cash Surrender Value.
Withdrawals must be at least $500, and 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 fixed account until all the value in the variable account
has been exhausted. (See "Withdrawal of Cash Surrender Value," Page ___.)
SURRENDER OF THE POLICY
You may surrender the 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 ___.)
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 ___.
OPTIONAL BENEFITS
Several optional benefits are available in connection with the policies.
They are:
- the Guaranteed Death Benefit Rider
- the Additional Protection Benefit Rider
- the Policy Split Option
- the Estate Preservation Rider
- the Term Rider
- the Continuing Coverage Rider
- the Enhanced Death Benefit Rider, and
- the Automatic Increase Rider.
Not all optional benefits are available in all states. See "Optional Benefits",
on page .
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
8
<PAGE> 14
remains in force. Also, your Beneficiary generally should not be taxed on death
benefit proceeds. (See "Tax Status of the Policy," Page ___.)
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 ___.)
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 from Policies Not Classified as Modified Endowment Contracts,"
Page ___.)
Generally, the proceeds of a policy are includible in the gross estate of
an insured person if that person possesses any "incidents of ownership" over the
policy at death. "Incidents of ownership" generally includes the right to
receive economic benefits of the policy as defined in Section 2042 of the Code
and applicable Treasury regulations. If an insured person never held incidents
of ownership over the policy, or irrevocably transferred all interests in the
policy to a third party, such as an irrevocable life insurance trust) more than
three years before death, the proceeds should be excluded from his or her gross
estate.
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 to understand the
long-term effects of different levels of investment performance, of charges and
deductions, of electing one or the other death benefit option, and generally
comparing and contrasting this Policy to other life insurance policies.
Nonetheless, the illustrations are based on hypothetical investment rates of
return. THEY ARE NOT GUARANTEED. Illustrations are not a representation of past
or future performance. Actual rates of return may be more or less than those
reflected in the illustrations and, therefore, actual values will differ from
those illustrated.
QUESTIONS
If you have questions, you may write or call us at National Life Drive,
Montpelier, Vermont 05604, (800) 537-7003.
9
<PAGE> 15
NATIONAL LIFE INSURANCE COMPANY, THE VARIABLE 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 VARIABLE ACCOUNT
We established the Variable 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 variable life insurance policies we
currently issue, and other variable life insurance policies we may issue in the
future. You may choose among all the Subaccounts of the Variable Account
available under the Policies; however, we may limit the number of different
Subaccounts, other than the Money Market Subaccount, used in any Policy over its
entire life to 16.
The Variable Account's assets are the property of National Life. The
portion of the Variable Account's assets equal to the reserves and other
liabilities under the Policies (and other policies) supported by the Variable
Account will not be exposed to liabilities arising out of any other business
that we may conduct. The portion of the Variable 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 Variable Account that fund
other variable life insurance policies. The Variable Account may also include
amounts derived from expenses we have charged to the Policies (and the other
policies) which we currently hold in the Variable Account. The Variable Account
also may in the future include amounts held to support other variable life
insurance policies we may issue. From time to time we may move these additional
amounts to the Fixed Account.
The Variable 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. This registration does not
involve any supervision of the management or investment practices or policies of
the Variable Account by the SEC. The Variable Account meets the definition of a
"separate account" under federal securities laws.
THE MARKET STREET FUND
The Growth, Sentinel Growth, Aggressive Growth, Bond, Managed,
International, and Money Market Subaccounts of the Variable 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 Variable 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 Variable Account depends on the investment performance of
the corresponding Portfolio. There is no assurance that any Portfolio will
achieve its stated objective.
The Growth Portfolio. The Growth Portfolio seeks intermediate and
long-term growth of capital. A reasonable level of income is an important
secondary objective. This Portfolio pursues its objectives by investing
primarily in common stocks of companies believed to offer above-average growth
potential over both the intermediate and the long term.
10
<PAGE> 16
The Sentinel Growth Portfolio. The Sentinel Growth Portfolio seeks
long-term growth of capital through equity participation in companies having
growth potential believed by its investment adviser to be more favorable than
the U.S. economy as a whole, with a focus on relatively well-established
companies.
The Aggressive Growth Portfolio. The Aggressive Growth Portfolio seeks to
achieve a high level of long-term capital appreciation by investing in
securities of a diverse group of smaller emerging companies.
The Bond Portfolio. The Bond Portfolio seeks to generate a high level of
current income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
The Managed Portfolio. The Managed Portfolio seeks to realize as high a
level of long-term total rate of return as is consistent with prudent investment
risk by investing in stocks, bonds, money market instruments or a combination
thereof.
The International Portfolio. The International Portfolio seeks long-term
growth of capital principally through investments in a diversified portfolio of
marketable equity securities of established non-United States companies.
The Money Market Portfolio. The Money Market Portfolio seeks to provide
maximum current income consistent with capital preservation and liquidity by
investing in high-quality money market instruments.
Sentinel Advisors Company ("SAC") manages the Growth, Sentinel Growth,
Aggressive Growth, Bond, Managed and Money Market Portfolios. SAC is registered
with the SEC as an investment adviser under the Investment Advisers Act of 1940.
SAC is a partnership whose partners are affiliates of National Life, Provident
Mutual Life Insurance Company ("Provident Mutual"), and The Penn Mutual Life
Insurance Company. National Life's affiliate is currently the managing partner
of SAC and is entitled to the majority share of SAC's profit or loss. The
International Portfolio is advised by Providentmutual Investment Management
Company ("PIMC"), which is also registered with the SEC as an investment adviser
under the Investment Advisers Act of 1940. PIMC has employed The Boston Company
Asset Management, Inc. to provide investment advisory services to the
International Portfolio.
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.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of the VP Value fund, and one Subaccount which invests exclusively in
shares of VP Income & Growth fund. Each is a 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 Funds are purchased and redeemed by the Variable Account at net asset
value without a sales charge.
The investment objectives of the Funds of American Century Variable
Portfolios, Inc. in which the Subaccounts invest are set forth below. The
investment experience of each Subaccount depends upon the investment performance
of the underlying Fund. There is no assurance that either Fund will achieve its
stated objective.
VP Value. To seek long-term capital growth. Income is a secondary
objective. The fund 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 fund will seek to achieve its investment objective by
investing in common stocks.
The VP Value fund and the VP Income & Growth fund of the American Century
Variable Portfolios, Inc. are managed by American Century Investment Management,
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 VP Value and VP Income & Growth.
11
<PAGE> 17
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Variable Account has two Subaccounts which invest exclusively in
shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund")
and two Subaccounts which invest exclusively in shares of Portfolios of the
Variable Insurance Products Fund II ("VIP Fund II"). Like the Market Street
Fund, the VIP Fund and the VIP II Fund are "series" type mutual funds registered
with the SEC as diversified open-end management investment companies issuing a
number of series. Shares of these Portfolios are purchased and redeemed by the
Variable Account at net asset value without a sales charge.
The investment objectives of the Portfolios of the VIP Fund and the VIP
Fund II in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
corresponding Portfolio. There is no assurance that any Portfolio will achieve
its stated objective.
The Growth and High Income Portfolios of the VIP Fund and the Index 500
and Contrafund Portfolios of the VIP Fund II are managed by Fidelity Management
& Research Company ("FMR"). Bankers Trust Company currently serves as
sub-advisor to the Index 500 Portfolio. 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.
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.
Index 500 Portfolio. This Portfolio seeks investment results that
correspond to the total return of the 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.
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.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
The Variable Account has four Subaccounts which invest exclusively in
shares of the following four Funds of Goldman Sachs Variable Insurance Trust:
- -the International Equity Fund
- -the Global Income Fund
- -the CORE Small Cap Equity Fund, and
- -the Mid Cap Value Fund.
Goldman Sachs Variable Insurance Trust ("Goldman Sachs VIT") is
registered with the SEC as an open-end management investment company that offers
shares in ten investment mutual funds ("Funds"). Each Fund, except the Global
Income Fund, is a diversified investment company. Goldman Sachs Asset Management
acts as investment adviser for the Goldman Sachs VIT CORESM Small Cap Equity and
Mid Cap Value*Funds. Goldman Sachs Asset Management International acts as
investment adviser for the Goldman Sachs VIT International Equity and Global
Income Funds.
Goldman Sachs VIT International Equity Fund. Seeks long-term capital
appreciation. The Fund pursues its objectives by managing investments in equity
securities of companies that are organized outside the U.S. or whose securities
are principally traded outside the United States. The Fund intends to invest in
companies with public stock market capitalizations that are larger than $1
billion at the time of investment.
Goldman Sachs VIT Global Income Fund. Seeks a high-total return,
emphasizing current income and, to a lesser extent, providing opportunities for
capital appreciation. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and enters into transactions
in foreign currencies.
Goldman Sachs VIT CORE Small Cap Equity Fund. Seeks long-term growth of
capital. The Fund pursues its investment objective by investing in a broadly
diversified portfolio of equity securities of U.S. issuers which are included in
the Russell 2000 Index at the time of investment.
Goldman Sachs VIT Mid Cap Value Fund. Seeks long-term capital
appreciation primarily through investments in mid-capitalization U. S. stocks
that are believed to be undervalued or undiscovered by the marketplace. The Fund
invests, under normal circumstances, in equity securities of companies with
public stock market capitalizations within the range of the market
capitalization of companies constituting the Russell Midcap Index at the time of
investment (currently between $300 million and $15 billion).
CORE(SM) is a service mark of Goldman, Sachs & Co.
Formerly Mid-Cap Equity
12
<PAGE> 18
J.P. MORGAN SERIES TRUST II
The Variable Account has one Subaccount which invests exclusively in
shares of the J.P. Morgan International Opportunities Portfolio, and one
Subaccount which invests exclusively in shares of J.P. Morgan Small Company
Portfolio. Each of these Portfolios is a 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 Funds are purchased and redeemed by
the Variable Account at net asset value without a sales charge.
The investment objectives of the J.P. Morgan Series Trust II Portfolios in
which the Subaccounts invest are set forth below. The investment experience of
each Subaccount depends upon the investment performance of the underlying Fund.
There is no assurance that either Fund 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 Funds, 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.
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
The Variable Account has one Subaccount which invests exclusively in
shares of the Partners Portfolio, a series of Neuberger Berman Advisers
Management Trust. Neuberger Berman Advisers Management Trust ("AMT") is
registered with the SEC as a diversified open-end management investment
company. AMT has nine separate series, which are called Portfolios. Shares of
each portfolio represent an interest in that Portfolio.
The investment objectives of the Partners Portfolio are 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.
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 Fund, 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.
13
<PAGE> 19
STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of the Mid Cap Growth Fund II, a series of Strong Variable Insurance
Funds, Inc., and one Subaccount which invests exclusively in shares of Strong
Opportunity Fund II, Inc. Strong Variable Insurance Funds, Inc. is a "series"
type mutual fund registered with the SEC as a diversified open-end management
investment company issuing a number of series or classes of shares, 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
are purchased and redeemed by the Variable Account at net asset value without a
sales charge.
The investment objectives of the Strong Funds in which the Subaccounts
invest are set forth below. The investment experience of each Subaccount depends
upon the investment performance of the underlying Fund. There is no assurance
that either Fund will achieve its stated objective.
Mid Cap Growth Fund II. This Fund 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.
PLANNED SUBSTITUTION
Before the end of 2000, we anticipate substituting shares of new
portfolios for all seven of the Market Street portfolios and all four of the
Goldman Sachs Variable Insurance Trust portfolios. We discuss certain
information about the proposed substitutions below. You should know, however,
that we cannot proceed with the proposed substitutions until we receive certain
regulatory approvals, and that the details of the substitutions, including the
portfolios offered, may change. We will notify you of the final details,
including the approximate date, at least 30 days in advance of the
substitutions, and we will notify you once the substitutions have occurred.
Before the substitutions, we will send you current prospectuses for the new fund
options including the replacement portfolios.
Below is a chart in which we list the portfolios affected by the proposed
substitutions, the replacement portfolios' investment objectives, and the
investment advisers for the replacement portfolios.
PORTFOLIOS AFFECTED BY THE SUBSTITUTIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CURRENT PORTFOLIO REPLACEMENT PORTFOLIO REPLACEMENT PORTFOLIO'S INVESTMENT
ADVISER
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market Street Growth Portfolio Sentinel Variable Products Common National Life Investment Management
Stock Fund* Company, Inc.
- ------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth Portfolio Sentinel Variable Products Mid Cap National Life Investment Management
Growth Fund* Company, Inc.
- ------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth Sentinel Variable Products Small National Life Investment Management
Portfolio Company Fund* Company, Inc.
- ------------------------------------------------------------------------------------------------------------------------
Market Street Bond Portfolio Fidelity VIP Investment Grade Bond Fidelity Management & Research
Portfolio Company
- ------------------------------------------------------------------------------------------------------------------------
Market Street Managed Portfolio Neuberger Berman AMT Balanced Neuberger Berman Management Inc.
Portfolio
- ------------------------------------------------------------------------------------------------------------------------
Market Street International Portfolio J.P. Morgan International J.P. Morgan Investment Management,
Opportunities Portfolio Inc.
- ------------------------------------------------------------------------------------------------------------------------
Market Street Money Market Portfolio Sentinel Variable Products Money National Life Investment Management
Market Fund* Company, Inc.
- ------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT International Equity Fidelity VIP Overseas Portfolio Fidelity Management & Research
Fund Company
- ------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT Global Income Fund Fidelity VIP Investment Grade Bond Fidelity Management & Research
Portfolio Company
- ------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT CORE Small Cap Equity J.P. Morgan Small Company Portfolio J.P. Morgan Investment Management,
Fund Inc.
- ------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT Mid Cap Value Fund American Century VP Value Portfolio American Century Investment
Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------
*A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. When you receive the effective
prospectus for these securities from us, please read it carefully before you
invest or allocate premiums.
ADDITIONAL FUNDS TO BE OFFERED IN THE FUTURE
National Life anticipates that at the time of the substitution referred to
in the previous paragraph, the following additional Funds or Portfolios, in
addition to those which will be receiving assets in the substitution, will also
be made available to owners of the Policies: Alger American Leveraged AllCap
Fund, Dreyfus Socially Responsible Growth Fund, Inc., and INVESCO Variable
Investment Funds, Inc. - VIF Dynamics Fund, VIF Technology Fund, and VIF Health
Sciences Fund.
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 Variable 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 National Life. 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>
American Century Variable Portfolios, Inc. 0.20% $187.26
- ---------------------------------------------------------------------------------------------------------------------
Goldman Sachs Variable Insurance Trust 0.20% 401.56
- ---------------------------------------------------------------------------------------------------------------------
J.P. Morgan Series Trust II 0.20% 186.59
- ---------------------------------------------------------------------------------------------------------------------
Neuberger Berman Advisers Management Trust 0.15% 142.46
- ---------------------------------------------------------------------------------------------------------------------
Strong VIF and Opportunity Fund II 0.20% 144.99
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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 Variable 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.
14
<PAGE> 20
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 Variable 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 Variable 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 year-by-year net investment returns of
the Subaccounts of the Separate Account since the inception of the Subaccounts
through December 31, 1999. The inception date of all Subaccounts is May 4, 1998,
the date that the Policies were first offered.
The net investment returns reflect investment income and capital gains and
losses less investment management fees and expenses and the maximum Variable
Account Charge. The returns do not reflect the Cost of Insurance Charge, the
Premium Expense 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.
STATEMENT OF NET INVESTMENT RETURNS
<TABLE>
<CAPTION>
Subaccount 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
Effective
Date
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Market Street Fund, Inc.
Money Market Portfolio 05/04/98 3.97% 2.55% N/A N/A N/A N/A N/A N/A N/A N/A
Bond Portfolio 05/04/98 -4.17% 4.92% N/A N/A N/A N/A N/A N/A N/A N/A
Managed Portfolio 05/04/98 0.00% 3.27% N/A N/A N/A N/A N/A N/A N/A N/A
Aggressive Growth Portfolio 05/04/98 14.88% -4.64% N/A N/A N/A N/A N/A N/A N/A N/A
International Portfolio 05/04/98 28.15% -6.05% N/A N/A N/A N/A N/A N/A N/A N/A
Growth Portfolio 05/04/98 2.04% 1.09% N/A N/A N/A N/A N/A N/A N/A N/A
Sentinel Growth Portfolio 05/04/98 37.57% 4.89% N/A N/A N/A N/A N/A N/A N/A N/A
American Century Variable Portfolios,
Inc.
VP Value Portfolio 05/04/98 -1.73% -6.84% N/A N/A N/A N/A N/A N/A N/A N/A
VP Income & Growth Portfolio 05/04/98 16.97% 8.23% N/A N/A N/A N/A N/A N/A N/A N/A
Fidelity: Variable Insurance Products
Fund I
Growth 05/04/98 36.21% 19.38% N/A N/A N/A N/A N/A N/A N/A N/A
High Income 05/04/98 7.19% -10.59% N/A N/A N/A N/A N/A N/A N/A N/A
Fidelity: Variable Insurance Products
Fund II
Index 500 05/04/98 19.44% 9.70% N/A N/A N/A N/A N/A N/A N/A N/A
Contrafund 05/04/98 23.15% 12.50% N/A N/A N/A N/A N/A N/A N/A N/A
Goldman Sachs Variable Insurance Trust
International Equity Fund 05/04/98 30.67% -1.65% N/A N/A N/A N/A N/A N/A N/A N/A
Global Income Fund 05/04/98 -1.90% 5.63% N/A N/A N/A N/A N/A N/A N/A N/A
CORE Small Cap Equity Fund 05/04/98 16.49% -18.65% N/A N/A N/A N/A N/A N/A N/A N/A
Mid Cap Value Fund 05/04/98 -1.83% -15.26% 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 05/04/98 35.44% -9.91% N/A N/A N/A N/A N/A N/A N/A N/A
Small Company Portfolio 05/04/98 43.11% -17.05% N/A N/A N/A N/A N/A N/A N/A N/A
Neuberger Berman Advisers Management
Trust Partners Portfolio 05/04/98 6.41% -7.54% 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 05/04/98 88.19% 15.22% N/A N/A N/A N/A N/A N/A N/A N/A
Opportunity Fund II 05/04/98 33.70% -4.68% N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
THE FIXED ACCOUNT
For information on the Fixed Account, see page .
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 death of both of the Insureds (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 ___.) 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. The Face
Amount of a Policy, on which the Unadjusted Death Benefit is based, may be made
up of either Basic Coverage or Additional Coverage. Additional Coverage is
provided by the Additional Protection Benefit Rider.
You must notify us as soon as reasonably possible of the death of each
Insured. National Life may require proof of whether both Insureds are living two
years from the Date of Issue. On the death of the first Insured to die we will
require you to provide us with evidence of death and proof of age and, if the
death is within two years from the Date of Issue, the cause of death.
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 ___.
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
of Younger ---------- of Younger ----------
Insured Insured
------- -------
<S> <C> <C> <C>
40 and under 250% 75-90 105%
45 215% 91 104%
50 185% 92 103%
55 150% 93 102%
60 130% 94+ 101%
65 120%
70 115%
</TABLE>
For Attained Ages of the younger Insured not shown, the percentages will
decrease by a ratable portion of each full year.
15
<PAGE> 21
Illustration of Option A -- For purposes of this illustration, assume that
the younger 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. Assuming the specified percentage
for a particular Policy for a particular Attained Age of the younger Insured is
250%, then, 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, an Accumulated Value of $90,000 for this Policy at
this Attained Age for the younger Insured will result in an Unadjusted Death
Benefit of $225,000 (2.50 x $90,000), and an Accumulated Value of $150,000 will
result in 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 younger Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option B, a Policy with a Face Amount of $200,000 will generally pay
an Unadjusted Death Benefit of $200,000 plus the Accumulated Value. Thus, for
example, a Policy with a $50,000 Accumulated Value will have an Unadjusted Death
Benefit of $250,000 ($200,000 plus $50,000). Since the specified percentage is
250%, the Unadjusted Death Benefit will be at least 2.50 times the Accumulated
Value. As a result, if the Accumulated Value exceeds $133,333, the Unadjusted
Death Benefit will be greater than the Face Amount plus the Accumulated Value.
Each additional dollar added to the Accumulated Value above $133,333 will
increase the Unadjusted Death Benefit by $2.50. An Accumulated Value of $150,000
will result in an Unadjusted Death Benefit of $375,000 (2.50 x $150,000), and an
Accumulated Value of $200,000 will yield an Unadjusted Death Benefit of $500,000
(2.50 x $200,000). Similarly, any time the Accumulated Value exceeds $133,333,
each dollar taken out of the Accumulated Value will reduce the Unadjusted Death
Benefit by $2.50. If at any time, however, the Accumulated Value multiplied by
the specified percentage is less than the Face Amount plus the Accumulated
Value, the Unadjusted Death Benefit will be the Face Amount plus the Accumulated
Value.
At Attained Age 100 of the younger of the two Insureds (even if the
younger of the two Insureds is not then living), 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 Insureds' existing insurance coverages 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 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.
16
<PAGE> 22
If a change in the Death Benefit Option would result in cumulative
premiums exceeding the maximum premium limitations under the 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 ___.)
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 the
written request. An increase or decrease in Face Amount may have federal tax
consequences. (See "Tax Treatment Of Policy Benefits," Page ___.) The effect of
changes in Face Amount on Policy charges, as well as other considerations, are
described below.
Increase. A request for an increase in Face Amount may not be for less
than $50,000, or such lesser amount required in a particular state. You may not
increase the Face Amount after the older of the two Insureds' Attained Age 90 or
if the Joint Age is greater than 90. To obtain the increase, you must submit an
application for the increase and provide evidence satisfactory to us of both
Insureds' insurability. The increase may be either an addition of Basic Coverage
or Additional Coverage. An increase in Basic Coverage will result in increased
Surrender Charges. An increase in Basic Coverage will also begin a new ten year
period for purposes of applying the Monthly Administrative Charge to the new
amount of Basic Coverage. If an increase in Basic Coverage would move the Policy
into a new size band for purposes of the Variable Account Charge, the Variable
Account Charge percentage rate may be reduced as a result of the increase. In
the event that an increase simultaneously adds both Basic Coverage and
Additional Coverage, the Basic Coverage is assumed to have been added first.
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, plus the Surrender Charge associated with the increase, in
the case of an increase in Basic Coverage. If the Cash Surrender Value is not
sufficient, the increase will not take effect until you pay a sufficient
additional premium to increase the Cash Surrender Value.
17
<PAGE> 23
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 Insureds may be in different Rate Classes 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 ___.)
After an increase, part of the Net Amount at Risk will be attributable to
the initial coverage under the Policy and part will be attributable to the
increase. For purposes of allocating Accumulated Value to each coverage to
determine the Net Amount at Risk and Cost of Insurance Charge by coverage
segment, the Accumulated Value is first considered part of the initial segment.
If the Accumulated Value exceeds the initial segment's Face Amount, then it is
allocated to increases in Face Amount in the order that such increases took
effect.
Decrease. 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 a decrease. The Basic Coverage after
any decrease may not be less than the Minimum Basic Coverage Amount, which is
currently $100,000. If a decrease in the Face Amount could result in cumulative
premiums exceeding the maximum premium limitations applicable for life insurance
under the 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. If a
decrease in Basic Coverage would move the Policy into a new size band for
purposes of the Variable Account Charge, the Variable Account Charge percentage
rate may increase as a result of the decrease.
For purposes of calculating the Monthly Deductions, 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.
If an increase involved the simultaneous addition of Basic Coverage,
Additional Coverage and Face Amount added through the operation of the Automatic
Increase Rider, a decrease in the Face Amount will reduce automatic increase
first, the Additional Coverage second, and then the Basic Coverage.
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 Cumulative Minimum Monthly
Premium. You will have certain rights to reinstate your Policy, if it should
lapse. (See "Reinstatement," Page ___.)
In addition, an optional Guaranteed Death Benefit Rider is available. This
Rider will guarantee that the Policy will not lapse prior to, at your option,
the end of the year that the younger Insured attains age 80, or for the entire
lifetimes of the two Insureds, regardless of investment performance, if you have
paid the Cumulative 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 Variable
Account and the Fixed 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 Variable
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:
18
<PAGE> 24
- the Net Premiums you pay
- the investment performance of the Portfolios you have chosen
- the crediting of interest on non-loaned Accumulated Value in the
Fixed Account and amounts held as Collateral in the Fixed Account
- transfers
- Withdrawals
- Loans
- Loan interest charged
- loan repayments, and
- charges assessed on the Policy.
Determination of Number of Units for the Variable Account. Amounts
allocated, transferred or added to a Subaccount of the Variable 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 Variable Account has its own
Net Investment Factor on each Valuation Day. 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.
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
Variable Account, determined by multiplying the number of units the
Policy has in each Subaccount of the Variable Account by such
Subaccount's unit value on that date; plus
(2) The value attributable to the Policy in the Fixed Account (See "The
Fixed Account," Page ___.)
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 amount
of Basic Coverage of a Policy under our rules is $100,000.
We may revise our rules from time to time to specify a different minimum
amount of Basic Coverage for subsequently issued Policies. A Policy will be
issued only on two Insureds each of whom has an Issue Age from 0 to 90 and whose
Joint Age is less than or equal to 90, 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 "Cost of
Insurance Rate", Page , and "Distribution of Policies," Page ___.)
From the time your application is signed until the time the Policy is
issued, you can, subject to our underwriting rules, obtain temporary
survivorship insurance protection, pending issuance of the Policy, if you are
able to answer "no" with respect to both Insureds 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.
19
<PAGE> 25
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 that the younger of the two proposed Insureds is 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 to Home Office employees who purchase a Policy,
as both Owner and one of the two Insureds. This one time credit will be 50% of
the Target Premium on the Policy. The amount of the credit will be added to the
initial premium payment you submit. Thus, the credit will be included in premium
payments for purposes of calculating and deducting the Premium Tax Charge. If
the Policy is surrendered, we will not recapture the credit. The amount of the
credit will not be included for purposes of calculating agent compensation for
the sale of the Policy.
Amount and Timing of Premiums. Each premium payment must be at least $100.
You have considerable flexibility in determining the amount and frequency of
premium payments, within the limits discussed below.
You may 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
under 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 or groups billing payments of less than $100.
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 $100 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 Policy's Cash Surrender Value
determines whether or not the Policy stays in force. Thus, even if Planned
Periodic Premiums are paid, the Policy will lapse whenever the Cash Surrender
Value is insufficient to pay the Monthly Deductions and any other charges under
the Policy, 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 and have paid the required premiums).
We will treat all your payments made while there is an outstanding Policy
loan as premium payments rather than loan repayments, unless you notify us in
writing that a payment is a loan repayment. You may not pay premiums after the
younger of the Insureds reaches Attained Age 100. However, you may make loan
repayments after this time.
Higher premium payments under Death Benefit Option A, until the applicable
percentage of Accumulated Value exceeds the Face Amount, will generally result
in a lower Net Amount at Risk, and lower Cost of Insurance Charges against the
Policy. Conversely, lower premium payments in this situation will result in a
higher Net Amount at Risk, which will result in higher Cost of Insurance Charges
under the Policy.
Under Death Benefit Option B, until the applicable percentage of
Accumulated Value exceeds the Face Amount plus the Accumulated Value, the level
of premium payments will not affect the Net Amount at Risk. However, both the
Accumulated Value and Death Benefit will be higher if premium payments are
higher, and lower if premium payments are lower.
Under either Death Benefit Option, if the Unadjusted Death Benefit is the
applicable percentage of Accumulated Value, then higher premium payments will
result in a higher Net Amount at Risk, and higher Cost of Insurance Charges.
Lower premium payments will result in a lower Net Amount at Risk, and lower Cost
of Insurance Charges.
Premium Limitations. The Code provides for exclusion of the Death Benefit
from the gross income of the Beneficiary 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 these limits, we will only accept that portion of
the premium which would make total premiums equal the maximum
20
<PAGE> 26
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 be 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 generally 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 ___.)
Unless the Insureds provide 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. However, premiums will not
be limited to the extent that they are Planned Periodic Premiums.
Allocation of Net Premiums. The Net Premium equals the premium paid less
the Premium Expense Charge. In your application for the Policy, you will
indicate how Net Premiums should be allocated among the Subaccounts of the
Variable Account and/or the Fixed Account. You may change these allocations at
any time by giving us written notice at our Home Office. If you have elected the
telephone transaction privilege, you may also change premium allocations over
the telephone (See "Telephone Transaction Privilege," Page ___.). Your
allocation percentages must be in whole numbers of not less than 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 Variable 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 the other Subaccounts based on the allocation percentages you have selected.
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 Fixed
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 Variable Account and the Fixed 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 ___.) Transfers between and among the Subaccounts of the
Variable Account and the Fixed 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 Variable
Account to another Subaccount and/or to the Fixed Account. For transfers from
the Fixed Account to the Variable Account, see "Transfers from Fixed Account,"
Page ___.
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 would be 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
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<PAGE> 27
- - transfers resulting from the exercise of the transfer rights described on
page ____ (see "Policy Rights - Other Transfer Rights," Page ___), 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 the Cumulative Minimum
Monthly Premium has been paid, regardless of whether the Cash Surrender Value is
sufficient to cover the monthly Deductions and other charges. In addition, if
you have elected at issue the Guaranteed Death Benefit Rider, and have paid the
Cumulative Guarantee Premium as of each Monthly Policy Date, the Policy will not
lapse, either prior to the end of the year that the younger Insured attains Age
80 or for the entire lifetimes of the two Insureds, whichever you elect,
regardless of whether the Cash Surrender Value is sufficient to cover the
Monthly Deductions. (See "Optional Benefits - Guaranteed Death Benefit," Page
___.)
The Policy provides for a 61-day Grace Period that is measured from the
date on which 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 both
Insureds' 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 Guaranteed Death Benefit 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 your chosen Subaccounts is poorer than expected or if
you do not pay sufficient premiums, the Policy may lapse or may not accumulate
sufficient Accumulated Value or Cash Surrender Value to fund the your purpose.
Withdrawals and Policy loans may significantly affect current and future
Accumulated Value, Cash Surrender Value, or Death Benefit proceeds. 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 ___.)
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) issuing and 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 these profits for any
purpose, including payment of distribution expenses.
For Policies issued in New York, charges may be different. Prospective
purchasers of a Policy to be issued in New York should see "Differences in
Charges for Policies Issued in New York", on page .
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<PAGE> 28
PREMIUM EXPENSE CHARGE
The Premium Expense Charge consists of two portions. The first is that we
deduct 3.40% of the premium from each premium payment prior to allocation of Net
Premiums, to cover state premium taxes and the federal DAC Tax.
The federal DAC Tax is a tax attributable to certain "policy acquisition
expenses" under Section 848 of the Code. 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.
The Premium Expense Charge will also include, during the first 10 Policy
Years, a deduction of 7.0% of the premium up to the Target Premium, and 4.0% of
premium in excess of the Target Premium, from each premium payment prior to
allocation of Net Premiums, to compensate us for the expenses incurred in
distributing the Policies, including commissions to selling agents. The Target
Premium depends on the Joint Age at issue or at the time of an increase in
Basic Coverage. Target Premiums per $1000 of Basic Coverage are shown in
Appendix B to this prospectus. Your Target Premium is set forth in your Policy.
We may increase the charge for premiums in excess of the Target Premium from
4.0% to 5.0% of such premiums. We currently intend to reduce this deduction
from premiums paid after the tenth Policy Anniversary to 4.0% of all premiums,
although we may deduct up to the maximum permitted during the first ten years.
SURRENDER CHARGE
We will impose a Surrender Charge if you surrender your Policy or it
lapses at any time before the end of the tenth Policy Year, or the ten years
after an increase in the Basic Coverage. The Surrender Charge rate depends on
the Joint Age at issue or at the time of increase in Basic Coverage. The initial
Surrender Charge per $1,000 of Basic Coverage is shown in Appendix B to this
Prospectus. (Surrender Charges are different for Policies issued in New York,
and for those Policies the initial Surrender Charge per $1, 000 of Basic
Coverage is shown in Appendix C). The Surrender Charge will be level for up to
five years, and then decline each month by one sixtieth of the initial Surrender
Charge until it is zero at the beginning of Policy Year 11, or at the beginning
of the eleventh year after the date of an increase in Basic Coverage. For those
cases in which the level Surrender Charge period is less than five years from
the Date of Issue or the effective date of the increase, it declines each month
by an amount equal to the initial Surrender Charge multiplied by a fraction of
which the numerator is one and the denominator is the number of months from the
end of the level Surrender Charge period to the beginning of Policy Year 11, or
the beginning of the eleventh year from the effective date of the increase. The
Surrender Charge will not decrease in the event of a decrease in Basic Coverage.
The actual Surrender Charge for your Policy will be stated in the Policy.
Since there is no Surrender Charge associated with Additional Coverage,
taking a portion of the Policy's Face Amount as Additional Coverage, rather than
Basic Coverage, would result in a lower Surrender Charge. See "Optional Benefits
- - Additional Protection Benefit," page .
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 four components:
(a) the Cost of Insurance Charge
(b) the Variable Account Charge
(c) the Monthly Administrative Charge, and
(d) 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 Variable Account and the Fixed Account, unless you have
requested at the time of application, or later request in writing, that we take
the Monthly Deduction 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 Variable Account and the Fixed Account.
Cost of Insurance Charge. We calculate the monthly Cost of Insurance
Charge by multiplying the cost of insurance rate or rates by the Net Amount at
Risk for each Policy Month. Because both the Net Amount at Risk and the
variables that determine the cost of insurance rate, such as the ages of the
Insureds 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> 29
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 Insureds both died. The actual calculation uses the Unadjusted Death
Benefit divided by 1.00327234, to take into account assumed monthly
earnings at an annual rate 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
part of the increases in Face Amount in the order such increases took
effect.
If your Policy includes Basic Coverage, Additional Coverage and
coverage added through the operation of the Automatic Increase Rider, we
separate the Net Amount at Risk into portions applicable to each type of
coverage. For this purpose, we apply Accumulated Value against Basic
Coverage first, Additional Coverage second and an automatic increase third
if they began simultaneously. Any change in the Net Amount at Risk will
affect the total Cost of Insurance Charges you pay.
Guaranteed Maximum Cost of Insurance Rates. The guaranteed maximum
cost of insurance rates will be set forth in your Policy, and will depend
on:
- each Insured's Issue Age
- each Insured's sex
- the substandard or uninsurable status of either Insured, if
applicable
- the coverage's Duration,
- whether the coverage is Basic Coverage or Additional Coverage
(guaranteed rates are higher for Additional Coverage), and
- the 1980 Commissioners Standard Ordinary Mortality Table.
Guaranteed maximum cost of insurance rates will also vary depending on
whether the coverage is Basic Coverage or Additional Coverage, with higher
rates being applicable to Additional Coverage.
Current Cost of Insurance Rates and How They are Determined. The
actual cost of insurance rates used ("current rates") will depend on:
- each Insured's Issue Age
- each Insured's sex
- each Insured's Rate Class
- the coverage's Duration, and
- whether the coverage is Basic Coverage or Additional Coverage
(however, current rates for Additional Coverage may be higher or
lower than for Basic Coverage), and
- our expectation of future mortality experience
We periodically review the adequacy of our current cost of insurance
rates, and we 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 sets of persons of the
same Issue Ages, sexes, and Rate Classes, and with coverages of the same
Duration.
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 a
cost of insurance rate based on the Rate Classes of the two Insureds on
the Date of Issue. For each increase in Face Amount, a rate based on the
Rate Classes of the two Insureds applicable at the time of the increase is
used. If, however, the Unadjusted Death Benefit is calculated as the
Accumulated Value times the specified percentage, the rate based on the
Rate Classes for the Initial Face Amount will be used 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. Again, if a policy includes both Basic Coverage and
Additional Coverage, separate cost of insurance rates are applied to each
type of coverage.
Rate Class. The Rate Classes of the two Insureds will affect the
current cost of insurance rates. We currently place Insureds into the
following rate classes:
- preferred nonsmoker
- nonsmoker
- preferred smoker
- smoker
- substandard, and
- uninsurable classes.
Smoker, substandard, and uninsurable classes reflect higher
mortality risks. In an otherwise identical Policy, Insureds in a preferred
or standard class will have a lower Cost of Insurance Charge than Insureds
in a substandard class with higher mortality risks. Nonsmoking Insureds
will generally incur lower cost of insurance
24
<PAGE> 30
rates than Insureds who are classified as smokers. Classification of an
Insured as substandard or uninsurable will also affect the guaranteed cost
of insurance rates. We classify all nicotine users as smokers, including
cigarette, cigar, pipe, chewing tobacco, snuff, nicotine patches and
nicotine gum.
The uninsurable rate class is not available in New York.
Variable Account Charge. We assess the Variable Account Charge to
compensate us for mortality and expense risks we assume due to the benefits and
guaranteed maximum charge levels under the Policies. 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. We may make a profit from
deducting this charge. Any profit may be used to finance distribution expenses.
The Variable Account Charge does not apply to Accumulated Value in the Fixed
Account.
The Variable Account Charge is deducted monthly as a percentage of
the Accumulated Value in the Variable Account. The Variable Account Charge,
expressed as an annual percentage, is as follows:
During the first 10 Policy Years:
<TABLE>
<S> <C>
For Policies with Basic Coverage less than $1,000,00.............................. 0.90%
For Policies with Basic Coverage from $1,000,000 to $2,999,999 ................... 0.80%
For Policies with Basic Coverage of $3 million or more. .......................... 0.75%.
</TABLE>
For years after Policy Year 10, we currently intend to reduce this charge to the
following rates:
<TABLE>
<S> <C>
For Policies with Basic Coverage of less than $1,000,000.......................... 0.35%
For Policies with Basic Coverage from $1,000,000 to $2,999,999 ................... 0.30%
For Policies with Basic Coverage of $3 million or more ........................... 0.25%.
</TABLE>
However, in all cases, we may increase this charge to an amount not to exceed
0.90%.
Monthly Administrative Charge. We charge the administrative charge to help
defray the expenses we incur in issuing and administering the Policy and in
distributing the Policy, including commissions to selling agents. The amount of
the Monthly Administrative Charge during the first ten Policy Years is $15.00,
plus $0.08 per $1000 of Basic Coverage (less for Joint Ages of 38 or less). We
increase the per $1000 portion of this charge during the first ten Policy Years
by $.005 per $1000 of Basic Coverage for each Insured who is a smoker.
After the first ten Policy Years, we currently intend to charge a Monthly
Administrative Charge of $7.50, with no additional amount per $1000 of Basic
Coverage. During this period the Monthly Administrative Charge is guaranteed not
to exceed $15.00, plus $0.08 per $1000 of Basic Coverage plus $0.005 per $1000
of Basic Coverage for each Insured who is a smoker. In addition, the per
$1000 of Basic Coverage portion of the Monthly Administrative Charge will apply
to increases in Basic Coverage for 10 years after an increase in Basic Coverage.
The per $1000 portion of this charge will not decrease in the event of the
decrease in Basic Coverage.
Optional Benefit Charges. The Monthly Deduction will include charges for
any additional benefits added to the Policy. The monthly charges will be
specified in the applicable Rider. The available Riders are listed under
"Optional Benefits," on Page ___ below.
WITHDRAWAL CHARGE
At the time of a Withdrawal, we will assess 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 Variable Account to the Fixed Account. Transfers from the Fixed Account
to the Variable Account are permitted within the limits described on Page ___.
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.
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<PAGE> 31
If we impose a transfer charge, we will deduct it from the amount being
transferred. We would treat all transfers requested on the same Valuation Day as
one transfer transaction. Any future transfer charge will not apply to transfers
resulting from:
- Policy loans
- the exercise of the transfer rights as described on page ____
- 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 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, and you may elect to pay the
charge in advance. If not paid in advance, we will deduct this charge from the
Subaccounts of the Variable Account and/or the Fixed Account in proportion to
their Accumulated Values.
OTHER CHARGES
The Variable 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 above. More detailed information is contained in the Fund
Prospectuses which accompany this Prospectus.
DIFFERENCES IN CHARGES FOR POLICIES ISSUED IN NEW YORK
Charges on Policies issued in New York will differ from charges on
Policies issued in other states in the following respects:
1. The Surrender Charges are in different amounts, and are shown in
Appendix C to this Prospectus.
2. The Premium Expense Charge is the same as the current Premium Expense
Charge for Policies issued in other states, but is guaranteed not to increase
from current levels.
3. The Variable Account Charge is also the same as the current Variable
Account Charge for Policies issued in other states, but is guaranteed not to
increase, either during the first 10 Policy Years, or for years after Policy
Year 10, from the amounts shown on page .
4. The Monthly Administrative Charge is also the same as the current
Monthly Administrative Charge for Policies issued in other states, but is
guaranteed not to increase, for years after Policy Year 10, from $7.50 per
month, and we guarantee that there will be no per $1000 portion of the Monthly
Administrative Charge after Policy Year 10.
5. We have the right to assess an additional charge, called the
Contingent Risk Charge, on Policies issued in New York. The current amount of
the Contingent Risk Charge is zero, but we may impose a Contingent Risk Charge
of up to 0.04167% per month (0.5% per year) at any time, subject to approval by
the New York Insurance Department.
POLICY RIGHTS
LOAN PRIVILEGES
General. You may at any time after the first year (and during the first
year where required by law)(i.e., in Indiana and New Jersey) 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. If you have elected the Guaranteed Death Benefit Rider and you take
a Policy loan in excess of the cumulative premiums paid minus the Cumulative
Guarantee Premium, then the Guaranteed Death Benefit Rider will enter a lapse
pending notification period. This means that the Guaranteed Death Benefit Rider
(but not the Policy itself) will lapse if a sufficient premium is not paid
within the 61-day lapse pending notification period.
While either Insured is living, you may repay all or a portion of a loan
and accrued interest. To take a loan you should send a written request to us 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
taken over the telephone to $25,000. (See "Telephone Transaction Privilege,"
Page ___.) Loan proceeds will be paid within seven days of a valid loan
request.
Interest Rate Charged. The interest rate charged on Policy loans will be
at the fixed rate of 6% per year. At the end of the Policy Year, the loan
interest will be added to the loan balance. Any payments you make to cover loan
interest will be used to reduce the amount of the Policy loan.
Allocation of Loans and Collateral. When you take a Policy loan, we hold
Accumulated Value in the Fixed Account as Collateral for the Policy loan. You
may specify how you would like Accumulated Value to be taken from the
Subaccounts of the Variable Account to serve as the 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 Fixed Account will become Collateral for a loan only to
the extent that the Accumulated Value in the Variable Account is insufficient.
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<PAGE> 32
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 such loan interest so added pro rata from the Subaccounts of the Variable
Account, and then, if the amounts in the Variable Account are insufficient, from
the non-loaned portion of the Fixed Account. At any time, the amount of the
outstanding loan under a Policy equals the sum of all loans (including 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 Fixed 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 declaration.
Preferred Policy Loans. We currently intend to make preferred Policy loans
available at the beginning of Policy Year 11. For these preferred Policy loans,
we will charge interest at 4.25% per annum, and we will credit interest on
amounts held as Collateral in the Fixed Account at an annual rate of 4.0%. We
are not obligated to continue to make preferred loans available (except where
required by law, as in New York), and we will make such loans available in our
sole discretion. Preferred loans may not be treated as indebtedness for federal
income tax purposes.
Effect of Policy Loan. Policy loans, whether or not repaid, will have a
permanent effect on the Accumulated Value and the Cash Surrender Value, and may
permanently affect the Death Benefit under the Policy. The effect on the
Accumulated Value and Death Benefit could be favorable or unfavorable. It will
depend on whether the investment performance of the Subaccounts, and the
interest credited to the non-loaned Accumulated Value in the Fixed Account,
is less than or greater than the interest being credited on the amounts held as
Collateral in the Fixed 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 Variable
Account and interest credited to the non-Collateral Accumulated Value in the
Fixed 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 a Policy
loan is outstanding 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 Fixed Account will be
reduced by an amount equal to the repayment, and such amount will be transferred
to the Subaccounts of the Variable Account and to the non-loaned portion of the
Fixed Account based on the Net Premium allocations in effect at the time of the
repayment.
Lapse With Loans Outstanding. The amount of an outstanding loan under a
Policy plus any accrued interest on outstanding loans is not part of Cash
Surrender Value. Therefore, the larger the amount of an outstanding loan, the
more likely it is that the Policy could lapse. (See "How the Duration of the
Policy May Vary," Page ___ and "Policy Lapse," Page ___.) In addition, if the
Policy is not a Modified Endowment Policy, lapse of the Policy with outstanding
loans may result in adverse federal income tax consequences. (See "Tax Treatment
of Policy Benefits," Page ___.)
Tax Considerations. Any loans taken from a "Modified Endowment Contract"
will be treated as a taxable distribution. In addition, with certain exceptions,
a 10% additional income tax penalty will be imposed on the portion of any loan
that is included in income. (See "Distributions from Policies Classified as
Modified Endowment Contracts," Page ___.)
SURRENDER PRIVILEGE
You may surrender your Policy for its Cash Surrender Value at any time
before the death of the last to die of the two Insureds. 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 the
written surrender request and the Policy to us. We will normally mail surrender
proceeds to you within seven days of when we receive the request. (See "Other
Policy Provisions - Payment of Policy Benefits", Page ___.)
A surrender may have Federal income tax consequences. (See "Tax Treatment
of Policy Benefits," Page ___.
WITHDRAWAL OF CASH SURRENDER VALUE
You may withdraw a portion of the Policy's Cash Surrender Value at any
time before the death of the last to die of the two Insureds and after the first
Policy Anniversary. The minimum amount which may be withdrawn is $500. The
27
<PAGE> 33
maximum Withdrawal is the Cash Surrender Value on the date we receive the
Withdrawal request, minus three times the Monthly Deduction for the most recent
Monthly Policy Date. However, if you elected the Guaranteed Death Benefit Rider,
and you obtain a Withdrawal which causes the Cumulative Guarantee Premium to
exceed the sum of premiums paid into the Policy, then the Guaranteed Death
Benefit Rider will enter a lapse pending notification period. This means that
the Guaranteed Death Benefit Rider (but not the Policy itself) will lapse if a
sufficient premium is not paid within the 61-day lapse pending notification
period.
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 ___.
You may specify how you would like the Withdrawal to be taken from the
Subaccounts of the Variable Account. If you do not so specify, we will allocate
the Withdrawal to 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 get
further instructions from you. You may take Withdrawals from the Fixed Account
only after the Accumulated Value in the Variable Account is 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 ___.)
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 younger
Insured is under 40 and there is no indebtedness. The applicable
percentage is 250% for a younger 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 paid to 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 paid 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. Thus the Unadjusted Death Benefit will also be
reduced by the amount of the Withdrawal.
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Under Option B, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $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 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 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 reduce Face Amount in
the order described under "Ability to Adjust Face Amount - Decreases" on page .
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 ___.) 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
___.) 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 that 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 normally 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 ___.)
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 10 days after you receive the Policy (or any longer
period provided by state law). To cancel the Policy, you must return the Policy
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 providing us with a proper 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 those 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
Variable Account to the Fixed 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 Variable Account is materially changed, you may transfer
Accumulated Value in that Subaccount to another Subaccount or to the Fixed
Account, without regard to any limits on transfers or free transfers.
Additional Transfer Right for Connecticut and Maryland Residents. For
Policies issued in Connecticut and Maryland, we offer a right to transfer the
entire Accumulated Value in the Policy to a fixed survivorship universal life
insurance contract, during the first 18 months after issue.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer, at no charge to you, two automated fund management
features. Only one of these two automated fund management features may be
operable at any time. We are not obligated to continue to offer these features.
Although we have no current intention to do so, we may stop offering one or both
of these features at any time, after providing 60 days prior written notice to
all Owners who are currently utilizing the features being discontinued.
Dollar Cost Averaging. This feature permits 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 the reallocation of the
Accumulated Value out of the Money Market Subaccount and into the other
Subaccounts occurs. 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 Fixed 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 level as well as
higher price levels.
Portfolio Rebalancing. This feature permits you to automatically rebalance
the value in the Subaccounts on a quarterly, semi-annual or 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 initial
application, or, after issue, by completing a change request form and sending it
to the Home Office.
In Policies utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer will take place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages,
starting with the Monthly Policy Date three, six or twelve months after the Date
of Issue, and then on each Monthly Policy Date three, six or twelve 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 three, six or twelve 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.
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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.
THE FIXED ACCOUNT
You may allocate some or all of the Net Premiums, and transfer some or all
of your Policy's Accumulated Value, to our Fixed Account. We credit interest on
Net Premiums and Accumulated Value allocated to the Fixed Account at rates we
declare (subject to a minimum guaranteed interest rate of 4%). The principal,
after deductions, is also guaranteed. The Fixed Account supports National Life's
insurance and annuity obligations. All assets in the Fixed Account are subject
to National Life's general liabilities from business operations.
The Fixed Account has not, and is not required to be, registered with the
SEC under the Securities Act of 1933. The Fixed Account has not been registered
as an investment company under the Investment Company Act of 1940. Therefore,
the Fixed Account is 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 in the Fixed Account is guaranteed to accumulate at
a minimum effective annual interest rate of 4%. We may credit the non-loaned
Accumulated Value in the Fixed 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 Fixed 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 Fixed Account in that month.
The rate declared on these 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 Fixed
Account on that date). We will determine any interest credited on the amounts in
the Fixed 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 Fixed Account will not share
in the investment performance of our general account.
Amounts deducted from the non-loaned Accumulated Value in the Fixed
Account for Withdrawals, Policy loans, transfers to the Variable 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, as long
as these changes do not reduce the guaranteed rate of interest below 4% per
annum or shorten the period for which the interest rate applies to less than 12
months.
Calculation of Non-loaned Accumulated Value in the Fixed Account. The
non-loaned Accumulated Value in the Fixed 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 FIXED ACCOUNT
We allow only one transfer in each Policy Year from the amount of
non-loaned Accumulated Value in the Fixed Account to any or all of the
Subaccounts of the Variable Account. The amount you transfer from the Fixed
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 the written or telephone
request at our Home Office.
OTHER POLICY PROVISIONS
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Indefinite Policy Duration. The Policy can remain in force indefinitely
(in New York, Texas and Maryland, however, the Policy matures at the younger
Insured's Attained Age 100, 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 younger Insured
reaches Attained Age 100, if the Face Amount is greater than the Accumulated
Value, the Face Amount will automatically be decreased to the current
Accumulated Value, and all Accumulated Value is transferred to the Fixed
Account. Also, at the younger Insured's Attained Age 100 Option B automatically
becomes Option A, and no premium payments are allowed after the younger
Insured's Attained Age 100. Loan repayments are allowed, however. Monthly
Deductions cease at the younger Insured's Attained Age 100. 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 can decide the form in which we pay Death
Benefit proceeds. During the lifetime of either of the two Insureds, 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 no election is made, payment will be made in a lump
sum. The Beneficiary may also arrange for payment of the Death Benefit in a lump
sum or under a Settlement Option. If paid in a lump sum, we will ordinarily pay
the Death Benefit to the Beneficiary within seven days after we receive proof of
the death of both of the Insureds at our Home Office, and all other requirements
are satisfied. If paid under a Settlement Option, the Death Benefit will be
applied to the Settlement Option within seven days after we receive proof of the
death of both of the Insureds at our Home Office, and all other requirements are
satisfied.
We will pay interest on the Death Benefit from the date we receive due
proof of the death of the last to die of the two Insureds 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 the proceeds of a surrender, Withdrawal, or Policy
loan within seven days of when we receive a written request at our Home Office
in a form satisfactory to us.
We will generally determine the amount of a payment as of 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
Fixed 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 applications can be used to void the Policy or deny a
claim. The statements are considered representations and not warranties. Only
one of National Life's duly authorized officers or registrars can agree to
change or waive any provisions of the Policy, and only in writing. As a result
of differences in applicable state laws, certain provisions of the Policy may
vary from state to state.
Ownership. The Owner is named in the application or thereafter changed.
While either of the two Insureds is living, the Owner is entitled to exercise
any of the Policy's rights. If the Owner dies before the last to die of the two
Insureds, these rights will vest in the estate of the Owner, unless otherwise
provided.
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Beneficiary. You designate the Beneficiary in the application for the
Policy. You may change the Beneficiary during the lifetime of either of the two
Insureds by sending us a written notice. The interest of any Beneficiary who
dies before the last to die of the two Insureds 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 Insureds are living when the request is received by us. 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 another person or 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 lives of the employee and his or her spouse, 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 and his or her spouse both die 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 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 rights under the Policy. We are
not bound by an assignment unless it is in writing and we have received 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 either of the two
Insureds 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 both of the Insureds have died, we will
adjust the Accumulated Value as of the last Monthly Policy Date prior to the
last to die of the Insureds' death; however, if the Accumulated Value is
insufficient for that adjustment, the amount of the Unadjusted Death Benefit
will also be adjusted.
Suicide. If either 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 either Insured dies by 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 both Insured's lifetimes 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
both Insureds' lifetimes 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.
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Dividends. The Policy is participating; however, no dividends are expected
to be paid on the Policy. If dividends are ever declared, they will be paid in
cash, or paid in the form required by the applicable state. At the time of the
death of the last to die of the two Insureds, 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. Guaranteed payment periods may be
elected for 0, 10, 15, or 20 years or for a refund period, at the end of
which the total payments will equal the proceeds placed under the option.
Payments of a Stated Amount. 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. When either chosen person dies, we will continue to make
two-thirds of the amount of those payments 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. When the primary chosen person dies, we will continue to
pay 50% of the amount of those payments 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 the
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
The following optional benefits, which are subject to the restrictions and
limitations set forth in the applicable Policy Riders, may be included in a
Policy at your option, if the Insureds meet any applicable underwriting
requirements. Election of any of these optional benefits may involve an
additional cost.
GUARANTEED DEATH BENEFIT
If you elect the Guaranteed Death Benefit Rider, we will guarantee that
the Policy will not lapse, regardless of the Policy's investment performance,
either for the entire lifetimes of the Insureds, or until the end of the year
that the younger Insured attains Age 80, whichever you elect. To be eligible to
elect the guarantee period until the end of the year that the younger Insured
attains Age 80, the Issue Age of the younger Insured must be 70 or less. Riders
which guarantee that the Policy will not lapse prior to the end of the year that
the younger Insured attains Age 80 will have lower Monthly
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Guarantee Premiums (and therefore lower Cumulative Guarantee Premiums) than
Riders which guarantee that the Policy will not lapse for the entire lifetimes
of the Insureds.
To keep this Rider in force, you must pay cumulative premiums greater than
the Cumulative Guarantee Premium from the Date of Issue. Your Policy will be
tested monthly for this qualification, and if not met, a notice will be sent to
you, who will have 61 days from the date the notice is mailed to pay a premium
sufficient to keep the Rider in force. The premium required will be an amount
equal to the Cumulative Guarantee Premium from the Date of Issue, plus two times
the Monthly Guarantee Premium, minus the sum of all premiums previously paid.
The Rider will be cancelled if a sufficient premium is not paid during that
61-day period. The Rider cannot be reinstated. The amount of the Monthly
Guarantee Premium for each Policy electing the Guaranteed Death Benefit Rider
will be stated in the Data section of the Policy.
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 if at
least 50% of the Face Amount consists of Basic Coverage.
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. For as long as Cash Surrender Value is zero, failure
to have paid the Cumulative Guarantee Premium as of any Monthly Policy Date will
cause the Guaranteed Death Benefit Rider to enter a 61 day lapse pending
notification period. If a sufficient premium, as set forth above, is not paid
during this period, the Rider will be cancelled and if the Cash Surrender Value
is still zero, the Policy will enter a Grace Period, and will lapse if the Grace
Period expires without a sufficient premium payment (see "Payment and Allocation
of Premiums - Policy Lapse", Page ).
If you increase the Face Amount of your Policy or change the Death Benefit
Option from Option A to Option B, the Rider's guarantee will extend to the
increased Face Amount. The Monthly Guarantee Premiums will increase as a result.
If you wish to keep the Rider in force, you must limit Withdrawals and
Policy loans to the excess of premiums paid over the sum of Monthly Guarantee
Premiums in effect since the Date of Issue. If you take a larger Policy loan or
Withdrawal, the Guaranteed Death Benefit Rider will enter a 61-day lapse-pending
notification period, and will be cancelled if a sufficient premium is not paid.
THE GUARANTEED DEATH BENEFIT RIDER IS NOT AVAILABLE IN TEXAS OR
MASSACHUSETTS. THE LIFETIME GUARANTEE PERIOD IS NOT AVAILABLE IN NEW YORK. THE
GUARANTEE PERIOD THROUGH AGE 80 IS NOT AVAILABLE IN PENNSYLVANIA.
ADDITIONAL PROTECTION BENEFIT
The Additional Protection Benefit Rider may be used to provide a higher
Face Amount by adding Additional Coverage to the Policy. This Rider is
available at issue, or after issue by submitting an application to us with
evidence satisfactory to us of insurability of both Insureds. Additional
Coverage must be in an amount of at least $50,000, and cannot exceed three
times the Basic Coverage.
Adding to the Face Amount of the Policy through the Additional Protection
Benefit Rider can offer a cost savings over adding to the Face Amount by
increasing the Basic Coverage. Specifically, there is no Target Premium, no
Surrender Charge, and no per $1000 Monthly Administrative Charge associated with
Additional Coverage. The cost of the Rider is that a Cost of Insurance Charge is
included in the Monthly Deductions for the Additional Coverage - the guaranteed
cost of insurance rate applicable to the Additional Coverage will generally be
higher than the rate applicable to Basic Coverage, but current cost of insurance
rates may be either higher or lower for the Additional Coverage than for the
Basic Coverage.
The Additional Protection Benefit Rider is not available in New York.
POLICY SPLIT OPTION
If you elect the Policy Split Option Rider, you will have the right to
split the Face Amount and Accumulated Value of a Policy into two single life
whole life insurance contracts on the lives of each of the two Insureds, in the
event of divorce or a material change in federal estate tax law. The two single
life contracts may be any traditional whole life insurance, universal or
variable life insurance contract we are then offering. This Rider is available
only at issue, only to Insureds legally married to each other, only where both
Insureds are not in a substandard Rate Class with a rating in excess of 250% and
not uninsurable, and only where neither Insured is older than age 80. We will
allow you to exercise the option to split the Policy without evidence of
insurability, but only within 180 days of the date of a final divorce decree
relating to the Insureds, or within 180 days of the occurrence of either of the
following changes in federal estate tax
35
<PAGE> 41
law: (1) an end to the Unlimited Marital Deduction, as defined in the Code; and
(2) a reduction of 50% or more of the percentage federal estate tax rate
applicable to the estate of the surviving spouse.
The two new policies will have an issue date of the date of the split, and
will be based on the Insureds' ages as of the date of the split. The Rate
Classes of each of the Insureds will be the Rate Class for such Insured for the
most recently issued coverage segment under the Policy. You may select the face
amounts of the new policies, as long as the total of the two face amounts does
not exceed the Face Amount of the Policy on the date of the split, and neither
of the face amounts on the two new policies exceeds 50% of the Face Amount on
the Policy. Increases on the Policy which contain a substandard rating in excess
of 250% will not be eligible for the split. If the face amounts of the new
policies are not equal, and the Policy is jointly owned, then the consent of all
Owners to the split is required. The Accumulated Value, and any Policy loans and
accrued interest, will be split in proportion to the Face Amount split, and the
total of the accumulated values and any policy loans and accrued interest of the
new individual contracts will equal the Accumulated Value of the Policy. There
will not be new suicide and incontestability periods for the new individual
policies as of the date of the split if they had expired on the Policy prior to
the split, but if such periods had not expired, then the remaining time to
expiration will be transferred to the new Policies.
There is no cost for the Policy Split Option Rider, except that a fixed
charge of $200 will also be assessed at the time of the split to cover
administrative costs. You may cancel the Rider at any time. It will
automatically terminate on its exercise, on the date of death of the first of
the two Insureds to die, or on the date that the older of the Insureds reaches
Attained Age 85. Any other Riders applicable to the Policy will terminate upon
exercise of the Policy Split Option.
The Policy Split Option is not available in Pennsylvania. In New York,
there is a charge for the Policy Split Option Rider. The charge varies by Joint
Age.
ESTATE PRESERVATION RIDER
The Estate Preservation Rider is designed for use in situations in which a
Policy is issued outside of an irrevocable life insurance trust but is expected
to be transferred into such a trust within a year after the Date of Issue. This
Rider provides four years of additional last survivor term coverage on the two
Insureds. The goal of the rider is to provide a Death Benefit including this
Rider, net of incremental estate taxes owed as a result of the Policy, at least
equal to the Death Benefit provided by the Policy not including the Rider. This
Rider is available only at issue and only where the Insureds are legally married
to each other.
The cost of the Estate Preservation Rider is a charge for the death
benefit coverage included by this Rider, at the same rates that apply to the
Additional Coverage. The coverage provided by this Rider will be level,
regardless of whether Option A or Option B applies to the Face Amount of the
Policy. The amount of coverage will be the initial Face Amount multiplied by a
fraction the numerator of which is 0.55 and the denominator of which is 1-0.55,
or 0.45. A factor of 0.55 is used in the above formula because the maximum
estate tax rate is currently 55%.
Any decrease in Face Amount during the first four Policy Years will result
in a proportionate reduction in the coverage provided by the Estate Preservation
Rider.
The Estate Preservation Rider will terminate on the first Policy
Anniversary, if the Owner of the Policy has not become an irrevocable life
insurance trust by that time. If the Owner has become an irrevocable life
insurance trust by such time, then the Rider will automatically terminate at the
end of the fourth Policy Year.
TERM RIDER
The Term Rider allows you to add individual life term coverage on either
or both of the two Insureds. The Term Rider is available at any time, subject to
submission of an application with evidence of insurability satisfactory to us,
on Insureds with Issue Ages from 20 through 75. The Term Rider coverage is
renewable through age 80. The maximum amount of Term Rider coverage for each
Insured is 50% of the Face Amount of the Policy. Charges included in the Monthly
Deductions will include amounts associated with the individual life term
coverage. The cost of insurance rates for the Term Rider will be set forth in
the Rider.
Individual term life insurance coverage addresses different insurance
needs than the survivorship life insurance coverage provided by the Face Amount
of the Policy. Your determination of the usefulness of the Term Rider should be
based on your specific insurance needs. Consult your sales representative for
further information.
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<PAGE> 42
CONTINUING COVERAGE RIDER
The Continuing Coverage Rider allows you to extend coverage at the Face
Amount of a Policy beyond the younger Insured's Attained Age 100 if the Policy
is still in force at that time. This Rider is available only at issue and only
if the younger Insured is no older than Attained Age 75.
On the date that the extension of coverage occurs, the Policy's
Accumulated Value will be transferred to the Fixed Account, and no further
transfers will be permitted. The Monthly Deductions will be set to zero. No
further Premium Payments will be accepted. All other rights and benefits will
continue while the Policy is in force.
The charge is guaranteed never to exceed $3.50 per $1000 per month applied
to the Net Amount at Risk. The current charge for the Continuing Coverage Rider
is $2.50 per $1000 per month, applied to the Net Amount at Risk. The charge will
begin at the younger Insured's Attained Age 90. At the time charges begin for
this Rider, Policies with Death Benefit Option B will automatically be changed
to Death Benefit Option A.
The tax consequences associated with continuing a Policy beyond age 100 of
the younger Insured are uncertain.
The Continuing Coverage Rider is not available in Texas, Maryland or New
York.
ENHANCED DEATH BENEFIT RIDER
The Enhanced Death Benefit Rider may provide a higher Death Benefit at a
targeted age for the younger Insured. You select the target age. The Rider
operates by increasing the otherwise applicable specified percentages that are
shown in the Policy and which may be applied in determining the Death Benefit,
beginning 4 years prior to the targeted Attained Age and ending at Attained Age
99 of the younger Insured, by the following percentages:
<TABLE>
<S> <C> <C>
Target Age - 4: 4% Target Age -1: 16% Attained Age - 97: 12%
Target Age - 3: 8% Target Age through Age 95: 20% Attained Age - 98: 8%
Target Age - 2: 12% Attained Age - 96: 16% Attained Age - 99: 4%
</TABLE>
The target age must be at least the later of the younger Insured's
Attained Age 70 and 15 years after the Date of Issue. The target age cannot be
more than Attained Age 95 of the younger Insured. Once you select it, you may
not change the target age. You may cancel this Rider at any time, but if you do,
you may not reinstate it.
There is no cost for the Enhanced Death Benefit Rider. However, if the
Rider's increases in the specified percentages result in an increase in Death
Benefit, the Net Amount at Risk will be higher than if the Rider did not apply,
and the Cost of Insurance Charges will be commensurately higher.
This Rider is available only at issue, and only where the younger
Insured's Issue Age is 80 or less.
The Enhanced Death Benefit Rider is not available in Texas.
AUTOMATIC INCREASE RIDER
The Automatic Increase Rider will provide for regular increases in Face
Amount. You may elect that such increases be effected annually in amounts equal
to either of 5% or 10% of the sum of the Face Amount of the Policy at issue,
plus all previous increases resulting from this Rider. You may also elect annual
increases of a level amount equal to your planned periodic premiums for the
Policy. In either case, the maximum increase that can be effected by means of
the Automatic Increase Rider is 100% of the Face Amount of the Policy at issue.
Increases in Face Amount effected by means of the Automatic Increase Rider
will be similar to Additional Coverage in that there will be no Target Premium,
no Surrender Charge and no per $1000 Monthly Administrative Charge associated
with these increases.
37
<PAGE> 43
The cost of the Rider is that the Cost of Insurance Charge for the Policy
will include amounts for the increase segments as they become effective. The
cost of insurance rates will be the same as the rates we apply to Basic Coverage
at issue. Guaranteed cost of insurance rates that will be applied to increases
effected through this Rider will be set forth in the Rider.
An Automatic Increase Rider terminates:
(a) at your request
(b) when the younger insured reaches Attained Age 81
(c) when the maximum total increase is reached
(d) on the death of the first to die of the Insureds, or (e) when a
requested decrease in Face Amount becomes effective.
Termination of the Rider does not cancel previously added increases.
This Rider is available only at issue, only if the younger Insured's Issue
Age is at least 20 and less than 71, and only if neither Insured has a
substandard rating in excess of 250%.
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. In the absence of such
guidance there is some uncertainty as to whether the Policy will qualify as a
life insurance contract for Federal tax purposes. Nevertheless, National Life
believes it reasonable to conclude that a Policy will satisfy the applicable
requirements. 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 Variable 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 Variable Account assets supporting the Policy.
In addition, the Code requires that the investments of the Variable
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
Variable 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
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<PAGE> 44
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 distribution 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, such as a
reduction in benefits, 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> 45
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.
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.
Policy Split Option. The policy split option permits a policy to be split
into two single life insurance policies. It is not clear whether exercising the
policy split option will be treated as a taxable transaction or whether the
individual policies would be classified as modified endowment contracts. A tax
advisor should be consulted before exercising the policy split option.
Other Tax Considerations. The Policy can be used 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.
Federal and state estate, inheritance, transfer, and other tax
consequences depend on the individual circumstances of each Policy Owner or
beneficiary. A tax advisor should be consulted on these consequences.
The transfer of the Policy or designation of a beneficiary may have
federal, state, and/or local transfer and inheritance tax consequences,
including the imposition of gift, estate, and generation-skipping transfer
("GST") taxes. For example, the transfer of the Policy to, or the designation as
a beneficiary of, or the payment of proceeds to, a person who is assigned to a
generation which is two or more generations below the generation assignment of
the Policy Owner (e.g., a grandchild) may have GST tax consequences under
federal and state tax law. The individual situation of each Policy Owner or
beneficiary will determine the extent, if any, to which federal, state, and
local transfer and inheritance taxes may be imposed and how ownership or receipt
of Policy proceeds will be treated for purposes of federal, state and local
estate, inheritance, GST and other taxes.
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.
VOTING RIGHTS
We will invest all of the assets held in the Subaccounts of the Variable
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 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. The number of shares held in each Subaccount attributable to a
Policy for which you may provide voting instructions will be determined by
dividing your Policy's Accumulated Value in that account by the net asset value
of one
40
<PAGE> 46
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 a 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 any such laws or regulations.
National Life also reserves the right, subject to compliance with
applicable law, including approval of Owners, if so required:
(1) to make changes in the form of the Variable Account, if in its
judgment such changes would serve the interests of Owners or would be
appropriate in carrying out the purposes of the Policies, for example:
(i) operating the Variable Account as a management company under the
1940 Act
(ii) deregistering the Variable Account under the 1940 Act if
registration is no longer required
(iii) combining or substituting separate accounts
(iv) transferring the assets of the Variable Account to another
separate account or to the Fixed Account
(v) making changes necessary to comply with, obtain or continue any
exemptions from the 1940 Act, or
(vi) making other technical changes in the Policy to conform with
any action described herein;
(2) if in its judgment a Portfolio no longer suits the investment goals of
the Policy, or if tax or marketing conditions so warrant, to substitute
shares of another investment portfolio for shares of such Portfolio;
(3) to eliminate, combine, or substitute Subaccounts and establish new
Subaccounts, if in its judgment marketing needs, tax considerations, or
investment conditions so warrant;
(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 notify you at least 30 days before the elimination, and will ask that
you name the Subaccount or Subaccounts (or the Fixed 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 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.
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<PAGE> 47
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
President, Chief Chief Operating Officer; 1993 to
Operating Officer, 1996 - Executive Vice President
and Director & Chief Financial Officer
Robert E. Boardman 1994 to present - Chairman of Hickok &
Director Boardman Financial Network
1967 to present - President of Hickok &
Boardman Realty, Inc.
Earle H. Harbison, Jr. 1993 to present: Chairman of
Director Harbison Walker, Inc.
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
James A. Mallon 1998 to present: Executive Vice President & Chief
Executive Vice President & Marketing Officer; 1996 to 1998:President & Chief
Chief Marketing Officer Executive Officer - Integon Life Insurance Corporation;
1993 to 1996: Senior Vice President & Chief Marketing
Officer - Commercial Union Life Insurance Company
Of America
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
Rodney A. Buck 2000 to present - Executive Vice President and Chief
Executive Vice President Investment Officer; 1996 to 2000 - Senior Vice
and Chief Investment President and Chief Investment Officer; 1996 to present -
Officer 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
</TABLE>
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<PAGE> 48
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION DURING THE PAST FIVE YEARS
- ----------------- --------------------------
<S> <C>
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
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
Chief Information Officer President & 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 Variable Account pursuant to an Underwriting Agreement to
which the Variable Account, ESI and National Life are parties.
National Life is seeking approval to sell the Policies in all states and
the District of Columbia. However, all approvals may not be obtained. The
Policies are offered and sold only in those states where their sale is lawful.
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.
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 and service fee 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 the Target Premium (which is a function of
Basic Coverage, and is shown in Appendix B to this Prospectus) and 2% 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 Premium, and 2% of premiums paid in excess of that amount. For Policy
Year 11 and thereafter, agent commissions will be 1.5% of all premiums paid.
43
<PAGE> 49
For premiums received in the year following an increase in Basic Coverage and
attributable to the increase, agent commissions will not be more than 48.5% up
to the Target Premium for the increase. Agents may also receive expense
allowances, and will also receive service fees, starting in Policy Year 5, of
0.15% of unloaned Accumulated Value. 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 concessions during the first
Policy Year of 85% of the premiums paid up to the Target Premium, 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 Basic Coverage
and attributable to the increase, the gross dealer concession will not be more
than 50% up to the Target Premium for the increase. The aggregate amounts of
sales load received by ESI in connection with the Policies in 1998 and 1999 were
$86,611.59 and $261,084.25, respectively.
POLICY REPORTS
At least 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 Fixed Account
- the amount held as Collateral in the Fixed Account
- the value in each Subaccount of the Variable 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.
We currently plan to send such statements quarterly. In addition, we will
send you a statement showing the status of the Policy following the transfer of
amounts from one Subaccount of a Variable Account to another or between the
Fixed Account and the Variable Account, 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 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.
44
<PAGE> 50
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 Variable 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 Variable 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 Variable Account appear on the following pages. The financial statements
of National Life should be distinguished from the financial statements of the
Variable Account and should be considered only as bearing upon National Life's
ability to meet its obligations under the Policies.
45
<PAGE> 51
GLOSSARY
ACCUMULATED VALUE The sum of the Policy's values in the
Variable Account and the Fixed Account.
ADDITIONAL COVERAGE One of the two types of coverage of which
the Face Amount is comprised, which is
provided by the Additional Protection
Benefit Rider; the other type of coverage is
Basic Coverage.
ADDITIONAL PROTECTION BENEFIT
RIDER A benefit that may be included in the Policy
at your option, which provides Additional
Coverage.
ATTAINED AGE The Issue Age of the Insured plus the number
of full Policy Years which have passed since
the Date of Issue.
BASIC COVERAGE One of the two types of coverage of which
the Face Amount is comprised; the other type
is Additional Coverage, provided by the
Additional Protection Benefit Rider.
BENEFICIARY The person(s) or entity(ies) designated to
receive all or some of the Death Benefit on
the death of the last to die of the two
Insureds. You designate the Beneficiary in
the application. If you subsequently change
Beneficiaries, then the Beneficiary is as
shown in the latest change filed with us.
The interest of any Beneficiary who dies
before the last to die of the two Insureds
shall vest in you 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
Fixed Account which secures the amount of
any Policy loan.
CODE The Internal Revenue Code of 1986, as
amended.
CUMULATIVE GUARANTEE PREMIUM The sum of the Monthly Guarantee 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.
CUMULATIVE MINIMUM MONTHLY
PREMIUM The sum of the Minimum Monthly Premiums in
effect on each Monthly Policy Date since the
Date of Issue (including the current month),
plus all Withdrawals and outstanding Policy
loans and accrued interest.
DAC TAX A tax attributable to Specified Policy
Acquisition Expenses under Section 848 of
the Code.
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.
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<PAGE> 52
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. The Face Amount is the sum of
the Basic Coverage and the Additional
Coverage.
FIXED 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 we send a notice of pending lapse,
during which the Policy will not lapse and
insurance coverage continues. To prevent
lapse, you 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.
GUARANTEED DEATH BENEFIT RIDER An optional Rider that will guarantee that
the Policy will not lapse, either, prior to
the end of the year that the younger Insured
attains Age 80, or for the entire lifetimes
of the Insureds, whichever you elect,
regardless of investment performance, if the
Cumulative 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.
INSUREDS The two persons upon whose lives the Policy
is issued.
ISSUE AGE The age of an Insured at his or her birthday
nearest the Date of Issue. The Issue Ages of
the two Insureds are stated in the Policy.
JOINT AGE The age assigned to the Policy, based on
characteristics of the two Insureds, used in
the calculation of the Target Premium and
the Surrender Charge. The Joint Age is set
forth in the Policy, and is discussed in
Appendix B of this Prospectus.
MINIMUM BASIC COVERAGE AMOUNT The Minimum Basic Coverage Amount is
$100,000.
MINIMUM INITIAL PREMIUM The minimum premium required to issue a
Policy. It is equal to the Minimum
Monthly Premium, or if the Guaranteed Death
Benefit Rider applies to the Policy, the
Monthly Guarantee Premium.
MINIMUM MONTHLY PREMIUM The monthly premium which, if paid, will
guarantee that the Policy will stay in force
during the first five Policy Years. 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 Ages, sexes and Rate Classes of
the two Insureds. This premium is stated in
the Policy, and will be restated upon
changes in coverage.
MONTHLY ADMINISTRATIVE CHARGE A charge included in the Monthly Deduction,
which is intended to reimburse us for
ordinary administrative expenses and
distribution expenses.
MONTHLY DEDUCTION The amount deducted from the Accumulated
Value on each Monthly Policy Date. It
includes the Variable Account Charge, the
Monthly Administrative Charge, the Cost of
Insurance Charge, and the monthly cost of
any benefits provided by Riders.
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<PAGE> 53
MONTHLY GUARANTEE PREMIUM The monthly premium level which will keep
the Guaranteed Death Benefit Rider in force.
If the Guaranteed Death Benefit Rider
applies only until the younger Insured's
Attained Age 81, then the Monthly Guarantee
Premium will be less than if you elect to
have the Guaranteed Death Benefit Rider
apply for the entire lifetimes of the two
Insureds. If the Guaranteed Death Benefit
Rider applies to a Policy, the Monthly
Guarantee Premium will be stated in the
Policy.
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.
NET PREMIUM The remainder of a premium after the
deduction of the Premium Expense Charge.
OWNER The person(s) or entity(ies) entitled to
exercise the rights granted in the Policy.
PLANNED PERIODIC PREMIUM The premium amount which you plan to pay at
the frequency selected. You may request a
reminder notice and may change the amount of
the Planned Periodic Premium. You are 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 EXPENSE CHARGE A charge deducted from each premium payment
which has two parts: one to cover the cost
of state and local premium taxes, and the
federal DAC Tax, and the other to cover
distribution expenses incurred in connection
with the Policies.
RATE CLASS The classification of an Insured for cost of
insurance purposes. The Rate Classes are:
preferred nonsmoker; nonsmoker; preferred
smoker; smoker; substandard and uninsurable.
RIDERS Optional benefits that you 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 10 Policy Years or 10 years
following an increase in Basic Coverage. The
Surrender Charge is shown in the Policy and
is discussed in Appendix B to this
Prospectus.
TARGET PREMIUM The premium used in the determination of the
amount of the Premium Expense Charge. This
amount is shown in each Policy and is
discussed in Appendix B to this Prospectus.
UNADJUSTED DEATH BENEFIT Under Option A, the greater of the Face
Amount or the applicable percentage of the
Accumulated Value; under Option B, the
greater of the Face Amount plus the
Accumulated Value, or the applicable
percentage of the Accumulated Value. 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.
48
<PAGE> 54
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 your request 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.
49
<PAGE> 55
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 Variable Account. The tables show how the Death Benefits, Accumulated
Values and Cash Surrender Values of a Policy issued to two Insureds of 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 with the
Insureds being a male age 55 and a female age 50, each in the Preferred
Nonsmoker Rate Class with a Face Amount of $1,000,000 and Planned Periodic
Premiums of $10,000 paid at the beginning of each Policy Year. Both Death
Benefit Option A and Death Benefit Option B, are illustrated. The Death
Benefits, Accumulated Values and Cash Surrender Values would be lower if either
or both of the Insureds were in a nonsmoker, preferred smoker, smoker,
substandard or uninsurable 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 Variable Account 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
Cost of Insurance Charge, the Premium Expense Charge, the Variable Account
Charge, and the Monthly Administrative Charge are charged at the maximum level.
The columns under the heading "Current" assume that throughout the life of the
Policy, the monthly charge for the cost of insurance is based on the current
cost of insurance rates and that the Premium Expense Charge, the Variable
Account Charge and the Monthly Administrative Charges are assessed at current
levels.
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 these asset charges reflected in
the Current and Guaranteed illustrations, not including the Variable Account
Charge, is 0.83%. This total charge is based on an assumption that you allocate
the Policy values equally among the Subaccounts of the Variable Account.
These other asset charges reflect an investment advisory fee of 0.64%,
which represents a simple average of the fees incurred by the Portfolios during
1999 and expenses of 0.19%, which is based on a simple average of the actual
expenses incurred by the Portfolios during 1999. This total is based on the
assumption that you allocate the Policy value equally among the Subaccounts of
the Variable Account. These asset charges take into account expense
reimbursement arrangements expected to be in place for 2000 for some of the
Portfolios. In the absence of the reimbursement arrangements for some of the
Portfolios, the other asset charges not including the Variable Account Charge,
would have totalled an average of 1.06%. If the reimbursement arrangements were
discontinued, the Accumulated Values and Cash Surrender Values of a Policy which
allocates Accumulated Value 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 Variable 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 Fixed Account, and no Policy loans
are made. The tables are also based on the assumption that you have 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, and that no Riders
have been purchased.
Illustrated values may vary based on Policy variations required by
individual states.
Upon request, we will provide a comparable illustration based upon the
proposed Insureds' Ages and Rate Classes, the Death Benefit Option, Face Amount,
Planned Periodic Premiums and Riders requested and state of issue.
A-1
<PAGE> 56
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE
PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.63% IN THE FIRST 10 YEARS
and -1.13% THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and
-1.73% IN ALL YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<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 10,500 7,626 0 1,000,000 7,634 0 1,000,000
2 21,525 15,005 5,005 1,000,000 15,028 5,028 1,000,000
3 33,101 22,117 12,117 1,000,000 22,164 12,164 1,000,000
4 45,256 28,941 18,941 1,000,000 29,016 19,016 1,000,000
5 58,019 35,449 25,449 1,000,000 35,559 25,559 1,000,000
6 71,420 41,613 33,446 1,000,000 41,764 33,597 1,000,000
7 85,491 47,400 41,233 1,000,000 47,597 41,430 1,000,000
8 100,266 52,774 48,608 1,000,000 53,315 49,149 1,000,000
9 115,779 57,698 55,531 1,000,000 58,923 56,756 1,000,000
10 132,068 62,122 61,955 1,000,000 64,412 64,245 1,000,000
11 149,171 65,990 65,990 1,000,000 71,465 71,465 1,000,000
12 167,130 69,229 69,229 1,000,000 78,390 78,390 1,000,000
13 185,986 71,748 71,748 1,000,000 85,172 85,172 1,000,000
14 205,786 73,427 73,427 1,000,000 91,784 91,784 1,000,000
15 226,575 74,133 74,133 1,000,000 98,206 98,206 1,000,000
16 248,404 73,717 73,717 1,000,000 104,406 104,406 1,000,000
17 271,324 72,014 72,014 1,000,000 110,345 110,345 1,000,000
18 295,390 68,846 68,846 1,000,000 115,975 115,975 1,000,000
19 320,660 64,021 64,021 1,000,000 121,235 121,235 1,000,000
20 347,193 57,301 57,301 1,000,000 126,050 126,050 1,000,000
25 501,135 0 0 0 145,339 145,339 1,000,000
30 697,608 0 0 0 133,585 133,585 1,000,000
</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
VARIABLE 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> 57
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE
PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.27% IN THE FIRST 10 YEARS and
4.80% THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and
4.17% IN ALL YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<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 10,500 8,116 0 1,000,000 8,125 0 1,000,000
2 21,525 16,452 6,452 1,000,000 16,478 6,478 1,000,000
3 33,101 24,993 14,993 1,000,000 25,046 15,046 1,000,000
4 45,256 33,720 23,720 1,000,000 33,809 23,809 1,000,000
5 58,019 42,609 32,609 1,000,000 42,746 32,746 1,000,000
6 71,420 51,633 43,467 1,000,000 51,829 43,663 1,000,000
7 85,491 60,761 54,595 1,000,000 61,028 54,862 1,000,000
8 100,266 69,958 65,792 1,000,000 70,605 66,439 1,000,000
9 115,779 79,184 77,017 1,000,000 80,580 78,413 1,000,000
10 132,068 88,387 88,220 1,000,000 90,960 90,793 1,000,000
11 149,171 97,507 97,507 1,000,000 103,657 103,657 1,000,000
12 167,130 106,466 106,466 1,000,000 116,925 116,925 1,000,000
13 185,986 115,166 115,166 1,000,000 130,776 130,776 1,000,000
14 205,786 123,477 123,477 1,000,000 145,215 145,215 1,000,000
15 226,575 131,255 131,255 1,000,000 160,250 160,250 1,000,000
16 248,404 138,335 138,335 1,000,000 175,883 175,883 1,000,000
17 271,324 144,533 144,533 1,000,000 192,108 192,108 1,000,000
18 295,390 149,646 149,646 1,000,000 208,912 208,912 1,000,000
19 320,660 153,456 153,456 1,000,000 226,274 226,274 1,000,000
20 347,193 155,693 155,693 1,000,000 244,164 244,164 1,000,000
25 501,135 128,044 128,044 1,000,000 344,981 344,981 1,000,000
30 697,608 0 0 0 451,264 451,264 1,000,000
</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
VARIABLE 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> 58
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM
ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.17% IN THE FIRST 10 YEARS and
10.73% THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and
10.06% IN ALL YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<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 10,500 8,607 0 1,000,000 8,616 0 1,000,000
2 21,525 17,959 7,959 1,000,000 17,988 7,988 1,000,000
3 33,101 28,106 18,106 1,000,000 28,166 18,166 1,000,000
4 45,256 39,099 29,099 1,000,000 39,206 29,206 1,000,000
5 58,019 50,996 40,996 1,000,000 51,165 41,165 1,000,000
6 71,420 63,852 55,686 1,000,000 64,104 55,938 1,000,000
7 85,491 77,732 71,565 1,000,000 78,089 71,922 1,000,000
8 100,266 92,701 88,534 1,000,000 93,488 89,321 1,000,000
9 115,779 108,833 106,666 1,000,000 110,452 108,285 1,000,000
10 132,068 126,201 126,034 1,000,000 129,134 128,967 1,000,000
11 149,171 144,883 144,883 1,000,000 151,896 151,896 1,000,000
12 167,130 164,956 164,956 1,000,000 177,082 177,082 1,000,000
13 185,986 186,494 186,494 1,000,000 204,942 204,942 1,000,000
14 205,786 209,561 209,561 1,000,000 235,747 235,747 1,000,000
15 226,575 234,235 234,235 1,000,000 269,806 269,806 1,000,000
16 248,404 260,602 260,602 1,000,000 307,454 307,454 1,000,000
17 271,324 288,771 288,771 1,000,000 349,066 349,066 1,000,000
18 295,390 318,875 318,875 1,000,000 395,055 395,055 1,000,000
19 320,660 351,093 351,093 1,000,000 445,886 445,886 1,000,000
20 347,193 385,625 385,625 1,000,000 502,082 502,082 1,000,000
25 501,135 603,292 603,292 1,000,000 890,837 890,837 1,000,000
30 697,608 960,215 960,215 1,008,226 1,542,053 1,542,053 1,619,155
</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
VARIABLE 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> 59
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE
PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.63% IN THE FIRST 10 YEARS and
-1.13% THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and
-1.73% IN ALL YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<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 10,500 7,625 0 1,007,625 7,634 0 1,007,634
2 21,525 15,002 5,002 1,015,002 15,025 5,025 1,015,025
3 33,101 22,107 12,107 1,022,107 22,153 12,153 1,022,153
4 45,256 28,916 18,916 1,028,916 28,991 18,991 1,028,991
5 58,019 35,399 25,399 1,035,399 35,509 25,509 1,035,509
6 71,420 41,523 33,357 1,041,523 41,674 33,507 1,041,674
7 85,491 47,251 41,084 1,047,251 47,448 41,281 1,047,448
8 100,266 52,542 48,376 1,052,542 53,099 48,932 1,053,099
9 115,779 57,352 55,186 1,057,352 58,631 56,465 1,058,631
10 132,068 61,626 61,460 1,061,626 64,037 63,871 1,064,037
11 149,171 65,301 65,301 1,065,301 70,994 70,994 1,070,994
12 167,130 68,295 68,295 1,068,295 77,808 77,808 1,077,808
13 185,986 70,507 70,507 1,070,507 84,464 84,464 1,084,464
14 205,786 71,808 71,808 1,071,808 90,931 90,931 1,090,931
15 226,575 72,056 72,056 1,072,056 97,184 97,184 1,097,184
16 248,404 71,093 71,093 1,071,093 103,187 103,187 1,103,187
17 271,324 68,752 68,752 1,068,752 108,893 108,893 1,108,893
18 295,390 64,857 64,857 1,064,857 114,246 114,246 1,114,246
19 320,660 59,231 59,231 1,059,231 119,173 119,173 1,119,173
20 347,193 51,658 51,658 1,051,658 123,587 123,587 1,123,587
25 501,135 0 0 0 139,974 139,974 1,139,974
30 697,608 0 0 0 120,204 120,204 1,120,204
</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
VARIABLE 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> 60
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM
ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.27% IN THE FIRST 10 YEARS and
4.80% THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and
10.06% IN ALL YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<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 10,500 8,116 0 1,008,116 8,124 0 1,008,124
2 21,525 16,449 6,449 1,016,449 16,475 6,475 1,016,475
3 33,101 24,982 14,982 1,024,982 25,034 15,034 1,025,034
4 45,256 33,690 23,690 1,033,690 33,780 23,780 1,033,780
5 58,019 42,548 32,548 1,042,548 42,685 32,685 1,042,685
6 71,420 51,520 43,353 1,051,520 51,715 43,549 1,051,715
7 85,491 60,566 54,400 1,060,566 60,832 54,665 1,060,832
8 100,266 69,642 65,475 1,069,642 70,309 66,142 1,070,309
9 115,779 78,694 76,527 1,078,694 80,164 77,997 1,080,164
10 132,068 87,656 87,490 1,087,656 90,403 90,236 1,090,403
11 149,171 96,450 96,450 1,096,450 102,927 102,927 1,102,927
12 167,130 104,974 104,974 1,104,974 115,988 115,988 1,115,988
13 185,986 113,101 113,101 1,113,101 129,591 129,591 1,129,591
14 205,786 120,667 120,667 1,120,667 143,731 143,731 1,143,731
15 226,575 127,484 127,484 1,127,484 158,405 158,405 1,158,405
16 248,404 133,342 133,342 1,133,342 173,598 173,598 1,173,598
17 271,324 138,006 138,006 1,138,006 189,286 189,286 1,189,286
18 295,390 141,219 141,219 1,141,219 205,430 205,430 1,205,430
19 320,660 142,711 142,711 1,142,711 221,972 221,972 1,221,972
20 347,193 142,159 142,159 1,142,159 238,836 238,836 1,238,836
25 501,135 92,109 92,109 1,092,109 330,948 330,948 1,330,948
30 697,608 0 0 0 407,333 407,333 1,407,333
</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
VARIABLE 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> 61
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE
PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.17% IN THE FIRST 10 YEARS and
10.73% THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and
10.06% IN ALL YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<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 10,500 8,607 0 1,008,607 8,616 0 1,008,616
2 21,525 17,955 7,955 1,017,955 17,984 7,984 1,017,984
3 33,101 28,093 18,093 1,028,093 28,153 18,153 1,028,153
4 45,256 39,065 29,065 1,039,065 39,172 29,172 1,039,172
5 58,019 50,922 40,922 1,050,922 51,091 41,091 1,051,091
6 71,420 63,709 55,543 1,063,709 63,960 55,794 1,063,960
7 85,491 77,476 71,309 1,077,476 77,831 71,664 1,077,831
8 100,266 92,269 88,103 1,092,269 93,083 88,917 1,093,083
9 115,779 108,138 105,972 1,108,138 109,861 107,694 1,109,861
10 132,068 125,125 124,958 1,125,125 128,307 128,141 1,128,307
11 149,171 143,262 143,262 1,143,262 150,768 150,768 1,150,768
12 167,130 162,571 162,571 1,162,571 175,572 175,572 1,175,572
13 185,986 183,049 183,049 1,183,049 202,953 202,953 1,202,953
14 205,786 204,663 204,663 1,204,663 233,153 233,153 1,233,153
15 226,575 227,357 227,357 1,227,357 266,446 266,446 1,266,446
16 248,404 251,057 251,057 1,251,057 303,123 303,123 1,303,123
17 271,324 275,662 275,662 1,275,662 343,495 343,495 1,343,495
18 295,390 301,052 301,052 1,301,052 387,896 387,896 1,387,896
19 320,660 327,090 327,090 1,327,090 436,675 436,675 1,436,675
20 347,193 353,582 353,582 1,353,582 490,207 490,207 1,490,207
25 501,135 479,969 479,969 1,479,969 852,095 852,095 1,852,095
30 697,608 531,111 531,111 1,531,111 1,409,274 1,409,274 2,409,274
</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
VARIABLE 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> 62
APPENDIX B
JOINT AGE CALCULATION
To calculate Joint Age, the two insureds ages are converted to adjusted ages,
the difference in adjusted ages, the difference in the adjusted ages is
converted to an add-on, and the add-on is added to the adjusted age of the
younger insured.
Step1: Sex Adjustment
Make the following adjustment to each insured's age based on sex:
Male: Subtract 0
Female: Subtract 5
Step2: Substandard Rating Adjustment:
Take the results from Step 1 and make the following adjustment to each
insured's age based on tobacco use:
Male Tobacco: Add 3
Female Tobacco: Add 2
Step2: Substandard Rating Adjustment:
Take the results from Step 2 and make the following adjustment to
each insured's age based on substandard rating table:
Table A (125%) Add 2 Table F (250%) Add 12
Table B (150%) Add 4 Table H (300%) Add 14
Table C (175%) Add 6 Table J (350%) Add 15
Table D (200%) Add 8 Table L (400%) Add 16
Table E (225%) Add 10 Table P (500%) Add 19
If the adjusted age exceeds 100, then cap the adjusted age at 100.
Step 4: Uninsurables:
An adjusted age of 100 will be used for all uninsurables.
Step 5: Age Add-on:
Take the difference of the adjusted ages and determine the add-on from
the following table:
0 0
1-2 1
3-4 2
5-6 3
7-9 4
10-12 5
13-15 6
16-18 7
19-23 8
24-28 9
29-34 10
35-39 11
40-44 12
45-47 13
48-50 14
51-53 15
54-56 16
57-60 17
61-64 18
65-69 19
70-75 20
76-85 21
Step 6: Joint Age:
Add the add-on from Step 5 to the younger adjusted age to get the Joint
Age.
B-1
<PAGE> 63
Target Premiums and Surrender Charges
(Annual rates per $1000 of Basic Coverage)
The initial surrender charge is level for the number of years indicated below.
Following this level period, the surrender charge decreases linearly by month
until it is zero at the beginning of the 11th year. These charges do not apply
to Policies issued in New York - see Appendix C for the initial surrender
charges that apply to Policies issued in New York
<TABLE>
<CAPTION>
Initial Level Initial Level
Joint Target Surrender Period Joint Target Surrender Period
Age Premium Charge (in years) Age Premium Charge (in years)
--- ------- ------ ---------- --- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
15 or less 2.40 2.40 5 53 11.70 11.70 5
16 2.50 2.50 5 54 12.90 12.90 5
17 2.60 2.60 5 55 14.05 14.05 5
18 2.65 2.65 5 56 15.25 15.25 5
19 2.75 2.75 5 57 16.45 16.45 5
20 2.80 2.80 5 58 17.65 17.65 5
21 2.90 2.90 5 59 18.80 18.80 5
22 3.00 3.00 5 60 20.00 20.00 5
23 3.10 3.10 5 61 20.75 20.75 5
24 3.20 3.20 5 62 21.50 21.50 5
25 3.30 3.30 5 63 22.70 22.70 5
26 3.35 3.35 5 64 23.90 23.90 5
27 3.45 3.45 5 65 25.05 25.05 5
28 3.60 3.60 5 66 26.25 26.25 5
29 3.70 3.70 5 67 27.45 27.45 5
30 3.80 3.80 5 68 28.65 28.65 5
31 3.90 3.90 5 69 29.80 29.80 5
32 4.00 4.00 5 70 31.00 31.00 5
33 4.15 4.15 5 71 31.75 31.75 5
34 4.30 4.30 5 72 32.50 32.50 5
35 4.50 4.50 5 73 33.45 33.45 5
36 4.70 4.70 5 74 34.40 34.40 5
37 4.85 4.85 5 75 35.30 35.30 5
38 5.05 5.05 5 76 36.25 36.25 5
39 5.30 5.30 5 77 37.20 37.20 5
40 5.50 5.50 5 78 38.15 38.15 4
41 5.65 5.65 5 79 39.05 39.05 4
42 5.80 5.80 5 80 40.00 40.00 3
43 6.35 6.35 5 81 40.00 41.00 3
44 6.85 6.85 5 82 40.00 42.00 3
45 7.40 7.40 5 83 40.00 43.00 2
46 7.90 7.90 5 84 40.00 44.00 2
47 8.45 8.45 5 85 40.00 45.00 1
48 8.95 8.95 5 86 40.00 46.00 1
49 9.50 9.50 5 87 40.00 47.00 1
50 10.00 10.00 5 88 40.00 48.00 1
51 10.25 10.25 5 89 40.00 49.00 0
52 10.50 10.50 5 90 40.00 50.00 0
</TABLE>
B-2
<PAGE> 64
APPENDIX C
New York Surrender Charge Information
SENTINEL ESTATE PROVIDER - NEW YORK
Target Premiums and Surrender Charges
(Annual rates per $1,000 of Basic Coverage)
The initial surrender charge is level for the number of years indicated below.
Following this level period, the surrender charge decreases linearly by month
until it is zero at the beginning of the 11th year.
<TABLE>
<CAPTION>
Initial Level Initial Level
Target Surrender Period Target Surrender Period
Joint Age Premium Charge (years) Joint Age Premium Charge (years)
- -------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 15 2.40 2.40 5 53 11.70 11.70 5
16 2.50 2.50 5 54 12.90 12.90 5
17 2.60 2.60 5 55 14.05 14.05 5
18 2.65 2.65 5 56 15.25 15.25 4
19 2.75 2.75 5 57 16.45 16.31 4
20 2.80 2.80 5 58 17.65 16.99 4
21 2.90 2.90 5 59 18.80 17.36 4
22 3.00 3.00 5 60 20.00 18.59 3
23 3.10 3.10 5 61 20.75 19.50 3
24 3.20 3.20 5 62 21.50 19.99 3
25 3.30 3.30 5 63 22.70 21.06 3
26 3.35 3.35 5 64 23.90 21.63 3
27 3.45 3.45 5 65 25.05 22.89 3
28 3.60 3.60 5 66 26.25 23.53 3
29 3.70 3.70 5 67 27.45 24.96 3
30 3.80 3.80 5 68 28.65 25.66 3
31 3.90 3.90 5 69 29.80 27.25 3
32 4.00 4.00 5 70 31.00 28.04 3
33 4.15 4.15 5 71 31.75 28.84 3
34 4.30 4.30 5 72 32.50 29.66 3
35 4.50 4.50 5 73 33.45 31.60 3
36 4.70 4.70 5 74 34.40 32.54 3
37 4.85 4.85 5 75 35.30 33.50 3
38 5.05 5.05 5 76 36.25 34.49 3
39 5.30 5.30 5 77 37.20 36.80 3
40 5.50 5.50 5 78 38.15 37.94 3
41 5.65 5.65 5 79 39.05 39.13 3
42 5.80 5.80 5 80 40.00 40.37 3
43 6.35 6.35 5 81 40.00 41.00 3
44 6.85 6.85 5 82 40.00 42.00 3
45 7.40 7.40 5 83 40.00 43.00 3
46 7.90 7.90 5 84 40.00 44.00 3
47 8.45 8.45 5 85 40.00 45.00 3
48 8.95 8.95 5 86 40.00 46.00 2
49 9.50 9.50 5 87 40.00 47.00 2
50 10.00 10.00 5 88 40.00 48.00 2
51 10.25 10.25 5 89 40.00 49.00 2
52 10.50 10.50 5 90 40.00 50.00 2
</TABLE>
C-1
<PAGE> 65
-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> 66
NATIONAL LIFE GROUP
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-2
<PAGE> 67
[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> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
<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> 83
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> 84
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> 85
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> 86
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> 87
<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> 88
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> 89
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> 90
NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-26
<PAGE> 91
[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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
<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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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> 113
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> 114
NATIONAL VARIABLE
LIFE INSURANCE ACCOUNT
(ESTATE PROVIDER SEGMENT)
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999
F-50
<PAGE> 115
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of National Life Insurance Company
and Policyholders of National Variable Life Insurance Account -
Estate Provider 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 -- Estate Provider
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 the year ended
December 31, 1999 and the period from May 1, 1998 through December 31, 1998,
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> 116
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER 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 (87,355.06 accumulation units at $12.72 unit value) $ 1,111,122
Market Street Fund Growth (22,399.80 accumulation units at $10.50 unit value) 235,245
Market Street Fund Aggressive Growth (5,483.25 accumulation units at $11.15 unit value) 61,159
Market Street Fund Managed (24,269.83 accumulation units at $10.51 unit value) 255,169
Market Street Fund Bond (23,729.56 accumulation units at $10.24 unit value) 242,908
Market Street Fund International (12,444.41 accumulation units at $12.26 unit value) 152,531
Market Street Fund Sentinel Growth (11,226.88 accumulation units at $14.69 unit value) 164,922
American Century Variable Portfolios VP Value (4,074.75 accumulation units at $9.32 unit value) 37,975
American Century Variable Portfolios VP Income & Growth (16,224.93 accumulation units at $12.89 unit value) 209,119
JP Morgan Series Trust II International Opportunities (5,512.70 acumulation units at $12.42 unit value) 68,479
JP Morgan Series Trust II Small Company (16,199.23 acumulation units at $12.09 unit value) 195,768
Strong Opportunity Fund II(4,716.77 accumulation units at $12.97 unit value) 61,198
Strong Variable Insurance Funds Mid Cap Growth (11,462.76 accumulation units at $22.07 unit value) 253,031
Neuberger Berman Partners Portfolio (13,913.06 accumulation units at $10.02 unit value) 139,372
Goldman Sachs International Equity (10,567.92 accumulation units at $13.08 unit value) 138,270
Goldman Sachs Global Income (1,149.40 accumulation units at $10.55 unit value) 12,126
Goldman Sachs CORE Small Cap Equity (9,590.49 accumulation units at $9.65 unit value) 92,525
Goldman Sachs Mid Cap Value (3,603.11 accumulation units at $8.47 unit value) 30,514
VIPF Growth (25,842.80 accumulation units at $16.56 unit value) 427,830
VIPF High Income (21,965.93 accumulation units at $9.76 unit value) 214,336
VIPF Index 500 (233,008.34 accumulation units at $13.34 unit value) 3,108,119
VIPF Contrafund (27,824.89 accumulation units at $14.10 unit value) 392,465
------------
Total Net Assets $ 7,604,183
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 117
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
AMERICAN CENTURY
MARKET STREET FUND VARIABLE PORTFOLIOS
----------------------------------------------------------------------- -----------------------
MONEY AGGRESSIVE SENTINEL VP INCOME &
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL GROWTH VP VALUE GROWTH
------- ------- ---------- ------- ---- ------------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions 40,526 $ 548 $ 496 $ 4,020 $ 164 $ 526 $ 735 $ 610 $ 4
EXPENSES:
Mortality and expense risk
charges 10,778 1,156 327 1,606 853 458 791 174 700
-------------------------------------------------------------------------------------------------
Net investment income (loss) 29,748 (608) 169 2,414 (689) 68 (56) 436 (696)
-------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold - 1,290 460 4,325 (220) 5,442 4,725 (181) 1,508
Net unrealized appreciation
(depreciation) on
investments - 762 9,017 (7,496) 1,716 13,170 35,074 (2,446) 20,046
-------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments - 2,052 9,477 (3,171) 1,496 18,612 39,799 (2,627) 21,554
-------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $29,748 $1,444 $9,646 $ (757) $ 807 $18,680 $39,743 $(2,191) $20,858
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 118
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
STRONG VARIABLE NEUBERGER
JP MORGAN SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
------------------------- ----------- --------------- ---------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
------------- ------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital
gain distributions $2,168 $ 4,033 $1,683 $ 5 $2,662
EXPENSES:
Mortality and expense risk
charges 144 632 156 421 764
-------------------------------------------------------------------
Net investment (loss) income 2,024 3,401 1,527 (416) 1,898
-------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss)
from shares sold 1,139 2,279 1,418 5,601 1,010
Net unrealized appreciation
(depreciation) on investments 6,017 51,818 3,679 50,886 2,934
-------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 7,156 54,097 5,097 56,487 3,944
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $9,180 $57,498 $6,624 $56,071 $5,842
===================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
-------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE
------------- ------ ---------- --------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital
gain distributions $ 8,786 $ 440 $ 194 $ 198
EXPENSES:
Mortality and expense risk
charges 424 37 408 129
-------------------------------------------
Net investment (loss) income 8,362 403 (214) 69
-------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss)
from shares sold 784 (82) 833 242
Net unrealized appreciation
(depreciation) on investments 15,215 (260) 14,070 (1,252)
-------------------------------------------
Net realized and unrealized gain
(loss) on investments 15,999 (342) 14,903 (1,010)
-------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $24,361 $ 61 14,689 $ (941)
===========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 119
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER 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
-----------------------------------------------------
HIGH INDEX
GROWTH INCOME 500 CONTRAFUND TOTAL
------- ------ -------- ---------- --------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 9,731 $3,784 $ 14,921 $ 1862 $ 98,096
EXPENSES:
Mortality and expense risk charges 1,530 909 12,632 1,146 36,175
--------------------------------------------------------------------
Net investment income 8,201 2,875 2,289 716 61,921
--------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 5,362 (692) 93,217 6,154 134,614
Net unrealized appreciation on
investments 56,306 2,934 256,118 41,349 569,657
--------------------------------------------------------------------
Net realized and unrealized gain on
investments 61,668 2,242 349,335 47,503 704,271
--------------------------------------------------------------------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $69,869 $5,117 $351,624 $48,219 $766,192
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 120
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
AMERICAN CENTURY
MARKET STREET FUND VARIABLE PORTFOLIOS
---------------------------------------------------------------------- ----------------------
MONEY AGGRESSIVE SENTINEL VP INCOME &
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL GROWTH VP VALUE GROWTH
------ ------ ---------- ------- ---- ------------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital
gain distributions $7,084 $ 19 $ - $ 358 $ - $ - $ - $ - $ 62
EXPENSES:
Mortality and expense risk charges 1,741 33 7 153 5 25 39 7 12
---------------------------------------------------------------------------------------------
Net investment (loss) income 5,343 (14) (7) 205 (5) (25) (39) (7) 50
---------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Net realized gain (loss) from
shares sold - 101 17 1,012 140 (432) 132 128 56
Net unrealized appreciation on
investments - 1,135 359 5,209 120 666 2,583 73 825
---------------------------------------------------------------------------------------------
Net realized and unrealized gain on
investments - 1,236 376 6,221 260 234 2,715 201 881
---------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $5,343 $1,222 $369 $6,426 $255 $209 $2,676 $194 $931
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 121
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
JP MORGAN STRONG VARIABLE NEUBERGER
SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
---------------------- ----------- --------------- ---------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
------------- ------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital gain
distributions $ - $ 358 $ 31 $ - $ -
EXPENSES:
Mortality and expense risk charges 3 33 25 3 18
-----------------------------------------------------------------
Net investment (loss) income (3) 325 6 (3) (18)
-----------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) from
shares sold 73 196 (375) 1 981
Net unrealized appreciation
(depreciation) on investments 37 1,341 1,166 709 152
-----------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 110 1,537 791 710 1,133
-----------------------------------------------------------------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $107 $1,862 $ 797 $707 $1,115
=================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE
------------- ------ ---------- -------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital gain
distributions $ 15 $ 72 $ 7 $17
EXPENSES:
Mortality and expense risk charges 4 4 9 3
------------------------------------------
Net investment (loss) income 11 68 (2) 14
------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) from
shares sold 146 8 (6) 2
Net unrealized appreciation
(depreciation) on investments 137 (61) 320 63
------------------------------------------
Net realized and unrealized gain
(loss) on investments 283 (53) 314 65
------------------------------------------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $294 $ 15 $312 $79
==========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 122
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
ESTATE PROVIDER SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
------------------------------------------
HIGH INDEX
GROWTH INCOME 500 CONTRAFUND TOTAL
------ ------ -------- ---------- --------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital gain
distributions $ - $ - $ - $ - $ 8,023
EXPENSES:
Mortality and expense risk charges 86 6 2,041 53 4,310
-------------------------------------------------------
Net investment (loss) income (86) (6) (2,041) (53) 3,713
-------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) from shares
sold 348 (3) 1,449 422 4,396
Net unrealized appreciation on
investments 3,862 47 110,537 4,347 133,627
-------------------------------------------------------
Net realized and unrealized gain on
investments 4,210 44 111,986 4,769 138,023
-------------------------------------------------------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $4,124 $38 $109,945 $4,716 $141,736
=======================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 123
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER 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 INTERNATIONAL
----------- -------- ---------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 29,748 $ 1,444 $ 9,646 $ (757) $ 807 $ 18,680
--------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 4,315,273 80,466 13,505 159,494 17,149 37,137
Transfers between investment
sub-accounts and general account, net (3,747,946) 142,903 36,708 53,839 219,508 95,714
Surrenders and lapses - (1,098) - - - (3,628)
Cost of insurance and administrative
charges (122,753) (12,573) (1,590) (27,116) (1,724) (2,826)
Miscellaneous (37,178) 237 (807) (59) 483 (77)
--------------------------------------------------------------------------------------
Total capital transactions 407,396 209,935 47,816 186,158 235,416 126,320
--------------------------------------------------------------------------------------
Increase in net assets 437,144 211,379 57,462 185,401 236,223 145,000
Net assets, beginning of period 673,978 23,866 3,697 69,768 6,685 7,531
--------------------------------------------------------------------------------------
Net assets, end of period $ 1,111,122 $235,245 $61,159 $255,169 $242,908 $152,531
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET
STREET AMERICAN CENTURY VARIABLE
FUND PORTFOLIOS
-------- -------------------------
SENTINEL VP INCOME &
GROWTH VP VALUE GROWTH
-------- --------- -----------
<S> <C> <C> <C>
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 39,743 $(2,191) $ 20,858
---------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 20,062 14,292 26,508
Transfers between investment
sub-accounts and general account, net 93,011 23,532 150,485
Surrenders and lapses (1,270) - -
Cost of insurance and administrative
charges (3,882) (2,041) (4,690)
Miscellaneous 1,311 (129) 329
---------------------------------------
Total capital transactions 109,232 35,654 172,632
---------------------------------------
Increase in net assets 148,975 33,463 193,490
Net assets, beginning of period 15,947 4,512 15,629
---------------------------------------
Net assets, end of period $164,922 $ 37,975 $209,119
=======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 124
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER 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 NEUBERGER
JP MORGAN SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
------------------------- ----------- --------------- ---------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
------------- ------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 9,180 $ 57,498 $ 6,624 $ 56,071 $ 5,842
------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 2,310 22,254 15,093 9,023 27,365
Transfers between investment
sub-accounts and general account, net 56,870 105,766 31,077 181,199 104,262
Surrenders and lapses - - (4,126) - -
Cost of insurance and administrative
charges (770) (4,462) (2,266) (1,650) (4,299)
Miscellaneous 2 188 8 (228) 372
------------------------------------------------------------------------------
Total capital transactions 58,412 123,746 39,786 188,344 127,700
------------------------------------------------------------------------------
Increase in net assets 67,592 181,244 46,410 244,415 133,542
Net assets, beginning of period 887 14,524 14,788 8,616 5,830
------------------------------------------------------------------------------
Net assets, end of period $68,479 $195,768 $61,198 $253,031 $139,372
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE
------------- ------ ---------- -------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 24,361 $ 61 $14,689 $ (941)
-------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 5,901 1,862 14,441 12,363
Transfers between investment
sub-accounts and general account, net 107,834 9,501 63,712 17,658
Surrenders and lapses - - - -
Cost of insurance and administrative
charges (1,731) (849) (1,526) (641)
Miscellaneous (76) (87) (1,104) (24)
-------------------------------------------------------
Total capital transactions 111,928 10,427 75,523 29,356
-------------------------------------------------------
Increase in net assets 136,289 10,488 90,212 28,415
Net assets, beginning of period 1,981 1,638 2,313 2,099
-------------------------------------------------------
Net assets, end of period $138,270 $12,126 $92,525 $30,514
=======================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 125
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER 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
---------------------------------------------------------
HIGH INDEX
GROWTH INCOME 500 CONTRAFUND TOTAL
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 69,869 $ 5,117 $ 351,624 $ 48,219 $ 766,192
-------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 138,594 19,771 436,403 76,009 5,465,275
Transfers between investment
sub-accounts and general account, net 186,776 184,642 1,637,161 245,788 -
Surrenders and lapses (1,316) - (20,562) - (32,000)
Cost of insurance and administrative charges (22,833) (4,215) (96,545) (12,214) (333,196)
Miscellaneous 6,099 (117) 8,737 2,071 (20,049)
-------------------------------------------------------------------------
Total capital transactions 307,320 200,081 1,965,194 311,654 5,080,030
-------------------------------------------------------------------------
Increase in net assets 377,189 205,198 2,316,818 359,873 5,846,222
Net assets, beginning of period 50,641 9,138 791,301 32,592 1,757,961
-------------------------------------------------------------------------
Net assets, end of period $427,830 $214,336 $3,108,119 $392,465 $7,604,183
=========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 126
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
-----------------------------------------------------------------------------------
MONEY AGGRESSIVE SENTINEL
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL GROWTH
---------- ------ ---------- ------- ------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 5,343 $ 1,222 $ 369 $ 6,426 $ 255 $ 209 $ 2,676
-----------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,133,620 6,174 1,707 18,935 381 2,729 4,088
Transfers between investment
sub-accounts and general account, net (403,626) 17,492 1,741 47,176 6,234 5,084 9,796
Cost of insurance and administrative charges (24,756) (1,023) (120) (2,836) (48) (503) (490)
Miscellaneous (36,603) 1 - 67 (137) 12 (123)
-----------------------------------------------------------------------------------
Total capital transactions 668,635 22,644 3,328 63,342 6,430 7,322 13,271
-----------------------------------------------------------------------------------
Increase in net assets 673,978 23,866 3,697 69,768 6,685 7,531 15,947
Net assets, beginning of period - - - - - - -
-----------------------------------------------------------------------------------
Net assets, end of period $ 673,978 $23,866 $3,697 $69,768 $6,685 $7,531 $15,947
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY VARIABLE
PORTFOLIOS
-------------------------
VP INCOME &
VP VALUE GROWTH
--------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 194 $ 931
-------------------------
CAPITAL TRANSACTIONS:
Participant deposits 574 438
Transfers between investment
sub-accounts and general account, net 4,060 14,524
Cost of insurance and administrative charges (321) (265)
Miscellaneous 5 1
-------------------------
Total capital transactions 4,318 14,698
-------------------------
Increase in net assets 4,512 15,629
Net assets, beginning of period - -
-------------------------
Net assets, end of period $4,512 $15,629
=========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 127
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH 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 IN NET ASSETS
RESULTING FROM OPERATIONS $107 $ 1,862 $ 797 $ 707 $1,115
--------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 853 3,172 81 - 3,877
Transfers between investment
sub-accounts and general account, net - 10,026 14,545 7,965 1,242
Cost of insurance and administrative charges (60) (520) (541) (56) (308)
Miscellaneous (13) (16) (94) - (96)
--------------------------------------------------------------------
Total capital transactions 780 12,662 13,991 7,909 4,715
--------------------------------------------------------------------
Increase in net assets 887 14,524 14,788 8,616 5,830
Net assets, beginning of period - - - - -
--------------------------------------------------------------------
Net assets, end of period $887 $14,524 $14,788 $8,616 $5,830
====================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
--------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE
------------- ------ ---------- -------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 294 $ 15 $ 312 $ 79
--------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 674 595 1,808 238
Transfers between investment
sub-accounts and general account, net 1,173 1,073 199 1,847
Cost of insurance and administrative charges (138) (118) (61) (82)
Miscellaneous (22) 73 55 17
--------------------------------------------------
Total capital transactions 1,687 1,623 2,001 2,020
--------------------------------------------------
Increase in net assets 1,981 1,638 2,313 2,099
Net assets, beginning of period - - - -
--------------------------------------------------
Net assets, end of period $1,981 $1,638 $2,313 $2,099
==================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 128
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
-----------------------------------------------
HIGH INDEX
GROWTH INCOME 500 CONTRAFUND TOTAL
------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 4,124 $ 38 $109,945 $ 4,716 $ 141,736
-------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 26,141 281 488,002 5,906 1,700,274
Transfers between investment
sub-accounts and general account, net 23,385 8,922 204,068 23,074 -
Cost of insurance and administrative charges (2,967) (104) (9,489) (1,105) (45,911)
Miscellaneous (42) 1 (1,225) 1 (38,138)
-------------------------------------------------------------
Total capital transactions 46,517 9,100 681,356 27,876 1,616,225
-------------------------------------------------------------
Increase in net assets 50,641 9,138 791,301 32,592 1,757,961
Net assets, beginning of period - - - - -
-------------------------------------------------------------
Net assets, end of period $50,641 $9,138 $791,301 $32,592 $1,757,961
=============================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE> 129
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(ESTATE PROVIDER 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 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 (the 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., American Century
Variable Portfolios, JP Morgan Series Trust II, Strong Variable Insurance Funds,
Strong Opportunity Fund II, Neuberger Berman Advisers Management Trust, Goldman
Sachs Variable Insurance Trust, and Variable Insurance Products Fund and
Variable Insurance Products Fund II (VIPF). 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-two 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, American Century Variable Portfolios VP Value,
American Century 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
F-65
<PAGE> 130
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, Goldman Sachs Variable Insurance Trust
Mid Cap Value (formerly Goldman Sachs Variable Insurance Trust Mid Cap Equity),
VIPF Growth, VIPF High Income, VIPF Contrafund, and VIPF Index 500 (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 is determined using the first-in first-out basis.
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-66
<PAGE> 131
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 1,111,122 $1,111,122
Growth 12,421 233,348
Aggressive Growth 2,784 51,784
Managed 15,198 257,456
Bond 22,959 241,072
International 9,145 138,695
Sentinel Growth 9,271 127,265
American Century Variable Portfolios
VP Value 6,382 40,348
VP Income & Growth 26,140 188,248
JP Morgan Series Trust II
International Opportunities 4,951 62,426
Small Company Fund 11,702 142,609
Strong Opportunity Fund II 2,355 56,352
Strong Variable Insurance Funds
Mid Cap Growth 8,332 201,436
Neuberger Berman Advisers Management Trust
Partners Portfolio 7,096 136,285
Goldman Sachs Variable Insurance Trust
International Equity 9,556 122,918
Global Income 1,234 12,447
CORE Small Cap Equity 8,729 78,135
Mid Cap Value 3,624 31,703
VIPF
Growth 7,789 367,662
High Income 18,951 211,354
Index 500 18,566 2,741,465
Contrafund 13,464 346,769
----------
Total $6,900,899
==========
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-67
<PAGE> 132
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 6,917,944 6,480,800
Growth 251,559 42,233
Aggressive Growth 89,019 41,033
Managed 312,808 124,237
Bond 247,455 12,728
International 177,863 51,475
Sentinel Growth 151,559 42,383
American Century Variable Portfolio
VP Value Fund 43,360 7,271
VP Income & Growth Fund 185,742 13,806
JP Morgan Series Trust II
International Opportunities 77,775 17,338
Small Company 144,835 17,687
Strong Opportunity Fund II 48,418 7,105
Strong Variable Insurance Funds
Mid Cap Growth 247,548 59,620
Neuberger Berman Advisers Management Trust
Partners Portfolio 149,731 20,134
Goldman Sachs Variable Insurance Trust
International Equity 148,844 28,554
Global Income Fund 14,203 3,373
CORE Small Cap Equity 112,737 37,427
Mid Cap Equity Value 32,916 3,491
VIPF
Growth 400,556 85,035
High Income 240,729 37,774
Index 500 2,432,677 465,193
Contrafund 378,127 65,757
</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-68
<PAGE> 133
NOTE 8- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (IRC), a
variable universal life contract, other than a contract issued in connection
with certain types of employee benefit plans, will not be treated as a variable
universal life contract for federal income tax purposes for any period for which
the investments of the segregated asset account on which the contract is based
are not adequately diversified. The IRC provides that the adequately diversified
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of the Treasury.
National Life believes that the Segment satisfies the current requirements of
the regulations, and it intends that the Segment will continue to meet such
requirements.
F-69
<PAGE> 134
Part II
<PAGE> 135
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article V, Section 7.1 of the Bylaws of National Life Insurance Company
("National Life" or the "Company") provides that, in accordance with the
provisions of the Section, the Company shall indemnify directors, officers and
employees of the Company or any other corporation served at the request of the
Company, and their heirs, executors and administrators, shall be indemnified to
the maximum extent permitted by law against all costs and expenses, including
judgments paid, settlement costs, and counsel fees, reasonably incurred in the
defense of any claim in which such person is involved by virtue of his or her
being or having been such a director, officer, or employee.
The Bylaws are filed as Exhibit 1.A.6(b) to the Registration Statement.
Vermont law authorizes Vermont corporations to provide indemnification
to directors, officers and other persons.
National Life owns a directors and officers liability insurance policy
covering liabilities that directors and officers of National Life and its
subsidiaries and affiliates may incur in acting as directors and officers.
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or other controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
REPRESENTATION RELATING TO FEES AND CHARGES
National Life Insurance Company ("the Company") hereby represents that
the fees and charges deducted under the variable life insurance policies
described in the prospectuses contained in this registration statement are, in
the aggregate, reasonable in relationship to the services rendered, the
expenses expected to be incurred, and the risks assumed by the Company.
<PAGE> 136
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents.
The facing sheet.
The prospectus consisting of __ pages.
Undertaking to file reports.
Rule 484 undertaking.
Representation relating to fees and charges.
The signatures.
Written consents of the following persons:
(a) Michele S. Gatto, Senior Vice President & General Counsel
(b) Elizabeth H. MacGowan, F.S.A., M.A.A.A., Actuary
(c) Sutherland, Asbill & Brennan LLP.
(d) Pricewaterhouse Coopers LLP.
The following exhibits, corresponding to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
1.
A.
(1) Resolutions of the Board of Directors of National
Life Insurance Company establishing the National
Variable Life Insurance Account.2
(2) Not Applicable.
(3) (a) Form of Distribution Agreement between
National Life Insurance Company and Equity
Services, Inc.4
(b)(1) Form of Equity Services, Inc. Branch Office
Supervisor Contract.2
(b)(2) Form of Equity Services, Inc. Registered
Representative Contract.2
(c) Schedule of Sales Commissions.6
(4) Not Applicable.
(5) (a) Specimen Sentinel Estate Provider Policy
Form.6
(b) Rider for Guaranteed Death Benefit.6
(c) Rider for Additional Protection Benefit.6
(d) Rider for Policy Split Option.6
(e) Rider for Estate Preservation.6
(f) Rider for Annually Renewable Term.6
(g) Rider for Continuing Coverage.6
(h) Rider for Enhanced Death Benefit.6
(i) Rider for Automatic Increase.6
(6) (a) Charter documents of National Life Insurance
Company.2
(b) Bylaws of National Life Insurance Company.2
(7) Not Applicable.
(8) (a) Participation Agreement by and among Market
Street Fund, Inc., National Life Insurance
Company and Equity Services, Inc.4
(a)(3) Form of Amendment No. 2 to Participation
Agreement among Market Street Fund., Inc.,
National Life Insurance Company and Equity
Services, Inc.6
(b) Participation Agreement among Variable
Insurance Products Fund, Fidelity
Distributors Corporation and Vermont Life
Insurance Company (now National Life
Insurance Company) dated August 1, 1989.3
(b)(2) Amendment No. 1 to Participation Agreement
among Variable Insurance Products Fund,
Fidelity Distributors Corporation and
National Life Insurance Company.4
(b)(4) Form of Amendment No. 3 to Participation
Agreement Among Variable Insurance Products
Fund, Fidelity Distributors Corporation and
National Life Insurance Company.6
(c) Participation Agreement by and among National
Life Insurance Company, Strong Variable
Insurance Funds, Inc., Strong Special Fund
II, Strong Capital Management, Inc. and
Strong Funds Distributors, Inc.6
(d) Form of Participation Agreement Among
Variable Insurance Products Fund II,
Fidelity Distributors Corporation and
Vermont Life Insurance Company (now National
Life Insurance Company) dated April 1,
1990.3
(d)(2) Form of Amendment No 1. to Participation
Agreement Among Variable Insurance Products
Fund II, Fidelity Distributors Corporation,
and National Life Insurance Company (as
successor to Vermont Life Insurance
Company)5
(d)(3) Form of Amendment No. 2 to Participation
Agreement among Variable Insurance Products
Fund II, Fidelity Distributors Corporation
and National Life Insurance Company (as
successor to Vermont Life Insurance Company)6
(e) Form of Participation Agreement among
National Life Insurance Company, American
Century Investment Management, Inc.6
(f) Form of Participation Agreement among
National Life Insurance Company, Neuberger &
Berman Advisers Managers Trust.6
(g) Form of Participation Agreement among
National Life Insurance Company, J. P. Morgan
Series Trust II.6
(h) Form of Participation Agreement among
National Life Insurance Company, Goldman
Sachs Variable Insurance Trust.6
<PAGE> 137
(9) Not Applicable.
(10) Sentinel Estate Provider Application Form. (7)
(11) Memorandum describing issuance, transfer and
redemption procedures.6
2. Opinion and Consent of Michele S. Gatto, Senior Vice President
& General Counsel, as to the legality of the securities being
offered.
3. Not Applicable.
4. Not Applicable.
5. Not Applicable.
6. Opinion and Consent of Elizabeth H. MacGowan, F.S.A.,
M.A.A.A., Actuary, as to actuarial matters pertaining to the
securities being registered.
7. (a) Consent of PricewaterhouseCoopers LLP.
(b) Consent of Sutherland, Asbill & Brennan LLP.
8. Powers of Attorney for Directors. (1)
- ------------------
1 Incorporated herein by reference to Registration Statement on Form S-6
(File No. 333-44723) for National Variable Life Insurance Account
(Sent. Estate Provider) filed January 22, 1998, Accession No. 00009501
33-98-000165.
2 Incorporated herein by reference to the Pre-Effective Amendment No. 2
to the Form S-6 Registration Statement (File No. 333-67003) for
National Variable Life Insurance Account (COLI) filed on February 11,
1999.
3 Incorporated herein by reference to Post-Effective Amendment No. 2
to the Form N-4 Registration Statement (File No. 333-19583) for
National Variable Annuity Account II (Sent. Adv.) filed February 25,
1999.
4 Incorporated herein by reference to Post Effective Amendment No. 1 to
S-6 Registration Statement File No. 33-91938 for National Variable Life
Insurance Account (VariTrak) filed March 12, 1996, Accession Number
0000950133-96-000202.
5 Incorporated herein by reference to Post Effective Amendment No. 2 to
the Form S-6 Registration Statement (File No. 33-91938) for National
Variable Life Insurance Account (VariTrak) filed April 30, 1997
(Accession Number 000.950133-97-001551).
6 Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Form S-6 Registration Statement (File No. 333-44723) for National
Variable Life Insurance Account (Sent. Estate. Provider), filed April
16, 1998
7 Incorporate herein by reference to Post Effective Amendment No.1 to
the Form S-6 Registration Statement (File No. 333-44723) for National
Variable Life Insurance Account (Sent. Est. Provider) filed February
26, 1999
B-3
<PAGE> 138
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, National Variable Life Insurance Account certifies that it meets
all the requirements for effectiveness of this Registration Statement pursuant
to Rule 485 (b) under the Securities Act of 1933, and has duly caused this
Post-Effective Amendment No. 3 to the Registration Statement to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of
Montpelier and the State of Vermont, on the 28th day of April, 2000.
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(Registrant)
By: NATIONAL LIFE INSURANCE COMPANY
Attest: /s/ LISA A PETTREY By: /s/ PATRICK E. WELCH
-------------------------- -----------------------------
Lisa A Pettrey Patrick E. Welch
Assistant Secretary Chairman of the Board and
Chief Executive Officer
<PAGE> 139
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, National
Life Insurance Company certifies that it meets all the requirements for
effectiveness of this Registration Statement pursuant to Rule 485 (b) under
the Securities Act of 1933, and has duly caused this Post-Effective Amendment
No. 3 to the Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, and its seal fixed and attested, in the
City of Montpelier and the State of Vermont, on the 28th day of April, 2000.
NATIONAL LIFE INSURANCE COMPANY
(SEAL) (Depositor)
Attest: /s/ LISA A. PETTREY By: /s/ PATRICK E. WELCH
--------------------- -----------------------------
Lisa A. Pettrey Patrick E. Welch
Assistant Secretary Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 3 Registration Statement has been signed below by
the following persons in the capacities indicated on the date(s) set forth
below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ PATRICK E. WELCH Chairman of the Board and
- ------------------------ and Chief Executive Officer 4/28/00
Patrick E. Welch
/s/ THOMAS H. MACLEAY President, Chief Operating
- ------------------------ Officer and Director 4/28/00
Thomas H. MacLeay
/s/ William A. Smith Executive Vice President
- ------------------------ Chief Financial Officer 4/28/00
William A. Smith
Robert E. Boardman* Director
- ------------------ 4/28/00
Robert E. Boardman
</TABLE>
<PAGE> 140
<TABLE>
<S> <C> <C>
Earle H. Harbison, Jr.* Director 4/28/00
- ----------------------
Earle H. Harbison, Jr.
A. Gary Shilling* Director 4/28/00
- ----------------
A. Gary Shilling
*By /s/ PATRICK E. WELCH Date: 4/28/00
--------------------------
Patrick E. Welch
Pursuant to Power of Attorney
</TABLE>
<PAGE> 141
EXHIBIT INDEX (continued)
(2) Opinion and Consent of Michele S. Gatto,
Senior Vice President & General Counsel.
(6) Opinion and consent of Elizabeth H. MacGowen,
F.S.A.; M.A.A.A., Actuary, as to actuarial
matters pertaining to the securities being
registered.
(7) (a) Consent of PricewaterhouseCoopers, LLP
(b) Consent of Sutherland, Asbill & Brennan LLP
<PAGE> 1
EXHIBIT 2
April 28, 2000
National Life Insurance Company
National Life Drive
Montpelier, Vermont 05604
Dear Sirs:
This opinion is furnished in connection with the filing of a
Post-Effective Amendment No. 3 to a Registration Statement on Form S-6
("Registration Statement") under the Securities Act of 1933, as amended, of
National Variable Life Insurance Account (the "Separate Account") and National
Life Insurance Company ("National Life"), covering an indefinite amount of
premiums expected to be received under certain last survivor flexible premium
adjustable benefit individual variable life insurance policies ("Policies") to
be offered by National Life. Under the Policies, amounts will be allocated by
National Life to the Separate Account as described in the prospectus included
in the Registration Statement to support reserves for such Policies.
In my capacity as Senior Vice President and General Counsel of
National Life, I have examined all such corporate records of National Life and
such other documents and laws as I consider appropriate as a basis for the
opinion hereinafter expressed. Based upon such examination, I am of the opinion
that:
1. National Life is a corporation duly organized and validly
existing under the laws of the State of Vermont.
2. The Separate Account has been duly created and is validly
existing as a separate account pursuant to Title 8, Vermont Statutes Annotated,
Sections 3855 to 3859.
3. The portion of the assets to be held in the Separate Account
equal to the reserves and other liabilities under the Policies is not
chargeable with liabilities arising out of any other business National Life may
conduct.
4. The Policies have been duly authorized by National Life and,
when issued as contemplated by the Registration Statement, will constitute
legal, validly issued and binding obligations of National Life in accordance
with their terms.
I hereby consent to the use of this opinion as an exhibit to
Post-Effective Amendment No. 3 to the S-6 Registration Statement and to the
reference to my name under the heading "Legal Matters" in the prospectus.
Very truly yours,
Michele S. Gatto
Senior Vice President & General Counsel
<PAGE> 1
EXHIBIT 6
April 28, 2000
Ladies and Gentlemen:
In my capacity as Actuary - Development of National Life Insurance
Company, I have provided actuarial advice concerning: (a) the preparation of
Post-Effective Amendment No. 3 to a registration statement for National Variable
Life Insurance Account filed on Form S-6 with the Securities and Exchange
Commission under the Securities Act of 1933 (the "Registration Statement")
regarding the offer and sale of Last Survivor Flexible Premium Adjustable
Benefit Variable Life Insurance Policies (the "Policies"); and (b) the
preparation of policy forms for the Policies described in the Registration
Statement.
It is my professional opinion that:
(1) The illustrations of Death Benefits, Cash Surrender Values, and
accumulated premiums in Appendix A of the prospectuses (the "Prospectuses")
contained in the Registration Statement, based on the assumptions stated in the
illustrations, are consistent with the assumptions stated in the Policies. The
rate structure of the Policies has not been designed so as to make the
relationship between premiums and benefits as shown in the illustrations, appear
to be correspondingly more favorable to the prospective purchasers of Policies,
who are male nonsmokers age 40 in the preferred rate class, than to prospective
purchasers of Policies for males or females at other ages or other rate classes.
(2) The information contained in the examples in the sections of the
prospectuses entitled "Detailed Description of Policy Provisions," "Charges and
Deductions," and "Policy Rights," based on the assumptions stated in the
examples, is consistent with the provisions of the Policies.
I hereby consent to the filing of this opinion as an exhibit to
Post-Effective Amendment No. 3 to the Registration Statement and the use of my
name under the heading "Experts" in the prospectuses contained in the
Registration Statement.
Sincerely,
Elizabeth H. MacGowan, F.S.A., M.A.A.A.
Actuary
<PAGE> 1
EXHIBIT 7(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 3 to the Registration Statement of the National
Variable Life Insurance Account, a Separate Account of National Life Insurance
Company, on Form S-6 relating to the Sentinel Estate Provider policy, of our
report dated March 10, 2000 relating to the consolidated financial statements of
National Life Holding Company, of our report dated March 10, 2000 relating to
the consolidated financial statements of National Life Insurance Company and our
report dated March 31, 2000 relating to the financial statements of the National
Variable Life Insurance Account -- Estate Provider Segment, all of which appear
in such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 28, 2000
<PAGE> 1
[SAB LETTERHEAD]
EXHIBIT 7(b)
April 28, 2000
National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
Re: National Variable Life Insurance Account
Registration Statement on Form S-6
File No. 333-44723
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Prospectus filed as part of Post-Effective Amendment No. 3 to
Form S-6 for National Variable Life Insurance Account, which Prospectus
describes certain last survivor flexible premium variable universal life
policies. In giving this consent, we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN LLP
By: /s/ Stephen E. Roth
