<PAGE> 1
As filed with the Securities and Exchange Commission on May 1, 2000.
Registration No. 333-67003
File No. 811-9044
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
-----------------------------
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(Exact name of trust)
NATIONAL LIFE INSURANCE COMPANY
(Name of depositor)
One National Life Drive
Montpelier, Vermont 05604
(Complete address of depositor's principal executive offices)
-----------------------------
D. Russell Morgan
Counsel
National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
(name and complete address of agent for service)
-----------------------------
Copy to:
Stephen E. Roth, Esq.
Sutherland Asbill & Brennan, LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2404
-----------------------------
It is proposed that this filing will become effective:
X on May 1, 2000 pursuant to paragraph (b) of Rule 485
- ----
60 days after filing pursuant to pargraph (a) of Rule 485
- ----
on May 1, 1999 pursuant to paragraph (a) of Rule 485
- ----
------------------------------
<PAGE> 2
SENTINEL BENEFIT PROVIDER
A Variable Universal Life Insurance Policy
Intended Primarily
for the Corporate Market
PROSPECTUS
Dated May 1, 2000
[GRAPHIC]
- --------------------------------------------------------------------------------
National Life Insurance Company - Home Office: National Life Drive, Montpelier,
Vermont 05604 - 1-800-536-5934 National Variable Life Insurance Account
- --------------------------------------------------------------------------------
This Prospectus describes the Sentinel Benefit Provider Policy, a flexible
premium variable universal life insurance policy offered by National Life
Insurance Company. The policy has an insurance component and an investment
component. Owners of policies can make premium payments at various times and in
various amounts. You can also allocate premiums among a number of funds with
different investment objectives and you can increase or decrease the death
benefit payable under your policy. You may also choose between two death benefit
compliance tests at the time your policy is issued.
We make certain deductions from premium payments. Then these premium payments go
to the National Variable Life Insurance Account, a separate account of National
Life. This separate account currently has twenty-three subaccounts, each of
which buys shares of specific fund portfolios. The available funds are
shown below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE GOLDMAN SACHS
MARKET STREET FUND, INC. ALGER AMERICAN FUND PORTFOLIOS, INC. VARIABLE INSURANCE
TRUST
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- - AGGRESSIVE GROWTH PORTFOLIO* - GROWTH PORTFOLIO - VP INCOME & GROWTH - CORE SMALL CAP
PORTFOLIO EQUITY
- - BOND PORTFOLIO* - SMALL CAPITALIZATION PORTFOLIO - VP VALUE PORTFOLIO - GLOBAL INCOME
- - GROWTH PORTFOLIO* - INTERNATIONAL EQUITY
- - INTERNATIONAL PORTFOLIO+ - MID CAP Value
- - MANAGED PORTFOLIO*
- - MONEY MARKET PORTFOLIO*
- - SENTINEL GROWTH PORTFOLIO*
*Managed by Sentinel Advisors Company Managed by Fred Alger Managed by American Century Managed by Goldman Sachs
+Managed by Provident Mutual Management, Inc. Investment Management, Inc. Asset Management &
Investment Management Company Goldman Sachs Asset
Management International
- ------------------------------------------------------------------------------------------------------------------------------------
NEUBERGER BERMAN Strong Variable Insurance Deutsche Asset
J.P. MORGAN SERIES TRUST II ADVISERS MANAGEMENT TRUST Funds, Inc. Management VIT Funds
- ------------------------------------------------------------------------------------------------------------------------------------
- - INTERNATIONAL OPPORTUNITIES - PARTNERS PORTFOLIO - Mid Cap Growth Fund II -Equity 500 Index Fund
PORTFOLIO -Small Cap Index Fund
- - SMALL COMPANY PORTFOLIO Strong Opportunity Fund II -EAFE(R) Equity Index
------ ----------- ---- -- Fund
Managed by J. P. Morgan Investment Managed by Neuberger & Berman Managed by Strong Capital Managed by Bankers Trust
Management, Inc. Management, Inc. Management, Inc. Company
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 in each subaccount will depend upon the investment results of the
funds you select. You bear the entire investment risk for all amounts allocated
to the various funds; there is no guaranteed minimum value for any of the funds,
and the value of your policy may be more or less than premiums paid.
You must receive, with this prospectus, current prospectuses for all of the fund
choices. They describe the investment objectives and the risks of the funds.
The value of your policy will also reflects our charges which include cost of
insurance charges, the policy administration charge, the mortality and expense
risk charge, the separate account administration charge, and certain other
charges. During the first five years your policy will remain in force if
specified premiums are paid on time, or if the policy has enough value to pay
the monthly charges as they become due. After the fifth year, the Policy will
remain in force only so long as it has enough value to pay the monthly charges
as they become due.
We recommend that you read this prospectus carefully. It may also be useful to
keep it to refer to later.
It may not be advantageous to purchase this 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> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary Description of the Policy...................................................................................
The Policy Offered......................................................................................
The Separate Account....................................................................................
Availability of Policy..................................................................................
The Death Benefit.......................................................................................
Flexibility to Adjust Amount of Death Benefit...........................................................
Account Value...........................................................................................
Allocation of Net Premiums..............................................................................
Transfers...............................................................................................
Free-Look Privilege.....................................................................................
Charges Assessed in Connection with the Policy..........................................................
Summary of Policy Expenses..................................................................
Premium Loads...............................................................................
Monthly Deductions..........................................................................
Daily Charges Against the Separate Account..................................................
Transfer Charge.............................................................................
Other Charges...............................................................................
Allocation of Charges to the Subaccounts....................................................
Policy Lapse and Reinstatement..........................................................................
Loan Privilege..........................................................................................
Withdrawal of Net Account Value.........................................................................
Surrender of the Policy.................................................................................
Available Automated Fund Management Features............................................................
National Life Insurance Company, The Separate Account, and The Funds................................................
National Life Insurance Company.........................................................................
The Separate Account....................................................................................
The Market Street Fund..................................................................................
The Growth Portfolio........................................................................
The Sentinel Growth Portfolio...............................................................
The Aggressive Growth Portfolio.............................................................
The Bond Portfolio..........................................................................
The Managed Portfolio.......................................................................
The International Portfolio.................................................................
The Money Market Portfolio..................................................................
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
<S> <C>
Alger American Fund.....................................................................................
Alger American Small Capitalization Portfolio...............................................
Alger American Growth Portfolio.............................................................
American Century Variable Portfolios, Inc...............................................................
VP Value Portfolio..........................................................................
VP Income & Growth Portfolio................................................................
Goldman Sachs Variable Insurance Trust..................................................................
International Equity........................................................................
Global Income...............................................................................
CORE Small Cap Equity.......................................................................
Mid Cap Value ..............................................................................
J.P. Morgan Series Trust II.............................................................................
International Opportunities Portfolio.......................................................
Small Company Portfolio.....................................................................
Neuberger Berman Advisers Management Trust..............................................................
Partners Portfolio..........................................................................
Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund, Inc..................................
Mid Cap Growth Fund II......................................................................
Strong Opportunity Fund II..................................................................
Deutsche Asset Management VIT Funds.....................................................................
Equity 500 Index Fund.......................................................................
Small Cap Index Fund........................................................................
EAFE Equity Index Fund......................................................................
Planned Substitution....................................................................................
Additional Funds to be Offered in the Future............................................................
Resolving Material Conflicts............................................................................
Detailed Description of Policy Provisions...............................................................
Death Benefit...........................................................................................
General.....................................................................................
Federal Income Tax Law Compliance Test Options..............................................
Death Benefit Options.......................................................................
Option A....................................................................................
Option B....................................................................................
Change in Death Benefit Option..............................................................
How the Death Benefit May Vary..............................................................
Ability to Adjust Face Amount...........................................................................
Increase....................................................................................
Decrease....................................................................................
How the Duration of the Policy May Vary.................................................................
Account Value...........................................................................................
Determination of Number of Units for the Separate Account...................................
Determination of Unit Value.................................................................
Net Investment Factor.......................................................................
Calculation of Account Value................................................................
Payment and Allocation of Premiums......................................................................
Issuance of a Policy........................................................................
Amount and Timing of Premiums...............................................................
Premium Limitations.........................................................................
Allocation of Net Premiums..................................................................
Transfers...................................................................................
Policy Lapse................................................................................
Reinstatement...............................................................................
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
<S> <C>
Charges and Deductions..............................................................................................
Premium Loads...........................................................................................
Monthly Deductions......................................................................................
Cost of Insurance Charge....................................................................
Cost of Insurance Rate......................................................................
Rate Class..................................................................................
Term Rider Charge...........................................................................
Policy Administration Charge................................................................
Underwriting Charge.........................................................................
Mortality and Expense Risk Charge.......................................................................
Separate Account Administration Charge..................................................................
Transfer Charge.........................................................................................
Other Charges...........................................................................................
Possible Charge for National Life's Taxes...............................................................
Policy Rights and Privileges........................................................................................
Loan Privileges.........................................................................................
General.....................................................................................
Interest Rate Charged.......................................................................
Allocation of Loans and Collateral..........................................................
Interest Credited to Amounts Held as Collateral.............................................
Effect of Policy Loan.......................................................................
Loan Repayments.............................................................................
Lapse With Loans Outstanding................................................................
Tax Considerations..........................................................................
Surrender Privilege.....................................................................................
Withdrawal of Net Account Value.........................................................................
Option A....................................................................................
Option B....................................................................................
Free-Look Privilege.....................................................................................
Transfer Right for Change in Investment Policy..........................................................
Available Automated Fund Management Features............................................................
</TABLE>
iv
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
<S> <C>
Other Policy Provisions.............................................................................................
Indefinite Policy Duration..................................................................
Payment of Policy Benefits..................................................................
The Policy..................................................................................
Split Dollar Arrangements...................................................................
Assignments.................................................................................
Misstatement of Age and Sex.................................................................
Suicide.....................................................................................
Incontestability............................................................................
Dividends...................................................................................
Correspondence..............................................................................
Settlement Options..........................................................................
Payment of Interest Only....................................................................
Payments for a Stated Time..................................................................
Payments for Life...........................................................................
Payments of a Stated Amount.................................................................
Life Annuity................................................................................
Joint and Two Thirds Annuity................................................................
50% Survivor Annuity........................................................................
Supplemental Term Insurance Rider...................................................................................
Federal Income Tax Considerations...................................................................................
Introduction............................................................................................
Tax Status of the Policy................................................................................
Tax Treatment of Policy Benefits........................................................................
In General..................................................................................
Modified Endowment Contracts................................................................
Distributions Other Than Death Benefits from Modified Endowment Contracts...................
Distributions Other Than Death Benefits from Policies that are not
Modified Endowment Contracts.............................................................
Investment in the Policy....................................................................
Policy Loan Interest........................................................................
Multiple Policies...........................................................................
Business Uses of the Policy.................................................................
Continuation Beyond Age 100.................................................................
Special Rules for Employee Benefit Plans................................................................
Possible Tax Law Changes....................................................................
Possible Changes for National Life's Taxes..................................................
Legal Developments Regarding Unisex Actuarial Tables................................................................
Voting Rights.......................................................................................................
Changes in Applicable Law, Funding and Otherwise....................................................................
Officers and Directors of National Life.............................................................................
Distribution of Policies............................................................................................
</TABLE>
v
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
<S> <C>
Policy Reports ............................................................................................
Third Party Administrator...........................................................................................
State Regulation....................................................................................................
Experts.............................................................................................................
Legal Matters.......................................................................................................
Financial Statements................................................................................................
Glossary............................................................................................................
Appendix A-Illustration of Death Benefits, Account Values and
Net Cash Surrender Values...............................................................................A-1
Financial Statements................................................................................................F-1
</TABLE>
THE POLICY MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT OFFER
THE POLICY IN ANY STATE IN WHICH WE MAY NOT LEGALLY OFFER THE POLICY. YOU SHOULD
RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. WE DO NOT CLAIM THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
vi
<PAGE> 8
SUMMARY DESCRIPTION OF THE POLICY
You should read this summary of the policy provisions together with the
detailed information appearing later in this Prospectus. Unless otherwise noted,
this Prospectus assumes the Insured is alive. The precise meanings of the few
capitalized terms used in this summary can be found in the Glossary, on pages 42
to 46.
THE POLICY OFFERED
The Sentinel Benefit Provider flexible premium variable universal life
insurance policy offered by this Prospectus is issued by National Life. Its
primary market is the corporate market. The policy allows you, subject to
certain limitations, to make premium payments in any amount and whenever you
like. As long as the policy remains in force, it will provide for:
(1) Life insurance coverage on the named insured person;
(2) A cash surrender value; and
(3) Surrender and withdrawal rights and policy loan privileges; and
(4) A variety of additional insurance benefits.
Life insurance is a long-term investment. You should consider your need
for insurance coverage and the policy's investment potential on a long-term
basis.
There is no fixed schedule for premium payments. You may, within limits,
increase or decrease the Face Amount and, if you have selected the Guideline
Premium Test to determine compliance with federal income tax law (see "Federal
Income Tax Law Compliance Test Options", page 17), you may change the Death
Benefit Option. The policy's value will fluctuate based on the investment
results of the chosen fund portfolios, as well as other factors. The death
benefit may also rise and fall, but not below the face amount as long as the
policy remains in force.
The failure to pay any particular amounts of premiums will not itself
cause the policy to lapse. Conversely, the payment of premiums in any amount or
frequency will not necessarily guarantee that the policy will remain in force.
In general, the Policy will lapse if it does not have enough value to pay the
monthly charges as they become due. During the first five years, the policy will
not lapse even if its value is not enough to pay the monthly charges as they
become due, if at least specified amounts of premiums have been paid (these
amounts are defined in the Glossary as the Cumulative Minimum Monthly Premium).
THE SEPARATE ACCOUNT
The National Variable Life Insurance Account is divided into subaccounts,
twenty-three of which are available under this policy. Each of these subaccounts
purchases shares of a designated corresponding Portfolio that is part of one of
the following Funds: the Market Street Fund, the Alger American Fund, the
American Century Variable Portfolios, Inc., the Goldman Sachs Variable Insurance
Trust, the J.P. Morgan Series Trust II, the Neuberger Berman Advisers Management
Trust, managed by Neuberger Berman Management Incorporated, the Strong Variable
Insurance Funds, Inc., and Strong Opportunity Fund II, managed by Strong Capital
Management, Inc. and the Deutsche Asset Management VIT Funds, managed by
Bankers Trust Company. There is no assurance that the investment objectives of
a particular Portfolio will be met. You bear the entire investment risk on the
value of your policy.
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<PAGE> 9
AVAILABILITY OF POLICY
This Policy can be issued for Insureds with Issue Ages of at least 20.
The insured person must be 85 years old or younger for policies underwritten on
the basis of full medical underwriting (65 or younger for guaranteed issue and
simplified issue). The Minimum Face Amount per Policy is $5000. The Minimum
Initial Premium per set of Policies purchased at the same time and associated
with a corporation or its affiliates, a trust or a partnership, or for a Policy
sold to an individual, is $50,000. The Policies are available on a full medical
underwriting basis, a simplified issue basis, or a guaranteed issue basis.
Before issuing a Policy on a full medical underwriting basis, we will require
that the person to be insured meets certain underwriting standards satisfactory
to us. The rate classes available are Male non-smoker, Female non-smoker,
Unisex non-smoker, Male smoker, Female smoker, Unisex smoker, Male unismoker,
female unismoker, and Unisex unismoker. (See "Issuance of a Policy," Page 21.)
In simplified issue cases, the application will ask 3 medical questions about
the person to be insured.
THE DEATH BENEFIT
As long as the Policy remains in force, we will pay the death benefit to
the beneficiary when we receive proof of the insured person's death. When you
purchase the policy, you must choose between two different death benefit
compliance tests used to qualify the policy as life insurance under the Internal
Revenue Code: the cash value accumulation test or the guideline premium test.
Once chosen, the death benefit compliance test that applies to the Policy cannot
be changed. If the Guideline Premium Test is chosen, then two death benefit
options are available. Option A provides for the greater of (a) the policy's
face amount and (b) the Death Benefit Factor times the Cash Surrender Value.
Option B provides for the greater of (a) the policy's face amount plus the
Account Value and (b) the Death Benefit Factor times the Cash Surrender Value.
(See "Death Benefit Options," Page 17). If the cash value accumulation test is
chosen, only Option A is available. The total death benefit will be the amount
provided for under Option A or Option B, plus any dividends payable and any
coverage provided by the optional term rider, and minus any outstanding policy
loans and accrued interest, and any unpaid monthly charges.
FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
You will have the ability to increase or decrease the face amount of the
policy. If you have elected the guideline premium test to qualify the policy as
life insurance for federal income tax purposes, you will also be able to change
the death benefit option from Option A to Option B, or from Option B to Option
A. (See "Change in Death Benefit Option," Page 18, and "Ability to Adjust Face
Amount," Page 19.)
Any change in death benefit option or in the face amount may affect the
charges under the policy. Any increase in the face amount will result in an
increase in monthly charges, since the policy will be providing more insurance
coverage. A decrease in face amount may also change the monthly deductions. (See
"Cost of Insurance Charge," Page 24.)
If you have elected the guideline premium test and you request a decrease
in face amount that would result in total premiums exceeding the maximum premium
limitations applicable under the Internal Revenue Code for life insurance, we
will not allow the decrease.
ACCOUNT VALUE
The Account Value is the total amount of value held in your policy at any
time. It equals the sum of the amounts held in the subaccounts of the separate
account, plus amounts held in the Loan Account. (See "Calculation of Account
Value," Page 21.)
The Account Value in the separate account will reflect the investment
performance of the chosen funds, any premiums paid, any transfers, any
withdrawals, any loans, any loan repayments, any loan interest charged and any
charges assessed on the policy. You bear the entire investment risk for amounts
in the separate account. There is no guaranteed minimum for the portion of the
Account Value in the separate account. Account Value in
2
<PAGE> 10
the separate account may be more or less than the premiums allocated to the
separate account.
The Account Value in the Loan Account will reflect any amounts
transferred from the separate account as collateral for policy loans, plus
interest at 4%. The Loan Account will be reduced by loan repayments. (See "Loan
Privileges," Page 27.)
The Account Value affects the death benefit and the level of cost of
insurance charges.
ALLOCATION OF NET PREMIUMS
Net premiums (that is, premiums you pay minus the deductions we make from
premium payments) will generally go to the subaccounts of the separate account
in accordance with the percentages you have specified, either in the application
or as subsequently changed. Account Value cannot be allocated to more than ten
subaccounts at any one time.
Any net premiums received before the end of the "free look" period will
go initially to the Money Market Subaccount. For this purpose we will assume
that the free look period will end on the earliest of (a) the end of the tenth
day following receipt of the Policy by you, if we receive at our Home Office a
signed delivery receipt for the Policy on or before that date; (b) the end of
the day on which we receive at the Home Office a signed delivery receipt for
the Policy, if on or between the eleventh and nineteenth days after the date
the Policy is issued; or (c) 20 days after the date the Policy is issued. On
the first Valuation Date on or after the earliest of the dates forth above,
whichever is sooner, the amount in the Money Market Subaccount (including
investment experience) will go to each of the chosen subaccounts based on your
chosen percentages. (See "Allocation of Net Premiums," Page 23.)
TRANSFERS
You may transfer the amounts in the subaccounts of the separate account
among the subaccounts on any business day. Transfer requests must be in writing
and in a form acceptable to us. Currently you are allowed an unlimited number of
transfers without charge. However, we may in the future impose a maximum charge
of $25 on each transfer in excess of twelve transfers in any one year. (See
"Transfers," Page 23.)
FREE-LOOK PRIVILEGE
The policy provides for an initial "free-look" period, during which you
may cancel the policy and receive a refund equal to the premiums paid on your
policy. This free-look period ends on the later of the end of the tenth day
after you receive the policy, or any longer period provided by state law. To
cancel the policy, you must return the policy to National Life or to an agent of
National Life within this period with a written request for cancellation. (See
"Free-Look Privilege," Page 30.)
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<TABLE>
<CAPTION>
CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Summary of Policy Expenses.
<S> <C>
Transaction Expenses
Premium Loads (as a percentage of premiums paid)...Year 1: 13% of premiums paid up to the Target
Premium, 0.5% of premiums paid in excess of
Target Premium;
Years 2 to 7: 15% of premiums paid up to Target
Premium, 2.5% of premiums paid in excess of
Target Premium; and
Years 8 and thereafter: 5% of premiums paid up
to Target Premium, 2.5% of premiums paid in
excess of Target Premium;
in each case plus an amount equal to the state and
local premium taxes actually assessed by the
jurisdiction in which the insured person resides.
Transfer Charge....................................No current charge(1)
Daily Charges
Mortality and Expense Risk Charge..................For years 1 - 7: 0.22% of Account Value in the
separate account
For years 8 -10: 0.12% of Account Value in the
separate account
For years 11-20: 0.02% of Account Value in the
separate account
For year 21 and thereafter: 0.00% of
Account Value in the separate account(2)
Separate Account Administration
Charge 0.10% of Account Value in the separate account
per year
Monthly Deductions
Cost of Insurance Charge Varies by age, sex, rate class-See below
Policy Administration Charge.......................$66 per year(3)
Underwriting Charge $20 in the first year, $45 in each of years 2 - 5;
only applies to policies issued on the basis of full
medical underwriting.
Supplemental Term Insurance Rider
Charge.............................................Varies by age, sex, rate class-See below
=============================================================================================================================
</TABLE>
(1) We reserve the right to impose in the future a transfer charge of up to $25
for each transfer in excess of twelve transfers in any year.
(2) We reserve the right to increase the Mortality and Expense Risk Charge to
rates up to 0.60% annually of Account Value in the separate account at any time.
(3) We reserve the right to increase the Policy Administration Charge up to an
amount equal to $96 per year.
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<PAGE> 12
Annual Charges of Underlying Funds (for the year ended December 31, 1999 and
after expense reimbursement.)(1)
<TABLE>
<CAPTION>
Management Other Total
Fee, after expense Expenses, Expenses,
reimbursement after expense after expense
reimbursement rembursement
<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%
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 0.60% 0.60% 1.20%
Portfolio
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%
Deutsche Asset Management VIT Funds
Equity 500 Index Fund 0.20% 0.10% 0.30%
Small Cap Index Fund 0.35% 0.10% 0.45%
EAFE Equity Index Fund(R) 0.45% 0.20% 0.65%
</TABLE>
(1) The fund expenses shown above are assessed at the underlying fund
level and are not direct charges against the subaccounts. These underlying fund
expenses are taken into consideration in computing each underlying fund's net
asset value, which is the share price used to calculate the unit values of the
subaccounts. The management fees and other expenses are more fully described in
the prospectuses for each individual underlying fund. The information relating
to the underlying fund expenses was provided by the underlying funds. We did not
independently verify it. In the absence of any voluntary fee waivers or expense
reimbursements, the management fees, other expenses, and total expenses of the
funds listed below would have been as follows:
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEES EXPENSES EXPENSES
<S> <C> <C> <C>
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%
Deutsche VIT Equity 500 Index Fund 0.20% 0.23% 0.43%
Deutsche VIT Small Cap Index Fund 0.35% 0.83% 1.18%
Deutsche VIT EAFE Equity Index Fund 0.45% 0.70% 1.15%
</TABLE>
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<PAGE> 13
We anticipate that these reimbursement arrangements will continue, but
there are no legal obligations to continue these arrangements for any particular
period of time. If they are terminated, the affected portfolios' expenses may
increase.
Information with respect to the expenses of certain underlying funds we
anticipate substituting for other funds later in the year is set forth below.
No information is shown for the four series of Sentinel Variable Products Fund,
Inc. because the registration statement for that Fund has not yet become
effective.
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL MUTUAL
FEES EXPENSES FUND EXPENSES
<S> <C> <C> <C>
Fidelity VIP Overseas Portfolio 0.73% 0.14% 0.87%
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>
Premium Loads. We will deduct a Premium Load from each premium payment.
The Premium Load consists of the Distribution Charge and the Premium Tax Charge.
The Distribution Charge is equal to, in the first year, 13% of the premiums paid
during the year up to the Target Premium, and 0.5% of premiums paid in excess of
the Target Premium. In the second through seventh years, the Distribution Charge
is equal to 15% of premiums paid during a year up to the Target Premium, and
2.5% of premiums paid in excess of the Target Premium in a year. After the
seventh year, the Distribution Charge will be 5% of premiums paid during a year
up to the Target Premium, and 2.5% of premiums paid in excess of the Target
Premium in a year.
The Premium Tax Charge will vary from state to state, and will be equal
to the actual amount of premium tax assessed in the jurisdiction in which the
insured person resides. (See "Premium Loads," Page 24.)
Monthly Deductions. Starting on the day the policy is issued and in each
following month, we will assess the Cost of Insurance Charge, the Policy
Administration Charge, and, for policies issued on the basis of full medical
underwriting, the Underwriting Charge. Any applicable charge for the Term Rider
will also be assessed monthly. The monthly Cost of Insurance Charge will be
determined by multiplying the Net Amount at Risk by the applicable cost of
insurance rate(s). See "Cost of Insurance Charge," Page 31. The Policy
Administration Charge is $5.50 per month, This Charge may be changed but is
guaranteed never to be greater than $8.00 per month. (See "Policy Administration
Charge," Page 25.)
If a policy is issued with full medical underwriting. we will assess an
Underwriting Charge each month in the first five years. The Underwriting Charge
totals $20 in Policy Year 1, and $45 in each of the next four Policy Years.
Policies issued on the basis of guaranteed issue or simplified issue will not be
assessed an Underwriting Charge. (See "Underwriting Charge", page 25).
Daily Charges Against the Separate Account. We will assess a daily charge
for our assumption of certain mortality and expense risks we accept on the
Policy. The current annual rates are set forth below.
For years 1 - 7: 0.22% of Account Value in the separate account
For years 8 -10: 0.12% of Account Value in the separate account
For years 11-20: 0.02% of Account Value in the separate account; and
For year 21 and thereafter: 0.00% of Account Value in the separate
account.
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<PAGE> 14
We may increase the above rates for the Mortality and Expense Risk Charge, but
the charge is guaranteed not to exceed 0.60% of Account Value in the separate
account at all times. (See "Mortality and Expense Risk Charge," Page 26.)
We also assess a daily separate account administration charge to cover
the expense of separate account administration. The annual rate of this charge
is 0.10% of Account Value in the separate account. (See "Separate Account
Administration Charge", page 26).
Transfer Charge. Currently you are allowed an unlimited number of
transfers without charge. We have no current intent to impose a transfer charge
in the foreseeable future; however, we reserve the right to impose in the future
a charge of up to $25 for each transfer in excess of twelve transfers in any
year. (See "Transfer Charge," Page 26.)
Other Charges. The subaccounts of the separate account purchase shares of
the funds at net asset value, which reflects management fees and expenses
deducted from the assets of the funds.
Allocation of Charges to the Subaccounts. All of the above charges will
be allocated to the subaccounts of the separate account based on the proportion
that each subaccount's value bears to the total Account Value in the separate
account.
POLICY LAPSE AND REINSTATEMENT
During the first five Policy Years, a policy will not lapse if premiums
in a specified amount (defined in the Glossary as the Cumulative Minimum Monthly
Premium) have been paid, no matter what happens to the value of the policy. If,
however, the specified premiums have not been paid or the policy is more than
five years old, and the policy's value is not enough to pay the monthly charges
as they become due, the policy will lapse after a 61-day grace period unless a
sufficient premium is paid.
You may reinstate a lapsed policy at any time within five years after the
beginning of the grace period, if you meet certain conditions, including
providing evidence of insurability satisfactory to us and the payment of a
sufficient premium. (See "Reinstatement," Page 24.)
LOAN PRIVILEGE
You may borrow against the policy. The maximum amount of all loans is the
Net Account Value less three times the next monthly deduction, and less the loan
interest due until the next policy anniversary. Policy loans and repayments may
be taken or made on any business day.
Policy loans will bear interest at the following fixed rates:
For years 1 - 7: 4.60%
For years 8 - 10: 4.50%
For years 11 - 20: 4.40%
For year 21 and thereafter: 4.35%.
Interest is payable at the end of each policy year. If interest is not
paid when due, it will be added to the outstanding loan balance. You may repay
policy loans at any time and in any amount. When the death benefit becomes
payable or the policy is surrendered we will deduct policy loans and accrued
interest from the proceeds otherwise payable.
When you take a policy loan, we will hold Account Value in the Loan
Account as collateral for the Policy loan. We will take Account Value from the
subaccounts of the separate account in proportion to the values in the
subaccounts. Account Value held in the Loan Account as collateral will earn
interest at an effective annual rate of 4%. (See "Loan Privileges," Page 27.)
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<PAGE> 15
Loans may cause a policy to lapse, depending upon the investment
performance of the Account Value and the amount of the loan. If a policy is not
a Modified Endowment Contract, lapse of a policy with loans outstanding may
result in adverse tax consequences. (See "Tax Treatment of Policy Benefits,"
Page 34.)
WITHDRAWAL OF NET ACCOUNT VALUE
After the first policy anniversary, you may request a withdrawal of Net
Account Value on any business day. The withdrawal amount will be taken from the
subaccounts of the separate account in proportion to the values in the
subaccounts. If the guideline premium test for federal tax law compliance and
death benefit option A are in effect, we will reduce the face amount of the
policy by an amount equal to the lesser of (a) the amount of the withdrawal and
(b) the excess of the face amount plus any term insurance amount provided by the
Term Rider, divided by the Death Benefit Factor, over the Cash Surrender Value
just after the withdrawal, but in any case not less than zero. If death benefit
option B is in effect, the withdrawal will not decrease the face amount. If the
cash value accumulation test is in effect, the withdrawal will result in a
decrease in the face amount plus any term insurance amount provided by the Term
Rider of an amount equal to the withdrawal amount times 1.00327374 (See
"Withdrawal of Net Account Value," Page 28.)
If a requested withdrawal would reduce the face amount below $5000, the
withdrawal will not be allowed.
SURRENDER OF THE POLICY
You may at any time fully surrender your policy and receive the Net Cash
Surrender Value, if any, which will take into account any outstanding policy
loans and accrued interest (See "Surrender Privilege," Page 28.)
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 Management Features," Page __.
TAX TREATMENT
We believe that a Policy issued on a standard rate class basis generally
should meet the Section 7702 definition of a life insurance contract. For
policies issued on a substandard basis, there is insufficient guidance to
determine if such a policy would in all situations satisfy the Section 7702
definition of a life insurance contract. Assuming that a policy qualifies as a
life insurance contract for Federal income tax purposes, you should not be
deemed to be in constructive receipt of value under your policy until there is a
distribution from the policy. Moreover, death benefits payable under a policy
should be completely excludable from the gross income of the beneficiary. As a
result, the beneficiary generally should not be taxed on these proceeds. (See
"Tax Status of the Policy," Page 33.)
Under certain circumstances, a policy may be treated as a "Modified
Endowment Contract." If a policy is a Modified Endowment Contract, then all
pre-death distributions, including policy loans, will be treated first as a
distribution of taxable income and then as a return of basis or investment in
the contract. In addition, prior to age 59-1/2 any distributions generally will
be subject to a 10% penalty tax. (For further discussion on the circumstances
under which a Policy will be treated as a Modified Endowment Contract, See "Tax
Treatment of Policy Benefits," Page 34.)
If a policy is not a Modified Endowment Contract, distributions generally
will be treated first as a return of basis or investment in the contract and
then as disbursing taxable income. Moreover, loans will not be treated as
distributions. Finally, neither distributions nor loans from a policy that is
not a Modified Endowment Contract are subject to the 10% penalty tax. (See
"Distributions from Policies Not Classified as Modified Endowment Contracts,"
Page 35.)
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<PAGE> 16
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUE AND NET CASH SURRENDER VALUE
Illustrations of how investment performance of the separate account may
cause the death benefit, the Account Value and the Net Cash Surrender Value to
vary are included in Appendix A commencing on Page A-1.
These illustrations of hypothetical values may help you to understand the
long-term effects of different levels of investment performance, of charges and
deductions, of electing one or the other death benefit option or death benefit
compliance test, and generally comparing and contrasting this policy to other
life insurance policies. Nonetheless, the illustrations are based on
hypothetical investment rates of return. THEY ARE NOT GUARANTEED. Illustrations
are not a representation of past or future performance. Actual rates of return
may be more or less than those reflected in the illustrations and, therefore,
actual values will differ from those illustrated.
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<PAGE> 17
The following detailed description of the policy uses certain precise
terms which are capitalized. These terms have the meanings set out in the
Glossary, on pages 42 to 46.
NATIONAL LIFE INSURANCE COMPANY, THE SEPARATE ACCOUNT,
AND THE FUNDS.
NATIONAL LIFE INSURANCE COMPANY
National Life Insurance Company ("National Life", or "we"), is authorized
to transact life insurance and annuity business in Vermont and in 50 other
jurisdictions. National Life was originally chartered as a mutual life
insurance company in 1848 under Vermont law. It is now a stock life insurance
company, all of the outstanding stock of which is indirectly owned by National
Life Holding Company, a mutual insurance holding company established under
Vermont law on January 1, 1999. All policyholders of National Life, including
all the Owners of the Policies, are voting members of National Life Holding
Company. National Life assumes all insurance risks under the Sentinel Benefit
Provider policy offered by this Prospectus (the "Policy") and its assets
support the Policy's benefits. On December 31, 1999, National Life's
consolidated assets were over $9.4 billion. (See "Financial Statements,"
Page F-1.)
THE SEPARATE ACCOUNT
The National Variable Life Insurance Account (the "Separate Account") was
established by National Life on February 1, 1985 under the provisions of the
Vermont Insurance Law. It is a separate investment account to which assets are
allocated to support the benefits payable under the Policies, other variable
life insurance policies National Life currently issues, and other variable life
insurance policies National Life may issue in the future.
The Separate Account's assets are the property of National Life. Each
Policy provides that the portion of the Separate Account's assets equal to the
reserves and other liabilities under the Policies (and other policies) supported
by the Separate Account will not be chargeable with liabilities arising out of
any other business that National Life may conduct. The portion of the Separate
Account's assets equal to the reserves and other liabilities under the Policies
may, however, be chargeable with liabilities arising from other subaccounts of
the Separate Account that fund other variable life insurance policies. In
addition to the net assets and other liabilities for the Policies (and other
policies), the Separate Account's net assets include amounts derived from
expenses charged to the Policies (and the other policies) by National Life which
it currently holds in the Separate Account, and may in the future include
amounts held to support other variable life insurance policies issued by
National Life. From time to time these additional amounts will be transferred in
cash by National Life to its general account.
The Separate Account is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act") as a
unit investment trust type of investment company. Such registration does not
involve any supervision of the management or investment practices or policies of
the Separate Account by the SEC. The Separate Account meets the definition of a
"Separate Account" under Federal securities laws.
You may choose among the Subaccount options described below. However, a
Policy may not allocate Account Value to more than ten Subaccounts at any one
time.
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<PAGE> 18
THE MARKET STREET FUND
The Growth, Sentinel Growth, Aggressive Growth, Bond, Managed,
International, and Money Market Subaccounts of the Separate Account invest in
shares of The Market Street Fund, Inc., a "series" type of mutual fund which is
registered with the SEC under the 1940 Act as a diversified open-end management
investment company. The Market Street Fund currently issues seven "series" or
classes of shares, each representing an interest in a separate portfolio within
the Fund, which are purchased and redeemed by the corresponding Subaccounts of
the Separate Account: the Growth Portfolio, the Sentinel Growth Portfolio, the
Aggressive Growth Portfolio, the Bond Portfolio, the Managed Portfolio, the
International Portfolio and the Money Market Portfolio. The Market Street Fund
sells and redeems its shares at net asset value without a sales charge.
The investment objectives of the Market Street Fund's Portfolios eligible
for purchase by the Separate Account are set forth below. The investment
experience of each of the Subaccounts of the Separate Account depends on the
investment performance of the corresponding Portfolio. There is no assurance
that any Portfolio will achieve its stated objective.
The Growth Portfolio. The Growth Portfolio seeks intermediate and
long-term growth of capital. A reasonable level of income is an important
secondary objective. This Portfolio pursues its objectives by investing
primarily in common stocks of companies believed to offer above-average growth
potential over both the intermediate and the long term.
The Sentinel Growth Portfolio. The Sentinel Growth Portfolio seeks
long-term growth of capital through equity participation in companies having
growth potential believed by its investment adviser to be more favorable than
the U.S. economy as a whole, with a focus on relatively well-established
companies.
The Aggressive Growth Portfolio. The Aggressive Growth Portfolio seeks to
achieve a high level of long-term capital appreciation by investing in
securities of a diverse group of smaller emerging companies.
The Bond Portfolio. The Bond Portfolio seeks to generate a high level of
current income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
The Managed Portfolio. The Managed Portfolio seeks to realize as high a
level of long-term total rate of return as is consistent with prudent investment
risk by investing in stocks, bonds, money market instruments or a combination
thereof.
The International Portfolio. The International Portfolio seeks long-term
growth of capital principally through investments in a diversified portfolio of
marketable equity securities of established non-United States companies.
The Money Market Portfolio. The Money Market Portfolio seeks to provide
maximum current income consistent with capital preservation and liquidity by
investing in high-quality money market instruments.
With respect to the Growth, Sentinel Growth, Aggressive Growth, Bond,
Managed and Money Market Portfolios, the Market Street Fund is advised by
Sentinel Advisors Company ("SAC"), which is registered with the SEC as an
investment adviser under the Investment Advisers Act of 1940. SAC is a
partnership whose partners are affiliates of National Life, Provident Mutual
Life Insurance Company ("Provident Mutual"), and The Penn Mutual Life Insurance
Company. National Life's affiliate is currently the managing partner of SAC and
is entitled to the majority share of SAC's profit or loss. With respect to the
International Portfolio, the Market Street Fund is advised by Providentmutual
Investment Management Company ("PIMC"), which is also registered with the SEC as
an investment adviser under the Investment
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<PAGE> 19
Advisers Act of 1940. PIMC has employed The Boston Company Asset Management,
Inc. to provide investment advisory services in connection with the Portfolio.
A full description of the Market Street Fund, its investment objectives
and policies, its risks, expenses, and all other aspects of its operation is
contained in the attached Prospectus for the Market Street Fund, which should be
read together with this Prospectus.
ALGER AMERICAN FUND
The Separate Account has two Subaccounts which invest exclusively in
shares of Portfolios of the Alger American Fund. Like the Market Street Fund and
the VIP Fund, the Alger American Fund is a "series" type mutual fund registered
with the SEC as a diversified open-end management investment company issuing a
number of series of shares, each of which represents an interest in a
Portfolio of the Alger American Fund.
The Alger Small Cap Subaccount and the Alger Growth Subaccount of the
Separate Account invest in shares of the Alger American Small Capitalization
Portfolio and the Alger American Growth Portfolio, respectively, of the Alger
American Fund. Shares of these Portfolios are purchased and redeemed by the
Separate Account at net asset value without a sales charge
The investment objectives of the Portfolios of the Alger American Fund in
which the Subaccounts invest are set forth below. The investment experience of
each Subaccount depends upon the investment performance of the corresponding
Portfolio. There is no assurance that any Portfolio will achieve its stated
objective.
Alger American Small Capitalization Portfolio. This Portfolio seeks
long-term capital appreciation by focusing on small, fast-growing companies that
offer innovative products, services or technologies to a rapidly expanding
marketplace. Under normal circumstances, the portfolio invests primarily in the
equity securities of small capitalization companies.
Alger American Growth Portfolio. This Portfolio seeks long-term capital
appreciation by focusing on growing companies that generally have broad product
lines, markets, financial resources and depth of management. Under normal
circumstances, the portfolio invests primarily in the equity securities of large
companies. The portfolio considers a large company to have a market
capitalization of $1 billion or greater.
The Alger American Small Capitalization Portfolio and the Alger American
Growth Portfolio are managed by Fred Alger Management, Inc.
A full description of the Alger American Fund, the investment objectives
and policies of the Portfolios, the risks, expenses and all other aspects of
their operation is contained in the attached Prospectus for the Alger American
Fund.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of the VP Value portfolio, and one Subaccount which invests exclusively
in shares of VP Income & Growth portfolio, each of which are series of American
Century Variable Portfolios, Inc. American Century Variable Portfolios, Inc. is
a "series" type mutual fund registered with the SEC as a diversified open-end
management investment company issuing a number of series or classes of shares,
each of which represents an interest in a portfolio of American Century
Variable Portfolios, Inc.
The American Century VP Value Subaccount and the American Century VP
Income & Growth Subaccount of the Variable Account invest in shares of the
VP Value portfolio and the VP Income & Growth portfolio, respectively, of the
American Century Variable Portfolios, Inc. Shares of these Portfolios will be
purchased and redeemed by the Variable Account at net asset value without a
sales charge.
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<PAGE> 20
The investment objectives of the Portfolios of American Century Variable
Portfolios, Inc. in which the Subaccounts are expected to invest are set forth
below. The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that either
Portfolio will achieve its stated objective.
VP Value. To seek long-term capital growth. Income is a secondary
objective. The Portfolio will seek to achieve its investment objective by
investing in securities that management believes to be undervalued at the time
of purchase.
VP Income & Growth. To seek dividend growth, current income and capital
appreciation. The Portfolio will seek to achieve its investment objective by
investing in common stocks.
The VP Value Portfolio and the VP Income & Growth Portfolio of the
American Century Variable Portfolios, Inc. are managed by American Century
Investment Management, Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and all other
aspects of their operation is contained in the attached Prospectuses for VP
Value and VP Income & Growth.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
The Variable Account has four Subaccounts which invest exclusively in
shares of the following four Portfolios of Goldman Sachs Variable Insurance
Trust: the International Equity Fund, the Global Income Fund, the CORE Small
Cap Value Fund. Goldman Sachs Variable Insurance Trust ("Goldman Sachs VIT") is
registered with the SEC as an open-end management investment company that offers
shares in 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 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
Investment Objective: 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
Investment Objective: Seeks a high-total return, emphasizing current
income and, to a lesser extent, providing opportunities for capital
appreciation. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and enters into transactions
in foreign currencies.
GOLDMAN SACHS VIT CORE SMALL CAP EQUITY FUND
Investment Objective: 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
Investment Objective: 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
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<PAGE> 21
J.P. MORGAN SERIES TRUST II
The Variable Account has one Subaccount which invests exclusively in
shares of the J.P. Morgan International Opportunities Portfolio, and one
Subaccount which invests exclusively in shares of J.P. Morgan Small Company
Portfolio, each of which are series of J.P. Morgan Series Trust II. J.P. Morgan
Series Trust II is a "series" type mutual fund registered with the SEC as a
diversified open-end management investment company issuing a number of series
or classes of shares, each of which represents an interest in a Portfolio of
J.P. Morgan Series Trust II.
The J.P. Morgan International Opportunities Subaccount and the J.P.
Morgan Small Company Subaccount of the Variable Account invest in shares of the
J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small
Company Portfolio, respectively, of the J.P. Morgan Series Trust II. Shares of
these Portfolios will be purchased and redeemed by the Variable Account at net
asset value without a sales charge.
The investment objectives of the J.P. Morgan Series Trust II Portfolios
in which the Subaccounts invest are set forth below. The investment experience
of each Subaccount depends upon the investment performance of the underlying
Portfolio. There is no assurance that either Portfolio will achieve its stated
objective.
J.P. Morgan International Opportunities Portfolio. Seeks to provide a
high total return from a portfolio comprised of equity securities of foreign
corporations. The Portfolio is designed for investors with a long-term
investment horizon who want to diversify their investments by adding
international equities and take advantage of investment opportunities outside
the U.S. As an international investment, the Portfolio is subject to foreign
market, political, and currency risks.
J.P. Morgan Small Company Portfolio. Seeks to provide a high total return
from a portfolio comprised of equity securities of small companies. The
Portfolio invests at least 65% of the value of its total assets in the common
stock of small U.S. companies primarily with market capitalizations of less than
$1 billion. The Portfolio is designed for investors who are willing to assume
the somewhat higher risk of investing in small companies in order to seek a
higher return over time than might be expected from a portfolio of large
companies.
The J.P. Morgan International Opportunities Portfolio and the J.P. Morgan
Small Company Portfolio of the J.P. Morgan Series Trust II are managed by J.P.
Morgan Investment Management Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and all other
aspects of their operation is contained in the attached Prospectuses for the
J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small
Company Portfolio.
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
The Variable Account has one Subaccount which invests exclusively in
shares of the Partners Portfolio, a series of Neuberger Berman Advisers
Management Trust. Neuberger Berman Advisers Management Trust ("AMT") is
registered with the SEC as a diversified open-end management investment company.
AMT has nine separate series, which are called Portfolios. Shares of each
Portfolio represent an interest in that Portfolio.
The Neuberger & Berman AMT Partners Subaccount of the Variable Account
invests in shares of the Partners Portfolio of Neuberger & Berman Advisers
Management Trust. Shares of this Portfolio will be purchased and redeemed by
the Variable Account at net asset value without a sales charge.
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<PAGE> 22
The investment objectives of the Partners Portfolio are set forth below.
The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that the
Portfolio will achieve its stated objective.
Partners Portfolio. To seek growth of capital. This Portfolio invests
mainly in common stock of mid-to large-capitalization companies. Its investment
co-managers seek securities believed to be undervalued based on fundamentals
such as low price-to-earnings ratios, consistent cash flows, and the company's
track record through all points of the market cycle. The Portfolio generally
considers selling a stock when it reaches the managers' target price, when it
fails to perform as expected, or when other opportunities appear more
attractive. The Portfolio has the ability to change its goal without shareholder
approval, although it does not currently intend to do so.
The Partners Portfolio of Neuberger Berman Advisers Management Trust is
managed by Neuberger Berman Management Inc. Neuberger Berman LLC is the
sub-adviser. A full description of this Portfolio, its investment objectives and
policies, and the risks, expenses and all other aspects of its operation is
contained in the attached Prospectus for the Partners Portfolio of Neuberger
Berman Advisers Management Trust.
STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of the Mid Cap Growth 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, each of
which represents an interest in a Portfolio of Strong Variable Insurance Funds,
Inc., and Strong Opportunity Fund II is a single series mutual fund also
registered with the SEC as a diversified open-end management investment
company.
The Strong Growth Subaccount and the Strong Opportunity Subaccount of the
Variable Account invest in shares of the Mid Cap Growth Fund II series of the
Strong Variable Insurance Funds, Inc., and the Strong Opportunity Fund II,
respectively. Shares of these Funds will be purchased and redeemed by the
Variable Account at net asset value without a sales charge.
The investment objectives of the Strong Funds in which the Subaccounts
invest are set forth below. The investment experience of each Subaccount depends
upon the investment performance of the underlying 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 all other
aspects of their operation is contained in the attached Prospectuses for the
Mid Cap Growth Fund II and Strong Opportunity Fund II, Inc.
DEUTSCHE ASSET MANAGEMENT VIT FUNDS
The Separate Account has three Subaccounts which invest exclusively in
shares of funds of Deutsche Asset Management VIT Funds. Deutsche Asset
Management VIT Funds is a "series" type mutual fund registered with the SEC as
a diversified open-end management investment company issuing a number of series
of shares, each of which represents an interest in a fund of Deutsche Asset
Management VIT Funds.
The Deutsche VIT Equity 500 Index Subaccount, the Deutsche VIT Small Cap
Index Subaccount and the Deutsche VIT Equity Index Subaccount of the Separate
Account invest in shares of the Equity 500 Index Fund, the Small Cap Index
Fund and the EAFE(R) Equity Index Fund, respectively, of Deutsche Asset
Management VIT Funds. Shares of these funds are purchased and redeemed by the
Separate Account at net asset value without a sales charge.
The investment objectives of the funds of Deutsche Asset Management VIT
Funds in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
corresponding fund. There is no assurance that any fund will achieve its stated
objective.
The Equity 500 Index Fund seeks to match, as closely as possible, before
expenses, the performance of the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index"), which emphasizes stocks of large U.S. companies.
The investment adviser invests in a statistically selected sample of the
securities found in the S&P 500 Index.
The Small Cap Index Fund seeks to match, as closely as possible, before
expenses, the performance of the Russell 2000 Small Stock Index (the "Russell
2000 Index"), which emphasizes stocks of small U.S. companies. The investment
adviser invests in a statistically selected sample of the securities found in
the Russell 2000 Index.
The EAFE(R) Equity Index Fund seeks to match, as closely as possible,
before expenses, the performance of the Morgan Stanley Capital International
(MCSI) EAFE(R) Index ("EAFE(R) Index") which emphasizes stocks of companies in
major markets in Europe, Australia and the Far East performance. The investment
adviser attempts to invest in stocks and other securities that are
representative of the EAFE(R) Index as a whole.
The Equity 500 Index Fund, the Small Cap Index Fund and the EAFE(R)
Equity Index Fund,are managed by Bankers Trust Company.
A full description of Deutsche Asset Management VIT Funds, the investment
objectives and policies of the funds, the risks, expenses and all other aspects
of their operation is contained in the attached Prospectuses for these funds.
Planned Substitution
Before the end of 2000, we anticipate substituting shares of new
portfolios for all seven of the Market Street portfolios and all four of the
Goldman Sachs Variable Insurance Trust portfolios. We discuss certain
information about the proposed substitutions below. You should know, however,
that we cannot proceed with the proposed substitutions until we receive certain
regulatory approvals, and that the details of the substitutions, including the
portfolios offered, may change. We will notify you of the final details,
including the approximate date, at least 30 days in advance of the
substitutions, and we will notify you once the substitutions have occurred.
Before the substitutions, we will send you current prospectuses for the new fund
options including the replacement portfolios.
Below is a chart in which we list the portfolios affected by the
proposed substitutions, the replacement portfolios" investment objectives, and
the investment advisers for the replacement portfolios.
PORTFOLIOS AFFECTED BY THE SUBSTITUTIONS
<TABLE>
<CAPTION>
- ----------------------------------------- --------------------------------------- --------------------------------------
CURRENT PORTFOLIO REPLACEMENT PORTFOLIO REPLACEMENT PORTFOLIO"S
INVESTMENT ADVISER
- ----------------------------------------- --------------------------------------- --------------------------------------
<S> <C> <C>
Market Street Growth Portfolio Sentinel Variable Products Common National Life Investment Management
Stock Fund Company, Inc.
- ----------------------------------------- --------------------------------------- --------------------------------------
Market Street Sentinel Growth Portfolio Sentinel Variable Products Mid Cap National Life Investment Management
Growth Fund Company, Inc.
- ----------------------------------------- --------------------------------------- --------------------------------------
Market Street Aggressive Growth Sentinel Variable Products Small National Life Investment Management
Portfolio Company Fund Company, Inc.
- ----------------------------------------- --------------------------------------- --------------------------------------
Market Street Bond Portfolio Fidelity VIP Investment Grade Bond Fidelity Management & Research
Portfolio Company
- ----------------------------------------- --------------------------------------- --------------------------------------
Market Street Managed Portfolio Neuberger Berman AMT Balanced Neuberger Berman Management Inc.
Portfolio
- ----------------------------------------- --------------------------------------- --------------------------------------
Market Street International Portfolio J.P. Morgan International J.P. Morgan Investment Management,
Opportunities Portfolio Inc.
- ----------------------------------------- --------------------------------------- --------------------------------------
Market Street Money Market Portfolio Sentinel Variable Products Money National Life Investment Management
Market Fund Company, Inc.
- ----------------------------------------- --------------------------------------- --------------------------------------
Goldman Sachs VIT International Equity Fidelity VIP Overseas Portfolio Fidelity Management & Research
Fund Company
- ----------------------------------------- --------------------------------------- --------------------------------------
Goldman Sachs VIT Global Income Fund Fidelity VIP Investment Grade Bond Fidelity Management & Research
Portfolio Company
- ----------------------------------------- --------------------------------------- --------------------------------------
Goldman Sachs VIT CORE Small Cap Equity J.P. Morgan Small Company Portfolio J.P. Morgan Investment Management,
Fund Inc.
- ----------------------------------------- --------------------------------------- --------------------------------------
Goldman Sachs VIT Mid Cap Value Fund American Century VP Value Portfolio American Century Investment
Management, Inc.
- ----------------------------------------- --------------------------------------- --------------------------------------
</TABLE>
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 any of those funds listed above which receive 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.
RESOLVING MATERIAL CONFLICTS
The participation agreements pursuant to which the Funds sell their
shares to Subaccounts of the Separate Account contain varying provisions
regarding termination. In general, each party may terminate a participation
agreement at its option with specified advance written notice, and may also
terminate in the event of specific regulatory or business developments. Should
an agreement between National Life
15
<PAGE> 23
and a Fund terminate, the Subaccounts which invest in that Fund may not be
able to purchase additional shares of such Fund. In that event, you will no
longer be able to transfer Accumulated Values or allocate Net Premiums to
Subaccounts investing in Portfolios of such Fund.
Additionally, in certain circumstances, it is possible that a Fund or a
Portfolio of a Fund may refuse to sell its shares to a Subaccount despite the
fact that the participation agreement between the Fund and National Life has
not been terminated. Should a Fund or Portfolio of such Fund decide not to
sell its shares to National Life, we will not be able to honor your requests
to allocate cash values or net premiums to Subaccounts investing in shares of
that Fund or Portfolio.
The Funds are available to registered separate accounts of insurance
companies, other than National Life, offering variable annuity and variable
life insurance policies. As a result, there is a possibility that a material
conflict may arise between the interests of owners of Policies with Account
Value allocated to the Separate Account and the owners of life insurance
policies and variable annuities issued by such other companies whose values
are allocated to one or more other separate accounts investing in any one of
the Funds.
In the event of a material conflict, National Life will take any
necessary steps, including removing the Separate Account from that Fund, to
resolve the matter. The Board of Directors or Trustees of the Funds intend to
monitor events in order to identify any material conflicts that possibly may
arise and to determine what action, if any, should be taken in response to
those events or conflicts. See the individual Fund Prospectuses for more
information.
OTHER MATTERS RELATING TO THE FUNDS
We have entered into or may enter into agreements with Funds pursuant to
which the adviser or distributor pays National Life a fee based upon an annual
percentage of the average net asset amount invested by National Life on behalf
of the Separate Account and other separate accounts of National Life. These
percentages may differ, and National Life may be paid a greater percentage by
some investment advisers or distributors than other advisers or distributors.
These agreements reflect administrative services provided by National Life.
The investment objectives and policies of certain Portfolios of the Funds
are similar to the investment objectives and policies of mutual fund portfolios
other than the Portfolios that may be managed by the investment adviser or
manager. The investment results of the Portfolios, however, may be higher or
lower than the results of such other portfolios. There can be no assurance, and
no representation is made, that the investment results of any of the Portfolios
will be comparable to the investment results of any other portfolio, even if the
other portfolio has the same investment adviser or manager.
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, the Death Benefit of the
Policy will, upon due proof of the Insured's death (and fulfillment of certain
other requirements), be paid to the named Beneficiary in accordance with the
designated Death Benefit Option, unless the claim is contestable in accordance
with the terms of the Policy. The proceeds may be paid in cash or under one of
the Settlement Options set forth in the Policy. (See "Payment of Policy
Benefits," Page 30.) The Death Benefit payable under Option A will be the
greater of the Face Amount or the Death Benefit Factor times the Cash Surrender
Value on the date of death; under Option B, the Death Benefit will be the
greater of the Face Amount plus the Account Value on the date of death, or the
Death Benefit Factor times the Cash Surrender Value on the date of death, in
each case, plus any Supplemental Term Insurance Amount, less any outstanding
Policy loan and accrued interest, and less any unpaid Monthly Deductions.
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<PAGE> 24
Federal Income Tax Law Compliance Test Options. The Policy must satisfy
either of two death benefit compliance tests in order to qualify as life
insurance under section 7702 of the Internal Revenue Code: the Cash Value
Accumulation Test or the Guideline Premium Test. Each test effectively requires
that the Policy's Death Benefit, plus any outstanding Policy loans and accrued
interest, and any unpaid Monthly Deductions, must always be equal to or greater
than the Cash Surrender Value multiplied by a certain percentage (the "Death
Benefit Factor"). Thus, the Policy has been structured so that the Death Benefit
may increase above the Face Amount in order to comply with the applicable test.
The Death Benefit Factor for the Guideline Premium Test varies only by age, as
shown below:
<TABLE>
<CAPTION>
Death Death
Attained Age Benefit Factor Attained Age Benefit Factor
------------ -------------- ------------ --------------
<S> <C> <C> <C>
40 and under 250% 70 115%
45 215% 75-90 105%
50 185% 91 104%
55 150% 92 103%
60 130% 93 102%
65 120% 94 101%
95+ 100%
</TABLE>
For Attained Ages not shown, the percentages will decrease by a ratable portion
of each full year.
The Death Benefit Factor for the Cash Value Accumulation Test varies by
age and sex, and generally such Death Benefit Factors are different from those
for the Guideline Premium Test. The Guideline Premium Test also imposes maximum
premium limits, whereas the Cash Value Accumulation test does not.
You must select and specify on the application which of the two federal
tax death benefit compliance tests will apply. Once the Policy is issued, you
may not change this selection. In general, where maximum accumulation of Account
Value during the initial Policy Years is a primary objective, the Cash Value
Accumulation Test is more appropriate. If your primary objective is the most
economically efficient method of obtaining a specified amount of coverage, the
Guideline Premium Test is generally more appropriate. You should take into
account in considering the Guideline Premium Test that both Option A and Option
B are available, and that it is possible to change from time to time between
Option A and Option B. Since the selection of the federal tax death benefit
compliance test depends on complex factors and may not be changed, prospective
purchasers of the Policy should consult with a qualified tax adviser before
making this election.
Death Benefit Options. The Policy provides two Death Benefit Options:
Option A and Option B. Policies which use the Guideline Premium Test as the
federal tax death benefit compliance test may select either Death Benefit Option
A or Option B. You designate the Death Benefit Option in the application, and
you may change it as described in "Change in Death Benefit Option," Page 18.
Only Option A is available for Policies which use the Cash Value Accumulation
Test as the federal tax death benefit compliance test.
Option A. The Death Benefit is equal to the greater of (a) the Face
Amount of the Policy and (b) the Cash Surrender Value on the Valuation Date on
or next following the Insured's date of death multiplied by the applicable Death
Benefit Factor, in each case less any outstanding Policy loan and accrued
interest thereon, and less any unpaid Monthly Deductions.
Illustration of Option A -- For purposes of this illustration, assume
that the Insured is under Attained Age 40, the Guideline Premium Test has been
elected, and there is no Policy loan outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will generally
have a Death Benefit of $200,000, assuming no Policy loans outstanding and no
unpaid Monthly Deductions. The Death Benefit Factor for an Insured under
Attained Age 40 on the Policy Anniversary prior to the date of death is 250%.
17
<PAGE> 25
Because the Death Benefit must be equal to or greater than 2.50 times the Cash
Surrender Value, any time the Cash Surrender Value exceeds $80,000 the Death
Benefit will exceed the Face Amount. Each additional dollar added to the Cash
Surrender Value will increase the Death Benefit by $2.50. Thus, a 35 year old
Insured with a Cash Surrender Value of $90,000 will have an Death Benefit of
$225,000 (2.50 x $90,000, and a Cash Surrender Value of $150,000 will have an
Death Benefit of $375,000 (2.50 x $150,000).
Similarly, any time the Cash Surrender Value exceeds $80,000, each dollar
taken out of the Cash Surrender Value will reduce the Death Benefit by $2.50. If
at any time, however, the Cash Surrender Value multiplied by the specified
percentage is less than the Face Amount, the Death Benefit will be the Face
Amount of the Policy.
If the Cash Value Accumulation Test for tax compliance applies to a
Policy, the Death Benefit Factors will be different but the above example
otherwise applies.
Option B. The Death Benefit is equal to the greater of (a) the Face
Amount of the Policy plus the Account Value and (b) the Cash Surrender Value on
the Valuation Date on or next following the Insured's date of death multiplied
by the applicable Death Benefit Factor (shown in the table above), in each case
less any outstanding Policy loan and accrued interest thereon, and less any
unpaid Monthly Deductions. As noted above, Option B is only available for
Policies on which the Guideline Premium Test has been elected.
Illustration of Option B -- For purposes of this illustration, assume
that the Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option B, a Policy with a face amount of $200,000 will generally
have a Death Benefit of $200,000 plus the Cash Surrender Value, assuming no
Policy loans outstanding and no unpaid Monthly Deductions. Thus, for example, a
Policy with a $50,000 Cash Surrender Value will have a Death Benefit of
$250,000 ($200,000 plus $50,000). Since the applicable Death Benefit Factor is
250%, the Death Benefit will be at least 2.50 times the Cash Surrender Value.
As a result, if the Cash Surrender Value exceeds $133,333, the Death Benefit
will be greater than the Face Amount plus the Cash Surrender Value. Each
additional dollar added to the Cash Surrender Value above $133,333 will
increase the Death Benefit by $2.50. An Insured with a Cash Surrender Value of
$150,000 will have a Death Benefit of $375,000 (2.50 x $150,000), and a Cash
Surrender Value of $200,000 will yield a Death Benefit of $500,000 (2.50 x
$200,000). Similarly, any time the Cash Surrender Value exceeds $133,333, each
dollar taken out of the Cash Surrender Value will reduce the Death Benefit by
$2.50. If at any time, however, the Cash Surrender Value multiplied by the
specified percentage is less than the Face Amount plus the Cash Surrender
Value, the Death Benefit will be the Face Amount plus the Cash Surrender Value.
At Attained Age 99, Option B automatically becomes Option A.
Change in Death Benefit Option. After the first Policy Year, the Death
Benefit Option in effect for Policies which have elected the Guideline Premium
Test as the federal tax death benefit compliance test may be changed by sending
National Life a written request. No charges will be imposed to make a change in
the Death Benefit Option. The effective date of any such change will be the
Policy Anniversary on or next following the date we receive the written request.
Only one change in Death Benefit Option is permitted in any one Policy Year.
On the effective date of a change in Death Benefit Option, the Face
Amount is adjusted so that there will be no change in the Death Benefit or the
Net Amount at Risk. In the case of a change from Option B to Option A, the Face
Amount must be increased by the Account Value. In the case of a change from
Option A to Option B, the Face Amount must be decreased by the Account Value.
The change from Option A to Option B will not be allowed if it would reduce the
Face Amount to less than the Minimum Face Amount.
On the effective date of the change, the Death Benefit, Account Value and
Net Amount at Risk (and therefore the Cost of Insurance Charges) are unchanged.
However, after the effective date of the change, the pattern of future Death
Benefits, Account Value, Net Amount at Risk and Cost of Insurance Charges will
be different than if the change had not been made.
18
<PAGE> 26
If a change in the Death Benefit Option would result in cumulative
premiums exceeding the maximum premium limitations under the Internal Revenue
Code for life insurance (such limitations apply only to Policies to which the
Guideline Premium Test for federal income tax law compliance has been elected),
we will not effect the change.
A change in the Death Benefit Option may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 34.)
How the Death Benefit May Vary. The amount of the Death Benefit may vary
with the Account Value in the following circumstances. The Death Benefit under
Option A will vary with the Account Value whenever the Death Benefit Factor
multiplied by the Cash Surrender Value exceeds the Face Amount of the Policy.
The Death Benefit under Option B will always vary with the Account Value because
the Death Benefit equals the greater of (a) the Face Amount plus the Account
Value and (b) the Cash Surrender Value multiplied by the Death Benefit Factor.
ABILITY TO ADJUST FACE AMOUNT
Subject to certain limitations, you may increase or decrease the Policy's
Face Amount by submitting a written application to National Life. The effective
date of an increase will be the Monthly Policy Date on or next following our
approval of the request, and the effective date of a decrease is the Monthly
Policy Date on or next following the date that we receive the written request.
An increase or decrease in Face Amount may have federal tax consequences. (See
"Tax Treatment Of Policy Benefits," Page 34.) The effect of changes in Face
Amount on Policy charges, as well as other considerations, are described below.
The Face Amount, and any change in Face Amount, do not include any coverage
provided by the Term Rider, if it has been elected.
Increase. To obtain an increase in Face Amount, you should submit an
application for the increase. We reserve the right to require evidence
19
<PAGE> 27
satisfactory to us of the Insured's insurability, if the Net Amount at Risk
would increase. For Policies issued on the basis of guaranteed issue
underwriting, increases in Face Amount are limited to a maximum of 10% without
medical underwriting. Automated annual increases in Face Amount of specified
percentages may be elected. You may not increase the Face Amount after the
Insured's Attained Age 85 (Attained Age 65 in the case of guaranteed issue or
simplified issue underwriting).
On the effective date of an increase, and taking the increase into
account, the Net Account Value must be greater than the Monthly Deductions
then due. If the Net Account Value is not sufficient, the increase will not
take effect until you make a sufficient additional premium payment to increase
the Net Account Value.
An increase in the Face Amount will generally affect the total Net Amount
at Risk which will increase the monthly Cost of Insurance Charges. In
addition, the Insured may be in a different Rate Class as to the increase in
insurance coverage. An increase in premium payment or frequency may be
appropriate after an increase in Face Amount. (See "Cost of Insurance Charge,"
Page 24.)
Decrease. By providing a written request, you may decrease the Face
Amount of the Policy. The Face Amount after any decrease may not be less than
the Minimum Face Amount, which is generally currently $5000, or may not be
less than the minimum amount for which the Policy qualify as life insurance
for federal income tax purposes under the Internal Revenue Code.
A decrease in the Face Amount generally will decrease the total Net
Amount at Risk, which will decrease your monthly Cost of Insurance Charges.
For purposes of determining the Cost of Insurance Charge, any decrease in
the Face Amount will reduce the Face Amount in the following order: (a) the
increase in Face Amount provided by the most recent increase; (b) the next
most recent increases, in inverse chronological order; and (c) the Face Amount
on the Date of Issue.
HOW THE DURATION OF THE POLICY MAY VARY
The Policy will remain in force as long as the Net Account Value of the
Policy is sufficient to pay the Monthly Deductions and the charges under the
Policy. When the Net Account Value is insufficient to pay the charges and the
Grace Period expires without an adequate premium payment the Policy will lapse
and terminate without value. Notwithstanding the foregoing, during the first
five Policy Years the Policy will not lapse if, as of the Monthly Policy Date
that the Net Account Value of the Policy first becomes insufficient to pay the
charges, the Cumulative Minimum Monthly Premium has been paid. You have certain
rights to reinstate the Policy, if it should lapse. (See "Reinstatement," Page
24.)
ACCOUNT VALUE
The Account Value is the total amount of value held under the Policy at
any time. It is equal to the sum of the Policy's values in the Separate Account
and the Loan Account. In Policy Years one and two, the Cash Surrender Value is
the Account Value reflecting the Distribution Charge Refund. After the second
Policy Anniversary, the Cash Surrender Value is equal to the Account Value.
There is no guaranteed minimum for the Account Value in any of the Subaccounts
of the Separate Account and, because the Account Value on any future date
depends upon a number of variables, it cannot be predetermined.
The Net Account Value and Net Cash Surrender Value will reflect the Net
Premiums paid, investment performance of the chosen Subaccounts of the Separate
Account, any transfers, any Withdrawals, any loans, any loan repayments, any
loan interest, and charges assessed in connection with the Policy.
Determination of Number of Units for the Separate Account. Amounts
allocated, transferred or added to a Subaccount of the Separate Account under a
Policy are used to purchase units of that
20
<PAGE> 28
Subaccount; units are redeemed when amounts are deducted, transferred or
withdrawn. The number of units a Policy has in a Subaccount equals the number of
units purchased minus the number of units redeemed up to such time. For each
Subaccount, the number of units purchased or redeemed in connection with a
particular transaction is determined by dividing the dollar amount by the unit
value.
Determination of Unit Value. The unit value of a Subaccount is equal to
the unit value on the immediately preceding Valuation Date multiplied by the Net
Investment Factor for that Subaccount on that Valuation Date.
Net Investment Factor. Each Subaccount of the Separate Account has its
own Net Investment Factor. The Net Investment Factor measures the daily
investment performance of the Subaccount. The factor will increase or decrease,
as appropriate, to reflect net investment income and capital gains or losses,
realized and unrealized, for the securities of the underlying portfolio or
series.
The asset charges for mortality and expense risks and for separate
account administration will be deducted in determining the applicable Net
Investment Factor. (See "Charges and Deductions - Mortality and Expense Risk
Charge," Page 26, and "Charges and Deductions - Separate Account Administration
Charge," Page 26.)
Calculation of Account Value. The Account Value is determined first on
the Date of Issue and thereafter on each Valuation Date. On the Date of Issue,
the Account Value will be the Net Premiums received, plus any earnings prior to
the Date of Issue, less the Monthly Deduction due on the Date of Issue. On each
Valuation Date after the Date of Issue, the Account Value will be:
(1) The aggregate of the values attributable to the Policy in the
Separate Account, determined by multiplying the number of units
the Policy has in each Subaccount of the Separate Account by such
Subaccount's unit value on that date; plus
(2) The value attributable to the Policy in the Loan Account.
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy. To purchase a Policy, you must apply to us through
a licensed National Life agent who is also a registered representative of
Equity Services, Inc. ("ESI") or a broker/dealer having a Selling Agreement
with ESI or a broker/dealer having a Selling Agreement with such a
broker/dealer. The Minimum Initial Premium must be submitted when the Policy
is delivered. The Minimum Face Amount of a Policy is generally $5000. The
Minimum Initial Premium per set of Policies purchased at the same time and
associated with a corporation or its affiliates, a trust or a partnership, or
for a Policy owned by an individual, is $50,000.
This Policy can be issued for Insureds with Issue Ages of at least 20.
The maximum Issue Age for full medical underwriting is 85. The maximum Issue Age
for guaranteed underwriting and simplified issue underwriting is 65. The Minimum
Face Amount is $5000. The Policies are available on a full medical underwriting
basis, a simplified issue basis, or a guaranteed issue basis. Before issuing a
Policy on a full medical underwriting basis, we will require that the proposed
Insured meet certain underwriting standards satisfactory to us. In simplified
issue cases, the application will ask 3 medical questions about the Insured. We
reserve the right to revise our rules from time to time to specify a different
Minimum Face Amount for subsequently issued policies. Acceptance is subject to
our underwriting rules. We reserve the right to reject an application for any
reason permitted by law.
Amount and Timing of Premiums. Each subsequent premium payment must be
at least $300. Subject to certain limitations described below, you have
considerable flexibility in determining the amount and frequency of premium
payments.
At the time of application, you may select a Planned Periodic Premium
schedule, based on a periodic billing mode of annual, semi-annual, or
quarterly payments. You may request us to send a
21
<PAGE> 29
premium reminder notice at the specified interval. You may change the Planned
Periodic Premium frequency and amount. Payments may be made by wire transfer
or by check.
You are not required to pay the Planned Periodic Premiums in accordance
with the specified schedule. You may pay premiums in any amount (subject to
the $300 minimum and the limitations described in the next section), frequency
and time period. Payment of the Planned Periodic Premiums will not, however,
guarantee that the Policy will remain in force (except that if such premiums
are at least equal to the Cumulative Minimum Monthly Premium, then the Policy
will remain in force for at least 5 years). Instead, the duration of the
Policy depends upon the Policy's Net Account Value. Thus, even if Planned
Periodic Premiums are paid, the Policy will lapse whenever the Net Account
Value is insufficient to pay the Monthly Deductions and any other charges
under the Policy and if a Grace Period expires without an adequate payment by
you (unless the Policy is in its first five years, and the Cumulative Minimum
Monthly Premium has been paid).
Any payments made while there is an outstanding Policy loan will be
applied as premium payments rather than loan repayments, unless we are notified
in writing that the amount is to be applied as a loan repayment. No premium
payments may be made after the Insured reaches Attained Age 99. However, loan
repayments will be permitted after Attained Age 99.
Higher premium payments under Death Benefit Option A, until the Death
Benefit Factor times the Cash Surrender Value exceeds the Face Amount, will
generally result in a lower Net Amount at Risk, and lower Cost of Insurance
Charges against the Policy. Conversely, lower premium payments in this situation
will result in a higher Net Amount at Risk, which will result in higher Cost of
Insurance Charges under the Policy.
Under Death Benefit Option B, until the Death Benefit Factor times the
Cash Surrender Value exceeds the Face Amount plus the Account Value, the level
of premium payments will not affect the Net Amount at Risk. (However, both the
Account Value and Death Benefit will be higher if premium payments are higher,
and lower if premium payments are lower.)
Under either Death Benefit Option, if the Death Benefit is based on the
Death Benefit Factor times the Cash Surrender Value, then higher premium
payments will result in a higher Net Amount at Risk, and higher Cost of
Insurance Charges. Lower premium payments will result in a lower Net Amount at
Risk, and lower Cost of Insurance Charges.
Premium Limitations. With regard to a Policy's inside build-up, in the
case of Policies to which the Guideline Premium Test for federal income tax
law compliance applies, the Internal Revenue Code of 1986 (the "Code")
provides for exclusion of the Death Benefit from gross income if total premium
payments do not exceed certain stated limits. In no event can the total of all
premiums paid under a Policy exceed such limits. If at any time a premium is
paid which would result in total premiums exceeding such limits, we will only
accept that portion of the premium which would make total premiums equal the
maximum amount which may be paid under the Policy. The excess will be promptly
refunded, and in the cases of premiums paid by check, after such check has
cleared. If there is an outstanding loan on the Policy, the excess may instead
be applied as a loan repayment.
The maximum premium limitations set forth in the Code depend in part upon
the amount of the Death Benefit at any time. As a result, any Policy changes
which affect the amount of the Death Benefit may affect whether cumulative
premiums paid under the Policy exceed the maximum premium limitations. To the
extent that any such change would result in cumulative premiums exceeding the
maximum premium limitations, we will not effect such change. (See "Federal
Income Tax Considerations," Page 33.)
Unless the Insured provides satisfactory evidence of insurability, we
reserve the right to limit the amount of any premium payment if it increases
the Net Amount at Risk.
22
<PAGE> 30
For Policies to which the Cash Value Accumulation Test for federal income
tax law compliance applies, the Internal Revenue Code does not provide any
limits on premium payments in determining whether a policy qualifies as life
insurance under the Code.
Allocation of Net Premiums. The Net Premium equals the premium paid less
the Premium Loads. In the application for the Policy, you will indicate how
Net Premiums should be allocated among the Subaccounts of the Separate
Account. You may change these allocations at any time by written notice to the
Third Party Administrator. The percentages of each Net Premium that may be
allocated to any Subaccount must be in whole numbers of not less than 5%, and
the sum of the allocation percentages must be 100%. Except in the
circumstances described in the following paragraph, National Life will
allocate the Net Premiums as of the Valuation Date it receives such premium at
its Home Office or at the office of the Third Party Administrator, based on
the allocation percentages then in effect.
Any portion of the Initial Premium and any subsequent premiums received
by National Life before the end of the free-look period will be allocated to
the Money Market Subaccount. For this purpose, we will assume that the free-
look period will end on the earliest of (a) the end of the tenth day following
receipt of the Policy by you, if we receive at our Home Office a signed
delivery receipt for the Policy on or before that date; (b) the end of the day
on which we receive at the Home Office a signed delivery receipt for the
Policy, if on or between the eleventh and nineteenth days after the date the
Policy is issued; or (c) 20 days after the date the Policy is issued. On the
earliest Valuation Date set forth above, we will allocate the amount in the
Money Market Subaccount to each of the Subaccounts selected in the application
based on the allocation percentage set forth in the application for such
Subaccount.
The values of the Subaccounts will vary with their investment experience.
You bear the entire investment risk. You should periodically review your
allocation percentages in light of market conditions and your overall
financial objectives.
Transfers. You may transfer the Account Value among the Subaccounts of
the Separate Account on any business day by making a written transfer request to
us. Transfer requests must be in a form acceptable to us. Transfers among the
Subaccounts of the Separate Account are made as of the Valuation Date on which
the request for transfer is received at the office of the Third Party
Administrator. You may transfer all or part of the amount in one of the
Subaccounts of the Separate Account to another Subaccount or Subaccounts.
However, Account Value may not be allocated to more than ten Subaccounts at any
one time.
Currently an unlimited number of transfers is permitted without charge,
and we have no current intent to impose a transfer charge in the foreseeable
future. However, we reserve the right, upon prior notice to Policy Owners, to
change this policy so as to deduct a transfer charge of up to $25 from each
transfer in excess of the twelfth transfer during any one Policy Year. All
transfers effected on the same Valuation Date are treated as one transfer
transaction. Transfers resulting from Policy loans, the exercise of the transfer
right for change of investment policy, and the reallocation from the Money
Market Subaccount following the free look period after the Date of Issue, will
not be subject to a transfer charge and will not count against the twelve free
transfers in any Policy Year. Under present law, transfers are not taxable
transactions.
Policy Lapse. The failure to make a premium payment will not itself cause
a Policy to lapse. Lapse will only occur when the Net Account Value is
insufficient to cover the Monthly Deductions and other charges under the Policy
and the Grace Period expires without a sufficient payment. During the first five
Policy Years, the Policy will not lapse so long as the Cumulative Minimum
Monthly Premium has been paid.
The Policy provides for a 61-day Grace Period that is measured from the
date on which notice is sent by National Life. The Policy does not lapse, and
the insurance coverage continues, until the expiration of this Grace Period. In
order to prevent lapse, you would have to during the Grace Period make a premium
payment equal to the sum of any amount by which the past Monthly Deductions have
been in excess of Net Account Value, plus three times the Monthly Deduction due
the date the Grace Period began. The notice sent by National Life will specify
the payment required to keep the Policy in force. Failure to
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make a payment at least equal to the required amount within the Grace Period
will result in lapse of the Policy without value.
Reinstatement. A Policy that lapses without value may be reinstated at
any time within five years after the beginning of the Grace Period by submitting
evidence of the Insured's insurability satisfactory to National Life and payment
of an amount sufficient to provide for two times the Monthly Deduction due on
the date the Grace Period began plus three times the Monthly Deduction due on
the effective date of reinstatement, which is, unless otherwise required by
state law, the Monthly Policy Date on or next following the date the
reinstatement application is approved. Upon reinstatement, the Account Value
will be based upon the premium paid to reinstate the Policy and the Policy will
be reinstated with the same Date of Issue as it had prior to the lapse. The
Policy Protection Period may not be reinstated.
For Policies that are intended to be used in multiple employer welfare
benefit plans established under section 419A(f)(6) of the Internal Revenue Code,
you should be aware that there is a risk that the intended tax consequences of
such a plan may not be realized. Congress is currently considering legislation
that might remove some or all of the tax advantage of these plans and the
Internal Revenue Service has raised questions about certain of these
arrangements under existing law. We do not guarantee any particular tax
consequences of any use of the Policies, including but not limited to use in
these so-called "section 419 plans." We recommend that you seek independent
tax advice with respect to applications in which you seek particular tax
consequences.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate
National Life for (a) providing the insurance and other benefits set forth in
the Policy; (b) administering the Policy; (c) assuming certain mortality and
other risks in connection with the Policy; and (d) incurring expenses in
distributing the Policy including costs associated with printing prospectuses
and sales literature and sales compensation. National Life may realize a profit
from any charges. Any such profit may be used for any purpose, including payment
of distribution expenses.
PREMIUM LOADS
A Premium Load will be deducted from each premium payment. The Premium
Load consists of the Distribution Charge and the Premium Tax Charge.
The Distribution Charge is equal to, in Policy Year 1, 13% of premiums
paid during the Policy Year up to the Target Premium, and 0.5% of premiums paid
in excess of the Target Premium. In Policy Years 2 through 7, the Distribution
Charge is equal to 15% of premiums paid during a Policy Year up to the Target
Premium, and 2.5% of premiums paid in excess of the Target Premium in any such
Policy Year. In Policy Years 8 and thereafter, the Distribution Charge will be
5% of premiums paid during a Policy Year up to the Target Premium, and 2.5% of
premiums paid in excess of the Target Premium in any such Policy Year. For this
purpose, the Target Premium equals 1.25 times the annual whole life premium
which would be calculated for the Policy using the applicable 1980 Commissioners
Standard Ordinary Mortality Table and an interest rate of 3.5%.
The Premium Tax Charge will vary from state to state, and will be equal
to the actual amount of premium tax assessed in the jurisdiction in which the
Policy is sold. Currently all states impose a premium tax on life insurance
policies sold by Vermont-domiciled insurance companies. Premium taxes generally
range from 2% to 3.5%. Premium taxes may range up to 4% for certain cities in
South Carolina and 12% for certain jurisdictions in Kentucky.
MONTHLY DEDUCTIONS
Charges will be deducted from the Account Value on the Date of Issue and
on each Monthly Policy Date. The Monthly Deduction consists of four components -
(a) the Cost of Insurance Charge, (b) the Policy Administration Charge, (c) for
Policies issued on the basis of full medical underwriting, the Underwriting
Charge, and (d) for Policies containing a Term Rider, the charges associated
with the Term Rider. Because portions of the Monthly Deduction, such as the Cost
of Insurance Charge, can vary from Policy Month to Policy Month, the Monthly
Deduction may vary in amount from Policy Month to Policy Month. The Monthly
Deduction will be deducted on a pro rata basis from the Subaccounts of the
Separate Account.
Cost of Insurance Charge. The monthly Cost on Insurance Charge is
calculated by multiplying the cost of insurance rate or rates by the Net Amount
at Risk for each Policy Month. Because both the Net Amount at Risk and the
variables that determine the cost of insurance rate, such as the Insured's age
and the Duration of the Policy, may vary, the Cost of Insurance Charge will
likely be different from month to month.
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(1) Net Amount At Risk. The Net Amount at Risk on any Monthly
Policy Date is approximately the amount by which the Death Benefit exceeds the
Account Value. It measures the amount that National Life would have to pay in
excess of the Policy's Account Value if the Insured died. The actual
calculation uses the Death Benefit divided by 1.00327234 to take into account
assumed monthly earnings at an annual rate of 4%. The Net Amount at Risk is
determined separately for the Face Amount on the Date of Issue and any
increases in Face Amount. In determining the Net Amount at Risk for each
increment of Face Amount, the Account Value is first applied to the Face Amount
on the Date of Issue. If the Account Value exceeds the Face Amount on the Date
of Issue, the excess is then applied to any increases in Face Amount in the
order such increases took effect.
If the Net Amount at Risk increases, your monthly Cost of Insurance
Charge will increase proportionately. The Net Amount at Risk may increase if,
for example, the Death Benefit is based on the Face Amount and the Account Value
decreases because of negative investment results. The Net Amount at Risk may
also increase if the Death Benefit is based on the Death Benefit Factor times
the Cash Surrender Value and the Account Value rises because of positive
investment results. The Net Amount at Risk may decrease in the opposite
situations, and if it does, your monthly Cost of Insurance Charge will decrease
proportionately.
(2) Cost of Insurance Rate. Policies may be issued
(a) after full medical underwriting of the proposed
Insured,
(b) on a guaranteed issue basis, where no medical
underwriting is required prior to issuance of a Policy, or
(c) on a simplified underwriting basis, under which medical
underwriting is limited to requiring the proposed Insured
to answer three medical questions on the application.
Current cost of insurance rates for Policies issued on a guaranteed issue basis
or a simplified underwriting basis are higher than current standard cost of
insurance rates for healthy Insureds who undergo medical underwriting.
Guaranteed Rates. The guaranteed maximum cost of insurance rates
are set forth in the Policy, and will depend on the Insured's Attained Age, Rate
Class, and the applicable 1980 Commissioners Standard Ordinary
Smoker/Nonsmoker/Unismoker Mortality Table. If you are based in Montana you must
generally select a "unisex" Rate Class.
Current Rates and How They are Determined. The actual cost of
insurance rates used ("current rates") will depend on the Insured's Attained
Age, Rate Class, underwriting method, and Duration. These current cost of
insurance rates are set based on National Life's anticipated mortality
experience. Generally rates are higher for an older Insured, if the Insured is a
smoker, or if the Insured is in a substandard rate class (usually because of a
health issue). Rates may also be higher for a Policy that has a longer Duration,
compared to another Policy with identical characteristics and a shorter
Duration. As noted above, rates for Policies issued on the basis of guaranteed
issue or simplified issue will generally be higher. We periodically review the
adequacy of our current cost of insurance rates and may adjust their level if
our anticipated mortality experience changes. However, our cost of insurance
ratess will never exceed guaranteed maximum cost of insurance rates. Any change
in the current cost of insurance rates will apply to all persons of the same
Issue Age, Rate Class, underwriting method, and with Policies of the same
Duration.
A cost of insurance rate is determined separately for the Face Amount on
the Date of Issue and any increases in Face Amount. In calculating the Cost of
Insurance Charge, the rate for the Rate Class on the Date of Issue is applied to
the Net Amount at Risk for the Face Amount on the Date of Issue (see "Rate
Class", below). For each increase in Face Amount, the rate for the Rate Class
applicable to the increase is used. If, however, the Death Benefit is based on
the Cash Surrender Value times the Death Benefit Factor, the rate for the Rate
Class for the Face Amount on the Date of Issue will be used for the amount of
the Death Benefit in excess of the total Face Amount.
Rate Class. The Rate Class of the Insured will affect the guaranteed and
current cost of insurance rates. National Life currently places Insureds into,
for each of guaranteed issue, simplified issue, and full medical underwriting,
male non-smoker, female non-smoker, unisex non-smoker, male smoker, female
smoker, unisex nonsmoker, unisex unismoker, male unismoker, and female unismoker
Rate Classes. For full medical underwriting cases, substandard rate classes may
also apply. Substandard, Smoker, male, guaranteed issue and simplified issue
Rate Classes reflect higher mortality risks. None of the unisex Rate Classes
are available in the state of Florida.
Term Rider Charge. For Policies which include the Term Rider, the charge
for the Term Rider will be the Supplemental Term Insurance Amount, divided by
1.00327234, times the same cost of insurance rates that apply to the Net Amount
at Risk for the Face Amount.
Policy Administration Charge. The Policy Administration Charge, which is
currently $5.50 per month, will be deducted from the Account Value on the Date
of Issue and each Monthly Policy Date as part of the Monthly Deduction. The
Policy Administration Charge may be increased, but is guaranteed never to exceed
$8.00 per month.
Underwriting Charge. Policies issued on the basis on full medical
underwriting will be assessed an Underwriting Charge, deducted monthly as part
of the Monthly Deduction. The Underwriting Charge totals $20 in Policy Year 1,
and $45 in each of the next four Policy Years. Policies issued on the basis of
guaranteed issue or simplified issue will not be assessed an Underwriting
Charge.
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MORTALITY AND EXPENSE RISK CHARGE
A daily Mortality and Expense Risk Charge will be assessed against the
Separate Account. The current annual rates are set forth below for the various
Policy Years of a Policy.
For Policy Years 1 - 7: 0.22% of Account Value in the Separate Account
For Policy Years 8 -10: 0.12% of Account Value in the Separate Account
For Policy Years 11-20: 0.02% of Account Value in the Separate Account;
and
For Policy Year 21 and thereafter: 0.00% of Account Value in the
Separate Account.
We may increase the above rates for the Mortality and Expense Risk Charge,
but the charge is guaranteed not to exceed 0.60% of Account Value in the
Separate Account at all times.
SEPARATE ACCOUNT ADMINISTRATION CHARGE
A daily Separate Account Administration Charge is assessed against the
Separate Account for our expenses incurred in connection with separate account
administration. This daily charge is assessed at an annual rate of 0.10% of the
Account Value in each Subaccount of the Separate Account. This charge is
guaranteed not to increase.
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts. We
have no present intention to impose a transfer charge in the foreseeable future.
However, we reserve the right to impose in the future a transfer charge of up to
$25 on each transfer in excess of twelve transfers in any Policy Year.
If imposed, the transfer charge will be deducted from the Subaccounts
based on the proportion that each Subaccount's value bears to the total Account
Value in the Separate Account. All transfers effected on the same Valuation Date
would be treated as one transfer transaction. The transfer charge will not apply
to transfers resulting from Policy loans, the exercise the transfer right due
to the change in investment policy of a Subaccount, or the initial reallocation
of Account Values from the Money Market Subaccount to other Subaccounts, These
transfers will not count against the twelve free transfers in any Policy Year.
OTHER CHARGES
The Separate Account purchases shares of the Funds at net asset value. The
net asset value of those shares reflect management fees and expenses already
deducted from the assets of the Funds' Portfolios. The fees and expenses for the
Funds and their Portfolios are described briefly in connection with a general
description of each Fund.
More detailed information is contained in the Funds' Prospectuses which
accompany this Prospectus.
POSSIBLE CHARGE FOR NATIONAL LIFE'S TAXES
At the present time, National Life makes no charge for any Federal, state
or local taxes (other than state premium taxes or the DAC Tax) that the Company
incurs that may be attributable to the Separate Account or to the Policies.
National Life, however, reserves the right in the future to make a charge for
any such tax or other economic burden resulting from the application of the tax
laws that it determines to be properly attributable to the Accounts or to the
Policies. If any tax charges are made in the future, they will be accumulated
daily and transferred from the Separate Account to National Life's general
account. Any investment earnings on tax charges accumulated in the Separate
Account will be retained by National Life.
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POLICY RIGHTS AND PRIVILEGES
LOAN PRIVILEGES
General. You may, on any Valuation Date, borrow money from National Life
using the Policy as the only security for the loan. The amount of these loans
may not exceed the Policy's Net Account Value on the date of receipt of the loan
request, minus three times the Monthly Deduction for the next Monthly Policy
Date. While the Insured is living, you may repay all or a portion of a loan and
accrued interest. Loans may be taken by making a written request to the Third
Party Administrator. Loan proceeds will be paid within seven days of the
Valuation Date on which a valid loan request is received at the office of the
Third Party Administrator.
Interest Rate Charged. The interest rate charged on Policy loans will be
as follows:
Policy Years 1 - 7 : 4.60% per year
Policy Years 8 - 10 : 4.50% per year
Policy Years 11 - 20 : 4.40% per year
Policy Years 21 and thereafter: 4.35% per year
Interest is charged from the date of the loan and will be added to the
loan balance at the end of the Policy Year and bear interest at the same rate.
Allocation of Loans and Collateral. When a Policy loan is taken, Account
Value is held in the Loan Account as Collateral for the Policy loan. Account
Value is taken from the Subaccounts of the Separate Account based upon the
proportion that each Subaccount's value bears to the total Account Value in the
Separate Account.
The Collateral for a Policy loan will initially be the loan amount. Any
loan interest due and unpaid will be added to the Policy loan. We will take
additional Collateral for such loan interest so added pro rata from the
Subaccounts of the Separate Account, and hold the Collateral in the Loan
Account. At any time, the amount of the outstanding loan under a Policy equals
the sum of all loans (including due and unpaid interest added to the loan
balance) minus any loan repayments.
Interest Credited to Amounts Held as Collateral. We will credit the amount
held in the Loan Account as Collateral with interest at an effective annual rate
of 4%.
Effect of Policy Loan. Policy loans, whether or not repaid, will have a
permanent effect on the Account Value, and may permanently affect the Death
Benefit under the Policy. The effect on the Account Value and Death Benefit
could be favorable or unfavorable, depending on whether the investment
performance of the Subaccounts is less than or greater than the interest being
credited on the amounts held as Collateral in the Loan Account while the loan is
outstanding. Compared to a Policy under which no loan is made, values under a
Policy will be lower when the credited interest rate on Collateral is less than
the investment experience of assets held in the Separate Account. The longer a
loan is outstanding, the greater the effect a Policy loan is likely to have. The
Death Benefit will be reduced by the amount of any outstanding Policy loan.
Loan Repayments. We will assume that any payments made while there is an
outstanding loan on the Policy are premium payments, rather than loan
repayments, unless it receives written instructions that a payment is a loan
repayment. In the event of a loan repayment, the amount held as Collateral in
the Loan Account will be reduced by an amount equal to the repayment, and such
amount will be transferred to the Subaccounts of the Separate Account based on
the proportion that each Subaccount's value bears to the total Account Value in
the Separate Account.
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<PAGE> 35
Lapse With Loans Outstanding. The amount of an outstanding loan under a
Policy plus any accrued interest on outstanding loans is not part of Net Account
Value. Therefore, the larger the amount of an outstanding loan, the more likely
it is that the Policy could lapse. (See "How the Duration of the Policy May
Vary," Page 20 and "Policy Lapse," Page 23.) In addition, if the Policy is not a
Modified Endowment Policy, lapse of the Policy with outstanding loans may result
in adverse federal income tax consequences. (See "Tax Treatment of Policy
Benefits," Page 34.)
Tax Considerations. Any loans taken from a "Modified Endowment Contract"
will be treated as a taxable distribution. In addition, with certain exceptions,
a 10% additional income tax penalty will be imposed on the portion of any loan
that is included in income. (See "Distributions from Policies Classified as
Modified Endowment Contracts," Page 35.)
SURRENDER PRIVILEGE
At any time before the death of the Insured, you may surrender the Policy
for its Net Cash Surrender Value. The Net Cash Surrender Value will equal the
Cash Surrender Value less any Policy loan and accrued interest. The Net Cash
Surrender Value will be determined by National Life on the Valuation Date it
receives, at its Home Office or at the office of the Third Party Administrator,
a written surrender request signed by the Owner, and the Policy. Coverage under
the Policy will end on the day you mail or otherwise send the written surrender
request and the Policy to National Life. We will ordinarily mail surrender
proceeds to you within seven days of receipt of the request. (See "Other Policy
Provisions - Payment of Policy Benefits", Page 30.)
A surrender may have Federal income tax consequences. (See "Tax Treatment
of Policy Benefits," Page 34).
WITHDRAWAL OF NET ACCOUNT VALUE
Before the death of the Insured and on any Valuation Date after the first
Policy Anniversary, you may withdraw a portion of the Policy's Net Account
Value. The maximum Withdrawal is the Net Account Value on the date of receipt of
the Withdrawal request, minus three times the Monthly Deduction on the most
recent Monthly Policy Date.
The Withdrawal will be taken from the Subaccounts of the Separate Account
based upon the proportion that each Subaccount's value bears to the total
Account Value in the Separate Account.
The effect of a Withdrawal on the Death Benefit and Face Amount will vary
depending upon the Death Benefit Option and federal tax death benefit compliance
test in effect and whether the Death Benefit is based on the applicable Death
Benefit Factor times the Cash Surrender Value. (See "Death Benefit Options,"
Page 17.)
Option A. The effect of a Withdrawal on the Face Amount and Death Benefit
under Option A and the Guideline Premium Test for tax law compliance is as
follows:
If the Face Amount divided by the Death Benefit Factor times the
Cash Surrender Value exceeds the Account Value just after the Withdrawal,
a Withdrawal will reduce the Face Amount by the lesser of such excess and
the amount of the Withdrawal.
For the purposes of this illustration (and the following
illustrations of Withdrawals), assume that the Attained Age of the Insured
is under 40, there is no indebtedness and there is no Term Insurance
Amount. The applicable Death Benefit Factor is 250% for an Insured with an
Attained Age under 40, if the Guideline Premium Test is in effect as the
federal tax death benefit compliance test.
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<PAGE> 36
Under Option A, a Policy with a Face Amount of $300,000 and an
Account Value of $30,000 will have a Death Benefit of $300,000. Assume
that the Owner takes a Withdrawal of $10,000 The Withdrawal will reduce
the Account Value to $20,000 ($30,000 - $10,000) after the Withdrawal. The
Face Amount divided by the Death Benefit Factor is $120,000 ($300,000 /
2.50), which exceeds the Account Value after the Withdrawal by $100,000
($120,000 - $20,000). The lesser of this excess and the amount of the
Withdrawal is $10,000, the amount of the Withdrawal. Therefore, the Face
Amount will be reduced by $10,000 to $290,000.
If the Face Amount plus the Term Insurance Amount, divided by the
applicable Death Benefit Factor times the Cash Surrender Value does not
exceed the Cash Surrender Value just after the Withdrawal, then the Face
Amount is not reduced. The Face Amount will be reduced by the lesser of
such excess or the amount of the Withdrawal.
A decrease in total insurance coverage shall apply first to any
Supplemental Term Insurance Amount provided by a Term Rider on this
Policy, then to any increase in Face Amount in reverse order in which they
were made, and then to the Face Amount on the Date of Issue.
Under Option A, a policy with a Face Amount of $300,000, an Account
Value of $150,000, and no Term Insurance Amount will have a Death Benefit
of $375,000 ($150,000 x 2.50). Assume that the Owner takes a Withdrawal of
$10,000. The Withdrawal will reduce the Account Value to $140,000
($150,000 - $10,000). The Face Amount divided by the applicable Death
Benefit Factor is $120,000, which does not exceed the Account Value after
the Withdrawal. Therefore, the Face Amount stays at $300,000 and the Death
Benefit is $350,000 ($140,000 x 2.50).
Option B. The Face Amount will never be decreased by a Withdrawal. A
Withdrawal will, however, always decrease the Death Benefit.
If the Death Benefit plus any outstanding Policy loans and any
unpaid Monthly Deductions equals the Face Amount plus the Account Value, a
Withdrawal will reduce the Account Value by the amount of the Withdrawal
and thus the Death Benefit will also be reduced by the amount of the
Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Account Value of $90,000 will have a Death Benefit of $390,000 ($300,000 +
$90,000), assuming no outstanding Policy loans and no unpaid Monthly
Deductions. Assume the Owner takes a Withdrawal of $20,000. The Withdrawal
will reduce the Account Value to $70,000 ($90,000 - $20,000) and the Death
Benefit to $370,000 ($300,000 + $70,000). The Face Amount is unchanged.
If the Death Benefit immediately prior to the Withdrawal is based
on the applicable Death Benefit Factor times the Cash Surrender Value, the
Death Benefit will be reduced to equal the greater of (a) the Face Amount
plus the Account Value after deducting the amount of the Withdrawal and
Withdrawal Charge and (b) the applicable Death Benefit Factor times the
Cash Surrender Value after deducting the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Account Value of $210,000 will have a Death Benefit of $525,000 ($210,000
X 2.5), assuming no Policy loans outstanding and no unpaid Monthly
Deductions. Assume the Owner takes a Withdrawal of $60,000. The Withdrawal
will reduce the Account Value to $150,000 ($210,000 - $60,000), and the
Death Benefit to the greater of (a) the Face Amount plus the Account
Value, or $450,000 ($300,000 + $150,000) and (b) the Death Benefit based
on the applicable Death Benefit Factor times the Cash Surrender Value, or
$375,000 ($150,000 X 2.50). Therefore, the Death Benefit will be $450,000.
The Face Amount is unchanged.
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If you have elected the Cash Value Accumulation Test for tax law
compliance, a Withdrawal will decrease Face Amount by an amount equal to the
amount withdrawn times 1.00327374.
Because a Withdrawal can affect the Face Amount and the Death Benefit as
described above, a Withdrawal may also affect the Net Amount at Risk which is
used to calculate the Cost of Insurance Charge under the Policy. (See "Cost of
Insurance Charge," Page 24.) Since a Withdrawal reduces the Net Account Value,
the likelihood that the Policy will lapse is increased. (See "Policy Lapse,"
Page 23.) A request for Withdrawal may not be allowed if such Withdrawal would
reduce the Face Amount below the Minimum Face Amount for the Policy. Also, if a
Withdrawal would result in cumulative premiums exceeding the maximum premium
limitations applicable under the Code for life insurance under the Guideline
Premium Test, we will not allow such Withdrawal.
You may request a Withdrawal only by sending a signed written request to the
Third Party Administrator. A Withdrawal will ordinarily be paid within seven
days of the Valuation Date on which a valid Withdrawal request is received.
A Withdrawal of Net Account Value may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 34.)
FREE-LOOK PRIVILEGE
The Policy provides for a "free-look" period, during which you may cancel
the Policy and receive a refund equal to the premiums paid on the Policy. This
free-look period ends on the later of the end of the 10th day after you receive
the Policy, or any longer period provided by state law. To cancel the Policy,
you must return the Policy to National Life or to an agent of National Life
within this period with a written request for cancellation.
TRANSFER RIGHT FOR CHANGE IN INVESTMENT POLICY
If the investment policy of a Subaccount of the Separate Account is materially
changed, you may transfer the portion of the Account Value in such Subaccount to
another Subaccount, without regard to any limits on transfers or free transfers.
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.
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.
OTHER POLICY PROVISIONS
Indefinite Policy Duration. The Policy can remain in force indefinitely
(in Texas and Maryland, however, the Policy matures at Attained Age 99 at which
time National Life will pay the Net Cash Surrender Value to the Owner in one sum
unless a Payment Option is chosen, and the Policy will terminate). However, for
a Policy to remain in force after the Insured reaches Attained Age 99, if the
Face Amount is greater than the Account Value, the Face Amount will
automatically be decreased to the current Account Value. Also, at Attained Age
99 Option B automatically becomes Option A, and no premium payments are allowed
after Attained Age 99, although loan repayments are allowed. The tax treatment
of a Policy's Account Value after Age 100 is unclear, and you may wish to
discuss this treatment with a tax advisor.
Payment of Policy Benefits. You may decide the form in which Death Benefit
proceeds will be paid. During the Insured's lifetime, you may arrange for the
Death Benefit to be paid in a lump sum or under a Settlement Option. These
choices are also available upon surrender of the Policy for its Net Cash
Surrender Value. If no election is made, payment will be made in a lump sum. The
Beneficiary may also arrange for payment of the Death Benefit in a lump sum or
under a Settlement Option. If paid in a lump sum, the Death Benefit under a
Policy will ordinarily be paid to the Beneficiary within seven days after
National Life receives proof of the Insured's death at its Home Office and all
other requirements are satisfied. If paid under a Settlement Option, the Death
Benefit will be applied to the Settlement Option
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<PAGE> 38
within seven days after National Life receives proof of the Insured's death at
its Home Office and all other requirements are satisfied.
Interest at the annual rate of 4% or any higher rate declared by us or
required by law is paid on the Death Benefit from the date of death until
payment is made.
Any amounts payable as a result of surrender, will ordinarily be paid
within seven days of receipt of written request at National Life's Home Office
or the office of the Third Party Administrator in a form satisfactory to
National Life. Any amounts payable as a result of a Withdrawal or Policy loan
will ordinarily be paid within seven days of the Valuation Date on which such
Withdrawal or Policy loan is validly requested.
Generally, the amount of a payment will be determined as of the date of
receipt by National Life or the Third Party Administrator of all required
documents. However, National Life may defer the determination or payment of such
amounts if the date for determining such amounts falls within any period during
which: (1) the disposal or valuation of a Subaccount's assets is not reasonably
practicable because the New York Stock Exchange is closed or conditions are such
that, under the SEC's rules and regulations, trading is restricted or an
emergency is deemed to exist; or (2) the SEC by order permits postponement of
such actions for the protection of National Life policyholders.
We may postpone any payment under the Policy derived from an amount paid
by check or draft until we are is satisfied that the check or draft has been
paid by the bank upon which it was drawn.
The Policy. The Policy and a copy of the applications attached thereto
are the entire contract. Only statements made in the applications can be used to
void the Policy or deny a claim. The statements are considered representations
and not warranties. Only one of National Life's duly authorized officers or
registrars can agree to change or waive any provisions of the Policy and only in
writing. As a result of differences in applicable state laws, certain provisions
of the Policy may vary from state to state.
Split Dollar Arrangements. The Owner or Owners may enter into a Split
Dollar Arrangement between each other or another person or persons whereby the
payment of premiums and the right to receive the benefits under the Policy
(i.e., Net Cash Surrender Value or Death Benefit) are split between the parties.
There are different ways of allocating such rights.
For example, an employer and employee might agree that under a Policy on
the life of the employee, the employer will pay the premiums and will have the
right to receive the Net Cash Surrender Value. The employee may designate the
Beneficiary to receive any Death Benefit in excess of the Net Cash Surrender
Value. If the employee dies while such an arrangement is in effect, the employer
would receive from the Death Benefit the amount which the employer would have
been entitled to receive upon surrender of the Policy and the employee's
Beneficiary would receive the balance of the proceeds.
No transfer of Policy rights pursuant to a Split Dollar Arrangement will
be binding on National Life unless in writing and received by National Life.
National Life does not impose any fee with respect to split dollar
arrangements.
The parties who elect to enter into a Split Dollar Arrangement should
consult their own tax advisers regarding the tax consequences of such an
arrangement.
Assignments. You may assign any and all rights under the Policy. No
assignment binds National Life unless in writing and received by us. National
Life assumes no responsibility for determining whether an assignment is valid or
the extent of the assignee's interest. All assignments will be subject to any
Policy loan. The interest of any beneficiary or other person will be subordinate
to any assignment. A payee who is not also the Owner may not assign or encumber
Policy benefits, and to the extent permitted by applicable law, such benefits
are not subject to any legal process for the payment of any claim against the
payee.
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<PAGE> 39
Misstatement of Age and Sex. If it is found that the amount of any benefit
provided by the Policy is incorrect because of misstatement as to age or sex (if
applicable), the Account Value and the Death Benefit will be equitably adjusted
on the basis of the correct facts. When adjusting the Account Value, the
adjustment will take effect on the Monthly Policy Date on or next following the
date we have proof to our satisfaction of such misstatement. When adjusting the
Death Benefit the adjustment shall take effect as of the Monthly Policy Date
preceding the date of death.
Suicide. In the event of the Insured's suicide, while sane or insane,
within two years from the Date of Issue of the Policy (except where state law
requires a shorter period), or within two years of the effective date of a
reinstatement (unless otherwise required by state law), National Life's
liability is limited to the payment to the beneficiary of a sum equal to the
premiums paid less any Policy loan and accrued interest and any Withdrawals
(since the date of reinstatement, in the case of a suicide within two years of
the effective date of a reinstatement), or other reduced amount provided by
state law.
If the Insured commits suicide within two years (or shorter period
required by state law) from the effective date of any Policy change which
increases the Death Benefit and for which an application is required, the amount
which National Life will pay with respect to the increase will be the Cost of
Insurance Charges previously made for such increase (unless otherwise required
by state law).
Incontestability. The Policy will be incontestable after it has been in
force during the Insured's lifetime for two years from the Date of Issue (or
such other date as required by state law). Similar incontestability will apply
to an increase in Face Amount or reinstatement after it has been in force during
the Insured's lifetime for two years from its effective date.
Before such times, however, we may contest the validity of the Policy (or
changes) based on material misstatements in the initial or any subsequent
application.
Dividends. The Policy is participating; however, no dividends are expected
to be paid on the Policy. If dividends are ever declared, they will be paid in
cash. At the time of the Insured person's death, the Death Benefit will be
increased by dividends payable, if any.
Correspondence. All correspondence to you will be deemed to have been sent
to you if mailed to you at your last known address.
Settlement Options. In lieu of a single sum payment on death or surrender,
an election may be made to apply the Death Benefit under any one of the
fixed-benefit Settlement Options provided in the Policy. The options are
described below.
Payment of Interest Only. Interest at a rate of 3.5% per year will be paid
on the amount of the proceeds retained by National Life. Upon the earlier of the
payee's death or the end of a chosen period, the proceeds retained will be paid
to the payee or his or her estate.
Payments for a Stated Time. Equal monthly payments, based on an interest
rate of 3.5% per annum, will be made for the number of years selected.
Payments for Life. Equal monthly payments, based on an interest rate of
3.5% per annum, will be made for a guaranteed period and thereafter during the
life of a chosen person. Guaranteed payment periods may be elected for 0, 10,
15, or 20 years or for a refund period, at the end of which the total payments
will equal the proceeds placed under the option.
Payments of a Stated Amount. Equal monthly payments will be made until the
proceeds, with interest at 3.5% per year on the unpaid balance, have been paid
in full. The total payments in any year must be at least $10 per month for each
thousand dollars of proceeds placed under this option.
Life Annuity. Equal monthly payments will be made in the same manner as in
the above Payments for Life option except that the amount of each payment will
be the monthly income provided by National Life's then current settlement rates
on the date the proceeds become payable. No additional interest will be paid.
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<PAGE> 40
Joint and Two Thirds Annuity. Equal monthly payments, based on an interest
rate of 3.5% per year, will be made while two chosen persons are both living.
Upon the death of either, two-thirds of the amount of those payments will
continue to be made during the life of the survivor. We may require proof of the
ages of the chosen persons.
50% Survivor Annuity. Equal monthly payments, based on an interest rate of
3.5% per year, will be made during the lifetime of the chosen primary person.
Upon the death of the chosen primary person, 50% of the amount of those payments
will continue to be made during the lifetime of the secondary chosen person. We
may require proof of the ages of the chosen persons.
We may pay interest in excess of the stated amounts under the first four
options listed above, but not the last three. Under the first two, and fourth
options above, the payee has the right to change options or to withdraw all or
part of the remaining proceeds. For additional information concerning the
payment options, see the Policy.
SUPPLEMENTAL TERM INSURANCE RIDER
At your option, the Term Rider, which is subject to the restrictions and
limitations set forth in the Rider, may be included in a Policy. Election of the
Term Rider will result in the Death Benefit including the Supplemental Term
Insurance Amount. The charge for the Term Rider will be an amount included in
the Monthly Deduction equal to the Supplemental Term Insurance Amount, divided
by 1.00327234, times the cost of insurance rates which apply based on the
Insured's then Attained Age, sex (if applicable) and Rate Class applicable to
the Insured on the date of issue of the Term Rider. At issue, costs can be
decreased by purchasing a higher Supplemental Term Insurance Amount through the
use of the Term Rider, since there is no Target Premium associated with the
Supplemental Term Insurance Amount, which may have the effect of reducing the
Premium Loads. For Policies issued in the State of Florida, the Supplemental
Term Insurance Rider is not available after age 95.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the Federal
income tax considerations associated with the Policy and does not purport to be
complete or to cover all 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> 41
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.
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Distributions Other Than Death Benefits from Policies that are not
Modified Endowment Contracts. Distributions other than death benefits from a
Policy that is not classified as a Modified Endowment Contract are generally
treated first as a recovery of the Policy Owner's investment in the policy and
only after the recovery of all investment in the policy as taxable income.
However, certain distributions which must be made in order to enable the Policy
to continue to qualify as a life insurance contract for Federal income tax
purposes if policy benefits are reduced during the first 15 policy years may be
treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not classified as a Modified
Endowment Contract are generally not treated as distributions. However, the tax
consequences associated with preferred Policy loans is less clear and a tax
adviser should be consulted about such loans.
Finally, neither distributions from nor loans from or secured by a
Policy that is not a Modified Endowment Contract are subject to the 10 percent
additional income tax.
Investment in the Policy. Your investment in the Policy is generally
your aggregate premium payments. When a distribution is taken from the Policy,
your investment in the Policy is reduced by the amount of the distribution that
is tax-free.
Policy Loan Interest. In general, interest paid on any loan under a
Policy will not be deductible.
Multiple Policies. All Modified Endowment Contracts that are issued by
National Life (or its affiliates) to the same Policy Owner during any calendar
year are treated as one Modified Endowment Contract for purposes of determining
the amount includible in the Policy Owner's income when a taxable distribution
occurs.
Business Uses of the Policy. Businesses can use the Policy in various
arrangements, including nonqualified deferred compensation or salary continuance
plans, split dollar insurance plans, executive bonus plans, tax exempt and
nonexempt welfare benefit plans, retiree medical benefit plans and others. The
tax consequences of such plans may vary depending on the particular facts and
circumstances. If you are purchasing the Policy for any arrangement the value of
which depends in part on its tax consequences, you should consult a qualified
tax adviser. In recent years, moreover, Congress has adopted new rules relating
to life insurance owned by businesses. Any business contemplating the purchase
of a new Policy or a change in an existing Policy should consult a tax adviser.
Continuation Beyond Age 100. The tax consequences of continuing the
Policy beyond the Insured's 100th year are unclear. You should consult a tax
adviser if you intend to keep the Policy in force beyond the Insured's 100th
year.
SPECIAL RULES FOR EMPLOYEE BENEFIT PLANS
If a trustee under a pension or profit-sharing plan, or similar
deferred compensation arrangement, owns a Policy, the Federal and state income
and estate tax consequences could differ. A tax adviser should be consulted with
respect to such consequences. Policies owned under these types of plans may 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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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.
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 "Special Rules For 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
All of the assets held in the Subaccounts of the Separate Account will be
invested in shares of corresponding Portfolios of the Funds. The Funds do not
hold routine annual shareholders' meetings. Shareholders' meetings will be
called whenever each Fund believes that it is necessary to vote to elect the
Board of Directors of the Fund and to vote upon certain other matters that are
required by the 1940 Act or other applicable law or governing documents to be
approved or ratified by the shareholders of a mutual fund. National Life is the
legal owner of Fund shares and as such has the right to vote upon any matter
that may be voted upon at a shareholders' meeting. However, in accordance with
the SEC's view of present applicable law, we will vote the shares of the Funds
at meetings of the shareholders of the appropriate Fund or Portfolio in
accordance with instructions received from Owners. Fund shares held in each
Subaccount of the Separate Account for which no timely instructions from Owners
are received will be voted by us in the same proportion as those shares in that
Subaccount for which instructions are received.
Each Owner having a voting interest will be sent proxy material and a form
for giving voting instructions. Owners may vote, by proxy or in person, only as
to the Portfolios that correspond to the Subaccounts in which their Policy
values are allocated. The number of shares held in each Subaccount attributable
to a Policy for which you may provide voting instructions will be determined by
dividing your Policy's Account Value in that Subaccount by the net asset value
of one share of the corresponding Portfolio as of the record date for the
shareholder meeting. Fractional shares will be counted. For each share of a
Portfolio for which Owners have no interest, we will cast votes, for or against
any matter, in the same proportion as Owners vote.
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<PAGE> 44
If required by state insurance officials, National Life may disregard
voting instructions if such instructions would require shares to be voted so as
to cause a change in the investment objectives or policies of one or more of the
Portfolios, or to approve or disapprove an investment policy or investment
adviser of one or more of the Portfolios. In addition, National Life may
disregard voting instructions in favor of certain changes initiated by an Owner
or the Fund's Board of Directors provided that National Life's disapproval of
the change is reasonable and is based on a good faith determination that the
change would be contrary to state law or otherwise inappropriate, considering
the portfolio's objectives and purposes, and the effect the change would have on
National Life. If we do disregard voting instructions, we will advise you of
that action and its reasons for such action in the next semi-annual report to
you.
Shares of the Funds are currently being offered to variable life insurance
and variable annuity separate accounts of life insurance companies other than
National Life that are not affiliated with National Life. National Life
understands that shares of these Funds also will be voted by such other life
insurance companies in accordance with instructions from their policyholders
invested in such separate accounts. This will dilute the effect of your voting
instructions.
CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under
applicable Federal securities laws. To the extent that such laws or regulations
promulgated thereunder eliminate the necessity to solicit voting instructions
from Owners or restrict such voting rights, National Life reserves the right to
proceed in accordance with any such laws or regulations.
National Life also reserves the right, subject to compliance with
applicable law, including approval of Owners, if so required: (1) to make
changes in the form of the Separate Account, if in its judgment such changes
would serve the interests of Owners or would be appropriate in carrying out the
purposes of the Policies, for example: (i) operating the Separate Account as a
management company under the 1940 Act; (ii) deregistering the Separate Account
under the 1940 Act if registration is no longer required; (iii) combining or
substituting separate accounts; (iv) transferring the assets of the Separate
Account to another separate account; (v) making changes necessary to comply
with, obtain or continue any exemptions from the 1940 Act; or (vi) making other
technical changes in the Policy to conform with any action described herein; (2)
if in its judgment a Portfolio no longer suits the investment goals of the
Policy, or if tax or marketing conditions so warrant, to substitute shares of
another investment portfolio for shares of such Portfolio; (3) to eliminate,
combine, or substitute Subaccounts and establish new Subaccounts, if in its
judgment marketing needs, tax considerations, or investment conditions so
warrant; and (4) to transfer assets from a Subaccount to another Subaccount or
separate account if the transfer in our judgment would best serve interests of
Policy Owners or would be appropriate in carrying out the purposes of the
Policies; and (5) to modify the provisions of the Policies to comply with
applicable laws. We have reserved all rights in respect of its corporate name
and any part thereof, including without limitation the right to withdraw its use
and to grant its use to one or more other separate accounts and other entities.
If your Policy has Account Value in a Subaccount that is eliminated, we
will give you at least 30 days notice before the elimination, and will request
that you designate the Subaccount or Subaccounts to which the Account Value in
the Subaccount to be eliminated should be transferred. If no such designation is
received prior to the date of the elimination, then the Account Value in such
Subaccount will be transferred to the Money Market Subaccount. In any case, if
in the future a transfer charge is imposed or limits on the number of transfers
or free transfers are established, no charge will be made for this transfer, and
it will not count toward any limit on transfers or free transfers.
OFFICERS AND DIRECTORS OF NATIONAL LIFE
The officers and directors of National Life, as well as their principal
occupations during the past five years, are listed below.
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION DURING THE PAST FIVE YEARS
- ----------------- --------------------------
<S> <C>
Patrick E. Welch 1997 to present - Chairman of the Board
Chairman of the Board, and Chief Executive Officer; 1992 to 1997 -
Chief Executive Officer Chairman of the Board, Chief Executive
Officer and President of GNA Corporation.
Thomas H. MacLeay 1996 to Present - President and Chief
President, Chief Operating Officer; 1993 to 1996 -
Operating Officer, Executive Vice President & Chief
and Director Financial Officer.
Robert E. Boardman 1994 to present - Chairman of Hickok &
Director Boardman Financial Network
1967 to present - President of Hickok & Boardman Realty,
Inc.
Earle H. Harbison, Jr. 1993 to present: Chairman of
Director Harbison Walker, Inc.
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
</TABLE>
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<PAGE> 46
<TABLE>
<S> <C>
James A. Mallon 1998 to present: Executive Vice President
Executive Vice President & Chief Marketing Officer; 1996 to 1998:
Chief Marketing Officer President & Chief Executive Officer - Integon
Life Insurance Corporation; 1993 to 1996: Senior
Vice President & Chief Marketing Officer - Commercial
Union Life Insurance Company of America.
William A. Smith 1998 to present: Executive Vice President & Chief
Executive Vice President & Financial Officer; 1994 to 1998 - Vice President and
Chief Financial Officer Controller, American Express Financial Advisors.
Rodney A. Buck 2000 to present - Executive Vice President and
Executive Vice President & Chief 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 Officer - 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
General Counsel Counsel and Secretary, Massachusetts Casualty Insurance
Company; 1986 to 1997 - Vice President, Assistant
General Counsel, Assistant Secretary/Treasurer,
and other legal positions, The Paul Revere Corporation
Charles C. Kittredge 2000 to present: Senior Vice President - Marketing and
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 present:
Senior Vice President 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 2000:
Senior Vice President Vice President & Director of Agencies; 1990 to 1997:
Vice President - Southern Regional Office
Michael A. Tahan 1998 to present: Senior Vice President & Chief
Senior Vice President & Information Officer; 1991 to 1998 - First Vice
Chief Information Officer President & Chief Information Officer-Merrill Lynch Asset
Management
</TABLE>
DISTRIBUTION OF POLICIES
Applications for the Policies are solicited by agents who are licensed by
state insurance authorities to sell National Life's variable life insurance
policies, and who are also registered representatives of Equity Services, Inc.
("ESI") or registered representatives of broker/dealers who have Selling
Agreements with ESI. ESI, a Vermont corporation formed on October 7, 1968,
whose address is National Life Drive, Montpelier, Vermont 05604, is a
registered broker/dealer under the Securities Exchange Act of 1934 (the "1934
Act") and a member of the National Association of Securities Dealers, Inc. (the
"NASD"). ESI is an indirect wholly-owned subsidiary of National Life. ESI acts
as the principal underwriter, as defined in the 1940 Act, of the Policies, and
for the Separate Account pursuant to an Underwriting Agreement to which the
Separate Account, ESI and National Life are parties.
National Life is seeking approval to sell the Policies in all states and
the District of Columbia. However, all approvals may not be obtained. The
Policies are offered and sold only in those states where their sale is lawful.
39
<PAGE> 47
The insurance underwriting and the determination of a proposed Insured's
Rate Class and whether to accept or reject an application for a Policy is done
by National Life. National Life will refund any premiums paid if a Policy
ultimately is not issued or will refund the applicable amount if the Policy is
returned under the free look provision.
Dealers are compensated for sales of the Policies by dealer concessions.
During the first seven Policy Years, the gross dealer concession will not be
more than 15% of the premiums paid up to the target Premium and 2.5% of the
premiums paid in excess of the Target Premium. For Policy Years after Policy
Year 7, the gross dealer concession will not be more than 5% of the premiums
paid, up to the Target Premium, and 2.5% of the premiums in excess of the Target
Premium. In addition, dealers will be paid amounts equal to 0.10% per annum of
the Account Value in the Separate Account for the first twenty Policy Years, and
0.05% per annum of such amount thereafter.
The directors of ESI are Patrick E. Welch, Thomas H. MacLeay, Rodney A.
Buck, all of whose principal occupations are disclosed under "Directors and
Officers of National Life" above, and Joseph M. Rob, the Chairman 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.
POLICY REPORTS
Within 30 days after each Policy Anniversary, a statement will be sent to
you describing the status of your Policy, including setting forth the Face
Amount, the current Death Benefit, any Policy loans and accrued interest, the
current Account Value, the amount held as Collateral in the Loan Account, the
value in each Subaccount of the Separate Account, premiums paid since the last
report, charges deducted since the last report, any Withdrawals since the last
report, and the current Net Cash Surrender Value. In addition, a statement will
be sent to you showing the status of your Policy following the transfer of
amounts from one Subaccount of a Separate Account to another, the taking out of
a loan, a repayment of a loan, a Withdrawal and the payment of any premiums
(excluding those paid by bank draft or otherwise under the Automatic Payment
Plan).
You will receive a semi-annual report containing the financial statements
of each Fund in which your Policy has Account Value, as required by the 1940
Act.
THIRD PARTY ADMINISTRATOR
McCamish Systems, LLC, which is located at 6425 Powers Ferry Road, Third
Floor, Atlanta, Georgia 30339, will act as administrator of the Policies on
behalf of National Life.
STATE REGULATION
National Life is subject to regulation and supervision by the Insurance
Department of the State of Vermont which periodically examines its affairs. It
is also subject to the insurance laws and regulations of all jurisdictions where
it is authorized to do business. A copy of the Policy form has been filed with,
and where required approved by, insurance officials in each jurisdiction where
the Policies are sold. National Life is required to submit annual statements of
its operations, including financial statements, to the insurance departments of
the various jurisdictions in which it does business for the purposes of
determining solvency and compliance with local insurance laws and regulations.
40
<PAGE> 48
can be no assurance that National Life will be successful, or that interaction
with other service providers will not impair National Life's services at that
time.
EXPERTS
The Financial Statements listed on Page F-1 have been included in this
Prospectus, in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Actuarial matters included in the Prospectus have been examined by Kiri
Parankirinathan, A.S.A., M.A.A.A., President of Life Product Developers, Inc.
LEGAL MATTERS
Sutherland Asbill & Brennan, LLP of Washington, D.C. has provided advice
on legal matters relating to certain aspects of Federal securities law
applicable to the issue and sale of the Policies. Matters of Vermont law
pertaining to the Policies, including National Life's right to issue the
Policies and its qualification to do so under applicable laws and regulations
issued thereunder, have been passed upon by Michelle S. Gatto, Senior Vice
President and General Counsel of National Life.
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.
41
<PAGE> 49
GLOSSARY
<TABLE>
<S> <C>
ACCOUNT VALUE The sum of the Policy's values in the Separate Account and the Loan
Account.
ATTAINED AGE The Issue Age of the Insured plus the number of full Policy Years which
have passed since the Date of Issue.
BENEFICIARY The person(s) or entity(ies) designated to receive all or some of the
Death Benefit when the Insured dies. The Beneficiary is designated in
the application or if subsequently changed, as shown in the latest
change filed with National Life. The interest of any Beneficiary who
dies before the Insured shall vest in the Owner unless otherwise stated.
CASH SURRENDER VALUE The Account Value of the Policy reflecting, in Policy Years 1 and 2, the
Distribution Charge Refund. The Cash Surrender Value is equal to the
Account Value on the second Policy Anniversary and thereafter.
COLLATERAL The Account Value in the Loan Account which secures the amount of any
Policy loan.
CUMULATIVE MINIMUM MONTHLY
PREMIUM The sum of the Minimum Monthly Premiums in effect on each Monthly
Policy Date since the Date of Issue (including the current month).
DAC TAX A tax attributable to Specified Policy Acquisition Expenses under
Internal Revenue Code Section 848.
DATE OF ISSUE The date on which the Policy is issued, which is set forth in the
Policy. It is used to determine Policy Years, Policy Months and Monthly
Policy Dates, as well as to measure suicide and contestable periods.
DEATH BENEFIT Under Option A, the greater of (a) the Face Amount or (b) the Death
Benefit Factor times the Cash Surrender Value on the date of death;
under Option B, the greater of (a) the Face Amount plus the Account
Value on the date of death, or (b) the Death Benefit Factor times the
Cash Surrender Value on the date of death; in each case plus any
Supplemental Term Insurance Amount, less any outstanding Policy loan
and accrued interest, and less any unpaid Monthly Deductions.
DEATH BENEFIT FACTOR A percentage specified in either the Cash Value Accumulation Test or the
Guideline Premium Test for qualification of a Policy as life insurance
under the Internal Revenue Code, which when multiplied by the Cash
Surrender Value, must always be less than or equal to the Death Benefit
plus any outstanding Policy loans, accrued interest thereon, and any
unpaid Monthly Deductions, and minus
</TABLE>
42
<PAGE> 50
<TABLE>
<S> <C>
any dividends payable and any Supplemental term Insurance Amount.
DEATH BENEFIT STANDARD The Death Benefit Factor multiplied by the Cash Surrender Value of the
Policy on the date of the Insured's death, less the amount of any
Monthly Deductions then due, and less any outstanding Policy loans plus
accrued interest.
DISTRIBUTION CHARGE An amount deducted from each premium to cover the cost of distribution
of the Policy. The Distribution Charge is equal to, in Policy Year 1,
13% of premiums paid during the Policy Year up to the Target Premium,
and 0.5% of premiums paid in excess of the target premium during the
Policy Year. In Policy Years 2 through 7, the Distribution Charge is
equal to 15% of premiums paid during a Policy Year up to the Target
Premium, and 2.5% of premiums paid in excess of the Target Premium in
any such Policy Year. In Policy Years 8 and thereafter, the
Distribution Charge will be 5% of premiums paid during a Policy Year up
to the Target Premium, and 2.5% of premiums paid in excess of the
Target Premium in any such Policy Year.
DISTRIBUTION CHARGE REFUND An amount which will be added to Account Value as of the time of the
applicable first year premium payments, to determine the proceeds
payable to the Owner upon surrender during in Policy Years 1 or 2. Such
amount shall be equal to the lesser of (a) the Premium Loads on all
premiums paid in the first Policy Year, less 2% of such premiums paid in
the first Policy Year, or (b) one third of the Premium Loads paid on all
premiums paid in the first Policy Year, plus 2% of such premiums, less
the Premium Tax Charge. The Distribution Charge Refund is zero at all
times after the first Policy Year.
DURATION The number of full years the insurance has been in force; for the Face
Amount on the Date of Issue, measured from the Date of Issue; for any
increase in Face Amount, measured from the effective date of such
increase.
FACE AMOUNT The Face Amount of the Policy on the Date of Issue plus any increases in
Face Amount and minus any decreases in Face Amount.
GRACE PERIOD A 61-day period measured from the date on which notice of pending lapse
is sent by National Life, during which the Policy will not lapse and
insurance coverage continues. To prevent lapse, the Owner must during
the Grace Period make a premium payment at least equal to three times
the Monthly Deduction due the date when the Grace Period began, plus any
Premium Loads.
HOME OFFICE National Life's Home Office at National Life Drive, Montpelier, Vermont
05604.
INSURED The person upon whose life the Policy is issued.
ISSUE AGE The age of the Insured at his or her birthday nearest the Date of Issue.
The Issue Age is stated in the Policy.
</TABLE>
43
<PAGE> 51
<TABLE>
<S> <C>
LOAN ACCOUNT Account Value which is held in National Life's general account as
Collateral for Policy loans.
MINIMUM FACE AMOUNT The Minimum Face Amount is $5000.
MINIMUM INITIAL PREMIUM The minimum premium required to issue a Policy. The Minimum Initial
Premium per set of Policies purchased at the same time and associated
with a corporation or its affiliates, a trust, or a partnership, is
$50,000.
MINIMUM MONTHLY PREMIUM An amount stated in the Policy, the payment of which each month will
keep the Policy from entering a Grace Period during the Policy
Protection Period.
MONTHLY DEDUCTION The amount deducted in advance from the Account Value on each
Monthly Policy Date. It includes the Policy Administration Charge, the
Cost of Insurance Charge, and, if applicable, the Underwriting Charge
and the charge for the Term Rider.
MONTHLY POLICY DATE The day in each calendar month which is the same day of the month as the
Date of Issue, or the last day of any month having no such date, except
that whenever the Monthly Policy Date would otherwise fall on a date
other than a Valuation Date, the Monthly Policy Date will be deemed to
be the next Valuation Date.
NET ACCOUNT VALUE The Account Value of a Policy less any outstanding Policy loans and
accrued interest thereon.
NET AMOUNT AT RISK The amount by which (a) the Death Benefit, plus any outstanding Policy
loans and accrued interest, and plus any unpaid Monthly Deductions, and
divided by 1.0032734 (to take into account earnings of 4% per annum
solely for the purpose of computing Net Amount at Risk), exceeds (b) the
Account Value.
NET CASH SURRENDER VALUE The Cash Surrender Value of a policy less any outstanding Policy Loans
and accrued interest thereon.
NET PREMIUM The remainder of a premium after the deduction of the Premium Loads.
OWNER The person(s) or entity(ies) entitled to exercise the rights granted in
the Policy.
POLICY ADMINISTRATION CHARGE A charge currently in the amount of $5.50 per month included in the
Monthly Deduction, which is intended to reimburse National Life for
ordinary administrative expenses. National Life reserves the right to
increase this charge up to an amount equal to $8.00 per month.
POLICY ANNIVERSARY The same day and month as the Date of Issue in each later year.
POLICY PROTECTION PERIOD The first five years after the Date of Issue of a Policy during which
the Policy will not lapse regardless of whether net Account value is
sufficient to cover the Monthly Deductions, provided that premium
</TABLE>
44
<PAGE> 52
<TABLE>
<S> <C>
payments at least equal to the Cumulative Minimum Monthly Premium
have been paid.
POLICY YEAR A year that starts on the Date of Issue or on a Policy Anniversary.
PREMIUM LOADS A charge deducted from each premium payment, which consists of the
Distribution Charge and the applicable Premium Tax Charge
PREMIUM TAX CHARGE A charge deducted from each premium payment to cover the cost of all
applicable state and local premium taxes.
RATE CLASS The classification of the Insured for cost of insurance purposes. The
Rate Classes are: for each of guaranteed issue, simplified issue, and
full medical underwriting, there are male non-smoker, female
non-smoker, unisex non-smoker, male smoker, female smoker, unisex
nonsmoker, unisex unismoker, male unismoker, and female unismoker.
For full medical underwriting cases, substandard rate classes may also
apply.
SUPPLEMENTAL TERM INSURANCE
AMOUNT Additional insurance coverage provided by the Term Rider, equal to,
under Option A, the Term Insurance Amount stated in the Policy less any
excess of (a) the Policy's Death Benefit Standard over (b) the Policy's
Face Amount on the date of the Insured's death, less the amount of any
Monthly Deductions then due, and less any outstanding Policy loans and
accrued interest thereon, but not less than zero. Under Option B, the
Supplemental Term Insurance Amount is equal to the Term Insurance
Amount stated in the Policy less any excess of (a) the Policy's Death
Benefit Standard over (b) the Policy's Face Amount on the date of the
Insured's death, plus the Account Value of the Policy on the date of the
Insured's Death, less the amount of any Monthly Deductions then due,
and less any outstanding Policy loans and accrued interest thereon, but
not less than zero.
TARGET PREMIUM An amount equal to 1.25 times the annual whole life premium which
would apply to a Policy calculated by using the applicable 1980
Commissioners Standard Ordinary Mortality Table and an interest rate of
3.5%.
TERM INSURANCE AMOUNT An amount stated in the Policy on which the Supplemental Term
Insurance Amount is based.
TERM RIDER An optional benefit that may be included in a Policy at the owner's
option, which provides additional insurance coverage in the form of the
Supplemental Term Insurance Amount.
THIRD PARTY ADMINISTRATOR The administrator of the Policy appointed by National Life, McCamish
Systems, LLC, located at 6425 Powers Ferry Road, Third Floor, Atlanta,
Georgia 30339.
VALUATION DATE Each day that the New York Stock Exchange is open for business other
than the day after Thanksgiving and any day on which trading is
restricted by directive of the Securities and Exchange Commission.
Unless otherwise indicated, whenever an event occurs
</TABLE>
45
<PAGE> 53
<TABLE>
<S> <C>
or a transaction is to be effected on a day that is not a Valuation Date,
it will be deemed to have occurred on the next Valuation Date.
VALUATION PERIOD The time between two successive Valuation Dates. Each Valuation Period
includes a Valuation Date and any non-Valuation Date or consecutive
non-Valuation Dates immediately preceding it.
WITHDRAWAL A payment made at the request of the Owner pursuant to the right in the
Policy to withdraw a portion of the Policy's Net Account Value.
</TABLE>
46
<PAGE> 54
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, ACCOUNT VALUES
AND NET CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Account Values and
Net Cash Surrender Values of a Policy may change with the investment experience
of the Separate Account. The tables show how the Death Benefits, Account Values
and Net Cash Surrender Values of a Policy issued to an Insured of a given age,
sex and Rate Class would vary over time if the investment return on the assets
held in each Portfolio of each of the Funds were a uniform, gross annual rate of
0%, 6% and 12%.
The tables on Pages A-2 to A-10 illustrate a Policy issued to a male
Insured, Age 40 in the full medical underwriting nonsmoker Rate Class with a
Face Amount of $250,000 and Planned Periodic Premiums of $3,000 paid at the
beginning of each Policy Year. The Death Benefits, Account Values and Net Cash
Surrender Values would be lower if the Insured was in a smoker or substandard
class, a guaranteed issue class or a simplified issue class, since the cost of
insurance charges are higher for these classes. Also, the values would be
different from those shown if the gross annual investment returns averaged 0%,
6% and 12% over a period of years, but fluctuated above and below those averages
for individual Policy Years.
The second column of the tables show the amount to which the premiums
would accumulate if an amount equal to those premiums were invested to earn
interest, after taxes, at 5% compounded annually. The columns shown under the
heading "Guaranteed" assume that throughout the life of the policy, the monthly
charge for cost of insurance is based on the maximum level permitted under the
Policy (based on the applicable 1980 CSO Table); the columns under the heading
"Current" assume that throughout the life of the Policy, the monthly charge for
cost of insurance is based on the current cost of insurance rate, and the
Mortality and Expense Risk Charge and the Policy Administration Charge are at
the current rates.
The amounts shown in all tables reflect (1) the Mortality and Expense
Risk Charge, (2) the Separate Account Administration Charge, and (3) an
averaging of certain other asset charges described below that may be assessed
under the Policy. The other asset charges reflected in the Current and
Guaranteed illustrations equal an average of 0.83%. This total is based on an
assumption that an Owner allocates the Policy values equally among the
Subaccounts of the Separate Account. These asset charges take into account
expense reimbursement arrangements expected to be in place for 2000 for some of
the Portfolios. In the absence of the reimbursement arrangements for some of
the Portfolios, the other asset charges would have totalled an average of
1.10%. If the reimbursement agreements were discontinued, the Account Values
and Net Cash Surrender Values of a Policy which allocates Policy Values
equally among the Subaccounts would be lower than those shown in the following
tables. For information on Fund and Portfolio expenses, see the prospectuses
for the Funds accompanying this prospectus.
The tables also reflect the fact that no charges for Federal or state
income taxes are currently made against the Separate Account. If such a charge
is made in the future, it would take a higher gross annual rate of return to
produce the same Policy values.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums are paid and allocated as
indicated and no Policy loans are made. The tables are also based on the
assumption that the Owner has not requested an increase or decrease in the Face
Amount, that no Withdrawals have been made and no transfers have been made in
any Policy Year.
Upon request, National Life will provide a comparable illustration based
upon the proposed Insured's Age and Rate Class, the Death Benefit Option, the
Death Benefit compliance test, Face Amount and Planned Periodic Premiums
requested and the application of the Term Rider, if requested.
A-1
<PAGE> 55
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
CASH VALUE ACCUMULATION TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 0% (NET ANNUAL RATE OF RETURN OF -1.50% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES,
-1.25% FOR THE FIRST SEVEN YEARS, -1.16% FOR THE NEXT
THREE YEARS, -1.06% FOR THE NEXT 10 YEARS, AND -1.01%
FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
---------- -------
Premium
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ------ ----------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,835 1,983 250,000 2,309 2,458 250,000
2 6,458 3,518 3,664 250,000 4,478 4,624 250,000
3 9,930 5,137 5,137 250,000 6,587 6,587 250,000
4 13,577 6,684 6,684 250,000 8,640 8,640 250,000
5 17,406 8,163 8,163 250,000 10,634 10,634 250,000
6 21,426 9,609 9,609 250,000 12,614 12,614 250,000
7 25,647 10,973 10,973 250,000 14,531 14,531 250,000
8 30,080 12,551 12,551 250,000 16,698 16,698 250,000
9 34,734 14,038 14,038 250,000 18,800 18,800 250,000
10 39,620 15,427 15,427 250,000 20,836 20,836 250,000
11 44,751 16,716 16,716 250,000 22,824 22,824 250,000
12 50,139 17,891 17,891 250,000 24,732 24,732 250,000
13 55,796 18,937 18,937 250,000 26,549 26,549 250,000
14 61,736 19,843 19,843 250,000 28,269 28,269 250,000
15 67,972 20,591 20,591 250,000 29,884 29,884 250,000
16 74,521 21,166 21,166 250,000 31,390 31,390 250,000
17 81,397 21,554 21,554 250,000 32,793 32,793 250,000
18 88,617 21,743 21,743 250,000 34,085 34,085 250,000
19 96,198 21,720 21,720 250,000 35,258 35,258 250,000
20 104,158 21,457 21,457 250,000 36,292 36,292 250,000
25 150,340 15,352 15,352 250,000 39,214 39,214 250,000
30 209,282 0 0 0 37,286 37,286 250,000
</TABLE>
The Death Benefit may, and the Account 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, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-2
<PAGE> 56
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
CASH VALUE ACCUMULATION TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 6% (NET ANNUAL RATE OF RETURN OF -1.50% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES,
4.67% FOR THE FIRST SEVEN YEARS, 4.77% FOR THE NEXT
THREE YEARS, 4.88% FOR THE NEXT 10 YEARS, AND 4.93%
FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
---------- -------
Premium
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- ----------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,964 2,121 250,000 2,454 2,611 250,000
2 6,458 3,885 4,049 250,000 4,905 5,070 250,000
3 9,930 5,851 5,851 250,000 7,439 7,439 250,000
4 13,577 7,858 7,858 250,000 10,062 10,062 250,000
5 17,406 9,906 9,906 250,000 12,774 12,774 250,000
6 21,426 12,037 12,037 250,000 15,628 15,628 250,000
7 25,647 14,204 14,204 250,000 18,577 18,577 250,000
8 30,080 16,719 16,719 250,000 21,964 21,964 250,000
9 34,734 19,282 19,282 250,000 25,477 25,477 250,000
10 39,620 21,887 21,887 250,000 29,120 29,120 250,000
11 44,751 24,533 24,533 250,000 32,930 32,930 250,000
12 50,139 27,209 27,209 250,000 36,874 36,874 250,000
13 55,796 29,902 29,902 250,000 40,952 40,952 250,000
14 61,736 32,603 32,603 250,000 45,163 45,163 250,000
15 67,972 35,295 35,295 250,000 49,511 49,511 250,000
16 74,521 37,966 37,966 250,000 54,000 54,000 250,000
17 81,397 40,601 40,601 250,000 58,647 58,647 250,000
18 88,617 43,193 43,193 250,000 63,455 63,455 250,000
19 96,198 45,728 45,728 250,000 68,430 68,430 250,000
20 104,158 48,183 48,183 250,000 73,566 73,566 250,000
25 150,340 58,198 58,198 250,000 102,187 102,187 250,000
30 209,282 60,081 60,081 250,000 136,923 136,923 250,000
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
<PAGE> 57
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
CASH VALUE ACCUMULATION TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 12% (NET ANNUAL RATE OF RETURN OF -1.50% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES,
10.60% FOR THE FIRST SEVEN YEARS, 10.71% FOR THE NEXT
THREE YEARS, 10.81% FOR THE NEXT 10 YEARS, AND 10.87%
FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
---------- -------
Premium
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- ----------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,093 2,259 250,000 2,599 2,765 250,000
2 6,458 4,269 4,451 250,000 5,351 5,534 250,000
3 9,930 6,628 6,628 250,000 8,362 8,362 250,000
4 13,577 9,184 9,184 250,000 11,663 11,663 250,000
5 17,406 11,959 11,959 250,000 15,282 15,282 250,000
6 21,426 15,015 15,015 250,000 19,303 19,303 250,000
7 25,647 18,331 18,331 250,000 23,716 23,716 250,000
8 30,080 22,265 22,265 250,000 28,925 28,925 250,000
9 34,734 26,547 26,547 250,000 34,662 34,662 250,000
10 39,620 31,209 31,209 250,000 40,985 40,985 250,000
11 44,751 36,292 36,292 250,000 48,005 48,005 250,000
12 50,139 41,829 41,829 250,000 55,749 55,749 250,000
13 55,796 47,859 47,859 250,000 64,293 64,293 250,000
14 61,736 54,430 54,430 250,000 73,726 73,726 250,000
15 67,972 61,593 61,593 250,000 84,149 84,149 250,000
16 74,521 69,409 69,409 250,000 95,679 95,679 250,000
17 81,397 77,947 77,947 250,000 108,457 108,457 250,000
18 88,617 87,296 87,296 250,000 122,623 122,623 259,492
19 96,198 97,552 97,552 250,000 138,244 138,244 284,225
20 104,158 108,822 108,822 250,000 155,424 155,424 310,580
25 150,340 183,480 183,480 320,287 270,923 270,923 472,930
30 209,282 293,833 293,833 454,758 456,333 456,333 706,254
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
<PAGE> 58
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 0% (NET ANNUAL RATE OF RETURN OF -1.50% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES,
-1.25% FOR THE FIRST SEVEN YEARS, -1.16% FOR THE NEXT
THREE YEARS, -1.06% FOR THE NEXT 10 YEARS, AND -1.01%
FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
---------- -------
Premium
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- ----------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,835 1,983 250,000 2,309 2,458 250,000
2 6,458 3,518 3,664 250,000 4,478 4,624 250,000
3 9,930 5,137 5,137 250,000 6,587 6,587 250,000
4 13,577 6,684 6,684 250,000 8,640 8,640 250,000
5 17,406 8,163 8,163 250,000 10,634 10,634 250,000
6 21,426 9,609 9,609 250,000 12,614 12,614 250,000
7 25,647 10,973 10,973 250,000 14,531 14,531 250,000
8 30,080 12,551 12,551 250,000 16,698 16,698 250,000
9 34,734 14,038 14,038 250,000 18,800 18,800 250,000
10 39,620 15,427 15,427 250,000 20,836 20,836 250,000
11 44,751 16,716 16,716 250,000 22,824 22,824 250,000
12 50,139 17,891 17,891 250,000 24,732 24,732 250,000
13 55,796 18,937 18,937 250,000 26,549 26,549 250,000
14 61,736 19,843 19,843 250,000 28,269 28,269 250,000
15 67,972 20,591 20,591 250,000 29,884 29,884 250,000
16 74,521 21,166 21,166 250,000 31,390 31,390 250,000
17 81,397 21,554 21,554 250,000 32,793 32,793 250,000
18 88,617 21,743 21,743 250,000 34,085 34,085 250,000
19 96,198 21,720 21,720 250,000 35,258 35,258 250,000
20 104,158 21,457 21,457 250,000 36,292 36,292 250,000
25 150,340 15,352 15,352 250,000 39,214 39,214 250,000
30 209,282 0 0 0 37,286 37,286 250,000
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
<PAGE> 59
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 6% (NET ANNUAL RATE OF RETURN OF -1.50% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES,
4.67% FOR THE FIRST SEVEN YEARS, 4.77% FOR THE NEXT
THREE YEARS, 4.88% FOR THE NEXT 10 YEARS, AND 4.93%
FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
---------- -------
Premium
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ------ ----------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,964 2,121 250,000 2,454 2,611 250,000
2 6,458 3,885 4,049 250,000 4,905 5,070 250,000
3 9,930 5,851 5,851 250,000 7,439 7,439 250,000
4 13,577 7,858 7,858 250,000 10,062 10,062 250,000
5 17,406 9,906 9,906 250,000 12,774 12,774 250,000
6 21,426 12,037 12,037 250,000 15,628 15,628 250,000
7 25,647 14,204 14,204 250,000 18,577 18,577 250,000
8 30,080 16,719 16,719 250,000 21,964 21,964 250,000
9 34,734 19,282 19,282 250,000 25,477 25,477 250,000
10 39,620 21,887 21,887 250,000 29,120 29,120 250,000
11 44,751 24,533 24,533 250,000 32,930 32,930 250,000
12 50,139 27,209 27,209 250,000 36,874 36,874 250,000
13 55,796 29,902 29,902 250,000 40,952 40,952 250,000
14 61,736 32,603 32,603 250,000 45,163 45,163 250,000
15 67,972 35,295 35,295 250,000 49,511 49,511 250,000
16 74,521 37,966 37,966 250,000 54,000 54,000 250,000
17 81,397 40,601 40,601 250,000 58,647 58,647 250,000
18 88,617 43,193 43,193 250,000 63,455 63,455 250,000
19 96,198 45,728 45,728 250,000 68,430 68,430 250,000
20 104,158 48,183 48,183 250,000 73,566 73,566 250,000
25 150,340 58,198 58,198 250,000 102,187 102,187 250,000
30 209,282 60,081 60,081 250,000 136,923 136,923 250,000
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE> 60
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 12% (NET ANNUAL RATE OF RETURN OF -1.50% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES,
10.60% FOR THE FIRST SEVEN YEARS, 10.71% FOR THE NEXT
THREE YEARS, 10.81% FOR THE NEXT 10 YEARS, AND 10.87%
FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
---------- -------
Premium
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ------ ----------- ------- --------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,093 2,259 250,000 2,599 2,765 250,000
2 6,458 4,269 4,451 250,000 5,351 5,534 250,000
3 9,930 6,628 6,628 250,000 8,362 8,362 250,000
4 13,577 9,184 9,184 250,000 11,663 11,663 250,000
5 17,406 11,959 11,959 250,000 15,282 15,282 250,000
6 21,426 15,015 15,015 250,000 19,303 19,303 250,000
7 25,647 18,331 18,331 250,000 23,716 23,716 250,000
8 30,080 22,265 22,265 250,000 28,925 28,925 250,000
9 34,734 26,547 26,547 250,000 34,662 34,662 250,000
10 39,620 31,209 31,209 250,000 40,985 40,985 250,000
11 44,751 36,292 36,292 250,000 48,005 48,005 250,000
12 50,139 41,829 41,829 250,000 55,749 55,749 250,000
13 55,796 47,859 47,859 250,000 64,293 64,293 250,000
14 61,736 54,430 54,430 250,000 73,726 73,726 250,000
15 67,972 61,593 61,593 250,000 84,149 84,149 250,000
16 74,521 69,409 69,409 250,000 95,679 95,679 250,000
17 81,397 77,947 77,947 250,000 108,457 108,457 250,000
18 88,617 87,296 87,296 250,000 122,630 122,630 250,000
19 96,198 97,552 97,552 250,000 138,369 138,369 250,000
20 104,158 108,822 108,822 250,000 155,862 155,862 250,000
25 150,340 185,604 185,604 250,000 277,671 277,671 338,759
30 209,282 313,828 313,828 364,041 480,611 480,611 557,509
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-7
<PAGE> 61
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 0% (NET ANNUAL RATE OF RETURN OF -1.50% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES,
-1.25% FOR THE FIRST SEVEN YEARS, -1.16% FOR THE NEXT
THREE YEARS, -1.06% FOR THE NEXT 10 YEARS, AND -1.01%
FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
---------- -------
Premium
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- ---- -------- ------- --------- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,830 1,978 251,830 2,308 2,456 252,308
2 6,458 3,504 3,649 253,504 4,473 4,620 254,473
3 9,930 5,108 5,108 255,108 6,577 6,577 256,577
4 13,577 6,635 6,635 256,635 8,622 8,622 258,622
5 17,406 8,088 8,088 258,088 10,604 10,604 260,604
6 21,426 9,502 9,502 259,502 12,570 12,570 262,570
7 25,647 10,827 10,827 260,827 14,466 14,466 264,466
8 30,080 12,356 12,356 262,356 16,605 16,605 266,605
9 34,734 13,785 13,785 263,785 18,674 18,674 268,674
10 39,620 15,105 15,105 265,105 20,667 20,667 270,667
11 44,751 16,314 16,314 266,314 22,605 22,605 272,605
12 50,139 17,395 17,395 267,395 24,450 24,450 274,450
13 55,796 18,333 18,333 268,333 26,192 26,192 276,192
14 61,736 19,115 19,115 269,115 27,819 27,819 277,819
15 67,972 19,721 19,721 269,721 29,325 29,325 279,325
16 74,521 20,136 20,136 270,136 30,702 30,702 280,702
17 81,397 20,343 20,343 270,343 31,957 31,957 281,957
18 88,617 20,333 20,333 270,333 33,079 33,079 283,079
19 96,198 20,090 20,090 270,090 34,058 34,058 284,058
20 104,158 19,588 19,588 269,588 34,869 34,869 284,869
25 150,340 12,071 12,071 262,071 36,217 36,217 286,217
30 209,282 0 0 0 31,854 31,854 281,854
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-8
<PAGE> 62
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 6% (NET ANNUAL RATE OF RETURN OF -1.50% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES,
4.67% FOR THE FIRST SEVEN YEARS, 4.77% FOR THE NEXT
THREE YEARS, 4.88% FOR THE NEXT 10 YEARS, AND 4.93%
FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
Guaranteed Current
---------- -------
Premium
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- -- ----------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,959 2,115 251,959 2,453 2,610 252,453
2 6,458 3,869 4,033 253,869 4,901 5,065 254,901
3 9,930 5,818 5,818 255,818 7,428 7,428 257,428
4 13,577 7,799 7,799 257,799 10,041 10,041 260,041
5 17,406 9,813 9,813 259,813 12,738 12,738 262,738
6 21,426 11,898 11,898 261,898 15,570 15,570 265,570
7 25,647 14,006 14,006 264,006 18,490 18,490 268,490
8 30,080 16,446 16,446 266,446 21,836 21,836 271,836
9 34,734 18,914 18,914 268,914 25,296 25,296 275,296
10 39,620 21,400 21,400 271,400 28,870 28,870 278,870
11 44,751 23,902 23,902 273,902 32,592 32,592 282,592
12 50,139 26,400 26,400 276,400 36,423 36,423 286,423
13 55,796 28,878 28,878 278,878 40,357 40,357 290,357
14 61,736 31,319 31,319 281,319 44,388 44,388 294,388
15 67,972 33,698 33,698 283,698 48,510 48,510 298,510
16 74,521 35,993 35,993 285,993 52,720 52,720 302,720
17 81,397 38,182 38,182 288,182 57,028 57,028 307,028
18 88,617 40,246 40,246 290,246 61,427 61,427 311,427
19 96,198 42,161 42,161 292,161 65,909 65,909 315,909
20 104,158 43,889 43,889 293,889 70,452 70,452 320,452
25 150,340 48,061 48,061 298,061 93,971 93,971 343,971
30 209,282 38,500 38,500 288,500 117,543 117,543 367,543
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-9
<PAGE> 63
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 NONSMOKER
GUIDELINE PREMIUM TEST
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 12% (NET ANNUAL RATE OF RETURN OF -1.50% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES,
10.60% FOR THE FIRST SEVEN YEARS, 10.71% FOR THE NEXT
THREE YEARS, 10.81% FOR THE NEXT 10 YEARS, AND 10.87%
FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
---------- -------
Premium
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
- -- ----------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,088 2,253 252,088 2,597 2,763 252,597
2 6,458 4,251 4,434 254,251 5,345 5,529 255,345
3 9,930 6,590 6,590 256,590 8,349 8,349 258,349
4 13,577 9,114 9,114 259,114 11,638 11,638 261,638
5 17,406 11,844 11,844 261,844 15,238 15,238 265,238
6 21,426 14,837 14,837 264,837 19,230 19,230 269,230
7 25,647 18,067 18,067 268,067 23,600 23,600 273,600
8 30,080 21,885 21,885 271,885 28,749 28,749 278,749
9 34,734 26,014 26,014 276,014 34,404 34,404 284,404
10 39,620 30,478 30,478 280,478 40,614 40,614 290,614
11 44,751 35,303 35,303 285,303 47,484 47,484 297,484
12 50,139 40,511 40,511 290,511 55,026 55,026 305,026
13 55,796 46,120 46,120 296,120 63,302 63,302 313,302
14 61,736 52,158 52,158 302,158 72,381 72,381 322,381
15 67,972 58,643 58,643 308,643 82,340 82,340 332,340
16 74,521 65,605 65,605 315,605 93,268 93,268 343,268
17 81,397 73,069 73,069 323,069 105,277 105,277 355,277
18 88,617 81,076 81,076 331,076 118,471 118,471 368,471
19 96,198 89,662 89,662 339,662 132,969 132,969 382,969
20 104,158 98,854 98,854 348,854 148,885 148,885 398,885
25 150,340 154,860 154,860 404,860 255,735 255,735 505,735
26 161,007 168,199 168,199 418,199 283,978 283,978 533,978
30 209,282 229,493 229,493 479,493 428,139 428,139 678,139
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-10
<PAGE> 64
-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> 65
NATIONAL LIFE GROUP
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-2
<PAGE> 66
[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> 67
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> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
<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> 82
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> 83
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> 84
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> 85
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> 86
<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> 87
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> 88
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> 89
NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-26
<PAGE> 90
[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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
<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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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> 113
NATIONAL VARIABLE
LIFE INSURANCE ACCOUNT
(BENEFIT PROVIDER SEGMENT)
FINANCIAL STATEMENTS
*****
DECEMBER 31, 1999
F-50
<PAGE> 114
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of National Life Insurance Company and Policyholders
of National Variable Life Insurance Account -- Benefit Provider Segment
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of each of the sub-accounts
constituting the National Variable Life Insurance Account -- Benefit Provider
Segment (a segment within a Separate Account of National Life Insurance Company)
(the Segment) at December 31, 1999, and the results of each of their operations
and each of their changes in net assets for the period from February 12, 1999
through December 31, 1999, 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> 115
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
POLICYHOLDER
ACCOUNT
VALUES
------------
<S> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value
(policyholder accumulation units and unit value):
American Century VP Income & Growth (23,131.19 accumulation units at $7.98 unit value) $ 184,516
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 116
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 12, 1999 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET AMERICAN
FUND CENTURY
------------------- --------------------
MONEY INCOME &
MARKET GROWTH TOTAL
------------------- -------------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 2,988 $ - $ 2,988
EXPENSES:
Mortality and expense risk charges 174 - 174
--------------------------------------------------
Net investment income 2,814 - 2,814
--------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold - - -
Net unrealized appreciation
on investments - 8,302 8,302
--------------------------------------------------
Net realized and unrealized
gain on investments - 8,302 8,302
--------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,814 $ 8,302 $11,116
==================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 117
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM FEBRUARY 12, 1999 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET AMERICAN
FUND CENTURY
--------------- ----------------
MONEY INCOME &
MARKET GROWTH TOTAL
--------------- ---------------- ------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,814 $ 8,302 $ 11,116
-----------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 177,053 - 177,053
Transfers between investment
sub-accounts and general account, net (176,214) 176,214 -
Cost of insurance and administrative charges (3,653) - (3,653)
-----------------------------------------------
Total capital transactions (2,814) 176,214 173,400
-----------------------------------------------
Increase in net assets - 184,516 184,516
Net assets, beginning of period - - -
-----------------------------------------------
Net assets, end of period $ - $ 184,516 $ 184,516
===============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 118
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(BENEFIT PROVIDER SEGMENT)
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Variable Life Insurance Account (the Variable Account) began operations
on March 11, 1996 and is registered as a unit investment trust under the
Investment Company Act of 1940, as amended. The operations of the Variable
Account are part of National Life Insurance Company (National Life). The
Variable Account was established by National Life as a separate investment
account to invest the net premiums received from the sale of certain variable
life insurance products. Equity Services, Inc., an indirect wholly-owned
subsidiary of National Life, is the principal underwriter for the variable life
insurance policies issued by National Life. Sentinel Advisors Company, an
indirectly-owned subsidiary of National Life, provides investment advisory
services for certain Market Street Fund, Inc. mutual fund portfolios.
National Life maintains three segments within the Variable Account. The Varitrak
Segment within the Variable Account was established on March 11, 1996 and is
used exclusively for National Life's flexible premium variable life insurance
products known collectively as Varitrak. On May 1, 1998, National Life
established the Estate Provider Segment 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 (the Segment) within the Variable
Account to be used exclusively for National Life's flexible premium variable
life insurance products 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,
American Century Variable Portfolios, JP Morgan Series Trust II, Strong Variable
Insurance Funds, Neuberger & Berman Advisers Management Trust, Goldman Sachs
Variable Insurance Trust, and BT Insurance Funds 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-three 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, BT Insurance Funds Trust Small Cap Index Fund, BT
Insurance Funds Trust EAFE Equity Index Fund, BT Insurance Funds Trust Equity
500 Index Fund, American
F-55
<PAGE> 119
Century Variable Portfolios VP Value, American Century Variable Portfolios VP
Income & Growth, JP Morgan Series Trust II International Opportunities, JP
Morgan Series Trust II Small Company, Strong Opportunity Fund II, Strong
Variable Insurance Funds Mid Cap Growth, Neuberger Berman 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
(the Portfolios). The assets of each portfolio are held separate from the assets
of the other portfolios and each has different investment objectives and
policies. Each portfolio operates separately and the gains or losses in one
portfolio have no effect on the investment performance of the other portfolios.
INVESTMENT VALUATION
The investments in the Portfolios are valued at the closing net asset value per
share as determined by the portfolio at the end of each period. The change in
the difference between cost and market value is reflected as unrealized gain
(loss) in the Statement of Operations.
INVESTMENT TRANSACTIONS
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed) and dividend income (including capital gain
distributions) are recorded on the ex-dividend date. The cost of investments
sold is determined using the first-in, first-out basis (FIFO).
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
0.4% in years 1-7 of each sub-account's net asset value for its assumption of
mortality and expense risks and for separate account administration. This rate
declines to an ultimate rate of 0.15% in years 21 and beyond. 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.
NOTE 4 - INVESTMENTS
The number of shares held and cost for the portfolio at December 31, 1999 is set
forth below:
<TABLE>
<CAPTION>
Portfolio Shares Cost
- --------- ------ ----
<S> <C> <C>
American Century Variable Portfolios
VP Income & Growth 23,064 $ 176,214
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-56
<PAGE> 120
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 $ 180,041 $ 180,041
American Century Variable Portfolios
VP Income & Growth 176,214
</TABLE>
NOTE 6 - LOANS
Policyholders may obtain loans on any business day 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.
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-57
<PAGE> 121
PART II
<PAGE> 122
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article VI, Section 2 of the Bylaws of National Life Insurance Company
("National Life" or the "Company") provides that, in accordance with the
provisions of the Section, the Company shall indemnify directors, officers and
employees of the Company or any other corporation served at the request of the
Company, and their heirs, executors and administrators, shall be indemnified to
the maximum extent permitted by law against all costs and expenses, including
judgments paid, settlement costs, and counsel fees, reasonably incurred in the
defense of any claim in which such person is involved by virtue of his or her
being or having been such a director, officer, or employee.
The Bylaws are filed as Exhibit 1.A.(7) to this Registration Statement.
Vermont law authorizes Vermont corporations to provide indemnification to
directors, officers and other persons.
National Life owns a directors and officers liability insurance policy
covering liabilities that directors and officers of National Life and its
subsidiaries and affiliates may incur in acting as directors and officers.
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or other
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
REPRESENTATION RELATING TO FEES AND CHARGES
National Life Insurance Company ("the Company") hereby represents that the
fees and charges deducted under the variable life insurance policies described
in the prospectuses contained in this registration statement are, in the
aggregate, reasonable in relationship to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
<PAGE> 123
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents.
The facing sheet.
The prospectus consisting of ____ pages.
Undertaking to file reports.(9)
Rule 484 undertaking.(9)
Representation relating to fees and charges.(9)
The signatures.
Written consents of the following persons:
(a) Michele S. Gatto, Esq.
(b) Kiri Parankirinathan, A.S.A., M.A.A.A.
(c) Sutherland, Asbill & Brennan,LLP.
(d) PricewaterhouseCoopers LLP.
The following exhibits, corresponding to those required by paragraph A of
the instructions as to exhibits in Form N-8B-2:
1.
A.
(1) Resolutions of the Board of Directors of National Life
Insurance Company establishing the National Variable Life
Insurance Account.(10)
(2) Not Applicable.
(3) (a) Form of Distribution Agreement between National Life
Insurance Company and Equity Services, Inc.(4)
(b)(1) Form of Equity Services, Inc. Branch Office Supervisor
Contract(10)
(b)(2) Form of Equity Services, Inc. Registered Representative
Contract(10)
(c) Schedule of Sales Commissions.(9)
(4) Not Applicable.
(5) (a) Specimen Sentinel Estate Provider Policy Form (Sex
Distinct)(8)
(b) Supplemental Term Insurance Rider(8)
(c) Endorsement for Unisex Policies(8)
(6) (a) Amended and Restated Charter of National Life
Insurance Company.(10)
(b) Amended and Restated Bylaws of National Life
Insurance Company.(10)
(7) Not Applicable.
(8) (a) Form of Participation Agreement by and among Market
Street Fund, Inc., National Life Insurance Company and
Equity Services, Inc.(3)
(a)(2) Form of Amendment No. 2 to Participation Agreement
among Market Street Fund, Inc., National Life Insurance
Company and 1717 Capital Management Company (formerly
PML Securities Company(5)
(a)(3) Form of Amendment No. 3 to Participation Agreement
among Market Street Fund, Inc., National Life Insurance
Company and 1717 Capital Management Company (formerly
PML Securities Company) (7)
(a)(4) Form of Amendment No. 4 to Participation Agreement
among Market Street Fund, Inc., National Life Insurance
Company, 1717 Capital Management Company (formerly
PML Securities Company) and LSW(9)
<PAGE> 124
(b) Form of Participation Agreement by and among The Alger
American Fund, National Life Insurance Company and Fred
Alger and Company(3)
(b)(2) Form of Amended Schedule A to the Participation
Agreement by and among The Alger American Fund,
National Life Insurance Company and Fred Alger and
Company(6)
(b)(3) Form of Amendment No. 2 to the Participation Agreement
by and among The Alger American Fund, National Life
Insurance Company and Fred Alger and Company(7)
(b)(4) Form of Amendment No. 3 to the Participation Agreement
by and among The Alger American Fund, National Life
Insurance Company, Fred Alger and Company and LSW(9)
(c) Form of Shareholder Services Agreement by and among
National Life Insurance Company and American Century
Investment Management, Inc.(5)
(d) Form of Participation Agreement by and among National
Life Insurance Company, Goldman Sachs Variable
Insurance Trust and Goldman Sachs & Co.(5)
(d)(1) Form of Amended Schedules to the Participation
Agreement by and among National Life Insurance Company,
Goldman Sachs Variable Insurance Trust and Goldman
Sachs & Co.(5)
(d)(2) Form of Amended Schedules to the Participation
Agreement by and among National Life Insurance Company,
Goldman Sachs Variable Insurance Trust and Goldman
Sachs & Co.(9)
(e) Form of Participation Agreement by and among National
Life Insurance Company and J. P. Morgan Series Trust
II(5)
(f) Form of Participation Agreement by and among
National Life Insurance Company, Neuberger Berman
Advisers Managers Trust, Advisers Managers Trust, and
Neuberger Berman Management Incorporated(5)
(g) Form of Participation Agreement by and between BT
Insurance Funds Trust, Bankers Trust Company and
National Life Insurance Company.
(9) Not Applicable.
(10)(a) Sentinel Benefit Provider Application Form.(8)
(11) Memorandum describing issuance, transfer and redemption
procedures.(9)
2. Opinion and Consent of D. Russell Morgan, as to the legality of the
securities being offered.
3. Not Applicable.
4. Not Applicable.
5. Not Applicable.
<PAGE> 125
6. Opinion and Consent of Kiri Parankirinathan, A.S.A., M.A.A.A., as to
actuarial matters pertaining to the securities being registered.
7. (a) Consent of PricewaterhouseCoopers LLP.
(b) Consent of Sutherland, Asbill & Brennan, LLP.
8. Powers of Attorney for Directors.(8)
A. Robert E. Boardman
B. Earle H. Harbison
C. A. Gary Shilling
- -----------------------------
(2)Incorporated herein by reference to the Form S-6 Registration Statement
(File No. 33-91938) for National Variable Life Insurance Account (VariTrak)
filed on May 5, 1995.
(3)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form
S-6 Registration Statement (File No. 33-91938) for National Variable Life
Insurance Account (VariTrak) filed December 29, 1995.
(4)Incorporated herein by reference to Post-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No.33-91938) for National Variable
Life Insurance Account (VariTrak) filed March 12, 1996, Accession Number
0000950133-96-000202
(5)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No. 333-44723) for National Variable
Life Insurance Account (Sentinel Estate Provider filed April 16, 1998),
Accession Number 0000950133-98-001468
(6)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form
N-4 Registration Statement (file No. 333-19583) for National Variable
Annuity Account II (Sentinel Advantage) filed May 28, 1997.
(7)Incorporated herein by referenced to Pre-Effective Amendment No. 1 to the
Form N-4 Registration Statement (File No. 333-47363 ) for LSW Variable
Annuity Account I (RetireMax) filed July 31, 1998.
(8)Incorporated herein by reference to the S-6 Registration Statement (File No.
333-67003) filed on November 9, 1999.
(9)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No. 333-67003) for National Variable
Life Insurance Account (COLI) filed February 8, 1999.
(10)Incorporated herein by reference to Pre-Effective Amendment No. 2 to the
Form S-6 Registration Statement (File No. 333-67003) for National Variable
Life Insurance Account (COLI) filed February 11, 1999.
<PAGE> 126
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. 2 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 1st day of May, 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> 127
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. 2
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 1st day of May, 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
Pre-Effective Amendment No. 2 to the Registration Statement has been signed
below by the following persons in the capacities indicated on the date(s) set
forth below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Patrick E. Welch Chairman of the Board and 5/1/2000
- --------------------- and Chief Executive Officer, --------
Patrick E. Welch and Director
/s/ Thomas H. MacLeay President & Chief Operating 5/1/2000
- ----------------------- Officer, and Director --------
Thomas H. MacLeay
/s/ William A. Smith Executive Vice President & 5/1/2000
- ----------------------- Chief Financial Officer --------
William A. Smith
Robert E. Boardman* Director
- ------------------ --------
Robert E. Boardman
</TABLE>
<PAGE> 128
<TABLE>
<S> <C> <C>
Earle H. Harbison, Jr.* Director
- ---------------------- ------------
Earle H. Harbison, Jr.
A. Gary Shilling* Director
- ----------------- ------------
A. Gary Shilling
</TABLE>
*By /s/ Patrick E. Welch Date: May 1, 2000
-----------------------------
Patrick E. Welch
Pursuant to Power of Attorney
<PAGE> 129
Exhibit Index
2. Opinion and Consent of Michele S. Gatto, as to the legality of the
securities being offered.
6. Opinion and Consent of Kiri Parankirinathan, A.S.A., M.A.A.A., as to
actuarial matters pertaining to the securities being registered.
7. (a) Consent of PricewaterhouseCoopers LLP
(b) Consent of Sutherland, Asbill & Brennan, LLP
<PAGE> 1
EXHIBIT 2
May 1, 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. 2 to a Registration Statement on Form S-6
("Registration Statement") under the Securities Act of 1933, as amended, of
National Variable Life Insurance Account (the "Separate Account") and National
Life Insurance Company ("National Life"), covering an indefinite amount of
premiums expected to be received under certain Sentinel Benefit Provider
variable universal life insurance policies intended primarily for the Corporate
Market ("Policies") to be offered by National Life. Under the Policies, amounts
will be allocated by National Life to the Separate Account as described in the
prospectus included in the Registration Statement to support reserves for such
Policies.
In my capacity as General Counsel and Senior Vice President of National
Life, I have examined all such corporate records of National Life and such
other documents and laws as I consider appropriate as a basis for the opinion
hereinafter expressed. Based upon such examination, I am of the opinion that:
1. National Life is a corporation duly organized and validly existing
under the laws of the State of Vermont.
2. The Separate Account has been duly created and is validly existing as
a separate account pursuant to Title 8, Vermont Statutes Annotated, Sections
3855 to 3859.
3. The portion of the assets to be held in the Separate Account equal to
the reserves and other liabilities under the Policies is not chargeable with
liabilities arising out of any other business National Life may conduct.
4. The Policies have been duly authorized by National Life and, when
issued as contemplated by the Registration Statement, will constitute legal,
validly issued and binding obligations of National Life in accordance with their
terms.
I hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to my name under the heading "Legal
Matters" in the prospectus.
Very truly yours,
Michele S. Gatto
Senior Vice President
and General Counsel.
<PAGE> 1
EXHIBIT 6
May 1, 2000
National Life Insurance Company
National Life Drive
Montpelier, VT 05604
Ladies and Gentlemen:
In my capacity as a consultant to National Life Insurance Company, I have
provided actuarial advice concerning: (a) the preparation of Post Effective
Amendment No. 2 to the registration statement for the National Variable Life
Insurance Account filed on Form S-6 with the Securities and Exchange Commission
under the Securities Act of 1933 (the "Registration Statement") regarding the
offer and sale of the Sentinel Benefit Provider Variable Universal Life
Insurance Policies intended primarily for the Corporate Market (the
"Policies"); and (b) the preparation of policy forms for the Policies described
in the Registration Statement.
It is my professional opinion that:
(1) The illustrations of Death Benefits, Net Cash Surrender Values,
Account Values, and accumulated premiums in Appendix A of the prospectus (the
"Prospectus") contained in the Registration Statement, based on the assumptions
stated in the illustrations, are consistent with the assumptions stated in the
Policies. The rate structure of the Policies has not been designed so as to make
the relationship between premiums and benefits as shown in the illustrations,
appear to be disproportionately more favorable to the prospective purchasers of
Policies, who are male non-smokers age 40 who undergo medical underwriting, than
to prospective purchasers of Policies for males or females at other ages or
other rate classes.
(2) The information contained in the examples in the sections of the
prospectus entitled "Detailed Description of Policy Provisions," "Charges and
Deductions," and "Policy Rights and Privileges," based on the assumptions stated
in the examples, is consistent with the provisions of the Policies.
I hereby consent to the filing of this opinion as an exhibit to
Post Effective Amendment No. 2 to the Registration Statement and the use of my
name under the heading "Experts" in the prospectus contained in the Registration
Statement.
Sincerely,
Kiri Parankirinathan, A.S.A., M.A.A.A
<PAGE> 1
EXHIBIT 7(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 2 to the Registration Statement on Form S-6,
relating to the Sentinel Benefit Provider policy, of our report dated March 10,
2000, relating to the consolidated financial statements of National Life Holding
Company, of our report dated March 10, 2000 relating to the consolidated
financial statements of National Life Insurance Company and our report dated
March 31, 2000 relating to the financial statements of the National Variable
Life Insurance Account - Benefit Provider Segment, all of which appear in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PricewaterhouseCoopers, LLP
Boston, Massachusetts
May 1, 2000
<PAGE> 1
[SUTHERLAND, ASBILL & BRENNAN LLP LETTERHEAD]
STEPHEN E. ROTH
DIRECT LINE: (202) 383-0158
Internet: [email protected]
May 1, 2000
VIA EDGAR
National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
Re: National Variable Life Insurance Account
Registration Statement on Form S-6
File No. 333-67003
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.
2 to Form S-6 for National Variable Life Insurance Account, which Prospectus
describes certain flexible premium variable universal life policies intended
primarily for the corporate market. 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:
Stephen E. Roth
