<PAGE> 1
As filed with the Securities and Exchange Commission on May 1, 2000.
Registration No. 33-91938
File No. 811-9044
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 6 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
VARITRAK
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 VariTrak policy, a variable universal
life insurance policy offered by National Life Insurance Company. This Policy
combines insurance and investment features. The policy's primary purpose is to
provide insurance protection on the life of the insured person. You can make
premium payments at various times and in various amounts. You can also allocate
premiums among a number of funds with different investment objectives, and you
can increase or decrease the death benefit payable under your policy.
We deduct certain charges from premium payments. Then these premium
payments go to the National Variable Life Insurance Account, a separate account
of National Life, or to the general account, or a combination of the two. The
general account pays interest at rates guaranteed to be at least 4%. The
separate account currently has twenty-six subaccounts. Each subaccount buys
shares of a specific fund portfolio. The available funds are:
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS AMERICAN CENTURY VARIABLE GOLDMAN SACHS VARIABLE
MARKET STREET FUND, INC. FUND AND PORTFOLIOS, INC. INSURANCE TRUST
VARIABLE INSURANCE PRODUCTS
FUND II
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AGGRESSIVE GROWTH PORTFOLIO* GROWTH PORTFOLIO VP INCOME & GROWTH CORE SMALL CAP EQUITY
BOND PORTFOLIO* HIGH INCOME PORTFOLIO VP VALUE GLOBAL INCOME
GROWTH PORTFOLIO* EQUITY INCOME PORTFOLIO INTERNATIONAL EQUITY
INTERNATIONAL PORTFOLIO+ OVERSEAS PORTFOLIO MID VALUE
MANAGED PORTFOLIO* INDEX 500 PORTFOLIO
MONEY MARKET PORTFOLIO* CONTRAFUND PORTFOLIO
SENTINEL GROWTH PORTFOLIO*
*Managed by Sentinel Advisors Managed by Fidelity Investments Managed by American Century Managed by Goldman Sachs
Company Investment Management, Inc. Asset Management & Goldman
+Managed by Provident Mutual Sachs Asset Management
Investment Management Company International
NEUBERGER BERMAN ADVISERS STRONG VARIABLE INSURANCE ALGER AMERICAN FUND
J.P. MORGAN SERIES TRUST II MANAGEMENT TRUST FUNDS, INC. AND STRONG
OPPORTUNITY FUND II
- ----------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL OPPORTUNITIES PARTNERS PORTFOLIO MID CAP GROWTH FUND II SMALL CAPITALIZATION
SMALL COMPANY OPPORTUNITY FUND II GROWTH
Managed by J. P. Morgan Investment Managed by Neuberger Berman Managed by Strong Capital Managed by Fred Alger
Management, Inc. Management, Inc. Management, Inc. Management, Inc.
</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
tax charge, cost of insurance charges, a mortality and expense risk charge, an
administrative charge, and certain other charges. During the first five years
your policy will remain in force if specified premiums are paid on time, or if
the policy has enough value to pay the monthly charges as they become due. After
the fifth year, the Policy will remain in force only so long as it has enough
value to pay the monthly charges as they become due.
We recommend that you read this prospectus carefully. You should keep it to
refer to later.
Investments in these contracts are not deposits or obligations of, and are not
guaranteed or endorsed by, adviser of any of the underlying funds identified
above, the U.S. government, or any bank or bank affiliate. Investments are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency.
<PAGE> 3
It may not be advantageous to purchase a policy as a replacement for another
type of life insurance or as a means to obtain additional insurance
protection if you already own another variable universal life insurance
policy.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
POLICY OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary Description of the Policy.........................................................
The Policy ......................................................................
The Separate Account.............................................................
Availability of Policy...........................................................
The Death Benefit................................................................
Flexibility to Adjust Amount of Death Benefit....................................
Accumulated Value................................................................
Allocation of Net Premiums.......................................................
Transfers........................................................................
Free-Look Privilege..............................................................
Charges Assessed in Connection with the Policy...................................
Loan Privilege...................................................................
Withdrawal of Cash Surrender Value...............................................
Surrender of the Policy..........................................................
Available Automated Fund Management Features.....................................
Tax Treatment....................................................................
Other Policies...................................................................
Illustrations....................................................................
Questions........................................................................
National Life Insurance Company, The Separate Account, and The Funds......................
National Life Insurance Company..................................................
The Separate Account.............................................................
The Market Street Fund...........................................................
Variable Insurance Products Fund and Variable Insurance Products Fund II.........
Alger American Fund..............................................................
American Century Variable Portfolios, Inc........................................
Goldman Sachs Variable Insurance Trust...........................................
J.P. Morgan Series Trust II......................................................
Neuberger Berman Advisers Management Trust.......................................
Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund II.............
Planned Substitutions............................................................
Additional Funds to be Offered in the Future.....................................
Other Information................................................................
The General Account..............................................................
Detailed Description of Policy Provisions.................................................
Death Benefit....................................................................
Ability to Adjust Face Amount....................................................
How the Duration of the Policy May Vary..........................................
Accumulated Value................................................................
Payment and Allocation of Premiums...............................................
Charges and Deductions....................................................................
Premium Tax Charge...............................................................
Surrender Charge.................................................................
Monthly Deductions...............................................................
Mortality and Expense Risk Charge................................................
Withdrawal Charge................................................................
Transfer Charge..................................................................
Projection Report Charge.........................................................
Other Charges....................................................................
</TABLE>
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<TABLE>
<S> <C>
Policy Rights and Privileges..............................................................
Loan Privileges..................................................................
Surrender Privilege..............................................................
Withdrawal of Cash Surrender Value...............................................
Free-Look Privilege..............................................................
Telephone Transaction Privilege..................................................
Other Transfer Rights............................................................
Available Automated Fund Management Features.....................................
Policy Rights Under Certain Plans................................................
The General Account.......................................................................
Minimum Guaranteed and Current Interest Rates....................................
Transfers from General Account...................................................
Other Policy Provisions...................................................................
Optional Benefits
Federal Income Tax Considerations.........................................................
Introduction.....................................................................
Tax Status of the Policy.........................................................
Tax Treatment of Policy Benefits.................................................
Special Rules for Employee Benefit Plans.........................................
Possible Tax Law Changes.........................................................
Possible Charges for National Life's Taxes.......................................
Policies Issued in Conjunction with Employee Benefit Plans................................
Legal Developments Regarding Unisex Actuarial Tables......................................
Voting Rights.............................................................................
Changes in Applicable Law, Funding and Otherwise..........................................
Officers and Directors of National Life...................................................
Distribution of Policies..................................................................
Policy Reports ........................................................................
State Regulation
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-Surrender Charge Target Premiums and Maximum Deferred Sales Charges............ B-1
Financial Statements...................................................................... F-1
</TABLE>
THE POLICY MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT OFFER
THE POLICY IN ANY STATE IN WHICH WE MAY NOT LEGALLY OFFER THE POLICY. YOU SHOULD
RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. WE DO NOT CLAIM THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
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<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 the insured person is alive. The precise meanings of the
few capitalized terms used in this summary can be found in the Glossary, on
pages to .
THE POLICY
National Life Insurance Company issues the VariTrak variable universal
life insurance policy. This life insurance policy allows you, within limits, to
make premium payments in any amount and whenever you like. As long as the policy
remains in force, it will provide for:
(1) Life insurance coverage which will provide a death benefit on the
death of the named insured person;
(2) A cash surrender value;
(3) Surrender and withdrawal rights and policy loan privileges; and
(4) A variety of additional insurance benefits (where provided by
optional riders, so long as those riders remain in force).
This policy is designed to help lessen the economic loss resulting from
the death of the insured person. You should consider your need for insurance
coverage and the policy's investment potential on a long-term basis.
There is no fixed schedule for premium payments, although you may
establish a schedule of planned periodic premiums. You may also, after a year
and within limits, increase or decrease the policy's face amount, and you may
change the death benefit option. The policy's value and death benefit will
fluctuate based on the investment results of the chosen fund portfolios, the
crediting of interest to the general account, and the deduction of charges.
Lapse. The policy will not lapse simply because you do not pay any
particular amounts of premiums. However, the payment of premiums in any amount
or frequency will not necessarily guarantee that the policy will remain in
force. In general, the policy will lapse if it does not have enough value to pay
the monthly charges as they become due. During the first five years, the policy
will not lapse even if its value is not enough to pay the monthly charges, if at
least specified amounts of premiums have been paid (these amounts are defined in
the Glossary as the Minimum Guarantee Premium). See "How the Duration of the
Policy May Vary," page .
Optional Guaranteed Death Benefit Rider. In addition, if you buy the
optional Guaranteed Death Benefit Rider, your policy will not lapse even if its
value is not enough to pay the monthly charges, if you have paid at least the
Minimum Guarantee Premium, until the later of 20 years from the date the policy
is issued or the insured person attains age 70. See "Optional Benefits -
Guaranteed Death Benefit Rider," page .
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<PAGE> 7
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.
THE SEPARATE ACCOUNT
The separate account is divided into subaccounts, 26 of which are
available under this policy. Each of these subaccounts buys shares of a
corresponding fund portfolio. See "National Life Insurance Company, the Separate
Account, and the Funds," page .
We cannot give any assurance that any portfolio will achieve its
investment objectives. You bear the entire investment risk on the value of your
policy which you allocate to the separate account.
AVAILABILITY OF POLICY
We will issue this policy for insured persons from ages 0 to 85. The
minimum face amount is generally $50,000, although exceptions to this minimum
may be made for employee benefit plans. Before issuing a policy, we will require
that the proposed insured person meet certain underwriting standards. We will
assign the insured person to one of the following types of rate classes:
- Preferred Nonsmoker
- Standard Nonsmoker
- Smoker
- Juvenile, or
- Substandard.
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 the insured
person. The death benefit will be increased by any additional benefits provided
by a supplementary benefit rider. The death benefit will be reduced by any
outstanding policy loans and accrued interest, and any unpaid monthly
deductions.
There are two death benefit options available, which we call Option A
and Option B. You may choose which option will apply to your policy.
If you choose death benefit Option A, the death benefit will be based on
the greater of :
(a) the face amount, or
(b) the Accumulated Value multiplied by a factor specified by federal
income tax law.
If you choose death benefit Option B, the death benefit will be based
on the greater of:
(a) the face amount plus the Accumulated Value, or
(b) the Accumulated Value multiplied by the same factor that applies to
option A.
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<PAGE> 8
See "Death Benefit Options," Page ___.
FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
After a year, you may adjust the death benefit by changing the death
benefit option or by increasing or decreasing the face amount of your policy.
(See "Change in Death Benefit Option," Page ___, and "Ability to Adjust Face
Amount," Page ___.)
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 separate account and
the general account. (See "Calculation of Accumulated Value," Page .)
The Accumulated Value in the separate account will reflect:
- the investment performance of your chosen funds
- premiums paid
- transfers
- withdrawals
- policy loans
- loan repayments
- loan interest charged, and
- the charges assessed in connection with the policy.
We pay interest on Accumulated Value in the general account at rates we
declare in advance for specific periods. We guarantee that these rates will be
at least 4%. (See "The General Account," Page ___.)
The Accumulated Value will likely impact both the death benefit and the
cost of insurance charges.
ALLOCATION OF PREMIUMS
You will specify, in the application for your policy, the percentages
of premium to go to each subaccount of the separate account or to the general
account. You may change these percentages whenever you like. You may choose
among all 26 available subaccounts of the separate account. However, we may
limit the number of different subaccounts, other than the money market
subaccount, used in your policy over its entire life to 16.
We will allocate all premiums, after reduction for premium taxes,
received during the free-look period that are to go to the separate account to
the money market subaccount. At the end of the free look period, we will move
the amount in the money market subaccount (including investment experience) to
your chosen subaccounts. For this purpose,
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<PAGE> 9
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 the general
account. Transfers between the subaccounts or from the separate account into the
general account will be made on the day we receive the request. We limit
transfers out of the general account to the greater of $1000 and 25% of the
Accumulated Value in the general account. We also allow only one transfer out of
the general account per year. See "Transfers," page .
FREE-LOOK PRIVILEGE
The Policy provides for an initial "free-look" period, during which you
may cancel the Policy and receive a refund equal to the premiums you paid. This
free-look period ends on the latest of:
(a) 45 days after you sign Part A of your application for the Policy
(b) 10 days after you receive the Policy, and
(c) 10 days after we mail or personally deliver to you a Notice of
Withdrawal Right,
or, in each case, any longer period provided by state law. To cancel your
policy, you must return the Policy to us or to our agent within such time with a
written request for cancellation. (See "Free-Look Privilege," Page .)
CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Summary of Policy Expenses.
<TABLE>
<CAPTION>
TRANSACTION EXPENSES
<S> <C>
Premium Tax (as a percentage of premiums paid) ............... 3.25%
Sales Load Imposed on Purchases ............................. NONE
Surrender Charge.............................................. See page -
Withdrawal Charge............................................. Lesser of 2% of amounts withdrawn or $25
Transfer Charge............................................... NONE*
</TABLE>
- - * We currently have no transfer charge, but we reserve the right to
charge up to $25 for each transfer in excess of five transfers in any
one year.
<TABLE>
<CAPTION>
SEPARATE ACCOUNT AND POLICY CHARGES
<S> <C>
Mortality and Expense Risk Charge (deducted daily)............ 0.90% (as a percentage of separate
account Accumulated Value)
Cost of Insurance Charge (deducted monthly)................... Varies by age, sex, Rate Class, policy size
and duration of the policy-See page
Administrative Charge (deducted monthly)...................... $90 per year
Rider Charges (deducted monthly).............................. See "Optional Benefits" on page for
charges for optional riders you may choose
to include in your policy
</TABLE>
ANNUAL EXPENSES OF UNDERLYING FUNDS(1) (for the year ended December 31, 1999):
6
<PAGE> 10
<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%
Alger:
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Small Capitalization 0.85% 0.05% 0.90%
American Century Variable Portfolios,
Inc.
VP Value Portfolio 1.00% 0.00% 1.00%
VP Income & Growth Portfolio 0.70% 0.00% 0.70%
Fidelity: Variable Insurance Products
Fund I
Equity Income Portfolio 0.48% 0.08% 0.56%
Growth Portfolio 0.58% 0.07% 0.65%
High Income Portfolio 0.58% 0.11% 0.69%
Overseas Portfolio 0.73% 0.14% 0.87%
Fidelity: Variable Insurance Products
Fund II
Index 500 Portfolio 0.24% 0.04% 0.28%
Contrafund Portfolio 0.58% 0.07% 0.65%
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>
(1) The fund expenses shown above are assessed at the underlying fund level and
are not direct charges against the subaccounts. These underlying fund expenses
are taken into consideration in computing each underlying fund's net asset
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<PAGE> 11
value, which is the share price used to calculate the unit values of the
subaccounts. The management fees and other expenses are more fully described in
the prospectuses for each individual underlying fund. The information relating
to the underlying fund expenses was provided by the underlying funds. We did not
independently verify it. In the absence of any voluntary fee waivers or expense
reimbursements, the management fees, other expenses, and total expenses of the
funds listed below would have been as follows:
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL MUTUAL
FEES EXPENSES FUND EXPENSES
<S> <C> <C> <C>
Fidelity VIP Fund-Equity Income
Portfolio 0.48% 0.09% 0.57%
Fidelity VIP Fund-Growth Portfolio 0.58% 0.08% 0.66%
Fidelity VIP Fund-Overseas Portfolio 0.73% 0.18% 0.91%
Fidelity VIP Fund II-Index 500
Portfolio 0.24% 0.10% 0.34%
Fidelity VIP Fund II-Contrafund
Portfolio 0.58% 0.09% 0.67%
Strong Mid Cap Growth Fund II 1.00% 0.20% 1.20%
Strong Opportunity Fund II 1.00% 0.20% 1.20%
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%
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 Tax Charge. We deduct a premium tax charge from each premium
payment, to cover the cost of state and local premium taxes, and the federal DAC
tax. This charge is 3.25% of each premium. For qualified employee benefit plans,
the charge will be 2.00% of each premium rather than 3.25%. We may change the
amount of the charge deducted from future premiums if the applicable law
changes. (See "Premium Tax Charge," Page .)
Monthly Deductions. On the date of issue and each month thereafter, we
will take a deduction from the Accumulated Value equal to the sum of:
(a) the monthly cost of insurance charge
(b) the monthly administrative charge, and
(c) if applicable, a charge for any additional benefits added by rider.
We calculate the monthly cost of insurance charge by multiplying the
net amount at risk (that is, the unadjusted death benefit less the policy's
Accumulated Value) by the applicable cost of insurance rate(s). These rates will
depend upon the age, sex, and rate class of the insured person, the time the
coverage has been in force, your policy size, and on our expectations of future
mortality and expense experience. Our cost of insurance rates cannot exceed the
guaranteed maximum cost of insurance rates set forth in your policy. These
guaranteed maximum rates are based on the insured person's age, sex, rate class,
and the "1980 Commissioners Standard Ordinary Smoker and Nonsmoker Mortality
Table." (See "Cost of Insurance Charge," Page .)
The monthly administrative charge is $7.50. (See "Monthly
Administrative Charge," Page .)
After 10 years, we currently intend to apply a bonus under which the
Monthly Deductions will be reduced by 0.50% per annum of the Accumulated Value
in the separate account. (See "Bonus," Page .) However, we do not guarantee such
a bonus, except as required by the state of issue.
Surrender Charge. We impose a surrender charge if you surrender your
policy or it lapses at any time during the first 15 years. The surrender charge
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<PAGE> 12
consists of a deferred administrative charge and a deferred sales charge. (See
"Surrender Charge," Page .)
The deferred administrative charge is generally initially $2 per
$1,000 of initial face amount (lower for insured people under 25 years old at
issue). After the first five years, the deferred administrative charge declines
linearly by month until the end of the fifteenth year, when it becomes zero.
We calculate the deferred sales charge individually for each policy,
based on its surrender charge target premium. The surrender charge target
premium is based on the initial face amount, and the age, sex and rate class of
the insured person. It is used solely for the purpose of calculating the
deferred sales charge. Your surrender charge target premium will be shown in
your Policy.
The deferred sales charge is equal to the lesser of:
(a) 30% of the premiums received up to one surrender charge target
premium, plus 10% of all premiums paid in excess of this
amount but not greater than twice this amount, plus 9% of all
premiums paid in excess of twice this amount,
or
(b) the maximum deferred sales charge, which is based on the initial
face amount, and the age, sex and rate class of the insured
person. The maximum deferred sales charge, which will be shown in
your policy, is level for the first five years, and then declines
linearly by month through the end of the fifteenth year, when it
becomes zero.
Appendix B to this Prospectus contains a table showing the surrender charge
target premium and the maximum deferred sales charge for male and female
nonsmokers and smokers of each age at the time a policy is issued, expressed as
a dollar amount per $1000 of initial face amount.
Daily Charge Against the Separate Account (Mortality and Expense Risk
Charge). We assess a daily charge for assuming certain mortality and expense
risks incurred in connection with the policies. This charge is currently 0.90%
annually of the average daily net assets of the separate account. (See
"Mortality and Expense Risk Charge," Page .)
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 .)
Transfer Charge. You may transfer value among the subaccounts on any
business day, without charge. We have no current intent to impose a transfer
charge in the foreseeable future; however, we may impose in the future a charge
of $25 for each transfer in excess of five transfers in any one year. (See
"Transfer Charge," Page ___.)
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<PAGE> 13
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 next
monthly deduction. Policy loans may be taken, or repayments made, on any
business day.
We charge interest on Policy loans at a fixed rate of 6% per year.
Interest is added to the loan balance at the end of each policy year. You may
repay policy loans at any time and in any amount. When the death benefit becomes
payable or the policy is surrendered, we will deduct policy loans and accrued
interest from the proceeds otherwise payable. When you take a policy loan, we
will hold Accumulated Value in the general account as collateral for the policy
loan. We credit interest on amounts held in the general account as collateral
for policy loans at rates we declare prior to each calendar year. This rate will
be at least 4%.
We currently plan to credit interest on Accumulated Value held as
collateral for loans in the general account for policies that are more than 10
years old at rates which are 0.50% per annum higher than those that apply to
policies still in their first ten years. This bonus is not guaranteed, however,
except as required by the state of issue. We may decide, in our sole discretion,
upon prior notice to policy owners, not to credit the bonus. We also currently
plan to make preferred loans available when the insured person is 65 years old
or a policy is 20 years old, whichever is later. These preferred loans will be
limited in amount. For these preferred policy loans, we will credit interest on
the amount held in the general account as collateral at an annual rate of 6%.
However, we are not obligated to continue to make preferred loans available, and
we will make these loans available in our sole discretion. (See "Loan
Privileges," Page ___.)
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 ___.)
10
<PAGE> 14
WITHDRAWAL OF CASH SURRENDER VALUE
After a year, you may request a withdrawal of Cash Surrender Value.
Withdrawals must be at least $500 (except that we may permit smaller withdrawals
for employee benefit plans). Withdrawals cannot be more than the Cash Surrender
Value minus three times the most recent monthly deduction. We will take the
withdrawal amount from the subaccounts based on your instructions. If you do not
provide instructions, we will take the withdrawal from the subaccount in
proportion to the values in the subaccounts. If the values in the subaccounts
will not allow us to carry out your instructions, we will not process the
withdrawal until you provide further instructions. You may not allocate
withdrawals to the general account until all the value in the separate account
has been exhausted. (See "Withdrawal of Cash Surrender Value," Page ___.)
SURRENDER OF THE POLICY
You may surrender your policy at any time and receive the cash
surrender value, if any. The cash surrender value will equal the Accumulated
Value less any policy loan with accrued interest and any surrender charge. (See
"Surrender Privilege," Page ___.)
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 ___.
TAX TREATMENT
Life insurance contracts receive tax-favored treatment under current
federal income tax law. Assuming that your policy qualifies as a life insurance
contract for federal income tax purposes, you should not be taxed on any
increase in cash surrender value while your policy remains in force. Also, your
beneficiary generally should not be taxed on death benefit proceeds. We believe
that a policy issued on a standard rate class basis generally should meet the
Section 7702 definition of a life insurance contract. For policies issued on a
substandard basis, there is insufficient guidance to determine if such a policy
would in all situations satisfy the Section 7702 definition of a life insurance
contract, particularly if you pay the full amount of premiums permitted under
the policy. (See "Tax Status of the Policy," Page ___.)
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
11
<PAGE> 15
Contract are subject to the 10% penalty tax. (See "Distributions from Policies
Not Classified as Modified Endowment Contracts," Page ___.)
OTHER POLICIES
We offer other variable life insurance policies which also invest in the
same portfolios of the funds. These policies may have different charges that
could affect the value of the subaccounts and may offer different benefits more
suitable to your needs. To obtain more information about these policies, you may
write or call us at National Life Drive, Montpelier, Vermont 05604, (800)
537-7003.
ILLUSTRATIONS
Illustrations of how investment performance of the subaccounts may
cause the death benefit, the Accumulated Value and the cash surrender value to
vary are included in Appendix A commencing on Page A-1.
These illustrations of hypothetical values may help you understand the
long-term effects of different levels of investment performance, of charges and
deductions, and of electing one or the other death benefit option. They may also
be useful in generally comparing and contrasting this policy to other life
insurance policies. Nonetheless, the illustrations are based on hypothetical
investment rates of return. THEY ARE NOT GUARANTEED. Illustrations are not a
representation of past or future performance. Actual rates of return may be more
or less than those reflected in the illustrations and, therefore, actual values
will differ from those illustrated.
QUESTIONS
If you have questions, you may write or call us at National Life Drive,
Montpelier, Vermont 05604, (800) 537-7003.
12
<PAGE> 16
NATIONAL LIFE INSURANCE COMPANY, THE SEPARATE ACCOUNT, AND THE FUNDS
NATIONAL LIFE INSURANCE COMPANY
National Life Insurance Company ("National Life", or "we") is
authorized to transact life insurance and annuity business in Vermont and in 50
other jurisdictions. National Life was originally chartered as a mutual life
insurance company in 1848 under Vermont law. It is now a stock life insurance
company. All of its outstanding stock is indirectly owned by National Life
Holding Company, a mutual insurance holding company established under Vermont
law on January 1, 1999. All policyholders of National Life, including all the
Owners of the Contracts, are voting members of National Life Holding Company.
National Life assumes all insurance risks under the Policy and its assets
support the Policy's benefits. On December 31, 1998, National Life's
consolidated assets were over $9.4 billion. (See "Financial Statements," Page
F-1.)
THE SEPARATE ACCOUNT
We established the Separate Account on February 1, 1985 under Vermont
law. It is a separate investment account to which we allocate assets to support
the benefits payable under the policies, other policies we currently issue, and
other variable life insurance policies we may issue in the future.
The Separate Account's assets are the property of National Life. The
portion of the Separate Account's assets equal to the reserves and other
liabilities under the Policies (and other policies) supported by the Separate
Account will not be exposed to liabilities arising out of any other business
that we may conduct. The portion of the Separate Account's assets equal to the
reserves and other liabilities under the Policies may, however, be exposed to
liabilities arising from other subaccounts of the Separate Account that fund
other variable life insurance policies. The Separate Account may also include
amounts derived from expenses we have charged to the Policies (and other
policies) which we currently hold in the Separate Account, and amounts held to
support other variable life insurance policies we may issue. From time to time
we may move these additional amounts to our General Account.
The Separate Account is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act") as a
unit investment trust type of investment company. Such registration does not
involve any supervision of the management or investment practices or policies of
the Separate Account by the SEC. The Separate Account meets the definition of a
"separate account" under Federal securities laws.
You may choose among the Subaccount options described below. However,
we may limit the number of different Subaccounts, other than the Money Market
Subaccount, used in any one Policy over its entire life to 16.
THE MARKET STREET FUND
The Growth, Sentinel Growth, Aggressive Growth, Bond, Managed,
International, and Money Market Subaccounts of the Separate Account invest in
shares of The Market Street Fund, Inc., a "series" type of mutual fund which is
registered with the SEC under the 1940 Act as a diversified open-end management
investment company. Each series of Market Street Fund shares represents an
interest in a separate portfolio within the Fund. They are purchased and
redeemed by the corresponding Subaccounts of the Separate Account. The Market
Street Fund sells and redeems its shares at net asset value without a sales
charge.
The investment objectives of the Market Street Fund's Portfolios you
may choose for your Policy are set forth below. The investment experience of
each of the Subaccounts of the Separate Account
13
<PAGE> 17
depends on the investment performance of the corresponding Portfolio. There is
no assurance that any Portfolio will achieve its stated objective.
The Growth Portfolio. The Growth Portfolio seeks intermediate and
long-term growth of capital. A reasonable level of income is an important
secondary objective. This Portfolio pursues its objectives by investing
primarily in common stocks of companies believed to offer above-average growth
potential over both the intermediate and the long term.
The Sentinel Growth Portfolio. The Sentinel Growth Portfolio seeks
long-term growth of capital through equity participation in companies having
growth potential believed by its investment adviser to be more favorable than
the U.S. economy as a whole, with a focus on relatively well-established
companies.
The Aggressive Growth Portfolio. The Aggressive Growth Portfolio seeks
to achieve a high level of long-term capital appreciation by investing in
securities of a diverse group of smaller emerging companies.
The Bond Portfolio. The Bond Portfolio seeks to generate a high level
of current income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
The Managed Portfolio. The Managed Portfolio seeks to realize as high a
level of long-term total rate of return as is consistent with prudent investment
risk by investing in stocks, bonds, money market instruments or a combination
thereof.
The International Portfolio. The International Portfolio seeks
long-term growth of capital principally through investments in a diversified
portfolio of marketable equity securities of established non-United States
companies.
The Money Market Portfolio. The Money Market Portfolio seeks to provide
maximum current income consistent with capital preservation and liquidity by
investing in high-quality money market instruments.
Sentinel Advisors Company ("SAC") manages the Growth, Sentinel Growth,
Aggressive Growth, Bond, Managed and Money Market Portfolios. SAC is registered
as an investment adviser under the Investment Advisers Act of 1940. SAC is a
partnership whose partners are affiliates of National Life, Provident Mutual
Life Insurance Company ("Provident Mutual"), and The Penn Mutual Life Insurance
Company. National Life's affiliate is currently the managing partner of SAC and
is entitled to the majority share of SAC's profit or loss. 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.
14
<PAGE> 18
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Separate Account has four Subaccounts which invest exclusively in
shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund")
and two Subaccounts which invest exclusively in shares of Portfolios of the
Variable Insurance Products Fund II ("VIP Fund II"). Like the Market Street
Fund, the VIP Fund and the VIP II Fund are "series" type mutual funds registered
with the SEC as diversified open-end management investment companies issuing a
number of series or classes of shares, each of which represents an interest in a
Portfolio of the VIP Fund or VIP Fund II. Shares of these Portfolios are
purchased and redeemed by the Separate Account at net asset value without a
sales charge.
The Equity-Income, Growth, High Income, and Overseas Portfolios of the
VIP Fund and the Index 500 and Contrafund Portfolios of the VIP Fund II are
managed by Fidelity Management and Research Company ("FMR"). Bankers Trust
Company currently serves as sub-advisor to the Index 500 Portfolio. FMR has
entered into sub-advisory agreements with FMR U.K., FMR Far East, and Fidelity
International Investment Advisors for the Overseas Portfolio.
The investment objectives of the Portfolios of the VIP Fund and the VIP
Fund II in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
corresponding Portfolio. There is no assurance that any Portfolio will achieve
its stated objective.
Equity-Income Portfolio. This Portfolio seeks reasonable income. The
Portfolio will also consider the potential for capital appreciation. The
Portfolio seeks a yield which exceeds the composite yield on the securities
comprising the Standard and Poor's 500 Composite Index of 500 Stocks ("S&P
500"). FMR normally invests at least 65% of the Portfolio's assets in
income-producing equity securities.
Growth Portfolio. This Portfolio seeks capital appreciation. FMR normally
invests the Portfolio's assets primarily in common stocks. FMR invests the
Portfolio's assets in companies FMR believes have above-average growth
potential.
High Income Portfolio. This Portfolio seeks a high level of current income
while also considering growth of capital. FMR normally invests at least 65% of
the Portfolio's total assets in income producing debt securities, preferred
stocks, and convertible securities, with an emphasis on lower-quality debt
securities. The risks of investing in these high-yielding, high-risk securities
is described in the attached Prospectus for the VIP Fund, which should be read
carefully before investing.
Overseas Portfolio. This Portfolio seeks long term growth of capital. FMR
normally invests at least 65% of the Portfolio's total assets in foreign
securities. FMR normally invests the Portfolio's assets primarily in common
stocks.
Index 500 Portfolio. This Portfolio seeks investment results that
correspond to the total return of common stocks publicly traded in the United
States, as represented by the S&P 500. Bankers Trust Company normally invests at
least 80% of the Portfolio's assets in common stocks included in the S&P 500.
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.
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.
15
<PAGE> 19
ALGER AMERICAN FUND
The Separate Account has two Subaccounts which invest exclusively in
shares of Portfolios of the Alger American Fund. Like the Market Street Fund and
the VIP Fund, the Alger American Fund is a "series" type mutual fund registered
with the SEC as a diversified open-end management investment company issuing a
number of series of shares, each of which represents an interest in a Portfolio
of the Alger American Fund. Shares of these Portfolios are purchased and
redeemed by the Separate Account at net asset value without a sales charge.
The investment objectives of the Portfolios of the Alger American Fund
in which the Subaccounts invest are set forth below. The investment experience
of each Subaccount depends upon the investment performance of the corresponding
Portfolio. There is no assurance that either Portfolio will achieve its stated
objective.
Alger American Small Capitalization Portfolio. This Portfolio seeks
long-term capital appreciation by focusing on small, fast-growing companies that
offer innovative products, services or technologies to a rapidly expanding
marketplace. Under normal circumstances, the portfolio invests primarily in the
equity securities of small capitalization companies. A small capitalization
company is one that has a market capitalization within the range of the
Russell(R) 2000 Growth Index or the S&P(R) SmallCap 600 Index.
Alger American Growth Portfolio. This Portfolio seeks long-term capital
appreciation by focusing on growing companies that generally have broad product
lines, markets, financial resources and depth of management. Under normal
circumstances, the portfolio invests primarily in the equity securities of large
companies. The portfolio considers a large company to have a market
capitalization of $1 billion or greater.
The Alger American Small Capitalization Portfolio and the Alger
American Growth Portfolio are managed by Fred Alger Management, Inc.
A full description of the Alger American Fund, the investment
objectives and policies of the Portfolios, the risks, expenses and other aspects
of their operation is contained in the attached Prospectus for the Alger
American Fund.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Separate Account has one Subaccount which invests exclusively in
shares of the VP Value portfolio, and one Subaccount which invests exclusively
in shares of VP Income & Growth portfolio, each of which are series of American
Century Variable Portfolios, Inc. American Century Variable Portfolios, Inc. is
a "series" type mutual fund registered with the SEC as a diversified open-end
management investment company issuing a number of series or classes of shares.
Shares of these Portfolios will be purchased and redeemed by the Separate
Account at net asset value without a sales charge.
The investment objectives of the Portfolios of American Century
Variable Portfolios, Inc. in which the Subaccounts are expected to invest are
set forth below. The investment experience of each Subaccount depends upon the
investment performance of the underlying Portfolio. There is no assurance that
either Portfolio will achieve its stated objective.
VP Value. To seek long-term capital growth. Income is a secondary
objective. The Portfolio will seek to achieve its investment objective by
investing in securities that management believes to be undervalued at the time
of purchase.
VP Income & Growth. To seek dividend growth, current income and capital
appreciation. The Portfolio will seek to achieve its investment objective by
investing in common stocks.
The VP Value Portfolio and the VP Income & Growth Portfolio of the
American Century Variable Portfolios, Inc. are managed by American Century
Investment Management, Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and other aspects of
their operation is contained in the attached Prospectuses for VP Value and VP
Income & Growth.
16
<PAGE> 20
GOLDMAN SACHS VARIABLE INSURANCE TRUST
The Separate 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 CORE(SM) 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
J.P. MORGAN SERIES TRUST II
The Separate Account has one Subaccount which invests exclusively in
shares of the J.P. Morgan International Opportunities Portfolio, and one
Subaccount which invests exclusively in shares of J.P. Morgan Small Company
Portfolio, each of which are series of J.P. Morgan Series Trust II. J.P. Morgan
Series Trust II is a "series" type mutual fund registered with the SEC as a
diversified open-end management investment company issuing a number of series or
classes of shares. Shares of these Portfolios will be purchased and redeemed by
the Separate Account at net asset value without a sales charge.
The investment objectives of the J.P. Morgan Series Trust II Portfolios
in which the Subaccounts invest are set forth below. The investment experience
of each Subaccount depends upon the investment
17
<PAGE> 21
performance of the underlying Portfolio. There is no assurance that either
Portfolio will achieve its stated objective.
J.P. Morgan International Opportunities Portfolio. Seeks to provide a
high total return from a portfolio comprised of equity securities of foreign
corporations. The Portfolio is designed for investors with a long-term
investment horizon who want to diversify their investments by adding
international equities and take advantage of investment opportunities outside
the U.S. As an international investment, the Portfolio is subject to foreign
market, political, and currency risks.
J.P. Morgan Small Company Portfolio. Seeks to provide a high total
return from a portfolio comprised of equity securities of small companies. The
Portfolio invests at least 65% of the value of its total assets in the common
stock of small U.S. companies primarily with market capitalizations of less than
$1 billion. The Portfolio is designed for investors who are willing to assume
the somewhat higher risk of investing in small companies in order to seek a
higher return over time than might be expected from a portfolio of large
companies.
The J.P. Morgan International Opportunities Portfolio and the J.P.
Morgan Small Company Portfolio of the J.P. Morgan Series Trust II are managed by
J.P. Morgan Investment Management Inc. A full description of these Portfolios,
their investment objectives and policies, and the risks, expenses and other
aspects of their operation is contained in the attached Prospectuses for the
J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small
Company Portfolio.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
The Separate Account has one Subaccount which invests exclusively in shares
of the Partners Portfolio, a series of Neuberger Berman Advisers Management
Trust. Neuberger Berman Advisers Management Trust ("AMT") is registered with the
SEC as a diversified open-end management investment company. AMT has nine
separate series, which are called Portfolios. Shares of each Portfolio represent
an interest in that Portfolio.
The investment objectives of the Partners Portfolio are set forth
below. The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that the
Portfolio will achieve its stated objective.
Partners Portfolio. To seek growth of capital. This Portfolio invests
mainly in common stock of mid-to large-capitalization companies. Its investment
co-managers seek securities believed to be undervalued based on fundamentals
such as low price-to-earnings ratios, consistent cash flows, and the company's
track record through all points of the market cycle. The Portfolio generally
considers selling a stock when it reaches the managers' target price, when it
fails to perform as expected, or when other opportunities appear more
attractive. The Portfolio has the ability to change its goal without shareholder
approval, although it does not currently intend to do so.
The Partners Portfolio of Neuberger Berman Advisers Management Trust is
managed by Neuberger Berman Management Inc. Neuberger Berman, LLC is the
sub-adviser. A full description of this Portfolio, its investment objectives and
policies, and the risks, expenses and other aspects of its operation is
contained in the attached Prospectus for the Partners Portfolio of Neuberger
Berman Advisers Management Trust.
STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC.
The Separate Account has one Subaccount which invests exclusively in
shares of the Mid Cap Growth Fund II series of Strong Variable Insurance Funds,
Inc., and one Subaccount which invests exclusively in shares of Strong
Opportunity Fund II, Inc. Strong Variable Insurance Funds, Inc. is a "series"
type mutual fund registered with the SEC as a diversified open-end management
investment company issuing a number of series or classes of shares, and Strong
Opportunity Fund II is a single series mutual fund also registered with the SEC
as a diversified open-end management investment company. Shares of these Funds
will be purchased and redeemed by the Separate Account at net asset value
without a sales charge.
18
<PAGE> 22
The investment objectives of the Strong Funds in which the Subaccounts
invest are set forth below. The investment experience of each Subaccount depends
upon the investment performance of the underlying Portfolio. There is no
assurance that either Portfolio will achieve its stated objective.
Mid Cap Growth Fund II. This Portfolio seeks capital growth. It invests
primarily in equity securities that the advisor believes have above-average
growth prospects.
Strong Opportunity Fund II, Inc. This Fund seeks capital appreciation
through investments in a diversified portfolio of equity securities.
The Mid Cap Growth Fund II series of Strong Variable Insurance Funds,
Inc., and Strong Opportunity Fund, Inc. are managed by Strong Capital
Management, Inc.
A full description of the Mid Cap Growth Fund II series of Strong
Variable Insurance Funds, Inc., and Strong Opportunity Fund, Inc. their
investment objectives and policies, and the risks, expenses and other aspects of
their operation is contained in the attached Prospectuses for the Mid Cap Growth
Fund II and Strong Opportunity Fund II, Inc.
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>
REPLACEMENT PORTFOLIO'S
CURRENT PORTFOLIO REPLACEMENT PORTFOLIO INVESTMENT ADVISER
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sentinel Variable Products Common National Life Investment Management
Market Street Growth Portfolio Stock Fund* Company, Inc.
- ------------------------------------------------------------------------------------------------------------------------
Sentinel Variable Products Mid Cap National Life Investment Management
Market Street Sentinel Growth Portfolio Growth Fund* Company, Inc.
- ------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth Sentinel Variable Products Small National Life Investment Management
Portfolio Company Fund* Company, Inc.
- ------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Investment Grade Bond Fidelity Management & Research
Market Street Bond Portfolio Portfolio Company
- ------------------------------------------------------------------------------------------------------------------------
Neuberger Berman AMT Balanced
Market Street Managed Portfolio Portfolio Neuberger Berman Management Inc.
- ------------------------------------------------------------------------------------------------------------------------
J.P. Morgan International J.P. Morgan Investment Management,
Market Street International Portfolio Opportunities Portfolio Inc.
- ------------------------------------------------------------------------------------------------------------------------
Sentinel Variable Products Money National Life Investment Management
Market Street Money Market Portfolio Market Fund* Company, Inc.
- ------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT International Equity Fidelity Management & Research
Fund Fidelity VIP Overseas Portfolio Company
- ------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Investment Grade Bond Fidelity Management & Research
Goldman Sachs VIT Global Income Fund Portfolio Company
- ------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT CORE Small Cap Equity J.P. Morgan Investment Management,
Fund J.P. Morgan Small Company Portfolio Inc.
- ------------------------------------------------------------------------------------------------------------------------
American Century Investment
Goldman Sachs VIT Mid Cap Value Fund American Century VP Value Portfolio 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 Separate Account and our other separate accounts. These
percentages may differ, and we may be paid a greater percentage by some
investment advisors or distributors than other advisors or distributors. These
agreements reflect administrative services provided by us. National Life
receives compensation from the adviser or distributor of the Funds in connection
with administration, distribution, or other services provided with respect to
the Fund and its availability through the Policy. The amount of this
compensation with respect to the Policy during 1999, which is based upon the
indicated percentages of assets of each Fund attributable to the Policy, is
shown below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Revenues National Life
Portfolios of the % of Assets Received During 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Fund 0.10% $12,728.64
- ---------------------------------------------------------------------------------------------------------------------
American Century Variable Portfolios, Inc. 0.20% 1,160.23
- ---------------------------------------------------------------------------------------------------------------------
Goldman Sachs Variable Insurance Trust 0.20% 851.54
- ---------------------------------------------------------------------------------------------------------------------
J.P. Morgan Series Trust II 0.20% 345.85
- ---------------------------------------------------------------------------------------------------------------------
Neuberger Berman Advisers Management Trust 0.15% 271.61
- ---------------------------------------------------------------------------------------------------------------------
Strong VIF and Opportunity Fund II 0.20% 1,255.07
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
These arrangements may change from time to time, and may include more Funds in
the future.
Investment Results. The investment objectives and policies of certain
Portfolios are similar to the investment objectives and policies of mutual fund
portfolios other than the Portfolios that may be managed by the investment
adviser or manager. The investment results of the Portfolios, however, may be
higher or lower than the results of such other portfolios. There can be no
assurance, and no representation is made, that the investment results of any of
the Funds will be comparable to the investment results of any other portfolio,
even if the other portfolio has the same investment adviser or manager.
Resolving Material Conflicts. The participation agreements under which
the Funds sell their shares to Subaccounts of the Separate Account contain
varying termination provisions. In general, each party may terminate at its
option with specified advance written notice, and may also terminate in the
event of specific regulatory or business developments.
Should an agreement between National Life and a Fund terminate, the
Subaccounts which invest in that Fund may not be able to purchase additional
shares of such Fund. In that event, you will no longer be able to transfer
Accumulated Values or allocate Net Premiums to Subaccounts investing in
Portfolios of such Fund.
Additionally, in certain circumstances, it is possible that a Fund or a
Portfolio of a Fund may refuse to sell its shares to a Subaccount despite the
fact that the participation agreement between the Fund and us has not been
terminated. Should a Fund or Portfolio of such Fund decide not to sell its
shares to us, we will not be able to honor your requests to allocate cash values
or net premiums to Subaccounts investing in shares of that Fund or Portfolio.
The Funds are available to registered separate accounts of insurance
companies, other than National Life, offering variable annuity and variable life
insurance policies. As a result, there is a possibility that a material conflict
may arise between the interests of Owners with Accumulated Value allocated to
the Separate Account and the owners of life insurance policies and variable
annuities issued by such other
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<PAGE> 23
companies whose values are allocated to one or more other separate accounts
investing in any one of the Funds.
In the event of a material conflict, we will take any necessary steps,
including removing the Separate Account from that Fund, to resolve the matter.
The Board of Directors or Trustees of the Funds intend to monitor events in
order to identify any material conflicts that possibly may arise and to
determine what action, if any, should be taken in response to those events or
conflicts. See the individual Fund Prospectuses for more information.
THE GENERAL ACCOUNT
For information on the General Account, see page .
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, we will pay the Death
Benefit of the Policy, after due proof of the Insured's death (and fulfillment
of certain other requirements), to the named Beneficiary, unless the claim is
contestable in accordance with the terms of the Policy. You may choose to have
the proceeds paid in cash or under one of the available Settlement Options. (See
"Payment of Policy Benefits," Page .) The Death Benefit payable will be the
Unadjusted Death Benefit under the Death Benefit Option that is in effect,
increased by any additional benefits, and decreased by any outstanding Policy
loan and accrued interest and any unpaid Monthly Deductions.
Death Benefit Options. The Policy provides two Death Benefit Options:
Option A and Option B. You select the Death Benefit Option in the application
and may change it as described in "Change in Death Benefit Option," Page .
Option A. The Unadjusted Death Benefit is equal to the greater of:
(a) the Face Amount of the Policy, and
(b) the Accumulated Value multiplied by the specified percentage shown in the
table below:
<TABLE>
<CAPTION>
Attained Age Percentage Attained Age Percentage
------------ ---------- ------------ ----------
<S> <C> <C> <C>
40 and under 250% 60 130%
45 215% 65 120%
50 185% 70 115%
55 150% 75 and over 105%
</TABLE>
For Attained Ages not shown, the percentages will decrease by a ratable portion
of each full year.
Illustration of Option A -- For purposes of this illustration, assume
that the Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will generally
have an Unadjusted Death Benefit of $200,000. The specified percentage for an
Insured under Attained Age 40 on the Policy Anniversary prior to the date of
death is 250%. Because the Unadjusted Death Benefit must be equal to or greater
than 2.50 times the Accumulated Value, any time the Accumulated Value exceeds
$80,000 the Unadjusted Death Benefit will exceed the Face Amount. Each
additional dollar added to the Accumulated Value will increase the Unadjusted
Death Benefit by $2.50. Thus, a 35 year old Insured with an
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<PAGE> 24
Accumulated Value of $90,000 will have an Unadjusted Death Benefit of $225,000
(2.50 x $90,000), and an Accumulated Value of $150,000 will have an Unadjusted
Death Benefit of $375,000 (2.50 x $150,000).
Similarly, any time the Accumulated Value exceeds $80,000, each dollar
taken out of the Accumulated Value will reduce the Unadjusted Death Benefit by
$2.50. If at any time, however, the Accumulated Value multiplied by the
specified percentage is less than the Face Amount, the Unadjusted Death Benefit
will be the Face Amount of the Policy.
Option B. The Unadjusted Death Benefit is equal to the greater of:
(a) the Face Amount of the Policy plus the Accumulated Value, and
(b) the Accumulated Value multiplied by the specified percentage shown in the
table above.
Illustration of Option B -- For purposes of this illustration, assume
that the Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option B, a Policy with a face amount of $200,000 will generally
have an Unadjusted Death Benefit of $200,000 plus the Accumulated Value. Thus,
for example, a Policy with a $50,000 Accumulated Value will have an Unadjusted
Death Benefit of $250,000 ($200,000 plus $50,000). Since the specified
percentage is 250%, the Unadjusted Death Benefit will be at least 2.50 times the
Accumulated Value. As a result, if the Accumulated Value exceeds $133,333, the
Unadjusted Death Benefit will be greater than the Face Amount plus the
Accumulated Value. Each additional dollar added to the Accumulated Value above
$133,333 will increase the Unadjusted Death Benefit by $2.50. An Insured with an
Accumulated Value of $150,000 will have an Unadjusted Death Benefit of $375,000
(2.50 x $150,000), and an Accumulated Value of $200,000 will yield an Unadjusted
Death Benefit of $500,000 (2.50 x $200,000). Similarly, any time the Accumulated
Value exceeds $133,333, each dollar taken out of the Accumulated Value will
reduce the Unadjusted Death Benefit by $2.50. If at any time, however, the
Accumulated Value multiplied by the specified percentage is less than the Face
Amount plus the Accumulated Value, the Unadjusted Death Benefit will be the Face
Amount plus the Accumulated Value.
At Attained Age 99, Option B automatically becomes Option A.
Which Death Benefit Option to Choose. If you prefer to have premium
payments and favorable investment performance reflected partly in the form of an
increasing Death Benefit, you should choose Option B. If you are satisfied with
the amount of the Insured's existing insurance coverage and prefer to have
premium payments and favorable investment performance reflected to the maximum
extent in the Accumulated Value, you should choose Option A.
Change in Death Benefit Option. After the first Policy Year, you may
change the Death Benefit Option in effect by sending us a written request. There
is no charge to change the Death Benefit Option. The effective date of a change
will be the Monthly Policy Date on or next following the date we receive the
written request. Only one change in Death Benefit Option is permitted in any one
Policy Year.
On the effective date of a change in Death Benefit Option, the Face Amount
is adjusted so that there will be no change in the Death Benefit or the Net
Amount at Risk. In the case of a change from Option B to Option A, the Face
Amount must be increased by the Accumulated Value. In the case of a change from
Option A to Option B, the Face Amount must be decreased by the Accumulated
Value. The change from Option A to Option B will not be allowed if it would
reduce the Face Amount to less than the Minimum Face Amount.
On the effective date of the change, the Death Benefit, Accumulated Value
and Net Amount at Risk (and therefore the Cost of Insurance Charges) are
unchanged. However, after the effective date of the change, the pattern of
future Death Benefits, Accumulated Value, Net Amount at Risk and Cost of
Insurance Charges will be different than if the change had not been made. In
determining whether a change is appropriate for you, the considerations
described in "Which Death Benefit Option to Choose" above will apply.
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<PAGE> 25
If a change in the Death Benefit Option would result in cumulative
premiums exceeding the maximum premium limitations under the Internal Revenue
Code for life insurance, we will not effect the change.
A change in the Death Benefit Option may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page .)
How the Death Benefit May Vary. The amount of the Death Benefit may
vary with the Accumulated Value. The Death Benefit under Option A will vary with
the Accumulated Value whenever the specified percentage of Accumulated Value
exceeds the Face Amount of the Policy. The Death Benefit under Option B will
always vary with the Accumulated Value because the Unadjusted Death Benefit
equals the greater of (a) the Face Amount plus the Accumulated Value and (b) the
Accumulated Value multiplied by the specified percentage.
ABILITY TO ADJUST FACE AMOUNT
You may, at any time after the first Policy Year, increase or decrease
the Policy's Face Amount by submitting a written application to us. There are
some limits on your ability to effect increases or decreases, which are
discussed below. The effective date of an increase will be the Monthly Policy
Date on or next following our approval of your request. The effective date of a
decrease is the Monthly Policy Date on or next following the date that we
receive your written request. Employee benefit plan Policies may adjust the Face
Amount even in Policy Year 1. An increase or decrease in Face Amount may have
federal tax consequences. (See "Tax Treatment Of Policy Benefits," Page .) The
effect of changes in Face Amount on Policy charges, as well as other
considerations, are described below.
Increase. A request for an increase in Face Amount may not be for less
than $25,000, or such lesser amount required in a particular state (except that
the minimum for employee benefit plans is $2000). You may not increase the Face
Amount after the Insured's Attained Age 85. To obtain the increase, you must
submit an application for the increase and provide evidence satisfactory to us
of the Insured's insurability.
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<PAGE> 26
On the effective date of an increase, and taking the increase into
account, the Cash Surrender Value must be at least equal to the Monthly
Deductions then due. If the Cash Surrender Value is not sufficient, the increase
will not take effect until you pay a sufficient additional premium payment to
increase the Cash Surrender Value.
An increase in the Face Amount will generally affect the total Net
Amount at Risk. This will normally increase the monthly Cost of Insurance
Charges. In addition, the Insured may be in a different Rate Class as to the
increase in insurance coverage. An increase in premium payment or frequency may
be appropriate after an increase in Face Amount. (See "Cost of Insurance
Charge," Page .)
Decrease. The amount of the Face Amount after a decrease cannot be less
than 75% of the largest Face Amount in force at any time in the twelve months
immediately preceding our receipt of your request for the decrease. The Face
Amount after any decrease may not be less than the Minimum Face Amount, which is
generally currently $50,000. If a decrease in the Face Amount would result in
cumulative premiums exceeding the maximum premium limitations applicable for
life insurance under the Internal Revenue Code, we will not allow the decrease.
A decrease in the Face Amount generally will decrease the total Net
Amount at Risk, which will decrease your monthly Cost of Insurance Charges.
For purposes of determining the Cost of Insurance Charge, any decrease
in the Face Amount will reduce the Face Amount in the following order:
(a) first, the increase in Face Amount provided by the most recent increase;
(b) then the next most recent increases, in inverse chronological order; and
finally
(c) the Initial Face Amount.
HOW THE DURATION OF THE POLICY MAY VARY
Your Policy will remain in force as long as the Cash Surrender Value of
the Policy is sufficient to pay the Monthly Deductions and the charges under the
Policy. When the Cash Surrender Value is insufficient to pay the charges and the
Grace Period expires without an adequate premium payment by you, the Policy will
lapse and terminate without value. However, during the first five Policy Years
the Policy will not lapse, if you have paid the Minimum Guarantee Premium. You
have certain rights to reinstate your Policy, if it should lapse. (See
"Reinstatement," Page .)
In addition, an optional Guaranteed Death Benefit Rider is available
which will guarantee that the Policy will not lapse prior to age 70, or 20 years
from the Date of Issue of the Policy, if longer, regardless of investment
performance, if you have paid the Minimum Guarantee Premium as of each Monthly
Policy Date.
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held under the
Policy at any time. It is equal to the sum of the Policy's values in the
Separate Account and the General Account. The Accumulated Value minus any
applicable Surrender Charge, and minus any outstanding Policy loans and accrued
interest, is equal to the Cash Surrender Value. There is no guaranteed minimum
for the portion of the Accumulated Value in any of the Subaccounts of the
Separate Account. Because the Accumulated Value on any future date depends upon
a number of variables, it cannot be predetermined.
The Accumulated Value and Cash Surrender Value will reflect:
- the Net Premiums paid
- the investment performance of the Portfolios you have chosen
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<PAGE> 27
- the crediting of interest on non-loaned Accumulated Value in the
General Account and amounts held as Collateral in the General
Account
- any transfers
- any Withdrawals
- any loans
- any loan repayments
- any loan interest charged, and
- charges assessed on the Policy.
Determination of Number of Units for the Separate Account. Amounts
allocated, transferred or added to a Subaccount of the Separate Account under a
Policy are used to purchase units of that Subaccount; units are redeemed when
amounts are deducted, transferred or withdrawn. The number of units a Policy has
in a Subaccount equals the number of units purchased minus the number of units
redeemed up to such time. For each Subaccount, the number of units purchased or
redeemed in connection with a particular transaction is determined by dividing
the dollar amount by the unit value.
Determination of Unit Value. The unit value of a Subaccount is equal to
the unit value on the immediately preceding Valuation Day multiplied by the Net
Investment Factor for that Subaccount on that Valuation Day.
Net Investment Factor. Each Subaccount of the Separate Account has its
own Net Investment Factor. The Net Investment Factor measures the daily
investment performance of the Subaccount. The factor will increase or decrease,
as appropriate, to reflect net investment income and capital gains or losses,
realized and unrealized, for the securities of the underlying portfolio or
series.
The asset charge for mortality and expense risks will be deducted in
determining the applicable Net Investment Factor. (See "Charges and Deductions -
Mortality and Expense Risk Charge," Page .)
Calculation of Accumulated Value. The Accumulated Value is determined
first on the Date of Issue and thereafter on each Valuation Day. On the Date of
Issue, the Accumulated Value will be the Net Premiums received, plus any
earnings prior to the Date of Issue, less any Monthly Deductions due on the Date
of Issue. On each Valuation Day after the Date of Issue, the Accumulated Value
will be:
(1) The aggregate of the values attributable to the Policy in the
Separate Account, determined by multiplying the number of
units the Policy has in each Subaccount of the Separate
Account by such Subaccount's unit value on that date; plus
(2) The value attributable to the Policy in the General Account
(See "The General Account," Page .)
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy. To purchase a Policy, you must apply to us
through a licensed National Life agent who is also a registered representative
of Equity Services, Inc. ("ESI") or a broker/dealer having a Selling Agreement
with ESI. If you do not pay the Minimum Initial Premium with your written
application, it must be paid when the Policy is delivered. If the premium paid
is less than the Minimum Initial Premium, the balance of the Minimum Initial
Premium must be received within five days, or all premiums will be refunded.
The Minimum Face Amount of a Policy under our rules is generally
$50,000; however, exceptions may be made for employee benefit plans. We may
revise our rules from time to time to specify a different Minimum Face Amount
for subsequently issued policies. A Policy will be issued only on
24
<PAGE> 28
Insureds who have an Issue Age of 85 or less and who provide us with
satisfactory evidence of insurability. Acceptance is subject to our underwriting
rules. We may reject an application for any reason permitted by law. (See
"Distribution of Policies," Page .) A tax-favored arrangement, including
qualified pension plans, should carefully consider the costs and benefits of the
Policy (such as asset diversification) before purchasing a Policy since the
tax-favored arrangement itself provides for tax-sheltered growth.
From the time the application for a Policy is signed until the time the
Policy is issued, you can, subject to our underwriting rules, obtain temporary
insurance protection, pending issuance of the Policy, if you are able to
answer "no" to the Health Questions of the Receipt & Temporary Life Insurance
Agreement and submitting (a) a complete Application including any medical
questionnaire required, and (b) payment of the Minimum Initial Premium.
The amount of coverage under the Receipt & Temporary Life Insurance
Agreement is the lesser of the Face Amount applied for or $1,000,000 ($100,000
in the case of proposed Insureds age 70 or over). Coverage under the agreement
will end on the earliest of:
(a) the 90th day from the date of the agreement;
(b) the date that insurance takes effect under the Policy;
(c) the date a policy, other than as applied for, is offered to you;
(d) three days from the date we mail a notice of termination of coverage;
(e) the time you first learn that we have terminated the temporary life
insurance; or
(f) the time you withdraw the application for life insurance.
We offer a one time credit on conversions of eligible National Life
term insurance policies to a VariTrak Policy. If the term policy being converted
has been in force for at least twelve months, the amount of the credit is 12% of
a target amount used to determine commission payments. If the term policy being
converted has been in force for less than twelve months, the credit will be
prorated based on the number of months the term policy has been outstanding at
the time of conversion. For GRT term policies, the credit will be 18% of the
target amount used to determine commission payments if the GRT term policy has
been in force for at least two years but not more than five years. For GRT term
policies in force for less than two years, the credit is 0.5% per month for each
month in the first year, and 1.0% per month for each month in the second year.
For GRT policies in force more than five years, the credit decreases from 18% by
0.5% for each month beyond five years, until it becomes zero at the end of year
eight.
The amount of the credit will be added to the initial premium payment,
if any, you pay and will be treated as part of the Initial Premium for the
Policy. Thus, the credit will be included in premium payments for purposes of
calculating and deducting the Premium Tax Charge. If you surrender your Policy,
we will not recapture the credit. We will not include the amount of the credit
for purposes of calculating agent compensation for the sale of the Policy.
We also offer a one time credit to Home Office employees who purchase a
VariTrak Policy, as both Owner and Insured. This one time credit is calculated
differently from the credit described above; in particular, the amount of the
credit will be 50% of the target premium used in the calculation of commissions
on the Policy. Otherwise, the credit will be treated in the same manner as the
credit described above.
Amount and Timing of Premiums. Each premium payment must be at least
$50. You have considerable flexibility in determining the amount and frequency
of premium payments, within the limits discussed below.
You will at the time of application select a Planned Periodic Premium
schedule, based on a periodic billing mode of annual, semi-annual, or quarterly
payments. You may request us to send a premium reminder notice at the specified
interval. You may change the Planned Periodic Premium frequency and amount.
Also, under an Automatic Payment Plan, you can select a monthly payment
schedule pursuant to which premium payments will be automatically deducted from
a bank account or other source, rather than being "billed." We may allow, in
certain situations, Automatic Payment Plan payments of less than $50. We may
require that Automatic Payment Plans be set up for at least the Minimum Monthly
Premium.
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<PAGE> 29
You are not required to pay the Planned Periodic Premiums in accordance
with the specified schedule. You may pay premiums whenever you like, and in any
amount (subject to the $50 minimum and the limitations described in the next
section). Payment of the Planned Periodic Premiums will not, however, guarantee
that the Policy will remain in force. Instead, the duration of the Policy
depends upon the Policy's Cash Surrender Value. Thus, even if you pay the
Planned Periodic Premiums, the Policy will lapse whenever the Cash Surrender
Value is insufficient to pay the Monthly Deductions and any other charges under
the Policy and if a Grace Period expires without an adequate payment by you
(unless the Policy is in its first five years, or you have purchased the
Guaranteed Death Benefit Rider, in either case so long as you have paid the
Minimum Guarantee Premium).
Any payments you make while there is an outstanding Policy loan will be
applied as premium payments rather than loan repayments, unless you notify us in
writing that the amount is to be applied as a loan repayment. You may not make
premium payments after the Insured reaches Attained Age 99. However, we permit
loan repayments after Attained Age 99.
Higher premium payments under Death Benefit Option A, until the
applicable percentage of Accumulated Value exceeds the Face Amount, will
generally result in a lower Net Amount at Risk. This will produce lower Cost of
Insurance Charges against the Policy. Conversely, lower premium payments in this
situation will result in a higher Net Amount at Risk, which will result in
higher Cost of Insurance Charges under the Policy.
Under Death Benefit Option B, until the applicable percentage of
Accumulated Value exceeds the Face Amount plus the Accumulated Value, the level
of premium payments will not affect the Net Amount at Risk. However, both the
Accumulated Value and Death Benefit will be higher if premium payments are
higher, and lower if premium payments are lower.
Under either Death Benefit Option, if the Unadjusted Death Benefit is
the applicable percentage of Accumulated Value, then higher premium payments
will result in a higher Net Amount at Risk, and higher Cost of Insurance
Charges. Lower premium payments will result in a lower Net Amount at Risk, and
lower Cost of Insurance Charges.
Premium Limitations. The Internal Revenue Code of 1986 (the "Code")
provides for exclusion of the Death Benefit from gross income if total premium
payments do not exceed certain stated limits. In no event can the total of all
premiums paid under a Policy exceed these limits. If at any time you pay a
premium which would result in total premiums exceeding the limits, we will only
accept that portion of the premium which would make total premiums equal the
maximum amount which may be paid under the Policy. We will promptly refund the
excess to you. In cases of premiums paid by check, we will wait until your check
has cleared. If you have an outstanding loan, we may instead apply the payment
as a loan repayment. Even if total premiums were to exceed the maximum premium
limitations established by the Code, the excess of (a) a Policy's Unadjusted
Death Benefit over (b) the Policy's Cash Surrender Value plus outstanding Policy
loans and accrued interest, would still be excludable from gross income under
the Code.
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 Insured provides satisfactory evidence of insurability, we
may limit the amount of any premium payment if it increases the Unadjusted Death
Benefit more than it increases the Accumulated Value.
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<PAGE> 30
Allocation of Net Premiums. The Net Premium equals the premium paid
less the Premium Tax Charge. In your application for the Policy, you will
indicate how Net Premiums should be allocated among the Subaccounts of the
Separate Account and/or the General Account. You may change these allocations at
any time by giving us written notice at our Home Office, or if you have elected
the telephone transaction privilege, by telephone instructions (See "Telephone
Transaction Privilege," Page .) You must make allocations in whole number
percentages of at least 5%, and the sum of the allocation percentages must be
100%. We will allocate Net Premiums as of the Valuation Date we receive the
premium at our Home Office, based on the allocation percentages then in effect,
except during the free look period.
We will allocate any portion of the Initial Premium and any subsequent
premiums we receive before the end of the free look period which are to be
allocated to the Separate Account, to the Money Market Subaccount. For this
purpose, we will assume that the free look period will end 20 days after the
date the Policy is issued. On the first Valuation Date following 20 days after
issue of the Policy, we will allocate the amount in the Money Market Subaccount
to each of the Subaccounts selected in the application based on your
instructions.
For example, assume a Policy was issued with Net Premiums to be
allocated 25% to the Managed Subaccount, 25% to the Bond Subaccount and 50% to
the General Account. During the period stated above, 50% (25% + 25%) of the Net
Premiums will be allocated to the Money Market Subaccount. At the end of such
period, 50% (25% / 50%) of the amount in the Money Market Subaccount will be
transferred to the Managed Subaccount and 50% to the Bond Subaccount.
The values of the Subaccounts will vary with their investment
experience. You bear the entire investment risk. You should periodically review
your allocation percentages in light of market conditions and your overall
financial objectives.
Transfers. You may transfer the Accumulated Value between and among the
Subaccounts of the Separate Account and the General Account by sending us a
written transfer request, or if you have elected the telephone transaction
privilege, by telephone instructions to us. (See "Telephone Transaction
Privilege," Page .) Transfers between and among the Subaccounts of the Separate
Account and the General Account are made as of the Valuation Day that the
request for transfer is received at the Home Office. You may, at any time,
transfer all or part of the amount in one of the Subaccounts of the Separate
Account to another Subaccount and/or to the General Account. For transfers from
the General Account to the Separate Account, see "Transfers from General
Account," Page .
Currently an unlimited number of transfers are permitted without
charge. We have no current intent to impose a transfer charge in the foreseeable
future. However, we may, after giving you prior notice, change this policy so as
to deduct a $25 transfer charge from each transfer in excess of the fifth
transfer during any one Policy Year. All transfers requested during one
Valuation Period are treated as one transfer transaction. If a transfer charge
is adopted in the future, these types of transfers would not be subject to a
transfer charge and would not count against the five free transfers in any
Policy Year:
- transfers resulting from Policy loans
- transfers resulting from the operation of the dollar cost
averaging or portfolio rebalancing features
- transfers resulting from the exercise of the transfer rights
described on page____ (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 you pay the
Minimum Guarantee Premium.
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<PAGE> 31
In addition, if you purchase the Guaranteed Death Benefit Rider, and
pay the Minimum Guarantee Premium as of each Monthly Policy Date, your Policy
will not lapse prior to the Insured's Attained Age 70, or 20 years from the Date
of Issue of the Policy if longer, regardless of whether the Cash Surrender Value
is sufficient to cover the Monthly Deductions. If you purchase the Guaranteed
Death Benefit Rider, your Minimum Guarantee Premium will be higher than if you
do not purchase the Guaranteed Death Benefit Rider. (See "Optional Benefits -
Guaranteed Death Benefit," Page .)
The Policy provides for a 61-day Grace Period that is measured from the
date we send a lapse notice. The Policy does not lapse, and the insurance
coverage continues, until the expiration of this Grace Period. To prevent lapse,
you must during the Grace Period pay a premium equal to the sum of any amount by
which the past Monthly Deductions have been in excess of Cash Surrender Value,
plus three times the Monthly Deduction due the date the Grace Period began. Our
notice will specify the payment required to keep the Policy in force. Failure to
make a payment at least equal to the required amount within the Grace Period
will result in lapse of the Policy without value.
Reinstatement. A Policy that lapses without value may be reinstated at
any time within five years (or longer period required in a particular state)
after the beginning of the Grace Period. To do so, you must submit evidence of
the Insured's insurability satisfactory to us and pay an amount sufficient to
provide for two times the Monthly Deduction due on the date the Grace Period
began plus three times the Monthly Deduction due on the effective date of
reinstatement. The effective date of reinstatement, unless otherwise required by
state law, will be the Monthly Policy Date on or next following the date your
reinstatement application is approved. Upon reinstatement, the Accumulated Value
will be based upon the premium paid to reinstate the Policy. The Policy will be
reinstated with the same Date of Issue as it had prior to the lapse. Neither the
five year no lapse guarantee nor the Death Benefit Guarantee Rider may be
reinstated.
Specialized Uses of the Policy. Because the Policy provides for an
accumulation of cash value as well as a death benefit, the Policy can be used
for various individual and business financial planning purposes. Purchasing the
Policy in part for such purposes entails certain risks. For example, if the
investment performance of the chosen Subaccounts is poorer than expected or if
sufficient premiums are not paid, the Policy may lapse or may not accumulate
sufficient Accumulated Value or Cash Surrender Value to fund the purpose for
which the Policy was purchased. Withdrawals and Policy loans may significantly
affect current and future Accumulated Value, Cash Surrender Value, or Death
Benefit proceeds. Depending upon Subaccount investment performance and the
amount of a Policy loan, the loan may cause a Policy to lapse. Because the
Policy is designed to provide benefits on a long-term basis, before purchasing a
Policy for a specialized purpose you should consider whether the long-term
nature of the Policy is consistent with your purpose. Using a Policy for a
specialized purpose may have tax consequences. (See "Federal Income Tax
Considerations," Page .)
For Policies that are intended to be used in multiple employer welfare
benefit plans established under Section 419 A(f)(6) of the Internal Revenue
Code, you should be aware that there is a risk that the intended tax
consequences of such a plan may not be realized. Congress is currently
considering legislation that might remove some or all of the tax advantage of
these plans and the Internal Revenue Service has raised questions about certain
of these arrangements under existing law. We do not guarantee any particular tax
consequences of any use of the Policies, including but not limited to use in
these so-called "Section 419 plans." We recommend that you seek independent tax
advice with respect to applications in which you seek particular tax
consequences.
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<PAGE> 32
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate us
for:
(a) providing the insurance and other benefits set forth in the Policy;
(b) administering the Policy;
(c) assuming certain mortality and other risks in connection with the
Policy; and
(d) incurring expenses in distributing the Policy including costs
associated with printing prospectuses and sales literature and
sales compensation.
We may realize a profit from any charges. We may use any profit for any
purpose, including payment of distribution expenses. We may also realize a
profit on one or more of these charges. We may use any profits for any corporate
purpose, including sales expenses.
PREMIUM TAX CHARGE
We will deduct 3.25% from each premium payment prior to allocation of
Net Premiums, to cover state premium taxes and the federal DAC Tax. For
qualified employee benefit plans, we will deduct 2.0% of each premium rather
than 3.25%.
The federal DAC Tax is a tax attributable to certain "policy
acquisition expenses" under Internal Revenue Code Section 848. Section 848 in
effect accelerates the realization of income we receive from the Policies, and
therefore the payment of federal income taxes on that income. The economic
consequence of Section 848 is, therefore, an increase in the tax burden borne by
us that is attributable to the Policies.
SURRENDER CHARGE
We impose a Surrender Charge, which consists of a Deferred
Administrative Charge and a Deferred Sales Charge, if the Policy is surrendered
or lapses at any time before the end of the fifteenth Policy Year.
Deferred Administrative Charge. The Deferred Administrative Charge
varies by Issue Age, and is based on the Initial Face Amount. After the first
five Policy Years, it declines linearly by Policy Month through the end of
Policy Year 15, after which it is zero. Charges per $1,000 of Face Amount for
sample Issue Ages are shown below:
<TABLE>
<CAPTION>
Sample Charge per $1000
Issue Age of Initial Face Amount
--------- ----------------------
<S> <C>
0-5 None
10 $0.50
15 $1.00
20 $1.50
25-85 $2.00
</TABLE>
For Issue Ages not shown, the charge will increase by a ratable portion
for each full year. The Deferred Administrative Charge has been designed to
cover actual expenses for the issue and underwriting of Policies, and is not
intended to produce a profit.
Deferred Sales Charge. The Deferred Sales Charge will not exceed the
Maximum Deferred Sales Charge specified in the Policy.
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<PAGE> 33
The actual Deferred Sales Charge will equal the lesser of:
(a) the maximum discussed in the previous sentence, and
(b) an amount equal to the sum of:
(i) 30% of the premiums actually received up to one Surrender
Charge target premium, plus
(ii) 10% of all premiums paid in excess of this amount but not
greater than twice this amount, plus
(iii) 9% of all premiums paid in excess of twice this amount.
Appendix B to this Prospectus contains a table showing the Surrender
Charge target premium and the Maximum Deferred Sales Charge for male and female
nonsmokers and smokers of each age at the time a policy is issued, expressed as
a dollar amount per $1000 of initial face amount.
To illustrate the calculation of a Policy's Surrender Charge, assume
that the Policy is issued to a male nonsmoker, Issue Age 45, with a
Face Amount of $100,000. Assume that the Surrender Charge target
premium ("SCTP") is $1,652, the initial Maximum Deferred Sales Charge
is $826 (50% of $1,652) and the Insured pays annual premiums of $1,500
at the beginning of each Policy Year. This example will illustrate
surrenders in the first five Policy Years and in the first month of the
eighth Policy Year.
Deferred Administrative Charge. The Deferred Administrative Charge for
the first five Policy Years is $200. This is calculated by applying the
charge of $2.00 per $1,000 of Face Amount for Issue Age 45 from the
schedule above to the Face Amount of $100,000 ($2.00 x
(100,000/1,000)). The Deferred Administrative Charge reduces linearly
by Policy Month in Policy Years 6 through 15. Linear reduction is
equivalent to a reduction each month of 1/121st of the initial charge.
For example, the Deferred Administrative Charge in the first month of
the eighth Policy Year (the 25th month after the end of the 5th Policy
Year) will be $158.68 ($200 - ($200 x (25/121)). After completion of
the 15th Policy Year, the Deferred Administrative Charge is zero. The
schedule of Deferred Administrative Charges in effect for the first
fifteen Policy Years is shown in the Policy.
Deferred Sales Charge. The Deferred Sales Charge is the lesser of the
Maximum Deferred Sales Charge and an amount calculated based on the
Insured's actual premium payments. The Maximum Deferred Sales Charge in
effect for the first five Policy Years is $826. The Maximum Deferred
Sales Charge reduces linearly by month in Policy Years 6 through 15.
Linear reduction is equivalent to a reduction each month of 1/121st of
the initial charge. For example, the Maximum Deferred Sales Charge in
the first month of the 8th Policy Year (the 25th month after the end of
the 5th Policy Year) will be $655.34 ($826 - ($826 x (25/121))). After
the completion of the 15th Policy Year, the Maximum Deferred Sales
Charge is $0. The schedule of Maximum Deferred Sales Charges in effect
for the first fifteen Policy Years is shown in the Policy.
The Maximum Deferred Sales Charge is compared to an amount calculated
as a function of premiums actually paid and the SCTP. The amount is
calculated as the sum of 30% of premiums paid up to the first SCTP
($1,652), 10% of premiums paid in excess of the first SCTP but not more
than two SCTP's (from $1,653 to $3,304), and 9% of premiums paid in
excess of two SCTP's (above $3,304). As an example, the calculated
amounts in Policy Years 1 through 5 and Policy Year 8 would be as
follows:
<TABLE>
<CAPTION>
Amount at 10%
Policy Cumulative Amount at 30% (From $1,653 Amount at 9%
Year Premiums (Below $1,652) to $3,304) (Above $3,304) Total
- ---- -------- -------------- ---------- -------------- -----
<S> <C> <C> <C> <C> <C>
1 $ 1,500 $1,500x.30=$450.00 - - $ 450.00
2 $ 3,000 $1,652x.30=$495.60 $1,348x.10=$134.80 - $ 630.40
3 $ 4,500 $1,652x.30=$495.60 $1,652x.10=$165.20 $1,196x.09=$107.64 $ 768.44
4 $ 6,000 $1,652x.30=$495.60 $1,652x.10=$165.20 $2,696x.09=$242.64 $ 903.44
5 $ 7,500 $1,652x.30=$495.60 $1,652x.10=$165.20 $4,196x.09=$377.64 $1,038.44
8 $12,000 $1,652x.30=$495.60 $1,652x.10=$165.20 $8,696x.09=$782.64 $1,443.44
</TABLE>
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<PAGE> 34
The total calculated amount would then be compared to the Maximum
Deferred Sales Charge to determine the Deferred Sales Charge actually
imposed. For example, the Deferred Sales Charge in the first five years
would be the following:
<TABLE>
<CAPTION>
(A) (B)
Maximum Deferred Deferred Sales Charge
Policy Year Calculated Amount Sales Charge (Lesser of (A) and (B)
----------- ----------------- ------------ ----------------------
<S> <C> <C> <C>
1 $ 450.00 $826.00 $450.00
2 $ 630.40 $826.00 $630.40
3 $ 768.44 $826.00 $768.44
4 $ 903.44 $826.00 $826.00
5 $1,038.44 $826.00 $826.00
</TABLE>
In this example, the charge based on SCTP is less than the Maximum
Deferred Sales Charge until the fourth Policy Year. Thereafter, the
Maximum Deferred Sales Charge is less than the charge based on SCTP.
For example, the Deferred Sales Charge in the first month of the eighth
Policy Year will be the Maximum Deferred Sales Charge of $655.34
(calculated above) since this is less than $1,443.44 (the calculated
amount based on premiums paid).
MONTHLY DEDUCTIONS
We will deduct charges from the Accumulated Value on the Date of Issue
and on each Monthly Policy Date. The Monthly Deduction consists of three
components:
(a) the Cost of Insurance Charge
(b) the Monthly Administrative Charge, and
(c) the cost of any additional benefits provided by Rider.
The Monthly Deduction may vary in amount from Policy Month to Policy
Month. We will take the Monthly Deduction on a pro rata basis from the
Subaccounts of the Separate Account and the General Account, unless you have
requested at the time of application, or later request in writing, that we take
the Monthly Deductions from the Money Market Subaccount. If we cannot take a
Monthly Deduction from the Money Market Subaccount, where you have so asked, we
will take the amount of the deduction in excess of the Accumulated Value
available in the Money Market Subaccount on a pro rata basis from Accumulated
Value in the Subaccounts of the Separate Account and the General Account.
Cost of Insurance Charge. We calculate the monthly Cost of Insurance
Charge by multiplying the applicable cost of insurance rate or rates by the Net
Amount at Risk for each Policy Month. Because both the Net Amount at Risk and
the variables that determine the cost of insurance rate, such as the age of the
Insured and the Duration of the Policy, may vary, the Cost of Insurance Charge
will likely be different from month to month.
Net Amount at Risk. The Net Amount at Risk on any Monthly
Policy Date is approximately the amount by which the Unadjusted Death
Benefit on that Monthly Policy Date exceeds the Accumulated Value. It
measures the amount National Life would have to pay in excess of the
Policy's Value if the Insured died. The actual calculation uses the
Unadjusted Death Benefit divided by 1.00327234, to take into account
assumed monthly earnings at an annual rate of 4%. We calculate the Net
Amount at Risk separately for the Initial Face Amount and any increases
in Face Amount. In determining the Net Amount at Risk for each
increment of Face Amount, we first consider the Accumulated Value part
of the Initial Face Amount. If the Accumulated Value exceeds the
Initial Face Amount, we consider it as part of any increases in Face
Amount in the order such increases took effect.
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<PAGE> 35
Any change in the Net Amount at Risk will affect the total Cost of
Insurance Charges paid by the Owner.
Guaranteed Maximum Cost of Insurance Rates. The guaranteed maximum cost
of insurance rates will be set forth in your Policy, and will depend on:
- the Insured's Attained Age
- the Insured's sex
- the Insured's Rate Class, and
- the 1980 Commissioners Standard Ordinary Smoker/Nonsmoker
Mortality Table.
For Policies issued in states which require "unisex" policies or in
conjunction with employee benefit plans, the guaranteed maximum cost of
insurance rate will use the 1980 Commissioners Standard Ordinary Mortality
Tables NB and SB.
Current Cost of Insurance Rates and How They are Determined. The actual
cost of insurance rates used ("current rates") will depend on:
- the Insured's Issue Age
- the Insured's sex
- the Insured's Rate Class
- the Policy's Duration, and
- the Policy's size.
Generally, the current cost of insurance rate for a given Attained Age
will be less than for an Insured whose Policy was issued more than 10 years ago,
than for an Insured whose Policy was issued less than 10 years ago, other
factors being equal. We periodically review the adequacy of our current cost of
insurance rates and may adjust their level. However, the current rates will
never exceed guaranteed maximum cost of insurance rates. Any change in the
current cost of insurance rates will apply to all persons of the same Issue Age,
sex, and Rate Class, and with Policies of the same Duration and size.
We use separate cost of insurance rates for the Initial Face Amount and
any increases in Face Amount. For the Initial Face Amount we use the rate for
the Insured's Rate Class on the Date of Issue. For each increase in Face Amount,
we use the rate for the Insured's Rate Class at the time of the increase. If the
Unadjusted Death Benefit is calculated as the Accumulated Value times the
specified percentage, we use the rate for the Rate Class for the Initial Face
Amount for the amount of the Unadjusted Death Benefit in excess of the total
Face Amount for Option A, and in excess of the total Face Amount plus the
Accumulated Value for Option B.
We may also issue Policies on a guaranteed issue basis, where no
medical underwriting is required prior to issuance of a Policy. Current cost of
insurance rates for Policies issued on a guaranteed issue basis may be higher
than current cost of insurance rates for healthy Insureds who undergo medical
underwriting.
Rate Class. The Rate Class of the Insured will affect both the
guaranteed and current cost of insurance rates. We currently place Insureds into
the following rate classes:
- preferred nonsmoker
- standard nonsmoker
- smoker
- juvenile, and
- substandard.
Smoker and substandard classes reflect higher mortality risks. In an
otherwise identical Policy, an Insured in a preferred or standard class will
have a lower Cost of Insurance Charge than an Insured in a substandard class
with higher mortality risks. Nonsmoking Insureds will generally incur lower cost
of insurance rates than Insureds who are classified as smokers.
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<PAGE> 36
The nonsmoker designation is not available for Insureds under Attained
Age 20. Shortly before an Insured attains age 20, we will notify the Insured
about possible classification as a nonsmoker and direct the Insured to his or
her agent to initiate a change in Rate Class. If the Insured qualifies as a
nonsmoker, we will change the guaranteed and current cost of insurance rates to
reflect the nonsmoker classification.
Current cost of insurance rates will also vary by Policy size, in the
following bands:
- those with Face Amounts less than $250,000
- those with Face Amounts between $250,000 and
$999,999, inclusive; and
- those with Face Amounts of $1,000,000 and over.
Cost of insurance rates will be lower as the Policy size band is
larger.
Monthly Administrative Charge. We deduct a Monthly Administrative
Charge of $7.50 from the Accumulated Value on the Date of Issue and each Monthly
Policy Date as part of the Monthly Deduction to help defray the expenses
incurred in administering the Policy. In Texas, the Monthly Administrative
Charge may be increased, but is guaranteed never to exceed $7.50 plus $0.07 per
$1,000 of Face Amount.
Optional Benefit Charges. The Monthly Deduction will include charges
for any additional benefits added to the Policy. The monthly charges will be
specified in the applicable Rider. The available Riders are listed under
"Optional Benefits", on Page below.
Bonus. We currently intend to reduce the Monthly Deductions starting in
the eleventh Policy Year by an amount equal to 0.50% per annum of the
Accumulated Value in the Separate Account. This bonus is not guaranteed (except
as required by the state of issue), however. It will only be continued if our
mortality and expense experience with the Policies justifies it. We may notify
you before the commencement of the eleventh Policy Year that we intend to
discontinue the bonus.
The bonus is calculated on each Monthly Policy Date as .041572% (the
monthly equivalent of 0.50% per annum) of the Accumulated Value in the Separate
Account on the just prior Monthly Policy Date. For example, if the Accumulated
Value in the Separate Account on the just prior Monthly Policy Date is $10,000,
then the bonus calculated for the current Monthly Policy Date will be $4.16
($10,000 X .00041572). To calculate the Monthly Deduction for the current
Monthly Policy Date, we net the $4.16 bonus against the Monthly Deductions for
Cost of Insurance, the Monthly Administrative Charge, and charges for any
Optional Benefits.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from the Separate Account at an annual rate of
0.90% (or a daily rate of .0024548%) of the average daily net assets of each
Subaccount of the Separate Account. This charge compensates us for the mortality
and expense risks assumed in connection with the Policy. The mortality risk we
assume is that insured persons may live for a shorter time than projected. This
means we would pay greater death benefits than expected in relation to the
amount of premiums received. The expense risk we assume is that expenses
incurred in issuing and administering the Policies will exceed the
administrative charges deducted from the Policy.
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<PAGE> 37
WITHDRAWAL CHARGE
We will assess on each Withdrawal a charge equal to the lesser of 2% of
the Withdrawal amount and $25. We will deduct this Withdrawal Charge from the
Withdrawal amount.
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts, or
from the Separate Account to the General Account. Transfers from the General
Account to the Separate Account are permitted within the limits described on
Page . Currently there is no charge for any transfers. We have no present
intention to impose a transfer charge in the foreseeable future. However, we may
impose in the future a transfer charge of $25 on each transfer in excess of five
transfers in any Policy Year. The Transfer Charge would be imposed to compensate
us for the costs of processing such transfers, and would not be designed to
produce a profit.
If we impose a transfer charge in the future, we will deduct it from
the amount being transferred. We would treat all transfers requested on the same
Valuation Date as one transfer transaction. Any future transfer charge will not
apply to transfers resulting from:
- Policy loans
- the exercise of the transfer rights described on page ____
- the initial reallocation of account values from the Money Market
Subaccount to other Subaccounts, and
- any transfers made pursuant to the Dollar Cost Averaging and
Portfolio Rebalancing features.
The transfers listed above also will not count against the five free transfers
in any Policy Year.
PROJECTION REPORT CHARGE
We may impose a charge for each projection report you request. This
report will project future values and future Death Benefits for the Policy. We
will notify you in advance of the amount of the charge. You may elect to pay the
charge in advance. If not paid in advance, we will deduct this charge from the
Subaccounts of the Separate Account and/or the General Account in proportion to
their Accumulated Values on the date of the deduction.
OTHER CHARGES
The Separate Account purchases shares of the Funds at net asset value.
The net asset value of those shares reflect management fees and expenses already
deducted from the assets of the Funds' Portfolios. Historical expense ratio
information for the Funds is presented in the "Summary of Policy Expenses"
section on page above. More detailed information is contained in the Funds'
Prospectuses which accompany this Prospectus.
POLICY RIGHTS AND PRIVILEGES
LOAN PRIVILEGES
General. You may at any time after the first year (and during the first
year where required by law) borrow money from us using the Policy as the only
security for the loan. The maximum amount you may borrow is the Policy's Cash
Surrender Value on the date we receive your loan request, minus three times the
Monthly Deduction for the most recent Monthly Policy Date. You may repay all or
a portion of a loan and accrued interest at any time, if the Insured is alive.
To take a loan, you should send us a written request at our Home Office. If you
have elected the telephone transaction privilege, you may also request a loan
over the telephone. We limit the amount of a Policy loan you can take by
telephone to $25,000. (See "Telephone
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<PAGE> 38
Transaction Privilege," Page .) We will normally pay loan proceeds within seven
days of a valid loan request.
Interest Rate Charged. We charge interest on Policy loans at the fixed
rate of 6% per year. We charge interest from the date of the loan and add it to
the loan balance at the end of the Policy Year. When this interest is added to
the loan balance, it bears interest at the same rate..
Allocation of Loans and Collateral. When you take a Policy loan, we
hold Accumulated Value in the General Account as Collateral for the Policy loan.
You may specify how you would like the Accumulated Value to be taken from the
Subaccounts of the Separate Account to serve as Collateral. If you do not so
specify, we will allocate the Policy loan to the Subaccounts in proportion to
the Accumulated Value in the Subaccounts. If the Accumulated Value in one or
more of the Subaccounts is insufficient to carry out your instructions, we will
not process the loan until we receive further instructions from you. Non-loaned
Accumulated Value in the General Account will become Collateral for a loan only
to the extent that the Accumulated Value in the Separate Account is
insufficient.
The Collateral for a Policy loan will initially be the loan amount.
Loan interest will be added to the Policy loan. We will take additional
Collateral for the loan interest pro rata from the Subaccounts of the Separate
Account, and then, if the amounts in the Separate Account are insufficient, from
the non-loaned portion of the General Account. At any time, the amount of the
outstanding loan under a Policy equals the sum of all loans (including due and
unpaid interest added to the loan balance) minus any loan repayments.
Interest Credited to Amounts Held as Collateral. As long as the Policy
is in force, we will credit the amount held in the General Account as Collateral
with interest at effective annual rates we declare, but not less than 4% or such
higher minimum rate required under state law. The rate will apply to the
calendar year which follows the date of determination.
Bonus. In Policy Years 11 and thereafter, we currently intend to credit
interest on amounts held in the General Account as Collateral at a rate 0.50%
per annum higher than for similar amounts for Policies still in their first ten
Policy Years. This bonus is not guaranteed, however. Upon prior notice to Owners
we may, in our sole discretion, decide not to credit the bonus.
Preferred Policy Loans. We also currently intend to make preferred
Policy loans available on the later of the Insured's Attained Age 65 and the
beginning of Policy Year 21. The maximum amounts of these preferred loans will
be 5% of Accumulated Value per year, with a cumulative maximum of 50% of
Accumulated Value. For these preferred Policy loans, the amounts held as
Collateral in the General Account will be credited with interest at an annual
rate of 6%. If both preferred and non-preferred loans exist at the same time, we
will first apply any loan repayment to the non-preferred loan. We are not
obligated to make preferred loans available, and will make such loans available
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 of your Policy. The effect on the
Accumulated Value and Death Benefit could be favorable or unfavorable. It will
depend on whether the investment performance of the Subaccounts, and the
interest credited to the non-loaned Accumulated Value in the General
Account, is less than or greater than the interest being credited on the amounts
held as Collateral in the General Account. Compared to a Policy under which no
loan is made, values under a Policy will be lower when the credited interest
rate on Collateral is less than the investment experience of assets held in the
Separate Account and interest credited to the non-Collateral Accumulated Value
in the General Account. The longer a loan is outstanding, the greater the effect
a Policy loan is likely to have. The Death Benefit will be reduced by the amount
of any outstanding Policy loan.
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<PAGE> 39
Loan Repayments. We will assume that any payments you make while there
is an outstanding Policy loan are premium payments, rather than loan repayments,
unless you specify in writing that a payment is a loan repayment. In the event
of a loan repayment, the amount held as Collateral in the General Account will
be reduced by an amount equal to the repayment, and such amount will be
transferred to the Subaccounts of the Separate Account and to the non-loaned
portion of the General Account based on the Net Premium allocations in effect at
the time of the repayment.
Lapse With Loans Outstanding. The amount of an outstanding loan under a
Policy plus any accrued interest on outstanding loans is not part of Cash
Surrender Value. Therefore, the larger the amount of an outstanding loan, the
more likely it is that the Policy could lapse. (See "How the Duration of the
Policy May Vary," Page 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 Insured. The Cash Surrender Value is the Accumulated
Value minus any Policy loan and accrued interest and less any Surrender Charge.
We will calculate the Cash Surrender Value on the Valuation Day we receive, at
our Home Office, your signed written surrender request, and the Policy. You may
not request a surrender over the telephone. Coverage under the Policy will end
on the day you mail or otherwise send your written surrender request and the
Policy to us. We will ordinarily mail surrender proceeds to you within seven
days of when we receive your request. (See "Other Policy Provisions - Payment of
Policy Benefits", Page .)
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 your Policy's Cash Surrender Value at any
time before the death of the Insured and, except for employee benefit plans,
after the first Policy Anniversary. The minimum amount which you may withdraw is
$500, except for employee benefit plans, where the minimum is $100. The maximum
Withdrawal is the Cash Surrender Value on the date of receipt of the Withdrawal
request, minus three times the Monthly Deduction for the most recent Monthly
Policy Date. A Withdrawal Charge will be deducted from the amount of the
Withdrawal. For a discussion of the Withdrawal Charge, see "Charges and
Deductions Withdrawal Charge" on Page .
You may specify how you would like us to take a Withdrawal from the
Subaccounts of the Separate Account. If you do not so specify, we will take the
Withdrawal from the Subaccounts in proportion to the Accumulated Value in each
Subaccount. If the Accumulated Value in one or more Subaccounts is insufficient
to carry out your instructions, we will not process the Withdrawal until we
receive further instructions from you. You may take Withdrawals from the General
Account only after the Accumulated Value in the Separate Account has been
exhausted.
The effect of a Withdrawal on the Death Benefit and Face Amount will
vary depending upon the Death Benefit Option in effect and whether the
Unadjusted Death Benefit is based on the applicable percentage of Accumulated
Value. (See "Death Benefit Options," Page .)
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<PAGE> 40
Option A. The effect of a Withdrawal on the Face Amount and Unadjusted
Death Benefit under Option A can be described as follows:
If the Face Amount divided by the applicable percentage of
Accumulated Value exceeds the Accumulated Value just after the
Withdrawal, a Withdrawal will reduce the Face Amount and the Unadjusted
Death Benefit by the lesser of such excess and the amount of the
Withdrawal.
For the purposes of this illustration (and the following
illustrations of Withdrawals), assume that the Attained Age of the
Insured is under 40 and there is no indebtedness. The applicable
percentage is 250% for an Insured with an Attained Age under 40.
Under Option A, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $30,000 will have an Unadjusted Death Benefit of
$300,000. Assume that you take a Withdrawal of $10,000. The Withdrawal
Charge will be $25 and the amount we pay you will be $9,975. The
Withdrawal will reduce the Accumulated Value to $20,000 ($30,000 -
$10,000) after the Withdrawal. The Face Amount divided by the
applicable percentage is $120,000 ($300,000 / 2.50), which exceeds the
Accumulated Value after the Withdrawal by $100,000 ($120,000 -
$20,000). The lesser of this excess and the amount of the Withdrawal is
$10,000, the amount of the Withdrawal. Therefore, the Unadjusted Death
Benefit and Face Amount will be reduced by $10,000 to $290,000.
If the Face Amount divided by the applicable percentage of
Accumulated Value does not exceed the Accumulated Value just after the
Withdrawal, then the Face Amount is not reduced. The Unadjusted Death
Benefit will be reduced by an amount equal to the reduction in
Accumulated Value times the applicable percentage (or equivalently, the
Unadjusted Death Benefit is equal to the new Accumulated Value times
the applicable percentage).
Under Option A, a policy with a Face Amount of $300,000 and an
Accumulated Value of $150,000 will have an Unadjusted Death Benefit of
$375,000 ($150,000 x 2.50). Assume that you take a Withdrawal of
$10,000. The Withdrawal Charge will be $25 and the amount we pay to you
will be $9,975. The Withdrawal will reduce the Accumulated Value to
$140,000 ($150,000 - $10,000). The Face Amount divided by the
applicable percentage is $120,000, which does not exceed the
Accumulated Value after the withdrawal. Therefore, the Face Amount
stays at $300,000 and the Unadjusted Death Benefit is $350,000
($140,000 x 2.50).
Option B. The Face Amount will never be decreased by a Withdrawal. A
Withdrawal will, however, always decrease the Death Benefit.
If the Unadjusted Death Benefit equals the Face Amount plus
the Accumulated Value, a Withdrawal will reduce the Accumulated Value
by the amount of the Withdrawal and thus the Unadjusted Death Benefit
will also be reduced by the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $90,000 will have an Unadjusted Death Benefit of
$390,000 ($300,000 + $90,000). Assume you take a Withdrawal of $20,000.
The Withdrawal Charge will be $25 and the amount we pay to you will be
$19,975. The Withdrawal will reduce the Accumulated Value to $70,000
($90,000 - $20,000) and the Unadjusted Death Benefit to $370,000
($300,000 + $70,000). The Face Amount is unchanged.
If the Unadjusted Death Benefit immediately prior to the
Withdrawal is based on the applicable percentage of Accumulated Value,
the Unadjusted Death Benefit will be reduced to equal the greater of
(a) the Face Amount plus the Accumulated Value after deducting the
amount of the Withdrawal and Withdrawal Charge and (b) the applicable
percentage of Accumulated Value after deducting the amount of the
Withdrawal.
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Under Option B, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $210,000 will have an Unadjusted Death Benefit of
$525,000 ($210,000 X 2.5). Assume you take a Withdrawal of $60,000. The
Withdrawal Charge will be $25 and the amount we pay to you will be
$59,975. The Withdrawal will reduce the Accumulated Value to $150,000
($210,000 - $60,000), and the Unadjusted Death Benefit to the greater
of (a) the Face Amount plus the Accumulated Value, or $450,000
($300,000 + $150,000) and (b) the Unadjusted Death Benefit based on the
applicable percentage of the Accumulated Value, or $375,000 ($150,000 X
2.50). Therefore, the Unadjusted Death Benefit will be $450,000. The
Face Amount is unchanged.
Any decrease in Face Amount due to a Withdrawal will first reduce the
most recent increase in Face Amount, then the most recent increases,
successively, and lastly, the Initial Face Amount.
Because a Withdrawal can affect the Face Amount and the Unadjusted
Death Benefit as described above, a Withdrawal may also affect the Net Amount at
Risk which is used to calculate the Cost of Insurance Charge under the Policy.
(See "Cost of Insurance Charge," Page .) Since a Withdrawal reduces the
Accumulated Value, the Cash Surrender Value of the Policy is reduced, thereby
increasing the likelihood that the Policy will lapse. (See "Policy Lapse," Page
.) A request for Withdrawal may not be allowed if such Withdrawal would reduce
the Face Amount below the Minimum Face Amount for the Policy. Also, if a
Withdrawal would result in cumulative premiums exceeding the maximum premium
limitations applicable under the Code for life insurance, we will not allow the
Withdrawal.
You may request a Withdrawal only by sending a signed written request to
us at our Home Office. You may not request a Withdrawal over the telephone. We
will ordinarily pay a Withdrawal within seven days of receiving at our Home
Office a valid Withdrawal request.
A Withdrawal of Cash Surrender Value may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page .)
FREE-LOOK PRIVILEGE
The Policy provides for a "free-look" period, during which you may
cancel the Policy and receive a refund equal to the premiums paid on the Policy.
This free-look period ends on the latest of:
(a) 45 days after Part A of the application for the Policy is signed
(b) 10 days after you receive the Policy
(c) 10 days after we mail the Notice of Withdrawal Right to you, or
(d) any longer period provided by state law.
To cancel your Policy, you must return it to us or to our agent within the free
look period with a written request for cancellation.
TELEPHONE TRANSACTION PRIVILEGE
If you elect the telephone transaction privilege, either on the
application for the Policy or thereafter by written authorization, you may
effect changes in premium allocation, transfers, and loans of up to $25,000; and
initiate or make changes in Dollar Cost Averaging or Portfolio Rebalancing by
providing instructions to us at our Home Office over the telephone. We may
suspend telephone transaction privileges at any time, for any reason, if we deem
such suspension to be in the best interests of Policy Owners. You may, on the
application or by a written authorization, authorize your National Life agent to
provide telephone instructions on your behalf.
We will employ reasonable procedures to confirm that instructions we
receive by telephone are genuine. If we follow these procedures, we will not be
liable for any losses due to unauthorized or fraudulent instructions. We may be
liable for any such losses if we do not follow these reasonable procedures. The
procedures to be followed for telephone transfers will include one or more of
the following:
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- requiring some form of personal identification prior to acting on
instructions received by telephone
- providing written confirmation of the transaction, and
- making a tape recording of the instructions given by telephone.
OTHER TRANSFER RIGHTS
Transfer Right for Policy. During the first two years following Policy
issue, you may, on one occasion, transfer the entire Accumulated Value in the
Separate Account to the General Account, without regard to any limits on
transfers or free transfers.
Transfer Right for Change in Investment Policy. If the investment
policy of a Subaccount of the Separate Account is materially changed, you may
transfer the portion of the Accumulated Value in that Subaccount to another
Subaccount or to the General Account, without regard to any limits on transfers
or free transfers.
Exchange Right for Connecticut Residents. For eighteen months after the
Date of Issue, Connecticut residents may exchange the Policy for any flexible
premium adjustable benefit life insurance policy offered for sale by us, the
benefits of which policy do not vary with the investment performance of a
separate account. Evidence of insurability will not be required to effect this
exchange.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer, at no charge to you, two automated fund management
features. Only one of these features may be active for any single Policy at any
time. We are not legally obligated to continue to offer these features. Although
we have no current intention to do so, we may cease offering one or both these
features at any time, after providing 60 days prior written notice to all Owners
who are then utilizing the features being discontinued
Dollar Cost Averaging. This feature permits you to automatically
transfer funds from the Money Market Subaccount to any other Subaccounts on a
monthly basis. You may elect Dollar Cost Averaging at issue by marking the
appropriate box on the initial application, and completing the appropriate
instructions. You may also begin a Dollar Cost Averaging program after issue by
filling out similar information on a change request form and sending it to us at
our Home Office.
If you elect this feature, we will take the amount to be transferred
from the Money Market Subaccount and transfer it to the Subaccount or
Subaccounts designated to receive the funds, each month on the Monthly Policy
Date. If you elect Dollar Cost Averaging on your application for the Policy, it
will start with the Monthly Policy Date after the date that is 20 days after
issue. If you begin a Dollar Cost Averaging program after the free look period
is over, it will start on the next Monthly Policy Date. Dollar Cost Averaging
will continue until the amount in the Money Market Subaccount is depleted. The
minimum monthly transfer by Dollar Cost Averaging is $100, except for the
transfer which reduces the amount in the Money Market Subaccount to zero. You
may discontinue Dollar Cost Averaging at any time by sending an appropriate
change request form to the Home Office. You may not use the dollar cost
averaging feature to transfer Accumulated Value to the General Account.
Dollar Cost Averaging allows you to move funds into the various
investment types on a more gradual and systematic basis than the frequency on
which you pay premiums. The dollar cost averaging method of investment is
designed to reduce the risk of making purchases only when the price of units is
high. The periodic investment of the same amount will result in higher numbers
of units being purchased when unit prices are lower, and lower numbers of units
being purchased when unit prices are higher. This technique will not, however,
assure a profit or protect against a loss in declining markets. Moreover, for
the dollar cost averaging technique to be effective, amounts should be available
for allocation from the Money Market Subaccount through periods of low price
levels as well as higher price levels.
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Portfolio Rebalancing. This feature permits you to automatically
rebalance the value in the Subaccounts on a semi-annual basis, based on your
premium allocation percentages in effect at the time of the rebalancing. You may
elect it at issue by marking the appropriate box on the application, or, after
issue, by completing a change request form and sending it to our Home Office.
In Policies utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer will take place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages,
starting with the Monthly Policy Date six months after the Date of Issue, and
then on each Monthly Policy Date six months thereafter. Policies electing
Portfolio Rebalancing after issue will have the first automated transfer occur
as of the Monthly Policy Date on or next following the date we receive the
election at our Home Office, and subsequent rebalancing transfers will occur
every six months from that date. You may discontinue Portfolio Rebalancing at
any time by submitting an appropriate change request form to us at our Home
Office.
If you change your Policy's premium allocation percentages, Portfolio
Rebalancing will automatically be discontinued unless you specifically direct
otherwise.
Portfolio Rebalancing will result in periodic transfers out of
Subaccounts that have had relatively favorable investment performance in
relation to the other Subaccounts to which a Policy allocates premiums, and into
Subaccounts which have had relatively unfavorable investment performance in
relation to the other Subaccounts to which the Policy allocates premiums.
Portfolio rebalancing does not guarantee a profit or protect against a loss.
POLICY RIGHTS UNDER CERTAIN PLANS
Policies may be purchased in connection with a plan sponsored by an
employer. In such cases, all rights under the Policy rest with the Policy Owner,
which may be the employer or other obligor under the plan, and benefits
available to participants under the plan will be governed solely by the
provisions of the plan. Accordingly, some of the options and elections under the
Policy may not be available to participants under the provisions of the plan. In
such cases, participants should contact their employers for information
regarding the specifics of the plan.
THE GENERAL ACCOUNT
You may allocate some or all of your Net Premiums, and transfer some or
all of the Accumulated Value of your Policy to our General Account. We credit
interest on Net Premiums and Accumulated Value allocated to the General Account
at rates we declare. These rates will not be less than 4%. The principal, after
deductions, is also guaranteed. The General Account supports National Life 's
insurance and annuity obligations. All assets in the General Account are subject
to National Life's general liabilities from business operations.
The General Account has not, and is not required to be, registered with
the SEC under the Securities Act of 1933. The General Account has not been
registered as an investment company under the Investment Company Act of 1940.
Therefore, the General Account and the interests therein are generally not
subject to regulation under the 1933 Act or the 1940 Act. The disclosures
relating to this account which are included in this Prospectus are for your
information and have not been reviewed by the SEC. However, such disclosures may
be subject to certain generally applicable provisions of the Federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
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The Accumulated Value not held as Collateral in the General Account is
guaranteed to accumulate at a minimum effective annual interest rate of 4%. We
may credit the non-loaned Accumulated Value in the General Account with current
rates in excess of the minimum guarantee, but we are not obligated to do so. We
have no specific formula for determining current interest rates. Since we
anticipate changing the current interest rate from time to time, in our sole
discretion, allocations to the General Account made at different times are
likely to be credited with different current interest rates. We will declare an
interest rate each month to apply to amounts allocated or transferred to the
General Account in that month. The rate declared on such amounts will remain in
effect for twelve months. At the end of the 12-month period, we may declare a
new current interest rate on such amounts and accrued interest thereon (which
may be a different current interest rate than the current interest rate on new
allocations to the General Account on that date). We will determine any interest
credited on the amounts in the General Account in excess of the minimum
guaranteed rate of 4% per year in our sole discretion. You assume the risk that
interest credited may not exceed the guaranteed minimum rate. Amounts allocated
to the General Account will not share in the investment performance of our
General Account.
Amounts deducted from the non-loaned Accumulated Value in the General
Account for Withdrawals, Policy loans, transfers to the Separate Account,
Monthly Deductions or other charges are, for the purpose of crediting interest,
accounted for on a last in, first out ("LIFO") method.
We may change the method of crediting interest from time to time,
provided that such changes do not have the effect of reducing the guaranteed
rate of interest below 4% per annum or shortening the period for which the
interest rate applies to less than 12 months.
Bonus Interest. We currently intend to credit interest on non-loaned
Accumulated Value in the General Account for Policies in Policy Year 11 and
thereafter at rates which are 0.50% per annum higher than those that apply to
Policies still in their first ten Policy Years. This bonus is not guaranteed,
however, except as required by the state of issue. We may in our sole
discretion, upon prior notice to Owners, decide not to credit the bonus.
Calculation of Non-loaned Accumulated Value in the General Account. The
non-loaned Accumulated Value in the General Account at any time is equal to
amounts allocated and transferred to it plus interest credited to it, minus
amounts deducted, transferred or withdrawn from it.
TRANSFERS FROM GENERAL ACCOUNT
We allow only one transfer in each Policy Year from the amount of
non-loaned Accumulated Value in the General Account to any or all of the
Subaccounts of the Separate Account. The amount you transfer from the General
Account may not exceed the greater of 25% of the value of the non-loaned
Accumulated Value in such account at the time of transfer, or $1000. We will
make the transfer as of the Valuation Day we receive your written or telephone
request at our Home Office.
OTHER POLICY PROVISIONS
Indefinite Policy Duration. The Policy can remain in force indefinitely
(in Texas and Maryland, however, the Policy matures at Attained Age 99 at which
time we will pay the Cash Surrender Value to you in one sum unless you have
chosen a Payment Option, and the Policy will terminate). However, for a Policy
to remain in force after the Insured reaches Attained Age 99, if the Face Amount
is greater than the Accumulated Value, the Face Amount will automatically be
decreased to the current Accumulated Value. Also, at Attained Age 99 Option B
automatically becomes Option A. No premium payments are allowed after Attained
Age 99, although loan repayments are allowed. The tax treatment of a Policy's
Accumulated Value after Age 100 is unclear, and you may wish to discuss this
treatment with a tax advisor.
Payment of Policy Benefits. You may decide the form in which we pay
Death Benefit proceeds. During the Insured's lifetime, you may arrange for the
Death Benefit to be paid in a lump sum or under a
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Settlement Option. These choices are also available upon surrender of the Policy
for its Cash Surrender Value. If you do not make an election, payment will be
made in a lump sum. The Beneficiary may also arrange for payment of the Death
Benefit in a lump sum or under a Settlement Option. If paid in a lump sum, we
will ordinarily pay the Death Benefit to the Beneficiary within seven days after
we receive proof of the Insured's death at our Home Office, and all other
requirements are satisfied. If paid under a Settlement Option, we will apply the
Death Benefit to the Settlement Option within seven days after we receive proof
of the Insured's death at our Home Office, and all other requirements are
satisfied.
We will pay interest on the Death Benefit from the date of death until
payment is made. The interest rate will be the highest of (a) 4% per annum, (b)
any higher rate we declare, or (c) any higher rate required by law.
We will normally pay proceeds of a surrender, Withdrawal, or Policy
loan within seven days of when we receive your written request at our Home
Office in a form satisfactory to us.
We will generally determine the amount of a payment on the Valuation
Day we receive all required documents. However, we may defer the determination
or payment of such amounts if the date for determining such amounts falls within
any period during which:
(1) the disposal or valuation of a Subaccount's assets is not
reasonably practicable because the New York Stock Exchange is
closed or conditions are such that, under the SEC's rules and
regulations, trading is restricted or an emergency is deemed to
exist; or
(2) the SEC by order permits postponement of such actions for the
protection of our policyholders.
We also may defer the determination or payment of amounts from the
General Account for up to six months.
Transactions will not be processed on the following days: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, the day after Thanksgiving and Christmas Day. In addition, Premium
Payments will not be allocated and transactions will not be effected to the
Money Market Subaccount on Columbus Day and Veterans Day.
We may postpone any payment under the Policy derived from an amount
paid by check or draft until we are satisfied that the check or draft has been
paid by the bank upon which it was drawn.
The Contract. The Policy and the application are the entire contract.
Only statements made in the application can be used to void the Policy or deny a
claim. The statements are considered representations and not warranties. Only
one of National Life's duly authorized officers or registrars can agree to
change or waive any provisions of the Policy, and only in writing. As a result
of differences in applicable state laws, certain provisions of the Policy may
vary from state to state.
Ownership. The Owner is the Insured unless a different Owner is named
in the application or thereafter changed. While the Insured is living, the Owner
is entitled to exercise any of the rights stated in the Policy or otherwise
granted by us. If the Insured and Owner are not the same, and the Owner dies
before the Insured, these rights will vest in the estate of the Owner, unless
otherwise provided.
Beneficiary. You designate the Beneficiary in the application for the
Policy. You may change the Beneficiary during the Insured's lifetime by sending
us a written notice. The interest of any Beneficiary who dies before the Insured
shall vest in you unless you otherwise provide.
Change of Owner and Beneficiary. As long as the Policy is in force, you
may change the Owner or Beneficiary by sending us an acceptable written request.
The change will take effect as of the date the request is signed, whether or not
the Insured is living when we receive the request. We will not be responsible
for any payment made or action taken before we receive the written request.
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Split Dollar Arrangements. You may enter into a Split Dollar
Arrangement among the Owners or other persons under which the payment of
premiums and the right to receive the benefits under the Policy (i.e., Cash
Surrender Value or Death Benefit) are split between the parties. There are
different ways of allocating such rights.
For example, an employer and employee might agree that under a Policy
on the life of the employee, the employer will pay the premiums and will have
the right to receive the Cash Surrender Value. The employee may designate the
Beneficiary to receive any Death Benefit in excess of the Cash Surrender Value.
If the employee dies while such an arrangement is in effect, the employer would
receive from the Death Benefit the amount which the employer would have been
entitled to receive upon surrender of the Policy and the employee's Beneficiary
would receive the balance of the proceeds.
No transfer of Policy rights pursuant to a Split Dollar Arrangement
will be binding on us unless it is in writing and received by us. We do not
assess any specific charge for Split Dollar Arrangements.
The parties who elect to enter into a Split Dollar Arrangement should
consult their own tax advisers regarding the tax consequences of such an
arrangement.
Assignments. You may assign any and all your rights under the Policy.
We are not bound by an assignment unless it is in writing and we receive it at
our Home Office. We assume no responsibility for determining whether an
assignment is valid, or the extent of the assignee's interest. All assignments
will be subject to any Policy loan. The interest of any Beneficiary or other
person will be subordinate to any assignment. A payee who is not also the Owner
may not assign or encumber Policy benefits, and to the extent permitted by
applicable law, such benefits are not subject to any legal process for the
payment of any claim against the payee.
Misstatement of Age and Sex. If the age or sex of the Insured at the
Date of Issue has been misstated in the application, we will adjust the
Accumulated Value of the Policy to be the amount that it would have been had the
Cost of Insurance Charges deducted been based on the correct age and sex, or as
otherwise required by state law. The adjustment will take place on the Monthly
Policy Date on or after the date on which we have proof to our satisfaction of
the misstatement. If the Insured has died, we will adjust the Accumulated Value
as of the last Monthly Policy Date prior to the Insured's death; however, if the
Accumulated Value is insufficient for that adjustment, the amount of the
Unadjusted Death Benefit will also be adjusted.
Suicide. If the Insured dies by suicide, while sane or insane, within
two years from the Date of Issue of the Policy (except where state law requires
a shorter period), or within two years of the effective date of a reinstatement
(unless otherwise required by state law), our liability is limited to the
payment to the Beneficiary of a sum equal to the premiums paid less any Policy
loan and accrued interest and any Withdrawals (since the date of reinstatement,
in the case of a suicide within two years of the effective date of a
reinstatement), or other reduced amount provided by state law.
If the Insured commits suicide within two years (or shorter period
required by state law) from the effective date of any Policy change which
increases the Unadjusted Death Benefit and for which an application is required,
the amount which we will pay with respect to the increase will be the Cost of
Insurance Charges previously made for such increase (unless otherwise required
by state law).
Incontestability. The Policy will be incontestable after it has been in
force during the Insured's lifetime for two years from the Date of Issue (or
such other date as required by state law). Similar incontestability will apply
to an increase in Face Amount or reinstatement after it has been in force during
the Insured's lifetime for two years from its effective date.
Before such times, however, we may contest the validity of the Policy
(or changes) based on material misstatements in the initial or any subsequent
application.
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Arbitration. Except where otherwise required by state law, the Policy
provides that any controversy under the Policy shall be settled by arbitration
in the state of residence of the Owner, in accordance with the rules of the
American Arbitration Association or any similar rules to which the parties
agree. Any award rendered through arbitration will be final on all parties, and
the award may be enforced in court.
The purpose of the arbitration is to provide an alternative dispute
resolution mechanism for investors that may be more efficient and less costly
than court litigation. You should be aware, however, that arbitration is, as
noted above, final and binding on all parties, and that the right to seek
remedies in court is waived, including the right to jury trial. Pre-arbitration
discovery is generally more limited than and different from court discovery
procedures, and the arbitrator's award is not required to include factual
findings or legal reasoning. Any party's right to appeal or to seek modification
of rulings by the arbitrators is strictly limited.
Dividends. The Policy is participating; however, no dividends are
expected to be paid on the Policy. If dividends are ever declared, they will be
paid in cash. At the time of the insured person's death, the Death Benefit will
be increased by dividends payable, if any.
Correspondence. All correspondence to you is deemed to have been sent
to you if mailed to you at your last address known to us.
Settlement Options. In lieu of a single sum payment on death or
surrender, you may elect to apply the Death Benefit under any one of the
fixed-benefit Settlement Options provided in the Policy. The options are
described below.
Payment of Interest Only. We will pay interest at a rate of 3.5% per
year on the amount of the proceeds retained by us. Upon the earlier of the
payee's death or the end of a chosen period, the proceeds retained will be paid
to the Payee or his or her estate.
Payments for a Stated Time. We will make equal monthly payments, based
on an interest rate of 3.5% per annum, for the number of years you select.
Payments for Life. We will make equal monthly payments, based on an
interest rate of 3.5% per annum, for a guaranteed period and thereafter during
the life of a chosen person. You may elect guaranteed payment periods for 0, 10,
15, or 20 years, or for a refund period, at the end of which the total payments
will equal the proceeds placed under the option.
Payments of a Stated Amount. We will make equal monthly payments until
the proceeds, with interest at 3.5% per year on the unpaid balance, have been
paid in full. The total payments in any year must be at least $10 per month for
each thousand dollars of proceeds placed under this option.
Life Annuity. We will make equal monthly payments in the same manner as
in the above Payments for Life option except that the amount of each payment
will be the monthly income provided by our then current settlement rates on the
date the proceeds become payable. No additional interest will be paid.
Joint and Two Thirds Annuity. We will make equal monthly payments,
based on an interest rate of 3.5% per year, while two chosen persons are both
living. Upon the death of either, two-thirds of the amount of those payments
will continue to be made during the life of the survivor. We may require proof
of the ages of the chosen persons.
50% Survivor Annuity. We will make equal monthly payments, based on an
interest rate of 3.5% per year, during the lifetime of the chosen primary
person. Upon the death of the chosen primary person, 50% of the amount of those
payments will continue to be made during the lifetime of the secondary chosen
person. We may require proof of the ages of the chosen persons.
We may pay interest in excess of the stated amounts under the first
four options listed above, but not the last three. Under the first two, and
fourth options above, the Payee has the right to change options or to withdraw
all or part of the remaining proceeds. For additional information concerning
the payment options, see the Policy.
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OPTIONAL BENEFITS
You may include the following benefits, which are subject to the
restrictions and limitations set forth in the applicable Policy Riders, in your
Policy at your option. Election of any of these optional benefits involves an
additional cost.
Waiver of Monthly Deductions. If you elect the Waiver of Monthly
Deductions Rider, we will waive Monthly Deductions against the Policy if the
Insured becomes totally disabled, before age 65 and for at least 120 days. If
total disability occurs after age 60 and before age 65, then we will waive
Monthly Deductions only until the Insured reaches Attained Age 65, or for a
period of two years, if longer. The monthly cost of this Rider is based on
sex-distinct rates (except for Policies issued in states which require "unisex"
policies or in conjunction with employee benefit plans, where the cost of this
Rider will not vary by sex) multiplied by the Monthly Deduction on the Policy.
We will add this cost to the Monthly Deduction on the Policy.
Accidental Death Benefit. The Accidental Death Rider provides for an
increased Death Benefit in the event that the Insured dies in an accident. If
you elect this Rider, we will add the monthly cost of this Rider to the Monthly
Deduction on the Policy.
Guaranteed Insurability Option. This Rider permits you to increase the
Face Amount of the Policy, within certain limits, without being required to
submit satisfactory proof of insurability at the time of the request for the
increase. Again, if you elect this Rider, we will add the monthly cost of this
Rider to the Monthly Deduction on the Policy.
Guaranteed Death Benefit. If you choose this Rider, we will guarantee
that the Policy will not lapse prior to the Insured's Attained Age 70, or 20
years from the Date of Issue of the Policy, if longer, regardless of the
Policy's investment performance. To keep this Rider in force, you must pay
cumulative premiums greater than the Minimum Guarantee Premium from the Date of
Issue. The Minimum Guarantee Premium for Policies with the Guaranteed Death
Benefit Rider will be higher than for those without the Guaranteed Death Benefit
Rider, all other things being equal. We will test the Policy monthly for this
qualification, and if not met, we will send you a notice, and you will have 61
days from the date we mailed the notice to pay a premium sufficient to keep the
Rider in force. The premium required will be the Minimum Guarantee Premium from
the Date of Issue, plus two times the Minimum Monthly Premium, minus premiums
previously paid. The Rider will be cancelled if a sufficient premium is not paid
during that 61-day period. If cancelled, the Rider cannot be reinstated
The cost of the Guaranteed Death Benefit Rider is $0.01 per thousand of
Face Amount per month. This Rider is available only at issue, and only for Issue
Ages 0-65.
If while the Guaranteed Death Benefit Rider is in force, the
Accumulated Value of the Policy is not sufficient to cover the Monthly
Deductions, Monthly Deductions will be made until the Accumulated Value of the
Policy is exhausted, and will thereafter be deferred, and collected at such time
as the Policy has positive Accumulated Value.
If you increase the Face Amount of a Policy subject to the Guaranteed
Death Benefit Rider, the Rider's guarantee will extend to the increased Face
Amount. This will result in increased Minimum Guarantee Premiums.
If you have elected both the Waiver of Monthly Deductions Rider and the
Guaranteed Death Benefit Rider, and Monthly Deductions are waived because of
total disability, then we will also waive the Minimum Guarantee Premiums
required to keep the Guaranteed Death Benefit Rider in force during the period
that Monthly Deductions are being waived.
If you wish to keep this Rider in force, you must limit Withdrawals and
Policy loans to the excess of premiums paid over the sum of the Minimum Monthly
Premiums in effect since the Date of Issue. If you take a Policy loan or
Withdrawal for an
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amount greater than such excess, the Guaranteed Death Benefit Rider will enter a
61-day lapse-pending notification period, and will be cancelled if you do not
pay a sufficient premium.
THE GUARANTEED DEATH BENEFIT RIDER IS NOT AVAILABLE IN TEXAS OR MASSACHUSETTS.
Rider for Disability Benefit - Payment of Mission Costs. If you are buying
your policy through a registered representative who is an agent of Beneficial
Life Insurance Company, you may at your option include in your policy the Rider
for Disability - Payment of Mission Costs. Election of this benefit involves
additional cost.
This Rider, which is subject to the restrictions and limitations set forth
in the Rider, provides a monthly benefit equal to the expenses of any dependent
children (under age 30) participating in voluntary mission service, up to a
maximum of $375 per month per child, while the Insured is totally disabled. The
maximum benefit duration is 24 months for each child. The maximum benefit will
be adjusted for inflation at an annual rate of 3%.
Benefits will be paid when the insured has been continuously disabled for
a period of six months due to disabilities occurring prior to age 65. After six
months of continuous disability, benefit payments are retroactive to the
beginning of the period. Coverage ceases at age 65. For Insureds disabled prior
to age 65, benefit eligibility continues until disability ends.
The monthly cost of this Rider is level, and varies by the age at issue
and the sex of the insured (except for Policies issued in states which require
"unisex" Policies, where the cost of this Rider will not vary by sex). The cost
of the Rider does not vary by the number of dependent children. Depending on the
age and sex of the Insured, the monthly cost of the Rider will range from $1.65
to $4.25. The monthly cost of this Rider will be added to the Monthly Deduction
on the Policy.
Accelerated Benefits Rider. This Rider pays a reduced benefit prior to the
death of the Insured, in certain circumstances where a terminal or chronic
illness creates a need for access to the death benefit. This Rider is not
available in all states, and its terms may vary by state. There is no cost for
this Rider. It can be included in a Policy at issue, or can be added after
issue, for Insureds ages 0-85. The maximum amount payable under the Rider is
$500,000. An Insured who has a chronic illness, as defined in the Rider, at the
time the Rider is issued, may not receive benefits under the Rider for five
years after its issue.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the Federal
income tax considerations associated with the Policy and does not purport to be
complete or to cover all tax situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon understanding of the present
Federal income tax laws. No representation is made as to the likelihood of
continuation of the present Federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for Federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under Federal tax law, a life insurance policy must satisfy certain
requirements which are set forth in the Internal Revenue Code. Guidance as to
how these requirements are to be applied is limited. Nevertheless, National Life
believes that a Policy issued on the basis of a standard rate class should
satisfy the applicable requirements. There is less guidance, however, with
respect to a policy issued on a substandard basis (i.e., a rate class involving
higher than standard mortality risk) and it is not clear whether such a policy
will in all cases satisfy the applicable requirements, particularly if the Owner
pays the full amount of premiums permitted under the Policy. Nevertheless,
National Life believes it reasonable to conclude that such a Policy should be
treated as a life insurance contract for Federal income tax purposes. If it is
subsequently determined that a Policy does not satisfy the applicable
requirements, National Life may take appropriate steps to bring the policy into
compliance with such requirements and National Life reserves the right to modify
the policy as necessary in order to do so.
In certain circumstances, owners of variable life insurance policies
have been considered for Federal income tax purposes to be the owners of the
assets of separate accounts supporting their contracts due to their ability to
exercise investment control over those assets. Where this is the case, the
policyowners have been currently taxed on income and gains attributable to
separate account assets. There is little guidance in this area, and some
features of the policy, such as the flexibility of Policy Owners to allocate
premium payments and Accumulated Values, have not been explicitly addressed in
published rulings. While National Life believes that the policy does not give
Policy Owners investment control over Separate Account assets, we reserve the
right to modify the policy as necessary to prevent the Policy Owner from being
treated as the owner of the Separate Account assets supporting the Policy.
In addition, the Code requires that the investments of the Separate
Account be "adequately diversified" in order for the policy to be treated as a
life insurance contract for Federal income tax purposes. It is intended that the
Separate Account, through the Funds, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
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<PAGE> 50
TAX TREATMENT OF POLICY BENEFITS
In General. National Life believes that the death benefit under a
Policy should be excludible from the gross income of the beneficiary. Federal,
state and local estate, inheritance, transfer, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy Owner or beneficiary. A tax advisor should be consulted on these
consequences.
Depending on the circumstances, the exchange of a Policy, an increase
or decrease of a Policy's Face Amount, a change in the Policy's Death Benefit
Option (i.e., a change from Death Benefit Option A to Death Benefit Option B or
vice versa, a Policy loan, a Withdrawal, a surrender, a change in ownership, or
an assignment of the Policy may have Federal income tax consequences. A tax
advisor should be consulted before effecting any of these policy changes.
Generally, as long as you are not subject to the Alternative Minimum
Tax, you will not be deemed to be in constructive receipt of the Account Value,
including increments thereof, until there is a distribution. The tax
consequences of distributions from, and loans taken from or secured by, a Policy
depend upon whether the Policy is classified as a "Modified Endowment Contract".
Whether a Policy is or is not a Modified Endowment Contract, upon a complete
surrender or lapse of a Policy or when benefits are paid at a Policy's maturity
date, if the amount received plus the amount of indebtedness exceeds the total
investment in the Policy, the excess will generally be treated as ordinary
income subject to tax.
Modified Endowment Contracts. Under the Internal Revenue Code, certain
life insurance contracts are classified as "Modified Endowment Contracts," with
less favorable tax treatment than other life insurance contracts. Due to the
flexibility of the Policy as to premium payments and benefits, the individual
circumstances of each Policy will determine whether it is classified as a
Modified Endowment Contract. The rules are too complex to be summarized here,
but generally depend on the amount of premium payments made during the first
seven policy years. Certain changes in a policy after it is issued could also
cause it to be classified as a Modified Endowment Contract. A current or
prospective Policy Owner should consult with a competent advisor to determine
whether a policy transaction will cause the Policy to be classified as a
Modified Endowment Contract.
Distributions Other Than Death Benefits from Modified Endowment
Contracts. Policies classified as Modified Endowment Contracts are subject to
the following tax rules:
(1) All distributions other than death benefits from a Modified
Endowment Contract, including distributions upon surrender and
withdrawals, will be treated first as distributions of gain
taxable as ordinary income and as tax-free recovery of the
Policy Owner's investment in the Policy only after all gain
has been distributed.
(2) Loans taken from or secured by a Policy classified as a
Modified Endowment Contract are treated as distributions and
taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount
subject to tax except where the distribution or loan is made
when the Policy Owner has attained age 59-1/2 or is 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.
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<PAGE> 51
Loans from or secured by a Policy that is not classified as a Modified
Endowment Contract are generally not treated as distributions. However, the tax
consequences associated with preferred Policy loans is less clear and a tax
adviser should be consulted about such loans.
Finally, neither distributions from nor loans from or secured by a
Policy that is not a Modified Endowment Contract are subject to the 10 percent
additional income tax.
Investment in the Policy. Your investment in the Policy is generally
your aggregate premium payments. When a distribution is taken from the Policy,
your investment in the Policy is reduced by the amount of the distribution that
is tax-free.
Policy Loan Interest. In general, interest paid on any loan under a
Policy will not be deductible.
Multiple Policies. All Modified Endowment Contracts that are issued by
National Life (or its affiliates) to the same Policy Owner during any calendar
year are treated as one Modified Endowment Contract for purposes of determining
the amount includible in the Policy Owner's income when a taxable distribution
occurs.
Business Uses of the Policy. Businesses can use the Policy in various
arrangements, including nonqualified deferred compensation or salary continuance
plans, split dollar insurance plans, executive bonus plans, tax exempt and
nonexempt welfare benefit plans, retiree medical benefit plans and others. The
tax consequences of such plans may vary depending on the particular facts and
circumstances. If you are purchasing the Policy for any arrangement the value of
which depends in part on its tax consequences, you should consult a qualified
tax adviser. In recent years, moreover, Congress has adopted new rules relating
to life insurance owned by businesses. Any business contemplating the purchase
of a new Policy or a change in an existing Policy should consult a tax adviser.
Continuation Beyond Age 100. The tax consequences of continuing the
Policy beyond the insured's 100th year are unclear. You should consult a tax
adviser if you intend to keep the Policy in force beyond the insured's 100th
year.
SPECIAL RULES FOR EMPLOYEE BENEFIT PLANS
If a trustee under a pension or profit-sharing plan, or similar
deferred compensation arrangement, owns a Policy, the Federal and state income
and estate tax consequences could differ. A tax adviser should be consulted with
respect to such consequences. Policies owned under these types of plans may also
be subject to restrictions under the Employee Retirement Income Security Act of
1974 ("ERISA"). You should consult a qualified adviser regarding ERISA.
The amounts of life insurance that may be purchased on behalf of a
participant in a pension or profit-sharing plan are limited.
The current cost of insurance for the net amount at risk is treated as
a "current fringe benefit" and must be included annually in the plan
participant's gross income. We report this cost (generally referred to as the
"P.S. 58" cost) to the participant annually.
If the plan participant dies while covered by the plan and the Policy
proceeds are paid to the participant's beneficiary, then the excess of the death
benefit over the Accumulated Value is not taxable. However, the Accumulated
Value will generally be taxable to the extent it exceeds the participant's cost
basis in the Policy.
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<PAGE> 52
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the policy could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Policy.
POSSIBLE CHARGES FOR NATIONAL LIFE'S TAXES
At the present time, National Life makes no charge for any Federal,
state or local taxes (other than the charge for state premium taxes and the DAC
tax) that may be attributable to the Subaccounts or to the policies. National
Life reserves the right to charge the Subaccounts for any future taxes or
economic burden National Life may incur.
POLICIES ISSUED IN CONJUNCTION WITH EMPLOYEE BENEFIT PLANS
Policies may be acquired in conjunction with employee benefit plans,
including the funding of qualified pension plans meeting the requirements of
Section 401 of the Code.
For employee benefit plan Policies, the maximum cost of insurance rates
used to determine the monthly Cost of Insurance Charge are based on the
Commissioners' 1980 Standard Ordinary Mortality Tables NB and SB. Under these
Tables, mortality rates are the same for male and female Insureds of a
particular Attained Age and Rate Class. (See "Cost of Insurance Charge," Page .)
Illustrations reflecting the premiums and charges for employee benefit
plan Policies will be provided upon request to purchasers of such Policies.
There is no provision for misstatement of sex in the employee benefit
plan Policies. (See "Misstatement of Age and Sex," Page .) Also, the rates used
to determine the amount payable under a particular Settlement Option will be the
same for male and female Insureds. (See "Settlement Options," Page .)
LEGAL DEVELOPMENTS REGARDING UNISEX ACTUARIAL TABLES
In 1983, the United States Supreme Court held in Arizona Governing
Committee v. Norris that optional annuity benefits provided under an employee's
deferred compensation plan could not, under Title VII of the Civil Rights Act of
1964, vary between men and women on the basis of sex. In that case, the Court
applied its decision only to benefits derived from contributions made on or
after August 1, 1983. Subsequent decisions of lower federal courts indicate that
in other factual circumstances the Title VII prohibition of sex-distinct
benefits may apply at an earlier date. In addition, legislative, regulatory, or
decisional authority of some states may prohibit use of sex-distinct mortality
tables under certain circumstances. The Policies offered by this Prospectus,
other than Policies issued in states which require "unisex" policies (currently
Montana) and employee benefit plan Policies (see "Policies Issued in Conjunction
with Employee Benefit Plans," Page ) are based upon actuarial tables which
distinguish between men and women and, thus, the Policy provides different
benefits to men and women of the same age. Accordingly, employers and employee
organizations should consider, in consultation with legal counsel, the impact of
these authorities on any employment-related insurance or benefits program before
purchasing the Policy and in determining whether an employee benefit plan Policy
is appropriate.
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<PAGE> 53
VOTING RIGHTS
We will invest all of the assets held in the Subaccounts of the
Separate Account in shares of corresponding Portfolios of the Funds. The Funds
do not hold routine annual shareholders' meetings. Shareholders' meetings will
be called whenever each Fund believes that it is necessary to vote to elect the
Board of Directors of the Fund and to vote upon certain other matters that are
required to be approved or ratified by the shareholders of a mutual fund.
We are the legal owner of Fund shares and as such have the right to
vote upon any matter that may be voted upon at a shareholders' meeting. However,
in accordance with the SEC's view of present applicable law, we will vote the
shares of the Funds at meetings of the shareholders of the appropriate Fund or
Portfolio in accordance with instructions of Policy Owners. We will vote Fund
shares held in each Subaccount of the Separate Account for which Owners do not
send timely instructions in the same proportion as those shares in that
Subaccount for which instructions are received.
If you have a voting interest, we will send you proxy material and a
form for giving voting instructions. You may vote, by proxy or in person, only
as to the Portfolios that correspond to the Subaccounts in which your Policy
values are allocated. We will determine the number of shares held in each
Subaccount attributable to a Policy for which you may provide voting
instructions by dividing the Policy's Accumulated Value in that account by the
net asset value of one share of the corresponding Portfolio as of the record
date for the shareholder meeting. We will count fractional shares. For each
share of a Portfolio for which Owners have no interest, we will cast votes, for
or against any matter, in the same proportion as Owners provide voting
instructions.
If required by state insurance officials, we may disregard voting
instructions if they would require shares to be voted so as to cause a change in
the investment objectives or policies of one or more of the Portfolios, or to
approve or disapprove an investment policy or investment adviser of one or more
of the Portfolios. In addition, we may disregard voting instructions in favor of
certain changes initiated by an Owner or the Fund's Board of Directors if our
disapproval of the change is reasonable and is based on a good faith
determination that the change would be contrary to state law or otherwise
inappropriate, considering the portfolio's objectives and purposes, and the
effect the change would have on us. If we disregard voting instructions, we will
advise you of that action and our reasons in the next semi-annual report to
Owners.
Shares of the Funds are currently being offered to variable life
insurance and variable annuity separate accounts of life insurance companies
other than National Life that are not affiliated with National Life. National
Life understands that shares of these Funds also will be voted by such other
life insurance companies in accordance with instructions from their
policyholders invested in such separate accounts. This will dilute the effect of
your voting instructions.
CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under
applicable Federal securities laws. If changes in these laws or regulations
eliminate the necessity to solicit your voting instructions or restrict such
voting rights, we may proceed in accordance with these laws or regulations.
We may also take the steps listed below, if we feel such an action is
reasonably necessary. In doing so we would comply with all applicable laws,
including approval of Owners, if so required:
(1) to make changes in the form of the Separate Account, if in our
judgment such changes would serve the interests of Owners or would be
appropriate in carrying out the purposes of the Policies, for example:
(i) operating the Separate Account as a management company
under the 1940 Act
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<PAGE> 54
(ii) deregistering the Separate Account under the 1940 Act if
registration is no longer required
(iii) combining or substituting separate accounts
(iv) transferring the assets of the Separate Account to
another separate account or to the General Account
(v) making changes necessary to comply with, obtain or
continue any exemptions from the 1940 Act; or
(vi) making other technical changes in the Policy to conform
with any action described herein;
(2) if in our judgment a Portfolio no longer suits the investment goals
of the Policy, or if tax or marketing conditions so warrant, to
substitute shares of another investment portfolio for shares of
such Portfolio;
(3) to eliminate, combine, or substitute Subaccounts and establish new
Subaccounts, if in its judgment marketing needs, tax
considerations, or investment conditions so warrant;
(4) to transfer assets from a Subaccount to another Subaccount or
separate account if the transfer in our judgment would best serve
interests of Policy Owners or would be appropriate in carrying out
the purposes of the Policies; and
(5) to modify the provisions of the Policies to comply with applicable
laws.
We have reserved all rights in respect of our corporate name and any
part thereof, including without limitation the right to withdraw its use and to
grant its use to one or more other separate accounts and other entities.
If your Policy has Accumulated Value in a Subaccount that is
eliminated, we will give you at least 30 days notice before the elimination, and
will request that you name the Subaccount or Subaccounts (or the General
Account) to which the Accumulated Value in that Subaccount should be
transferred. If you do not name a new Subaccount, then we will use the Money
Market Subaccount. In any case, if in the future we impose a transfer charge or
establish limits on the number of transfers or free transfers, no charge will be
made for this transfer, and it will not count toward any limit on transfers or
free transfers.
OFFICERS AND DIRECTORS OF NATIONAL LIFE
The officers and directors of National Life, as well as their principal
occupations during the past five years, are listed below.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION DURING THE PAST FIVE YEARS
- ----------------- --------------------------
<S> <C>
Patrick E. Welch 1997 to present - Chairman of the Board
Chairman of the Board, and Chief Executive Officer; 1992 to 1997 -
Chief Executive Officer Chairman of the Board, Chief Executive
Officer and President of GNA Corporation.
Thomas H. MacLeay 1996 to Present - President and Chief
President, Chief Operating Officer; 1993 to 1996 -
Operating Officer, Executive Vice President & Chief
and Director Financial Officer
Robert E. Boardman 1994 to present - Chairman of Hickok &
Director Boardman Financial Network
1967 to present - President
of Hickok & Boardman Realty, Inc.
</TABLE>
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<PAGE> 55
<TABLE>
<S> <C>
Earle H. Harbison, Jr. 1993 to present: Chairman of
Director Harbison Walker, Inc.;
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
James A. Mallon 1998 to present: Executive Vice President
Executive Vice President & Chief Marketing Officer; 1996 to 1998:
Chief Marketing Officer President & Chief Executive Officer - Integon
Life Insurance Corporation; 1993 to 1996: Senior
Vice President & Chief Marketing Officer - Commercial
Union Life Insurance Company of America.
William A. Smith 1998 to present: Executive Vice President & Chief
Executive Vice President & Financial Officer; 1994 to 1998 - Vice President and
Chief Financial Officer Controller, American Express Financial Advisors; 1991 to
1994 - Vice President and Chief Financial Officer of ACUMA, Ltd.
Rodney A. Buck 2000 to present - Executive Vice President and Chief
Executive Vice President and Investment Officer; 1996 to 2000 - Senior Vice
Chief Investment Officer President and Chief Investment Officer; 1996 to present -
Chairman, President & Chief Executive Officer, National
Life Investment Management Company, Inc. ("NLIMC");
1998 to present - Chief Executive Office - Sentinel
Advisors Company ("SAC"); 1987 to 1997 - Senior Vice
President - SAC.
Gregory H. Doremus 1998 to present: Senior Vice President -
Senior Vice President - New New Business & Customer Services; 1994 to 1998 -
Business & Customer Services Vice President - Customer Services
Michele S. Gatto 1999 to present: Senior Vice President & General
Senior Vice President & Counsel; 1997 to 1999 - Vice President, General Counsel
General Counsel and Secretary, Massachusetts Casualty Insurance Company; 1986 to 1997 - Vice
President, Assistant General Counsel, Assistant Secretary/Treasurer, and other
legal positions, The Paul Revere Corporation
Charles C. Kittredge 2000 to present: Senior Vice President - Marketing
Senior Vice President - Marketing Development and Operations; 1997 to 2000: Senior Vice
Development and Operations President - Sales and Distribution; 1993 to 1997: - Vice
President -Agency Financial Planning & Services
Wade H. Mayo 2000 to present: Senior Vice President; 1993 to
Senior Vice President present: President and Chief Executive Officer - Life
Insurance Company of the Southwest ("LSW"); 1996 to present:
President - LSW National Holdings, Inc.1989 to present:
President & Director - Insurance Investors Life Insurance
Company
Joseph A. Miller 2000 to present: Senior Vice President; 1997 to
Senior Vice President 2000: Vice President & Director of Agencies;
1990 to 1997: Vice President - Southern Regional Office
Michael A. Tahan 1998 to present: Senior Vice President & Chief
Senior Vice President & Information Officer; 1991 to 1998 - First Vice President
Chief Information Officer & Chief Information Officer - Merrill Lynch Asset Management
</TABLE>
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<PAGE> 56
DISTRIBUTION OF POLICIES
We sell Policies through agents who are licensed by state insurance
authorities to sell our variable life insurance policies, and who are also
registered representatives of Equity Services, Inc. ("ESI") or registered
representatives of broker/dealers who have Selling Agreements with ESI. ESI,
whose address is National Life Drive, Montpelier, Vermont 05604, is a registered
broker/dealer under the Securities Exchange Act of 1934 (the "1934 Act") and a
member of the National Association of Securities Dealers, Inc. (the "NASD"). ESI
is an indirect wholly-owned subsidiary of National Life, formed on October 7,
1968. ESI acts as the principal underwriter, as defined in the 1940 Act, of the
Policies, and for the Separate Account pursuant to an Underwriting Agreement to
which the Separate Account, ESI and National Life are parties.
National Life has sought approval to sell the Policies in all states
and the District of Columbia. However, all approvals may not be obtained. The
Policies are offered and sold only in those states where their sale is lawful.
The directors of ESI are Patrick E. Welch, Thomas H. MacLeay, Rodney
A. Buck, all of whose principal occupations are disclosed under "Directors and
Officers of National Life" above, and Joseph M. Rob, the Chairman and Chief
Executive Officer of ESI. ESI's other officers are:
<TABLE>
<S> <C>
Kenneth R. Ehinger President & Chief Operating Officer
John M. Grab, Jr. Senior Vice President & Chief Financial Officer
Stephen A. Englese Senior Vice President - Financial Products
Gregory D. Teese Vice President - Compliance
Budd A. Shedaker Assistant Vice President - Communications
D. Russell Morgan Counsel
Sharon E. Bernard Treasurer & Controller
Lisa A. Pettrey Secretary
JoAnn K. Morissette Assistant Secretary
</TABLE>
The principal business address of all these individuals is National
Life Drive, Montpelier, Vermont 05604.
We do the insurance underwriting , determine a proposed Insured's Rate
Class, and determine whether to accept or reject an application for a Policy. We
will refund any premiums paid if a Policy ultimately is not issued or will
refund the applicable amount if the Policy is returned under the free look
provision.
Agents who are ESI registered representatives are compensated for
sales of the Policies on a commission basis and with other forms of
compensation. During the first Policy Year, agent commissions will not be more
than 50% of the premiums paid up to a target amount (which is a function of
Face Amount, and which is used primarily to determine commission payments) and
3% of the premiums paid in excess of that amount. For Policy Years 2 through
10, the agent commissions will not be more than 4% of the premiums paid up to
the target amount, and 3% of premiums paid in excess of that amount. For Policy
year 11 and thereafter, agent commissions will be 1.5% of all premiums paid.
For premiums received in the year following an increase in Face Amount and
attributable to the increase, agent commissions will not be more than 48.5% up
to the target amount for the increase. Full time agents of National Life who
achieve specified annual sales goals may be eligible for compensation in
addition to the amounts stated above.
Dealers other than ESI will receive gross dealer concessions during the
first Policy Year of 85% of the premiums paid up to the target amount and 4% of
the premiums paid in excess of that amount. For Policy Years 2 through 10, the
gross dealer concession will not be more than 4% of the premiums paid. For
Policy Year 11 and thereafter, the gross dealer concession will be 1.5% of all
premiums paid. For premiums received in the year following an increase in Face
Amount and attributable to the increase, the gross dealer concession will not be
more than 50% up to the target amount for the increase. The aggregate amounts of
sales load received by ESI in connection with the Policies in 1997, 1998 and
1999 were $31,525.99, $189,078.86 and $239,093.31, respectively.
53
<PAGE> 57
POLICY REPORTS
Once each Policy Year, we will send you a statement describing the status
of the Policy, including setting forth:
- the Face Amount
- the current Death Benefit
- any Policy loans and accrued interest
- the current Accumulated Value
- the non-loaned Accumulated Value in the General Account
- the amount held as Collateral in the General Account
- the value in each Subaccount of the Separate Account
- premiums paid since the last report
- charges deducted since the last report
- any Withdrawals since the last report, and
- the current Cash Surrender Value.
In addition, we will send you a statement showing the status of the
Policy following the transfer of amounts from one Subaccount of a Separate
Account to another, the taking out of a loan, a repayment of a loan, a
Withdrawal and the payment of any premiums (excluding those paid by bank draft
or otherwise under the Automatic Payment Plan).
We will send you a semi-annual report containing the financial
statements of each Fund in which your Policy has Accumulated Value, as required
by the 1940 Act.
STATE REGULATION
We are subject to regulation and supervision by the Department of
Banking, Insurance, Securities and Health Care Administration of the State of
Vermont, which periodically examines our affairs. We are also subject to the
insurance laws and regulations of all jurisdictions where we are authorized to
do business. We have filed a copy of the Policy form with, and where required
obtained an approval by, insurance officials in each jurisdiction where the
Policies are sold. We are required to submit annual statements of our
operations, including financial statements, to the insurance departments of the
various jurisdictions in which we do business for the purposes of determining
solvency and compliance with local insurance laws and regulations.
INSURANCE MARKETPLACE STANDARDS ASSOCIATION
National Life Insurance Company is a member of the Insurance
Marketplace Standards Association ("IMSA"), and as such may include the IMSA
logo and information about IMSA membership in its advertisements. Companies that
belong to IMSA subscribe to a set of ethical standards covering the various
aspects of sales and service for individually sold life insurance and annuities.
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<PAGE> 58
EXPERTS
The Financial Statements listed on Page F-1 have been included in this
Prospectus, in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Actuarial matters included in the Prospectus have been examined by
Elizabeth H. MacGowan, F.S.A. MAAA, Actuary Product Development of National
Life.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided
advice on legal matters relating to certain aspects of Federal securities law
applicable to the issue and sale of the Policies. Matters of Vermont law
pertaining to the Policies, including National Life's right to issue the
Policies and its qualification to do so under applicable laws and regulations
issued thereunder, have been passed upon by Michele S. Gatto, Senior Vice
President and General Counsel of National Life.
The Separate Account is not a party to any litigation. There are no
material legal proceedings involving National Life which are likely to have a
material adverse effect upon the Separate Account or upon the ability of
National Life to meet its obligations under the Policies. ESI is not engaged in
any litigation of any material nature.
The Company, like other life insurance companies, is involved in
lawsuits, including class action lawsuits. In some class action and other
lawsuits involving insurance companies, substantial damages have been sought
and/or material settlement payments have been made. Although the Company cannot
predict the outcome of any litigation with certainty, the Company believes that
at the present time, there are no pending or threatened lawsuits that are
reasonably likely to have a material adverse impact on it or the Variable
Account.
FINANCIAL STATEMENTS
The financial statements of National Life and of the relevant
Subaccounts of the Separate Account appear on the following pages. The financial
statements of National Life should be distinguished from the financial
statements of the Separate Account and should be considered only as bearing upon
National Life's ability to meet its obligations under the Policies.
55
<PAGE> 59
GLOSSARY
ACCUMULATED VALUE The sum of the Policy's values in the Separate
Account and the General Account.
ATTAINED AGE The Issue Age of the Insured plus the number
of full Policy Years which have passed since
the Date of Issue.
BENEFICIARY The person(s) or entity(ies) designated to
receive all or some of the Death Benefit
when the Insured dies. The Beneficiary is
designated in the application or if
subsequently changed, as shown in the latest
change filed with National Life. The
interest of any Beneficiary who dies before
the Insured shall vest in the Owner unless
otherwise stated.
CASH SURRENDER VALUE The Accumulated Value minus any applicable
Surrender Charge, and minus any outstanding
Policy loans and accrued interest on such
loans.
COLLATERAL The portion of the Accumulated Value in the
General Account which secures the amount of
any Policy loan.
DAC TAX A tax attributable to Specified Policy
Acquisition Expenses under Internal Revenue
Code Section 848.
DATE OF ISSUE The date on which the Policy is issued,
which is set forth in the Policy. It is used
to determine Policy Years, Policy Months and
Monthly Policy Dates, as well as to measure
suicide and contestable periods.
DEATH BENEFIT The Policy's Unadjusted Death Benefit, plus
any relevant additional benefits provided by a
supplementary benefit Rider, less any
outstanding Policy loan and accrued interest,
and less any unpaid Monthly Deductions.
DURATION The number of full years the insurance has
been in force; for the Initial Face Amount,
measured from the Date of Issue; for any
increase in Face Amount, measured from the
effective date of such increase.
FACE AMOUNT The Initial Face Amount plus any increases in
Face Amount and minus any decreases in Face
Amount.
GENERAL ACCOUNT The account which holds the assets of National
Life which are available to support its
insurance and annuity obligations.
GRACE PERIOD A 61-day period measured from the date on
which notice of pending lapse is sent by
National Life, during which the Policy will
not lapse and insurance coverage continues. To
prevent lapse, the Owner must during the Grace
Period make a premium payment equal to the sum
of any amount by which the past Monthly
Deductions have been in excess of Cash
Surrender Value, plus three times the Monthly
Deduction due the date the Grace Period began.
56
<PAGE> 60
GUARANTEED DEATH BENEFIT RIDER An optional Rider that will guarantee that the
Policy will not lapse prior to Attained Age
70, or 20 years from the Policy's Date of
Issue, if longer, regardless of investment
performance, if the Minimum Guarantee Premium
has been paid as of each Monthly Policy Date.
HOME OFFICE National Life's Home Office at National Life
Drive, Montpelier, Vermont 05604.
INITIAL FACE AMOUNT The Face Amount of the Policy on the Date of
Issue. The Face Amount may be increased or
decreased after the first Policy Year.
INSURED The person upon whose life the Policy is
issued.
ISSUE AGE The age of the Insured at his or her birthday
nearest the Date of Issue. The Issue Age is
stated in the Policy.
MINIMUM FACE AMOUNT The Minimum Face Amount is generally $50,000.
However, exceptions may be made in employee
benefit plan cases.
MINIMUM GUARANTEE PREMIUM The sum of the Minimum Monthly Premiums in
effect on each Monthly Policy Date since the
Date of Issue (including the current month),
plus all Withdrawals and outstanding Policy
loans and accrued interest.
MINIMUM INITIAL PREMIUM The minimum premium required to issue a
Policy. It is equal to the Minimum Monthly
Premium.
MINIMUM MONTHLY PREMIUM The monthly amount used to determine the
Minimum Guarantee Premium. This amount, which
includes any substandard charges and any
applicable Rider charges, is determined
separately for each Policy, based on the
requested Initial Face Amount, and the Issue
Age, sex and Rate Class of the Insured, and
the Death Benefit Option and any optional
benefits selected. It is stated in each
Policy.
MONTHLY ADMINISTRATIVE CHARGE A charge of $7.50 per month included in the
Monthly Deduction, which is intended to
reimburse National Life for ordinary
administrative expenses.
MONTHLY DEDUCTION The amount deducted from the Accumulated Value
on each Monthly Policy Date. It includes the
Monthly Administrative Charge, the Cost of
Insurance Charge, and the monthly cost of any
benefits provided by Riders.
MONTHLY POLICY DATE The day in each calendar month which is the
same day of the month as the Date of Issue, or
the last day of any month having no such date,
except that whenever the Monthly Policy Date
would otherwise fall on a date other than a
Valuation Day, the Monthly Policy Date will be
deemed to be the next Valuation Day.
NET AMOUNT AT RISK The amount by which the Unadjusted Death
Benefit exceeds the Accumulated Value.
57
<PAGE> 61
NET PREMIUM The remainder of a premium after the deduction
of the Premium Tax Charge.
OWNER The person(s) or entity(ies) entitled to
exercise the rights granted in the Policy.
PLANNED PERIODIC PREMIUM The premium amount which the Owner plans to
pay at the frequency selected. The Owner may
request a reminder notice and may change the
amount of the Planned Periodic Premium. The
Owner is not required to pay the designated
amount.
POLICY ANNIVERSARY The same day and month as the Date of Issue in
each later year.
POLICY YEAR A year that starts on the Date of Issue or on
a Policy Anniversary.
PREMIUM TAX CHARGE A charge deducted from each premium payment to
cover the cost of state and local premium
taxes, and the federal DAC Tax.
RATE CLASS The classification of the Insured for cost of
insurance purposes. The Rate Classes are:
preferred nonsmoker; standard nonsmoker;
smoker; juvenile; and substandard.
RIDERS Optional benefits that an Owner may elect to
add to the Policy at an additional cost.
SURRENDER CHARGE The amount deducted from the Accumulated Value
of the Policy upon lapse or surrender during
the first 15 Policy Years. The Maximum
Surrender Charge is shown in the Policy.
UNADJUSTED DEATH BENEFIT Under Option A, the greater of the Face Amount
or the applicable percentage of the
Accumulated Value on the date of death; under
Option B, the greater of the Face Amount plus
the Accumulated Value on the date of death, or
the applicable percentage of the Accumulated
Value on the date of death. The Death Benefit
Option is selected at time of application but
may be later changed.
VALUATION DAY Each day that the New York Stock Exchange is
open for business other than the day after
Thanksgiving and any day on which trading is
restricted by directive of the Securities and
Exchange Commission. Unless otherwise
indicated, whenever under a Policy an event
occurs or a transaction is to be effected on a
day that is not a Valuation Date, it will be
deemed to have occurred on the next Valuation
Date.
VALUATION PERIOD The time between two successive Valuation
Days. Each Valuation Period includes a
Valuation Day and any non-Valuation Day or
consecutive non-Valuation Days immediately
preceding it.
WITHDRAWAL A payment made at the request of the Owner
pursuant to the right in the Policy to
withdraw a portion of the Cash Surrender Value
of the Policy. The Withdrawal Charge will be
deducted from the Withdrawal Amount.
58
<PAGE> 62
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Accumulated
Values and Cash Surrender Values of a Policy may change with the investment
experience of the Separate Account. The tables show how the Death Benefits,
Accumulated Values and Cash Surrender Values of a Policy issued to an Insured of
a given age, sex and Rate Class would vary over time if the investment return on
the assets held in each Portfolio of each of the Funds were a uniform, gross,
annual rate of 0%, 6% and 12%.
The tables on Pages A-2 to A-7 illustrate a Policy issued to a male
Insured, Age 40 in the Preferred Nonsmoker Rate Class with a Face Amount of
$250,000 and Planned Periodic Premiums of $3,000 for Death Benefit Option A, and
$4,000 for Death Benefit Option B, in each case paid at the beginning of each
Policy Year. The Death Benefits, Accumulated Values and Cash Surrender Values
would be lower if the Insured was in a standard nonsmoker, smoker or substandard
class since the cost of insurance charges are higher for these classes. Also,
the values would be different from those shown if the gross annual investment
returns averaged 0%, 6% and 12% over a period of years, but fluctuated above and
below those averages for individual Policy Years. The net annual rate of return
shown in the tables is the gross annual rate reduced to reflect the average
investment advisory fee and average operating expenses of the Funds after
reimbursement and the Mortality and Expense Risk Charge.
The second column of the tables show the amount to which the premiums
would accumulate if an amount equal to those premiums were invested to earn
interest, after taxes, at 5% compounded annually. The columns shown under the
heading "Guaranteed" assume that throughout the life of the policy, the monthly
charge for cost of insurance is based on the maximum level permitted under the
Policy (based on the 1980 CSO Smoker/Nonsmoker Table); the columns under the
heading "Current" assume that throughout the life of the Policy, the monthly
charge for cost of insurance is based on the current cost of insurance rate, and
for Policy Years after year 10, a bonus under which the Monthly Deductions are
reduced by 0.50% per annum.
The amounts shown in all tables reflect an averaging of certain other asset
charges described below that may be assessed under the Policy, depending upon
how premiums are allocated. The total of the asset charges reflected in the
Current and Guaranteed illustrations, including the Mortality and Expense Risk
Charge of 0.90%, is 1.72%. This total charge is based on an assumption that an
Owner allocates the Policy values equally among the Subaccounts of the Separate
Account.
These asset charges reflect an investment advisory fee of 0.65%, which
represents simple average of the fees incurred by the Portfolios during 1998 and
expenses of 0.17% which is based on an average of the actual expenses incurred
by the Portfolios during 1999, adjusted, as appropriate, to take into account
expense reimbursement arrangements expected to be in place for 2000. In the
absence of the reimbursement arrangements for some of the Portfolios, the total
asset charges reflected in the Current and Guaranteed Illustrations, including
the Mortality and Expense Risk Charge, would have totalled an average of 1.92%.
If the reimbursement arrangements were discontinued, the Accumulated Values and
Cash Surrender Values of a Policy which allocates Policy values equally among
the Subaccounts would be lower than those shown in the following tables. For
information on Fund expenses, see the prospectuses for the Funds accompanying
this prospectus.
The tables also reflect the fact that no charges for Federal or state
income taxes are currently made against the Separate Accounts. If such a charge
is made in the future, it would take a higher gross annual rate of return to
produce the same Policy values.
The tables illustrate the Policy values that would result based upon
the hypothetical investment rates of return if premiums are paid and allocated
as indicated, no amounts are allocated to the General Account, and no Policy
loans are made. The tables are also based on the assumption that the Owner has
not requested an increase or decrease in the Face Amount, that no Withdrawals
have been made and no transfers have been made in any Policy Year.
Upon request, National Life will provide a comparable illustration
based upon the proposed Insured's Age and Rate Class, the Death Benefit Option,
Face Amount, Planned Periodic Premiums and Riders requested.
A-1
<PAGE> 63
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.72%)
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ----------------------------------- ------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,204 804 250,000 2,302 902 250,000
2 6,458 4,332 2,593 250,000 4,544 2,805 250,000
3 9,930 6,383 4,371 250,000 6,723 4,711 250,000
4 13,577 8,357 6,259 250,000 8,838 6,741 250,000
5 17,406 10,251 8,153 250,000 10,882 8,784 250,000
6 21,426 12,060 10,170 250,000 12,855 10,966 250,000
7 25,647 13,781 12,099 250,000 14,748 13,067 250,000
8 30,080 15,411 13,937 250,000 16,557 15,083 250,000
9 34,734 16,948 15,682 250,000 18,285 17,019 250,000
10 39,620 18,385 17,327 250,000 19,927 18,870 250,000
11 44,751 19,720 18,870 250,000 21,843 20,993 250,000
12 50,139 20,939 20,297 250,000 23,684 23,042 250,000
13 55,796 22,027 21,594 250,000 25,450 25,016 250,000
14 61,736 22,977 22,752 250,000 27,134 26,908 250,000
15 67,972 23,769 23,752 250,000 28,731 28,713 250,000
16 74,521 24,390 24,390 250,000 30,238 30,238 250,000
17 81,397 24,826 24,826 250,000 31,647 31,647 250,000
18 88,617 25,067 25,067 250,000 32,947 32,947 250,000
19 96,198 25,100 25,100 250,000 34,119 34,119 250,000
20 104,158 24,900 24,900 250,000 35,146 35,146 250,000
25 150,340 19,269 19,269 250,000 37,910 37,910 250,000
30 209,282 1,335 1,335 250,000 35,645 35,645 250,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-2
<PAGE> 64
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.18%)
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------ --------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,354 954 250,000 2,455 1,055 250,000
2 6,458 4,768 3,029 250,000 4,993 3,255 250,000
3 9,930 7,243 5,231 250,000 7,612 5,600 250,000
4 13,577 9,778 7,680 250,000 10,315 8,218 250,000
5 17,406 12,376 10,278 250,000 13,096 10,998 250,000
6 21,426 15,029 13,139 250,000 15,959 14,070 250,000
25,647 17,739 16,057 250,000 18,898 17,216 250,000
8 30,080 20,505 19,031 250,000 21,910 20,436 250,000
9 34,734 23,325 22,059 250,000 25,002 23,737 250,000
10 39,620 26,196 25,138 250,000 28,173 27,115 250,000
11 44,751 29,116 28,266 250,000 31,830 30,981 250,000
12 50,139 32,076 31,434 250,000 35,615 34,974 250,000
13 55,796 35,062 34,629 250,000 39,533 39,100 250,000
14 61,736 38,069 37,844 250,000 43,586 43,360 250,000
15 67,972 41,081 41,064 250,000 47,774 47,757 250,000
16 74,521 44,087 44,087 250,000 52,106 52,106 250,000
17 81,397 47,075 47,075 250,000 56,581 56,581 250,000
18 88,617 50,039 50,039 250,000 61,198 61,198 250,000
19 96,198 52,968 52,968 250,000 65,952 65,952 250,000
20 104,158 55,843 55,843 250,000 70,838 70,838 250,000
25 150,340 68,508 68,508 250,000 97,540 97,540 250,000
30 209,282 74,787 74,787 250,000 128,932 128,932 250,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
<PAGE> 65
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
<TABLE>
<CAPTION>
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.07%)
Premiums Guaranteed Current
------------------------------------- --------------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,505 1,105 250,000 2,609 1,209 250,000
2 6,458 5,223 3,484 250,000 5,461 3,722 250,000
3 9,930 8,175 6,163 250,000 8,576 6,563 250,000
4 13,577 11,382 9,284 250,000 11,979 9,882 250,000
5 17,406 14,820 12,772 250,000 15,692 13,594 250,000
6 21,426 18,659 16,769 250,000 19,747 17,857 250,000
25,647 22,779 21,097 250,000 24,169 22,488 250,000
8 30,080 27,263 25,789 250,000 28,993 27,519 250,000
9 34,734 32,146 30,880 250,000 34,263 32,998 250,000
10 39,620 37,464 36,406 250,000 40,024 38,967 250,000
11 44,751 43,264 42,414 250,000 46,798 45,948 250,000
12 50,139 49,586 48,944 250,000 54,259 53,618 250,000
13 55,796 56,475 56,042 250,000 62,485 62,052 250,000
14 61,736 63,991 63,766 250,000 71,557 71,332 250,000
15 67,972 72,193 72,176 250,000 81,568 81,551 250,000
16 74,521 81,152 81,152 250,000 92,626 92,626 250,000
17 81,397 90,952 90,952 250,000 104,846 104,846 250,000
18 88,617 101,694 101,694 250,000 118,360 118,360 250,000
19 96,198 113,492 113,492 250,000 133,314 133,314 250,000
20 104,158 126,472 126,472 250,000 149,875 149,875 250,000
25 150,340 215,240 215,240 262,593 264,014 264,014 322,097
30 209,282 358,658 358,658 416,044 451,398 451,398 523,622
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
<PAGE> 66
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.72%)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
------------------------------------- --------------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,149 1,610 253,149 3,248 1,709 253,248
2 8,610 6,200 4,277 256,199 6,413 4,492 256,415
3 13,241 9,153 7,055 259,153 9,498 7,400 259,498
4 18,103 12,004 9,906 262,003 12,496 10,398 262,496
5 23,208 14,754 12,656 264,753 15,400 13,303 265,400
6 28,568 17,395 15,505 267,394 18,213 16,323 268,213
7 34,196 19,924 18,242 269,923 20,923 19,241 270,923
8 40,106 22,337 20,863 272,337 23,524 22,051 273,524
9 46,312 24,633 23,367 274,633 26,022 24,756 276,022
10 52,827 26,803 25,745 276,802 28,410 27,352 278,410
11 59,669 28,844 27,994 278,844 31,116 30,266 281,116
12 66,852 30,742 30,100 280,741 33,727 33,086 283,727
13 74,395 32,480 32,047 282,480 36,242 35,808 286,242
14 82,314 34,048 33,823 284,048 38,651 38,426 288,651
15 90,630 35,426 35,409 285,426 40,949 40,932 290,949
16 99,361 36,601 36,601 286,601 43,133 43,133 293,133
17 108,530 37,555 37,555 287,555 45,191 45,191 295,191
18 118,156 38,280 38,280 288,280 47,109 47,109 297,109
19 128,264 38,762 38,762 288,762 48,868 48,868 298,868
20 138,877 38,977 38,977 288,977 50,444 50,444 300,444
25 200,454 34,966 34,966 284,966 55,375 55,375 305,375
30 279,043 18,770 18,770 268,770 54,241 54,241 304,241
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
<PAGE> 67
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
<TABLE>
<CAPTION>
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.18%)
Premiums Guaranteed Current
------------------------------------ --------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,357 1,818 253,356 3,458 1,920 253,458
2 8,610 6,807 4,884 256,806 7,035 5,113 257,035
3 13,241 10,356 8,258 260,355 10,731 8,633 260,731
4 18,103 13,999 11,901 263,999 14,548 12,450 264,548
5 23,208 17,741 15,643 267,741 18,481 16,384 268,481
6 28,568 21,576 19686 271,575 22535 20,646 272,535
7 34,196 25,502 23,820 275,501 26,703 25,022 276,703
8 40,106 29,518 28,044 279,518 30,981 29,508 280,981
9 46,312 33,623 32,357 283,623 35,377 34,111 285,377
10 52,827 37,811 36,753 287,810 39,887 38,830 289,887
11 59,669 42,079 41,229 292,078 45,020 44,170 295,020
12 66,852 46,413 45,771 296,412 50,330 49,688 300,330
13 74,395 50,797 50,364 300,798 55,823 55,389 305,823
14 82,314 55,221 54,996 305,221 61,497 61,272 311,497
15 90,630 59,661 59,644 309,661 67,354 67,336 317,354
16 99,361 64,101 64,101 314,101 73,396 73,396 323,396
17 108,530 68,519 68,519 318,519 79,620 79,620 329,620
18 118,156 72,903 72,903 322,903 86,019 86,019 336,019
19 128,264 77,233 77,233 327,233 92,578 92,578 342,578
20 138,877 81,477 81,477 331,477 99,279 99,279 349,279
25 200,454 99,926 99,926 349,926 134,840 134,840 384,840
30 279,043 108,205 108,205 358,205 172,966 172,966 422,966
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE> 68
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
<TABLE>
<CAPTION>
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.07%)
Premiums Guaranteed Current
------------------------------------ --------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,564 2,025 253,564 3,669 2,130 253,669
2 8,610 7,440 5,517 257,439 7,681 5,758 257,681
3 13,241 11,658 9,560 261,657 12,065 9,968 262,065
4 18,103 16,246 14,148 266,246 16,858 14,760 266,858
5 23,208 21,242 19,144 271,241 22,088 19,991 272,088
6 28,568 26,675 24,785 276,674 27,801 25,911 277,801
7 34,196 32,584 30,902 282,584 34,031 32,350 284,031
8 40,106 39,013 37,539 289,012 40,824 39,350 290,824
9 46,312 46,008 44,742 296,007 48,238 46,972 298,238
10 52,827 53,616 52,558 303,615 56,327 55,270 306,327
11 59,669 61,893 61,043 311,893 65,774 64,925 315,774
12 66,852 70,889 70,247 320,888 76,158 75,517 326,158
13 74,395 80,656 80,223 330,656 87,577 87,143 337,577
14 82,314 91,259 91,034 341,259 100,129 99,904 350,129
15 90,630 102,756 102,739 352,757 113,928 113,910 363,928
16 99,361 115,221 115,221 365,221 129,100 129,100 379,100
17 108,530 128,729 128,729 378,729 145,778 145,778 395,778
18 118,156 143,372 143,372 393,372 164,107 164,107 414,107
19 128,264 159,247 159,247 409,247 184,238 184,238 434,238
20 138,877 176,446 176,446 426,446 206,337 206,337 456,337
25 200,454 286,027 286,027 536,027 354,131 354,131 604,131
30 279,043 446,719 446,719 696,719 591,418 591,418 841,418
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-7
<PAGE> 69
APPENDIX B
SURRENDER CHARGE TARGET PREMIUMS ("SCTP") AND
MAXIMUM DEFERRED SALES CHARGES ("MDSC")
(ANNUAL RATES PER $1,000 OF FACE AMOUNT)
<TABLE>
<CAPTION>
MALE FEMALE
ISSUE NONSMOKER SMOKER NONSMOKER SMOKER
AGE SCTP MDSC SCTP MDSC SCTP MDSC SCTP MDSC
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 2.85 1.43 2.85 1.43 2.24 1.12 2.24 1.12
1 2.78 1.39 2.78 1.39 2.20 1.10 2.20 1.10
2 2.87 1.44 2.87 1.44 2.27 1.14 2.27 1.14
3 2.97 1.49 2.97 1.49 2.35 1.18 2.35 1.18
4 3.08 1.54 3.08 1.54 2.43 1.22 2.43 1.22
5 3.19 1.60 3.19 1.60 2.52 1.26 2.52 1.26
6 3.32 1.66 3.32 1.66 2.61 1.31 2.61 1.31
7 3.45 1.73 3.45 1.73 2.71 1.36 2.71 1.36
8 3.59 1.80 3.59 1.80 2.82 1.41 2.82 1.41
9 3.74 1.87 3.74 1.87 2.93 1.47 2.93 1.47
10 3.90 1.95 3.90 1.95 3.05 1.53 3.05 1.53
11 4.08 2.04 4.08 2.04 3.17 1.59 3.17 1.59
12 4.25 2.13 4.25 2.13 3.31 1.66 3.31 1.66
13 4.44 2.22 4.44 2.22 3.45 1.73 3.45 1.73
14 4.63 2.32 4.63 2.32 3.59 1.80 3.59 1.80
15 4.82 2.41 4.82 2.41 3.74 1.87 3.74 1.87
16 5.01 2.51 5.01 2.51 3.90 1.95 3.90 1.95
17 5.21 2.61 5.21 2.61 4.06 2.03 4.06 2.03
18 5.40 2.70 5.40 2.70 4.23 2.12 4.23 2.12
19 5.61 2.81 5.61 2.81 4.41 2.21 4.41 2.21
20 5.18 2.59 6.89 3.45 4.36 2.18 5.19 2.60
21 5.37 2.69 7.15 3.58 4.54 2.27 5.41 2.71
22 5.58 2.79 7.43 3.72 4.73 2.37 5.65 2.83
23 5.80 2.90 7.73 3.87 4.94 2.47 5.90 2.95
24 6.04 3.02 8.05 4.03 5.15 2.58 6.16 3.08
25 6.29 3.15 8.39 4.20 5.38 2.69 6.43 3.22
26 6.56 3.28 8.76 4.38 5.62 2.81 6.73 3.37
27 6.85 3.43 9.16 4.58 5.87 2.94 7.04 3.52
28 7.16 3.58 9.58 4.79 6.14 3.07 7.36 3.68
29 7.49 3.75 10.04 5.02 6.42 3.21 7.70 3.85
30 7.84 3.92 10.52 5.26 6.71 3.36 8.07 4.04
31 8.21 4.11 11.04 5.52 7.03 3.52 8.45 4.23
32 8.61 4.31 11.59 5.80 7.36 3.68 8.85 4.43
33 9.03 4.52 12.17 6.09 7.71 3.86 9.28 4.64
34 9.47 4.74 12.79 6.40 8.08 4.04 9.73 4.87
35 9.95 4.98 13.44 6.72 8.47 4.24 10.21 5.11
36 10.45 5.23 14.14 7.07 8.88 4.44 10.71 5.36
37 10.98 5.49 14.88 7.44 9.32 4.66 11.24 5.62
38 11.54 5.77 15.66 7.83 9.77 4.89 11.80 5.90
39 12.14 6.07 16.49 8.25 10.26 5.13 12.38 6.19
40 12.77 6.39 17.36 8.68 10.77 5.39 12.99 6.50
41 13.43 6.72 18.28 9.14 11.30 5.65 13.63 6.82
42 14.14 7.07 19.26 9.63 11.86 5.93 14.30 7.15
43 14.89 7.45 20.28 10.14 12.45 6.23 14.99 7.50
</TABLE>
B-1
<PAGE> 70
<TABLE>
<CAPTION>
MALE FEMALE
ISSUE NONSMOKER SMOKER NONSMOKER SMOKER
AGE SCTP MDSC SCTP MDSC SCTP MDSC SCTP MDSC
<S> <C> <C> <C> <C> <C> <C> <C> <C>
44 15.68 7.84 21.37 10.69 13.07 6.54 15.72 7.86
45 16.52 8.26 22.51 11.26 13.73 6.87 16.49 8.25
46 17.42 8.71 23.72 11.86 14.43 7.22 17.29 8.65
47 18.37 9.19 25.00 12.50 15.16 7.58 18.14 9.07
48 19.38 9.69 26.35 13.18 15.94 7.97 19.03 9.52
49 20.46 10.23 27.79 13.90 16.77 8.39 19.98 9.99
50 21.61 10.81 29.32 14.66 17.65 8.83 20.97 10.49
51 22.83 11.42 30.94 15.47 18.57 9.29 22.02 11.01
52 24.14 12.07 32.65 16.33 19.56 9.78 23.13 11.57
53 25.53 12.77 34.48 17.24 20.61 10.31 24.30 12.15
54 27.02 13.51 36.40 18.20 21.72 10.86 25.54 12.77
55 28.60 14.30 38.44 19.22 22.90 11.45 26.84 13.42
56 30.29 15.15 40.59 20.30 24.15 12.08 28.23 14.12
57 32.08 16.04 42.87 21.44 25.49 12.75 29.70 14.85
58 34.01 17.01 45.29 22.65 26.92 13.46 31.26 15.63
59 36.07 18.04 47.85 23.93 28.46 14.23 32.95 16.48
60 38.27 19.14 50.59 25.30 30.12 15.06 34.77 17.39
61 40.63 20.32 53.51 26.76 31.91 15.96 36.73 18.37
62 43.16 21.58 56.62 28.31 33.85 16.93 38.84 19.42
63 45.88 22.94 59.92 29.96 35.92 17.96 41.11 20.56
64 48.78 24.39 63.42 31.71 38.15 19.08 43.53 21.77
65 51.89 25.95 67.11 33.56 40.54 20.27 46.11 23.06
66 55.21 27.61 71.01 35.51 43.09 21.55 48.84 24.42
67 58.77 29.39 75.13 37.57 45.84 22.92 51.77 25.89
68 62.59 31.30 79.52 37.75 48.81 24.41 54.92 27.46
69 66.71 33.36 84.20 37.75 52.04 26.02 58.36 29.18
70 71.16 35.58 89.20 37.75 55.57 27.79 62.10 31.05
71 75.96 36.00 94.56 37.75 59.43 29.72 66.20 33.10
72 81.04 36.00 100.28 37.75 63.65 31.83 70.68 35.00
73 86.57 36.00 106.35 37.75 68.25 34.00 75.53 35.00
74 92.47 36.00 112.74 37.75 73.23 34.00 80.75 35.00
75 98.73 36.00 119.44 37.75 78.61 34.00 86.34 35.00
76 105.38 36.00 126.39 37.75 84.42 34.00 92.32 35.00
77 112.45 36.00 133.62 37.75 90.68 34.00 98.70 35.00
78 120.00 36.00 141.17 37.75 97.47 34.00 105.57 35.00
79 128.12 36.00 149.15 37.75 104.88 34.00 113.00 35.00
80 136.88 36.00 157.63 37.75 112.98 34.00 121.09 35.00
81 146.36 36.00 166.67 37.75 121.85 34.00 129.91 35.00
82 156.57 36.00 176.28 37.75 131.55 34.00 139.51 35.00
83 167.52 36.00 186.39 37.75 142.10 34.00 149.91 35.00
84 179.12 36.00 196.88 37.75 153.50 34.00 161.12 35.00
85 191.34 36.00 207.71 37.75 165.78 34.00 172.98 35.00
</TABLE>
Unisex policies will have surrender charge target premiums and maximum deferred
sales charges that are higher than those for females above but lower than those
for males.
B-2
<PAGE> 71
-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> 72
NATIONAL LIFE GROUP
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-2
<PAGE> 73
[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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
<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> 89
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> 90
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> 91
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> 92
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> 93
<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> 94
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> 95
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> 96
NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-26
<PAGE> 97
[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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
<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> 113
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> 114
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> 115
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> 116
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> 117
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> 118
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> 119
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> 120
NATIONAL VARIABLE
LIFE INSURANCE ACCOUNT
(VARITRAK SEGMENT)
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999
F-50
<PAGE> 121
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of National Life Insurance Company
and Policyholders of National Variable Life Insurance Account -- Varitrak
Segment
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of each of the sub-accounts
constituting the National Variable Life Insurance Account -- Varitrak Segment
(a segment within a Separate Account of National Life Insurance Company) (the
Segment) at December 31, 1999, and the results of each of their operations
and each of their changes in net assets for each of the three years then
ended, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Segment's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted
in the United States which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at
December 31, 1999 by correspondence with the funds, provide a reasonable
basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
March 31, 2000
F-51
<PAGE> 122
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
POLICYHOLDER
ACCOUNT
VALUES
---------------
<S> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value
(policyholder accumulation units and unit value):
Market Street Fund Money Market (457,700.93 accumulation units at $11.71 unit value) $ 5,358,457
Market Street Fund Growth (785,636.12 accumulation units at $16.45 unit value) 12,919,844
Market Street Fund Aggressive Growth (118,770.59 accumulation units at $16.72 unit value) 1,985,760
Market Street Fund Managed (137,184.85 accumulation units at $14.53 unit value) 1,992,873
Market Street Fund Bond (151,215.28 accumulation units at 11.47 unit value) 1,734,440
Market Street Fund International (186,695.40 accumulation units at $16.71 unit value) 3,119,576
Market Street Fund Sentinel Growth (141,722.47 accumulation units at $22.71 unit value) 3,218,517
Alger American Fund Growth (380,350.42 accumulation units at $25.93 unit value) 9,860,929
Alger American Fund Small Capitalization (445,440.10 accumulation units at $18.06 unit value) 8,045,531
VIPF Equity Income Portfolio (303,914.15 accumulation units at $35.19 unit value) 10,694,428
VIPF Overseas Portfolio (147,357.59 accumulation units at $29.39 unit value) 4,331,372
VIPF Growth Portfolio (239,691.23 accumulation units at $57.59 unit value) 13,802,814
VIPF High Income Portfolio (92,780.05 accumulation units at $29.11 unit value) 2,700,605
VIPF Contrafund Portfolio (238,927.92 accumulation units at $19.45 unit value) 4,646,129
VIPF Index 500 Portfolio (511,054.93 accumulation units at $35.78 unit value) 18,284,795
American Century Variable Portfolios VP Value (21,371.41 accumulation units at $10.25 unit value) 218,998
American Century Variable Portfolios VP Income & Growth (79,083.88 accumulation units at $12.85 unit value) 1,016,274
JP Morgan Series Trust II International Opportunities (25,101.23 accumulation units at $13.15 unit value) 330,095
JP Morgan Series Trust II Small Company (14,240.28 accumulation units at $14.31 unit value) 203,838
Strong Opportunity Fund II(43,769.74 accumulation units at $13.93 unit value) 609,810
Strong Variable Insurance Funds Mid Cap Growth (75,292.18 accumulation units at $21.30 unit value) 1,603,929
Neuberger Berman Advisers Management Trust Partners Portfolio (25,882.53 accumulation units at $10.87 unit value) 281,245
Goldman Sachs Variable Insurance Trust International Equity (17,860.81 accumulation units at $13.24 unit value) 236,418
Goldman Sachs Variable Insurance Trust Global Income (3,631.05 accumulation units at $10.22 unit value) 37,096
Goldman Sachs Variable Insurance Trust CORE Small Cap Equity (6,687.30 accumulation units at $11.03 unit value) 73,789
Goldman Sachs Variable Insurance Trust Mid Cap Value (14,285.28 accumulation units at $9.72 unit value) 138,821
------------
Total Net Assets $107,446,383
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 123
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET FUND
---------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL
------------ ----------- ------------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 224,222 $ 244,886 $ 180,507 $ 71,210 $ 24,621 $ 134,771
EXPENSES:
Mortality and expense risk
charges 41,721 107,429 14,087 15,752 11,973 21,719
---------------------------------------------------------------------------------
Net investment income 182,501 137,457 166,420 55,458 12,648 113,052
---------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold - 79,013 (29,873) 37,402 (5,840) 32,890
Net unrealized (depreciation)
appreciation on investments - (15,120) 120,658 (98,893) (56,125) 500,650
---------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments - 63,893 90,785 (61,491) (61,965) 533,540
---------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 182,501 $ 201,350 $ 257,205 $ (6,033) $ (49,317) $ 646,592
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
ALGER AMERICAN FUND
---------- ---------------------------
SENTINEL
GROWTH GROWTH SMALL CAP
--------- ---------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 70,274 $ 583,780 $ 687,887
EXPENSES:
Mortality and expense risk
charges 18,499 61,216 50,956
-----------------------------------------------
Net investment income 51,775 522,564 636,931
-----------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 65,850 577,304 93,301
Net unrealized (depreciation)
appreciation on investments 682,680 1,024,377 1,596,167
-----------------------------------------------
Net realized and unrealized
gain (loss) on investments 748,530 1,601,681 1,689,468
-----------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 800,305 $ 2,124,245 $ 2,326,399
===============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 124
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY HIGH
INCOME OVERSEAS GROWTH INCOME CONTRAFUND
----------- -------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 424,670 $ 100,811 $ 847,889 $ 217,914 $ 80,833
EXPENSES:
Mortality and expense risk charges 89,153 27,018 86,698 23,116 26,335
-------------------------------------------------------------------------------------
Net investment income (loss) 335,517 73,793 761,191 194,798 54,498
-------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 361,515 86,245 677,291 (146,982) 193,124
Net unrealized (depreciation)
appreciation on investments (217,244) 1,039,168 1,869,134 116,488 469,976
-------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 144,271 1,125,413 2,546,425 (30,494) 663,100
-------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 479,788 $1,199,206 $3,307,616 $ 164,304 $ 717,598
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY
VIPF VARIABLE PORTFOLIOS
----------- --------------------------------
INDEX VP INCOME &
500 VP VALUE GROWTH
---------- ------------ --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 112,837 $ 5,747 $ 40
EXPENSES:
Mortality and expense risk charges 102,705 1,010 4,209
---------------------------------------------
Net investment income (loss) 10,132 4,737 (4,169)
---------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 823,410 (2,164) 24,948
Net unrealized (depreciation)
appreciation on investments 1,421,745 (14,728) 77,756
---------------------------------------------
Net realized and unrealized
gain (loss) on investments 2,245,155 (16,892) 102,704
---------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $2,255,287 $ (12,155) $ 98,535
=============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 125
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECMEBER 31, 1999
<TABLE>
<CAPTION>
JP MORGAN STRONG VARIABLE NEUBERGER
SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
--------------------------------- -------------- ------------------ ------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND GROWTH PORTFOLIO
----------------- ------------- -------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 9,965 $ 4,932 $ 3,110 $ 155 $ 3,906
EXPENSES:
Mortality and expense risk charges 632 865 1,447 4,044 1,657
--------------------------------------------------------------------------------------
Net investment income (loss) 9,333 4,067 1,663 (3,889) 2,249
--------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 1,579 21,966 4,649 73,685 4,890
Net unrealized appreciation
(depreciation) on investments 33,198 34,479 63,891 391,256 2,086
--------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 34,777 56,445 68,540 464,941 6,976
--------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 44,110 $ 60,512 $ 70,203 $ 461,052 $ 9,225
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
-------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
-------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 17,323 $ 1,386 $ 148 $ 662 $ 4,054,486
EXPENSES:
Mortality and expense risk charges 1,055 131 445 346 714,218
---------------------------------------------------------------------------------------
Net investment income (loss) 16,268 1,255 (297) 316 3,340,268
---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 8,182 (42) 2,815 1,831 2,986,989
Net unrealized appreciation
(depreciation) on investments 21,079 (1,337) 7,437 (3,555) 9,065,223
---------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 29,261 (1,379) 10,252 (1,724) 12,052,212
---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 45,529 $ (124) $ 9,955 $ (1,408) $15,392,480
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 126
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECMEBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
-------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
----------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 174,631 $ 828,642 $ 54,654 $ 82,717 $ 35,739
EXPENSES:
Mortality and expense risk charges 29,369 72,436 8,545 10,475 6,127
-------------------------------------------------------------------------------------
Net investment income 145,262 756,206 46,109 72,242 29,612
-------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized (loss) gain from
shares sold - (125,406) 12,423 54,347 5,728
Net unrealized appreciation
on investments - 371,666 27,969 5,509 10,575
-------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 246,260 40,392 59,856 16,303
-------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 145,262 $ 1,002,466 $ 86,501 $ 132,098 $ 45,915
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
---------------------------------- -------------------------------
SENTINAL
INTERNATINAL GROWTH GROWTH SMALL CAP
---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 71,101 $ 126,914 $ 520,351 $ 477,358
EXPENSES:
Mortality and expense risk charges 12,891 9,352 30,787 33,154
--------------------------------------------------------------------
Net investment income 58,210 117,562 489,564 444,204
--------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized (loss) gain from
shares sold 3,127 (39,825) 133,365 (9,041)
Net unrealized appreciation
on investments 33,776 83,638 759,665 156,309
--------------------------------------------------------------------
Net realized and unrealized
gain on investments 36,903 43,813 893,030 147,268
--------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 95,113 $ 161,375 $ 1,382,594 $ 591,472
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 127
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
-----------------------------------------------------------------------------------
EQUITY HIGH
INCOME OVERSEAS GROWTH INCOME CONTRAFUND
----------- ------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 332,243 $ 106,077 $ 508,477 $ 154,838 $ 30,797
EXPENSES:
Mortality and expense risk charges 61,108 16,784 45,640 15,314 9,280
-----------------------------------------------------------------------------------
Net investment income (loss) 271,135 89,293 462,837 139,524 21,517
-----------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 183,982 11,052 144,728 (30,566) 18,665
Net unrealized appreciation
(depreciation) on investments 230,682 81,094 1,154,458 (220,695) 264,772
-----------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 414,664 92,146 1,299,186 (251,261) 283,437
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 685,799 $ 181,439 $1,762,023 $ (111,737) $ 304,954
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY
VIPF VARIABLE PORTFOLIOS
------------- --------------------------------
INDEX VP INCOME &
500 VP VALUE GROWTH
------------- ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 48,516 $ - $ 356
EXPENSES:
Mortality and expense risk charges 27,146 65 119
-------------------------------------------------
Net investment income (loss) 21,370 (65) 237
-------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 117,440 968 1,528
Net unrealized appreciation
(depreciation) on investments 659,903 1,426 7,468
-------------------------------------------------
Net realized and unrealized
gain (loss) on investments 777,343 2,394 8,996
-------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 798,713 $ 2,329 $ 9,233
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 128
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
JP MORGAN STRONG VARIABLE NEUBERGER
SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
--------------------------- -------------- --------------- ----------
INTERNATIONAL SMALL OPPORTUNITY II MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
------------- ----------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ - $ 185 $ 10 $ - $ -
EXPENSES:
Mortality and expense risk charges 1 10 2 5 66
-------------------------------------------------------------------------
Net investment (loss) income (1) 175 8 (5) (66)
-------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 70 28 30 43 565
Net unrealized appreciation
on investments 56 427 198 686 2,769
-------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 126 455 228 729 3,334
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 125 $ 630 $ 236 $ 724 $ 3,268
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
------------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 170 $ 93 $ 65 $ 115 $3,554,049
EXPENSES:
Mortality and expense risk charges 36 6 25 28 388,771
-------------------------------------------------------------------------
Net investment (loss) income 134 87 40 87 3,165,278
-------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 164 (160) 96 54 483,405
Net unrealized appreciation
on investments 1,643 23 1,929 1,693 3,637,639
-------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1,807 (137) 2,025 1,747 4,121,044
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,941 $ (50) $ 2,065 $ 1,834 $7,286,322
=========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 129
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Market Street Fund
----------------------------------------------------------------------------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth
--------- -------- ---------- --------- ------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 131,394 $ 139,288 $ 1,211 $ 23,450 $ 9,403 $ 19,573 $ 434
EXPENSES:
Mortality and expense risk charges 22,402 24,951 3,114 5,910 1,833 5,158 2,431
----------------------------------------------------------------------------------------
Net investment income (loss) 108,992 114,337 (1,903) 17,540 7,570 14,415 (1,997)
----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold - 106,196 12,533 13,707 483 6,441 16,851
Net unrealized appreciation
on investments - 353,473 51,230 85,995 11,666 2,281 44,338
----------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 459,669 63,763 99,702 12,149 8,722 61,189
----------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 108,992 $ 574,006 $ 61,860 $ 117,242 $ 19,719 $ 23,137 $ 59,192
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Alger American Fund
-------------------------
Growth Small Cap
---------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 9,832 $ 54,467
EXPENSES:
Mortality and expense risk charges 11,355 15,072
-------------------------
Net investment income (loss) (1,523) 39,395
-------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 48,393 29,498
Net unrealized appreciation
on investments 176,680 141,467
-------------------------
Net realized and unrealized
gain on investments 225,073 170,965
-------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 223,550 $ 210,360
=========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 130
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
VIPF
--------------------------------------------------------------------------
EQUITY HIGH INDEX
INCOME OVERSEAS GROWTH INCOME CONTRAFUND 500 TOTAL
---------- ----------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 146,791 $ 22,598 $ 30,327 $ 17,180 $ - $ - $ 605,948
EXPENSES:
Mortality and expense risk charges 25,535 6,281 17,476 5,215 812 984 148,529
------------------------------------------------------------------------------------------
Net investment income (loss) 121,256 16,317 12,851 11,965 (812) (984) 457,419
------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 77,167 9,870 48,614 10,903 2,592 1,900 385,148
Net unrealized appreciation
(depreciation) on 428,283 (475) 280,065 62,794 5,500 15,881 1,659,178
------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 505,450 9,395 328,679 73,697 8,092 17,781 2,044,326
------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $ 341,530 $ 85,662 $ 7,280 $ 16,797 $ 2,501,745
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 131
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET FUND
-------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- -------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 182,501 $ 201,350 $ 257,205 $ (6,033) $(49,317)
-------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 18,682,585 3,472,661 502,580 450,497 517,217
Transfers between investment
sub-accounts and general account, net (17,513,159) 441,371 116,341 315,228 428,435
Surrenders and lapses (129,543) (642,850) (60,070) (39,263) (42,491)
Death benefits - (17,717) - - -
Loan collateral interest received 6,164 4,077 1,290 2,872 11
Transfers for policy loans 36,797 (122,318) (21,898) 222,748 (3,291)
Cost of insurance and administrative charges (1,012,392) (1,071,664) (155,432) (192,739) (118,739)
Miscellaneous 10,796 (2,509) 202 3,717 263
-------------------------------------------------------------------------------
Total capital transactions 81,248 2,061,051 383,013 763,060 781,405
-------------------------------------------------------------------------------
Increase in net assets 263,749 2,262,401 640,218 757,027 732,088
Net assets, beginning of period 5,094,708 10,657,443 1,345,542 1,235,846 1,002,352
-------------------------------------------------------------------------------
Net assets, end of period $ 5,358,457 $ 12,919,844 $ 1,985,760 $1,992,873 $ 1,734,440
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
------------------------------- -----------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 646,592 $ 800,305 $ 2,124.245 $ 2,326,399
--------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 687,287 639,909 2,019,518 1,495,117
Transfers between investment
sub-accounts and general account, net 133,338 478,416 1,708,558 126,6009
Surrenders and lapses (47,051) (19,197) (218,945) (216,2798)
Death benefits (5,597) - - (1686)
Loan collateral interest received 301 985 4,566 2,8369
Transfers for policy loans (9,989) (11,042) (152,859) (127,5694)
Cost of insurance and administrative charges (216,417) (194,166) (592,963) (458,654)
Miscellaneous 2,715 (973) 1,537 (1,656)
--------------------------------------------------------------
Total capital transactions 544,587 893,932 2,769,412 820,227
--------------------------------------------------------------
Increase in net assets 1,191,179 1,694,237 4,893,657 3,146,626
Net assets, beginning of period 1,928,397 1,524,280 4,967,272 4,898,905
--------------------------------------------------------------
Net assets, end of period $ 3,119,576 $ 3,218,517 $ 9,860.929 $ 8,045,531
==============================================================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-61
<PAGE> 132
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- -------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 479,788 $ 1,199,206 $ 3,307,616 $ 164,304 $ 717,598
-------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 2,589,209 830,581 2,642,108 668,099 1,053,960
Transfers between investment
sub-accounts and general account, net 434,075 321,622 1,897,474 224,167 1,497,929
Surrenders and lapses (338,308) (116,132) (369,618) (254,614) (165,080)
Death benefits (15,977) (890) (18,064) - (391)
Loan collateral interest received 5,410 1,079 5,360 1,059 2,169
Transfers for policy loans (150,436) (37,314) (53,981) 15,738 (39,618)
Cost of insurance and administrative
charges (896,278) (241,330) (782,269) (218,356) (273,807)
Miscellaneous (558) 2,519 2,059 224 766
-------------------------------------------------------------------------------------
Total capital transactions 1,627,137 760,135 3,323,069 436,317 2,075,928
-------------------------------------------------------------------------------------
Increase in net assets 2,106,925 1,959,341 6,630,685 600,621 2,793,528
Net assets, beginning of period 8,587,503 2,372,031 7,172,129 2,099,984 1,852,603
-------------------------------------------------------------------------------------
Net assets, end of period 10,694,428 $ 4,331,372 $ 13,802,814 $ 2,700,605 $ 4,646,129
=====================================================================================
<CAPTION>
AMERICAN CENTURY VARIABLE
VIPF PORTFOLIOS
------------- ----------------------------------
VP INCOME &
INDEX 500 VP VALUE GROWTH
------------- ---------------- ----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,255,287 $ (12,155) $ 98,535
-------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 4,757,826 95,324 250,364
Transfers between investment
sub-accounts and general account, net 6,525,053 118,104 636,747
Surrenders and lapses (144,754) (335) (2,017)
Death benefits (278) - -
Loan collateral interest received 1,475 30 30
Transfers for policy loans (74,165) (1,615) (1,652)
Cost of insurance and administrative
charges (1,205,701) (16,178) (64,083)
Miscellaneous (7,881) 1,020 (528)
-------------------------------------------------
Total capital transactions 9,851,575 196,350 818,861
-------------------------------------------------
Increase in net assets 12,106,862 184,195 917,396
Net assets, beginning of period 6,177,933 34,803 98,878
-------------------------------------------------
Net assets, end of period $ 18,284,795 $ 218,998 $ 1,016,274
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 133
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
STRONG VARIABLE
INSURANCE NEUBERGER
JP MORGAN SERIES TRUST II STRONG FUNDS BERMAN
----------------------------------- ----------------- ------------------ ----------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
----------------- ---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 44,110 $ 60,512 $ 70,203 $ 461,052 $ 9,225
---------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 33,152 96,651 104,505 283,781 116,821
Transfers between investment
sub-accounts and general
account, net 255,894 57,937 446,411 907,034 128,937
Surrenders and lapses (222) (942) (1,323) (962) (835)
Death benefits - - - - -
Loan collateral interest received - - 30 15 -
Transfers for policy loans (790) (2,271) (39) (178) (1,542)
Cost of insurance and
administrative charges (5,688) (16,273) (15,424) (50,854) (22,504)
Miscellaneous (26) 326 145 (648) 1,049
---------------------------------------------------------------------------------------------
Total capital transactions 282,320 135,428 534,305 1,138,188 221,926
---------------------------------------------------------------------------------------------
Increase in net assets 326,430 195,940 604,508 1,599,240 231,151
Net assets, beginning of period 3,665 7,898 5,302 4,889 50,094
---------------------------------------------------------------------------------------------
Net assets, end of period $ 330,095 $ 203,838 $ 609,810 $ 1,603,929 $ 281,245
=============================================================================================
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
--------------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
------------------ ----------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 45,529 $ (124) $ 9,955 $ (1,408) $ 15,392,480
----------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 73,810 11,385 20,290 25,462 42,120,899
Transfers between investment
sub-accounts and general
account, net 99,089 18,795 31,986 107,309 (56,309)
Surrenders and lapses (1,016) - (2,114) (217) (2,814,178)
Death benefits - - - - (59,082)
Loan collateral interest received - - - - 39,759
Transfers for policy loans - - (2,265) - (539,549)
Cost of insurance and
administrative charges (16,831) (1,588) (5,138) (7,755) (7,853,223)
Miscellaneous 13 (73) 29 48 12,576
----------------------------------------------------------------------------------------------
Total capital transactions 155,065 28,519 42,788 124,847 30,850,693
----------------------------------------------------------------------------------------------
Increase in net assets 200,594 28,395 52,743 123,439 46,243,173
Net assets, beginning of period 35,824 8,701 21,046 15,382 61,203,210
----------------------------------------------------------------------------------------------
Net assets, end of period $ 236,418 $ 37,096 $ 73,789 $ 138,821 $ 107,446,383
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 134
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
----------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 145,262 $ 1,002,466 $ 86,501 $ 132,098 $ 45,915
----------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 16,065,276 3,354,679 445,159 398,177 196,330
Transfers between investment
sub-accounts and general
account, net (14,045,451) 2,034,966 311,097 221,558 398,322
Surrenders and lapses (68,115) (132,734) (21,255) (69,168) (5,455)
Death benefits - (7,259) - - -
Loan collateral interest received 2,566 938 33 65 -
Transfers for policy loans (126,218) (85,328) (8,932) (269,851) (183)
Cost of insurance and
administrative charges (740,562) (856,845) (109,134) (146,025) (64,998)
Miscellaneous (81,958) 3,632 (360) 2,239 942
----------------------------------------------------------------------------------------
Total capital transactions 1,005,538 4,312,049 616,608 136,995 524,958
----------------------------------------------------------------------------------------
Increase in net assets 1,150,800 5,314,515 703,109 269,093 570,873
Net assets, beginning of period 3,943,908 5,342,928 642,433 966,753 431,479
----------------------------------------------------------------------------------------
Net assets, end of period $ 5,094,708 $ 10,657,443 $ 1,345,542 $ 1,235,846 $ 1,002,352
========================================================================================
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
-------------------------------- ---------------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 95,113 $ 161,375 $ 1,382,594 $ 591,472
-----------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 559,764 459,162 1,209,427 1,436,433
Transfers between investment
sub-accounts and general
account, net 561,436 384,776 742,149 634,727
Surrenders and lapses (27,026) (6,365) (55,449) (90,129)
Death benefits - (74) (3,477) -
Loan collateral interest received 63 18 789 905
Transfers for policy loans (9,095) (4,451) (60,399) (45,307)
Cost of insurance and
administrative charges (156,931) (106,073) (326,928) (380,014)
Miscellaneous (262) 9,459 702 1,507
-----------------------------------------------------------------------
Total capital transactions 927,949 736,452 1,506,814 1,558,122
-----------------------------------------------------------------------
Increase in net assets 1,023,062 897,827 2,889,408 2,149,594
Net assets, beginning of period 905,335 626,453 2,077,864 2,749,311
-----------------------------------------------------------------------
Net assets, end of period $ 1,928,397 $ 1,524,280 $ 4,967,272 $ 4,898,905
=======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE> 135
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- -------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS $ 685,799 $ 181,439 $ 1,762,023 $ (111,737) $ 304,954
RESULTING FROM OPERATIONS
-------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 2,326,536 743,468 1,759,391 581,195 415,042
Transfers between investment
sub-accounts and general account, net 1,742,916 449,158 960,014 702,770 833,579
Surrenders and lapses (76,821) (58,543) (122,190) (21,495) (5,561)
Death benefits (6,548) - - - -
Loan collateral interest received 1,619 493 1,166 216 90
Transfers for policy loans (102,818) (22,119) (116,207) (49,108) (6,944)
Cost of insurance and administrative
charges (700,287) (185,158) (501,069) (157,515) (106,990)
Miscellaneous 6,609 2,008 2,116 (345) 1,387
-------------------------------------------------------------------------------------
Total capital transactions 3,191,206 929,307 1,983,221 1,055,718 1,130,603
-------------------------------------------------------------------------------------
Increase in net assets 3,877,005 1,110,746 3,745,244 943,981 1,435,557
Net assets, beginning of period 4,710,498 1,261,285 3,426,885 1,156,003 417,046
-------------------------------------------------------------------------------------
Net assets, end of period $ 8,587,503 $ 2,372,031 $ 7,172,129 $ 2,099,984 $ 1,852,603
=====================================================================================
<CAPTION>
AMERICAN CENTURY VARIABLE
VIPF PORTFOLIOS
------------- ----------------------------------
VP INCOME &
INDEX 500 VP VALUE GROWTH
------------- ---------------- ----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS $ 798,713 $ 2,329 $ 9,233
RESULTING FROM OPERATIONS
-------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,365,857 15,989 19,753
Transfers between investment
sub-accounts and general account, net 3,838,930 18,383 71,190
Surrenders and lapses (6,581) - -
Death benefits - - -
Loan collateral interest received 820 - -
Transfers for policy loans (28,549) - -
Cost of insurance and administrative
charges (339,911) (1,892) (1,301)
Miscellaneous 4,244 (6) 3
-------------------------------------------------
Total capital transactions 4,834,810 32,474 89,645
-------------------------------------------------
Increase in net assets 5,633,523 34,803 98,878
Net assets, beginning of period 544,410 - -
-------------------------------------------------
Net assets, end of period $ 6,177,933 $ 34,803 $ 98,878
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE> 136
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
STRONG VARIABLE
INSURANCE NEUBERGER
JP MORGAN SERIES TRUST II STRONG FUNDS BERMAN
----------------------------------- ----------------- ----------------- ---------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
----------------- ---------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 125 $ 630 $ 236 $ 724 $ 3,268
------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 116 898 565 378 11,133
Transfers between investment
sub-accounts and general
account, net 3,456 6,594 4,661 3,673 37,275
Surrenders and lapses - - - - -
Death benefits - - - - -
Loan collateral interest received - - - - -
Transfers for policy loans - - - - -
Cost of insurance and
administrative charges (33) (285) (157) (82) (1,557)
Miscellaneous 1 61 (3) (4) (25)
------------------------------------------------------------------------------------------
Total capital transactions 3,540 7,268 5,066 3,965 46,826
------------------------------------------------------------------------------------------
Increase in net assets 3,665 7,898 5,302 4,689 50,094
Net assets, beginning of period - - - - -
------------------------------------------------------------------------------------------
Net assets, end of period $ 3,665 $ 7,898 $ 5,302 $ 4,689 $ 50,094
==========================================================================================
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
----------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
---------------- --------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,941 $ (50) $ 2,065 $ 1,834 $ 7,286,322
----------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,395 346 664 122 31,367,255
Transfers between investment
sub-accounts and general
account, net 33,060 8,465 18,678 13,988 (9,630)
Surrenders and lapses - - - - (766,887)
Death benefits - - - - (17,358)
Loan collateral interest received - - - - 9,781
Transfers for policy loans - - - - (935,509)
Cost of insurance and
administrative charges (580) (127) (362) (562) (4,885,378)
Miscellaneous 8 67 1 - (47,977)
----------------------------------------------------------------------------------------
Total capital transactions 33,883 8,751 18,981 13,548 24,714,297
----------------------------------------------------------------------------------------
Increase in net assets 35,824 8,701 21,046 15,382 32,000,619
Net assets, beginning of period - - - - 29,202,591
----------------------------------------------------------------------------------------
Net assets, end of period $ 35,824 $ 8,701 $ 21,046 $ 15,382 $ 61,203,210
========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE> 137
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARKET STREET FUND
---------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 108,992 $ 574,006 $ 61,860 $ 117,242 $ 19,719
---------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 14,928,533 1,666,786 226,537 291,903 117,811
Transfers between investment
sub-accounts and general
account, net (11,556,251) 2,658,992 304,863 252,090 250,863
Surrenders and lapses (35,239) (16,526) (3,762) (7,277) (2,819)
Death benefits - (16,352) - - -
Loan collateral interest received - 62 - - -
Transfers for policy loans - (12,082) (47) - -
Cost of insurance and
administrative charges (632,456) (368,354) (52,706) (103,982) (33,934)
Miscellaneous (1,308) 4,519 158 (328) (11)
---------------------------------------------------------------------------------------
Total capital transactions 2,703,279 3,917,045 475,043 432,406 331,910
---------------------------------------------------------------------------------------
Increase in net assets 2,812,271 4,491,051 536,903 549,648 351,629
Net assets, beginning of period 1,131,637 851,877 105,530 417,105 79,850
---------------------------------------------------------------------------------------
Net assets, end of period $ 3,943,908 $ 5,342,928 $ 642,433 $ 966,753 $ 431,479
=======================================================================================
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
-------------------------------- --------------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 23,137 $ 59,192 $ 223,550 $ 210,360
----------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 333,866 200,093 726,590 1,015,432
Transfers between investment
sub-accounts and general
account, net 372,293 310,212 755,142 1,179,593
Surrenders and lapses (3,213) (1,141) (6,060) (19,896)
Death benefits - - - (830)
Loan collateral interest received - 9 91 93
Transfers for policy loans (845) (437) (9,340) (14,708)
Cost of insurance and
administrative charges (82,909) (37,403) (174,005) (238,728)
Miscellaneous (1,222) 3,791 246 (388)
----------------------------------------------------------------------
Total capital transactions 617,970 475,124 1,292,664 1,920,568
----------------------------------------------------------------------
Increase in net assets 641,107 534,316 1,516,214 2,130,928
Net assets, beginning of period 264,228 92,137 561,650 618,383
----------------------------------------------------------------------
Net assets, end of period $ 905,335 $ 626,453 $ 2,077,864 $ 2,749,311
======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE> 138
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
VIPF
---------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $ 341,530 $ 85,662 $ 7,280
---------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,350,368 421,824 1,240,642 273,306 90,825
Transfers between investment
sub-accounts and general account, net 1,824,653 715,582 1,471,895 690,283 331,696
Surrenders and lapses (15,710) (3,305) (15,336) (2,774) (489)
Death benefits - (295) (879) - -
Loan collateral interest received 390 101 115 12 -
Transfers for policy loans (27,151) (8,820) (15,684) (1,157) (201)
Cost of insurance and administrative
charges (363,378) (92,839) (274,427) (61,178) (12,527)
Miscellaneous 89 2,820 1,042 511 462
---------------------------------------------------------------------------------------
Total capital transactions 2,769,261 1,035,068 2,407,368 899,003 409,766
---------------------------------------------------------------------------------------
Increase in net assets 3,395,967 1,060,780 2,748,898 984,665 417,046
Net assets, beginning of period 1,314,531 200,505 677,987 171,338 -
---------------------------------------------------------------------------------------
Net assets, end of period $ 4,710,498 $ 1,261,285 $ 3,426,885 $ 1,156,003 $ 417,046
=======================================================================================
<CAPTION>
VIPF
-------------
INDEX 500 TOTAL
------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 16,797 $ 2,501,745
---------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 112,247 22,996,763
Transfers between investment
sub-accounts and general account, net 436,969 (1,125)
Surrenders and lapses (322) (133,869)
Death benefits - (18,356)
Loan collateral interest received - 873
Transfers for policy loans - (90,472)
Cost of insurance and administrative
charges (19,167) (2,547,993)
Miscellaneous (2,114) 8,267
---------------------------------
Total capital transactions 527,613 20,214,088
---------------------------------
Increase in net assets 544,410 22,715,833
Net assets, beginning of period - 6,486,758
---------------------------------
Net assets, end of period $ 544,410 $ 29,202,591
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE> 139
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Variable Life Insurance Account (the Variable Account) began operations
on March 11, 1996 and is registered as a unit investment trust under the
Investment Company Act of 1940, as amended. The operations of the Variable
Account are part of National Life Insurance Company (National Life). The
Variable Account was established by National Life as a separate investment
account to invest the net premiums received from the sale of certain variable
life insurance products. Equity Services, Inc., an indirect wholly-owned
subsidiary of National Life, is the principal underwriter for the variable life
insurance policies issued by National Life. Sentinel Advisors Company, an
indirectly-owned subsidiary of National Life, provides investment advisory
services for certain Market Street Fund, Inc. mutual fund portfolios.
National Life maintains three segments within the Variable Account. The Varitrak
Segment (the Segment) within the Variable Account was established on March 11,
1996 and is used exclusively for National Life's flexible premium variable life
insurance products known collectively as Varitrak. On May 1, 1998, National Life
established the Estate Provider Segment within the Variable Account to be used
exclusively for National Life's flexible premium variable life insurance
products known collectively as Estate Provider. On February 12, 1999, National
Life established the Benefit Provider Segment within the Variable Account to be
used exclusively for National Life's flexible premium variable universal life
policy known collectively as Benefit Provider.
The Segment invests the accumulated policyholder account values in shares of
mutual fund portfolios within Market Street Fund, Inc., Alger American Fund,
Variable Insurance Products Fund and Variable Insurance Products fund II (VIPF),
American Century Variable Portfolios, JP Morgan Series Trust II, Strong Variable
Insurance Funds, Strong Opportunity Fund II, Neuberger Berman Advisers
Management Trust and Goldman Sachs Variable Insurance Trust. Net premiums
received by the Segment are deposited in investment portfolios as designated by
the policyholder, except for initial net premiums on new policies which are
first invested in the Market Street Fund Money Market Portfolio. Policyholders
may also direct the allocations of their account value between the various
investment portfolios within the Segment and a declared interest account (within
the General Account of National Life) through participant transfers.
There are Twenty-six sub-accounts within the Segment. Each sub-account, which
invests exclusively in the shares of the corresponding portfolio, comprises the
accumulated policyholder account values of the underlying variable life
insurance policies investing in the sub-account.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States (GAAP). The preparation of
financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
in the preparation of the Segment's financial statements.
INVESTMENTS
The mutual fund portfolios consist of the Market Street Fund Money Market,
Market Street Fund Growth, Market Street Fund Aggressive Growth, Market Street
Fund Managed, Market Street Fund Bond, Market Street Fund International, Market
Street Fund Sentinel Growth, Alger American Fund Growth, Alger American Fund
Small Capitalization, VIPF Equity Income, VIPF Overseas, VIPF Growth, VIPF High
Income, VIPF Contra, VIPF Index 500, American Century Variable Portfolios VP
Value, American Century
F-69
<PAGE> 140
Variable Portfolios VP Income & Growth, JP Morgan Series Trust II International
Opportunities, JP Morgan Series Trust II Small Company, Strong Opportunity Fund
II, Strong Variable Insurance Funds Mid Cap Growth, Neuberger Berman Advisers
Management Trust Partners Portfolio, Goldman Sachs Variable Insurance Trust
International Equity, Goldman Sachs Variable Insurance Trust Global Income,
Goldman Sachs Variable Insurance Trust CORE Small Cap Equity, and Goldman Sachs
Variable Insurance Trust Mid Cap Value (formerly Goldman Sachs Variable
Insurance Trust Mid Cap Equity) (the Portfolios). The assets of each portfolio
are held separate from the assets of the other portfolios and each has different
investment objectives and policies. Each portfolio operates separately and the
gains or losses in one portfolio have no effect on the investment performance of
the other portfolios.
INVESTMENT VALUATION
The investments in the Portfolios are valued at the closing net asset value per
share as determined by the portfolio at the end of each period. The change in
the difference between cost and market value is reflected as unrealized gain
(loss) in the Statement of Operations.
INVESTMENT TRANSACTIONS
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed) and dividend income (including capital gain
distributions) are recorded on the ex-dividend date. The cost of investments
sold was determined using the average cost method prior to 1998. Effective
January 1, 1998, the Variable Account changed its method of calculating the cost
of investments sold from the average cost method to the first in, first out
method (FIFO). Management believes FIFO better matches policyholder and
sub-account investment activity. Management also believes it would be
impractical to calculate the cumulative effect of this change on previously
reported realized and unrealized gains and losses; however, during 1998 the
change increased net realized gains by $ 176,300 and decreased net unrealized
gains by the same amount.
FEDERAL INCOME TAXES
The operations of the Segment are part of, and taxed with, the total operations
of National Life. Under existing federal income tax law, investment income and
capital gains attributable to the Segment are not taxed.
NOTE 3 - CHARGES AND EXPENSES
National Life deducts a daily charge from the Segment based on an annual rate of
.9% of each sub-account's net asset value for its assumption of mortality and
expense risks. The mortality risk assumed is that the insureds under the
policies may die sooner than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the policies may exceed expected
levels.
Cost of insurance charges are deducted monthly from each policyholder's
accumulated account value for the insurance protection provided and are remitted
to National Life. These charges vary based on the net amount at risk, attained
age of the insured, and other factors. As partial compensation for
administrative services provided, National Life also deducts a monthly
administrative charge from each policyholder's accumulated account value.
Certain deferred administrative and sales charges are deducted from the
policyholder's accumulated account value if the underlying variable life
insurance policy is surrendered or lapsed prior to the end of the fifteenth
policy year.
F-70
<PAGE> 141
NOTE 4 - INVESTMENTS
The number of shares held and cost for each of the portfolios at December 31,
1999 are set forth below:
<TABLE>
<CAPTION>
Portfolio Shares Cost
- --------- --------- ------------
<S> <C> <C>
Market Street Fund
Money Market 5,358,457 $5,358,457
Growth 682,146 12,175,244
Aggressive Growth 90,385 1,781,021
Managed 118,694 1,999,930
Bond 163,936 1,767,570
International 187,025 2,575,305
Sentinel Growth 180,917 2,402,248
Alger American Fund
Growth 153,168 7,879,902
Small Capitalization 145,885 6,150,958
VIPF
Equity Income 415,964 10,198,642
Overseas 157,849 3,202,915
Growth 251,280 10,482,207
High Income 238,780 2,738,276
Contrafund 159,387 3,905,880
Index 500 109,222 16,187,265
American Century Variable Portfolios
VP Value 36,806 232,301
VP Income & Growth 127,034 931,049
JP Morgan Series Trust II
International Opportunities 23,868 296,841
Small Company 12,184 168,933
Strong Opportunity Fund II 23,463 545,722
Strong Variable Insurance Funds
Mid Cap Growth 52,813 1,211,986
Neuberger & Berman Partners Portfolio 14,320 276,390
Goldman Sachs Variable Insurance Trust
International Equity 16,339 213,696
Global Income 3,774 38,411
CORE Small Cap Equity 6,961 64,424
Mid Cap Value 16,487 140,683
-----------
Total $92,926,256
===========
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-71
<PAGE> 142
NOTE 5 - PURCHASES AND SALES OF PORTFOLIO SHARES
Purchases and proceeds from sales of shares in the portfolios for the period
ended December 31, 1999 aggregated the following:
<TABLE>
<CAPTION>
Portfolio Purchases Proceeds
- --------- ------------ ------------
<S> <C> <C>
Market Street Fund
Money Market $ 30,017,749 $ 29,754,001
Growth 5,906,146 3,707,638
Aggressive Growth 1,012,942 463,509
Managed 1,601,669 783,151
Bond 1,237,707 443,654
International 1,373,865 716,226
Sentinel Growth 1,530,288 584,581
Alger American Fund
Growth 5,246,454 1,954,478
Small Capitalization 3,299,916 1,842,757
VIPF
Equity Income 4,653,458 2,690,803
Overseas 1,653,898 819,970
Growth 6,794,360 2,710,100
High Income 1,636,086 1,004,971
Contra Fund 3,173,362 1,042,936
Index 500 14,975,545 5,113,839
American Century Variable Portfolios
VP Value 247,551 46,463
VP Income & Growth Fund 1,087,652 272,961
JP Morgan Series Trust II
International Opportunities 303,830 12,176
Small Company 291,978 152,482
Strong Opportunity Fund II 616,948 80,979
Strong Variable Insurance Funds
Mid Cap Growth 1,479,359 345,061
Neuberger Berman Advisers Management Trust
Partners Portfolio 341,053 116,879
Goldman Sachs Variable Insurance Trust
International Equity 288,345 117,011
Global Income 32,872 3,098
CORE Small Cap Equity 76,961 34,469
Mid Cap Value 143,810 18,647
</TABLE>
NOTE 6 - LOANS
Policyholders may obtain loans after the first policy year as outlined in the
variable life insurance policy. At the time a loan is granted, accumulated value
equal to the amount of the loan is designated as collateral and transferred from
the Segment to the General Account of National Life. Interest is credited by
National Life at predetermined rates on collateral held in the General Account.
This interest is periodically transferred to the Segment.
NOTE 7 - DISTRIBUTION OF NET INCOME
The Segment does not expect to declare dividends to policyholders from
accumulated net income. The accumulated net income will be distributed to
policyholders as withdrawals (in the form of death benefits, surrenders or
policy loans) in excess of the policyholders' net contributions to the Segment.
F-72
<PAGE> 143
NOTE 8 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (IRC), a
variable universal life insurance contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
a variable universal life insurance contract for federal income tax purposes for
any period for which the investments of the segregated asset account on which
the contract is based are not adequately diversified. The IRC provides that the
adequately diversified requirement may be met if the underlying investments
satisfy either a statutory safe harbor test or diversification requirements set
forth in regulations issued by the Secretary of the Treasury.
National Life believes that the Segment satisfies the current requirements of
the regulations, and it intends that the Segment will continue to meet such
requirements.
F-73
<PAGE> 144
VARITRAK
VARIABLE UNIVERSAL LIFE INSURANCE
P R O S P E C T U S
DATED MAY 1, 2000
<TABLE>
<S> <C>
NATIONAL LIFE INSURANCE COMPANY Home Office: National Life Drive, Montpelier, Vermont 05604
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT Telephone: (800) 537-7003
</TABLE>
This prospectus describes the VariTrak policy, a variable universal
life insurance policy offered by National Life Insurance Company. This Policy
combines insurance and investment features. The policy's primary purpose is to
provide insurance protection on the life of the insured person. You can make
premium payments at various times and in various amounts. You can also allocate
premiums among a number of funds with different investment objectives, and you
can increase or decrease the death benefit payable under your policy. This
Prospectus offers the policy only in the State of New York.
We deduct certain charges from premium payments. Then these premium
payments go to the National Variable Life Insurance Account, a separate account
of National Life, or to the general account, or a combination of the two. The
general account pays interest at rates guaranteed to be at least 4%. The
separate account currently has twenty-six subaccounts. Each subaccount buys
shares of a specific fund portfolio. The available funds are:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
VARIABLE INSURANCE PRODUCTS AMERICAN CENTURY VARIABLE GOLDMAN SACHS VARIABLE
MARKET STREET FUND, INC. FUND AND PORTFOLIOS, INC. INSURANCE TRUST
VARIABLE INSURANCE PRODUCTS
FUND II
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AGGRESSIVE GROWTH PORTFOLIO* GROWTH PORTFOLIO VP INCOME & GROWTH CORE SMALL CAP EQUITY
BOND PORTFOLIO* HIGH INCOME PORTFOLIO VP VALUE GLOBAL INCOME
GROWTH PORTFOLIO* EQUITY INCOME PORTFOLIO INTERNATIONAL EQUITY
INTERNATIONAL PORTFOLIO+ OVERSEAS PORTFOLIO MID CAP VALUE
MANAGED PORTFOLIO* INDEX 500 PORTFOLIO
MONEY MARKET PORTFOLIO* CONTRAFUND PORTFOLIO
SENTINEL GROWTH PORTFOLIO*
*Managed by Sentinel Advisors Managed by Fidelity Investments Managed by American Century Managed by Goldman Sachs
Company Investment Management, Inc. Asset Management & Goldman
+Managed by Provident Mutual Sachs Asset Management
Investment Management Company International
- ------------------------------------------------------------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISERS STRONG VARIABLE INSURANCE ALGER AMERICAN FUND
J.P. MORGAN SERIES TRUST II MANAGEMENT TRUST FUNDS, INC. AND STRONG
OPPORTUNITY FUND II
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL OPPORTUNITIES PARTNERS PORTFOLIO MID CAP GROWTH FUND II SMALL CAPITALIZATION
SMALL COMPANY OPPORTUNITY FUND II GROWTH
Managed by J. P. Morgan Investment Managed by Neuberger Berman Managed by Strong Capital Managed by Fred Alger
Management, Inc. Management, Inc. Management, Inc. Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
</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
tax charge, cost of insurance charges, a mortality and expense risk charge, an
administrative charge, and certain other charges. During the first five years
your policy will remain in force if specified premiums are paid on time, or if
the policy has enough value to pay the monthly charges as they become due. After
the fifth year, the Policy will remain in force only so long as it has enough
value to pay the monthly charges as they become due.
We recommend that you read this prospectus carefully. You should keep it to
refer to later.
Investments in these contracts are not deposits or obligations of, and are not
guaranteed or endorsed by, adviser of any of the underlying funds identified
above, the U.S. government, or any bank or bank affiliate. Investments are not
<PAGE> 145
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency.
It may not be advantageous to purchase a policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if you already own another variable universal life insurance policy.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
POLICY OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 146
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary Description of the Policy.........................................................................
The Policy ......................................................................................
The Separate Account.............................................................................
Availability of Policy...........................................................................
The Death Benefit................................................................................
Flexibility to Adjust Amount of Death Benefit....................................................
Accumulated Value................................................................................
Allocation of Net Premiums.......................................................................
Transfers........................................................................................
Free-Look Privilege..............................................................................
Charges Assessed in Connection with the Policy...................................................
Loan Privilege...................................................................................
Withdrawal of Cash Surrender Value...............................................................
Surrender of the Policy..........................................................................
Available Automated Fund Management Features.....................................................
Tax Treatment....................................................................................
Other Policies
Illustrations....................................................................................
Questions
National Life Insurance Company, The Separate Account, and The Funds......................................
National Life Insurance Company..................................................................
The Separate Account.............................................................................
The Market Street Fund...........................................................................
Variable Insurance Products Fund and Variable Insurance Products Fund II.........................
Alger American Fund..............................................................................
American Century Variable Portfolios, Inc........................................................
Goldman Sachs Variable Insurance Trust...........................................................
J.P. Morgan Series Trust II......................................................................
Neuberger Berman Advisers Management Trust.......................................................
Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund II, Inc........................
Planned Substitutions............................................................................
Additional Funds to be Offered in the Future....................................................
Other Information................................................................................
The General Account..............................................................................
Detailed Description of Policy Provisions.................................................................
Death Benefit....................................................................................
Ability to Adjust Face Amount....................................................................
How the Duration of the Policy May Vary..........................................................
Accumulated Value................................................................................
Payment and Allocation of Premiums...............................................................
Charges and Deductions....................................................................................
Premium Tax Charge...............................................................................
Surrender Charge.................................................................................
Monthly Deductions...............................................................................
Mortality and Expense Risk Charge................................................................
Withdrawal Charge................................................................................
Transfer Charge..................................................................................
Projection Report Charge.........................................................................
Other Charges....................................................................................
</TABLE>
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<TABLE>
<S> <C>
Policy Rights and Privileges..............................................................................
Loan Privileges..................................................................................
Surrender Privilege..............................................................................
Withdrawal of Cash Surrender Value...............................................................
Free-Look Privilege..............................................................................
Telephone Transaction Privilege..................................................................
Other Transfer Rights............................................................................
Available Automated Fund Management Features.....................................................
Policy Rights Under Certain Plans................................................................
The General Account.......................................................................................
Minimum Guaranteed and Current Interest Rates....................................................
Transfers from General Account...................................................................
Other Policy Provisions...................................................................................
Optional Benefits.........................................................................................
Federal Income Tax Considerations.........................................................................
Introduction.....................................................................................
Tax Status of the Policy.........................................................................
Tax Treatment of Policy Benefits.................................................................
Special Rules for Employee Benefit Plans.........................................................
Possible Tax Law Changes.........................................................................
Possible Charges for National Life's Taxes.......................................................
Policies Issued in Conjunction with Employee Benefit Plans................................................
Legal Developments Regarding Unisex Actuarial Tables......................................................
Voting Rights.............................................................................................
Changes in Applicable Law, Funding and Otherwise..........................................................
Officers and Directors of National Life...................................................................
Distribution of Policies..................................................................................
Policy Reports ........................................................................................
State Regulation..........................................................................................
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-Surrender Charge Target Premiums and Maximum Deferred Sales
Charges.......................................................................................... B-1
Financial Statements...................................................................................... F-1
</TABLE>
THE POLICY MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT OFFER
THE POLICY IN ANY STATE IN WHICH WE MAY NOT LEGALLY OFFER THE POLICY. YOU SHOULD
RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. WE DO NOT CLAIM THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
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SUMMARY DESCRIPTION OF THE POLICY
You should read this summary of the policy provisions together with the
detailed information appearing later in this Prospectus. Unless otherwise noted,
this Prospectus assumes the insured person is alive. The precise meanings of the
few capitalized terms used in this summary can be found in the Glossary, on
pages to .
THE POLICY
National Life Insurance Company issues the VariTrak variable universal
life insurance policy. This life insurance policy allows you, within limits, to
make premium payments in any amount and whenever you like. As long as the policy
remains in force, it will provide for:
(1) Life insurance coverage which will provide a death benefit on
the death of the named insured person;
(2) A cash surrender value;
(3) Surrender and withdrawal rights and policy loan privileges;
and
(4) A variety of additional insurance benefits. (Where provided
by optional riders, so long as these riders remain in force).
This policy is designed to help lessen the economic loss resulting from
the death of the insured person. You should consider your need for insurance
coverage and the policy's investment potential on a long-term basis. The policy
matures, resulting in payment of cash surrender value, when the insured reaches
age 99.
There is no fixed schedule for premium payments, although you may
establish a schedule of planned periodic premiums. You may also, after a year
and within limits, increase or decrease the policy's face amount, and you may
change the death benefit option. The policy's value and death benefit will
fluctuate based on the investment results of the chosen fund portfolios, the
crediting of interest to the general account, and the deduction of charges.
Lapse. The policy will not lapse simply because you do not pay any
particular amounts of premiums. However, the payment of premiums in any amount
or frequency will not necessarily guarantee that the policy will remain in
force. In general, the policy will lapse if it does not have enough value to pay
the monthly charges as they become due. During the first five years, the policy
will not lapse even if its value is not enough to pay the monthly charges, if at
least specified amounts of premiums have been paid (these amounts are defined in
the Glossary as the Minimum Guarantee Premium). See "How the Duration of the
Policy May Vary," page .
Optional Guaranteed Death Benefit Rider. In addition, if you buy the
optional Guaranteed Death Benefit Rider, your policy will not lapse even if its
value is not enough to pay the monthly charges, if you have paid at least the
Minimum Guarantee Premium, until the later of 20 years from the date the policy
is issued or the insured person attains age 70. See "Optional Benefits -
Guaranteed Death Benefit Rider," page .
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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.
THE SEPARATE ACCOUNT
The separate account is divided into subaccounts, 26 of which are
available under this policy. Each of these subaccounts buys shares of a
corresponding fund portfolio. See "National Life Insurance Company, the Separate
Account, and the Funds," page .
We cannot give any assurance that any portfolio will achieve its
investment objectives. You bear the entire investment risk on the value of your
policy which you allocate to the separate account.
AVAILABILITY OF POLICY
We will issue this policy for insured persons from ages 0 to 85. The
minimum face amount is generally $50,000, although exceptions to this minimum
may be made for employee benefit plans. Before issuing a policy, we will require
that the proposed insured person meet certain underwriting standards. We will
assign the insured person to one of the following types of rate classes:
- Preferred Nonsmoker
- Standard Nonsmoker
- Smoker
- Juvenile, or
- Substandard.
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 the insured
person. The death benefit will be increased by any additional benefits provided
by a supplementary benefit rider. The death benefit will be reduced by any
outstanding policy loans and accrued interest, and any unpaid monthly
deductions.
There are two death benefit options available, which we call Option A
and Option B. You may choose which option will apply to your policy.
If you choose death benefit Option A, the death benefit will be based on
the greater of :
(a) the face amount, or
(b) the Accumulated Value multiplied by a factor specified by
federal income tax law.
If you choose death benefit Option B, the death benefit will be based
on the greater of:
(a) the face amount plus the Accumulated Value, or
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(b) the Accumulated Value multiplied by the same factor that applies to
option A.
See "Death Benefit Options," Page ___.
FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
After a year, you may adjust the death benefit by changing the death
benefit option or by increasing or decreasing the face amount of your policy.
(See "Change in Death Benefit Option," Page ___, and "Ability to Adjust Face
Amount," Page ___.)
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 separate account and
the general account. (See "Calculation of Accumulated Value," Page .)
The Accumulated Value in the separate account will reflect:
- the investment performance of your chosen funds
- premiums paid
- transfers
- withdrawals
- policy loans
- loan repayments
- loan interest charged, and
- the charges assessed in connection with the policy.
We pay interest on Accumulated Value in the general account at rates we
declare in advance for specific periods. We guarantee that these rates will be
at least 4%. (See "The General Account," Page ___.)
The Accumulated Value will likely impact both the death benefit and
the cost of insurance charges.
ALLOCATION OF PREMIUMS
You will specify, in the application for your policy, the percentages
of premium to go to each subaccount of the separate account or to the general
account. You may change these percentages whenever you like. You may choose
among all 26 available subaccounts of the separate account. However, we may
limit the number of different subaccounts, other than the money market
subaccount, used in your policy over its entire life to 16.
We will allocate all premiums, after reduction for premium taxes,
received during the free-look period that are to go to the separate account to
the money market subaccount. At the end of the free look period, we will move
the amount in the money market subaccount
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(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 the general
account. Transfers between the subaccounts or from the separate account into the
general account will be made on the day we receive the request. We limit
transfers out of the general account to the greater of $1000 and 25% of the
Accumulated Value in the general account. We also allow only one transfer out of
the general account per year. See "Transfers," page .
FREE-LOOK PRIVILEGE
The Policy provides for an initial "free-look" period, during which you
may cancel the Policy and receive a refund equal to the premiums you paid. This
free-look period ends on the latest of:
(a) 45 days after you sign Part A of your application for the Policy
(b) 10 days after you receive the Policy, and
(c) 10 days after we mail or personally deliver to you a Notice of
Withdrawal Right,
or, in each case, any longer period provided by state law. To cancel your
policy, you must return the Policy to us or to our agent within such time with a
written request for cancellation. (See "Free-Look Privilege," Page .)
CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Summary of Policy Expenses.
<TABLE>
<S> <C>
TRANSACTION EXPENSES
Premium Tax (as a percentage of premiums paid)............. 3.25%
Sales Load Imposed on Purchases............................ NONE
Surrender Charge........................................... See page __
Withdrawal Charge.......................................... Lesser of 2% of amounts withdrawn or $25
Transfer Charge............................................ NONE*
</TABLE>
- - We currently have no transfer charge, but we reserve the right to
charge up to $25 for each transfer in excess of twelve transfers in any
one year.
<TABLE>
<S> <C>
SEPARATE ACCOUNT AND POLICY CHARGES
Mortality and Expense Risk Charge (deducted daily)......... 0.90% (as a percentage of separate account
Accumulated Value)
Cost of Insurance Charge (deducted monthly)................ Varies by age, sex, Rate Class, policy size and
duration of the policy-See page __
Administrative Charge (deducted monthly)................... $90 per year
Rider Charges (deducted monthly)........................... See "Optional Benefits" on page for charges for
optional riders you may choose to include in your
policy
</TABLE>
ANNUAL EXPENSES OF UNDERLYING FUNDS(1) (for the year ended December 31, 1998):
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ANNUAL EXPENSES OF UNDERLYING FUNDS(1) (for the year ended December 31, 1999):
<TABLE>
<CAPTION>
Management Other Total
Fee, after expense Expenses, Expenses,
reimbursement after expense after expense
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%
Alger:
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Small Capitalization 0.85% 0.05% 0.90%
American Century Variable Portfolios, Inc.
VP Value Portfolio 1.00% 0.00% 1.00%
VP Income & Growth Portfolio 0.70% 0.00% 0.70%
Fidelity: Variable Insurance Products Fund I
Equity Income Portfolio 0.48% 0.08% 0.56%
Growth Portfolio 0.58% 0.07% 0.65%
High Income Portfolio 0.58% 0.11% 0.69%
Overseas Portfolio 0.73% 0.14% 0.87%
Fidelity: Variable Insurance Products Fund II
Index 500 Portfolio 0.24% 0.04% 0.28%
Contrafund Portfolio 0.58% 0.07% 0.65%
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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(1) The fund expenses shown above are assessed at the underlying fund
level and are not direct charges against the subaccounts. These underlying fund
expenses are taken into consideration in computing each underlying fund's net
asset value, which is the share price used to calculate the unit values of the
subaccounts. The management fees and other expenses are more fully described in
the prospectuses for each individual underlying fund. The information relating
to the underlying fund expenses was provided by the underlying funds. We did not
independently verify it. In the absence of any voluntary fee waivers or expense
reimbursements, the management fees, other expenses, and total expenses of the
funds listed below would have been as follows:
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL MUTUAL
FEES EXPENSES FUND EXPENSES
<S> <C> <C> <C>
Fidelity VIP Fund-Equity Income Portfolio 0.48% 0.09% 0.57%
Fidelity VIP Fund-Growth Portfolio 0.58% 0.08% 0.66%
Fidelity VIP Fund-Overseas Portfolio 0.73% 0.18% 0.91%
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.10% 0.34%
Fidelity VIP Fund II-Contrafund Portfolio 0.58% 0.09% 0.67%
Strong Mid Cap Growth Fund II 1.00% 0.20% 1.20%
Strong Opportunity Fund II 1.00% 0.20% 1.20%
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%
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 Tax Charge. We deduct a premium tax charge from each premium
payment, to cover the cost of state and local premium taxes, and the federal DAC
tax. This charge is 3.25% of each premium. For qualified employee benefit plans,
the charge will be 2.00% of each premium rather than 3.25%. We may change the
amount of the charge deducted from future premiums if the applicable law
changes. (See "Premium Tax Charge," Page .)
Monthly Deductions. On the date of issue and each month thereafter, we
will take a deduction from the Accumulated Value equal to the sum of:
(a) the monthly cost of insurance charge
(b) the monthly administrative charge, and
(c) if applicable, a charge for any additional benefits added by rider.
We calculate the monthly cost of insurance charge by multiplying the
net amount at risk (that is, the unadjusted death benefit less the policy's
Accumulated Value) by the applicable cost of insurance rate(s). These rates will
depend upon the age, sex, and rate class of the insured person, the time the
coverage has been in force, your policy size, and on our expectations of future
mortality and expense experience. Our cost of insurance rates cannot exceed the
guaranteed maximum cost of insurance rates set forth in your policy. These
guaranteed maximum rates are based on the insured person's age, sex, rate class,
and the "1980 Commissioners Standard Ordinary Smoker and Nonsmoker Mortality
Table." (See "Cost of Insurance Charge," Page .)
The monthly administrative charge is currently $7.50. (See "Monthly
Administrative Charge," Page .)
After 10 years, we will credit a separate account enhancement under
which the Monthly Deductions are reduced by 0.50% per annum of the Accumulated
Value in the separate account. (See "Separate Account Enhancement," Page .) The
separate account enhancement is guaranteed.
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<PAGE> 154
Surrender Charge. We impose a surrender charge if you surrender your
policy or it lapses at any time during the first 15 years. The surrender charge
consists of a deferred administrative charge and a deferred sales charge. (See
"Surrender Charge," Page .)
The deferred administrative charge is generally initially $2 per $1,000
of initial fare amount (lower for insured people under 25 years old at issue).
After the first five years, the deferred administrative charge declines
linearly by month until the end of the fifteenth year, when it becomes zero.
We calculate the deferred sales charge individually for each policy,
based on its surrender charge target premium. The surrender charge target
premium is based on the initial face amount, and the age, sex and rate class of
the insured person. It is used solely for the purpose of calculating the
deferred sales charge. Your surrender charge target premium will be shown in
your Policy.
The deferred sales charge is equal to the lesser of:
(a) 30% of the premiums received up to one surrender charge target
premium, plus 10% of all premiums paid in excess of this
amount but not greater than twice this amount, plus 9% of all
premiums paid in excess of twice this amount,
or
(b) the maximum deferred sales charge, which is based on the
initial face amount, and the age, sex and rate class of the
insured person. The maximum deferred sales charge, which will
be shown in your policy, is level for the first five years,
and then declines linearly by month through the end of the
fifteenth year, when it becomes zero.
Appendix B to this Prospectus contains a table showing the surrender
charge target premium and the maximum deferred sales charge for male and female
nonsmokers and smokers of each age at the time a policy is issued, expressed as
a dollar amount per $1000 of initial face amount.
Daily Charge Against the Separate Account (Mortality and Expense Risk
Charge). We assess a daily charge for assuming certain mortality and expense
risks incurred in connection with the policies. This charge is currently 0.90%
annually of the average daily net assets of the separate account. (See
"Mortality and Expense Risk Charge," Page .)
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 .)
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
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<PAGE> 155
$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, not to exceed $25. (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.
We charge interest on Policy loans at a fixed rate of 6% per year.
Interest is added to the loan balance at the end of each policy year. You may
repay policy loans at any time and in any amount. When the death benefit becomes
payable or the policy is surrendered, we will deduct policy loans and accrued
interest from the proceeds otherwise payable. When you take a policy loan, we
will hold Accumulated Value in the general account as collateral for the policy
loan. We credit interest on amounts held in the general account as collateral
for policy loans at rates we declare prior to each calendar year. This rate will
be at least 4%.
We will credit interest on Accumulated Value held as collateral for
loans in the general account for policies that are more than 10 years old at
rates which are 0.50% per annum higher than those that apply to policies still
in their first ten years. We also currently plan to make preferred loans
available when the insured person is 65 years old or a policy is 20 years old,
whichever is later. These preferred loans will be limited in amount. For these
preferred policy loans, we will credit interest on the amount held in the
general account as collateral at an annual rate of 6%. However, we are not
obligated to continue to make preferred loans available, and we will make these
loans available in our sole discretion. (See "Loan Privileges," Page ___.)
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 ___.)
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<PAGE> 156
WITHDRAWAL OF CASH SURRENDER VALUE
After a year, you may request a withdrawal of Cash Surrender Value.
Withdrawals must be at least $500 (except that we may permit smaller withdrawals
for employee benefit plans). Withdrawals cannot be more than the Cash Surrender
Value minus three times the most recent monthly deduction. We will take the
withdrawal amount from the subaccounts based on your instructions. If you do not
provide instructions, we will take the withdrawal from the subaccount in
proportion to the values in the subaccounts. If the values in the subaccounts
will not allow us to carry out your instructions, we will not process the
withdrawal until you provide further instructions. You may not allocate
withdrawals to the general account until all the value in the separate account
has been exhausted. (See "Withdrawal of Cash Surrender Value," Page ___.)
SURRENDER OF THE POLICY
You may surrender your policy at any time and receive the cash
surrender value, if any. The cash surrender value will equal the Accumulated
Value less any policy loan with accrued interest and any surrender charge. (See
"Surrender Privilege," Page ___.)
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 ___.
TAX TREATMENT
Life insurance contracts receive tax-favored treatment under current
federal income tax law. Assuming that your policy qualifies as a life insurance
contract for federal income tax purposes, you should not be taxed on any
increase in cash surrender value while your policy remains in force. Also, your
beneficiary generally should not be taxed on death benefit proceeds. We believe
that a policy issued on a standard rate class basis generally should meet the
Section 7702 definition of a life insurance contract. For policies issued on a
substandard basis, there is insufficient guidance to determine if such a policy
would in all situations satisfy the Section 7702 definition of a life insurance
contract, particularly if you pay the full amount of premiums permitted under
the policy. (See "Tax Status of the Policy," Page ___.)
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 ___.)
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<PAGE> 157
OTHER POLICIES
We offer other variable life insurance policies which also invest in the
same portfolios of the funds. These policies may have different charges that
could affect the value of the subaccounts and may offer different benefits more
suitable to your needs. To obtain more information about these policies, you may
write or call us at National Life Drive, Montpelier, Vermont 05604, (800)
537-7003.
ILLUSTRATIONS
Illustrations of how investment performance of the subaccounts may
cause the death benefit, the Accumulated Value and the cash surrender value to
vary are included in Appendix A commencing on Page A-1.
These illustrations of hypothetical values may help you understand the
long-term effects of different levels of investment performance, of charges and
deductions, and of electing one or the other death benefit option. They may also
be useful in generally comparing and contrasting this policy to other life
insurance policies. Nonetheless, the illustrations are based on hypothetical
investment rates of return. THEY ARE NOT GUARANTEED. Illustrations are not a
representation of past or future performance. Actual rates of return may be more
or less than those reflected in the illustrations and, therefore, actual values
will differ from those illustrated.
QUESTIONS
If you have questions, you may write or call us at National Life Drive,
Montpelier, Vermont 05604, (800) 537-7003.
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NATIONAL LIFE INSURANCE COMPANY, THE SEPARATE ACCOUNT, AND THE FUNDS
NATIONAL LIFE INSURANCE COMPANY
National Life Insurance Company ("National Life", or "we") is
authorized to transact life insurance and annuity business in Vermont and in 50
other jurisdictions. National Life was originally chartered as a mutual life
insurance company in 1848 under Vermont law. It is now a stock life insurance
company. All of its outstanding stock is indirectly owned by National Life
Holding Company, a mutual insurance holding company established under Vermont
law on January 1, 1999. All policyholders of National Life, including all the
Owners of the Contracts, are voting members of National Life Holding Company.
National Life assumes all insurance risks under the Policy and its assets
support the Policy's benefits. On December 31, 1998, National Life's
consolidated assets were over $9.4 billion. (See "Financial Statements," Page
F-1.)
THE SEPARATE ACCOUNT
We established the Separate Account on February 1, 1985 under Vermont
law. It is a separate investment account to which we allocate assets to support
the benefits payable under the policies, other policies we currently issue, and
other variable life insurance policies we may issue in the future.
The Separate Account's assets are the property of National Life. The
portion of the Separate Account's assets equal to the reserves and other
liabilities under the Policies (and other policies) supported by the Separate
Account will not be exposed to liabilities arising out of any other business
that we may conduct. The portion of the Separate Account's assets equal to the
reserves and other liabilities under the Policies may, however, be exposed to
liabilities arising from other subaccounts of the Separate Account that fund
other variable life insurance policies. The Separate Account may also include
amounts derived from expenses we have charged to the Policies (and other
policies) which we currently hold in the Separate Account, and amounts held to
support other variable life insurance policies we may issue. From time to time
we may move these additional amounts to our General Account.
The Separate Account is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act") as a
unit investment trust type of investment company. Such registration does not
involve any supervision of the management or investment practices or policies of
the Separate Account by the SEC. The Separate Account meets the definition of a
"separate account" under Federal securities laws.
You may choose among the Subaccount options described below. However,
we may limit the number of different Subaccounts, other than the Money Market
Subaccount, used in any one Policy over its entire life to 16.
THE MARKET STREET FUND
The Growth, Sentinel Growth, Aggressive Growth, Bond, Managed,
International, and Money Market Subaccounts of the Separate Account invest in
shares of The Market Street Fund, Inc., a "series" type of mutual fund which is
registered with the SEC under the 1940 Act as a diversified open-end management
investment company. Each series of Market Street Fund shares represents an
interest in a separate portfolio within the Fund. They are purchased and
redeemed by the corresponding Subaccounts of the Separate Account. The Market
Street Fund sells and redeems its shares at net asset value without a sales
charge.
The investment objectives of the Market Street Fund's Portfolios you
may choose for your Policy are set forth below. The investment experience of
each of the Subaccounts of the Separate Account
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<PAGE> 159
depends on the investment performance of the corresponding Portfolio. There is
no assurance that any Portfolio will achieve its stated objective.
The Growth Portfolio. The Growth Portfolio seeks intermediate and
long-term growth of capital. A reasonable level of income is an important
secondary objective. This Portfolio pursues its objectives by investing
primarily in common stocks of companies believed to offer above-average growth
potential over both the intermediate and the long term.
The Sentinel Growth Portfolio. The Sentinel Growth Portfolio seeks
long-term growth of capital through equity participation in companies having
growth potential believed by its investment adviser to be more favorable than
the U.S. economy as a whole, with a focus on relatively well-established
companies.
The Aggressive Growth Portfolio. The Aggressive Growth Portfolio seeks
to achieve a high level of long-term capital appreciation by investing in
securities of a diverse group of smaller emerging companies.
The Bond Portfolio. The Bond Portfolio seeks to generate a high level
of current income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
The Managed Portfolio. The Managed Portfolio seeks to realize as high a
level of long-term total rate of return as is consistent with prudent investment
risk by investing in stocks, bonds, money market instruments or a combination
thereof.
The International Portfolio. The International Portfolio seeks
long-term growth of capital principally through investments in a diversified
portfolio of marketable equity securities of established non-United States
companies.
The Money Market Portfolio. The Money Market Portfolio seeks to provide
maximum current income consistent with capital preservation and liquidity by
investing in high-quality money market instruments.
Sentinel Advisors Company ("SAC") manages the Growth, Sentinel Growth,
Aggressive Growth, Bond, Managed and Money Market Portfolios. SAC is registered
as an investment adviser under the Investment Advisers Act of 1940. SAC is a
partnership whose partners are affiliates of National Life, Provident Mutual
Life Insurance Company ("Provident Mutual"), and The Penn Mutual Life Insurance
Company. National Life's affiliate is currently the managing partner of SAC and
is entitled to the majority share of SAC's profit or loss. 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.
14
<PAGE> 160
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Separate Account has four Subaccounts which invest exclusively in
shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund")
and two Subaccounts which invest exclusively in shares of Portfolios of the
Variable Insurance Products Fund II ("VIP Fund II"). Like the Market Street
Fund, the VIP Fund and the VIP II Fund are "series" type mutual funds registered
with the SEC as diversified open-end management investment companies issuing a
number of series or classes of shares, each of which represents an interest in a
Portfolio of the VIP Fund or VIP Fund II. Shares of these Portfolios are
purchased and redeemed by the Separate Account at net asset value without a
sales charge.
The Equity-Income, Growth, High Income, and Overseas Portfolios of the
VIP Fund and the Index 500 and Contrafund Portfolios of the VIP Fund II are
managed by Fidelity Management and Research Company ("FMR"). Bankers Trust
Company currently serves as sub-advisor to the Index 500 Portfolio. FMR has
entered into sub-advisory agreements with FMR U.K., FMR Far East, and Fidelity
International Investment Advisors for the Overseas Portfolio.
The investment objectives of the Portfolios of the VIP Fund and the VIP
Fund II in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
corresponding Portfolio. There is no assurance that any Portfolio will achieve
its stated objective.
Equity-Income Portfolio. This Portfolio seeks reasonable income. The
Portfolio will also consider the potential for capital appreciation. The
Portfolio seeks a yield which exceeds the composite yield of the securities
comprising the Standard and Poor's 500 Composite Index of 500 Stocks ("S&P
500"). MFR normally invests at least 65% of the Portfolio's assets in
income-producing equity securities.
Growth Portfolio. This Portfolio seeks capital appreciation. FMR normally
invests the Portfolio's assets primarily in common stocks. FMR invests the
Portfolio's assets in companies FMR believes have above-average growth
potential.
High Income Portfolio. This Portfolio seeks a high level of current income
while also considering growth of capital. FMR normally invests at least 65% of
the Portfolio's total assets in income producing debt securities, preferred
stocks, and convertible securities, with an emphasis on lower-quality debt
securities. The risks of investing in these high-yielding, high-risk securities
is described in the attached Prospectus for the VIP Fund, which should be read
carefully before investing.
Overseas Portfolio. This Portfolio seeks long term growth of capital. FMR
normally invests at least 65% of the Portfolio's total assets in foreign
securities. FMR normally invests the Portfolio's assets primarily in common
stocks.
Index 500 Portfolio. This Portfolio seeks investment results that
correspond to the total return of common stocks publicly traded in the United
States, as represented by the S&P 500. Bankers Trust Company normally invests at
least 80% of the Portfolio's assets in common stocks included in the S&P 500.
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.
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.
15
<PAGE> 161
ALGER AMERICAN FUND
The Separate Account has two Subaccounts which invest exclusively in
shares of Portfolios of the Alger American Fund. Like the Market Street Fund and
the VIP Fund, the Alger American Fund is a "series" type mutual fund registered
with the SEC as a diversified open-end management investment company issuing a
number of series of shares, each of which represents an interest in a Portfolio
of the Alger American Fund. Shares of these Portfolios are purchased and
redeemed by the Separate Account at net asset value without a sales charge
The investment objectives of the Portfolios of the Alger American Fund in
which the Subaccounts invest are set forth below. The investment experience of
each Subaccount depends upon the investment performance of the corresponding
Portfolio. There is no assurance that either Portfolio will achieve its stated
objective.
Alger American Small Capitalization Portfolio. This Portfolio seeks
long-term capital appreciation by focusing on small, fast-growing companies that
offer innovative products, services or technologies to a rapidly expanding
marketplace. Under normal circumstances, the portfolio invests primarily in the
equity securities of small capitalization companies. A small capitalization
company is one that has a market capitalization within the range of the
Russell(R) 2000 Growth Index or the S&P(R) SmallCap 600 Index.
Alger American Growth Portfolio. This Portfolio seeks long-term capital
appreciation by focusing on growing companies that generally have broad product
lines, markets, financial resources and depth of management. Under normal
circumstances, the portfolio invests primarily in the equity securities of large
companies. The portfolio considers a large company to have a market
capitalization of $1 billion or greater.
The Alger American Small Capitalization Portfolio and the Alger American
Growth Portfolio are managed by Fred Alger Management, Inc.
A full description of the Alger American Fund, the investment objectives
and policies of the Portfolios, the risks, expenses and other aspects of their
operation is contained in the attached Prospectus for the Alger American Fund.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Separate Account has one Subaccount which invests exclusively in
shares of the VP Value portfolio, and one Subaccount which invests exclusively
in shares of VP Income & Growth portfolio, each of which are series of American
Century Variable Portfolios, Inc. American Century Variable Portfolios, Inc. is
a "series" type mutual fund registered with the SEC as a diversified open-end
management investment company issuing a number of series or classes of shares.
Shares of these Portfolios will be purchased and redeemed by the Separate
Account at net asset value without a sales charge.
The investment objectives of the Portfolios of American Century Variable
Portfolios, Inc. in which the Subaccounts are expected to invest are set forth
below. The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that either
Portfolio will achieve its stated objective.
VP Value. To seek long-term capital growth. Income is a secondary
objective. The Portfolio will seek to achieve its investment objective by
investing in securities that management believes to be undervalued at the time
of purchase.
VP Income & Growth. To seek dividend growth, current income and capital
appreciation. The Portfolio will seek to achieve its investment objective by
investing in common stocks.
The VP Value Portfolio and the VP Income & Growth Portfolio of the
American Century Variable Portfolios, Inc. are managed by American Century
Investment Management, Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and other aspects of
their operation is contained in the attached Prospectuses for VP Value and VP
Income & Growth.
16
<PAGE> 162
GOLDMAN SACHS VARIABLE INSURANCE TRUST
The Separate 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 CORE(SM) 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
J.P. MORGAN SERIES TRUST II
The Separate Account has one Subaccount which invests exclusively in
shares of the J.P. Morgan International Opportunities Portfolio, and one
Subaccount which invests exclusively in shares of J.P. Morgan Small Company
Portfolio, each of which are series of J.P. Morgan Series Trust II. J.P. Morgan
Series Trust II is a "series" type mutual fund registered with the SEC as a
diversified open-end management investment company issuing a number of series or
classes of shares. Shares of these Portfolios will be purchased and redeemed by
the Separate Account at net asset value without a sales charge.
The investment objectives of the J.P. Morgan Series Trust II Portfolios in
which the Subaccounts invest are set forth below. The investment experience of
each Subaccount depends upon the investment
17
<PAGE> 163
performance of the underlying Portfolio. There is no assurance that either
Portfolio will achieve its stated objective.
J.P. Morgan International Opportunities Portfolio. Seeks to provide a high
total return from a portfolio comprised of equity securities of foreign
corporations. The Portfolio is designed for investors with a long-term
investment horizon who want to diversify their investments by adding
international equities and take advantage of investment opportunities outside
the U.S. As an international investment, the Portfolio is subject to foreign
market, political, and currency risks.
J.P. Morgan Small Company Portfolio. Seeks to provide a high total return
from a portfolio comprised of equity securities of small companies. The
Portfolio invests at least 65% of the value of its total assets in the common
stock of small U.S. companies primarily with market capitalizations of less than
$1 billion. The Portfolio is designed for investors who are willing to assume
the somewhat higher risk of investing in small companies in order to seek a
higher return over time than might be expected from a portfolio of large
companies.
The J.P. Morgan International Opportunities Portfolio and the J.P.
Morgan Small Company Portfolio of the J.P. Morgan Series Trust II are managed by
J.P. Morgan Investment Management Inc. A full description of these Portfolios,
their investment objectives and policies, and the risks, expenses and other
aspects of their operation is contained in the attached Prospectuses for the
J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small
Company Portfolio.
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
The Separate Account has one Subaccount which invests exclusively in shares
of the Partners Portfolio, a series of Neuberger Berman Advisers Management
Trust. Neuberger Berman Advisers Management Trust ("AMT") is registered with the
SEC as a diversified open-end management investment company. AMT has nine
separate series, which are called Portfolios. Shares of each Portfolio represent
an interest in that Portfolio.
The investment objectives of the Partners Portfolio are set forth below.
The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that the
Portfolio will achieve its stated objective.
Partners Portfolio. To seek growth of capital. This Portfolio invests
mainly in common stock of mid-to large-capitalization companies. Its investment
co-managers seek securities believed to be undervalued based on fundamentals
such as low price-to-earnings ratios, consistent cash flows, and the company's
track record through all points of the market cycle. The Portfolio generally
considers selling a stock when it reaches the managers' target price, when it
fails to perform as expected, or when other opportunities appear more
attractive. The Portfolio has the ability to change its goal without shareholder
approval, although it does not currently intend to do so.
The Partners Portfolio of Neuberger Berman Advisers Management Trust is
managed by Neuberger Berman Management Inc. Neuberger Berman, LLC is the
sub-adviser. A full description of this Portfolio, its investment objectives and
policies, and the risks, expenses and other aspects of its operation is
contained in the attached Prospectus for the Partners Portfolio of Neuberger
Berman Advisers Management Trust.
STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC.
The Separate Account has one Subaccount which invests exclusively in
shares of the Mid Cap Growth Fund II, 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
will be purchased and redeemed by the Separate Account at net asset value
without a sales charge.
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<PAGE> 164
The investment objectives of the Strong Funds in which the Subaccounts
invest are set forth below. The investment experience of each Subaccount depends
upon the investment performance of the underlying Portfolio. There is no
assurance that either Portfolio will achieve its stated objective.
Mid Cap Growth Fund II. This Portfolio seeks capital growth. It invests
primarily in equity securities that the advisor believes have above-average
growth prospects.
Strong Opportunity Fund II, Inc. This Fund seeks capital appreciation
through investments in a diversified portfolio of equity securities.
The Mid Cap Growth Fund II series of Strong Variable Insurance Funds,
Inc., and Strong Opportunity Fund, Inc. are managed by Strong Capital
Management, Inc.
A full description of the Mid Cap Growth Fund II series of Strong Variable
Insurance Funds, Inc., and Strong Opportunity Fund, Inc. their investment
objectives and policies, and the risks, expenses and other aspects of their
operation is contained in the attached Prospectuses for the Mid Cap Growth Fund
II and Strong Opportunity Fund II, Inc.
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 National Life Investment
Common Stock Fund* Management Company, Inc.
- ---------------------------------- ------------------------------- --------------------------------
Market Street Sentinel Growth Sentinel Variable Products National Life Investment
Portfolio Mid Cap Growth Fund* Management Company, Inc.
- ---------------------------------- ------------------------------- --------------------------------
Market Street Aggressive Growth Sentinel Variable Products National Life Investment
Portfolio Small Company Fund* Management Company, Inc.
- ---------------------------------- ------------------------------- --------------------------------
Market Street Bond Portfolio Fidelity VIP Investment Grade Fidelity Management & Research
Bond Portfolio Company
- ---------------------------------- ------------------------------- --------------------------------
Market Street Managed Portfolio Neuberger Berman AMT Balanced Neuberger Berman Management
Portfolio Inc.
- ---------------------------------- ------------------------------- --------------------------------
Market Street International J.P. Morgan International J.P. Morgan Investment
Portfolio Opportunities Portfolio Management, Inc.
- ---------------------------------- ------------------------------- --------------------------------
Market Street Money Market Sentinel Variable Products National Life Investment
Portfolio Money Market Fund* Management Company, Inc.
- ---------------------------------- ------------------------------- --------------------------------
Goldman Sachs VIT International Fidelity VIP Overseas Fidelity Management & Research
Equity Fund Portfolio Company
- ---------------------------------- ------------------------------- --------------------------------
Goldman Sachs VIT Global Income Fidelity VIP Investment Grade Fidelity Management & Research
Fund Bond Portfolio Company
- ---------------------------------- ------------------------------- --------------------------------
Goldman Sachs VIT CORE Small Cap J.P. Morgan Small Company J.P. Morgan Investment
Equity Fund Portfolio Management, Inc.
- ---------------------------------- ------------------------------- --------------------------------
Goldman Sachs VIT Mid Cap Value American Century VP Value American Century Investment
Fund Portfolio 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 Separate Account and our other separate accounts. These
percentages may differ, and we may be paid a greater percentage by some
investment advisors or distributors than other advisors or distributors. These
agreements reflect administrative services provided by us. National Life
receives compensation from the adviser or distributor of the Funds in connection
with administration, distribution, or other services provided with respect to
the Fund and its availability through the Policy. The amount of this
compensation with respect to the Policy during 1999, which is based upon the
indicated percentages of assets of each Fund attributable to the Policy, is
shown below:
<TABLE>
<CAPTION>
- -------------------------------------------------- ------------------ ---------------------------
Revenues National Life
Portfolios of the % of Assets Received During 1999
- -------------------------------------------------- ------------------ ---------------------------
<S> <C> <C>
Alger American Fund 0.10% $12,728.64
- -------------------------------------------------- ------------------ ---------------------------
American Century Variable Portfolios, Inc. 0.20% 1,160.23
- -------------------------------------------------- ------------------ ---------------------------
Goldman Sachs Variable Insurance Trust 0.20% 851.54
- -------------------------------------------------- ------------------ ---------------------------
J.P. Morgan Series Trust II 0.20% 345.85
- -------------------------------------------------- ------------------ ---------------------------
Neuberger Berman Advisers Management Trust 0.15% 271.61
- -------------------------------------------------- ------------------ ---------------------------
Strong VIF and Opportunity Fund II 0.20% 1,255.07
- -------------------------------------------------- ------------------ ---------------------------
</TABLE>
These arrangements may change from time to time, and may include more Funds in
the future.
Investment Results. The investment objectives and policies of certain
Portfolios are similar to the investment objectives and policies of mutual fund
portfolios other than the Portfolios that may be managed by the investment
adviser or manager. The investment results of the Portfolios, however, may be
higher or lower than the results of such other portfolios. There can be no
assurance, and no representation is made, that the investment results of any of
the Funds will be comparable to the investment results of any other portfolio,
even if the other portfolio has the same investment adviser or manager.
Resolving Material Conflicts. The participation agreements under which the
Funds sell their shares to Subaccounts of the Separate Account contain varying
termination provisions. In general, each party may terminate at its option with
specified advance written notice, and may also terminate in the event of
specific regulatory or business developments.
Should an agreement between National Life and a Fund terminate, the
Subaccounts which invest in that Fund may not be able to purchase
additional shares of such Fund. In that event, you will no longer be able
to transfer Accumulated Values or allocate Net Premiums to Subaccounts
investing in Portfolios of such Fund.
Additionally, in certain circumstances, it is possible that a Fund
or a Portfolio of a Fund may refuse to sell its shares to a Subaccount
despite the fact that the participation agreement between the Fund and us
has not been terminated. Should a Fund or Portfolio of such Fund decide
not to sell its shares to us, we will not be able to honor your requests
to allocate cash values or net premiums to Subaccounts investing in shares
of that Fund or Portfolio.
The Funds are available to registered separate accounts of insurance
companies, other than National Life, offering variable annuity and
variable life insurance policies. As a result, there is a possibility that
a material conflict may arise between the interests of Owners with
Accumulated Value allocated to the Separate Account and the owners of life
insurance policies and variable annuities issued by such other
19
<PAGE> 165
companies whose values are allocated to one or more other separate
accounts investing in any one of the Funds.
In the event of a material conflict, we will take any necessary
steps, including removing the Separate Account from that Fund, to resolve
the matter. The Board of Directors or Trustees of the Funds intend to
monitor events in order to identify any material conflicts that possibly
may arise and to determine what action, if any, should be taken in
response to those events or conflicts. See the individual Fund
Prospectuses for more information.
Net Investment Return of the Separate Account. The chart below is included to
comply with Part 54, Section 54.9 of the Codes, Rules and Regulations of the
State of New York. The chart shows the year-by-year net investment returns of
the Subaccounts of the Separate Account since the inception of the Subaccounts
through December 31, 1999. With respect to the Subaccounts of the Market Street
Fund (other than the Growth and Sentinel Growth Portfolios), the Variable
Insurance Products Fund and the Alger American Fund, the inception date of the
Subaccounts is March 13, 1996, the date that the Policies were first offered.
With respect to the Subaccounts of the Growth and Sentinel Growth Portfolios,
the inception date of the Subaccounts is March 18, 1996. With respect to the
Subaccounts of the Variable Insurance Products Fund II, the inception date of
the Subaccounts is May 1, 1997. With respect to the Subaccounts of the American
Century Variable Portfolios, Inc., the Goldman Sachs Variable Insurance Trust,
the J.P. Morgan Series Trust II, the Neuberger Berman Advisers Management
Trust, the Strong Variable Insurance Funds, Inc. and the Strong Opportunity
Fund II, Inc., the inception date of the Subaccounts is August 3, 1998.
The net investment returns reflect investment income and capital gains
and losses less investment management fees and expenses and the Mortality and
Expense Risk Charge. The returns do not reflect the Cost of Insurance Charge,
the Premium Tax Charge, the Monthly Administrative Charge, the charge for any
optional benefits, or potential Surrender Charges which will significantly
reduce the returns.
Returns are not annualized for periods under one year.
STATEMENT OF NET INVESTMENT RETURNS
<TABLE>
<CAPTION>
Date
Subaccount
Effective 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Market Street Fund, Inc.
Money Market Portfolio 03/13/96 3.97% 4.39% 4.39% 3.36% N/A N/A N/A N/A N/A N/A
Bond Portfolio 03/13/96 -4.17% 7.26% 8.53% 2.82% N/A N/A N/A N/A N/A N/A
Managed Portfolio 03/13/96 0.00% 11.50% 20.16% 8.43% N/A N/A N/A N/A N/A N/A
Aggressive Growth Portfolio 03/13/96 14.88% 6.93% 20.13% 13.29% N/A N/A N/A N/A N/A N/A
International Portfolio 03/13/96 28.15% 9.18% 8.72% 9.85% N/A N/A N/A N/A N/A N/A
Growth Portfolio 03/18/96 2.04% 12.49% 26.32% 13.41% N/A N/A N/A N/A N/A N/A
Sentinel Growth Portfolio 03/18/96 37.57% 14.43% 30.41% 10.62% N/A N/A N/A N/A N/A N/A
Alger
Alger American Growth Portfolio 03/13/96 32.55% 46.75% 24.63% 6.94% N/A N/A N/A N/A N/A N/A
Alger American Small Capitalization 03/13/96 42.14% 14.50% 10.40% 0.53% N/A N/A N/A N/A N/A N/A
American Century Variable Portfolios, Inc.
VP Value Portfolio 08/03/98 -1.73% 4.28% N/A N/A N/A N/A N/A N/A N/A N/A
VP Income & Growth Portfolio 08/03/98 16.97% 9.86% N/A N/A N/A N/A N/A N/A N/A N/A
Fidelity: Variable Insurance Products Fund I
Growth 03/13/96 36.21% 38.25% 22.38% 9.09% N/A N/A N/A N/A N/A N/A
High Income 03/13/96 7.19% -5.18% 16.62% 9.61% N/A N/A N/A N/A N/A N/A
Equity Income 03/13/96 5.38% 10.63% 26.97% 10.18% N/A N/A N/A N/A N/A N/A
Overseas 03/13/96 41.36% 11.75% 10.56% 11.54% N/A N/A N/A N/A N/A N/A
Fidelity: Variable Insurance Products Fund II
Index 500 05/01/97 19.44% 27.18% 21.91% N/A N/A N/A N/A N/A N/A N/A
Contrafund 05/01/97 23.15% 28.82% 22.58% N/A N/A N/A N/A N/A N/A N/A
Goldman Sachs Variable Insurance Trust
International Equity Fund 08/03/98 30.68% 1.29% N/A N/A N/A N/A N/A N/A N/A N/A
Global Income Fund 08/03/98 -1.90% 4.14% N/A N/A N/A N/A N/A N/A N/A N/A
CORE Small Cap Equity Fund 08/03/98 16.49% -5.28% N/A N/A N/A N/A N/A N/A N/A N/A
Mid Cap Value Fund 08/03/98 -1.83% -1.01% 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 08/03/98 35.44% -2.91% N/A N/A N/A N/A N/A N/A N/A N/A
Small Company Portfolio 08/03/98 43.11% 0.03% N/A N/A N/A N/A N/A N/A N/A N/A
Neuberger Berman Advisers Management Trust
Partners Portfolio 08/03/98 6.41% 2.11% N/A N/A N/A N/A N/A N/A N/A N/A
Strong Variable Insurance Funds, Inc.
Mid Cap Growth Fund II Fund 08/03/98 88.19% 13.20% N/A N/A N/A N/A N/A N/A N/A N/A
Strong Opportunity Fund II 08/03/98 33.70% 4.20% N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
THE GENERAL ACCOUNT
For information on the General Account, see page .
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, we will pay the
Death Benefit of the Policy, after due proof of the Insured's death (and
fulfillment of certain other requirements), to the named Beneficiary,
unless the claim is contestable in accordance with the terms of the
Policy. You may choose to have the proceeds paid in cash or under one of
the available Settlement Options. (See "Payment of Policy Benefits," Page
.) The Death Benefit payable will be the Unadjusted Death Benefit under
the Death Benefit Option that is in effect, increased by any additional
benefits, and decreased by any outstanding Policy loan and accrued
interest and any unpaid Monthly Deductions.
Death Benefit Options. The Policy provides two Death Benefit
Options: Option A and Option B. You select the Death Benefit Option in the
application and may change it as described in "Change in Death Benefit
Option," Page .
Option A. The Unadjusted Death Benefit is equal to the greater of:
(a) the Face Amount of the Policy, and
(b) the Accumulated Value multiplied by the specified percentage shown in the
table below:
<TABLE>
<CAPTION>
Attained Age Percentage Attained Age Percentage
------------ ---------- ------------ ----------
<S> <C> <C> <C>
40 and under 250% 60 130%
45 215% 65 120%
50 185% 70 115%
55 150% 75 and over 105%
</TABLE>
For Attained Ages not shown, the percentages will decrease by a ratable portion
of each full year.
Illustration of Option A -- For purposes of this illustration, assume that
the Insured is under Attained Age 40 and there is no Policy loan outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will generally
have an Unadjusted Death Benefit of $200,000. The specified percentage for an
Insured under Attained Age 40 on the Policy Anniversary prior to the date of
death is 250%. Because the Unadjusted Death Benefit must be equal to or greater
than 2.50 times the Accumulated Value, any time the Accumulated Value exceeds
$80,000 the Unadjusted Death Benefit will exceed the Face Amount. Each
additional dollar added to the Accumulated Value will increase the Unadjusted
Death Benefit by $2.50. Thus, a 35 year old Insured with an
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Accumulated Value of $90,000 will have an Unadjusted Death Benefit of $225,000
(2.50 x $90,000, and an Accumulated Value of $150,000 will have an Unadjusted
Death Benefit of $375,000 (2.50 x $150,000).
Similarly, any time the Accumulated Value exceeds $80,000, each dollar
taken out of the Accumulated Value will reduce the Unadjusted Death Benefit by
$2.50. If at any time, however, the Accumulated Value multiplied by the
specified percentage is less than the Face Amount, the Unadjusted Death Benefit
will be the Face Amount of the Policy.
Option B. The Unadjusted Death Benefit is equal to the greater of:
(a) the Face Amount of the Policy plus the Accumulated Value, and
(b) the Accumulated Value multiplied by the specified percentage shown in the
table above.
Illustration of Option B -- For purposes of this illustration, assume that
the Insured is under Attained Age 40 and there is no Policy loan outstanding.
Under Option B, a Policy with a face amount of $200,000 will generally
have an Unadjusted Death Benefit of $200,000 plus the Accumulated Value. Thus,
for example, a Policy with a $50,000 Accumulated Value will have an Unadjusted
Death Benefit of $250,000 ($200,000 plus $50,000). Since the specified
percentage is 250%, the Unadjusted Death Benefit will be at least 2.50 times the
Accumulated Value. As a result, if the Accumulated Value exceeds $133,333, the
Unadjusted Death Benefit will be greater than the Face Amount plus the
Accumulated Value. Each additional dollar added to the Accumulated Value above
$133,333 will increase the Unadjusted Death Benefit by $2.50. An Insured with an
Accumulated Value of $150,000 will have an Unadjusted Death Benefit of $375,000
(2.50 x $150,000), and an Accumulated Value of $200,000 will yield an Unadjusted
Death Benefit of $500,000 (2.50 x $200,000). Similarly, any time the Accumulated
Value exceeds $133,333, each dollar taken out of the Accumulated Value will
reduce the Unadjusted Death Benefit by $2.50. If at any time, however, the
Accumulated Value multiplied by the specified percentage is less than the Face
Amount plus the Accumulated Value, the Unadjusted Death Benefit will be the Face
Amount plus the Accumulated Value.
Which Death Benefit Option to Choose. If you prefer to have premium
payments and favorable investment performance reflected partly in the form of an
increasing Death Benefit, you should choose Option B. If you are satisfied with
the amount of the Insured's existing insurance coverage and prefer to have
premium payments and favorable investment performance reflected to the maximum
extent in the Accumulated Value, you should choose Option A.
Change in Death Benefit Option. After the first Policy Year, you may
change the Death Benefit Option in effect by sending us a written request. There
is no charge to change the Death Benefit Option. The effective date of a change
will be the Monthly Policy Date on or next following the date we receive the
written request. Only one change in Death Benefit Option is permitted in any one
Policy Year.
On the effective date of a change in Death Benefit Option, the Face
Amount is adjusted so that there will be no change in the Death Benefit or the
Net Amount at Risk. In the case of a change from Option B to Option A, the Face
Amount must be increased by the Accumulated Value. In the case of a change from
Option A to Option B, the Face Amount must be decreased by the Accumulated
Value. The change from Option A to Option B will not be allowed if it would
reduce the Face Amount to less than the Minimum Face Amount.
On the effective date of the change, the Death Benefit, Accumulated Value and
Net Amount at Risk (and therefore the Cost of Insurance Charges) are unchanged.
However, after the effective date of the change, the pattern of future Death
Benefits, Accumulated Value, Net Amount at Risk and Cost of Insurance Charges
will be different than if the change had not been made. In determining whether a
change is appropriate for you, the considerations described in "Which Death
Benefit Option to Choose" above will apply.
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<PAGE> 167
If a change in the Death Benefit Option would result in cumulative
premiums exceeding the maximum premium limitations under the Internal Revenue
Code for life insurance, we will not effect the change.
A change in the Death Benefit Option may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page .)
How the Death Benefit May Vary. The amount of the Death Benefit may vary
with the Accumulated Value. The Death Benefit under Option A will vary with the
Accumulated Value whenever the specified percentage of Accumulated Value exceeds
the Face Amount of the Policy. The Death Benefit under Option B will always vary
with the Accumulated Value because the Unadjusted Death Benefit equals the
greater of (a) the Face Amount plus the Accumulated Value and (b) the
Accumulated Value multiplied by the specified percentage.
ABILITY TO ADJUST FACE AMOUNT
You may, at any time after the first Policy Year, increase or decrease
the Policy's Face Amount by submitting a written application to us. There are
some limits on your ability to effect increases or decreases, which are
discussed below. The effective date of an increase will be the Monthly Policy
Date on or next following our approval of your request. The effective date of a
decrease is the Monthly Policy Date on or next following the date that we
receive your written request. Employee benefit plan Policies may adjust the Face
Amount even in Policy Year 1. An increase or decrease in Face Amount may have
federal tax consequences. (See "Tax Treatment Of Policy Benefits," Page .) The
effect of changes in Face Amount on Policy charges, as well as other
considerations, are described below.
Increase. A request for an increase in Face Amount may not be for less
than $25,000, or such lesser amount required in a particular state (except
that the minimum for employee benefit plans is $2000). You may not increase
the Face Amount after the Insured's Attained Age 85. To obtain the increase,
you must submit an application for the increase and provide evidence
satisfactory to us of the Insured's insurability.
On the effective date of an increase, and taking the increase into
account, the Cash Surrender Value must be at least equal to the Monthly
Deductions then due. If the Cash Surrender Value is not sufficient,
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<PAGE> 168
the increase will not take effect until you pay a sufficient additional
premium payment to increase the Cash Surrender Value.
An increase in the Face Amount will generally affect the total Net
Amount at Risk. This will normally increase the monthly Cost of Insurance
Charges. In addition, the Insured may be in a different Rate Class as to the
increase in insurance coverage. An increase in premium payment or frequency
may be appropriate after an increase in Face Amount. (See "Cost of Insurance
Charge," Page .)
Decrease. The amount of the Face Amount after a decrease cannot be less
than 75% of the largest Face Amount in force at any time in the twelve months
immediately preceding our receipt of your request for the decrease. The Face
Amount after any decrease may not be less than the Minimum Face Amount, which
is generally currently $50,000. If a decrease in the Face Amount would result
in cumulative premiums exceeding the maximum premium limitations applicable
for life insurance under the Internal Revenue Code, we will not allow the
decrease.
A decrease in the Face Amount generally will decrease the total Net
Amount at Risk, which will decrease your monthly Cost of Insurance Charges.
For purposes of determining the Cost of Insurance Charge, any decrease
in the Face Amount will reduce the Face Amount in the following order:
(a) first, the increase in Face Amount provided by the most recent
increase;
(b) then the next most recent increases, in inverse chronological
order; and finally
(c) the Initial Face Amount.
HOW THE DURATION OF THE POLICY MAY VARY
Your Policy will remain in force as long as the Cash Surrender Value of
the Policy is sufficient to pay the Monthly Deductions and the charges under the
Policy. When the Cash Surrender Value is insufficient to pay the charges and the
Grace Period expires without an adequate premium payment by you, the Policy will
lapse and terminate without value. However, during the first five Policy Years
the Policy will not lapse, if you have paid the Minimum Guarantee Premium. You
have certain rights to reinstate your Policy, if it should lapse. (See
"Reinstatement," Page .)
In addition, an optional Guaranteed Death Benefit Rider is available
which will guarantee that the Policy will not lapse prior to age 70, or 20 years
from the Date of Issue of the Policy, if longer, regardless of investment
performance, if you have paid the Minimum Guarantee Premium as of each Monthly
Policy Date.
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held under the
Policy at any time. It is equal to the sum of the Policy's values in the
Separate Account and the General Account. The Accumulated Value minus any
applicable Surrender Charge, and minus any outstanding Policy loans and accrued
interest, is equal to the Cash Surrender Value. There is no guaranteed minimum
for the portion of the Accumulated Value in any of the Subaccounts of the
Separate Account. Because the Accumulated Value on any future date depends upon
a number of variables, it cannot be predetermined.
The Accumulated Value and Cash Surrender Value will reflect:
- the Net Premiums paid
- the investment performance of the Portfolios you have chosen
- the crediting of interest on non-loaned Accumulated Value in the
General Account and amounts held as Collateral in the General Account
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<PAGE> 169
- any transfers
- any Withdrawals
- any loans
- any loan repayments
- any loan interest charged, and
- charges assessed on the Policy.
Determination of Number of Units for the Separate Account. Amounts
allocated, transferred or added to a Subaccount of the Separate Account under a
Policy are used to purchase units of that Subaccount; units are redeemed when
amounts are deducted, transferred or withdrawn. The number of units a Policy has
in a Subaccount equals the number of units purchased minus the number of units
redeemed up to such time. For each Subaccount, the number of units purchased or
redeemed in connection with a particular transaction is determined by dividing
the dollar amount by the unit value.
Determination of Unit Value. The unit value of a Subaccount is equal to
the unit value on the immediately preceding Valuation Day multiplied by the Net
Investment Factor for that Subaccount on that Valuation Day.
Net Investment Factor. Each Subaccount of the Separate Account has its
own Net Investment Factor. The Net Investment Factor measures the daily
investment performance of the Subaccount. The factor will increase or decrease,
as appropriate, to reflect net investment income and capital gains or losses,
realized and unrealized, for the securities of the underlying portfolio or
series.
The asset charge for mortality and expense risks will be deducted in
determining the applicable Net Investment Factor. (See "Charges and Deductions -
Mortality and Expense Risk Charge," Page .)
Calculation of Accumulated Value. The Accumulated Value is determined
first on the Date of Issue and thereafter on each Valuation Day. On the Date of
Issue, the Accumulated Value will be the Net Premiums received, plus any
earnings prior to the Date of Issue, less any Monthly Deductions due on the Date
of Issue. On each Valuation Day after the Date of Issue, the Accumulated Value
will be:
(1) The aggregate of the values attributable to the Policy in the
Separate Account, determined by multiplying the number of units
the Policy has in each Subaccount of the Separate Account by such
Subaccount's unit value on that date; plus
(2) The value attributable to the Policy in the General Account
(See "The General Account," Page.)
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy. To purchase a Policy, you must apply to us
through a licensed National Life agent who is also a registered representative
of Equity Services, Inc. ("ESI") or a broker/dealer having a Selling Agreement
with ESI. If you do not pay the Minimum Initial Premium with your written
application, it must be paid when the Policy is delivered. If the premium
paid is less than the Minimum Initial Premium, the balance of the Minimum
Initial Premium must be received within five days, or all premiums will be
refunded.
The Minimum Face Amount of a Policy under our rules is generally
$50,000; however, exceptions may be made for employee benefit plans. We may
revise our rules from time to time to specify a different Minimum Face Amount
for subsequently issued policies. A Policy will be issued only on Insureds who
have an Issue Age of 85 or less and who provide us with satisfactory evidence
of
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<PAGE> 170
insurability. Acceptance is subject to our underwriting rules. We may
reject an application for any reason permitted by law. (See "Distribution of
Policies," Page .) A tax-favored arrangement, including qualified pension
plans, should carefully consider the costs and benefits of the Policy (such as
asset diversification) before purchasing a Policy since the tax-favored
arrangement itself provides for tax-sheltered growth.
From the time the application for a Policy is signed until the time the
Policy is issued, you can, subject to our underwriting rules, obtain temporary
insurance protection, pending issuance of the Policy, if you are able to
answer "no" to the Health Questions of the Receipt & Temporary Life Insurance
Agreement and submitting (a) a complete Application including any medical
questionnaire required, and (b) payment of the Minimum Initial Premium.
The amount of coverage under the Receipt & Temporary Life Insurance
Agreement is the lesser of the Face Amount applied for or $1,000,000 ($100,000
in the case of proposed Insureds age 70 or over). Coverage under the agreement
will end on the earliest of:
(a) the 90th day from the date of the agreement;
(b) the date that insurance takes effect under the Policy;
(c) the date a policy, other than as applied for, is offered to you;
(d) five days from the date we mail a notice of termination of coverage;
(e) the time you first learn that we have terminated the temporary life
insurance; or
(f) the time you withdraw the application for life insurance.
We offer a one time credit on conversions of eligible National Life
term insurance policies to a VariTrak Policy. If the term policy being converted
has been in force for at least twelve months, the amount of the credit is 12% of
a target amount used to determine commission payments. If the term policy being
converted has been in force for less than twelve months, the credit will be
prorated based on the number of months the term policy has been outstanding at
the time of conversion. For GRT term policies, the credit will be 18% of the
target amount used to determine commission payments if the GRT term policy has
been in force for at least two years but not more than five years. For GRT term
policies in force for less than two years, the credit is 0.5% per month for each
month in the first year, and 1.0% per month for each month in the second year.
For GRT policies in force more than five years, the credit decreases from 18% by
0.5% for each month beyond five years, until it becomes zero at the end of year
eight.
The amount of the credit will be added to the initial premium payment,
if any, you pay and will be treated as part of the Initial Premium for the
Policy. Thus, the credit will be included in premium payments for purposes of
calculating and deducting the Premium Tax Charge. If you surrender your Policy,
we will not recapture the credit. We will not include the amount of the credit
for purposes of calculating agent compensation for the sale of the Policy.
We also offer a one time credit to Home Office employees who purchase a
VariTrak Policy, as both Owner and Insured. This one time credit is calculated
differently from the credit described above; in particular, the amount of the
credit will be 50% of the target premium used in the calculation of commissions
on the Policy. Otherwise, the credit will be treated in the same manner as the
credit described above.
Amount and Timing of Premiums. Each premium payment must be at least
$50. You have considerable flexibility in determining the amount and frequency
of premium payments, within the limits discussed below.
You will at the time of application select a Planned Periodic Premium
schedule, based on a periodic billing mode of annual, semi-annual, or
quarterly payments. You may request us to send a premium reminder notice at
the specified interval. You may change the Planned Periodic Premium frequency
and amount. Also, under an Automatic Payment Plan plan, you can select a
monthly payment schedule pursuant to which premium payments will be
automatically deducted from a bank account or other source, rather than being
"billed." We may allow, in certain situations, Automatic Payment Plan payments
of less than $50. We may require that Automatic Payment Plans be set up for at
least the Minimum Monthly Premium.
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<PAGE> 171
You are not required to pay the Planned Periodic Premiums in accordance
with the specified schedule. You may pay premiums whenever you like, and in
any amount (subject to the $50 minimum and the limitations described in the
next section). Payment of the Planned Periodic Premiums will not, however,
guarantee that the Policy will remain in force. Instead, the duration of the
Policy depends upon the Policy's Cash Surrender Value. Thus, even if you pay
the Planned Periodic Premiums, the Policy will lapse whenever the Cash
Surrender Value is insufficient to pay the Monthly Deductions and any other
charges under the Policy and if a Grace Period expires without an adequate
payment by you (unless the Policy is in its first five years, or you have
purchased the Guaranteed Death Benefit Rider, in either case so long as you
have paid the Minimum Guarantee Premium).
Any payments you make while there is an outstanding Policy loan will be
applied as premium payments rather than loan repayments, unless you notify us in
writing that the amount is to be applied as a loan repayment.
Higher premium payments under Death Benefit Option A, until the
applicable percentage of Accumulated Value exceeds the Face Amount, will
generally result in a lower Net Amount at Risk. This will produce lower Cost of
Insurance Charges against the Policy. Conversely, lower premium payments in this
situation will result in a higher Net Amount at Risk, which will result in
higher Cost of Insurance Charges under the Policy.
Under Death Benefit Option B, until the applicable percentage of
Accumulated Value exceeds the Face Amount plus the Accumulated Value, the level
of premium payments will not affect the Net Amount at Risk. However, both the
Accumulated Value and Death Benefit will be higher if premium payments are
higher, and lower if premium payments are lower.
Under either Death Benefit Option, if the Unadjusted Death Benefit is
the applicable percentage of Accumulated Value, then higher premium payments
will result in a higher Net Amount at Risk, and higher Cost of Insurance
Charges. Lower premium payments will result in a lower Net Amount at Risk, and
lower Cost of Insurance Charges.
Premium Limitations. The Internal Revenue Code of 1986 (the "Code")
provides for exclusion of the Death Benefit from gross income if total premium
payments do not exceed certain stated limits. In no event can the total of all
premiums paid under a Policy exceed these limits. If at any time you pay a
premium which would result in total premiums exceeding the limits, we will
only accept that portion of the premium which would make total premiums equal
the maximum amount which may be paid under the Policy. We will promptly refund
the excess to you. In cases of premiums paid by check, we will wait until your
check has cleared. If you have an outstanding loan, we may instead apply the
payment as a loan repayment. Even if total premiums were to exceed the maximum
premium limitations established by the Code, the excess of (a) a Policy's
Unadjusted Death Benefit over (b) the Policy's Cash Surrender Value plus
outstanding Policy loans and accrued interest, would still be excludable from
gross income under the Code.
The maximum premium limitations set forth in the Code depend in part
upon the amount of the Unadjusted Death Benefit at any time. As a result, any
Policy changes which affect the amount of the Unadjusted Death Benefit may
affect whether cumulative premiums paid under the Policy exceed the maximum
premium limitations. To the extent that any such change would result in
cumulative premiums exceeding the maximum premium limitations, we will not
effect the change. (See "Federal Income Tax Considerations," Page .)
Unless the Insured provides satisfactory evidence of insurability, we
may limit the amount of any premium payment if it increases the Unadjusted
Death Benefit more than it increases the Accumulated Value.
Allocation of Net Premiums. The Net Premium equals the premium paid
less the Premium Tax Charge. In your application for the Policy, you will
indicate how Net Premiums should be allocated among the Subaccounts of the
Separate Account and/or the General Account. You may change these
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<PAGE> 172
allocations at any time by giving us written notice at our Home Office, or
if you have elected the telephone transaction privilege, by telephone
instructions (See "Telephone Transaction Privilege," Page .) You must make
allocations in whole number percentages of at least 5%, and the sum of the
allocation percentages must be 100%. We will allocate Net Premiums as of
the Valuation Date we receive the premium at our Home Office, based on the
allocation percentages then in effect, except during the free look period.
We will allocate any portion of the Initial Premium and any subsequent
premiums we receive before the end of the free look period which are to be
allocated to the Separate Account, to the Money Market Subaccount. For this
purpose, we will assume that the free look period will end 20 days after the
date the Policy is issued. On the first Valuation Date following 20 days after
issue of the Policy, we will allocate the amount in the Money Market
Subaccount to each of the Subaccounts selected in the application based on
your instructions.
For example, assume a Policy was issued with Net Premiums to be
allocated 25% to the Managed Subaccount, 25% to the Bond Subaccount and 50% to
the General Account. During the period stated above, 50% (25% + 25%) of the
Net Premiums will be allocated to the Money Market Subaccount. At the end of
such period, 50% (25% / 50%) of the amount in the Money Market Subaccount will
be transferred to the Managed Subaccount and 50% to the Bond Subaccount.
The values of the Subaccounts will vary with their investment
experience. You bear the entire investment risk. You should periodically
review your allocation percentages in light of market conditions and your
overall financial objectives.
Transfers. You may transfer the Accumulated Value between and among the
Subaccounts of the Separate Account and the General Account by sending us a
written transfer request, or if you have elected the telephone transaction
privilege, by telephone instructions to us. (See "Telephone Transaction
Privilege," Page .) Transfers between and among the Subaccounts of the Separate
Account and the General Account are made as of the Valuation Day that the
request for transfer is received at the Home Office. You may, at any time,
transfer all or part of the amount in one of the Subaccounts of the Separate
Account to another Subaccount and/or to the General Account. For transfers from
the General Account to the Separate Account, see "Transfers from General
Account," Page .
Currently an unlimited number of transfers are permitted without
charge. We have no current intent to impose a transfer charge in the foreseeable
future. However, we may, after giving you prior notice, change this policy so as
to deduct a $25 transfer charge from each transfer in excess of the twelfth
transfer during any one Policy Year. All transfers requested during one
Valuation Period are treated as one transfer transaction. If a transfer charge
is adopted in the future, these types of transfers would not be subject to a
transfer charge and would not count against the twelve free transfers in any
Policy Year:
- transfers resulting from Policy loans
- transfers resulting from the operation of the dollar cost averaging or
portfolio rebalancing features
- transfers resulting from the exercise of the transfer rights
described on page____ (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 you pay the
Minimum Guarantee Premium.
In addition, if you purchase the Guaranteed Death Benefit Rider, and pay
the Minimum Guarantee Premium as of each Monthly Policy Date, your Policy will
not lapse prior to the Insured's Attained Age
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<PAGE> 173
70, or 20 years from the Date of Issue of the Policy if longer, regardless of
whether the Cash Surrender Value is sufficient to cover the Monthly Deductions.
If you purchase the Guaranteed Death Benefit Rider, your Minimum Guarantee
Premium will be higher than if you do not purchase the Guaranteed Death Benefit
Rider. (See "Optional Benefits - Guaranteed Death Benefit," Page .)
The Policy provides for a 61-day Grace Period that is measured from the
date we send a lapse notice. The Policy does not lapse, and the insurance
coverage continues, until the expiration of this Grace Period. To prevent lapse,
you must during the Grace Period pay a premium equal to the sum of any amount by
which the past Monthly Deductions have been in excess of Cash Surrender Value,
plus three times the Monthly Deduction due the date the Grace Period began. Our
notice will specify the payment required to keep the Policy in force. Failure to
make a payment at least equal to the required amount within the Grace Period
will result in lapse of the Policy without value.
Reinstatement. A Policy that lapses without value may be reinstated at
any time within five years (or longer period required in a particular state)
after the beginning of the Grace Period. To do so, you must submit evidence of
the Insured's insurability satisfactory to us and pay an amount sufficient to
provide for two times the Monthly Deduction due on the date the Grace Period
began plus three times the Monthly Deduction due on the effective date of
reinstatement. The effective date of reinstatement, unless otherwise required by
state law, will be the Monthly Policy Date on or next following the date your
reinstatement application is approved. Upon reinstatement, the Accumulated Value
will be based upon the premium paid to reinstate the Policy. The Policy will be
reinstated with the same Date of Issue as it had prior to the lapse. Neither the
five year no lapse guarantee nor the Death Benefit Guarantee Rider may be
reinstated.
Specialized Uses of the Policy. Because the Policy provides for an
accumulation of cash value as well as a death benefit, the Policy can be used
for various individual and business financial planning purposes. Purchasing the
Policy in part for such purposes entails certain risks. For example, if the
investment performance of the chosen Subaccounts is poorer than expected or if
sufficient premiums are not paid, the Policy may lapse or may not accumulate
sufficient Accumulated Value or Cash Surrender Value to fund the purpose for
which the Policy was purchased. Withdrawals and Policy loans may significantly
affect current and future Accumulated Value, Cash Surrender Value, or Death
Benefit proceeds. Depending upon Subaccount investment performance and the
amount of a Policy loan, the loan may cause a Policy to lapse. Because the
Policy is designed to provide benefits on a long-term basis, before purchasing a
Policy for a specialized purpose you should consider whether the long-term
nature of the Policy is consistent with your purpose. Using a Policy for a
specialized purpose may have tax consequences. (See "Federal Income Tax
Considerations," Page .)
For Policies that are intended to be used in multiple employer welfare
benefit plans established under Section 419A(f)(6) of the Internal Revenue Code,
you should be aware that there is a risk that the intended tax consequences of
such a plan may not be realized. Congress is currently considering legislation
that might remove some or all of the tax advantage of these plans and the
Internal Revenue Service has raised questions about certain of these
arrangements under existing law. We do not guarantee any particular tax
consequences of any use of the Policies, including but not limited to use in
these so-called "Section 419 Plans." We recommend that you seek independent tax
advice with respect to applications in which you seek particular tax
consequences.
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CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate us
for:
(a) providing the insurance and other benefits set forth in the Policy;
(b) administering the Policy;
(c) assuming certain mortality and other risks in connection with the
Policy; and
(d) incurring expenses in distributing the Policy including costs
associated with printing prospectuses and sales literature and sales
compensation.
We may realize a profit from any charges. We may use any profit for any
purpose, including payment of distribution expenses. We may also realize a
profit on one or more of these charges. We may use any profits for any
corporate purpose, including sales expenses.
PREMIUM TAX CHARGE
We will deduct 3.25% from each premium payment prior to allocation of Net
Premiums, to cover state premium taxes and the federal DAC Tax. For qualified
employee benefit plans, we will deduct 2.0% of each premium rather than 3.25%.
The federal DAC Tax is a tax attributable to certain "policy acquisition
expenses" under Internal Revenue Code Section 848. Section 848 in effect
accelerates the realization of income we receive from the Policies, and
therefore the payment of federal income taxes on that income. The economic
consequence of Section 848 is, therefore, an increase in the tax burden borne by
us that is attributable to the Policies.
SURRENDER CHARGE
We impose a Surrender Charge, which consists of a Deferred Administrative
Charge and a Deferred Sales Charge, if the Policy is surrendered or lapses at
any time before the end of the fifteenth Policy Year.
Deferred Administrative Charge. The Deferred Administrative Charge varies
by Issue Age, and is based on the Initial Face Amount. After the first five
Policy Years, it declines linearly by Policy Month until the end of Policy Year
15, when it becomes zero. Charges per $1,000 of Face Amount for sample Issue
Ages are shown below:
<TABLE>
<CAPTION>
Sample Charge per $1000
Issue Age of Initial Face Amount
--------- ----------------------
<S> <C>
0-5 None
10 $0.50
15 $1.00
20 $1.50
25-85 $2.00
</TABLE>
For Issue Ages not shown, the charge will increase by a ratable portion
for each full year. The Deferred Administrative Charge has been designed to
cover actual expenses for the issue and underwriting of Policies, and is not
intended to produce a profit.
Deferred Sales Charge. The Deferred Sales Charge will not exceed the
Maximum Deferred Sales Charge specified in the Policy.
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<PAGE> 175
The actual Deferred Sales Charge will equal the lesser of:
(a) the maximum discussed in the previous paragraph, and
(b) an amount equal to the sum of:
(i) 30% of the premiums actually received up to one Surrender
Charge target premium, plus
(ii) 10% of all premiums paid in excess of this amount but not
greater than twice this amount, plus
(iii) 9% of all premiums paid in excess of twice this amount.
Appendix B to this Prospectus contains a table showing the Surrender
Charge target premium and the Maximum Deferred Sales Charge for male
and female nonsmokers of each age at the time a policy is issued,
expressed as a dollar amount per $1000 of Initial Face Amount.
To illustrate the calculation of a Policy's Surrender Charge, assume
that the Policy is issued to a male nonsmoker, Issue Age 45, with a
Face Amount of $100,000. Assume that the Surrender Charge target
premium ("SCTP") is $1,652, the initial Maximum Deferred Sales
Charge is $826 (50% of $1,652) and the Insured pays annual premiums
of $1,500 at the beginning of each Policy Year. This example will
illustrate surrenders in the first five Policy Years and in the
first month of the eighth Policy Year.
Deferred Administrative Charge. The Deferred Administrative Charge
for the first five Policy Years is $200. This is calculated by
applying the charge of $2.00 per $1,000 of Face Amount for Issue Age
45 from the schedule above to the Face Amount of $100,000 ($2.00 x
(100,000/1,000)). The Deferred Administrative Charge reduces
linearly by Policy Month in Policy Years 6 through 15. Linear
reduction is equivalent to a reduction each month of 1/121st of the
initial charge. For example, the Deferred Administrative Charge in
the first month of the eighth Policy Year (the 25th month after the
end of the 5th Policy Year) will be $158.68 ($200 - ($200 x
(25/121)). After completion of the 15th Policy Year, the Deferred
Administrative Charge is zero. The schedule of Deferred
Administrative Charges in effect for the first fifteen Policy Years
is shown in the Policy.
Deferred Sales Charge. The Deferred Sales Charge is the lesser of
the Maximum Deferred Sales Charge and an amount calculated based on
the Insured's actual premium payments. The Maximum Deferred Sales
Charge in effect for the first five Policy Years is $826. The
Maximum Deferred Sales Charge reduces linearly by month in Policy
Years 6 through 15. Linear reduction is equivalent to a reduction
each month of 1/121st of the initial charge. For example, the
Maximum Deferred Sales Charge in the first month of the 8th Policy
Year (the 25th month after the end of the 5th Policy Year) will be
$655.34 ($826 - ($826 x (25/121))). After the completion of the 15th
Policy Year, the Maximum Deferred Sales Charge is $0. The schedule
of Maximum Deferred Sales Charges in effect for the first fifteen
Policy Years is shown in the Policy.
The Maximum Deferred Sales Charge is compared to an amount
calculated as a function of premiums actually paid and the SCTP. The
amount is calculated as the sum of 30% of premiums paid up to the
first SCTP ($1,652), 10% of premiums paid in excess of the first
SCTP but not more than two SCTP's (from $1,653 to $3,304), and 9% of
premiums paid in excess of two SCTP's (above $3,304). As an example,
the calculated amounts in Policy Years 1 through 5 and Policy Year 8
would be as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Amount at 10%
Policy Cumulative Amount at 30% (From $1,653 Amount at 9%
Year Premiums (Below $1,652) to $3,304) (Above $3,304) Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $ 1,500 $1,500x.30=$450.00 - - $ 450.00
2 $ 3,000 $1,652x.30=$495.60 $1,348x.10=$134.80 - $ 630.40
3 $ 4,500 $1,652x.30=$495.60 $1,652x.10=$165.20 $1,196x.09=$107.64 $ 768.44
4 $ 6,000 $1,652x.30=$495.60 $1,652x.10=$165.20 $2,696x.09=$242.64 $ 903.44
5 $ 7,500 $1,652x.30=$495.60 $1,652x.10=$165.20 $4,196x.09=$377.64 $1,038.44
8 $12,000 $1,652x.30=$495.60 $1,652x.10=$165.20 $8,696x.09=$782.64 $1,443.44
</TABLE>
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<PAGE> 176
The total calculated amount would then be compared to the Maximum
Deferred Sales Charge to determine the Deferred Sales Charge
actually imposed. For example, the Deferred Sales Charge in the
first five years would be the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(A) (B)
Maximum Deferred Deferred Sales Charge
Policy Year Calculated Amount Sales Charge (Lesser of (A) and (B)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 $ 450.00 $826.00 $450.00
2 $ 630.40 $826.00 $630.40
3 $ 768.44 $826.00 $768.44
4 $ 903.44 $826.00 $826.00
5 $1,038.44 $826.00 $826.00
</TABLE>
In this example, the charge based on SCTP is less than the Maximum
Deferred Sales Charge until the fourth Policy Year. Thereafter, the
Maximum Deferred Sales Charge is less than the charge based on SCTP.
For example, the Deferred Sales Charge in the first month of the
eighth Policy Year will be the Maximum Deferred Sales Charge of
$655.34 (calculated above) since this is less than $1,443.44 (the
calculated amount based on premiums paid).
MONTHLY DEDUCTIONS
We will deduct charges from the Accumulated Value on the Date of Issue and
on each Monthly Policy Date. The Monthly Deduction consists of three components:
(a) the Cost of Insurance Charge
(b) the Monthly Administrative Charge, and
(c) the cost of any additional benefits provided by Rider.
The Monthly Deduction may vary in amount from Policy Month to Policy
Month. We will take the Monthly Deduction on a pro rata basis from the
Subaccounts of the Separate Account and the General Account, unless you have
requested at the time of application, or later request in writing, that we take
the Monthly Deductions from the Money Market Subaccount. If we cannot take a
Monthly Deduction from the Money Market Subaccount, where you have so asked, we
will take the amount of the deduction in excess of the Accumulated Value
available in the Money Market Subaccount on a pro rata basis from Accumulated
Value in the Subaccounts of the Separate Account and the General Account.
Cost of Insurance Charge. We calculate the monthly Cost of Insurance
Charge by multiplying the applicable cost of insurance rate or rates by the Net
Amount at Risk for each Policy Month. Because both the Net Amount at Risk and
the variables that determine the cost of insurance rate, such as the age of the
Insured and the Duration of the Policy, may vary, the Cost of Insurance Charge
will likely be different from month to month.
Net Amount at Risk. The Net Amount at Risk on any Monthly Policy
Date is approximately the amount by which the Unadjusted Death Benefit on
that Monthly Policy Date exceeds the Accumulated Value. It measures the
amount National Life would have to pay in excess of the Policy's Value if
the Insured died. The actual calculation uses the Unadjusted Death Benefit
divided by 1.00327234, to take into account assumed monthly earnings at an
annual rate of 4%. We calculate the Net Amount at Risk separately for the
Initial Face Amount and any increases in Face Amount. In determining the
Net Amount at Risk for each increment of Face Amount, we first consider
the Accumulated Value part of the Initial Face Amount. If the Accumulated
Value exceeds the Initial Face Amount, we consider it as part of any
increases in Face Amount in the order such increases took effect.
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<PAGE> 177
Any change in the Net Amount at Risk will affect the total Cost of
Insurance Charges paid by the Owner.
Guaranteed Maximum Cost of Insurance Rates. The guaranteed maximum
cost of insurance rates will be set forth in your Policy, and will depend
on:
- the Insured's Attained Age
- the Insured's sex
- the Insured's Rate Class, and
- the 1980 Commissioners Standard Ordinary Smoker/Nonsmoker Mortality
Table.
For Policies issued in conjunction with employee benefit plans, the
guaranteed maximum cost of insurance rate will use the 1980 Commissioners
Standard Ordinary Mortality Tables NB and SB.
Current Cost of Insurance Rates and How They are Determined. The
actual cost of insurance rates used ("current rates") will depend on:
- the Insured's Issue Age
- the Insured's sex
- the Insured's Rate Class
- the Policy's Duration, and
- the Policy's size.
Generally, the current cost of insurance rate for a given Attained
Age will be less than for an Insured whose Policy was issued more than 10
years ago, than for an Insured whose Policy was issued less than 10 years
ago, other factors being equal. We periodically review the adequacy of our
current cost of insurance rates and may adjust their level. However, the
current rates will never exceed guaranteed maximum cost of insurance
rates. Any change in the current cost of insurance rates will apply to all
persons of the same Issue Age, sex, and Rate Class, and with Policies of
the same Duration and size.
We use separate cost of insurance rates for the Initial Face Amount
and any increases in Face Amount. For the Initial Face Amount we use the
rate for the Insured's Rate Class on the Date of Issue. For each increase
in Face Amount, we use the rate for the Insured's Rate Class at the time
of the increase. If the Unadjusted Death Benefit is calculated as the
Accumulated Value times the specified percentage, we use the rate for the
Rate Class for the Initial Face Amount for the amount of the Unadjusted
Death Benefit in excess of the total Face Amount for Option A, and
in excess of the total Face Amount plus the Accumulated Value for
Option B.
Rate Class. The Rate Class of the Insured will affect both the
guaranteed and current cost of insurance rates. We currently place
Insureds into the following rate classes:
- preferred nonsmoker
- standard nonsmoker
- smoker
- juvenile, and
- substandard.
Smoker, juvenile, and substandard classes reflect higher mortality
risks. In an otherwise identical Policy, an Insured in a preferred or
standard class will have a lower Cost of Insurance Charge than an Insured
in a substandard class with higher mortality risks. Nonsmoking Insureds
will generally incur lower cost of insurance rates than Insureds who are
classified as smokers.
The nonsmoker designation is not available for Insureds under
Attained Age 20. Shortly before an Insured attains age 20, we will notify
the Insured about possible classification as a nonsmoker and
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<PAGE> 178
direct the Insured to his or her agent to initiate a change in Rate Class.
If the Insured qualifies as a nonsmoker, we will change the guaranteed
and current cost of insurance rates to reflect the nonsmoker
classification.
Current cost of insurance rates will also vary by Policy size, in
the following bands:
- those with Face Amounts less than $250,000
- those with Face Amounts between $250,000 and $999,999, inclusive; and
- those with Face Amounts of $1,000,000 and over.
Cost of insurance rates will be lower as the Policy size band is
larger.
Monthly Administrative Charge. We deduct a Monthly Administrative Charge
from the Accumulated Value on the Date of Issue and each Monthly Policy Date as
part of the Monthly Deduction to help defray the expenses incurred in
administering the Policy. The Monthly Administrative Charge is currently $7.50.
The monthly charge is guaranteed not to exceed $7.50 plus $0.07 per $1000 of
Face Amount.
Optional Benefit Charges. The Monthly Deduction will include charges for
any additional benefits added to the Policy. The monthly charges will be
specified in the applicable Rider. The available Riders are listed under
"Optional Benefits", on Page below.
Separate Account Enhancement. We will reduce the Monthly Deductions
starting in the eleventh Policy Year by an amount equal to 0.50% per annum of
the Accumulated Value in the Separate Account.
The separate account enhancement is calculated on each Monthly Policy Date
as .041572% (the monthly equivalent of 0.50% per annum) of the Accumulated Value
in the Separate Account on the just prior Monthly Policy Date. For example, if
the Accumulated Value in the Separate Account on the just prior Monthly Policy
Date is $10,000, then the separate account enhancement calculated for the
current Monthly Policy Date will be $4.16 ($10,000 X .00041572). To calculate
the Monthly Deduction for the current Monthly Policy Date, we net the $4.16
separate account enhancement against the Monthly Deductions for Cost of
Insurance, the Monthly Administrative Charge, and charges for any Optional
Benefits.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from the Separate Account at an annual rate of
0.90% (or a daily rate of .0024548%) of the average daily net assets of each
Subaccount of the Separate Account. This charge compensates us for the mortality
and expense risks assumed in connection with the Policy. The mortality risk we
assume is that insured persons may live for a shorter time than projected. This
means we would pay greater death benefits than expected in relation to the
amount of premiums received. The expense risk we assume is that expenses
incurred in issuing and administering the Policies will exceed the
administrative charges deducted from the Policy.
WITHDRAWAL CHARGE
We will assess on each Withdrawal a charge equal to the lesser of 2% of
the Withdrawal amount and $25. We will deduct this Withdrawal Charge from the
Withdrawal amount.
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts, or
from the Separate Account to the General Account. Transfers from the General
Account to the Separate Account are permitted within the limits described on
Page . 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
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<PAGE> 179
transfer charge of $25 on each transfer in excess of twelve transfers in any
Policy Year. The Transfer Charge would be imposed to compensate us for the costs
of processing such transfers, and would not be designed to produce a profit.
If we impose a transfer charge in the future, we will deduct it from the
amount being transferred. We would treat all transfers requested on the same
Valuation Date as one transfer transaction. Any future transfer charge will not
apply to transfers resulting from:
- Policy loans
- the exercise of the transfer rights described on page___
- the initial reallocation of account values from the Money Market
Subaccount to other Subaccounts, and
- any transfers made pursuant to the Dollar Cost Averaging and
Portfolio Rebalancing features.
The transfers listed above also will not count against the twelve free transfers
in any Policy Year.
PROJECTION REPORT CHARGE
We may impose a charge, not to exceed $25, for each projection report you
request. This report will project future values and future Death Benefits for
the Policy. We will notify you in advance of the amount of the charge. You may
elect to pay the charge in advance. If not paid in advance, we will deduct this
charge from the Subaccounts of the Separate Account and/or the General Account
in proportion to their Accumulated Values on the date of the deduction.
OTHER CHARGES
The Separate Account purchases shares of the Funds at net asset value. The
net asset value of those shares reflect management fees and expenses already
deducted from the assets of the Funds' Portfolios. Historical expense ratio
information for the Funds is presented in the "Summary of Policy Expenses"
section on page above. More detailed information is contained in the Funds'
Prospectuses which accompany this Prospectus.
POLICY RIGHTS AND PRIVILEGES
LOAN PRIVILEGES
General. You may at any time after the first year (and during the first
year where required by law) borrow money from us using the Policy as the only
security for the loan. The maximum amount you may borrow is the Policy's Cash
Surrender Value on the date we receive your loan request, minus three times the
Monthly Deduction for the most recent Monthly Policy Date. You may repay all or
a portion of a loan and accrued interest at any time, if the Insured is alive.
To take a loan, you should send us a written request at our Home Office. If you
have elected the telephone transaction privilege, you may also request a loan
over the telephone. We limit the amount of a Policy loan you can take by
telephone to $25,000. (See "Telephone Transaction Privilege," Page .) We will
normally pay loan proceeds within seven days of a valid loan request.
Interest Rate Charged. We charge interest on Policy loans at the fixed
rate of 6% per year. We charge interest from the date of the loan and add it to
the loan balance at the end of the Policy Year. When this interest is added to
the loan balance, it bears interest at the same rate..
Allocation of Loans and Collateral. When you take a Policy loan, we hold
Accumulated Value in the General Account as Collateral for the Policy loan. You
may specify how you would like the Accumulated Value to be taken from the
Subaccounts of the Separate Account to serve as Collateral. If you do not so
specify, we will allocate the Policy loan to the Subaccounts in proportion to
the
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<PAGE> 180
Accumulated Value in the Subaccounts. If the Accumulated Value in one or more of
the Subaccounts is insufficient to carry out your instructions, we will not
process the loan until we receive further instructions from you. Non-loaned
Accumulated Value in the General Account will become Collateral for a loan only
to the extent that the Accumulated Value in the Separate Account is
insufficient.
The Collateral for a Policy loan will initially be the loan amount. Loan
interest will be added to the Policy loan. We will take additional Collateral
for the loan interest pro rata from the Subaccounts of the Separate Account, and
then, if the amounts in the Separate Account are insufficient, from the
non-loaned portion of the General Account. At any time, the amount of the
outstanding loan under a Policy equals the sum of all loans (including due and
unpaid interest added to the loan balance) minus any loan repayments.
Interest Credited to Amounts Held as Collateral. As long as the Policy is
in force, we will credit the amount held in the General Account as Collateral
with interest at effective annual rates we declare, but not less than 4% or such
higher minimum rate required under state law. The rate will apply to the
calendar year which follows the date of determination.
In Policy Years 11 and thereafter, we will credit interest on amounts held
in the General Account as Collateral at a rate 0.50% per annum higher than for
similar amounts for Policies still in their first ten Policy Years.
Preferred Policy Loans. We also currently intend to make preferred Policy
loans available on the later of the Insured's Attained Age 65 and the beginning
of Policy Year 21. The maximum amounts of these preferred loans will be 5% of
Accumulated Value per year, with a cumulative maximum of 50% of Accumulated
Value. For these preferred Policy loans, the amounts held as Collateral in the
General Account will be credited with interest at an annual rate of 6%. If both
preferred and non-preferred loans exist at the same time, we will first apply
any loan repayment to the non-preferred loan. We are not obligated to make
preferred loans available, and will make such loans available 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 of your Policy. The effect on the
Accumulated Value and Death Benefit could be favorable or unfavorable. It will
depend on whether the investment performance of the Subaccounts, and the
interest credited to the non-loaned Accumulated Value in the General Account, is
less than or greater than the interest being credited on the amounts held as
Collateral in the General Account. Compared to a Policy under which no loan is
made, values under a Policy will be lower when the credited interest rate on
Collateral is less than the investment experience of assets held in the Separate
Account and interest credited to the non-Collateral Accumulated Value in the
General Account. The longer a loan is outstanding, the greater the effect a
Policy loan is likely to have. The Death Benefit will be reduced by the amount
of any outstanding Policy loan.
Loan Repayments. We will assume that any payments you make while there is
an outstanding Policy loan are premium payments, rather than loan repayments,
unless you specify in writing that a payment is a loan repayment. In the event
of a loan repayment, the amount held as Collateral in the General Account will
be reduced by an amount equal to the repayment, and such amount will be
transferred to the Subaccounts of the Separate Account and to the non-loaned
portion of the General Account based on the Net Premium allocations in effect at
the time of the repayment.
Lapse With Loans Outstanding. The amount of an outstanding loan under a
Policy plus any accrued interest on outstanding loans is not part of Cash
Surrender Value. Therefore, the larger the amount of an outstanding loan, the
more likely it is that the Policy could lapse. (See "How the Duration of the
Policy May Vary," Page and "Policy Lapse," Page .) In addition, if the Policy is
not a Modified
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<PAGE> 181
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 Insured. The Cash Surrender Value is the Accumulated
Value minus any Policy loan and accrued interest and less any Surrender Charge.
We will calculate the Cash Surrender Value on the Valuation Day we receive, at
our Home Office, your signed written surrender request, and the Policy. You may
not request a surrender over the telephone. Coverage under the Policy will end
on the day you mail or otherwise send your written surrender request and the
Policy to us. We will ordinarily mail surrender proceeds to you within seven
days of when we receive your request. (See "Other Policy Provisions - Payment of
Policy Benefits", Page .)
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 your Policy's Cash Surrender Value at any
time before the death of the Insured and, except for employee benefit plans,
after the first Policy Anniversary. The minimum amount which you may withdraw is
$500, except for employee benefit plans, where the minimum is $100. The maximum
Withdrawal is the Cash Surrender Value on the date of receipt of the Withdrawal
request, minus three times the Monthly Deduction for the most recent Monthly
Policy Date. A Withdrawal Charge will be deducted from the amount of the
Withdrawal. For a discussion of the Withdrawal Charge, see "Charges and
Deductions - Withdrawal Charge" on Page .
You may specify how you would like us to take a Withdrawal from the
Subaccounts of the Separate Account. If you do not so specify, we will take the
Withdrawal from the Subaccounts in proportion to the Accumulated Value in each
Subaccount. If the Accumulated Value in one or more Subaccounts is insufficient
to carry out your instructions, we will not process the Withdrawal until we
receive further instructions from you. You may take Withdrawals from the General
Account only after the Accumulated Value in the Separate Account has been
exhausted.
The effect of a Withdrawal on the Death Benefit and Face Amount will vary
depending upon the Death Benefit Option in effect and whether the Unadjusted
Death Benefit is based on the applicable percentage of Accumulated Value. (See
"Death Benefit Options," Page .)
Option A. The effect of a Withdrawal on the Face Amount and Unadjusted
Death Benefit under Option A can be described as follows:
If the Face Amount divided by the applicable percentage of
Accumulated Value exceeds the Accumulated Value just after the Withdrawal,
a Withdrawal will reduce the Face Amount and the Unadjusted Death Benefit
by the lesser of such excess and the amount of the Withdrawal.
For the purposes of this illustration (and the following
illustrations of Withdrawals), assume that the Attained Age of the Insured
is under 40 and there is no indebtedness. The applicable percentage is
250% for an Insured with an Attained Age under 40.
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<PAGE> 182
Under Option A, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $30,000 will have an Unadjusted Death Benefit of
$300,000. Assume that you take a Withdrawal of $10,000. The Withdrawal
Charge will be $25 and the amount we pay you will be $9,975. The
Withdrawal will reduce the Accumulated Value to $20,000 ($30,000 -
$10,000) after the Withdrawal. The Face Amount divided by the applicable
percentage is $120,000 ($300,000 / 2.50), which exceeds the Accumulated
Value after the Withdrawal by $100,000 ($120,000 - $20,000). The lesser of
this excess and the amount of the Withdrawal is $10,000, the amount of the
Withdrawal. Therefore, the Unadjusted Death Benefit and Face Amount will
be reduced by $10,000 to $290,000.
If the Face Amount divided by the applicable percentage of
Accumulated Value does not exceed the Accumulated Value just after the
Withdrawal, then the Face Amount is not reduced. The Unadjusted Death
Benefit will be reduced by an amount equal to the reduction in Accumulated
Value times the applicable percentage (or equivalently, the Unadjusted
Death Benefit is equal to the new Accumulated Value times the applicable
percentage).
Under Option A, a policy with a Face Amount of $300,000 and an
Accumulated Value of $150,000 will have an Unadjusted Death Benefit of
$375,000 ($150,000 x 2.50). Assume that you take a Withdrawal of $10,000.
The Withdrawal Charge will be $25 and the amount we pay to you will be
$9,975. The Withdrawal will reduce the Accumulated Value to $140,000
($150,000 - $10,000). The Face Amount divided by the applicable percentage
is $120,000, which does not exceed the Accumulated Value after the
withdrawal. Therefore, the Face Amount stays at $300,000 and the
Unadjusted Death Benefit is $350,000 ($140,000 x 2.50).
Option B. The Face Amount will never be decreased by a Withdrawal. A
Withdrawal will, however, always decrease the Death Benefit.
If the Unadjusted Death Benefit equals the Face Amount plus the
Accumulated Value, a Withdrawal will reduce the Accumulated Value by the
amount of the Withdrawal and thus the Unadjusted Death Benefit will also
be reduced by the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $90,000 will have an Unadjusted Death Benefit of
$390,000 ($300,000 + $90,000). Assume you take a Withdrawal of $20,000.
The Withdrawal Charge will be $25 and the amount we pay to you will be
$19,975. The Withdrawal will reduce the Accumulated Value to $70,000
($90,000 - $20,000) and the Unadjusted Death Benefit to $370,000 ($300,000
+ $70,000). The Face Amount is unchanged.
If the Unadjusted Death Benefit immediately prior to the Withdrawal
is based on the applicable percentage of Accumulated Value, the Unadjusted
Death Benefit will be reduced to equal the greater of (a) the Face Amount
plus the Accumulated Value after deducting the amount of the Withdrawal
and Withdrawal Charge and (b) the applicable percentage of Accumulated
Value after deducting the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $210,000 will have an Unadjusted Death Benefit of
$525,000 ($210,000 X 2.5). Assume you take a Withdrawal of $60,000. The
Withdrawal Charge will be $25 and the amount we pay to you will be
$59,975. The Withdrawal will reduce the Accumulated Value to $150,000
($210,000 - $60,000), and the Unadjusted Death Benefit to the greater of
(a) the Face Amount plus the Accumulated Value, or $450,000 ($300,000 +
$150,000) and (b) the Unadjusted Death Benefit based on the applicable
percentage of the Accumulated Value, or $375,000 ($150,000 X 2.50).
Therefore, the Unadjusted Death Benefit will be $450,000. The Face Amount
is unchanged.
Any decrease in Face Amount due to a Withdrawal will first reduce the most
recent increase in Face Amount, then the most recent increases, successively,
and lastly, the Initial Face Amount.
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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 .) A request
for Withdrawal may not be allowed if such Withdrawal would reduce the Face
Amount below the Minimum Face Amount for the Policy. Also, if a Withdrawal would
result in cumulative premiums exceeding the maximum premium limitations
applicable under the Code for life insurance, we will not allow the Withdrawal.
You may request a Withdrawal only by sending a signed written request to
us at our Home Office. You may not request a Withdrawal over the telephone. We
will ordinarily pay a Withdrawal within seven days of receiving at our Home
Office a valid Withdrawal request.
A Withdrawal of Cash Surrender Value may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page .)
FREE-LOOK PRIVILEGE
The Policy provides for a "free-look" period, during which you may cancel
the Policy and receive a refund equal to the premiums paid on the Policy.
This free-look period ends on the latest of:
(a) 45 days after Part A of the application for the Policy is signed
(b) 10 days after you receive the Policy
(c) 10 days after we mail the Notice of Withdrawal Right to you, or
(d) any longer period provided by state law.
To cancel your Policy, you must return it to us or to our agent within the free
look period with a written request for cancellation.
TELEPHONE TRANSACTION PRIVILEGE
If you elect the telephone transaction privilege by written authorization,
you may effect changes in premium allocation, transfers, loans of up to
$25,000, and initiate or make changes in Dollar Cost Averaging or Portfolio
Rebalancing, by providing instructions to us at our Home Office over the
telephone. We may suspend telephone transaction privileges at any time, for any
reason, if we deem such suspension to be in the best interests of Policy
Owners. You may, on the application or by a written authorization, authorize
your National Life agent to provide telephone instructions on your behalf.
We will employ reasonable procedures to confirm that instructions we
receive by telephone are genuine. If we follow these procedures, we will not be
liable for any losses due to unauthorized or fraudulent instructions. We may be
liable for any such losses if we do not follow these reasonable procedures. The
procedures to be followed for telephone transfers will include one or more of
the following:
- requiring some form of personal identification prior to acting on
instructions received by telephone
- providing written confirmation of the transaction, and
- making a tape recording of the instructions given by telephone.
OTHER TRANSFER RIGHTS
Transfer Right for Policy. During the first two years following Policy
issue, you may, on one occasion, transfer the entire Accumulated Value in the
Separate Account to the General Account, without regard to any limits on
transfers or free transfers.
Transfer Right for Change in Investment Policy. If the investment policy
of a Subaccount of the Separate Account is materially changed, you may transfer
the portion of the Accumulated Value in that
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Subaccount to another Subaccount or to the General Account, without regard to
any limits on transfers or free transfers.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer, at no charge to you, two automated fund management
features. Only one of these features may be active for any single Policy at any
time. We are not legally obligated to continue to offer these features. Although
we have no current intention to do so, we may cease offering one or both these
features at any time, after providing 60 days prior written notice to all Owners
who are then utilizing the features being discontinued
Dollar Cost Averaging. This feature permits you to automatically transfer
funds from the Money Market Subaccount to any other Subaccounts on a monthly
basis. You may elect Dollar Cost Averaging at issue by marking the appropriate
box on the initial application, and completing the appropriate instructions. You
may also begin a Dollar Cost Averaging program after issue by filling out
similar information on a change request form and sending it to us at our Home
Office.
If you elect this feature, we will take the amount to be transferred from
the Money Market Subaccount and transfer it to the Subaccount or Subaccounts
designated to receive the funds, each month on the Monthly Policy Date. If you
elect Dollar Cost Averaging on your application for the Policy, it will start
with the Monthly Policy Date after the date that is 20 days after issue. If you
begin a Dollar Cost Averaging program after the free look period is over, it
will start on the next Monthly Policy Date. Dollar Cost Averaging will continue
until the amount in the Money Market Subaccount is depleted. The minimum
monthly transfer by Dollar Cost Averaging is $100, except for the transfer
which reduces the amount in the Money Market Subaccount to zero. You may
discontinue Dollar Cost Averaging at any time by sending an appropriate change
request form to the Home Office. You may not use the dollar cost averaging
feature to transfer Accumulated Value to the General Account.
Dollar Cost Averaging allows you to move funds into the various investment
types on a more gradual and systematic basis than the frequency on which you pay
premiums. The dollar cost averaging method of investment is designed to reduce
the risk of making purchases only when the price of units is high. The periodic
investment of the same amount will result in higher numbers of units being
purchased when unit prices are lower, and lower numbers of units being
purchased when unit prices are higher. This technique will not, however, assure
a profit or protect against a loss in declining markets. Moreover, for the
dollar cost averaging technique to be effective, amounts should be available
for allocation from the Money Market Subaccount through periods of low price
levels as well as higher price levels.
Portfolio Rebalancing. This feature permits you to automatically rebalance
the value in the Subaccounts on a semi-annual basis, based on your premium
allocation percentages in effect at the time of the rebalancing. You may elect
it at issue by marking the appropriate box on the application, or, after issue,
by completing a change request form and sending it to our Home Office.
In Policies utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer will take place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages,
starting with the Monthly Policy Date six months after the Date of Issue, and
then on each Monthly Policy Date six months thereafter. Policies electing
Portfolio Rebalancing after issue will have the first automated transfer occur
as of the Monthly Policy Date on or next following the date we receive the
election at our Home Office, and subsequent rebalancing transfers will occur
every six months from that date. You may discontinue Portfolio Rebalancing at
any time by submitting an appropriate change request form to us at our Home
Office.
If you change your Policy's premium allocation percentages, Portfolio
Rebalancing will automatically be discontinued unless you specifically direct
otherwise.
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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.
POLICY RIGHTS UNDER CERTAIN PLANS
Policies may be purchased in connection with a plan sponsored by an
employer. In such cases, all rights under the Policy rest with the Policy Owner,
which may be the employer or other obligor under the plan, and benefits
available to participants under the plan will be governed solely by the
provisions of the plan. Accordingly, some of the options and elections under the
Policy may not be available to participants under the provisions of the plan. In
such cases, participants should contact their employers for information
regarding the specifics of the plan.
THE GENERAL ACCOUNT
You may allocate some or all of your Net Premiums, and transfer some or
all of the Accumulated Value of your Policy to our General Account. We credit
interest on Net Premiums and Accumulated Value allocated to the General Account
at rates we declare. These rates will not be less than 4%. The principal, after
deductions, is also guaranteed. The General Account supports National Life 's
insurance and annuity obligations. All assets in the General Account are subject
to National Life's general liabilities from business operations.
The General Account has not, and is not required to be, registered with
the SEC under the Securities Act of 1933. The General Account has not been
registered as an investment company under the Investment Company Act of 1940.
Therefore, the General Account and the interests therein are generally not
subject to regulation under the 1933 Act or the 1940 Act. The disclosures
relating to this account which are included in this Prospectus are for your
information and have not been reviewed by the SEC. However, such disclosures may
be subject to certain generally applicable provisions of the Federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Accumulated Value not held as Collateral in the General Account is
guaranteed to accumulate at a minimum effective annual interest rate of 4%. We
may credit the non-loaned Accumulated Value in the General Account with current
rates in excess of the minimum guarantee, but we are not obligated to do so. We
have no specific formula for determining current interest rates. Since we
anticipate changing the current interest rate from time to time, in our sole
discretion, allocations to the General Account made at different times are
likely to be credited with different current interest rates. We will declare an
interest rate each month to apply to amounts allocated or transferred to the
General Account in that month. The rate declared on such amounts will remain in
effect for twelve months. At the end of the 12-month period, we may declare a
new current interest rate on such amounts and accrued interest thereon (which
may be a different current interest rate than the current interest rate on new
allocations to the General Account on that date). We will determine any interest
credited on the amounts in the General Account in excess of the minimum
guaranteed rate of 4% per year in our sole discretion. You assume the risk that
interest credited may not exceed the guaranteed minimum rate. Amounts allocated
to the General Account will not share in the investment performance of our
General Account.
Amounts deducted from the non-loaned Accumulated Value in the General
Account for Withdrawals, Policy loans, transfers to the Separate Account,
Monthly Deductions or other charges are, for the purpose of crediting interest,
accounted for on a last in, first out ("LIFO") method.
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We may change the method of crediting interest from time to time,
provided that such changes do not have the effect of reducing the guaranteed
rate of interest below 4% per annum or shortening the period for which the
interest rate applies to less than 12 months.
We will credit interest on non-loaned Accumulated Value in the General
Account for Policies in Policy Year 11 and thereafter at rates which are 0.50%
per annum higher than those that apply to Policies still in their first ten
Policy Years.
Calculation of Non-loaned Accumulated Value in the General Account. The
non-loaned Accumulated Value in the General Account at any time is equal to
amounts allocated and transferred to it plus interest credited to it, minus
amounts deducted, transferred or withdrawn from it.
TRANSFERS FROM GENERAL ACCOUNT
We allow only one transfer in each Policy Year from the amount of
non-loaned Accumulated Value in the General Account to any or all of the
Subaccounts of the Separate Account. The amount you transfer from the General
Account may not exceed the greater of 25% of the value of the non-loaned
Accumulated Value in such account at the time of transfer, or $1000. We will
make the transfer as of the Valuation Day we receive your written or telephone
request at our Home Office.
OTHER POLICY PROVISIONS
Maturity at 99. If the Policy is in force on the Policy Anniversary at
which the Insured is Attained Age 99, we will pay the Cash Surrender Value to
you in one sum unless you have chosen a Payment Option, and the Policy will
terminate.
Reduced Paid - Up Benefit. Prior to maturity, you may elect to continue
the Policy in force as paid-up General Account life insurance coverage. All or a
portion of the Cash Surrender Value of the Policy will be applied to paid-up
life insurance coverage. We will pay in one lump sum any amount of the Cash
Surrender Value which you do not apply toward paid-up life insurance coverage.
You may thereafter surrender any paid-up General Account life insurance at any
time for its value.
Payment of Policy Benefits. You may decide the form in which we pay Death
Benefit proceeds. During the Insured's lifetime, you may arrange for the Death
Benefit to be paid in a lump sum or under a Settlement Option. These choices are
also available upon surrender of the Policy for its Cash Surrender Value. If you
do not make an election, payment will be made in a lump sum. The Beneficiary may
also arrange for payment of the Death Benefit in a lump sum or under a
Settlement Option. If paid in a lump sum, we will ordinarily pay the Death
Benefit to the Beneficiary within seven days after we receive proof of the
Insured's death at our Home Office, and all other requirements are satisfied. If
paid under a Settlement Option, we will apply the Death Benefit to the
Settlement Option within seven days after we receive proof of the Insured's
death at our Home Office, and all other requirements are satisfied.
We will pay interest on the Death Benefit from the date of death until
payment is made. The interest rate will be the highest of (a) 4% per annum, (b)
any higher rate we declare, or (c) any higher rate required by law.
We will normally pay proceeds of a surrender, Withdrawal, or Policy loan
within seven days of when we receive your written request at our Home Office in
a form satisfactory to us.
We will generally determine the amount of a payment on the Valuation Day
we receive all required documents. However, we may defer the determination or
payment of such amounts if the date for determining such amounts falls within
any period during which:
(1) the New York Stock Exchange is closed (except for normal holiday
closing); or
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(2) an emergency exists, as determined by the Securities and Exchange
Commission, as a result of which it is not reasonably practicable to
dispose of securities or to determine the value of the net assets of the
Separate Account.
Transactions will not be processed on the following days: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, the day after Thanksgiving and Christmas Day. In addition, Premium
Payments will not be allocated and transactions will not be effected to the
Money Market Subaccount on Columbus Day and Veterans Day.
We may postpone any payment under the Policy derived from an amount paid
by check or draft until we are satisfied that the check or draft has been paid
by the bank upon which it was drawn.
The Policy provides that we may delay payment of any amounts which are
payable as result of a surrender, Withdrawal, or Policy loan and which are
allocated to the General Account for up to six months after receipt of your
request. If we do not mail or deliver the amounts owed to you within ten days of
when we receive your request for payment, we will pay interest on the amount at
the rate then in effect under Payment Option 1 - Payment of Interest Only, from
the date of our receipt of your request for payment to the date we actually make
the payment.
The Contract. The Policy and the application are the entire contract.
Only statements made in the application can be used to void the Policy or deny a
claim. The statements are considered representations and not warranties. Only
one of National Life's duly authorized officers or registrars can agree to
change or waive any provisions of the Policy, and only in writing. As a result
of differences in applicable state laws, certain provisions of the Policy may
vary from state to state.
Ownership. The Owner is the Insured unless a different Owner is named in
the application or thereafter changed. While the Insured is living, the Owner is
entitled to exercise any of the rights stated in the Policy or otherwise granted
by us. If the Insured and Owner are not the same, and the Owner dies before the
Insured, these rights will vest in the estate of the Owner, unless otherwise
provided.
Beneficiary. You designate the Beneficiary in the application for the
Policy. You may change the Beneficiary during the Insured's lifetime by sending
us a written notice. The interest of any Beneficiary who dies before the Insured
shall vest in you unless you otherwise provide.
Change of Owner and Beneficiary. As long as the Policy is in force, you
may change the Owner or Beneficiary by sending us an acceptable written request.
The change will take effect as of the date the request is signed, whether or not
the Insured is living when we receive the request. We will not be responsible
for any payment made or action taken before we receive the written request.
Split Dollar Arrangements. You may enter into a Split Dollar Arrangement
among the Owners or other persons under which the payment of premiums and the
right to receive the benefits under the Policy (i.e., Cash Surrender Value or
Death Benefit) are split between the parties. There are different ways of
allocating such rights.
For example, an employer and employee might agree that under a Policy on
the life of the employee, the employer will pay the premiums and will have the
right to receive the Cash Surrender Value. The employee may designate the
Beneficiary to receive any Death Benefit in excess of the Cash Surrender Value.
If the employee dies while such an arrangement is in effect, the employer would
receive from the Death Benefit the amount which the employer would have been
entitled to receive upon surrender of the Policy and the employee's Beneficiary
would receive the balance of the proceeds.
No transfer of Policy rights pursuant to a Split Dollar Arrangement will
be binding on us unless it is in writing and received by us. We do not assess
any specific charge for Split Dollar Arrangements.
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The parties who elect to enter into a Split Dollar Arrangement should
consult their own tax advisers regarding the tax consequences of such an
arrangement.
Assignments. You may assign any and all your rights under the Policy. We
are not bound by an assignment unless it is in writing and we receive it at our
Home Office. We assume no responsibility for determining whether an assignment
is valid, or the extent of the assignee's interest. All assignments will be
subject to any Policy loan. The interest of any Beneficiary or other person will
be subordinate to any assignment. A payee who is not also the Owner may not
assign or encumber Policy benefits, and to the extent permitted by applicable
law, such benefits are not subject to any legal process for the payment of any
claim against the payee.
Misstatement of Age and Sex. If the age or sex of the Insured at the Date
of Issue has been misstated in the application, we will adjust the Accumulated
Value of the Policy to be the amount that it would have been had the Cost of
Insurance Charges deducted been based on the correct age and sex, or as
otherwise required by state law. The adjustment will take place on the Monthly
Policy Date on or after the date on which we have proof to our satisfaction of
the misstatement. If the Insured has died, we will adjust the Accumulated Value
as of the last Monthly Policy Date prior to the Insured's death; however, if the
Accumulated Value is insufficient for that adjustment, the amount of the
Unadjusted Death Benefit will also be adjusted.
Suicide. If the Insured dies by suicide within two years from the Date of
Issue of the Policy, our liability is limited to the payment to the Beneficiary
of a sum equal to the premiums paid less any Policy loan and accrued interest
and any Withdrawals, or other reduced amount provided by state law.
If the Insured commits suicide within two years from the effective date
of any Policy change which increases the Unadjusted Death Benefit and for which
an application is required, the amount which we will pay with respect to the
increase will be the Cost of Insurance Charges previously made for such
increase.
Incontestability. The Policy will be incontestable after it has been in
force during the Insured's lifetime for two years from the Date of Issue.
Similar incontestability will apply to an increase in Face Amount or
reinstatement after it has been in force during the Insured's lifetime for two
years from its effective date.
Before such times, however, we may contest the validity of the Policy (or
changes) based on material misstatements in the initial or any subsequent
application.
Dividends. The Policy is participating; however, no dividends are
expected to be paid on the Policy. If dividends are ever declared, they will be
used to purchase dividend additions or, at your direction, they may be paid in
cash or left with us to accumulate at interest. At the time of the insured
person's death, the Death Benefit will be increased by dividends payable, if
any.
Correspondence. All correspondence to you is deemed to have been sent to
you if mailed to you at your last address known to us.
Settlement Options. In lieu of a single sum payment on death or
surrender, you may elect to apply the Death Benefit under any one of the
fixed-benefit Settlement Options provided in the Policy. The options are
described below.
Payment of Interest Only. We will pay interest at a rate of 3.5% per year
on the amount of the proceeds retained by us. Upon the earlier of the payee's
death or the end of a chosen period, the proceeds retained will be paid to the
Payee of his or her estate.
Payments for a Stated Time. We will make equal monthly payments, based on
an interest rate of 3.5% per annum, for the number of years you select.
Payments for Life. We will make equal monthly payments, based on an
interest rate of 3.5% per annum, for a guaranteed period and thereafter during
the life of a chosen person. You may elect
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guaranteed payment periods for 0, 10, 15, or 20 years, or for a refund period,
at the end of which the total payments will equal the proceeds placed under the
option.
Payments of a Stated Amount. We will make equal monthly payments until
the proceeds, with interest at 3.5% per year on the unpaid balance, have been
paid in full. The total payments in any year must be at least $10 per month for
each thousand dollars of proceeds placed under this option.
Life Annuity. We will make equal monthly payments in the same manner as
in the above Payments for Life option except that the amount of each payment
will be the monthly income provided by our then current settlement rates on the
date the proceeds become payable. No additional interest will be paid.
Joint and Two Thirds Annuity. We will make equal monthly payments, based
on an interest rate of 3.5% per year, while two chosen persons are both living.
Upon the death of either, two-thirds of the amount of those payments will
continue to be made during the life of the survivor. We may require proof of the
ages of the chosen persons.
50% Survivor Annuity. We will make equal monthly payments, based on an
interest rate of 3.5% per year, during the lifetime of the chosen primary
person. Upon the death of the chosen primary person, 50% of the amount of those
payments will continue to be made during the lifetime of the secondary chosen
person. We may require proof of the ages of the chosen persons.
We may pay interest in excess of the stated amounts under the first four
options listed above, but not the last three. Under the first two, and fourth
options above, the Payee has the right to change options or to withdraw all or
part of the remaining proceeds. For additional information concerning the
payment options, see the Policy.
OPTIONAL BENEFITS
You may include the following benefits, which are subject to the
restrictions and limitations set forth in the applicable Policy Riders, in your
Policy at your option. Election of any of these optional benefits involves an
additional cost.
Waiver of Monthly Deductions. If you elect the Waiver of Monthly
Deductions Rider, we will waive Monthly Deductions against the Policy if the
Insured becomes totally disabled, before age 65 and for at least 120 days. If
total disability occurs after age 60 and before age 65, then we will waive
Monthly Deductions only until the Insured reaches Attained Age 65, or for a
period of two years, if longer. The monthly cost of this Rider is based on
sex-distinct rates (except for Policies issued in conjunction with employee
benefit plans, where the cost of this Rider will not vary by sex) multiplied by
the Monthly Deduction on the Policy. We will add this cost to the Monthly
Deduction on the Policy.
Accidental Death Benefit. The Accidental Death Rider provides for an
increased Death Benefit in the event that the Insured dies in an accident. If
you elect this Rider, we will add the monthly cost of this Rider to the Monthly
Deduction on the Policy.
Guaranteed Insurability Option. This Rider permits you to increase the
Face Amount of the Policy, within certain limits, without being required to
submit satisfactory proof of insurability at the time of the request for the
increase. Again, if you elect this Rider, we will add the monthly cost of this
Rider to the Monthly Deduction on the Policy.
Guaranteed Death Benefit. If you choose this Rider, we will guarantee
that the Policy will not lapse prior to the Insured's Attained Age 70, or 20
years from the Date of Issue of the Policy, if longer, regardless of the
Policy's investment performance. To keep this Rider in force, you must pay
cumulative premiums greater than the Minimum Guarantee Premium from the Date of
Issue. The Minimum Guarantee Premium for Policies with the Guaranteed Death
Benefit Rider will be higher than for those without the Guaranteed Death Benefit
Rider, all other things being equal. We will test the Policy monthly for this
qualification, and if not met, we will send you a notice, and you will have 61
days from the date we mailed the notice to pay a premium sufficient to keep the
Rider in force. The premium
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required will be the Minimum Guarantee Premium from the Date of Issue, plus two
times the Minimum Monthly Premium, minus premiums previously paid. The Rider
will be cancelled if a sufficient premium is not paid during that 61-day period.
If cancelled, the Rider cannot be reinstated.
The cost of the Guaranteed Death Benefit Rider is $0.01 per thousand of
Face Amount per month. This Rider is available only at issue, and only for Issue
Ages 0-65.
If while the Guaranteed Death Benefit Rider is in force, the Accumulated
Value of the Policy is not sufficient to cover the Monthly Deductions, Monthly
Deductions will be made until the Accumulated Value of the Policy is exhausted,
and will thereafter be deferred, and collected at such time as the Policy has
positive Accumulated Value.
If you increase the Face Amount of a Policy subject to the Guaranteed
Death Benefit Rider, the Rider's guarantee will extend to the increased Face
Amount. This will result in increased Minimum Guarantee Premiums.
If you have elected both the Waiver of Monthly Deductions Rider and the
Guaranteed Death Benefit Rider, and Monthly Deductions are waived because of
total disability, then we will also waive the Minimum Guarantee Premiums
required to keep the Guaranteed Death Benefit Rider in force during the period
that Monthly Deductions are being waived.
If you wish to keep this Rider in force, you must limit Withdrawals and
Policy loans to the excess of premiums paid over the sum of the Minimum Monthly
Premiums in effect since the Date of Issue. If you take a Policy loan or
Withdrawal for an amount greater than such excess, the Guaranteed Death Benefit
Rider will enter a 61-day lapse-pending notification period, and will be
cancelled if you do not pay a sufficient premium.
Accelerated Benefits Rider. This Rider pays a reduced benefit prior to
the death of the Insured, in certain circumstances where a terminal or chronic
illness creates a need for access to the death benefit. This Rider is not
available in all states, and its terms may vary by state. There is no cost for
this Rider. It can be included in a Policy at issue, or can be added after
issue, for Insureds ages 0-85. The maximum amount payable under the Rider is
$500,000. An Insured who has a chronic illness, as defined in the Rider, at the
time the Rider is issued, may not receive benefits under the Rider for five
years after its issue.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the Federal
income tax considerations associated with the Policy and does not purport to be
complete or to cover all tax situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon understanding of the present
Federal income tax laws. No representation is made as to the likelihood of
continuation of the present Federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service.
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TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for Federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under Federal tax law, a life insurance policy must satisfy certain
requirements which are set forth in the Internal Revenue Code. Guidance as to
how these requirements are to be applied is limited. Nevertheless, National Life
believes that a Policy issued on the basis of a standard rate class should
satisfy the applicable requirements. There is less guidance, however, with
respect to a policy issued on a substandard basis (i.e., a rate class involving
higher than standard mortality risk) and it is not clear whether such a policy
will in all cases satisfy the applicable requirements, particularly if the Owner
pays the full amount of premiums permitted under the Policy. Nevertheless,
National Life believes it reasonable to conclude that such a Policy should be
treated as a life insurance contract for Federal income tax purposes. If it is
subsequently determined that a Policy does not satisfy the applicable
requirements, National Life may take appropriate steps to bring the policy into
compliance with such requirements and National Life reserves the right to modify
the policy as necessary in order to do so.
In certain circumstances, owners of variable life insurance policies have
been considered for Federal income tax purposes to be the owners of the assets
of separate accounts supporting their contracts due to their ability to exercise
investment control over those assets. Where this is the case, the policyowners
have been currently taxed on income and gains attributable to separate account
assets. There is little guidance in this area, and some features of the policy,
such as the flexibility of Policy Owners to allocate premium payments and
Accumulated Values, have not been explicitly addressed in published rulings.
While National Life believes that the policy does not give Policy Owners
investment control over Separate Account assets, we reserve the right to modify
the policy as necessary to prevent the Policy Owner from being treated as the
owner of the Separate Account assets supporting the Policy.
In addition, the Code requires that the investments of the Separate
Account be "adequately diversified" in order for the policy to be treated as a
life insurance contract for Federal income tax purposes. It is intended that the
Separate Account, through the Funds, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
In General. National Life believes that the death benefit under a
Policy should be excludible from the gross income of the beneficiary. Federal,
state and local estate, inheritance, transfer, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy Owner or beneficiary. A tax advisor should be consulted on these
consequences.
Depending on the circumstances, the exchange of a Policy, an increase
or decrease of a Policy's Face Amount, a change in the Policy's Death Benefit
Option (i.e., a change from Death Benefit Option A to Death Benefit Option B or
vice versa, a Policy loan, a Withdrawal, a surrender, a change in ownership, or
an assignment of the Policy may have Federal income tax consequences. A tax
advisor should be consulted before effecting any of these policy changes.
Generally, as long as you are not subject to the Alternative Minimum
Tax, you will not be deemed to be in constructive receipt of the Account Value,
including increments thereof, until there is a distribution. The tax
consequences of distributions from, and loans taken from or secured by, a
Policy depend upon whether the Policy is classified as a "Modified Endowment
Contract". Whether a Policy is or is not a Modified Endowment Contract, upon a
complete surrender or lapse of a Policy or when benefits are paid at a Policy's
maturity date, if the amount received plus the amount of indebtedness exceeds
the total investment in the Policy, the excess will generally be treated as
ordinary income subject to tax.
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
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<PAGE> 192
Contract. The rules are too complex to be summarized here, but generally depend
on the amount of premium payments made during the first seven policy years.
Certain changes in a policy after it is issued could also cause it to be
classified as a Modified Endowment Contract. A current or prospective Policy
Owner should consult with a competent advisor to determine whether a policy
transaction will cause the Policy to be classified as a Modified Endowment
Contract.
Distributions Other Than Death Benefits from Modified Endowment
Contracts. Policies classified as Modified Endowment Contracts are subject to
the following tax rules:
(1) All distributions other than death benefits from a Modified
Endowment Contract, including distributions upon surrender and
withdrawals, will be treated first as distributions of gain
taxable as ordinary income and as tax-free recovery of the Policy
Owner's investment in the Policy only after all gain has been
distributed.
(2) Loans taken from or secured by a Policy classified as a Modified
Endowment Contract are treated as distributions and taxed
accordingly.
(3) A 10 percent additional income tax is imposed on the amount
subject to tax except where the distribution or loan is made when
the Policy Owner has attained age 59-1/2 or is disabled, or where
the distribution is part of a series of substantially equal
periodic payments for the life (or life expectancy) of the Policy
Owner or the joint lives (or joint life expectancies) of the
Policy Owner and the Policy Owner's beneficiary or designated
beneficiary.
If a Contract becomes a modified endowment contract, distributions that
occur during the contract year will be taxed as distributions from a modified
endowment contract. In addition, distributions from a Contract within two
years before it becomes a modified endowment contract will be taxed in this
manner. This means that a distribution made from a Contract that is not a
modified endowment contract could later become taxable as a distribution from a
modified endowment contract.
Distributions Other Than Death Benefits from Policies that are not
Modified Endowment Contracts. Distributions other than death benefits from a
Policy that is not classified as a Modified Endowment Contract are generally
treated first as a recovery of the Policy Owner's investment in the policy and
only after the recovery of all investment in the policy as taxable income.
However, certain distributions which must be made in order to enable the Policy
to continue to qualify as a life insurance contract for Federal income tax
purposes if policy benefits are reduced during the first 15 policy years may be
treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not classified as a Modified
Endowment Contract are generally not treated as distributions. However, the tax
consequences associated with preferred Policy loans is less clear and a tax
adviser should be consulted about such loans.
Finally, neither distributions from nor loans from or secured by a Policy
that is not a Modified Endowment Contract are subject to the 10 percent
additional income tax.
Investment in the Policy. Your investment in the Policy is generally your
aggregate premium payments. When a distribution is taken from the Policy, your
investment in the Policy is reduced by the amount of the distribution that is
tax-free.
Policy Loan Interest. In general, interest paid on any loan under a
Policy will not be deductible.
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.
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<PAGE> 193
Business Uses of the Policy. Businesses can use the Policy in various
arrangements, including nonqualified deferred compensation or salary continuance
plans, split dollar insurance plans, executive bonus plans, tax exempt and
nonexempt welfare benefit plans, retiree medical benefit plans and others. The
tax consequences of such plans may vary depending on the particular facts and
circumstances. If you are purchasing the Policy for any arrangement the value of
which depends in part on its tax consequences, you should consult a qualified
tax adviser. In recent years, moreover, Congress has adopted new rules relating
to life insurance owned by businesses. Any business contemplating the purchase
of a new Policy or a change in an existing Policy should consult a tax adviser.
Continuation Beyond Age 100. The tax consequences of continuing the
Policy beyond the Insured's 100th year are unclear. You should consult a tax
adviser if you intend to keep the Policy in force beyond the Insured's 100th
year.
SPECIAL RULES FOR EMPLOYEE BENEFIT PLANS
If a trustee under a pension or profit-sharing plan, or similar deferred
compensation arrangement, owns a Policy, the Federal and state income and estate
tax consequences could differ. A tax adviser should be consulted with respect to
such consequences. Policies owned under these types of plans may also be subject
to restrictions under the Employee Retirement Income Security Act of 1974
("ERISA"). You should consult a qualified adviser regarding ERISA.
The amounts of life insurance that may be purchased on behalf of a
participant in a pension or profit-sharing plan are limited.
The current cost of insurance for the net amount at risk is treated as a
"current fringe benefit" and must be included annually in the plan participant's
gross income. We report this cost (generally referred to as the "P.S. 58" cost)
to the participant annually.
If the plan participant dies while covered by the plan and the Policy
proceeds are paid to the participant's beneficiary, then the excess of the death
benefit over the Accumulated Value is not taxable. However, the Accumulated
Value will generally be taxable to the extent it exceeds the participant's cost
basis in the Policy.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the policy could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Policy.
POSSIBLE CHARGES FOR NATIONAL LIFE'S TAXES
At the present time, National Life makes no charge for any Federal, state
or local taxes (other than the charge for state premium taxes and the DAC tax)
that may be attributable to the Subaccounts or to the policies. National Life
reserves the right to charge the Subaccounts for any future taxes or economic
burden National Life may incur.
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POLICIES ISSUED IN CONJUNCTION WITH EMPLOYEE BENEFIT PLANS
Policies may be acquired in conjunction with employee benefit plans,
including the funding of qualified pension plans meeting the requirements of
Section 401 of the Code.
For employee benefit plan Policies, the maximum cost of insurance rates
used to determine the monthly Cost of Insurance Charge are based on the
Commissioners' 1980 Standard Ordinary Mortality Tables NB and SB. Under these
Tables, mortality rates are the same for male and female Insureds of a
particular Attained Age and Rate Class. (See "Cost of Insurance Charge," Page .)
Illustrations reflecting the premiums and charges for employee benefit
plan Policies will be provided upon request to purchasers of such Policies.
There is no provision for misstatement of sex in the employee benefit
plan Policies. (See "Misstatement of Age and Sex," Page .) Also, the rates used
to determine the amount payable under a particular Settlement Option will be the
same for male and female Insureds. (See "Settlement Options," Page .)
LEGAL DEVELOPMENTS REGARDING UNISEX ACTUARIAL TABLES
In 1983, the United States Supreme Court held in Arizona Governing
Committee v. Norris that optional annuity benefits provided under an employee's
deferred compensation plan could not, under Title VII of the Civil Rights Act of
1964, vary between men and women on the basis of sex. In that case, the Court
applied its decision only to benefits derived from contributions made on or
after August 1, 1983. Subsequent decisions of lower federal courts indicate that
in other factual circumstances the Title VII prohibition of sex-distinct
benefits may apply at an earlier date. In addition, legislative, regulatory, or
decisional authority of some states may prohibit use of sex-distinct mortality
tables under certain circumstances. The Policies offered by this Prospectus,
other than employee benefit plan Policies (see "Policies Issued in Conjunction
with Employee Benefit Plans," Page ) are based upon actuarial tables which
distinguish between men and women and, thus, the Policy provides different
benefits to men and women of the same age. Accordingly, employers and employee
organizations should consider, in consultation with legal counsel, the impact of
these authorities on any employment-related insurance or benefits program before
purchasing the Policy and in determining whether an employee benefit plan Policy
is appropriate.
VOTING RIGHTS
We will invest all of the assets held in the Subaccounts of the Separate
Account in shares of corresponding Portfolios of the Funds. The Funds do not
hold routine annual shareholders' meetings. Shareholders' meetings will be
called whenever each Fund believes that it is necessary to vote to elect the
Board of Directors of the Fund and to vote upon certain other matters that are
required to be approved or ratified by the shareholders of a mutual fund.
We are the legal owner of Fund shares and as such have the right to vote
upon any matter that may be voted upon at a shareholders' meeting. However, in
accordance with the SEC's view of present applicable law, we will vote the
shares of the Funds at meetings of the shareholders of the appropriate Fund or
Portfolio in accordance with instructions of Policy Owners. We will vote Fund
shares held in each Subaccount of the Separate Account for which Owners do not
send timely instructions in the same proportion as those shares in that
Subaccount for which instructions are received.
If you have a voting interest, we will send you proxy material and a form
for giving voting instructions. You may vote, by proxy or in person, only as to
the Portfolios that correspond to the
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<PAGE> 195
Subaccounts in which your Policy values are allocated. We will determine the
number of shares held in each Subaccount attributable to a Policy for which you
may provide voting instructions by dividing the Policy's Accumulated Value in
that account by the net asset value of one share of the corresponding Portfolio
as of the record date for the shareholder meeting. We will count fractional
shares. For each share of a Portfolio for which Owners have no interest, we will
cast votes, for or against any matter, in the same proportion as Owners provide
voting instructions.
If required by state insurance officials, we may disregard voting
instructions if they would require shares to be voted so as to cause a change in
the investment objectives or policies of one or more of the Portfolios, or to
approve or disapprove an investment policy or investment adviser of one or more
of the Portfolios. In addition, we may disregard voting instructions in favor of
certain changes initiated by an Owner or the Fund's Board of Directors if our
disapproval of the change is reasonable and is based on a good faith
determination that the change would be contrary to state law or otherwise
inappropriate, considering the portfolio's objectives and purposes, and the
effect the change would have on us. If we disregard voting instructions, we will
advise you of that action and our reasons in the next semi-annual report to
Owners.
Shares of the Funds are currently being offered to variable life
insurance and variable annuity separate accounts of life insurance companies
other than National Life that are not affiliated with National Life. National
Life understands that shares of these Funds also will be voted by such other
life insurance companies in accordance with instructions from their
policyholders invested in such separate accounts. This will dilute the effect of
your voting instructions.
CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under
applicable Federal securities laws. If changes in these laws or regulations
eliminate the necessity to solicit your voting instructions or restrict such
voting rights, we may proceed in accordance with these laws or regulations.
We may also take the steps listed below, if we feel such an action is
reasonably necessary. In doing so we would comply with all applicable laws,
including approval of Owners, if so required:
(1) to make changes in the form of the Separate Account, if in our
judgment such changes would serve the interests of Owners or would be
appropriate in carrying out the purposes of the Policies, for example:
(i) operating the Separate Account as a management company
under the 1940 Act
(ii) deregistering the Separate Account under the 1940 Act if
registration is no longer required
(iii) combining or substituting separate accounts
(iv) transferring the assets of the Separate Account to another
separate account or to the General Account
(v) making changes necessary to comply with, obtain or continue
any exemptions from the 1940 Act; or
(vi) making other technical changes in the Policy to conform
with any action described herein;
(2) if in our judgment a Portfolio no longer suits the investment goals
of the Policy, or if tax or marketing conditions so warrant, to
substitute shares of another investment portfolio for shares of such
Portfolio;
(3) to eliminate, combine, or substitute Subaccounts and establish new
Subaccounts, if in its judgment marketing needs, tax considerations, or
investment conditions so warrant;
(4) to transfer assets from a Subaccount to another Subaccount or
separate account if the transfer in our judgment would best serve
interests of Policy Owners or would be appropriate in carrying out the
purposes of the Policies; and
(5) to modify the provisions of the Policies to comply with applicable
laws.
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<PAGE> 196
We have reserved all rights in respect of our corporate name and any part
thereof, including without limitation the right to withdraw its use and to grant
its use to one or more other separate accounts and other entities.
If your Policy has Accumulated Value in a Subaccount that is eliminated,
we will give you at least 30 days notice before the elimination, and will
request that you name the Subaccount or Subaccounts (or the General Account) to
which the Accumulated Value in that Subaccount should be transferred. If you do
not name a new Subaccount, then we will use the Money Market Subaccount. In any
case, if in the future we impose a transfer charge or establish limits on the
number of transfers or free transfers, no charge will be made for this transfer,
and it will not count toward any limit on transfers or free transfers.
OFFICERS AND DIRECTORS OF NATIONAL LIFE
The officers and directors of National Life, as well as their principal
occupations during the past five years, are listed below.
PRINCIPAL OCCUPATION
<TABLE>
<CAPTION>
NAME AND POSITION DURING THE PAST FIVE YEARS
- ----------------- --------------------------
<S> <C>
Patrick E. Welch 1997 to present - Chairman of the Board
Chairman of the Board, and Chief Executive Officer; 1992 to 1997 -
Chief Executive Officer Chairman of the Board, Chief Executive
Officer and President of
GNA Corporation.
Thomas H. MacLeay 1996 to Present - President and Chief
President, Chief Operating Officer; 1993 to 1996 -
Operating Officer, Executive Vice President & Chief
and Director Financial Officer
Robert E. Boardman 1994 to present - Chairman of Hickok &
Director Boardman Financial Network
1967 to present - President
of Hickok & Boardman Realty, Inc.
Earle H. Harbison, Jr. 1993 to present: Chairman of
Director Harbison Walker, Inc.
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
James A. Mallon 1998 to present: Executive Vice President
Executive Vice President & Chief Marketing Officer; 1996 to 1998:
Chief Marketing Officer President & Chief Executive Officer - Integon
Life Insurance Corporation; 1993 to 1996: Senior
Vice President & Chief Marketing Officer - Commercial
Union Life Insurance Company of America.
William A. Smith 1998 to present: Executive Vice President & Chief
Executive Vice President & Financial Officer; 1994 to 1998 - Vice President and
Chief Financial Officer Controller, American Express Financial Advisors
</TABLE>
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<TABLE>
<S> <C>
Rodney A. Buck 2000 to present - Executive Vice President and Chief
Executive Vice President & Investment Officer; 1996 to 2000 - Senior Vice
Chief Investment Officer President and Chief Investment Officer; 1996 to
present - Chairman, President & Chief Executive Officer,
National Life Investment Management Company, Inc.
("NLIMC"); 1998 to present - Chief Executive Office -
Sentinel Advisors Company ("SAC"); 1987 to 1997 - Senior
Vice President - SAC.
Gregory H. Doremus 1998 to present: Senior Vice President -
Senior Vice President - New New Business & Customer Services; 1994 to 1998 -
Business & Customer Services Vice President - Customer Services
Michele S. Gatto 1999 to present: Senior Vice President & General
Senior Vice President & Counsel; 1997 to 1999 - Vice President, General Counsel
General Counsel and Secretary, Massachusetts Casualty Insurance Company;
1986 to 1997 - Vice President, Assistant General Counsel,
Assistant Secretary/Treasurer, and other
legal positions, The Paul Revere Corporation
Charles C. Kittredge 2000 to present: Senior Vice President - Marketing
Senior Vice President - Marketing Development and Operations; 1997 to 2000:
Development and Operations Senior Vice President - Sales and Distribution;
1993 to 1997: - Vice President -Agency Financial Planning
& Services
Wade H. Mayo 2000 to present: Senior Vice President; 1993 to
Senior Vice President present: President and Chief Executive Officer - Life
Insurance Company of the Southwest ("LSW"); 1996 to
present: President - LSW National Holdings, Inc.1989 to
present: President & Director - Insurance Investors Life
Insurance Company
Joseph A. Miller 2000 to present: Senior Vice President; 1997 to
Senior Vice President 2000: Vice President & Director of Agencies;
1990 to 1997: Vice President - Southern Regional Office
Michael A. Tahan 1998 to present: Senior Vice President & Chief
Senior Vice President & Information Officer; 1991 to 1998 - First Vice President
Chief Information Officer & Chief Information Officer - Merrill Lynch Asset Management
</TABLE>
DISTRIBUTION OF POLICIES
We sell Policies through agents who are licensed by state insurance
authorities to sell our variable life insurance policies, and who are also
registered representatives of Equity Services, Inc. ("ESI") or registered
representatives of broker/dealers who have Selling Agreements with ESI. ESI,
whose address is National Life Drive, Montpelier, Vermont 05604, is a registered
broker/dealer under the Securities Exchange Act of 1934 (the "1934 Act") and a
member of the National Association of Securities Dealers, Inc. (the "NASD"). ESI
is an indirect wholly-owned subsidiary of National Life, formed on October 7,
1968. ESI acts as the principal underwriter, as defined in the 1940 Act, of the
Policies, and for the Separate Account pursuant to an Underwriting Agreement to
which the Separate Account, ESI and National Life are parties.
National Life has sought approval to sell the Policies in all states and
the District of Columbia. However, all approvals may not be obtained. The
Policies are offered and sold only in those states where their sale is lawful.
The directors of ESI are Patrick E. Welch, Thomas H. MacLeay, Rodney A.
Buck, all of whose principal occupations are disclosed under "Directors and
Officers of National
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<PAGE> 198
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 basis and with other forms of compensation.
During the first Policy Year, agent commissions will not be more than 50% of the
premiums paid up to a target amount (which is a function of Face Amount, and
which is used primarily to determine commission payments) and 3% of the premiums
paid in excess of that amount. For Policy Years 2 through 10, the agent
commissions will not be more than 4% of the premiums paid up to the target
amount, and 3% of premiums paid in excess of that amount. For Policy year 11 and
thereafter, agent commissions will be 1.5% of all premiums paid. For premiums
received in the year following an increase in Face Amount and attributable to
the increase, agent commissions will not be more than 48.5% up to the target
amount for the increase. Full time agents of National Life who achieve specified
annual sales goals may be eligible for compensation in addition to the amounts
stated above.
Dealers other than ESI will receive gross dealer concessions during the
first Policy Year of 85% of the premiums paid up to the target amount and 4% of
the premiums paid in excess of that amount. For Policy Years 2 through 10, the
gross dealer concession will not be more than 4% of the premiums paid. For
Policy Year 11 and thereafter, the gross dealer concession will be 1.5% of all
premiums paid. For premiums received in the year following an increase in Face
Amount and attributable to the increase, the gross dealer concession will not be
more than 50% up to the target amount for the increase. The aggregate amounts
of sales load received by ESI in connection with the Policies in 1997, 1998 and
1999 were $31,525.99, $189,078.86 and $239,093.31, respectively.
POLICY REPORTS
Once each Policy Year, we will send you a statement describing the status
of the Policy, including setting forth:
- the Face Amount
- the current Death Benefit
- any Policy loans and accrued interest
- the current Accumulated Value
- the non-loaned Accumulated Value in the General Account
- the amount held as Collateral in the General Account
- the value in each Subaccount of the Separate Account
- premiums paid since the last report
- charges deducted since the last report
- any Withdrawals since the last report, and
- the current Cash Surrender Value.
In addition, we will send you a statement showing the status of the
Policy following the transfer of amounts from one Subaccount of a Separate
Account to another, the taking out of a loan, a repayment of a loan, a
Withdrawal and the payment of any premiums (excluding those paid by bank draft
or otherwise under the Automatic Payment Plan).
We will send you a semi-annual report containing the financial statements
of each Fund in which your Policy has Accumulated Value, as required by the 1940
Act.
STATE REGULATION
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We are subject to regulation and supervision by the Department of
Banking, Insurance, Securities and Health Care Administration of the State of
Vermont, which periodically examines our affairs. We are also subject to the
insurance laws and regulations of all jurisdictions where we are authorized to
do business. We have filed a copy of the Policy form with, and where required
obtained an approval by, insurance officials in each jurisdiction where the
Policies are sold. We are required to submit annual statements of our
operations, including financial statements, to the insurance departments of the
various jurisdictions in which we do business for the purposes of determining
solvency and compliance with local insurance laws and regulations.
INSURANCE MARKETPLACE STANDARDS ASSOCIATION
National Life Insurance Company is a member of the Insurance
Marketplace Standards Association ("IMSA"), and as such may include the IMSA
logo and information about IMSA membership in its advertisements. Companies that
belong to IMSA subscribe to a set of ethical standards covering the various
aspects of sales and service for individually sold life insurance and annuities.
EXPERTS
The Financial Statements listed on Page F-1 have been included in this
Prospectus, in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Actuarial matters included in the Prospectus have been examined by
Elizabeth H. MacGowan, F.S.A. MAAA, Actuary-Product Development of National
Life.
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<PAGE> 200
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice
on legal matters relating to certain aspects of Federal securities law
applicable to the issue and sale of the Policies. Matters of Vermont law
pertaining to the Policies, including National Life's right to issue the
Policies and its qualification to do so under applicable laws and regulations
issued thereunder, have been passed upon by Michele S. Gatto, Senior Vice
President and General Counsel of National Life.
The Separate Account is not a party to any litigation. There are no
material legal proceedings involving National Life which are likely to have a
material adverse effect upon the Separate Account or upon the ability of
National Life to meet its obligations under the Policies. ESI is not engaged in
any litigation of any material nature.
The Company, like other life insurance companies, is involved in lawsuits,
including class action lawsuits. In some class action and other lawsuits
involving insurance companies, substantial damages have been sought and/or
material settlement payments have been made. Although the Company cannot
predict the outcome of any litigation with certainty, the Company believes that
at the present time, there are no pending or threatened lawsuits that are
reasonably likely to have a material adverse impact on it or the Variable
Account.
FINANCIAL STATEMENTS
The financial statements of National Life and of the relevant Subaccounts
of the Separate Account appear on the following pages. The financial statements
of National Life should be distinguished from the financial statements of the
Separate Account and should be considered only as bearing upon National Life's
ability to meet its obligations under the Policies.
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<PAGE> 201
GLOSSARY
ACCUMULATED VALUE The sum of the Policy's values in the Separate
Account and the General Account.
ATTAINED AGE The Issue Age of the Insured plus the number of
full Policy Years which have passed since the Date
of Issue.
BENEFICIARY The person(s) or entity(ies) designated to receive
all or some of the Death Benefit when the Insured
dies. The Beneficiary is designated in the
application or if subsequently changed, as shown in
the latest change filed with National Life. The
interest of any Beneficiary who dies before the
Insured shall vest in the Owner unless otherwise
stated.
CASH SURRENDER VALUE The Accumulated Value minus any applicable
Surrender Charge, and minus any outstanding Policy
loans and accrued interest on such loans.
COLLATERAL The portion of the Accumulated Value in the General
Account which secures the amount of any Policy
loan.
DAC TAX A tax attributable to Specified Policy Acquisition
Expenses under Internal Revenue Code Section 848.
DATE OF ISSUE The date on which the Policy is issued, which is
set forth in the Policy. It is used to determine
Policy Years, Policy Months and Monthly Policy
Dates, as well as to measure suicide and
contestable periods.
DEATH BENEFIT The Policy's Unadjusted Death Benefit, plus any
relevant additional benefits provided by a
supplementary benefit Rider, less any outstanding
Policy loan and accrued interest, and less any
unpaid Monthly Deductions.
DURATION The number of full years the insurance has been in
force; for the Initial Face Amount, measured from
the Date of Issue; for any increase in Face Amount,
measured from the effective date of such increase.
FACE AMOUNT The Initial Face Amount plus any increases in Face
Amount and minus any decreases in Face Amount.
GENERAL ACCOUNT The account which holds the assets of National Life
which are available to support its insurance and
annuity obligations.
GRACE PERIOD A 61-day period measured from the date on which
notice of pending lapse is sent by National Life,
during which the Policy will not lapse and
insurance coverage continues. To prevent lapse, the
Owner must during the Grace Period make a premium
payment equal to the sum of any amount by which the
past Monthly Deductions have been in excess of Cash
Surrender Value, plus three times the Monthly
Deduction due the date the Grace Period began.
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<PAGE> 202
GUARANTEED DEATH BENEFIT RIDER An optional Rider that will guarantee that
the Policy will not lapse prior to Attained
Age 70, or 20 years from the Policy's Date of
Issue, if longer, regardless of investment
performance, if the Minimum Guarantee Premium
has been paid as of each Monthly Policy Date.
HOME OFFICE National Life's Home Office at National Life
Drive, Montpelier, Vermont 05604.
INITIAL FACE AMOUNT The Face Amount of the Policy on the Date of
Issue. The Face Amount may be increased or
decreased after the first Policy Year.
INSURED The person upon whose life the Policy is
issued.
ISSUE AGE The age of the Insured at his or her birthday
nearest the Date of Issue. The Issue Age is
stated in the Policy.
MINIMUM FACE AMOUNT The Minimum Face Amount is generally $50,000.
However, exceptions may be made in employee
benefit plan cases.
MINIMUM GUARANTEE PREMIUM The sum of the Minimum Monthly Premiums in
effect on each Monthly Policy Date since the
Date of Issue (including the current month),
plus all Withdrawals and outstanding Policy
loans and accrued interest.
MINIMUM INITIAL PREMIUM The minimum premium required to issue a
Policy. It is equal to the Minimum Monthly
Premium.
MINIMUM MONTHLY PREMIUM The monthly amount used to determine the
Minimum Guarantee Premium. This amount, which
includes any substandard charges and any
applicable Rider charges, is determined
separately for each Policy, based on the
requested Initial Face Amount, and the Issue
Age, sex and Rate Class of the Insured, and
the Death Benefit Option and any optional
benefits selected. It is stated in each
Policy.
MONTHLY ADMINISTRATIVE CHARGE A current charge of $7.50 per month included
in the Monthly Deduction, which is intended
to reimburse National Life for ordinary
administrative expenses. On a guaranteed
basis, this charge may not exceed $7.50 per
Policy plus $0.07 per thousand of Face Amount
per month.
MONTHLY DEDUCTION The amount deducted from the Accumulated
Value on each Monthly Policy Date. It
includes the Monthly Administrative Charge,
the Cost of Insurance Charge, and the monthly
cost of any benefits provided by Riders.
MONTHLY POLICY DATE The day in each calendar month which is the
same day of the month as the Date of Issue,
or the last day of any month having no such
date, except that whenever the Monthly Policy
Date would otherwise fall on a date other
than a Valuation Day, the Monthly Policy Date
will be deemed to be the next Valuation Day.
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<PAGE> 203
NET AMOUNT AT RISK The amount by which the Unadjusted Death
Benefit exceeds the Accumulated Value.
NET PREMIUM The remainder of a premium after the
deduction of the Premium Tax Charge.
OWNER The person(s) or entity(ies) entitled to
exercise the rights granted in the Policy.
PLANNED PERIODIC PREMIUM The premium amount which the Owner plans to
pay at the frequency selected. The Owner may
request a reminder notice and may change the
amount of the Planned Periodic Premium. The
Owner is not required to pay the designated
amount.
POLICY ANNIVERSARY The same day and month as the Date of Issue
in each later year.
POLICY YEAR A year that starts on the Date of Issue or on
a Policy Anniversary.
PREMIUM TAX CHARGE A charge deducted from each premium payment
to cover the cost of state and local premium
taxes, and the federal DAC Tax.
RATE CLASS The classification of the Insured for cost of
insurance purposes. The Rate Classes are:
preferred nonsmoker; standard nonsmoker;
smoker; juvenile; and substandard.
RIDERS Optional benefits that an Owner may elect to
add to the Policy at an additional cost.
SURRENDER CHARGE The amount deducted from the Accumulated
Value of the Policy upon lapse or surrender
during the first 15 Policy Years. The Maximum
Surrender Charge is shown in the Policy.
UNADJUSTED DEATH BENEFIT Under Option A, the greater of the Face
Amount or the applicable percentage of the
Accumulated Value on the date of death; under
Option B, the greater of the Face Amount plus
the Accumulated Value on the date of death,
or the applicable percentage of the
Accumulated Value on the date of death. The
Death Benefit Option is selected at time of
application but may be later changed.
VALUATION DAY Each day that the New York Stock Exchange is
open for business other than the day after
Thanksgiving and any day on which trading is
restricted by directive of the Securities and
Exchange Commission. Unless otherwise
indicated, whenever under a Policy an event
occurs or a transaction is to be effected on
a day that is not a Valuation Date, it will
be deemed to have occurred on the next
Valuation Date.
VALUATION PERIOD The time between two successive Valuation
Days. Each Valuation Period includes a
Valuation Day and any non-Valuation Day or
consecutive non-Valuation Days immediately
preceding it.
WITHDRAWAL A payment made at the request of the Owner
pursuant to the right in the Policy to
withdraw a portion of the Cash Surrender
Value of the Policy. The Withdrawal Charge
will be deducted from the Withdrawal Amount.
58
<PAGE> 204
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Accumulated
Values and Cash Surrender Values of a Policy may change with the investment
experience of the Separate Account. The tables show how the Death Benefits,
Accumulated Values and Cash Surrender Values of a Policy issued to an Insured of
a given age, sex and Rate Class would vary over time if the investment return on
the assets held in each Portfolio of each of the Funds were a uniform, gross,
annual rate of 0%, 6% and 12%.
The tables on Pages A-2 to A-7 illustrate a Policy issued to a male
Insured, Age 40 in the Preferred Nonsmoker Rate Class with a Face Amount of
$250,000 and Planned Periodic Premiums of $3,000 for Death Benefit Option A, and
$4,000 for Death Benefit Option B, in each case paid at the beginning of each
Policy Year. The Death Benefits, Accumulated Values and Cash Surrender Values
would be lower if the Insured was in a standard nonsmoker, smoker or substandard
class since the cost of insurance charges are higher for these classes. Also,
the values would be different from those shown if the gross annual investment
returns averaged 0%, 6% and 12% over a period of years, but fluctuated above and
below those averages for individual Policy Years. The net annual rate of return
shown in the tables is the gross annual rate reduced to reflect the average
investment advisory fee and average operating expenses of the Funds after
reimbursement and the Mortality and Expense Risk Charge.
The second column of the tables show the amount to which the premiums
would accumulate if an amount equal to those premiums were invested to earn
interest, after taxes, at 5% compounded annually. The columns shown under the
heading "Guaranteed" assume that throughout the life of the Policy, the monthly
charge for cost of insurance is based on the maximum level permitted under the
Policy (based on the 1980 CSO Smoker/Nonsmoker Table), and the guaranteed
maximum Monthly Administrative Charge of $7.50 per Policy plus $0.07 per
thousand of Face Amount applies; the columns under the heading "Current" assume
that throughout the life of the Policy, the monthly charge for cost of
insurance is based on the current cost of insurance rate, and the Monthly
Administrative Charge is set at its current level of $7.50 per Policy.
The amounts shown in all tables reflect an averaging of certain other
asset charges described below that may be assessed under the Policy, depending
upon how premiums are allocated. The total of the asset charges reflected in the
Current and Guaranteed illustrations, including the Mortality and Expense Risk
Charge of 0.90%, is 1.72%. This total charge is based on an assumption that an
Owner allocates the Policy values equally among the Subaccounts of the Separate
Account.
These asset charges reflect an investment advisory fee of 0.65%, which
represents a simple average of the fees incurred by the Portfolios during 1999
and expenses of 0.17% which is based on a simple average of the actual expenses
incurred by the Portfolios during 1999, adjusted, as appropriate, to take into
account expense reimbursement arrangements expected to be in place for 2000. In
the absence of the reimbursement arrangements for some of the Portfolios, the
total asset charges reflected in the Current and Guaranteed Illustrations,
including the Mortality and Expense Risk Charge, would have totaled an average
of 1.92%. If the reimbursement arrangements were discontinued, the Accumulated
Values and Cash Surrender Values of a Policy which allocates Policy values
equally among the Subaccounts would be lower than those shown in the following
tables. For information on Fund expenses, see the prospectuses for the Funds
accompanying this prospectus.
The tables also reflect the fact that no charges for Federal or state
income taxes are currently made against the Separate Accounts. If such a charge
is made in the future, it would take a higher gross annual rate of return to
produce the same Policy values.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums are paid and allocated as
indicated, no amounts are allocated to the General Account, and no Policy loans
are made. The tables are also based on the assumption that the Owner has not
requested an increase or decrease in the Face Amount, that no Withdrawals have
been made and no transfers have been made in any Policy Year.
Upon request, National Life will provide a comparable illustration based
upon the proposed Insured's Age and Rate Class, the Death Benefit Option, Face
Amount, Planned Periodic Premiums and Riders requested.
A-1
<PAGE> 205
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.72%)
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------ -------------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,996 596 250,000 2,302 902 250,000
2 6,458 3,918 2,179 250,000 4,544 2,805 250,000
3 9,930 5,768 3,755 250,000 6,723 4,711 250,000
4 13,577 7,541 5,443 250,000 8,838 6,741 250,000
5 17,406 9,238 7,141 250,000 10,882 8,784 250,000
6 21,426 10,853 8,964 250,000 12,855 10,966 250,000
7 25,647 12,382 10,700 250,000 14,748 13,067 250,000
8 30,080 13,822 12,349 250,000 16,557 15,083 250,000
9 34,734 15,172 13,906 250,000 18,285 17,019 250,000
10 39,620 16,423 15,365 250,000 19,927 18,870 250,000
11 44,751 17,664 16,815 250,000 21,843 20,993 250,000
12 50,139 18,796 18,155 250,000 23,684 23,042 250,000
13 55,796 19,804 19,371 250,000 25,450 25,016 250,000
14 61,736 20,677 20,451 250,000 27,134 26,908 250,000
15 67,972 21,395 21,377 250,000 28,731 28,713 250,000
16 74,521 21,944 21,944 250,000 30,238 30,238 250,000
17 81,397 22,309 22,309 250,000 31,647 31,647 250,000
18 88,617 22,479 22,479 250,000 32,947 32,947 250,000
19 96,198 22,439 22,439 250,000 34,119 34,119 250,000
20 104,158 22,162 22,162 250,000 35,146 35,146 250,000
25 150,340 16,033 16,033 250,000 37,910 37,910 250,000
30 209,282 0 0 0 35,645 35,645 250,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-2
<PAGE> 206
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.18%)
<TABLE>
<CAPTION>
Guaranteed Current
Premiums ------------------------------------ ------------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,139 739 250,000 2,455 1,055 250,000
2 6,458 4,328 2,590 250,000 4,993 3,255 250,000
3 9,930 6,569 4,557 250,000 7,612 5,600 250,000
4 13,577 8,859 6,761 250,000 10,315 8,218 250,000
5 17,406 11,199 9,102 250,000 13,096 10,998 250,000
6 21,426 13,585 11,695 250,000 15,959 14,070 250,000
7 25,647 16,014 14,332 250,000 18,898 17,216 250,000
8 30,080 18,485 17,012 250,000 21,910 20,436 250,000
9 34,734 20,997 19,732 250,000 25,002 23,737 250,000
10 39,620 23,544 22,487 250,000 28,173 27,115 250,000
11 44,751 26,259 25,409 250,000 31,830 30,981 250,000
12 50,139 29,015 28,374 250,000 35,615 34,974 250,000
13 55,796 31,802 31,369 250,000 39,533 39,100 250,000
14 61,736 34,612 34,386 250,000 43,586 43,360 250,000
15 67,972 37,428 37,411 250,000 47,774 47,757 250,000
16 74,521 40,241 40,241 250,000 52,106 52,106 250,000
17 81,397 43,037 43,037 250,000 56,581 56,581 250,000
18 88,617 45,809 45,809 250,000 61,198 61,198 250,000
19 96,198 48,547 48,547 250,000 65,952 65,952 250,000
20 104,158 51,229 51,229 250,000 70,838 70,838 250,000
25 150,340 62,849 62,849 250,000 97,540 97,540 250,000
30 209,282 67,608 67,608 250,000 128,932 128,932 250,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
<PAGE> 207
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.07%)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
----------------------------------- --------------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,284 884 250,000 2,609 1,209 250,000
2 6,458 4,757 3,018 250,000 5,461 3722 250,000
3 9,930 7,440 5,427 250,000 8,576 6,563 250,000
4 13,577 10,348 8,250 250,000 11,979 9,882 250,000
5 17,406 13,506 11,408 250,000 15,692 13,594 250,000
6 21,426 16,931 15,042 250,000 19,747 17,857 250,000
7 25,647 20,649 18,967 250,000 24,169 22,488 250,000
8 30,080 24,687 23,213 250,000 28,993 27,519 250,000
9 34,734 29,076 27,811 250,000 34,263 32,998 250,000
10 39,620 33,849 32,791 250,000 40,024 38,967 250,000
11 44,751 39,240 38,390 250,000 46,798 45,948 250,000
12 50,139 45,137 44,496 250,000 54,259 53,618 250,000
13 55,796 51,588 51,154 250,000 62,485 62,052 250,000
14 61,736 58,649 58,423 250,000 71,557 71,332 250,000
15 67,972 66,380 66,363 250,000 81,568 81,551 250,000
16 74,521 74,856 74,856 250,000 92,626 92,626 250,000
17 81,397 84,160 84,160 250,000 104,846 104,846 250,000
18 88,617 94,396 94,396 250,000 118,360 118,360 250,000
19 96,198 105,681 105,681 250,000 133,314 133,314 250,000
20 104,158 118,143 118,143 250,000 149,875 149,875 250,000
25 150,340 204,469 204,469 250,000 264,014 264,014 322,097
30 209,282 348,675 348,675 404,463 451,398 451,398 523,622
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
<PAGE> 208
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.72%)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
------------------------------------ --------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,941 1,402 252,941 3,248 1,709 253,248
2 8,610 5,787 3,864 255,787 6,415 4,492 256,415
3 13,241 8,539 6,442 258,539 9,498 7,400 259,498
4 18,103 11,192 9,095 261,192 12,496 10,398 262,496
5 23,208 13,748 11,651 263,748 15,400 13,303 265,400
6 28,568 16,198 14,309 266,198 18,213 16,323 268,213
7 34,196 18,540 16,858 268,540 20,923 19,241 270,923
8 40,106 20,769 19,296 270,769 23,524 22,051 273,524
9 46,312 22,884 21,619 272,884 26,022 24,756 276,022
10 52,827 24,876 23,818 274,876 28,410 27,352 278,410
11 59,669 26,879 26,030 276,879 31,116 30,266 281,116
12 66,852 28,750 28,108 278,750 33,727 33,086 283,727
13 74,395 30,470 30,037 280,470 36,242 35,808 286,242
14 82,314 32,029 31,804 282,029 38,651 38,426 288,651
15 90,630 33,405 33,388 283,405 40,949 40,932 290,949
16 99,361 34,583 34,583 284,583 43,133 43,133 293,133
17 108,530 35,547 35,547 285,547 45,191 45,191 295,191
18 118,156 36,285 36,285 286,285 47,109 47,109 297,109
19 128,264 36,784 36,784 286,784 48,868 48,868 298,868
20 138,877 37,016 37,016 287,016 50,444 50,444 300,444
25 200,454 33,060 33,060 283,060 55,375 55,375 305,375
30 279,043 16,677 16,677 266,677 54,241 54,241 304,241
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
<PAGE> 209
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.18%)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
----------------------------------- -------------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,141 1,603 253,141 3,458 1,920 253,458
2 8,610 6,368 4,446 256,368 7,035 5,113 257,035
3 13,241 9,684 7,586 259,684 10,731 8,633 260,731
4 18,103 13,084 10,987 263,084 14,548 12,450 264,548
5 23,208 16,573 14,476 266,573 18,481 16,384 268,481
6 28,568 20,145 18,255 270,145 22,535 20,646 272,535
7 34,196 23,796 22,115 273,796 26,703 25,022 276,703
8 40,106 27,527 26,053 277,527 30,981 29,508 280,981
9 46,312 31,334 30,068 281,334 35,377 34,111 285,377
10 52,827 35,211 34,153 285,211 39,887 38,830 299,887
11 59,669 39,354 38,505 289,354 45,020 44,170 295,020
12 66,852 43,580 42,938 293,580 50,330 49,688 300,330
13 74,395 47,873 47,440 297,873 55,823 55,389 305,823
14 82,314 52,223 51,998 302,223 61,497 61,272 311,497
15 90,630 56,609 56,591 306,609 67,354 67,336 317,354
16 99,361 61,013 61,013 311,013 73,396 73,396 323,396
17 108,530 65,418 65,418 315,418 79,620 79,620 329,620
18 118,156 69,810 69,810 319,810 86,019 86,019 336,019
19 128,264 74,171 74,171 324,171 92,578 92,578 342,578
20 138,877 78,468 78,468 328,468 99,279 99,279 349,279
25 200,454 97,545 97,545 347,545 134,840 134,840 384,840
30 279,043 107,009 107,009 357,009 172,996 172,966 422,966
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE> 210
NATIONAL LIFE
VARITRAK FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $4000 NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.07%)
<TABLE>
<CAPTION>
Guaranteed Current
Premiums -------------------------------------------- ----------------------------------------
End of Accumulated Accum- Cash Accum- Cash
Policy at 5% Int. ulated Surrender Death ulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,342 1,804 253,342 3,669 2,130 253,669
2 8,610 6,974 5,052 256,974 3,681 5,758 257,681
3 13,241 10,924 8,827 260,924 12,065 9,968 262,065
4 18,103 15,218 13,120 265,218 16,858 14,760 266,858
5 23,208 19,888 17,791 269,888 22,088 19,991 272,088
6 28,568 24,964 23,074 274,964 27,801 25,911 277,801
7 34,196 30,479 28,798 280,479 34,031 32,350 284,031
8 40,106 36,475 35,001 286,475 40,824 39,350 290,824
9 46,312 42,993 41,728 292,993 48,238 46,972 298,238
10 52,827 50,076 49,018 300,076 56,327 55,270 306,327
11 59,669 58,065 57,216 308,065 65,774 64,925 315,774
12 66,852 66,787 66,146 316,787 65,158 75,517 326,158
13 74,395 76,302 75,868 326,302 87,577 87,143 337,577
14 82,314 86,677 86,451 336,677 100,129 99,904 350,129
15 90,630 97,980 97,962 347,980 113,928 113,910 363,928
16 99,361 110,291 110,291 360,291 129,100 129,100 379,100
17 108,530 123,697 123,697 373,697 145,778 145,778 395,778
18 118,156 138,301 138,301 388,301 164,107 164,107 414,107
19 128,264 154,211 154,211 404,211 184,238 184,238 434,238
20 138,877 171,536 171,536 421,536 206,337 206,337 456,337
25 200,454 283,759 283,759 533,759 354,131 354,131 604,131
30 279,043 453,055 453,055 703,055 591,418 591,418 841,418
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-7
<PAGE> 211
APPENDIX B
SURRENDER CHARGE TARGET PREMIUMS ("SCTP") AND
MAXIMUM DEFERRED SALES CHARGES ("MDSC")
(ANNUAL RATES PER $1,000 OF FACE AMOUNT)
<TABLE>
<CAPTION>
MALE FEMALE
ISSUE NONSMOKER SMOKER NONSMOKER SMOKER
AGE SCTP MDSC SCTP MDSC SCTP MDSC SCTP MDSC
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 2.85 1.43 2.85 1.43 2.24 1.12 2.24 1.12
1 2.78 1.39 2.78 1.39 2.20 1.10 2.20 1.10
2 2.87 1.44 2.87 1.44 2.27 1.14 2.27 1.14
3 2.97 1.49 2.97 1.49 2.35 1.18 2.35 1.18
4 3.08 1.54 3.08 1.54 2.43 1.22 2.43 1.22
5 3.19 1.60 3.19 1.60 2.52 1.26 2.52 1.26
6 3.32 1.66 3.32 1.66 2.61 1.31 2.61 1.31
7 3.45 1.73 3.45 1.73 2.71 1.36 2.71 1.36
8 3.59 1.80 3.59 1.80 2.82 1.41 2.82 1.41
9 3.74 1.87 3.74 1.87 2.93 1.47 2.93 1.47
10 3.90 1.95 3.90 1.95 3.05 1.53 3.05 1.53
11 4.08 2.04 4.08 2.04 3.17 1.59 3.17 1.59
12 4.25 2.13 4.25 2.13 3.31 1.66 3.31 1.66
13 4.44 2.22 4.44 2.22 3.45 1.73 3.45 1.73
14 4.63 2.32 4.63 2.32 3.59 1.80 3.59 1.80
15 4.82 2.41 4.82 2.41 3.74 1.87 3.74 1.87
16 5.01 2.51 5.01 2.51 3.90 1.95 3.90 1.95
17 5.21 2.61 5.21 2.61 4.06 2.03 4.06 2.03
18 5.40 2.70 5.40 2.70 4.23 2.12 4.23 2.12
19 5.61 2.81 5.61 2.81 4.41 2.21 4.41 2.21
20 5.18 2.59 6.89 3.45 4.36 2.18 5.19 2.60
21 5.37 2.69 7.15 3.58 4.54 2.27 5.41 2.71
22 5.58 2.79 7.43 3.72 4.73 2.37 5.65 2.83
23 5.80 2.90 7.73 3.87 4.94 2.47 5.90 2.95
24 6.04 3.02 8.05 4.03 5.15 2.58 6.16 3.08
25 6.29 3.15 8.39 4.20 5.38 2.69 6.43 3.22
26 6.56 3.28 8.76 4.38 5.62 2.81 6.73 3.37
27 6.85 3.43 9.16 4.58 5.87 2.94 7.04 3.52
28 7.16 3.58 9.58 4.79 6.14 3.07 7.36 3.68
29 7.49 3.75 10.04 5.02 6.42 3.21 7.70 3.85
30 7.84 3.92 10.52 5.26 6.71 3.36 8.07 4.04
31 8.21 4.11 11.04 5.52 7.03 3.52 8.45 4.23
32 8.61 4.31 11.59 5.80 7.36 3.68 8.85 4.43
33 9.03 4.52 12.17 6.09 7.71 3.86 9.28 4.64
34 9.47 4.74 12.79 6.40 8.08 4.04 9.73 4.87
35 9.95 4.98 13.44 6.72 8.47 4.24 10.21 5.11
36 10.45 5.23 14.14 7.07 8.88 4.44 10.71 5.36
37 10.98 5.49 14.88 7.44 9.32 4.66 11.24 5.62
38 11.54 5.77 15.66 7.83 9.77 4.89 11.80 5.90
39 12.14 6.07 16.49 8.25 10.26 5.13 12.38 6.19
40 12.77 6.39 17.36 8.68 10.77 5.39 12.99 6.50
41 13.43 6.72 18.28 9.14 11.30 5.65 13.63 6.82
42 14.14 7.07 19.26 9.63 11.86 5.93 14.30 7.15
43 14.89 7.45 20.28 10.14 12.45 6.23 14.99 7.50
</TABLE>
B-1
<PAGE> 212
<TABLE>
<CAPTION>
MALE FEMALE
ISSUE NONSMOKER SMOKER NONSMOKER SMOKER
AGE SCTP MDSC SCTP MDSC SCTP MDSC SCTP MDSC
<S> <C> <C> <C> <C> <C> <C> <C> <C>
44 15.68 7.84 21.37 10.69 13.07 6.54 15.72 7.86
45 16.52 8.26 22.51 11.26 13.73 6.87 16.49 8.25
46 17.42 8.71 23.72 11.86 14.43 7.22 17.29 8.65
47 18.37 9.19 25.00 12.50 15.16 7.58 18.14 9.07
48 19.38 9.69 26.35 13.18 15.94 7.97 19.03 9.52
49 20.46 10.23 27.79 13.90 16.77 8.39 19.98 9.99
50 21.61 10.81 29.32 14.66 17.65 8.83 20.97 10.49
51 22.83 11.42 30.94 15.47 18.57 9.29 22.02 11.01
52 24.14 12.07 32.65 16.33 19.56 9.78 23.13 11.57
53 25.53 12.77 34.48 17.24 20.61 10.31 24.30 12.15
54 27.02 13.51 36.40 18.20 21.72 10.86 25.54 12.77
55 28.60 14.30 38.44 19.22 22.90 11.45 26.84 13.42
56 30.29 15.15 40.59 20.30 24.15 12.08 28.23 14.12
57 32.08 16.04 42.87 21.44 25.49 12.75 29.70 14.85
58 34.01 17.01 45.29 22.65 26.92 13.46 31.26 15.63
59 36.07 18.04 47.85 23.93 28.46 14.23 32.95 16.48
60 38.27 19.14 50.59 25.30 30.12 15.06 34.77 17.39
61 40.63 20.32 53.51 26.76 31.91 15.96 36.73 18.37
62 43.16 21.58 56.62 28.31 33.85 16.93 38.84 19.42
63 45.88 22.94 59.92 29.96 35.92 17.96 41.11 20.56
64 48.78 24.39 63.42 31.71 38.15 19.08 43.53 21.77
65 51.89 25.95 67.11 33.56 40.54 20.27 46.11 23.06
66 55.21 27.61 71.01 35.51 43.09 21.55 48.84 24.42
67 58.77 29.39 75.13 37.57 45.84 22.92 51.77 25.89
68 62.59 31.30 79.52 37.75 48.81 24.41 54.92 27.46
69 66.71 33.36 84.20 37.75 52.04 26.02 58.36 29.18
70 71.16 35.58 89.20 37.75 55.57 27.79 62.10 31.05
71 75.96 36.00 94.56 37.75 59.43 29.72 66.20 33.10
72 81.04 36.00 100.28 37.75 63.65 31.83 70.68 35.00
73 86.57 36.00 106.35 37.75 68.25 34.00 75.53 35.00
74 92.47 36.00 112.74 37.75 73.23 34.00 80.75 35.00
75 98.73 36.00 119.44 37.75 78.61 34.00 86.34 35.00
76 105.38 36.00 126.39 37.75 84.42 34.00 92.32 35.00
77 112.45 36.00 133.62 37.75 90.68 34.00 98.70 35.00
78 120.00 36.00 141.17 37.75 97.47 34.00 105.57 35.00
79 128.12 36.00 149.15 37.75 104.88 34.00 113.00 35.00
80 136.88 36.00 157.63 37.75 112.98 34.00 121.09 35.00
81 146.36 36.00 166.67 37.75 121.85 34.00 129.91 35.00
82 156.57 36.00 176.28 37.75 131.55 34.00 139.51 35.00
83 167.52 36.00 186.39 37.75 142.10 34.00 149.91 35.00
84 179.12 36.00 196.88 37.75 153.50 34.00 161.12 35.00
85 191.34 36.00 207.71 37.75 165.78 34.00 172.98 35.00
</TABLE>
Unisex policies will have surrender charge target premiums and maximum deferred
sales charges that are higher than those for females above but lower than those
for males.
B-2
<PAGE> 213
-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> 214
NATIONAL LIFE GROUP
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-2
<PAGE> 215
[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> 216
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> 217
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> 218
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> 219
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> 220
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> 221
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> 222
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> 223
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> 224
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> 225
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> 226
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> 227
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> 228
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> 229
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> 230
<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> 231
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> 232
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> 233
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> 234
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> 235
<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> 236
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> 237
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> 238
NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-26
<PAGE> 239
[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> 240
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> 241
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> 242
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> 243
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> 244
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> 245
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> 246
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> 247
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> 248
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> 249
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> 250
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> 251
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> 252
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> 253
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> 254
<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> 255
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> 256
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> 257
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> 258
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> 259
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> 260
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> 261
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> 262
NATIONAL VARIABLE
LIFE INSURANCE ACCOUNT
(VARITRAK SEGMENT)
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999
F-50
<PAGE> 263
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of National Life Insurance Company
and Policyholders of National Variable Life Insurance Account -- Varitrak
Segment
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of each of the sub-accounts
constituting the National Variable Life Insurance Account -- Varitrak Segment
(a segment within a Separate Account of National Life Insurance Company) (the
Segment) at December 31, 1999, and the results of each of their operations
and each of their changes in net assets for each of the three years then
ended, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Segment's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted
in the United States which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at
December 31, 1999 by correspondence with the funds, provide a reasonable
basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
March 31, 2000
F-51
<PAGE> 264
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
POLICYHOLDER
ACCOUNT
VALUES
---------------
<S> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value
(policyholder accumulation units and unit value):
Market Street Fund Money Market (457,700.93 accumulation units at $11.71 unit value) $ 5,358,457
Market Street Fund Growth (785,636.12 accumulation units at $16.45 unit value) 12,919,844
Market Street Fund Aggressive Growth (118,770.59 accumulation units at $16.72 unit value) 1,985,760
Market Street Fund Managed (137,184.85 accumulation units at $14.53 unit value) 1,992,873
Market Street Fund Bond (151,215.28 accumulation units at 11.47 unit value) 1,734,440
Market Street Fund International (186,695.40 accumulation units at $16.71 unit value) 3,119,576
Market Street Fund Sentinel Growth (141,722.47 accumulation units at $22.71 unit value) 3,218,517
Alger American Fund Growth (380,350.42 accumulation units at $25.93 unit value) 9,860,929
Alger American Fund Small Capitalization (445,440.10 accumulation units at $18.06 unit value) 8,045,531
VIPF Equity Income Portfolio (303,914.15 accumulation units at $35.19 unit value) 10,694,428
VIPF Overseas Portfolio (147,357.59 accumulation units at $29.39 unit value) 4,331,372
VIPF Growth Portfolio (239,691.23 accumulation units at $57.59 unit value) 13,802,814
VIPF High Income Portfolio (92,780.05 accumulation units at $29.11 unit value) 2,700,605
VIPF Contrafund Portfolio (238,927.92 accumulation units at $19.45 unit value) 4,646,129
VIPF Index 500 Portfolio (511,054.93 accumulation units at $35.78 unit value) 18,284,795
American Century Variable Portfolios VP Value (21,371.41 accumulation units at $10.25 unit value) 218,998
American Century Variable Portfolios VP Income & Growth (79,083.88 accumulation units at $12.85 unit value) 1,016,274
JP Morgan Series Trust II International Opportunities (25,101.23 accumulation units at $13.15 unit value) 330,095
JP Morgan Series Trust II Small Company (14,240.28 accumulation units at $14.31 unit value) 203,838
Strong Opportunity Fund II(43,769.74 accumulation units at $13.93 unit value) 609,810
Strong Variable Insurance Funds Mid Cap Growth (75,292.18 accumulation units at $21.30 unit value) 1,603,929
Neuberger Berman Advisers Management Trust Partners Portfolio (25,882.53 accumulation units at $10.87 unit value) 281,245
Goldman Sachs Variable Insurance Trust International Equity (17,860.81 accumulation units at $13.24 unit value) 236,418
Goldman Sachs Variable Insurance Trust Global Income (3,631.05 accumulation units at $10.22 unit value) 37,096
Goldman Sachs Variable Insurance Trust CORE Small Cap Equity (6,687.30 accumulation units at $11.03 unit value) 73,789
Goldman Sachs Variable Insurance Trust Mid Cap Value (14,285.28 accumulation units at $9.72 unit value) 138,821
------------
Total Net Assets $107,446,383
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 265
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET FUND
---------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL
------------ ----------- ------------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 224,222 $ 244,886 $ 180,507 $ 71,210 $ 24,621 $ 134,771
EXPENSES:
Mortality and expense risk
charges 41,721 107,429 14,087 15,752 11,973 21,719
---------------------------------------------------------------------------------
Net investment income 182,501 137,457 166,420 55,458 12,648 113,052
---------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold - 79,013 (29,873) 37,402 (5,840) 32,890
Net unrealized (depreciation)
appreciation on investments - (15,120) 120,658 (98,893) (56,125) 500,650
---------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments - 63,893 90,785 (61,491) (61,965) 533,540
---------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 182,501 $ 201,350 $ 257,205 $ (6,033) $ (49,317) $ 646,592
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
ALGER AMERICAN FUND
---------- ---------------------------
SENTINEL
GROWTH GROWTH SMALL CAP
--------- ---------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 70,274 $ 583,780 $ 687,887
EXPENSES:
Mortality and expense risk
charges 18,499 61,216 50,956
-----------------------------------------------
Net investment income 51,775 522,564 636,931
-----------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 65,850 577,304 93,301
Net unrealized (depreciation)
appreciation on investments 682,680 1,024,377 1,596,167
-----------------------------------------------
Net realized and unrealized
gain (loss) on investments 748,530 1,601,681 1,689,468
-----------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 800,305 $ 2,124,245 $ 2,326,399
===============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 266
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY HIGH
INCOME OVERSEAS GROWTH INCOME CONTRAFUND
----------- -------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 424,670 $ 100,811 $ 847,889 $ 217,914 $ 80,833
EXPENSES:
Mortality and expense risk charges 89,153 27,018 86,698 23,116 26,335
-------------------------------------------------------------------------------------
Net investment income (loss) 335,517 73,793 761,191 194,798 54,498
-------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 361,515 86,245 677,291 (146,982) 193,124
Net unrealized (depreciation)
appreciation on investments (217,244) 1,039,168 1,869,134 116,488 469,976
-------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 144,271 1,125,413 2,546,425 (30,494) 663,100
-------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 479,788 $1,199,206 $3,307,616 $ 164,304 $ 717,598
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY
VIPF VARIABLE PORTFOLIOS
----------- --------------------------------
INDEX VP INCOME &
500 VP VALUE GROWTH
---------- ------------ --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 112,837 $ 5,747 $ 40
EXPENSES:
Mortality and expense risk charges 102,705 1,010 4,209
---------------------------------------------
Net investment income (loss) 10,132 4,737 (4,169)
---------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 823,410 (2,164) 24,948
Net unrealized (depreciation)
appreciation on investments 1,421,745 (14,728) 77,756
---------------------------------------------
Net realized and unrealized
gain (loss) on investments 2,245,155 (16,892) 102,704
---------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $2,255,287 $ (12,155) $ 98,535
=============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 267
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECMEBER 31, 1999
<TABLE>
<CAPTION>
JP MORGAN STRONG VARIABLE NEUBERGER
SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
--------------------------------- -------------- ------------------ ------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND GROWTH PORTFOLIO
----------------- ------------- -------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 9,965 $ 4,932 $ 3,110 $ 155 $ 3,906
EXPENSES:
Mortality and expense risk charges 632 865 1,447 4,044 1,657
--------------------------------------------------------------------------------------
Net investment income (loss) 9,333 4,067 1,663 (3,889) 2,249
--------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 1,579 21,966 4,649 73,685 4,890
Net unrealized appreciation
(depreciation) on investments 33,198 34,479 63,891 391,256 2,086
--------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 34,777 56,445 68,540 464,941 6,976
--------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 44,110 $ 60,512 $ 70,203 $ 461,052 $ 9,225
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
-------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
-------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 17,323 $ 1,386 $ 148 $ 662 $ 4,054,486
EXPENSES:
Mortality and expense risk charges 1,055 131 445 346 714,218
---------------------------------------------------------------------------------------
Net investment income (loss) 16,268 1,255 (297) 316 3,340,268
---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 8,182 (42) 2,815 1,831 2,986,989
Net unrealized appreciation
(depreciation) on investments 21,079 (1,337) 7,437 (3,555) 9,065,223
---------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 29,261 (1,379) 10,252 (1,724) 12,052,212
---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 45,529 $ (124) $ 9,955 $ (1,408) $15,392,480
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 268
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECMEBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
-------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
----------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 174,631 $ 828,642 $ 54,654 $ 82,717 $ 35,739
EXPENSES:
Mortality and expense risk charges 29,369 72,436 8,545 10,475 6,127
-------------------------------------------------------------------------------------
Net investment income 145,262 756,206 46,109 72,242 29,612
-------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized (loss) gain from
shares sold - (125,406) 12,423 54,347 5,728
Net unrealized appreciation
on investments - 371,666 27,969 5,509 10,575
-------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 246,260 40,392 59,856 16,303
-------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 145,262 $ 1,002,466 $ 86,501 $ 132,098 $ 45,915
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
---------------------------------- -------------------------------
SENTINAL
INTERNATINAL GROWTH GROWTH SMALL CAP
---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 71,101 $ 126,914 $ 520,351 $ 477,358
EXPENSES:
Mortality and expense risk charges 12,891 9,352 30,787 33,154
--------------------------------------------------------------------
Net investment income 58,210 117,562 489,564 444,204
--------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized (loss) gain from
shares sold 3,127 (39,825) 133,365 (9,041)
Net unrealized appreciation
on investments 33,776 83,638 759,665 156,309
--------------------------------------------------------------------
Net realized and unrealized
gain on investments 36,903 43,813 893,030 147,268
--------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 95,113 $ 161,375 $ 1,382,594 $ 591,472
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 269
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
-----------------------------------------------------------------------------------
EQUITY HIGH
INCOME OVERSEAS GROWTH INCOME CONTRAFUND
----------- ------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 332,243 $ 106,077 $ 508,477 $ 154,838 $ 30,797
EXPENSES:
Mortality and expense risk charges 61,108 16,784 45,640 15,314 9,280
-----------------------------------------------------------------------------------
Net investment income (loss) 271,135 89,293 462,837 139,524 21,517
-----------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 183,982 11,052 144,728 (30,566) 18,665
Net unrealized appreciation
(depreciation) on investments 230,682 81,094 1,154,458 (220,695) 264,772
-----------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 414,664 92,146 1,299,186 (251,261) 283,437
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 685,799 $ 181,439 $1,762,023 $ (111,737) $ 304,954
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY
VIPF VARIABLE PORTFOLIOS
------------- --------------------------------
INDEX VP INCOME &
500 VP VALUE GROWTH
------------- ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 48,516 $ - $ 356
EXPENSES:
Mortality and expense risk charges 27,146 65 119
-------------------------------------------------
Net investment income (loss) 21,370 (65) 237
-------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 117,440 968 1,528
Net unrealized appreciation
(depreciation) on investments 659,903 1,426 7,468
-------------------------------------------------
Net realized and unrealized
gain (loss) on investments 777,343 2,394 8,996
-------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 798,713 $ 2,329 $ 9,233
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 270
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
JP MORGAN STRONG VARIABLE NEUBERGER
SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
--------------------------- -------------- --------------- ----------
INTERNATIONAL SMALL OPPORTUNITY II MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
------------- ----------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ - $ 185 $ 10 $ - $ -
EXPENSES:
Mortality and expense risk charges 1 10 2 5 66
-------------------------------------------------------------------------
Net investment (loss) income (1) 175 8 (5) (66)
-------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 70 28 30 43 565
Net unrealized appreciation
on investments 56 427 198 686 2,769
-------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 126 455 228 729 3,334
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 125 $ 630 $ 236 $ 724 $ 3,268
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
------------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 170 $ 93 $ 65 $ 115 $3,554,049
EXPENSES:
Mortality and expense risk charges 36 6 25 28 388,771
-------------------------------------------------------------------------
Net investment (loss) income 134 87 40 87 3,165,278
-------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 164 (160) 96 54 483,405
Net unrealized appreciation
on investments 1,643 23 1,929 1,693 3,637,639
-------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1,807 (137) 2,025 1,747 4,121,044
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,941 $ (50) $ 2,065 $ 1,834 $7,286,322
=========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 271
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Market Street Fund
----------------------------------------------------------------------------------------
Money Aggressive Sentinel
Market Growth Growth Managed Bond International Growth
--------- -------- ---------- --------- ------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 131,394 $ 139,288 $ 1,211 $ 23,450 $ 9,403 $ 19,573 $ 434
EXPENSES:
Mortality and expense risk charges 22,402 24,951 3,114 5,910 1,833 5,158 2,431
----------------------------------------------------------------------------------------
Net investment income (loss) 108,992 114,337 (1,903) 17,540 7,570 14,415 (1,997)
----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold - 106,196 12,533 13,707 483 6,441 16,851
Net unrealized appreciation
on investments - 353,473 51,230 85,995 11,666 2,281 44,338
----------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 459,669 63,763 99,702 12,149 8,722 61,189
----------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 108,992 $ 574,006 $ 61,860 $ 117,242 $ 19,719 $ 23,137 $ 59,192
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Alger American Fund
-------------------------
Growth Small Cap
---------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 9,832 $ 54,467
EXPENSES:
Mortality and expense risk charges 11,355 15,072
-------------------------
Net investment income (loss) (1,523) 39,395
-------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 48,393 29,498
Net unrealized appreciation
on investments 176,680 141,467
-------------------------
Net realized and unrealized
gain on investments 225,073 170,965
-------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 223,550 $ 210,360
=========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 272
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
VIPF
--------------------------------------------------------------------------
EQUITY HIGH INDEX
INCOME OVERSEAS GROWTH INCOME CONTRAFUND 500 TOTAL
---------- ----------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 146,791 $ 22,598 $ 30,327 $ 17,180 $ - $ - $ 605,948
EXPENSES:
Mortality and expense risk charges 25,535 6,281 17,476 5,215 812 984 148,529
------------------------------------------------------------------------------------------
Net investment income (loss) 121,256 16,317 12,851 11,965 (812) (984) 457,419
------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold 77,167 9,870 48,614 10,903 2,592 1,900 385,148
Net unrealized appreciation
(depreciation) on 428,283 (475) 280,065 62,794 5,500 15,881 1,659,178
------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 505,450 9,395 328,679 73,697 8,092 17,781 2,044,326
------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $ 341,530 $ 85,662 $ 7,280 $ 16,797 $ 2,501,745
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 273
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET FUND
-------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- -------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 182,501 $ 201,350 $ 257,205 $ (6,033) $(49,317)
-------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 18,682,585 3,472,661 502,580 450,497 517,217
Transfers between investment
sub-accounts and general account, net (17,513,159) 441,371 116,341 315,228 428,435
Surrenders and lapses (129,543) (642,850) (60,070) (39,263) (42,491)
Death benefits - (17,717) - - -
Loan collateral interest received 6,164 4,077 1,290 2,872 11
Transfers for policy loans 36,797 (122,318) (21,898) 222,748 (3,291)
Cost of insurance and administrative charges (1,012,392) (1,071,664) (155,432) (192,739) (118,739)
Miscellaneous 10,796 (2,509) 202 3,717 263
-------------------------------------------------------------------------------
Total capital transactions 81,248 2,061,051 383,013 763,060 781,405
-------------------------------------------------------------------------------
Increase in net assets 263,749 2,262,401 640,218 757,027 732,088
Net assets, beginning of period 5,094,708 10,657,443 1,345,542 1,235,846 1,002,352
-------------------------------------------------------------------------------
Net assets, end of period $ 5,358,457 $ 12,919,844 $ 1,985,760 $1,992,873 $ 1,734,440
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
------------------------------- -----------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 646,592 $ 800,305 $ 2,124.245 $ 2,326,399
--------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 687,287 639,909 2,019,518 1,495,117
Transfers between investment
sub-accounts and general account, net 133,338 478,416 1,708,558 126,6009
Surrenders and lapses (47,051) (19,197) (218,945) (216,2798)
Death benefits (5,597) - - (1686)
Loan collateral interest received 301 985 4,566 2,8369
Transfers for policy loans (9,989) (11,042) (152,859) (127,5694)
Cost of insurance and administrative charges (216,417) (194,166) (592,963) (458,654)
Miscellaneous 2,715 (973) 1,537 (1,656)
--------------------------------------------------------------
Total capital transactions 544,587 893,932 2,769,412 820,227
--------------------------------------------------------------
Increase in net assets 1,191,179 1,694,237 4,893,657 3,146,626
Net assets, beginning of period 1,928,397 1,524,280 4,967,272 4,898,905
--------------------------------------------------------------
Net assets, end of period $ 3,119,576 $ 3,218,517 $ 9,860.929 $ 8,045,531
==============================================================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-61
<PAGE> 274
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- -------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 479,788 $ 1,199,206 $ 3,307,616 $ 164,304 $ 717,598
-------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 2,589,209 830,581 2,642,108 668,099 1,053,960
Transfers between investment
sub-accounts and general account, net 434,075 321,622 1,897,474 224,167 1,497,929
Surrenders and lapses (338,308) (116,132) (369,618) (254,614) (165,080)
Death benefits (15,977) (890) (18,064) - (391)
Loan collateral interest received 5,410 1,079 5,360 1,059 2,169
Transfers for policy loans (150,436) (37,314) (53,981) 15,738 (39,618)
Cost of insurance and administrative
charges (896,278) (241,330) (782,269) (218,356) (273,807)
Miscellaneous (558) 2,519 2,059 224 766
-------------------------------------------------------------------------------------
Total capital transactions 1,627,137 760,135 3,323,069 436,317 2,075,928
-------------------------------------------------------------------------------------
Increase in net assets 2,106,925 1,959,341 6,630,685 600,621 2,793,528
Net assets, beginning of period 8,587,503 2,372,031 7,172,129 2,099,984 1,852,603
-------------------------------------------------------------------------------------
Net assets, end of period 10,694,428 $ 4,331,372 $ 13,802,814 $ 2,700,605 $ 4,646,129
=====================================================================================
<CAPTION>
AMERICAN CENTURY VARIABLE
VIPF PORTFOLIOS
------------- ----------------------------------
VP INCOME &
INDEX 500 VP VALUE GROWTH
------------- ---------------- ----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,255,287 $ (12,155) $ 98,535
-------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 4,757,826 95,324 250,364
Transfers between investment
sub-accounts and general account, net 6,525,053 118,104 636,747
Surrenders and lapses (144,754) (335) (2,017)
Death benefits (278) - -
Loan collateral interest received 1,475 30 30
Transfers for policy loans (74,165) (1,615) (1,652)
Cost of insurance and administrative
charges (1,205,701) (16,178) (64,083)
Miscellaneous (7,881) 1,020 (528)
-------------------------------------------------
Total capital transactions 9,851,575 196,350 818,861
-------------------------------------------------
Increase in net assets 12,106,862 184,195 917,396
Net assets, beginning of period 6,177,933 34,803 98,878
-------------------------------------------------
Net assets, end of period $ 18,284,795 $ 218,998 $ 1,016,274
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 275
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
STRONG VARIABLE
INSURANCE NEUBERGER
JP MORGAN SERIES TRUST II STRONG FUNDS BERMAN
----------------------------------- ----------------- ------------------ ----------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
----------------- ---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 44,110 $ 60,512 $ 70,203 $ 461,052 $ 9,225
---------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 33,152 96,651 104,505 283,781 116,821
Transfers between investment
sub-accounts and general
account, net 255,894 57,937 446,411 907,034 128,937
Surrenders and lapses (222) (942) (1,323) (962) (835)
Death benefits - - - - -
Loan collateral interest received - - 30 15 -
Transfers for policy loans (790) (2,271) (39) (178) (1,542)
Cost of insurance and
administrative charges (5,688) (16,273) (15,424) (50,854) (22,504)
Miscellaneous (26) 326 145 (648) 1,049
---------------------------------------------------------------------------------------------
Total capital transactions 282,320 135,428 534,305 1,138,188 221,926
---------------------------------------------------------------------------------------------
Increase in net assets 326,430 195,940 604,508 1,599,240 231,151
Net assets, beginning of period 3,665 7,898 5,302 4,889 50,094
---------------------------------------------------------------------------------------------
Net assets, end of period $ 330,095 $ 203,838 $ 609,810 $ 1,603,929 $ 281,245
=============================================================================================
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
--------------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
------------------ ----------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 45,529 $ (124) $ 9,955 $ (1,408) $ 15,392,480
----------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 73,810 11,385 20,290 25,462 42,120,899
Transfers between investment
sub-accounts and general
account, net 99,089 18,795 31,986 107,309 (56,309)
Surrenders and lapses (1,016) - (2,114) (217) (2,814,178)
Death benefits - - - - (59,082)
Loan collateral interest received - - - - 39,759
Transfers for policy loans - - (2,265) - (539,549)
Cost of insurance and
administrative charges (16,831) (1,588) (5,138) (7,755) (7,853,223)
Miscellaneous 13 (73) 29 48 12,576
----------------------------------------------------------------------------------------------
Total capital transactions 155,065 28,519 42,788 124,847 30,850,693
----------------------------------------------------------------------------------------------
Increase in net assets 200,594 28,395 52,743 123,439 46,243,173
Net assets, beginning of period 35,824 8,701 21,046 15,382 61,203,210
----------------------------------------------------------------------------------------------
Net assets, end of period $ 236,418 $ 37,096 $ 73,789 $ 138,821 $ 107,446,383
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 276
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
----------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 145,262 $ 1,002,466 $ 86,501 $ 132,098 $ 45,915
----------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 16,065,276 3,354,679 445,159 398,177 196,330
Transfers between investment
sub-accounts and general
account, net (14,045,451) 2,034,966 311,097 221,558 398,322
Surrenders and lapses (68,115) (132,734) (21,255) (69,168) (5,455)
Death benefits - (7,259) - - -
Loan collateral interest received 2,566 938 33 65 -
Transfers for policy loans (126,218) (85,328) (8,932) (269,851) (183)
Cost of insurance and
administrative charges (740,562) (856,845) (109,134) (146,025) (64,998)
Miscellaneous (81,958) 3,632 (360) 2,239 942
----------------------------------------------------------------------------------------
Total capital transactions 1,005,538 4,312,049 616,608 136,995 524,958
----------------------------------------------------------------------------------------
Increase in net assets 1,150,800 5,314,515 703,109 269,093 570,873
Net assets, beginning of period 3,943,908 5,342,928 642,433 966,753 431,479
----------------------------------------------------------------------------------------
Net assets, end of period $ 5,094,708 $ 10,657,443 $ 1,345,542 $ 1,235,846 $ 1,002,352
========================================================================================
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
-------------------------------- ---------------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 95,113 $ 161,375 $ 1,382,594 $ 591,472
-----------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 559,764 459,162 1,209,427 1,436,433
Transfers between investment
sub-accounts and general
account, net 561,436 384,776 742,149 634,727
Surrenders and lapses (27,026) (6,365) (55,449) (90,129)
Death benefits - (74) (3,477) -
Loan collateral interest received 63 18 789 905
Transfers for policy loans (9,095) (4,451) (60,399) (45,307)
Cost of insurance and
administrative charges (156,931) (106,073) (326,928) (380,014)
Miscellaneous (262) 9,459 702 1,507
-----------------------------------------------------------------------
Total capital transactions 927,949 736,452 1,506,814 1,558,122
-----------------------------------------------------------------------
Increase in net assets 1,023,062 897,827 2,889,408 2,149,594
Net assets, beginning of period 905,335 626,453 2,077,864 2,749,311
-----------------------------------------------------------------------
Net assets, end of period $ 1,928,397 $ 1,524,280 $ 4,967,272 $ 4,898,905
=======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE> 277
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- -------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS $ 685,799 $ 181,439 $ 1,762,023 $ (111,737) $ 304,954
RESULTING FROM OPERATIONS
-------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 2,326,536 743,468 1,759,391 581,195 415,042
Transfers between investment
sub-accounts and general account, net 1,742,916 449,158 960,014 702,770 833,579
Surrenders and lapses (76,821) (58,543) (122,190) (21,495) (5,561)
Death benefits (6,548) - - - -
Loan collateral interest received 1,619 493 1,166 216 90
Transfers for policy loans (102,818) (22,119) (116,207) (49,108) (6,944)
Cost of insurance and administrative
charges (700,287) (185,158) (501,069) (157,515) (106,990)
Miscellaneous 6,609 2,008 2,116 (345) 1,387
-------------------------------------------------------------------------------------
Total capital transactions 3,191,206 929,307 1,983,221 1,055,718 1,130,603
-------------------------------------------------------------------------------------
Increase in net assets 3,877,005 1,110,746 3,745,244 943,981 1,435,557
Net assets, beginning of period 4,710,498 1,261,285 3,426,885 1,156,003 417,046
-------------------------------------------------------------------------------------
Net assets, end of period $ 8,587,503 $ 2,372,031 $ 7,172,129 $ 2,099,984 $ 1,852,603
=====================================================================================
<CAPTION>
AMERICAN CENTURY VARIABLE
VIPF PORTFOLIOS
------------- ----------------------------------
VP INCOME &
INDEX 500 VP VALUE GROWTH
------------- ---------------- ----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS $ 798,713 $ 2,329 $ 9,233
RESULTING FROM OPERATIONS
-------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,365,857 15,989 19,753
Transfers between investment
sub-accounts and general account, net 3,838,930 18,383 71,190
Surrenders and lapses (6,581) - -
Death benefits - - -
Loan collateral interest received 820 - -
Transfers for policy loans (28,549) - -
Cost of insurance and administrative
charges (339,911) (1,892) (1,301)
Miscellaneous 4,244 (6) 3
-------------------------------------------------
Total capital transactions 4,834,810 32,474 89,645
-------------------------------------------------
Increase in net assets 5,633,523 34,803 98,878
Net assets, beginning of period 544,410 - -
-------------------------------------------------
Net assets, end of period $ 6,177,933 $ 34,803 $ 98,878
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE> 278
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
STRONG VARIABLE
INSURANCE NEUBERGER
JP MORGAN SERIES TRUST II STRONG FUNDS BERMAN
----------------------------------- ----------------- ----------------- ---------------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
----------------- ---------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 125 $ 630 $ 236 $ 724 $ 3,268
------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 116 898 565 378 11,133
Transfers between investment
sub-accounts and general
account, net 3,456 6,594 4,661 3,673 37,275
Surrenders and lapses - - - - -
Death benefits - - - - -
Loan collateral interest received - - - - -
Transfers for policy loans - - - - -
Cost of insurance and
administrative charges (33) (285) (157) (82) (1,557)
Miscellaneous 1 61 (3) (4) (25)
------------------------------------------------------------------------------------------
Total capital transactions 3,540 7,268 5,066 3,965 46,826
------------------------------------------------------------------------------------------
Increase in net assets 3,665 7,898 5,302 4,689 50,094
Net assets, beginning of period - - - - -
------------------------------------------------------------------------------------------
Net assets, end of period $ 3,665 $ 7,898 $ 5,302 $ 4,689 $ 50,094
==========================================================================================
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
----------------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
---------------- --------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,941 $ (50) $ 2,065 $ 1,834 $ 7,286,322
----------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,395 346 664 122 31,367,255
Transfers between investment
sub-accounts and general
account, net 33,060 8,465 18,678 13,988 (9,630)
Surrenders and lapses - - - - (766,887)
Death benefits - - - - (17,358)
Loan collateral interest received - - - - 9,781
Transfers for policy loans - - - - (935,509)
Cost of insurance and
administrative charges (580) (127) (362) (562) (4,885,378)
Miscellaneous 8 67 1 - (47,977)
----------------------------------------------------------------------------------------
Total capital transactions 33,883 8,751 18,981 13,548 24,714,297
----------------------------------------------------------------------------------------
Increase in net assets 35,824 8,701 21,046 15,382 32,000,619
Net assets, beginning of period - - - - 29,202,591
----------------------------------------------------------------------------------------
Net assets, end of period $ 35,824 $ 8,701 $ 21,046 $ 15,382 $ 61,203,210
========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE> 279
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARKET STREET FUND
---------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 108,992 $ 574,006 $ 61,860 $ 117,242 $ 19,719
---------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 14,928,533 1,666,786 226,537 291,903 117,811
Transfers between investment
sub-accounts and general
account, net (11,556,251) 2,658,992 304,863 252,090 250,863
Surrenders and lapses (35,239) (16,526) (3,762) (7,277) (2,819)
Death benefits - (16,352) - - -
Loan collateral interest received - 62 - - -
Transfers for policy loans - (12,082) (47) - -
Cost of insurance and
administrative charges (632,456) (368,354) (52,706) (103,982) (33,934)
Miscellaneous (1,308) 4,519 158 (328) (11)
---------------------------------------------------------------------------------------
Total capital transactions 2,703,279 3,917,045 475,043 432,406 331,910
---------------------------------------------------------------------------------------
Increase in net assets 2,812,271 4,491,051 536,903 549,648 351,629
Net assets, beginning of period 1,131,637 851,877 105,530 417,105 79,850
---------------------------------------------------------------------------------------
Net assets, end of period $ 3,943,908 $ 5,342,928 $ 642,433 $ 966,753 $ 431,479
=======================================================================================
<CAPTION>
MARKET STREET FUND ALGER AMERICAN FUND
-------------------------------- --------------------------------
SENTINEL
INTERNATIONAL GROWTH GROWTH SMALL CAP
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 23,137 $ 59,192 $ 223,550 $ 210,360
----------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 333,866 200,093 726,590 1,015,432
Transfers between investment
sub-accounts and general
account, net 372,293 310,212 755,142 1,179,593
Surrenders and lapses (3,213) (1,141) (6,060) (19,896)
Death benefits - - - (830)
Loan collateral interest received - 9 91 93
Transfers for policy loans (845) (437) (9,340) (14,708)
Cost of insurance and
administrative charges (82,909) (37,403) (174,005) (238,728)
Miscellaneous (1,222) 3,791 246 (388)
----------------------------------------------------------------------
Total capital transactions 617,970 475,124 1,292,664 1,920,568
----------------------------------------------------------------------
Increase in net assets 641,107 534,316 1,516,214 2,130,928
Net assets, beginning of period 264,228 92,137 561,650 618,383
----------------------------------------------------------------------
Net assets, end of period $ 905,335 $ 626,453 $ 2,077,864 $ 2,749,311
======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE> 280
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
VIPF
---------------------------------------------------------------------------------------
EQUITY INCOME OVERSEAS GROWTH HIGH INCOME CONTRAFUND
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 626,706 $ 25,712 $ 341,530 $ 85,662 $ 7,280
---------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,350,368 421,824 1,240,642 273,306 90,825
Transfers between investment
sub-accounts and general account, net 1,824,653 715,582 1,471,895 690,283 331,696
Surrenders and lapses (15,710) (3,305) (15,336) (2,774) (489)
Death benefits - (295) (879) - -
Loan collateral interest received 390 101 115 12 -
Transfers for policy loans (27,151) (8,820) (15,684) (1,157) (201)
Cost of insurance and administrative
charges (363,378) (92,839) (274,427) (61,178) (12,527)
Miscellaneous 89 2,820 1,042 511 462
---------------------------------------------------------------------------------------
Total capital transactions 2,769,261 1,035,068 2,407,368 899,003 409,766
---------------------------------------------------------------------------------------
Increase in net assets 3,395,967 1,060,780 2,748,898 984,665 417,046
Net assets, beginning of period 1,314,531 200,505 677,987 171,338 -
---------------------------------------------------------------------------------------
Net assets, end of period $ 4,710,498 $ 1,261,285 $ 3,426,885 $ 1,156,003 $ 417,046
=======================================================================================
<CAPTION>
VIPF
-------------
INDEX 500 TOTAL
------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 16,797 $ 2,501,745
---------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 112,247 22,996,763
Transfers between investment
sub-accounts and general account, net 436,969 (1,125)
Surrenders and lapses (322) (133,869)
Death benefits - (18,356)
Loan collateral interest received - 873
Transfers for policy loans - (90,472)
Cost of insurance and administrative
charges (19,167) (2,547,993)
Miscellaneous (2,114) 8,267
---------------------------------
Total capital transactions 527,613 20,214,088
---------------------------------
Increase in net assets 544,410 22,715,833
Net assets, beginning of period - 6,486,758
---------------------------------
Net assets, end of period $ 544,410 $ 29,202,591
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE> 281
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - VARITRAK SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Variable Life Insurance Account (the Variable Account) began operations
on March 11, 1996 and is registered as a unit investment trust under the
Investment Company Act of 1940, as amended. The operations of the Variable
Account are part of National Life Insurance Company (National Life). The
Variable Account was established by National Life as a separate investment
account to invest the net premiums received from the sale of certain variable
life insurance products. Equity Services, Inc., an indirect wholly-owned
subsidiary of National Life, is the principal underwriter for the variable life
insurance policies issued by National Life. Sentinel Advisors Company, an
indirectly-owned subsidiary of National Life, provides investment advisory
services for certain Market Street Fund, Inc. mutual fund portfolios.
National Life maintains three segments within the Variable Account. The Varitrak
Segment (the Segment) within the Variable Account was established on March 11,
1996 and is used exclusively for National Life's flexible premium variable life
insurance products known collectively as Varitrak. On May 1, 1998, National Life
established the Estate Provider Segment within the Variable Account to be used
exclusively for National Life's flexible premium variable life insurance
products known collectively as Estate Provider. On February 12, 1999, National
Life established the Benefit Provider Segment within the Variable Account to be
used exclusively for National Life's flexible premium variable universal life
policy known collectively as Benefit Provider.
The Segment invests the accumulated policyholder account values in shares of
mutual fund portfolios within Market Street Fund, Inc., Alger American Fund,
Variable Insurance Products Fund and Variable Insurance Products fund II (VIPF),
American Century Variable Portfolios, JP Morgan Series Trust II, Strong Variable
Insurance Funds, Strong Opportunity Fund II, Neuberger Berman Advisers
Management Trust and Goldman Sachs Variable Insurance Trust. Net premiums
received by the Segment are deposited in investment portfolios as designated by
the policyholder, except for initial net premiums on new policies which are
first invested in the Market Street Fund Money Market Portfolio. Policyholders
may also direct the allocations of their account value between the various
investment portfolios within the Segment and a declared interest account (within
the General Account of National Life) through participant transfers.
There are Twenty-six sub-accounts within the Segment. Each sub-account, which
invests exclusively in the shares of the corresponding portfolio, comprises the
accumulated policyholder account values of the underlying variable life
insurance policies investing in the sub-account.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States (GAAP). The preparation of
financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
in the preparation of the Segment's financial statements.
INVESTMENTS
The mutual fund portfolios consist of the Market Street Fund Money Market,
Market Street Fund Growth, Market Street Fund Aggressive Growth, Market Street
Fund Managed, Market Street Fund Bond, Market Street Fund International, Market
Street Fund Sentinel Growth, Alger American Fund Growth, Alger American Fund
Small Capitalization, VIPF Equity Income, VIPF Overseas, VIPF Growth, VIPF High
Income, VIPF Contra, VIPF Index 500, American Century Variable Portfolios VP
Value, American Century
F-69
<PAGE> 282
Variable Portfolios VP Income & Growth, JP Morgan Series Trust II International
Opportunities, JP Morgan Series Trust II Small Company, Strong Opportunity Fund
II, Strong Variable Insurance Funds Mid Cap Growth, Neuberger Berman Advisers
Management Trust Partners Portfolio, Goldman Sachs Variable Insurance Trust
International Equity, Goldman Sachs Variable Insurance Trust Global Income,
Goldman Sachs Variable Insurance Trust CORE Small Cap Equity, and Goldman Sachs
Variable Insurance Trust Mid Cap Value (formerly Goldman Sachs Variable
Insurance Trust Mid Cap Equity) (the Portfolios). The assets of each portfolio
are held separate from the assets of the other portfolios and each has different
investment objectives and policies. Each portfolio operates separately and the
gains or losses in one portfolio have no effect on the investment performance of
the other portfolios.
INVESTMENT VALUATION
The investments in the Portfolios are valued at the closing net asset value per
share as determined by the portfolio at the end of each period. The change in
the difference between cost and market value is reflected as unrealized gain
(loss) in the Statement of Operations.
INVESTMENT TRANSACTIONS
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed) and dividend income (including capital gain
distributions) are recorded on the ex-dividend date. The cost of investments
sold was determined using the average cost method prior to 1998. Effective
January 1, 1998, the Variable Account changed its method of calculating the cost
of investments sold from the average cost method to the first in, first out
method (FIFO). Management believes FIFO better matches policyholder and
sub-account investment activity. Management also believes it would be
impractical to calculate the cumulative effect of this change on previously
reported realized and unrealized gains and losses; however, during 1998 the
change increased net realized gains by $ 176,300 and decreased net unrealized
gains by the same amount.
FEDERAL INCOME TAXES
The operations of the Segment are part of, and taxed with, the total operations
of National Life. Under existing federal income tax law, investment income and
capital gains attributable to the Segment are not taxed.
NOTE 3 - CHARGES AND EXPENSES
National Life deducts a daily charge from the Segment based on an annual rate of
.9% of each sub-account's net asset value for its assumption of mortality and
expense risks. The mortality risk assumed is that the insureds under the
policies may die sooner than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the policies may exceed expected
levels.
Cost of insurance charges are deducted monthly from each policyholder's
accumulated account value for the insurance protection provided and are remitted
to National Life. These charges vary based on the net amount at risk, attained
age of the insured, and other factors. As partial compensation for
administrative services provided, National Life also deducts a monthly
administrative charge from each policyholder's accumulated account value.
Certain deferred administrative and sales charges are deducted from the
policyholder's accumulated account value if the underlying variable life
insurance policy is surrendered or lapsed prior to the end of the fifteenth
policy year.
F-70
<PAGE> 283
NOTE 4 - INVESTMENTS
The number of shares held and cost for each of the portfolios at December 31,
1999 are set forth below:
<TABLE>
<CAPTION>
Portfolio Shares Cost
- --------- --------- ------------
<S> <C> <C>
Market Street Fund
Money Market 5,358,457 $5,358,457
Growth 682,146 12,175,244
Aggressive Growth 90,385 1,781,021
Managed 118,694 1,999,930
Bond 163,936 1,767,570
International 187,025 2,575,305
Sentinel Growth 180,917 2,402,248
Alger American Fund
Growth 153,168 7,879,902
Small Capitalization 145,885 6,150,958
VIPF
Equity Income 415,964 10,198,642
Overseas 157,849 3,202,915
Growth 251,280 10,482,207
High Income 238,780 2,738,276
Contrafund 159,387 3,905,880
Index 500 109,222 16,187,265
American Century Variable Portfolios
VP Value 36,806 232,301
VP Income & Growth 127,034 931,049
JP Morgan Series Trust II
International Opportunities 23,868 296,841
Small Company 12,184 168,933
Strong Opportunity Fund II 23,463 545,722
Strong Variable Insurance Funds
Mid Cap Growth 52,813 1,211,986
Neuberger & Berman Partners Portfolio 14,320 276,390
Goldman Sachs Variable Insurance Trust
International Equity 16,339 213,696
Global Income 3,774 38,411
CORE Small Cap Equity 6,961 64,424
Mid Cap Value 16,487 140,683
-----------
Total $92,926,256
===========
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-71
<PAGE> 284
NOTE 5 - PURCHASES AND SALES OF PORTFOLIO SHARES
Purchases and proceeds from sales of shares in the portfolios for the period
ended December 31, 1999 aggregated the following:
<TABLE>
<CAPTION>
Portfolio Purchases Proceeds
- --------- ------------ ------------
<S> <C> <C>
Market Street Fund
Money Market $ 30,017,749 $ 29,754,001
Growth 5,906,146 3,707,638
Aggressive Growth 1,012,942 463,509
Managed 1,601,669 783,151
Bond 1,237,707 443,654
International 1,373,865 716,226
Sentinel Growth 1,530,288 584,581
Alger American Fund
Growth 5,246,454 1,954,478
Small Capitalization 3,299,916 1,842,757
VIPF
Equity Income 4,653,458 2,690,803
Overseas 1,653,898 819,970
Growth 6,794,360 2,710,100
High Income 1,636,086 1,004,971
Contra Fund 3,173,362 1,042,936
Index 500 14,975,545 5,113,839
American Century Variable Portfolios
VP Value 247,551 46,463
VP Income & Growth Fund 1,087,652 272,961
JP Morgan Series Trust II
International Opportunities 303,830 12,176
Small Company 291,978 152,482
Strong Opportunity Fund II 616,948 80,979
Strong Variable Insurance Funds
Mid Cap Growth 1,479,359 345,061
Neuberger Berman Advisers Management Trust
Partners Portfolio 341,053 116,879
Goldman Sachs Variable Insurance Trust
International Equity 288,345 117,011
Global Income 32,872 3,098
CORE Small Cap Equity 76,961 34,469
Mid Cap Value 143,810 18,647
</TABLE>
NOTE 6 - LOANS
Policyholders may obtain loans after the first policy year as outlined in the
variable life insurance policy. At the time a loan is granted, accumulated value
equal to the amount of the loan is designated as collateral and transferred from
the Segment to the General Account of National Life. Interest is credited by
National Life at predetermined rates on collateral held in the General Account.
This interest is periodically transferred to the Segment.
NOTE 7 - DISTRIBUTION OF NET INCOME
The Segment does not expect to declare dividends to policyholders from
accumulated net income. The accumulated net income will be distributed to
policyholders as withdrawals (in the form of death benefits, surrenders or
policy loans) in excess of the policyholders' net contributions to the Segment.
F-72
<PAGE> 285
NOTE 8 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (IRC), a
variable universal life insurance contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
a variable universal life insurance contract for federal income tax purposes for
any period for which the investments of the segregated asset account on which
the contract is based are not adequately diversified. The IRC provides that the
adequately diversified requirement may be met if the underlying investments
satisfy either a statutory safe harbor test or diversification requirements set
forth in regulations issued by the Secretary of the Treasury.
National Life believes that the Segment satisfies the current requirements of
the regulations, and it intends that the Segment will continue to meet such
requirements.
F-73
<PAGE> 286
Part II
<PAGE> 287
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> 288
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents.
The facing sheet.
The prospectuses.
Undertaking to file reports.
Rule 484 undertaking.
Representation relating to fees and charges.
The signatures.
Written consents of the following persons:
(a) Michele S. Gatto
(b) Elizabeth H. MacGowan
(c) Sutherland, Asbill & Brennan LLP.
(d) PricewaterhouseCoopers LLP.
The following exhibits, corresponding to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
1.
A.
(1) Resolutions of the Board of Directors of National
Life Insurance Company establishing the National
Variable Life Insurance Account.(1)
(2) Not Applicable.
(3) (a) Form of Distribution Agreement between
National Life Insurance Company and Equity
Services, Inc.(3)
(b)(1) Form of Equity Services, Inc. Branch Office
Supervisor Contract.(1)
(b)(2) Form of Equity Services, Inc. Registered
Representative Contract.(1)
(c) Schedule of Sales Commissions.(6)
(4) Not Applicable.
(5) (a) Specimen VariTrak Policy Form.(7)
(b) Rider for Guaranteed Insurability Options.(7)
(c) Rider for Waiver of Monthly Deductions.(7)
(d) Rider for Accidental Death Benefit.(7)
(e) Rider for Guaranteed Death Benefit.(7)
(f) Specimen VariTrak (New York) Policy Form.(4)
(g) Specimen VariTrak (New York-Unisex) Policy
Form.(4)
(h) New York Rider for Guaranteed Insurability
Options.(4)
(i) New York Rider for Waiver of Monthly
Deductions.(4)
(j) New York Rider for Accidental Death
Benefit.(4)
(6) (a) Charter documents of National Life Insurance
Company.(1)
(b) Bylaws of National Life Insurance Company.(1)
(7) Not Applicable.
(8) (a) Form of Participation Agreement by and among
Market Street Fund, Inc., National Life
Insurance Company and Equity Services,
Inc.(3)
(b) Form of Amendment No. 1 to Participation
Agreement Among Variable Insurance Products
Fund, Fidelity Distributors Corporation and
National Life Insurance Company.(3)
(b)(2) Participation Agreement among Variable
Insurance Products Fund, Fidelity
Distributors Corporation and Vermont Life
Insurance Company (now National Life
Insurance Company) dated August 1, 1989.(2)
(c) Form of Participation Agreement by and among
The Alger American Fund, National Life
Insurance Company and Fred Alger and
Company.(3)
(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(2)
(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)(4)
(e) Form of Shareholder Service Agreement
between NationalLife Insurance Company and
American Century Investment Management,
Inc. (5)
(f) Form of Participation Agreement between
National Life Insurance Company and
Neuberger & Berman Advisers Managers
Trust(5)
(g) Form of Participation Agreement between
National Life Insurance Company and J.
P. Morgan Series Trust II. (5)
(h) Form of Participation Agreement between
National Life Insurance Company and
Goldman Sachs Variable Insurance Trust.
(5)
(i) Form of Participation Agreement between
National Life Insurance Company, Strong
Variable Insurance Funds, Inc. and Strong
Opportunity Fund II.(6)
<PAGE> 289
(9) Not Applicable.
(10)(a) VariTrak Application Form.(7)
(b) VariTrak (New York) Application Form.(4)
(11) Memorandum describing issuance, transfer and
redemption procedures.(8)
2. Opinion and Consent of Michele S. Gatto, Senior Vice President
and 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., 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.(5)
A. Robert E. Boardman F. Thomas P. Salmon
B. David R. Coates G. Roger B. Porter
C. Benjamin F. Edwards III H. Thomas R. Williams
D. E. Miles Prentice III I. Patricia K. Woolf
- ------------------
(1) 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.
(2) 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 (Sentinel Advantage) filed
February 25, 1999.
(3) Incorporated herein by reference to Post Effective Amendment No. 1 to
the Form S-6 Registration Statement (File No. 33-91938) for National
Variable Life Insurance Account (VariTrak) filed March 12, 1996,
Accession Number 0000950133-96-000202.
(4) Incorporated herein by reference to Post-Effective Amendment No. 2 to
the Form S-6 Registration Statement filed April 30, 1997 for National
Variable Life Insurance Account (VariTrak) (File No. 33-91938),
Accession Number 0000950133-97-001551.
(5) Incorporated herein by reference to Pre-Effective Amendment
No. 1 to the Form S-6 Registration Statement filed April 16, 1998 for
National Variable Life Insurance Account (Sent. Est. Provider)
(File No. 333-44723), Accession No. 950133-98-1468.
(6) Incorporated herein by reference to Post-Effective Amendment
No. 3 to the Form S-6 Registration Statement for National Variable
Life Insurance Account (VariTrak) filed May 1, 1998 (File No. 33-91938)
(7) Incorporated herein by reference to Post-Effective Amendment No. 4 to
the Form S-6 Registration Statement for National Variable Life
Insurance Accent (Varitrak) filed February 26, 1999, Accession No.
950133-99-000666
(8) Incorporated herein by reference to Post-Effective Amendment No. 5 to
the Form S-6 Registration Statement for National Variable Life
Insurance Account (VeriTrak) filed April 30, 1999. Accession
No. 0000950133-99-001604
<PAGE> 290
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. 6 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> 291
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. 6
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. 4 to the Registration Statement has been signed
below by the following persons in the capacities indicated on the date(s) set
forth below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ PATRICK E. WELCH Chairman of the Board and 4/28/00
- ------------------------ and Chief Executive Officer
Patrick E. Welch
/s/ THOMAS H. MACLEAY President, Chief Operating 4/28/00
- ------------------------ Officer and Director
Thomas H. MacLeay
/s/ William A. Smith Executive Vice President 4/28/00
- ------------------------ Chief Financial Officer
John L. LaGue, Jr.
Robert E. Boardman* Director 4/28/00
- ------------------
Robert E. Boardman
</TABLE>
<PAGE> 292
<TABLE>
<S> <C> <C>
*By /s/ EARLE H. HARBISON JR.* Director Date:
-------------------------- 4/28/00
Earle H. Harbison JR.
*By /s/ A. Gary Shilling* Director Date:
-------------------------- 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> 293
EXHIBIT INDEX
2. Opinion and Consent of Michele S. Gatto, Senior Vice President
and General Counsel as to the legality of the securities being
offered.
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
<PAGE> 1
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. 6 to a Registration Statement on Form S-6
("Registration Statement") under the Securities Act of 1933, as amended, of
National Variable Life Insurance Account (the "Separate Account") and National
Life Insurance Company ("National Life"), covering an indefinite amount of
premiums expected to be received under certain flexible premium adjustable
benefit individual variable life insurance policies ("Policies") to be offered
by National Life. Under the Policies, amounts will be allocated by National Life
to the Separate Account as described in the prospectus included in the
Registration Statement to support reserves for such Policies.
In my capacity as Senior Vice President & 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. 6 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
JJ:R:VARI:ATTYOPIN
<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. 6 to a registration statement for National
Variable Life Insurance Account filed on Form S-6 with the Securities and
Exchange Commission under the Securities Act of 1933 (the "Registration
Statement") regarding the offer and sale of Flexible Premium Adjustable Benefit
Variable Life Insurance Policies (the "Policies"); and (b) the preparation of
policy forms for the Policies described in the Registration Statement.
It is my professional opinion that:
(1) The illustrations of Death Benefits, Cash Surrender Values, and
accumulated premiums in Appendix A of the prospectuses (the "Prospectuses")
contained in the Registration Statement, based on the assumptions stated in the
illustrations, are consistent with the assumptions stated in the Policies. The
rate structure of the Policies has not been designed so as to make the
relationship between premiums and benefits as shown in the illustrations appear
to be correspondingly more favorable to the prospective purchasers of Policies,
who are male non-smokers age 40 in the preferred rate class, than to prospective
purchasers of Policies for males or females at other ages or other rate classes.
(2) The information contained in the examples in the sections of the
prospectuses entitled "Detailed Description of Policy Provisions," "Charges and
Deductions," and "Policy Rights," based on the assumptions stated in the
examples, is consistent with the provisions of the Policies.
I hereby consent to the filing of this opinion as an exhibit to Post
Effective Amendment No. 6 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. 6 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 VariTrak 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 - Varitrak 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]
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. 033-91938
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. 6 to
Form S-6 for National Variable Life Insurance Account, which Prospectus
describes certain individual 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
Stephen E. Roth
