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SENTINEL ESTATE PROVIDER
P R O S P E C T U S
[PHOTO] DATED MAY 1, 2000, AS AMENDED DECEMBER 1, 2000
NATIONAL LIFE INSURANCE COMPANY
Home Office: National Life Drive, Montpelier, Vermont 05604
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
Telephone: (800) 537-7003
This prospectus describes the Sentinel Estate Provider Policy, a
survivorship variable universal life insurance policy offered by National Life
Insurance Company. This Policy combines insurance and investment features. It
provides a death benefit on the death of the last to die of two specified
insured people. You can make premium payments at various times and in various
amounts. You can also allocate premiums among a number of funds with different
investment objectives, and you can increase or decrease the death benefit
payable under your policy.
We deduct certain charges from premium payments. Then these premium
payments go to the National Variable Life Insurance Account, a separate
account of National Life, or to the fixed account, or a combination of the
two. The fixed account pays interest at rates guaranteed to be at least 4%.
The separate account has twenty-eight subaccounts. Each subaccount buys shares
of a specific fund portfolio. Currently the available funds are:
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SENTINEL VARIABLE PRODUCTS
-------- -------- --------
TRUST ALGER AMERICAN FUND
----- ----- -------- ----
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COMMON STOCK FUND GROWTH PORTFOLIO
MID CAP GROWTH FUND LEVERAGED ALLCAP PORTFOLIO
SMALL COMPANY FUND SMALL CAPITALIZATION PORTFOLIO
GROWTH INDEX FUND
MONEY MARKET FUND
Managed by National Life
Investment Management Managed by Fred Alger
Company, Inc. Management, Inc
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FIDELITY VARIABLE INSURANCE FIDELITY VARIABLE INSURANCE
-------- -------- --------- -------- -------- ---------
PRODUCTS FUND PRODUCTS FUND II
-------- ---- -------- ---- --
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EQUITY-INCOME PORTFOLIO CONTRAFUND PORTFOLIO
GROWTH PORTFOLIO INDEX 500 PORTFOLIO
HIGH INCOME PORTFOLIO INVESTMENT GRADE BOND PORTFOLIO
OVERSEAS PORTFOLIO
Managed by Fidelity Investments Managed by Fidelity Investments
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NEUBERGER BERMAN ADVISERS
--------- ------ --------
MARKET STREET FUND, INC. MANAGEMENT TRUST
------ ------ ----- ---- ---------- -----
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BOND PORTFOLIO PARTNERS PORTFOLIO
MANAGED PORTFOLIO
Managed by Sentinel Advisors Managed by Neuberger Berman
Company Management, Inc.
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</TABLE>
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AMERICAN CENTURY VARIABLE DREYFUS SOCIALLY RESPONSIBLE
-------- ------- -------- ------- -------- -----------
PORTFOLIOS, INC. GROWTH FUND, INC.
---------- --- ------ ---- ---
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VP INCOME & GROWTH PORTFOLIO SOCIALLY RESPONSIBLE GROWTH
VP VALUE PORTFOLIO FUND, INC.
Managed by American Century Managed by The Dreyfus
Investment Management, Inc. Corporation
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INVESCO VARIABLE INSURANCE
------- -------- ---------
FUNDS, INC. J.P. MORGAN SERIES TRUST II
------ ---- ---- ------ ------ ----- --
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VIF - DYNAMICS FUND INTERNATIONAL OPPORTUNITIES
VIF - HEALTH SCIENCES FUND PORTFOLIO
VIF - TECHNOLOGY FUND SMALL COMPANY PORTFOLIO
Managed by J. P. Morgan
Managed by INVESCO Funds Investment Management Company
Group, Inc.
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STRONG VARIABLE INSURANCE
------ -------- ---------
FUNDS, INC. STRONG OPPORTUNITY FUND II.
------ ---- ------ ----------- ---- ---
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MID CAP GROWTH FUND II OPPORTUNITY FUND II
Managed by Strong Capital Managed by Strong Capital
Management, Inc. Management, Inc.
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</TABLE>
The value of your policy will depend upon the investment results of
the funds you select. You bear the entire investment risk for all amounts
allocated to the separate account; there is no guaranteed minimum value for
any of the funds, and the value of your policy may be more or less than
premiums paid. You must receive, with this prospectus, current prospectuses
for all of the fund options. They describe the investment objectives and the
risks of the funds.
The value of your policy will also reflect our charges. These include
a premium expense charge, cost of insurance charges, the variable account
charge, the monthly administrative charge, and certain other charges. During
the first five years your policy will remain in force if specified premiums
are paid on time, or if the policy has enough value to pay the monthly charges
as they become due. After the fifth year, the Policy will remain in force only
so long as it has enough value to pay the monthly charges as they become due.
We recommend that you read this prospectus carefully. You should keep it to
refer to later.
Investments in these contracts are not deposits or obligations of,
and are not guaranteed or endorsed by, adviser of any of the underlying funds
identified above, the U.S. government, or any bank or bank affiliate.
Investments are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other governmental agency.
It may not be advantageous to purchase a policy as a replacement for
another type of life insurance or as a means to obtain additional insurance
protection if you already own another last survivor variable universal life
insurance policy.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THE POLICY OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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Summary Description of the Policy.........................................................................1
The Policy ......................................................................................1
The Variable Account.............................................................................2
Availability of Policy...........................................................................2
The Death Benefit................................................................................2
Flexibility to Adjust Death Benefit..............................................................3
Accumulated Value................................................................................3
Allocation of Premiums...........................................................................3
Transfers........................................................................................3
Free-Look Privilege..............................................................................4
Charges Assessed in Connection with the Policy...................................................4
Loan Privilege...................................................................................7
Withdrawal of Cash Surrender Value...............................................................8
Surrender of the Policy..........................................................................8
Available Automated Fund Management Features.....................................................8
Optional Benefits................................................................................8
Tax Treatment....................................................................................9
Other Policies...................................................................................9
Illustrations....................................................................................9
Questions........................................................................................9
National Life Insurance Company, The Variable Account, and The Funds......................................10
National Life Insurance Company..................................................................10
The Variable Account.............................................................................10
Sentinel Variable Products Trust.................................................................10
Alger American Fund..............................................................................11
American Century Variable Portfolios, Inc........................................................12
Dreyfus Socially Responsible Growth Fund, Inc....................................................12
Fidelity Variable Insurance Products Fund and Fidelity Variable Insurance
Products Fund II..............................................................................12
INVESCO Variable Insurance Funds, Inc............................................................13
J. P. Morgan Series Trust II.....................................................................14
Market Street Fund, Inc..........................................................................15
Neuberger Berman Advisers Management Trust.......................................................15
Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund II.............................16
Other Information................................................................................16
The Fixed Account................................................................................18
Detailed Description of Policy Provisions.................................................................19
Death Benefit....................................................................................19
Ability to Adjust Face Amount....................................................................21
How the Duration of the Policy May Vary..........................................................22
Accumulated Value................................................................................22
Payment and Allocation of Premiums...............................................................23
</TABLE>
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Charges and Deductions....................................................................................26
Premium Expense Charge...........................................................................27
Surrender Charge.................................................................................27
Monthly Deductions...............................................................................27
Withdrawal Charge................................................................................30
Transfer Charge..................................................................................30
Projection Report Charge.........................................................................30
Other Charges....................................................................................30
Differences in Charges for Policies Issued in New York...........................................31
Policy Rights.............................................................................................31
Loan Privileges..................................................................................31
Surrender Privilege..............................................................................32
Withdrawal of Cash Surrender Value...............................................................33
Free-Look Privilege..............................................................................34
Telephone Transaction Privilege..................................................................35
Other Transfer Rights............................................................................35
Available Automated Fund Management Features.....................................................35
The Fixed Account.........................................................................................36
Minimum Guaranteed and Current Interest Rates....................................................36
Transfers from Fixed Account.....................................................................37
Other Policy Provisions...................................................................................37
Optional Benefits.........................................................................................40
Federal Income Tax Considerations.........................................................................44
Introduction.....................................................................................44
Tax Status of the Policy.........................................................................44
Tax Treatment of Policy Benefits.................................................................45
Possible Tax Law Changes.........................................................................47
Possible Charges for National Life's Taxes.......................................................47
Voting Rights.............................................................................................47
Changes in Applicable Law, Funding and Otherwise..........................................................48
Officers and Directors of National Life...................................................................48
Distribution of Policies..................................................................................50
Policy Reports............................................................................................51
State Regulation..........................................................................................51
Insurance Marketplace Standards Association...............................................................52
Experts...................................................................................................52
Legal Matters.............................................................................................52
Financial Statements......................................................................................52
Glossary..................................................................................................53
Appendix A-Illustration of Death Benefits, Accumulated Values and
Cash Surrender Values............................................................................A-1
Appendix B-Joint Age Calculation..........................................................................B-1
Appendix C-New York Surrender Charge Information..........................................................C-1
Financial Statements......................................................................................F-1
</TABLE>
THE POLICY MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT OFFER
THE POLICY IN ANY STATE IN WHICH WE MAY NOT LEGALLY OFFER THE POLICY. YOU
SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. WE DO NOT CLAIM THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
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SUMMARY DESCRIPTION OF THE POLICY
You should read this summary of the policy provisions together with
the detailed information appearing later in this Prospectus. Unless otherwise
noted, this Prospectus assumes at least one of the insured people is alive.
The precise meanings of the few capitalized terms used in this summary can be
found in the Glossary, on pages 53 to 57.
THE POLICY
National Life Insurance Company issues the Sentinel Estate Provider
last survivor variable universal life insurance policy. This life insurance
policy allows you to make premium payments in any amount and whenever you
like, within limits. As long as the policy remains in force, it will provide
for:
(1) Life insurance coverage which will provide a death benefit on the
death of the last to die of two named insured people;
(2) A cash surrender value;
(3) Surrender and withdrawal rights and policy loan privileges; and
(4) A variety of additional insurance benefits (where provided by
optional riders, so long as those riders remain in force).
This policy is designed to help lessen the economic loss resulting
from the deaths of the two insured people. You should consider your need for
survivorship insurance coverage and the policy's investment potential on a
long-term basis. This policy pays its death benefit on the death of the last
to die of two named insured people.
There is no fixed schedule for premium payments, although you may
establish a schedule of planned periodic premiums. You may also, after a year
and within limits, increase or decrease the policy's face amount, and you may
change the death benefit option. The policy's value and death benefit will
fluctuate based on the investment results of the chosen fund portfolios, and
the crediting of interest to the fixed account, as well as other factors.
Lapse. The policy will not lapse simply because you do not pay any
particular amounts of premiums. However, the payment of premiums in any amount
or frequency will not necessarily guarantee that the policy will remain in
force. In general, the policy will lapse if it does not have enough value to
pay the monthly charges as they become due. During the first five years, the
policy will not lapse even if its value is not enough to pay the monthly
charges, if at least specified amounts of premiums have been paid (these
amounts are defined in the Glossary as the Cumulative Minimum Monthly
Premium). See "How the Duration of the Policy May Vary," page 22.
Optional Guaranteed Death Benefit Rider. In addition, if you buy the
optional Guaranteed Death Benefit Rider, your policy will not lapse even if
its value is not enough to pay the monthly charges, if at least another set of
specified amounts of premiums have been paid (these amounts are defined in the
Glossary as the Cumulative Guarantee Premium). You may choose to have the
optional Guaranteed Death Benefit Rider cover the entire lifetimes of the two
insured people, or the period prior to the younger insured person's age 81. Of
course, the premiums necessary to keep the rider in force will be higher if
you elect to have the rider cover the entire lifetimes of the two insured
people, rather than until the younger insured person's age 81. See "Optional
Benefits," page 40.
If you already have life insurance, you should consider whether or
not changing or adding to existing coverage would be advantageous. It may not
be advisable to purchase another policy as a replacement for an existing
policy.
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THE VARIABLE ACCOUNT
The variable account is divided into subaccounts, twenty eight of which
are available under this policy. Each of these subaccounts buys shares of a
corresponding fund Portfolio. See "National Life Insurance Company, the
Variable Account and the Funds," page 10.
We cannot give any assurance that any Portfolio will achieve its
investment objectives. You bear the entire investment risk on the value of
your policy which you allocate to the variable account.
AVAILABILITY OF POLICY
We will issue this policy for insured people from ages 0 to 90, as long
as the joint age is less than or equal to 90. To calculate a joint age for two
potential insured people, see Appendix B to this Prospectus. The minimum
amount of basic coverage for a Policy is $100,000. Before issuing a policy, we
will require that the proposed insured people meet certain underwriting
standards.
We will assign insured people to one of these types of rate classes:
- Preferred Nonsmoker
- Nonsmoker
- Preferred Smoker
- Smoker
- Substandard, or
- Uninsurable.
A person may be assigned to an Uninsurable rate class where he or she would
not be insurable for single life coverage. (See "Issuance of a Policy," Page
23.)
THE DEATH BENEFIT
As long as your policy remains in force, we will pay the death
benefit to your beneficiary, when we receive due proof of the death of both of
the two insured people. The death benefit will be increased by any additional
benefits that may be provided by a supplementary benefit rider. The death
benefit will be reduced by any outstanding policy loans and accrued interest,
and any unpaid monthly deductions.
There are two death benefit options available, which we call Option A
and Option B. You may choose which option will apply to your policy.
If you choose death benefit Option A, the death benefit will be based on
the greater of :
(a) the face amount, or
(b) the Accumulated Value multiplied by a factor specified by federal
income tax law.
If you choose death benefit Option B, the death benefit will be based on
the greater of:
(a) the face amount plus the Accumulated Value, or
(b) the Accumulated Value multiplied by the same factor that applies to
option A. (See "Death Benefit Options," Page 19.)
There are also two types of coverage available under the Policy - basic
coverage and additional coverage. (See "Death Benefit", Page 19.)
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FLEXIBILITY TO ADJUST DEATH BENEFIT
After a year, you may adjust the death benefit by changing the death
benefit option or by increasing or decreasing the face amount of your policy.
(See "Change in Death Benefit Option," Page 20, and "Ability to Adjust Face
Amount," Page 21.)
Any change in death benefit option or in the face amount may affect
the charges under your policy. If you increase the face amount, your monthly
charges will increase. A decrease in face amount may decrease the monthly
charges. (See "Cost of Insurance Charge," Page 28.)
If you request a decrease in face amount which would cause the policy
not to qualify as life insurance under federal tax law, we will not allow the
decrease.
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held in the policy
at any time. It equals the sum of the amounts held in the variable account and
the fixed account. (See "Calculation of Accumulated Value," Page 23.)
The Accumulated Value in the variable account will reflect:
- the investment results of the chosen funds
- premiums paid
- transfers
- withdrawals
- loans
- loan repayments
- loan interest charged, and
- our charges on the policy.
We pay interest on Accumulated Value in the fixed account at rates we
declare in advance for specific periods. We guarantee that these rates will be
at least 4%. (See "The Fixed Account," Page 36.)
The Accumulated Value will likely impact both the Death Benefit and
the Monthly Deduction.
ALLOCATION OF PREMIUMS
You will be asked to specify, in the application for your policy, the
percentages of premium to go to each subaccount of the variable account or to
the fixed account. You may change these percentages whenever you like. You may
choose among all twenty-eight available subaccounts of the variable account.
However, we may limit the number of different subaccounts, other than the
money market subaccount, used in your Policy over its entire life to 16.
We will allocate all premiums, after deduction for premium expense
charges, received during the free-look period that are to go to the variable
account to the Money Market Subaccount. At the end of the free look period, we
will move the amount in the Money Market Subaccount (including investment
experience) to your chosen subaccounts. For this purpose, we will assume that
the free-look period ends 20 days after the date the policy is issued.
Premiums received after the free look period ends will be allocated directly
to your chosen subaccounts. (See "Allocation of Net Premiums," Page 25.)
TRANSFERS
You may transfer the amounts in the subaccounts and fixed account.
Transfers between the subaccounts or from the variable account into the fixed
account will be made on the day we receive the request. We limit transfers out
of the fixed account to the greater of $1000 and 25%
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of the Accumulated Value in the fixed account. We also allow only one transfer
out of the fixed account per year. (See "Transfers," Page 25.)
FREE-LOOK PRIVILEGE
The policy provides for an initial "free-look" period, during which
you may cancel the Policy and receive a refund equal to the premiums you paid.
This free-look period ends 10 days after you receive the policy, or at the end
of such longer period provided by state law. To cancel your policy, you must
return the policy to us or to our agent within such time with a written
request for cancellation. (See "Free-Look Privilege," Page 34.)
CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Summary of Policy Expenses
TRANSACTION EXPENSES
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Premium Expense Charge (as a
percentage of premiums paid).................3.40%, plus:
For years 1 to 10: 7% up to
Target Premium,
4% for premiums in excess
of Target Premium
After year 10: 4%(1)
Surrender Charge.............................See page 27
Withdrawal Charge............................Lesser of 2% of the amount withdrawn or $25
Transfer Charge ..............................NONE(2)
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(1) We may (except as otherwise required by the state of issue) raise the
Premium Expense Charge to 3.40% plus 7% for premiums up to the Target Premium
plus 5% for premiums in excess of the Target Premium. We may also raise the
Premium Expense Charge after Policy Year 10 up to the maximum permitted during
the first 10 Policy Years.
(2) We currently have no transfer charge, but we reserve the right to charge
up to $25 for each transfer in excess of twelve transfers in any one year.
VARIABLE ACCOUNT AND POLICY CHARGES
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Variable Account Charge (deducted monthly).....Years 1-10:
Basic Coverage less than $1 million: annual
rate of 0.90%(3)
Basic Coverage of $1 million to $2,999,999: annual
rate of .80%(3)
Basic Coverage $3 million and over: annual
rate of 0.75%(3)
After year 10:
Basic Coverage less than $1 million: annual rate of 0.35%(4)
Basic Coverage of $1 million to $2,999,999: annual
rate of 0.30%(4)
Basic Coverage $3 million and over: annual rate of 0.25%(4)
Costof Insurance Charge (deducted monthly) Varies by Issue Age, sexes, Rate Class, duration of the
Policy-See pages 7 and 28
Administrative Charge (deducted monthly) Years 1 to 10: $15 plus $0.085 per $1000 of Basic
Coverage per month(6)
After year 10: $7.50 per month(7)
Rider Charges (deducted monthly) See "Optional Benefits" on page 40 for charges
applicable to optional Riders elected for a Policy
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(3) The charge shown is the annual equivalent of the monthly charge. The
Variable Account Charge applies to Accumulated Value held in the Variable
Account. It does not apply to amounts held in the Fixed Account. We may
increase this charge to an amount up to 0.90% in all cases.
(4) This reduction is not guaranteed, except as required by the state of
issue.
(5) This rate is lower for Joint Ages 38 and below.
(6) This charge is increased by $.005 per $1000 of Basic Coverage per month
for each Insured who is a smoker.
(7) We may (except as otherwise required by the state of issue) increase the
Monthly Administrative Charge for years after year 10 up to an amount not to
exceed $15 plus $0.08 per $1000 of Basic Coverage, plus $0.005 per $1000 of
Basic Coverage per month for each smoker. In addition, the $0.08 per $1000 of
Basic Coverage portion of the Monthly Administrative Charge, plus $.005 per
$1000 of Basic Coverage per month for each smoker, will apply to increases in
Basic Coverage for 10 years after an increase in Basic Coverage.
ANNUAL EXPENSES OF UNDERLYING FUNDS(8) (for the year ended December 31, 1999):
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Management Other Total
Fee, after expense Expenses, Expenses,
reimbursement after expense after expense
reimbursement reimbursement
<S> <C> <C> <C>
Sentinel Variable Products Trust
Common Stock Fund 0.00% 0.48% 0.48%
Mid Cap Growth Fund 0.19% 0.52% 0.71%
Small Company Fund 0.05% 0.52% 0.57%
Growth Index Fund 0.04% 0.56% 0.60%
Money Market Fund 0.00% 0.40% 0.40%
Alger:
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Leveraged AllCap Portfolio 0.85% 0.08% 0.93%
Alger American Small Capitalization 0.85% 0.05% 0.90%
American Century Variable Portfolios, Inc.
VP Value Portfolio 1.00% 0.00% 1.00%
VP Income & Growth Portfolio 0.70% 0.00% 0.70%
Dreyfus Socially Responsible Growth Fund, Inc.
Socially Responsible Growth Fund, Inc. 0.75% 0.04% 0.79%
Fidelity: Variable Insurance Products Fund I
Equity Income Portfolio 0.48% 0.08% 0.56%
Growth Portfolio 0.58% 0.07% 0.65%
High Income Portfolio 0.58% 0.11% 0.69%
Overseas Portfolio 0.73% 0.14% 0.87%
Fidelity: Variable Insurance Products Fund II
Contrafund Portfolio 0.58% 0.07% 0.65%
Index 500 Portfolio 0.24% 0.04% 0.28%
Investment Grade Bond Portfolio 0.43% 0.11% 0.54%
INVESCO Variable Insurance Funds, Inc.
VIF Dynamics Fund 0.75% 0.51% 1.26%
VIF Health Sciences Fund 0.75% 0.73% 1.48%
VIF Technology Fund 0.75% 0.56% 1.31%
J.P. Morgan Series Trust II
International Opportunities Portfolio 0.60% 0.60% 1.20%
Small Company Portfolio 0.60% 0.55% 1.15%
Market Street Fund, Inc.:
Bond Portfolio 0.35% 0.17% 0.52%
Managed Portfolio 0.40% 0.16% 0.57%
Neuberger Berman Advisers Management Trust
Partners Portfolio 0.80% 0.07% 0.87%
Strong Variable Insurance Funds, Inc.
Mid Cap Growth Fund II 1.00% 0.10% 1.10%
Strong Opportunity Fund II 1.00% 0.10% 1.10%
</TABLE>
(8) The Fund expenses shown above are assessed at the underlying Fund level
and are not direct charges against the subaccounts. These underlying Fund
expenses are taken into consideration in computing each underlying Fund's net
asset value, which is the share price used to calculate the unit values of the
subaccounts. The management fees and other expenses are more fully described
in the prospectuses for each individual underlying Fund. The information
relating to the underlying Fund expenses was provided by the underlying Fund
and
5
<PAGE> 9
was not independently verified by National Life. In the absence of any
voluntary fee waivers or expense reimbursements, the Management Fees, Other
Expenses, and Total Expenses of the Funds listed below would have been as
follows:
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<CAPTION>
Management Other Total Mutual
Fees Expenses Fund Expenses
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Sentinel Variable Products Trust:
Common Stock Fund 0.47% 0.52% 0.99%
Mid Cap Growth Fund 0.49% 0.52% 1.01%
Small Company Fund 0.50% 0.52% 1.02%
Growth Index Fund 0.30% 0.56% 0.86%
Money Market Fund 0.25% 0.52% 0.77%
Fidelity VIP Fund-Growth Portfolio 0.58% 0.08% 0.66%
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.10% 0.34%
Fidelity VIP Fund II-Contrafund Portfolio 0.58% 0.09% 0.67%
INVESCO Variable Insurance Funds, Inc.
VIF Dynamics Fund 0.75% 1.53% 2.28%
VIF Health Sciences Fund 0.75% 2.11% 2.86%
VIF Technology Fund 0.75% 0.78% 1.53%
Strong Mid Cap Growth Fund II 1.00% 0.20% 1.20%
Strong Opportunity Fund II 1.00% 0.20% 1.20%
J.P. Morgan International Opportunities 0.60% 1.38% 1.98%
J.P. Morgan Small Company 0.60% 1.97% 2.57%
</TABLE>
We expect these reimbursement arrangements to continue, but there are
no legal obligations to continue these arrangements for any particular period
of time; if they are terminated, the affected Portfolios' expenses may
increase.
Premium Expense Charge. We deduct a Premium Expense Charge from each
premium payment. One portion of this charge, equal to 3.40% of each premium,
covers the cost of state and local premium taxes, and the federal DAC Tax. We
may change this portion of the charge if the applicable law changes. (See
"Premium Expense Charge," Page 27.)
The remainder of the Premium Expense Charge compensates us for
expenses we incur in selling the policies, including commissions to selling
agents. During the first 10 Years, we will deduct 7.0% of each premium paid up
to the Target Premium, and 4.0% of premiums paid in excess of the Target
Premium. We may increase the charge for premiums in excess of the Target
Premium from 4.0% to 5.0% of such premiums. We currently intend to reduce this
deduction from premiums paid after first 10 years to 4.0% of all premiums;
however, we will have the right to deduct amounts up to the maximum permitted
during the first ten years. The Target Premium varies from policy to policy -
it will be stated in your policy and it is discussed in Appendix B to this
prospectus.
Surrender Charge. We impose a Surrender Charge if a policy is
surrendered or lapses at any time before the end of the tenth year, or the ten
years after an increase in Basic Coverage. The initial Surrender Charge varies
by Joint Age and is shown in Appendix B to this prospectus. The Surrender
Charge is level for up to five years, and then declines by equal amounts each
month until it is zero at the beginning of year 11. For increases in Basic
Coverage, the Surrender Charge will be determined in the same way. The
Surrender Charge will not decrease in the event of a decrease in Basic
Coverage. (See "Surrender Charge," Page 27.)
Withdrawal Charge. If you make a withdrawal from your policy, we
assess a withdrawal charge equal to the lesser of 2% of the amount withdrawn
or $25. (See "Withdrawal Charge," Page 30.)
Monthly Deductions. On the date of issue and each month thereafter,
we will deduct from a policy's Accumulated Value an amount equal to the sum of
the monthly Cost of Insurance Charge, Variable Account Charge, Monthly
Administrative Charge, and a charge for any additional benefits added by
rider.
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<PAGE> 10
Cost of Insurance Charge. The monthly Cost of Insurance
Charge will be determined by multiplying the Net Amount at Risk (that
is, the amount by which the death benefit (before adjustment for policy
loans and unpaid monthly deductions) exceeds Accumulated Value) by the
cost of insurance rate(s) that apply to the two insured people. These
rates depend upon:
- the ages of the insured persons when the coverage was issued
- the sexes of the insured persons
- the rate classes of the insured persons
- the time the coverage has been in force
- whether the coverage is Basic Coverage or Additional Coverage, and
- on our expectations as to future mortality experience.
However, these cost of insurance rates will not exceed the guaranteed
maximum cost of insurance rates set forth in your policy based on the
insured peoples' ages when the coverage was issued, sexes, Rate Class,
the time the coverage has been in force, whether the coverage is Basic
Coverage or Additional Coverage, and the "1980 Commissioners Standard
Ordinary Mortality Table." (See "Cost of Insurance Charge," Page 28.).
Variable Account Charge. The Variable Account Charge is a
percentage of the Accumulated Value in the Variable Account, and is not
assessed on Accumulated Value in the Fixed Account. The schedule of
percentages that apply to policies of various sizes and at different
times are shown in the chart provided above. We may raise applicable
Variable Account Charge percentages to annual amounts up to 0.90%. (See
"Variable Account Charge, page 29).
Monthly Administrative Charge. The Monthly Administrative
Charge during the first 10 years is $15.00 plus $0.08 per $1000 of Basic
Coverage. This charge is increased by $0.005 per $1000 of Basic Coverage
for each insured person who is a smoker, and is reduced if the Joint Age
of the insured people is 38 or less. After 10 years, we currently intend
to assess a reduced Monthly Administrative Charge of $7.50, with no
additional amount per $1000 of Basic Coverage, but we may increase the
Monthly Administrative Charge after the tenth year to an amount not to
exceed $15 plus $0.08 per $1000 of Basic Coverage, plus $0.005 for each
smoker. The per $1000 of Basic Coverage portion of the Monthly
Administrative Charge will also apply to the increase in Basic Coverage
for 10 years after an increase in Basic Coverage. The per $1000 of Basic
Coverage portion of the Monthly Administrative Charge will not be
reduced for decreases in Basic Coverage. (See "Monthly Administrative
Charge," Page 29.)
Transfer Charge. You may transfer value among the subaccounts on any
business day, without charge. We have no current intent to impose a transfer
charge in the foreseeable future; however, we may impose in the future a
charge of $25 for each transfer in excess of twelve transfers in any one year.
(See "Transfer Charge," Page 30.)
Projection Report Charge. If you request a projection report, we may
impose a charge. (See "Projection Report Charge," Page 30.)
Other Charges. Shares of the Portfolios are purchased by the subaccounts
at net asset value, which reflects management fees and expenses deducted from
the assets of the Portfolios. These management fees and expenses are shown
above under "Annual Charges of Underlying Funds".
LOAN PRIVILEGE
After a year, you may borrow against your policy. The maximum amount
of all loans is the Cash Surrender Value less three times the most recent
monthly deduction. Policy loans may be taken, or repayments made, on any
business day.
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Policy loans will bear interest at a fixed rate of 6% per year.
Interest is added to the loan balance at the end of each policy year. You may
repay policy loans at any time and in any amount. When the death benefit
becomes payable or the policy is surrendered, we will deduct policy loans and
accrued interest from the proceeds otherwise payable.
When you take a policy loan, we will hold Accumulated Value in the
fixed account as collateral for the policy loan. We credit interest on amounts
held in the fixed account as collateral for policy loans at rates we declare
prior to each calendar year. This rate will be at least 4%.
We currently intend to make preferred loans available starting after
a policy is 10 years old. We plan to charge an interest rate of 4.25% per
annum on preferred loans, and credit interest on collateral for preferred
loans at 4.0% per annum. We are not obligated to make preferred loans
available at any time. (See "Loan Privileges," Page 31.)
Loans may cause a policy to lapse, depending on investment
performance and the amount of the loan. If a policy is not a Modified
Endowment Contract, lapse with policy loans outstanding may result in adverse
tax consequences. (See "Tax Treatment of Policy Benefits," Page 45.)
WITHDRAWAL OF CASH SURRENDER VALUE
After a year, you may request a withdrawal of Cash Surrender Value.
Withdrawals must be at least $500, and cannot be more than the Cash Surrender
Value minus three times the most recent monthly deduction. We will take the
withdrawal amount from the subaccounts based on your instructions. If you do
not provide instructions, we will take the withdrawal from the subaccount in
proportion to the values in the subaccounts. If the values in the subaccounts
will not allow us to carry out your instructions, we will not process the
withdrawal until you provide further instructions. You may not allocate
withdrawals to the fixed account until all the value in the variable account
has been exhausted. (See "Withdrawal of Cash Surrender Value," Page 33.)
SURRENDER OF THE POLICY
You may surrender the Policy at any time and receive the Cash
Surrender Value, if any. The Cash Surrender Value will equal the Accumulated
Value less any policy loan with accrued interest and any Surrender Charge.
(See "Surrender Privilege," Page 32.)
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer, at no charge to you, two automated fund management
programs, Dollar Cost Averaging and Portfolio Rebalancing. For a description
of these features, see "Available Automated Fund Management Features," Page
35.
OPTIONAL BENEFITS
Several optional benefits are available in connection with the policies.
They are:
- the Guaranteed Death Benefit Rider
- the Additional Protection Benefit Rider
- the Policy Split Option
- the Estate Preservation Rider
- the Term Rider
- the Continuing Coverage Rider
- the Enhanced Death Benefit Rider, and
- the Automatic Increase Rider.
Not all optional benefits are available in all states. See "Optional
Benefits", on page 40.
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<PAGE> 12
TAX TREATMENT
Life insurance contracts receive tax-favored treatment under current
federal income tax law. Assuming that your Policy qualifies as a life
insurance contract for federal income tax purposes, you should not be taxed on
any increase in Cash Surrender Value while your policy remains in force. Also,
your Beneficiary generally should not be taxed on death benefit proceeds. (See
"Tax Status of the Policy," Page 44.)
A policy may be treated as a "Modified Endowment Contract" in some
situations. If your policy is a Modified Endowment Contract, then certain
pre-death distributions, including policy loans, will be treated first as a
distribution of taxable income and then as a return of basis or investment in
the contract. In addition, prior to age 59-1/2 any such distributions
generally will be subject to a 10% penalty tax. (For further discussion on the
circumstances under which a Policy will be treated as a Modified Endowment
Contract, See "Tax Treatment of Policy Benefits," Page 45.)
If your policy is not a Modified Endowment Contract, distributions
generally will be treated first as a return of basis or investment in the
contract, and then as disbursing taxable income. Loans will not be treated as
distributions. Neither distributions nor loans from a policy that is not a
Modified Endowment Contract are subject to the 10% penalty tax. (See
"Distributions Other Than Death Benefits from Policies that are not Modified
Endowment Contracts," Page 46.)
Generally, the proceeds of a policy are includible in the gross estate
of an insured person if that person possesses any "incidents of ownership"
over the policy at death. "Incidents of ownership" generally includes the
right to receive economic benefits of the policy as defined in Section 2042 of
the Code and applicable Treasury regulations. If an insured person never held
incidents of ownership over the policy, or irrevocably transferred all
interests in the policy to a third party such as an irrevocable life insurance
trust) more than three years before death, the proceeds should be excluded
from his or her gross estate.
OTHER POLICIES
We offer other variable life insurance policies which also invest in the
same portfolios of the funds. These policies may have different charges that
could affect the value of the subaccounts and may offer different benefits
more suitable to your needs. To obtain more information about these policies,
you may write or call us at National Life Drive, Montpelier, Vermont 05604,
(800) 537-7003.
ILLUSTRATIONS
Illustrations of how investment performance of the subaccounts may
cause the death benefit, the Accumulated Value and the Cash Surrender Value to
vary are included in Appendix A commencing on Page A-1.
These illustrations of hypothetical values may help you to understand
the long-term effects of different levels of investment performance, of
charges and deductions, of electing one or the other death benefit option, and
generally comparing and contrasting this Policy to other life insurance
policies. Nonetheless, the illustrations are based on hypothetical investment
rates of return. THEY ARE NOT GUARANTEED. Illustrations are not a
representation of past or future performance. Actual rates of return may be
more or less than those reflected in the illustrations and, therefore, actual
values will differ from those illustrated.
QUESTIONS
If you have questions, you may write or call us at National Life Drive,
Montpelier, Vermont 05604, (800) 537-7003.
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<PAGE> 13
NATIONAL LIFE INSURANCE COMPANY, THE VARIABLE ACCOUNT,
AND
THE FUNDS
NATIONAL LIFE INSURANCE COMPANY
National Life Insurance Company ("National Life", or "we") is
authorized to transact life insurance and annuity business in Vermont and in
50 other jurisdictions. National Life was originally chartered as a mutual
life insurance company in 1848 under Vermont law. It is now a stock life
insurance company. All of its outstanding stock is indirectly owned by
National Life Holding Company, a mutual insurance holding company established
under Vermont law on January 1, 1999. All policyholders of National Life,
including all the Owners of the Contracts, are voting members of National Life
Holding Company. National Life assumes all insurance risks under the Policy
and its assets support the Policy's benefits. On December 31, 1999, National
Life's consolidated assets were over $9.4 billion. (See "Financial
Statements," Page F-1.)
THE VARIABLE ACCOUNT
We established the Variable Account on February 1, 1985 under Vermont law.
It is a separate investment account to which we allocate assets to support the
benefits payable under the Policies, other variable life insurance policies we
currently issue, and other variable life insurance policies we may issue in
the future. You may choose among all the Subaccounts of the Variable Account
available under the Policies; however, we may limit the number of different
Subaccounts, other than the Money Market Subaccount, used in any Policy over
its entire life to 16.
The Variable Account's assets are the property of National Life. The
portion of the Variable Account's assets equal to the reserves and other
liabilities under the Policies (and other policies) supported by the Variable
Account will not be exposed to liabilities arising out of any other business
that we may conduct. The portion of the Variable Account's assets equal to the
reserves and other liabilities under the Policies may, however, be exposed to
liabilities arising from other subaccounts of the Variable Account that fund
other variable life insurance policies. The Variable Account may also include
amounts derived from expenses we have charged to the Policies (and the other
policies) which we currently hold in the Variable Account. The Variable
Account also may in the future include amounts held to support other variable
life insurance policies we may issue. From time to time we may move these
additional amounts to the Fixed Account.
The Variable Account is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act") as a
unit investment trust type of investment company. This registration does not
involve any supervision of the management or investment practices or policies
of the Variable Account by the SEC. The Variable Account meets the definition
of a "separate account" under federal securities laws.
SENTINEL VARIABLE PRODUCTS TRUST
The Common Stock, Mid Cap Growth, Small Company, Growth Index and Money
Market Subaccounts of the Variable Account invest in shares of Sentinel
Variable Products Trust, a "series" type of mutual fund which is registered
with the SEC under the 1940 Act as a diversified open-end management
investment company. Each series of Sentinel Variable Products Trust shares
represents an interest in a separate portfolio within the Trust. They are
purchased and redeemed by the corresponding Subaccounts of the Variable
Account. Sentinel Variable Products Trust sells and redeems its shares at net
asset value without a sales charge.
The investment objectives of Sentinel Variable Products Trust's Funds are
set forth below. The investment experience of each of the Subaccounts of the
Variable Account depends on the investment performance of the corresponding
Fund. There is no assurance that any Fund will achieve its stated objective.
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<PAGE> 14
The Common Stock Fund. The Common Stock Fund seeks a combination of
growth of capital, current income, growth of income and relatively low risk as
compared with the stock market as a whole, by investing in a diverse group of
common stocks of well-established companies.
The Mid Cap Growth Fund. The Mid Cap Growth Fund seeks growth of
capital, by focusing its investments on common stocks of mid-sized growing
companies. Income is not a factor in selecting stocks.
The Small Company Fund. The Small Company Fund seeks growth of
capital, by investing mainly in common stocks of small companies that National
Life Investment Management believes have attractive growth potential and are
attractively valued. Income is not a factor in selecting stocks.
The Growth Index Fund. The Growth Index Fund seeks to match, as
closely as possible before expenses, the performance of the S&P 500/BARRA
Growth Index, by investing in common stocks of the companies comprising the
Index in approximately the same weightings as the Index.
The Money Market Fund. The Money Market Fund seeks as high a level of
current income as is consistent with stable principal values and liquidity by
investing exclusively in dollar-denominated money market instruments,
including U.S. government securities, bank obligations, repurchase agreements,
commercial paper, and other corporate debt obligations.
National Life Investment Management Company, Inc. ("NLIMC") manages each
of the Funds of Sentinel Variable Products Trust. NLIMC is registered with the
SEC as an investment adviser under the Investment Advisers Act of 1940. NLIMC
is a wholly owned subsidiary of National Life.
A full description of Sentinel Variable Products Trust, its investment
objectives and policies, its risks, expenses, and other aspects of its
operation is contained in the attached Prospectus for Sentinel Variable
Products Trust, which you should read together with this Prospectus.
ALGER AMERICAN FUND
The Separate Account has three Subaccounts which invest exclusively in
shares of Portfolios of the Alger American Fund. The Alger American Fund is a
"series" type mutual fund registered with the SEC as a diversified open-end
management investment company issuing a number of series of shares, each of
which represents an interest in a Portfolio of the Alger American Fund. Shares
of these Portfolios are purchased and redeemed by the Separate Account at net
asset value without a sales charge.
The investment objectives of the Portfolios of the Alger American Fund in
which the Subaccounts invest are set forth below. The investment experience of
each Subaccount depends upon the investment performance of the corresponding
Portfolio. There is no assurance that either Portfolio will achieve its stated
objective.
Alger American Growth Portfolio. This Portfolio seeks long-term capital
appreciation by focusing on growing companies that generally have broad product
lines, markets, financial resources and depth of management. Under normal
circumstances, the portfolio invests primarily in the equity securities of large
companies. The portfolio considers a large company to have a market
capitalization of $1 billion or greater.
Alger American Leveraged AllCap Portfolio. This Portfolio seeks long-term
capital appreciation. It invests in the equity securities of companies of any
size which demonstrate promising growth potential. This Portfolio can leverage,
that is, borrow money, up to one-third of its total assets to buy additional
securities.
Alger American Small Capitalization Portfolio. This Portfolio seeks
long-term capital appreciation by focusing on small, fast-growing companies that
offer innovative products, services or technologies to a rapidly expanding
marketplace. Under normal circumstances, the portfolio invests primarily in the
equity securities of small capitalization companies. A small capitalization
company is one that has a market capitalization within the range of the
Russell(R) 2000 Growth Index or the S&P(R) SmallCap 600 Index.
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The Alger American Alger American Growth Portfolio, the Alger American
Leveraged AllCap Portfolio and the Alger American Small Capitalization
Portfolio are managed by Fred Alger Management, Inc.
A full description of the Alger American Fund, the investment objectives
and policies of the Portfolios, the risks, expenses and other aspects of their
operation is contained in the attached Prospectuses for the Alger American
Small Capitalization Portfolio, the Alger American Growth Portfolio and the
Alger American Leveraged AllCap Portfolio.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The Separate Account has one Subaccount which invests exclusively in
shares of the VP Value portfolio, and one Subaccount which invests exclusively
in shares of VP Income & Growth portfolio, each of which are series of
American Century Variable Portfolios, Inc. American Century Variable
Portfolios, Inc. is a "series" type mutual fund registered with the SEC as a
diversified open-end management investment company issuing a number of series
or classes of shares. Shares of these Portfolios will be purchased and
redeemed by the Separate Account at net asset value without a sales charge.
The investment objectives of the Portfolios of American Century Variable
Portfolios, Inc. in which the Subaccounts are expected to invest are set forth
below. The investment experience of each Subaccount depends upon the
investment performance of the underlying Portfolio. There is no assurance that
either Portfolio will achieve its stated objective.
VP Value. To seek long-term capital growth. Income is a secondary
objective. The Portfolio will seek to achieve its investment objective by
investing in securities that management believes to be undervalued at the time
of purchase.
VP Income & Growth. To seek dividend growth, current income and capital
appreciation. The Portfolio will seek to achieve its investment objective by
investing in common stocks.
The VP Value Portfolio and the VP Income & Growth Portfolio of the
American Century Variable Portfolios, Inc. are managed by American Century
Investment Management, Inc. A full description of these Portfolios, their
investment objectives and policies, and the risks, expenses and other aspects
of their operation is contained in the attached Prospectuses for VP Value and
VP Income & Growth.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Variable Account has one Subaccount which invests exclusively in
shares of The Dreyfus Socially Responsible Growth Fund, Inc. This Fund is
registered with the SEC as a diversified open-end management investment
company.
The investment objective of The Dreyfus Socially Responsible Growth
Fund, Inc. is set forth below. The investment experience of each Subaccount
depends upon the investment performance of the underlying Fund. There is no
assurance that the Fund will achieve its stated objective.
The Dreyfus Socially Responsible Growth Fund, Inc. The Fund seeks to
provide capital growth, with current income as a secondary goal. To pursue
these goals, the Fund invests primarily in the common stock of companies that,
in the opinion of the Fund's management, meet traditional investment standards
and conduct their business in a manner that contributes to the enhancement of
the quality of life in America.
The Dreyfus Socially Responsible Growth Fund, Inc. is managed by The
Dreyfus Corporation. A full description of this Fund, its investment
objectives and policies, and the risks, expenses and other aspects of its
operation is contained in the attached Prospectus for The Dreyfus Socially
Responsible Growth Fund, Inc.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS
FUND II
The Separate Account has four Subaccounts which invest exclusively in
shares of Portfolios of the
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Variable Insurance Products Fund (the "VIP Fund") and three Subaccounts which
invest exclusively in shares of Portfolios of the Variable Insurance Products
Fund II ("VIP Fund II"). Like the Market Street Fund, the VIP Fund and the VIP
II Fund are "series" type mutual funds registered with the SEC as diversified
open-end management investment companies issuing a number of series or classes
of shares, each of which represents an interest in a Portfolio of the VIP Fund
or VIP Fund II. Shares of these Portfolios are purchased and redeemed by the
Separate Account at net asset value without a sales charge.
The Equity-Income, Growth, High Income, and Overseas Portfolios of the
VIP Fund and the Contrafund, Index 500 and Investment Grade Bond Portfolios of
the VIP Fund II are managed by Fidelity Management and Research Company
("FMR"). Bankers Trust Company currently serves as sub-advisor to the Index
500 Portfolio. FMR has entered into sub-advisory agreements with FMR U.K., FMR
Far East, and Fidelity International Investment Advisors for the Overseas
Portfolio.
The investment objectives of the Portfolios of the VIP Fund and the VIP
Fund II in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
corresponding Portfolio. There is no assurance that any Portfolio will achieve
its stated objective.
Equity-Income Portfolio. This Portfolio seeks reasonable income. The
Portfolio will also consider the potential for capital appreciation. The
Portfolio seeks a yield which exceeds the composite yield on the securities
comprising the Standard and Poor's 500 Composite Index of 500 Stocks ("S&P
500"). FMR normally invests at least 65% of the Portfolio's assets in
income-producing equity securities.
Growth Portfolio. This Portfolio seeks capital appreciation. FMR
normally invests the Portfolio's assets primarily in common stocks. FMR
invests the Portfolio's assets in companies FMR believes have above-average
growth potential.
High Income Portfolio. This Portfolio seeks a high level of current
income while also considering growth of capital. FMR normally invests at least
65% of the Portfolio's total assets in income producing debt securities,
preferred stocks, and convertible securities, with an emphasis on
lower-quality debt securities. The risks of investing in these high-yielding,
high-risk securities is described in the attached Prospectus for the VIP Fund,
which should be read carefully before investing.
Overseas Portfolio. This Portfolio seeks long term growth of capital.
FMR normally invests at least 65% of the Portfolio's total assets in foreign
securities. FMR normally invests the Portfolio's assets primarily in common
stocks.
Contrafund Portfolio. This Portfolio seeks long-term capital
appreciation. FMR normally invests the Portfolio's assets primarily in common
stocks. FMR invests the Portfolio's assets in securities of companies whose
value FMR believes is not fully recognized by the public.
Index 500 Portfolio. This Portfolio seeks investment results that
correspond to the total return of common stocks publicly traded in the United
States, as represented by the S&P 500. Bankers Trust Company normally invests
at least 80% of the Portfolio's assets in common stocks included in the S&P
500.
Investment Grade Bond Portfolio. This Portfolio seeks as high a level
of current income as is consistent with the preservation of capital. It
normally invests in U.S. dollar-denominated investment-grade bonds (those of
medium and high quality).
A full description of the VIP Fund and VIP Fund II, the investment
objectives and policies of the Portfolios, the risks, expenses and other
aspects of their operation is contained in the attached Prospectuses for the
VIP Fund and VIP Fund II.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
The Variable Account has three Subaccounts which invests exclusively in
shares of the following three series of INVESCO Variable Investment Funds,
Inc.:
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INVESCO VIF - Dynamics Fund
INVESCO VIF - Health Sciences Fund
INVESCO VIF - Technology Fund
INVESCO Variable Investment 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 portfolios of shares. Shares of these
Funds are purchased and redeemed by the Variable Account at net asset value
without a sales charge.
The investment objectives of the INVESCO Variable Investment Funds,
Inc. Funds in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
underlying Fund. There is no assurance that any of these Funds will achieve
its stated objective.
INVESCO VIF - Dynamics Fund. This Fund seeks to make an investment
grow. It is actively managed. The Fund invests primarily in equity securities
that INVESCO believes will rise in price faster than other securities, as well
as in options and other investments whose values are based upon the values of
equity securities. The Fund invests primarily in common stocks of mid-sized
U.S. companies - those with market capitalizations between $2 billion and $15
billion at the time of purchase - but also has the flexibility to invest in
other types of securities, including preferred stocks, convertible securities
and bonds.
INVESCO VIF - Health Sciences Fund. This Fund seeks to make an
investment grow. It is aggressively managed. Although the Fund can invest in
debt securities, it primarily invests in equity securities that INVESCO
believes will rise in price faster than other securities, as well as in
options and other investments whose values are based upon the values of equity
securities. The Fund invests primarily in equity securities of companies that
develop, produce or distribute products or services related to health care.
These companies include, but are not limited to, medical equipment or
supplies, pharmaceuticals, health care facilities, and applied research and
development of new products or services.
INVESCO VIF - Technology Fund. This Fund seeks to make an investment
grow. It is aggressively managed. Although the Fund can invest in debt
securities, it primarily invests in equity securities that INVESCO believes
will rise in price faster than other securities, as well as in options and
other investments whose values are based upon the values of equity securities.
The Fund invests primarily in equity securities of companies engaged in
technology-related industries. These include, but are not limited to, applied
technology, biotechnology, communications, computers, electronics, Internet,
IT services and consulting, oceanography, office and factory automation,
networking, robotics, and video.
The INVESCO VIF Dynamics Fund, Health Sciences Fund and Technology Fund
are managed by INVESCO Funds Group, Inc. A full description of these Funds,
their investment objectives and policies, and the risks, expenses and other
aspects of their operation is contained in the attached Prospectuses for the
INVESCO VIF - Dynamics Fund, the INVESCO VIF - Health Sciences Fund, and the
INVESCO VIF - Technology Fund.
J.P. MORGAN SERIES TRUST II
The Separate Account has one Subaccount which invests exclusively in
shares of the J.P. Morgan International Opportunities Portfolio, and one
Subaccount which invests exclusively in shares of J.P. Morgan Small Company
Portfolio, each of which are series of J.P. Morgan Series Trust II. J.P.
Morgan Series Trust II is a "series" type mutual fund registered with the SEC
as a diversified open-end management investment company issuing a number of
series or classes of shares. Shares of these Portfolios will be purchased and
redeemed by the Separate Account at net asset value without a sales charge.
The investment objectives of the J.P. Morgan Series Trust II Portfolios
in which the Subaccounts invest are set forth below. The investment experience
of each Subaccount depends upon the investment performance of the underlying
Portfolio. There is no assurance that either Portfolio will achieve its stated
objective.
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<PAGE> 18
J.P. Morgan International Opportunities Portfolio. Seeks to provide a
high total return from a portfolio comprised of equity securities of foreign
corporations. The Portfolio is designed for investors with a long-term
investment horizon who want to diversify their investments by adding
international equities and take advantage of investment opportunities outside
the U.S. As an international investment, the Portfolio is subject to foreign
market, political, and currency risks.
J.P. Morgan Small Company Portfolio. Seeks to provide a high total
return from a portfolio comprised of equity securities of small companies. The
Portfolio invests at least 65% of the value of its total assets in the common
stock of small U.S. companies primarily with market capitalizations of less
than $1 billion. The Portfolio is designed for investors who are willing to
assume the somewhat higher risk of investing in small companies in order to
seek a higher return over time than might be expected from a portfolio of
large companies.
The J.P. Morgan International Opportunities Portfolio and the J.P.
Morgan Small Company Portfolio of the J.P. Morgan Series Trust II are managed
by J.P. Morgan Investment Management Inc. A full description of these
Portfolios, their investment objectives and policies, and the risks, expenses
and other aspects of their operation is contained in the attached Prospectuses
for the J.P. Morgan International Opportunities Portfolio and the J.P. Morgan
Small Company Portfolio.
THE MARKET STREET FUND
The Bond and Managed Subaccounts of the Separate Account invest in
shares of The Market Street Fund, Inc., a "series" type of mutual fund which
is registered with the SEC under the 1940 Act as a diversified open-end
management investment company. Each series of Market Street Fund shares
represents an interest in a separate portfolio within the Fund. They are
purchased and redeemed by the corresponding Subaccounts of the Separate
Account. The Market Street Fund sells and redeems its shares at net asset
value without a sales charge.
The investment objectives of the Market Street Fund's Portfolios you
may choose for your Policy are set forth below. The investment experience of
each of the Subaccounts of the Separate Account depends on the investment
performance of the corresponding Portfolio. There is no assurance that any
Portfolio will achieve its stated objective.
The Bond Portfolio. The Bond Portfolio seeks to generate a high level
of current income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
The Managed Portfolio. The Managed Portfolio seeks to realize as high
a level of long-term total rate of return as is consistent with prudent
investment risk by investing in stocks, bonds, money market instruments or a
combination thereof.
Sentinel Advisors Company ("SAC") manages the Bond and Managed
Portfolios. SAC is registered as an investment adviser under the Investment
Advisers Act of 1940. SAC is a partnership whose partners are affiliates of
National Life, Provident Mutual Life Insurance Company ("Provident Mutual"),
and The Penn Mutual Life Insurance Company. National Life's affiliate is
currently the managing partner of SAC and is entitled to the majority share of
SAC's profit or loss. It is expected that SAC will be replaced as investment
advisor to these two Portfolios in the near future.
A full description of the Market Street Fund, its investment
objectives and policies, its risks, expenses, and other aspects of its
operation is contained in the attached Prospectus for the Market Street Fund,
which you should read together with this Prospectus.
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
The Separate Account has one Subaccount which invests exclusively in
shares of the Partners Portfolio, a series of Neuberger Berman Advisers
Management Trust. Neuberger Berman Advisers Management Trust ("AMT") is
registered with the SEC as a diversified open-end management investment
company. AMT has nine separate series, which are called Portfolios. Shares of
each Portfolio represent an interest in that Portfolio.
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The investment objectives of the Partners Portfolio are set forth below.
The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that the
Portfolio will achieve its stated objective.
Partners Portfolio. To seek growth of capital. This Portfolio invests
mainly in common stock of mid-to large-capitalization companies. Its
investment co-managers seek securities believed to be undervalued based on
fundamentals such as low price-to-earnings ratios, consistent cash flows, and
the company's track record through all points of the market cycle. The
Portfolio generally considers selling a stock when it reaches the managers'
target price, when it fails to perform as expected, or when other
opportunities appear more attractive. The Portfolio has the ability to change
its goal without shareholder approval, although it does not currently intend
to do so.
The Partners Portfolio of Neuberger Berman Advisers Management Trust
is managed by Neuberger Berman Management Inc. Neuberger Berman, LLC is the
sub-adviser. A full description of this Portfolio, its investment objectives
and policies, and the risks, expenses and other aspects of its operation is
contained in the attached Prospectus for the Partners Portfolio of Neuberger
Berman Advisers Management Trust.
STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC.
The Separate Account has one Subaccount which invests exclusively in
shares of the Mid Cap Growth Fund II series of Strong Variable Insurance
Funds, Inc., and one Subaccount which invests exclusively in shares of Strong
Opportunity Fund II, Inc. Strong Variable Insurance Funds, Inc. is a "series"
type mutual fund registered with the SEC as a diversified open-end management
investment company issuing a number of series or classes of shares, and Strong
Opportunity Fund II is a single series mutual fund also registered with the
SEC as a diversified open-end management investment company. Shares of these
Funds will be purchased and redeemed by the Separate Account at net asset
value without a sales charge.
The investment objectives of the Strong Funds in which the Subaccounts
invest are set forth below. The investment experience of each Subaccount
depends upon the investment performance of the underlying Portfolio. There is
no assurance that either Portfolio will achieve its stated objective.
Mid Cap Growth Fund II . This Portfolio seeks capital growth. It invests
primarily in equity securities that the advisor believes have above-average
growth prospects.
Strong Opportunity Fund II, Inc. This Fund seeks capital appreciation
through investments in a diversified portfolio of equity securities.
The Mid Cap Growth Fund II series of Strong Variable Insurance Funds,
Inc., and Strong Opportunity Fund, Inc. are managed by Strong Capital
Management, Inc.
A full description of the Mid Cap Growth Fund II series of Strong
Variable Insurance Funds, Inc., and Strong Opportunity Fund, Inc. their
investment objectives and policies, and the risks, expenses and other aspects
of their operation is contained in the attached Prospectuses for the Mid Cap
Growth Fund II and Strong Opportunity Fund II, Inc.
OTHER INFORMATION
Contractual Arrangements. We have entered into or may enter into
agreements with Funds pursuant to which the advisor or distributor pays us a
fee based upon an annual percentage of the average net asset amount we invest
on behalf of the Variable Account and our other separate accounts. These
percentages may differ, and we may be paid a greater percentage by some
investment advisors or distributors than other advisors or distributors. These
agreements reflect administrative services provided by National Life. National
Life receives compensation from the adviser or distributor of the Funds in
connection with administration, distribution, or other services provided with
respect to the Fund and its availability through the Policy. The amount of
this compensation with respect to the Policy during 1999, which is based upon
the indicated percentages of assets of each Fund attributable to the Policy,
is shown below:
16
<PAGE> 20
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Portfolios of the % of Assets Revenues National Life
Received During 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
American Century Variable Portfolios, Inc. 0.20% $187.26
----------------------------------------------------------------------------------------------------------------------
J.P. Morgan Series Trust II 0.20% 186.59
----------------------------------------------------------------------------------------------------------------------
Neuberger Berman Advisers Management Trust 0.15% 142.46
----------------------------------------------------------------------------------------------------------------------
Strong VIF and Opportunity Fund II 0.20% 144.99
----------------------------------------------------------------------------------------------------------------------
</TABLE>
With respect to Fidelity VIPF and VIPF II Funds, an agreement was
reached during 2000 under which National Life would receive compensation equal
to 0.10% of assets (except 0.05% with respect to the Index 500 Portfolio).
National Life will receive compensation equal to 0.20% for assets in Dreyfus
Socially Responsible Growth Fund, Inc. and equal to 0.25% for assets in
INVESCO Variable Insurance Funds, Inc. These arrangements may change from time
to time, and may include more Funds in the future.
Investment Results. The investment objectives and policies of certain
Portfolios are similar to the investment objectives and policies of mutual
fund portfolios other than the Portfolios that may be managed by the
investment adviser or manager. The investment results of the Portfolios,
however, may be higher or lower than the results of such other portfolios.
There can be no assurance, and no representation is made, that the investment
results of any of the Funds will be comparable to the investment results of
any other portfolio, even if the other portfolio has the same investment
adviser or manager.
Resolving Material Conflicts. The participation agreements under
which the Funds sell their shares to Subaccounts of the Variable Account
contain varying termination provisions. In general, each party may terminate
at its option with specified advance written notice, and may also terminate in
the event of specific regulatory or business developments.
Should an agreement between National Life and a Fund terminate, the
Subaccounts which invest in that Fund may not be able to purchase additional
shares of such Fund. In that event, you will no longer be able to transfer
Accumulated Values or allocate Net Premiums to Subaccounts investing in
Portfolios of such Fund.
Additionally, in certain circumstances, it is possible that a Fund or
a Portfolio of a Fund may refuse to sell its shares to a Subaccount despite
the fact that the participation agreement between the Fund and us has not been
terminated. Should a Fund or Portfolio of such Fund decide not to sell its
shares to us, we will not be able to honor your requests to allocate cash
values or net premiums to Subaccounts investing in shares of that Fund or
Portfolio.
The Funds are available to registered separate accounts of insurance
companies, other than National Life, offering variable annuity and variable
life insurance policies. As a result, there is a possibility that a material
conflict may arise between the interests of Owners with Accumulated Value
allocated to the Variable Account and the owners of life insurance policies
and variable annuities issued by such other companies whose values are
allocated to one or more other separate accounts investing in any one of the
Funds.
In the event of a material conflict, we will take any necessary steps,
including removing the Variable Account from that Fund, to resolve the matter.
The Board of Directors or Trustees of the Funds intend to monitor events in
order to identify any material conflicts that possibly may arise and to
determine what action, if any, should be taken in response to those events or
conflicts. See the individual Fund Prospectuses for more information.
Net Investment Return of the Separate Account. The chart below is
included to comply with Part 54, Section 54.9 of the Codes, Rules and
Regulations of the State of New York. The chart shows the year-by-year net
investment returns of the Subaccounts of the Separate Account since the
inception of the Subaccounts through December 31, 1999. The inception date of
all Subaccounts is May 4, 1998, the date that the Policies were first offered.
The net investment returns reflect investment income and capital gains
and losses less investment management fees and expenses and the maximum
Variable Account Charge. The returns do not reflect the
17
<PAGE> 21
Cost of Insurance Charge, the Premium Expense Charge, the Monthly
Administrative Charge, the charge for any optional benefits, or potential
Surrender Charges which will significantly reduce the returns.
Returns are not annualized for periods under one year.
STATEMENT OF NET INVESTMENT RETURNS
<TABLE>
<CAPTION>
Subaccount 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
Effective
Date
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sentinel Variable Products Trust
Common Stock 5/4/1998 2.04% 1.09% N/A N/A N/A N/A N/A N/A N/A N/A
Mid Cap Growth 5/4/1998 37.57% 4.89% N/A N/A N/A N/A N/A N/A N/A N/A
Money Market 5/4/1998 3.97% 2.55% N/A N/A N/A N/A N/A N/A N/A N/A
Small Company 5/4/1998 14.88% -4.64% N/A N/A N/A N/A N/A N/A N/A N/A
Growth Index 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Alger
Alger American Growth Portfolio 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Alger American Small
Capitalization 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Leveraged All Cap 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
American Century Variable Portfolios,
Inc.
VP Value Portfolio 5/4/1998 -1.73% -6.84% N/A N/A N/A N/A N/A N/A N/A N/A
VP Income & Growth Portfolio 5/4/1998 16.97% 8.23% N/A N/A N/A N/A N/A N/A N/A N/A
Dreyfus
Dreyfus Socially Responsible
Growth 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Fidelity: Variable Insurance Products
Fund I
Equity Income 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Growth 5/4/1998 36.21% 19.38% N/A N/A N/A N/A N/A N/A N/A N/A
High Income 5/4/1998 7.19% -10.59% N/A N/A N/A N/A N/A N/A N/A N/A
Overseas 11/30/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Fidelity: Variable Insurance Products
Fund II
Contrafund 5/4/1998 23.15% 12.50% N/A N/A N/A N/A N/A N/A N/A N/A
Index 500 5/4/1998 19.44% 9.70% N/A N/A N/A N/A N/A N/A N/A N/A
Investment Grade Bond 11/30/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
INVESCO Variable Investment Funds
Dynamics Fund 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Health Sciences Fund 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Technology Fund 12/1/2000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
J.P. Morgan Series Trust II
International Opportunities
Portfolio 5/4/1998 35.44% -9.91% N/A N/A N/A N/A N/A N/A N/A N/A
Small Company Portfolio 5/4/1998 43.11% -17.05% N/A N/A N/A N/A N/A N/A N/A N/A
Market Street Fund, Inc.
Bond Portfolio 5/4/1998 -4.17% 4.92% N/A N/A N/A N/A N/A N/A N/A N/A
Managed Portfolio 5/4/1998 0.00% 3.27% N/A N/A N/A N/A N/A N/A N/A N/A
Neuberger Berman Advisers Management
Trust
Partners Portfolio 5/4/1998 6.41% -7.54% N/A N/A N/A N/A N/A N/A N/A N/A
Strong Variable Insurance Funds, Inc.
Mid Cap Growth Fund 5/4/1998 88.19% 15.22% N/A N/A N/A N/A N/A N/A N/A N/A
Strong Opportunity Fund II 5/4/1998 33.70% -4.68% N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
THE FIXED ACCOUNT
For information on the Fixed Account, see page 36.
18
<PAGE> 22
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, we will pay the Death
Benefit of the Policy, after due proof of the death of both of the Insureds
(and fulfillment of certain other requirements), to the named Beneficiary,
unless the claim is contestable in accordance with the terms of the Policy.
You may choose to have the proceeds paid in cash or under one of the available
Settlement Options. (See "Payment of Policy Benefits," Page 37.) The Death
Benefit payable will be the Unadjusted Death Benefit under the Death Benefit
Option that is in effect, increased by any additional benefits, and decreased
by any outstanding Policy loan and accrued interest and any unpaid Monthly
Deductions. The Face Amount of a Policy, on which the Unadjusted Death Benefit
is based, may be made up of either Basic Coverage or Additional Coverage.
Additional Coverage is provided by the Additional Protection Benefit Rider.
You must notify us as soon as reasonably possible of the death of each
Insured. National Life may require proof of whether both Insureds are living
two years from the Date of Issue. On the death of the first Insured to die we
will require you to provide us with evidence of death and proof of age and, if
the death is within two years from the Date of Issue, the cause of death.
Death Benefit Options. The Policy provides two Death Benefit Options:
Option A and Option B. You select the Death Benefit Option in the application
and may change it as described in "Change in Death Benefit Option," page 20.
Option A. The Unadjusted Death Benefit is equal to the greater of (a) the
Face Amount of the Policy and (b) the Accumulated Value, multiplied by the
specified percentage shown in the table below:
<TABLE>
<CAPTION>
Attained Age Percentage Attained Age Percentage
------------ ---------- ------------ ----------
of Younger of Younger
---------- ----------
Insured Insured
------- -------
<S> <C> <C> <C>
40 and under 250% 75-90 105%
45 215% 91 104%
50 185% 92 103%
55 150% 93 102%
60 130% 94+ 101%
65 120%
70 115%
</TABLE>
For Attained Ages of the younger Insured not shown, the percentages will
decrease by a ratable portion of each full year.
Illustration of Option A -- For purposes of this illustration, assume that
the younger Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will generally have
an Unadjusted Death Benefit of $200,000. Assuming the specified percentage for a
particular Policy for a particular Attained Age of the younger Insured is 250%,
then, because the Unadjusted Death Benefit must be equal to or greater than 2.50
times the Accumulated Value, any time the Accumulated Value exceeds $80,000 the
Unadjusted Death Benefit will exceed the Face Amount. Each additional dollar
added to the Accumulated Value will increase the Unadjusted Death Benefit by
$2.50. Thus, an Accumulated Value of $90,000 for this Policy at this Attained
Age for the younger Insured will result in an Unadjusted Death Benefit of
$225,000 (2.50 x $90,000), and an Accumulated Value of $150,000 will result in
an Unadjusted Death Benefit of $375,000 (2.50 x $150,000). Similarly, any time
the Accumulated Value exceeds $80,000, each dollar taken out of the Accumulated
Value will reduce the Unadjusted Death Benefit by $2.50. If at any time,
however, the
19
<PAGE> 23
Accumulated Value multiplied by the specified percentage is less than the Face
Amount, the Unadjusted Death Benefit will be the Face Amount of the Policy.
Option B. The Unadjusted Death Benefit is equal to the greater of (a) the
Face Amount of the Policy plus the Accumulated Value and (b) the Accumulated
Value multiplied by the specified percentage shown in the table above.
Illustration of Option B -- For purposes of this illustration, assume that
the younger Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option B, a Policy with a Face Amount of $200,000 will generally pay
an Unadjusted Death Benefit of $200,000 plus the Accumulated Value. Thus, for
example, a Policy with a $50,000 Accumulated Value will have an Unadjusted Death
Benefit of $250,000 ($200,000 plus $50,000). Since the specified percentage is
250%, the Unadjusted Death Benefit will be at least 2.50 times the Accumulated
Value. As a result, if the Accumulated Value exceeds $133,333, the Unadjusted
Death Benefit will be greater than the Face Amount plus the Accumulated Value.
Each additional dollar added to the Accumulated Value above $133,333 will
increase the Unadjusted Death Benefit by $2.50. An Accumulated Value of $150,000
will result in an Unadjusted Death Benefit of $375,000 (2.50 x $150,000), and an
Accumulated Value of $200,000 will yield an Unadjusted Death Benefit of $500,000
(2.50 x $200,000). Similarly, any time the Accumulated Value exceeds $133,333,
each dollar taken out of the Accumulated Value will reduce the Unadjusted Death
Benefit by $2.50. If at any time, however, the Accumulated Value multiplied by
the specified percentage is less than the Face Amount plus the Accumulated
Value, the Unadjusted Death Benefit will be the Face Amount plus the Accumulated
Value.
At Attained Age 100 of the younger of the two Insureds (even if the younger
of the two Insureds is not then living), Option B automatically becomes Option
A.
Which Death Benefit Option to Choose. If you prefer to have premium payments
and favorable investment performance reflected partly in the form of an
increasing Death Benefit, you should choose Option B. If you are satisfied with
the amount of the Insureds' existing insurance coverages and prefer to have
premium payments and favorable investment performance reflected to the maximum
extent in the Accumulated Value, you should choose Option A.
Change in Death Benefit Option. After the first Policy Year, you may change
the Death Benefit Option by sending us a written request. There is no charge to
change the Death Benefit Option. The effective date of a change will be the
Monthly Policy Date on or next following the date we receive the written
request. Only one change in Death Benefit Option is permitted in any one Policy
Year.
On the effective date of a change in Death Benefit Option, the Face Amount
is adjusted so that there will be no change in the Death Benefit or the Net
Amount at Risk. In the case of a change from Option B to Option A, the Face
Amount must be increased by the Accumulated Value. In the case of a change from
Option A to Option B, the Face Amount must be decreased by the Accumulated
Value. The change from Option A to Option B will not be allowed if it would
reduce the Face Amount to less than the Minimum Face Amount.
On the effective date of the change, the Death Benefit, Accumulated Value and
Net Amount at Risk (and therefore the Cost of Insurance Charges) are
unchanged. However, after the effective date of the change, the pattern of
future Death Benefits, Accumulated Value, Net Amount at Risk and Cost of
Insurance Charges will be different than if the change had not been made. In
determining whether a change is appropriate for you, the considerations
described in "Which Death Benefit Option to Choose" above will apply.
If a change in the Death Benefit Option would result in cumulative
premiums exceeding the maximum premium limitations under the Code for life
insurance, we will not effect the change.
A change in the Death Benefit Option may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 45.)
20
<PAGE> 24
How the Death Benefit May Vary. The amount of the Death Benefit may vary
with the Accumulated Value. The Death Benefit under Option A will vary with
the Accumulated Value whenever the specified percentage of Accumulated Value
exceeds the Face Amount of the Policy. The Death Benefit under Option B will
always vary with the Accumulated Value because the Unadjusted Death Benefit
equals the greater of (a) the Face Amount plus the Accumulated Value and (b)
the Accumulated Value multiplied by the specified percentage.
ABILITY TO ADJUST FACE AMOUNT
You may, at any time after the first Policy Year, increase or decrease
the Policy's Face Amount by submitting a written application to us. There are
some limits on your ability to effect increases or decreases, which are
discussed below. The effective date of an increase will be the Monthly Policy
Date on or next following our approval of your request. The effective date of
a decrease is the Monthly Policy Date on or next following the date that we
receive the written request. An increase or decrease in Face Amount may have
federal tax consequences. (See "Tax Treatment Of Policy Benefits," Page 45.)
The effect of changes in Face Amount on Policy charges, as well as other
considerations, are described below.
Increase. A request for an increase in Face Amount may not be for less
than $50,000, or such lesser amount required in a particular state. You may
not increase the Face Amount after the older of the two Insureds' Attained Age
90 or if the Joint Age is greater than 90. To obtain the increase, you must
submit an application for the increase and provide evidence satisfactory to us
of both Insureds' insurability. The increase may be either an addition of
Basic Coverage or Additional Coverage. An increase in Basic Coverage will
result in increased Surrender Charges. An increase in Basic Coverage will also
begin a new ten year period for purposes of applying the Monthly
Administrative Charge to the new amount of Basic Coverage. If an increase in
Basic Coverage would move the Policy into a new size band for purposes of the
Variable Account Charge, the Variable Account Charge percentage rate may be
reduced as a result of the increase. In the event that an increase
simultaneously adds both Basic Coverage and Additional Coverage, the Basic
Coverage is assumed to have been added first.
On the effective date of an increase, and taking the increase into
account, the Cash Surrender Value must be at least equal to the Monthly
Deductions then due, plus the Surrender Charge associated with the increase,
in the case of an increase in Basic Coverage. If the Cash Surrender Value is
not sufficient, the increase will not take effect until you pay a sufficient
additional premium to increase the Cash Surrender Value.
An increase in the Face Amount will generally affect the total Net
Amount at Risk. This will normally increase the monthly Cost of Insurance
Charges. In addition, the Insureds may be in different Rate Classes as to the
increase in insurance coverage. An increase in premium payment or frequency
may be appropriate after an increase in Face Amount. (See "Cost of Insurance
Charge," Page 28.)
After an increase, part of the Net Amount at Risk will be attributable
to the initial coverage under the Policy and part will be attributable to the
increase. For purposes of allocating Accumulated Value to each coverage to
determine the Net Amount at Risk and Cost of Insurance Charge by coverage
segment, the Accumulated Value is first considered part of the initial
segment. If the Accumulated Value exceeds the initial segment's Face Amount,
then it is allocated to increases in Face Amount in the order that such
increases took effect.
Decrease. The Face Amount after a decrease cannot be less than 75% of
the largest Face Amount in force at any time in the twelve months immediately
preceding our receipt of your request for a decrease. The Basic Coverage after
any decrease may not be less than the Minimum Basic Coverage Amount, which is
currently $100,000. If a decrease in the Face Amount could result in
cumulative premiums exceeding the maximum premium limitations applicable for
life insurance under the Code, we will not allow the decrease.
A decrease in the Face Amount generally will decrease the total Net
Amount at Risk, which will decrease your monthly Cost of Insurance Charges. If
a decrease in Basic Coverage would move the Policy into a new size band for
purposes of the Variable Account Charge, the Variable Account Charge
percentage rate may increase as a result of the decrease.
21
<PAGE> 25
For purposes of calculating the Monthly Deductions, any decrease in the Face
Amount will reduce the Face Amount in the following order:
(a) first, the increase in Face Amount provided by the most recent increase;
(b) then, the next most recent increases, in inverse chronological order; and
finally
(c) the Initial Face Amount.
If an increase involved the simultaneous addition of Basic Coverage,
Additional Coverage and Face Amount added through the operation of the
Automatic Increase Rider, a decrease in the Face Amount will reduce automatic
increase first, the Additional Coverage second, and then the Basic Coverage.
HOW THE DURATION OF THE POLICY MAY VARY
Your Policy will remain in force as long as the Cash Surrender Value of
the Policy is sufficient to pay the Monthly Deductions and the charges under
the Policy. When the Cash Surrender Value is insufficient to pay the charges
and the Grace Period expires without an adequate premium payment by you, the
Policy will lapse and terminate without value. However, during the first five
Policy Years the Policy will not lapse, if you have paid the Cumulative
Minimum Monthly Premium. You will have certain rights to reinstate your
Policy, if it should lapse. (See "Reinstatement," Page 26.)
In addition, an optional Guaranteed Death Benefit Rider is available. This
Rider will guarantee that the Policy will not lapse prior to, at your option,
the end of the year that the younger Insured attains age 80, or for the entire
lifetimes of the two Insureds, regardless of investment performance, if you have
paid the Cumulative Guarantee Premium as of each Monthly Policy Date.
ACCUMULATED VALUE
The Accumulated Value is the total amount of value held under the Policy
at any time. It is equal to the sum of the Policy's values in the Variable
Account and the Fixed Account. The Accumulated Value minus any applicable
Surrender Charge, and minus any outstanding Policy loans and accrued interest,
is equal to the Cash Surrender Value. There is no guaranteed minimum for the
portion of the Accumulated Value in any of the Subaccounts of the Variable
Account. Because the Accumulated Value on any future date depends upon a number
of variables, it cannot be predetermined.
The Accumulated Value and Cash Surrender Value will reflect:
- the Net Premiums you pay
- the investment performance of the Portfolios you have chosen
- the crediting of interest on non-loaned Accumulated Value in the Fixed
Account and amounts held as Collateral in the Fixed Account
- transfers
- Withdrawals
- Loans
- Loan interest charged
- loan repayments, and
- charges assessed on the Policy.
Determination of Number of Units for the Variable Account. Amounts
allocated, transferred or added to a Subaccount of the Variable Account under
a Policy are used to purchase units of that Subaccount; units are redeemed
when amounts are deducted, transferred or withdrawn. The number of units a
Policy has in a Subaccount equals the number of units purchased minus the
number of units redeemed up to such time. For each Subaccount, the number of
units purchased or redeemed in connection with a particular transaction is
determined by dividing the dollar amount by the unit value.
Determination of Unit Value. The unit value of a Subaccount is equal to
the unit value on the immediately preceding Valuation Day multiplied by the
Net Investment Factor for that Subaccount on that Valuation Day.
22
<PAGE> 26
Net Investment Factor. Each Subaccount of the Variable Account has its
own Net Investment Factor on each Valuation Day. The Net Investment Factor
measures the daily investment performance of the Subaccount. The factor will
increase or decrease, as appropriate, to reflect net investment income and
capital gains or losses, realized and unrealized, for the securities of the
underlying Portfolio.
Calculation of Accumulated Value. The Accumulated Value is determined
first on the Date of Issue and thereafter on each Valuation Day. On the Date
of Issue, the Accumulated Value will be the Net Premiums received, plus any
earnings prior to the Date of Issue, less any Monthly Deductions due on the
Date of Issue. On each Valuation Day after the Date of Issue, the Accumulated
Value will be:
(1) The aggregate of the values attributable to the Policy in the
Variable Account, determined by multiplying the number of units the Policy has
in each Subaccount of the Variable Account by such Subaccount's unit value on
that date; plus
(2) The value attributable to the Policy in the Fixed Account (See
"The Fixed Account," Page 18.)
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy. To purchase a Policy, you must apply to us through
a licensed National Life agent who is also a registered representative of
Equity Services, Inc. ("ESI") or a broker/dealer having a Selling Agreement
with ESI. If you do not pay the Minimum Initial Premium with your written
application, it must be paid when the Policy is delivered. If the premium paid
is less than the Minimum Initial Premium, the balance of the Minimum Initial
Premium must be received within five days, or all premiums will be refunded.
The minimum amount of Basic Coverage of a Policy under our rules is
$100,000.We may revise our rules from time to time to specify a different
minimum amount of Basic Coverage for subsequently issued Policies. A Policy
will be issued only on two Insureds each of whom has an Issue Age from 0 to 90
and whose Joint Age is less than or equal to 90, and who provide us with
satisfactory evidence of insurability. Acceptance is subject to our
underwriting rules. We may reject an application for any reason permitted by
law. (See "Cost of Insurance Charge", Page 28, and "Distribution of Policies,"
Page 50.)
From the time your application is signed until the time the Policy is
issued, you can, subject to our underwriting rules, obtain temporary
survivorship insurance protection, pending issuance of the Policy, if you are
able to answer "no" with respect to both Insureds to the Health Questions of
the Receipt & Temporary Life Insurance Agreement and submitting (a) a complete
Application including any medical questionnaire required, and (b) payment of
the Minimum Initial Premium.
The amount of coverage under the Receipt & Temporary Life Insurance
Agreement is the lesser of the Face Amount applied for or $1,000,000 ($100,000
in the case that the younger of the two proposed Insureds is age 70 or over).
Coverage under the agreement will end on the earliest of
(a) the 90th day from the date of the agreement;
(b) the date that insurance takes effect under the Policy;
(c) the date a policy, other than as applied for, is offered to you;
(d) three days from the date we mail a notice of termination of coverage;
(e) the time you first learn that we have terminated the temporary life
insurance; or
(f) the time you withdraw the application for life insurance.
We offer a one time credit to Home Office employees who purchase a
Policy, as both Owner and one of the two Insureds. This one time credit will
be 50% of the Target Premium on the Policy. The amount of the credit will be
added to the initial premium payment you submit. Thus, the credit will be
included in premium payments for purposes of calculating and deducting the
Premium Tax Charge. If the Policy is surrendered, we will not recapture the
credit. The amount of the credit will not be included for purposes of
calculating agent compensation for the sale of the Policy.
23
<PAGE> 27
Amount and Timing of Premiums. Each premium payment must be at least
$100. You have considerable flexibility in determining the amount and
frequency of premium payments, within the limits discussed below.
You may at the time of application select a Planned Periodic Premium
schedule, based on a periodic billing mode of annual, semi-annual, or
quarterly payments. You may request us to send a premium reminder notice at
the specified interval. You may change the Planned Periodic Premium frequency
and amount. Also, under an Automatic Payment Plan, you can select a monthly
payment schedule under which premium payments will be automatically deducted
from a bank account or other source, rather than being "billed." We may allow,
in certain situations, Automatic Payment Plan or group billing payments of
less than $100. We may require that Automatic Payment Plans be set up for at
least the Minimum Monthly Premium.
You are not required to pay the Planned Periodic Premiums in accordance
with the specified schedule. You may pay premiums whenever you like, and in
any amount (subject to the $100 minimum and the limitations described in the
next section). Payment of the Planned Periodic Premiums will not, however,
guarantee that the Policy will remain in force. Instead, the Policy's Cash
Surrender Value determines whether or not the Policy stays in force. Thus,
even if Planned Periodic Premiums are paid, the Policy will lapse whenever the
Cash Surrender Value is insufficient to pay the Monthly Deductions and any
other charges under the Policy, if a Grace Period expires without an adequate
payment by you (unless the Policy is in its first five years, or you have
purchased the Guaranteed Death Benefit Rider and have paid the required
premiums).
We will treat all your payments made while there is an outstanding
Policy loan as premium payments rather than loan repayments, unless you notify
us in writing that a payment is a loan repayment. You may not pay premiums
after the younger of the Insureds reaches Attained Age 100. However, you may
make loan repayments after this time.
Higher premium payments under Death Benefit Option A, until the
applicable percentage of Accumulated Value exceeds the Face Amount, will
generally result in a lower Net Amount at Risk, and lower Cost of Insurance
Charges against the Policy. Conversely, lower premium payments in this
situation will result in a higher Net Amount at Risk, which will result in
higher Cost of Insurance Charges under the Policy.
Under Death Benefit Option B, until the applicable percentage of
Accumulated Value exceeds the Face Amount plus the Accumulated Value, the
level of premium payments will not affect the Net Amount at Risk. However,
both the Accumulated Value and Death Benefit will be higher if premium
payments are higher, and lower if premium payments are lower.
Under either Death Benefit Option, if the Unadjusted Death Benefit is
the applicable percentage of Accumulated Value, then higher premium payments
will result in a higher Net Amount at Risk, and higher Cost of Insurance
Charges. Lower premium payments will result in a lower Net Amount at Risk, and
lower Cost of Insurance Charges.
Premium Limitations. The Code provides for exclusion of the Death
Benefit from the gross income of the Beneficiary if total premium payments do
not exceed certain stated limits. In no event can the total of all premiums
paid under a Policy exceed these limits. If at any time you pay a premium
which would result in total premiums exceeding these limits, we will only
accept that portion of the premium which would make total premiums equal the
maximum amount which may be paid under the Policy. We will promptly refund the
excess to you. In cases of premiums paid by check, we will wait until your
check has cleared. If you have an outstanding loan, we may instead be apply
the payment as a loan repayment. Even if total premiums were to exceed the
maximum premium limitations established by the Code, the excess of (a) a
Policy's Unadjusted Death Benefit over (b) the Policy's Cash Surrender Value
plus outstanding Policy loans and accrued interest, would still generally be
excludable from gross income under the Code.
The maximum premium limitations set forth in the Code depend in part
upon the amount of the Unadjusted Death Benefit at any time. As a result, any
Policy changes which affect the amount of the Unadjusted Death Benefit may
affect whether cumulative premiums paid under the Policy exceed the
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<PAGE> 28
maximum premium limitations. To the extent that any such change would result
in cumulative premiums exceeding the maximum premium limitations, we will not
effect the change. (See "Federal Income Tax Considerations," Page 44.)
Unless the Insureds provide satisfactory evidence of insurability, we
may limit the amount of any premium payment if it increases the Unadjusted
Death Benefit more than it increases the Accumulated Value. However, premiums
will not be limited to the extent that they are Planned Periodic Premiums.
Allocation of Net Premiums. The Net Premium equals the premium paid less
the Premium Expense Charge. In your application for the Policy, you will
indicate how Net Premiums should be allocated among the Subaccounts of the
Variable Account and/or the Fixed Account. You may change these allocations at
any time by giving us written notice at our Home Office. If you have elected
the telephone transaction privilege, you may also change premium allocations
over the telephone (See "Telephone Transaction Privilege," Page 35). Your
allocation percentages must be in whole numbers of not less than 5%, and the
sum of the allocation percentages must be 100%. We will allocate Net Premiums
as of the Valuation Date we receive the premium at our Home Office, based on
the allocation percentages then in effect, except during the free look
period..
We will allocate any portion of the Initial Premium and any subsequent
premiums we receive before the end of the free-look period which are to be
allocated to the Variable Account, to the Money Market Subaccount. For this
purpose, we will assume that the free-look period will end 20 days after the
date the Policy is issued. On the first Valuation Date following 20 days after
issue of the Policy, we will allocate the amount in the Money Market
Subaccount to the other Subaccounts based on the allocation percentages you
have selected.
For example, assume a Policy was issued with Net Premiums to be
allocated 25% to the Managed Subaccount, 25% to the Bond Subaccount and 50% to
the Fixed Account. During the period stated above, 50% (25% + 25%) of the Net
Premiums will be allocated to the Money Market Subaccount. At the end of such
period, 50% (25% / 50%) of the amount in the Money Market Subaccount will be
transferred to the Managed Subaccount and 50% to the Bond Subaccount.
The values of the Subaccounts will vary with their investment
experience. You bear the entire investment risk. You should periodically
review your allocation percentages in light of market conditions and your
overall financial objectives.
Transfers. You may transfer the Accumulated Value between and among the
Subaccounts of the Variable Account and the Fixed Account by sending us a
written transfer request, or if you have elected the telephone transaction
privilege, by telephone instructions to us. (See "Telephone Transaction
Privilege," Page 35.) Transfers between and among the Subaccounts of the
Variable Account and the Fixed Account are made as of the Valuation Day that
the request for transfer is received at the Home Office. You may, at any time,
transfer all or part of the amount in one of the Subaccounts of the Variable
Account to another Subaccount and/or to the Fixed Account. For transfers from
the Fixed Account to the Variable Account, see "Transfers from Fixed Account,"
Page 37.
Currently an unlimited number of transfers are permitted without charge.
We have no current intent to impose a transfer charge in the foreseeable
future. However, we may, after giving you prior notice, change this policy so
as to deduct a $25 transfer charge from each transfer in excess of the twelfth
transfer during any one Policy Year. All transfers requested during one
Valuation Period would be treated as one transfer transaction. If a transfer
charge is adopted in the future, these types of transfers would not be subject
to a transfer charge and would not count against the twelve free transfers in
any Policy Year:
- transfers resulting from Policy loans
- transfers resulting from the operation of the dollar cost averaging or
portfolio rebalancing features
- transfers resulting from the exercise of the transfer rights described on
page 35 (see "Policy Rights - Other Transfer Rights," Page 35), and
- the reallocation from the Money Market Subaccount following the free look
period.
Under present law, transfers are not taxable transactions.
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Policy Lapse. The failure to make a premium payment will not itself
cause a Policy to lapse. A Policy will lapse only when the Cash Surrender
Value is insufficient to cover the Monthly Deductions and other charges under
the Policy, and the Grace Period expires without a sufficient payment. During
the first five Policy Years, the Policy will not lapse so long as the
Cumulative Minimum Monthly Premium has been paid, regardless of whether the
Cash Surrender Value is sufficient to cover the monthly Deductions and other
charges. In addition, if you have elected at issue the Guaranteed Death
Benefit Rider, and have paid the Cumulative Guarantee Premium as of each
Monthly Policy Date, the Policy will not lapse, either prior to the end of the
year that the younger Insured attains Age 80 or for the entire lifetimes of
the two Insureds, whichever you elect, regardless of whether the Cash
Surrender Value is sufficient to cover the Monthly Deductions. (See "Optional
Benefits - Guaranteed Death Benefit," Page 40.)
The Policy provides for a 61-day Grace Period that is measured from the
date on which we send a lapse notice. The Policy does not lapse, and the
insurance coverage continues, until the expiration of this Grace Period. To
prevent lapse, you must during the Grace Period pay a premium equal to the sum
of any amount by which the past Monthly Deductions have been in excess of Cash
Surrender Value, plus three times the Monthly Deduction due the date the Grace
Period began. Our notice will specify the payment required to keep the Policy
in force. Failure to make a payment at least equal to the required amount
within the Grace Period will result in lapse of the Policy without value.
Reinstatement. A Policy that lapses without value may be reinstated at
any time within five years (or longer period required in a particular state)
after the beginning of the Grace Period. To do so, you must submit evidence of
both Insureds' insurability satisfactory to us and pay an amount sufficient to
provide for two times the Monthly Deduction due on the date the Grace Period
began plus three times the Monthly Deduction due on the effective date of
reinstatement. The effective date of reinstatement, unless otherwise required
by state law, will be the Monthly Policy Date on or next following the date
your reinstatement application is approved. Upon reinstatement, the
Accumulated Value will be based upon the premium paid to reinstate the Policy.
The Policy will be reinstated with the same Date of Issue as it had prior to
the lapse. Neither the five year no lapse guarantee nor the Guaranteed Death
Benefit Rider may be reinstated.
Specialized Uses of the Policy. Because the Policy provides for an
accumulation of cash value as well as a death benefit, the Policy can be used
for various individual and business financial planning purposes. Purchasing
the Policy in part for such purposes entails certain risks. For example, if
the investment performance of your chosen Subaccounts is poorer than expected
or if you do not pay sufficient premiums, the Policy may lapse or may not
accumulate sufficient Accumulated Value or Cash Surrender Value to fund the
your purpose. Withdrawals and Policy loans may significantly affect current
and future Accumulated Value, Cash Surrender Value, or Death Benefit proceeds.
Because the Policy is designed to provide benefits on a long-term basis,
before purchasing a Policy for a specialized purpose you should consider
whether the long-term nature of the Policy is consistent with your purpose.
Using a Policy for a specialized purpose may have tax consequences. (See
"Federal Income Tax Considerations," Page 44.)
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate us for
(a) providing the insurance and other benefits set forth in the Policy;
(b) issuing and administering the Policy;
(c) assuming certain mortality and other risks in connection with the Policy;
and
(d) incurring expenses in distributing the Policy, including costs associated
with printing prospectuses and sales literature and sales compensation.
We may realize a profit from any charges. We may use these profits for any
purpose, including payment of distribution expenses.
For Policies issued in New York, charges may be different. Prospective
purchasers of a Policy to be issued in New York should see "Differences in
Charges for Policies Issued in New York", on page 31.
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PREMIUM EXPENSE CHARGE
The Premium Expense Charge consists of two portions. The first is that
we deduct 3.40% of the premium from each premium payment prior to allocation
of Net Premiums, to cover state premium taxes and the federal DAC Tax.
The federal DAC Tax is a tax attributable to certain "policy acquisition
expenses" under Section 848 of the Code. Section 848 in effect accelerates the
realization of income we receive from the Policies, and therefore the payment
of federal income taxes on that income. The economic consequence of Section
848 is, therefore, an increase in the tax burden borne by us that is
attributable to the Policies.
The Premium Expense Charge will also include, during the first 10 Policy
Years, a deduction of 7.0% of the premium up to the Target Premium, and 4.0%
of premium in excess of the Target Premium, from each premium payment prior to
allocation of Net Premiums, to compensate us for the expenses incurred in
distributing the Policies, including commissions to selling agents. The Target
Premium depends on the Joint Age at issue or at the time of an increase in
Basic Coverage. Target Premiums per $1000 of Basic Coverage is shown in
Appendix B to this prospectus. Your Target Premium is set forth in your
Policy. We may increase the charge for premiums in excess of the Target
Premium from 4.0% to 5.0% of such premiums. We currently intend to reduce this
deduction from premiums paid after the tenth Policy Anniversary to 4.0% of all
premiums, although we may deduct up to the maximum permitted during the first
ten years.
SURRENDER CHARGE
We will impose a Surrender Charge if you surrender your Policy or it
lapses at any time before the end of the tenth Policy Year, or the ten years
after an increase in the Basic Coverage. The Surrender Charge rate depends on
the Joint Age at issue or at the time of increase in Basic Coverage. The
initial Surrender Charge per $1,000 of Basic Coverage is shown in Appendix B
to this Prospectus (Surrender Charges are different for Policies issued in New
York, and for those Policies the initial Surrender Charge per $1, 000 of Basic
Coverage is shown in Appendix C). The Surrender Charge will be level for up to
five years, and then decline each month by one sixtieth of the initial
Surrender Charge until it is zero at the beginning of Policy Year 11, or at
the beginning of the eleventh year after the date of an increase in Basic
Coverage. For those cases in which the level Surrender Charge period is less
than five years from the Date of Issue or the effective date of the increase,
it declines each month by an amount equal to the initial Surrender Charge
multiplied by a fraction of which the numerator is one and the denominator is
the number of months from the end of the level Surrender Charge period to the
beginning of Policy Year 11, or the beginning of the eleventh year from the
effective date of the increase. The Surrender Charge will not decrease in the
event of a decrease in Basic Coverage. The actual Surrender Charge for your
Policy will be stated in the Policy.
Since there is no Surrender Charge associated with Additional Coverage,
taking a portion of the Policy's Face Amount as Additional Coverage, rather
than Basic Coverage, would result in a lower Surrender Charge. See "Optional
Benefits - Additional Protection Benefit," page 41.
MONTHLY DEDUCTIONS
We will deduct charges from the Accumulated Value on the Date of Issue
and on each Monthly Policy Date. The Monthly Deduction consists of four
components:
(a) the Cost of Insurance Charge
(b) the Variable Account Charge
(c) the Monthly Administrative Charge, and
(d) the cost of any additional benefits provided by Rider.
The Monthly Deduction may vary in amount from Policy Month to Policy
Month. We will take the Monthly Deduction on a pro rata basis from the
Subaccounts of the Variable Account and the Fixed Account, unless you have
requested at the time of application, or later request in writing, that we
take the Monthly Deduction from the Money Market Subaccount. If we cannot take
a Monthly Deduction from the Money Market Subaccount, where you have so asked,
we will take the amount of the deduction in excess of the Accumulated Value
available in the Money Market Subaccount on a pro rata basis from Accumulated
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Value in the Subaccounts of the Variable Account and the Fixed Account.
Cost of Insurance Charge. We calculate the monthly Cost of Insurance
Charge by multiplying the cost of insurance rate or rates by the Net Amount at
Risk for each Policy Month. Because both the Net Amount at Risk and the
variables that determine the cost of insurance rate, such as the ages of the
Insureds and the Duration of the Policy, may vary, the Cost of Insurance
Charge will likely be different from month to month.
Net Amount at Risk. The Net Amount at Risk on any Monthly
Policy Date is approximately the amount by which the Unadjusted Death
Benefit on that Monthly Policy Date exceeds the Accumulated Value. It
measures the amount National Life would have to pay in excess of the
Policy's value if the Insureds both died. The actual calculation uses
the Unadjusted Death Benefit divided by 1.00327234, to take into
account assumed monthly earnings at an annual rate 4%. We calculate the
Net Amount at Risk separately for the Initial Face Amount and any
increases in Face Amount. In determining the Net Amount at Risk for
each increment of Face Amount, we first consider the Accumulated Value
part of the Initial Face Amount. If the Accumulated Value exceeds the
Initial Face Amount, we consider it part of the increases in Face
Amount in the order such increases took effect.
If your Policy includes Basic Coverage, Additional Coverage and
coverage added through the operation of the Automatic Increase Rider,
we separate the Net Amount at Risk into portions applicable to each
type of coverage. For this purpose, we apply Accumulated Value against
Basic Coverage first, Additional Coverage second and an automatic
increase third if they began simultaneously. Any change in the Net
Amount at Risk will affect the total Cost of Insurance Charges you pay.
Guaranteed Maximum Cost of Insurance Rates. The guaranteed
maximum cost of insurance rates will be set forth in your Policy, and
will depend on:
- each Insured's Issue Age
- each Insured's sex
- the substandard or uninsurable status of either Insured, if
applicable
- the coverage's Duration,
- whether the coverage is Basic Coverage or Additional Coverage
(guaranteed rates are higher for Additional Coverage), and
- the 1980 Commissioners Standard Ordinary Mortality Table.
Guaranteed maximum cost of insurance rates will also vary
depending on whether the coverage is Basic Coverage or Additional
Coverage, with higher rates being applicable to Additional Coverage.
Current Cost of Insurance Rates and How They are Determined.
The actual cost of insurance rates used ("current rates") will depend
on:
- each Insured's Issue Age
- each Insured's sex
- each Insured's Rate Class
- the coverage's Duration
- whether the coverage is Basic Coverage or Additional Coverage
(however, current rates for Additional Coverage may be higher
or lower than for Basic Coverage), and
- our expectation of future mortality experience.
We periodically review the adequacy of our current cost of
insurance rates, and we may adjust their level. However, the current
rates will never exceed guaranteed maximum cost of insurance rates. Any
change in the current cost of insurance rates will apply to all sets of
persons of the same Issue Ages, sexes, and Rate Classes, and with
coverages of the same Duration.
We use separate cost of insurance rates for the Initial Face
Amount and any increases in Face Amount. For the Initial Face Amount,
we use a cost of insurance rate based on the Rate Classes of
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the two Insureds on the Date of Issue. For each increase in Face Amount,
a rate based on the Rate Classes of the two Insureds applicable at the
time of the increase is used. If, however, the Unadjusted Death Benefit
is calculated as the Accumulated Value times the specified percentage,
the rate based on the Rate Classes for the Initial Face Amount will be
used for the amount of the Unadjusted Death Benefit in excess of the
total Face Amount for Option A, and in excess of the total Face Amount
plus the Accumulated Value for Option B. Again, if a policy includes
both Basic Coverage and Additional Coverage, separate cost of insurance
rates are applied to each type of coverage.
Rate Class. The Rate Classes of the two Insureds will affect
the current cost of insurance rates. We currently place Insureds into
the following rate classes:
- preferred nonsmoker
- nonsmoker
- preferred smoker
- smoker
- substandard, and
- uninsurable classes.
Smoker, substandard, and uninsurable classes reflect higher
mortality risks. In an otherwise identical Policy, Insureds in a
preferred or standard class will have a lower Cost of Insurance Charge
than Insureds in a substandard class with higher mortality risks.
Nonsmoking Insureds will generally incur lower cost of insurance rates
than Insureds who are classified as smokers. Classification of an
Insured as substandard or uninsurable will also affect the guaranteed
cost of insurance rates. We classify all nicotine users as smokers,
including cigarette, cigar, pipe, chewing tobacco, snuff, nicotine
patches and nicotine gum.
The uninsurable rate class is not available in New York.
Variable Account Charge. We assess the Variable Account Charge to
compensate us for mortality and expense risks we assume due to the benefits
and guaranteed maximum charge levels under the Policies. The mortality risk we
assume is that insured persons may live for a shorter time than projected.
This means we would pay greater death benefits than expected in relation to
the amount of premiums received. The expense risk we assume is that expenses
incurred in issuing and administering the Policies will exceed the
administrative charges deducted from the Policy. We may make a profit from
deducting this charge. Any profit may be used to finance distribution
expenses. The Variable Account Charge does not apply to Accumulated Value in
the Fixed Account.
The Variable Account Charge is deducted monthly as a percentage of the
Accumulated Value in the Variable Account. The Variable Account Charge,
expressed as an annual percentage, is as follows:
During the first 10 Policy Years:
For Policies with Basic Coverage less than $1,000,00 ..................0.90%
For Policies with Basic Coverage from $1,000,000 to $2,999,999 ........0.80%
For Policies with Basic Coverage of $3 million or more. ...............0.75%.
For years after Policy Year 10, we currently intend to reduce this charge to
the following rates:
For Policies with Basic Coverage of less than $1,000,000 ..............0.35%
For Policies with Basic Coverage from $1,000,000 to $2,999,999 ........0.30%
For Policies with Basic Coverage of $3 million or more ................0.25%.
However, in all cases, we may increase this charge to an amount not to exceed
0.90%.
Monthly Administrative Charge. We charge the administrative charge to
help defray the expenses we incur in issuing and administering the Policy, and
in distributing the Policy, including commissions to selling agents. The
amount of the Monthly Administrative Charge during the first ten Policy Years
is $15.00, plus $0.08 per $1000 of Basic Coverage (less for Joint Ages of 38
or less). We increase the per $1000 portion of
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<PAGE> 33
this charge during the first ten Policy Years by $.005 per $1000 of Basic
Coverage for each Insured who is a smoker.
After the first ten Policy Years, we currently intend to charge a Monthly
Administrative Charge of $7.50, with no additional amount per $1000 of Basic
Coverage. During this period the Monthly Administrative Charge is guaranteed
not to exceed $15.00, plus $0.08 per $1000 of Basic Coverage plus $0.005 per
$1000 of Basic Coverage for each Insured who is a smoker. In addition, the per
$1000 of Basic Coverage portion of the Monthly Administrative Charge will
apply to increases in Basic Coverage for 10 years after an increase in Basic
Coverage. The per $1000 portion of this charge will not decrease in the event
of a decrease in Basic Coverage.
Optional Benefit Charges. The Monthly Deduction will include charges for
any additional benefits added to the Policy. The monthly charges will be
specified in the applicable Rider. The available Riders are listed under
"Optional Benefits," on Page 40 below.
WITHDRAWAL CHARGE
At the time of a Withdrawal, we will assess a charge equal to the lesser
of 2% of the Withdrawal amount and $25. We will deduct this Withdrawal Charge
from the Withdrawal amount.
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts, or from
the Variable Account to the Fixed Account. Transfers from the Fixed Account to
the Variable Account are permitted within the limits described on Page 37.
Currently there is no charge for any transfers. We have no present intention
to impose a transfer charge in the foreseeable future. However, we may impose
in the future a transfer charge of $25 on each transfer in excess of twelve
transfers in any Policy Year. The Transfer Charge would be imposed to
compensate us for the costs of processing such transfers, and would not be
designed to produce a profit.
If we impose a transfer charge, we will deduct it from the amount being
transferred. We would treat all transfers requested on the same Valuation Day
as one transfer transaction. Any future transfer charge will not apply to
transfers resulting from:
- Policy loans
- the exercise of the transfer rights as described on page 35
- the initial reallocation of account values from the Money Market
Subaccount to other Subaccounts, and
- any transfers made pursuant to the Dollar Cost Averaging and Portfolio
Rebalancing features.
The transfers listed above also will not count against the twelve free
transfers in any Policy Year.
PROJECTION REPORT CHARGE
We may impose a charge for each projection report you request. This report
will project future values and future Death Benefits for the Policy. We will
notify you in advance of the amount of the charge, and you may elect to pay
the charge in advance. If not paid in advance, we will deduct this charge from
the Subaccounts of the Variable Account and/or the Fixed Account in proportion
to their Accumulated Values.
OTHER CHARGES
The Variable Account purchases shares of the Funds at net asset value. The
net asset value of those shares reflect management fees and expenses already
deducted from the assets of the Funds' Portfolios. Historical expense ratio
information for the Funds is presented in the "Summary of Policy Expenses"
section on pages 4 and 5 above. More detailed information is contained in the
Fund Prospectuses which accompany this Prospectus.
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DIFFERENCES IN CHARGES FOR POLICIES ISSUED IN NEW YORK
Charges on Policies issued in New York will differ from charges on
Policies issued in other states in the following respects:
1. The Surrender Charges are in different amounts, and are shown in
Appendix C to this Prospectus.
2. The Premium Expense Charge is the same as the current Premium Expense
Charge for Policies issued in other states, but is guaranteed not to increase
from current levels.
3. The Variable Account Charge is also the same as the current Variable
Account Charge for Policies issued in other states, but is guaranteed not to
increase, either during the first 10 Policy Years, or for years after Policy
Year 10, from the amounts shown on page 29.
4. The Monthly Administrative Charge is also the same as the current
Monthly Administrative Charge for Policies issued in other states, but is
guaranteed not to increase, for years after Policy Year 10, from $7.50 per
month, and we guarantee that there will be no per $1000 portion of the Monthly
Administrative Charge after Policy Year 10.
5. We have the right to assess an additional charge, called the Contingent
Risk Charge, on Policies issued in New York. The current amount of the
Contingent Risk Charge is zero, but we may impose a Contingent Risk Charge of up
to 0.04167% per month (0.5% per year) at any time, subject to approval by the
New York Insurance Department.
POLICY RIGHTS
LOAN PRIVILEGES
General. You may at any time after the first year (and during the first
year where required by law, i.e., in Indiana and New Jersey) borrow money from
us using the Policy as the only security for the loan. The maximum amount you
may borrow is the Policy's Cash Surrender Value on the date we receive your
loan request, minus three times the Monthly Deduction for the most recent
Monthly Policy Date. If you have elected the Guaranteed Death Benefit Rider
and you take a Policy loan in excess of the cumulative premiums paid minus the
Cumulative Guarantee Premium, then the Guaranteed Death Benefit Rider will
enter a lapse pending notification period. This means that the Guaranteed
Death Benefit Rider (but not the Policy itself) will lapse if a sufficient
premium is not paid within the 61-day lapse pending notification period.
While either Insured is living, you may repay all or a portion of a loan
and accrued interest. To take a loan you should send a written request to us
at our Home Office. If you have elected the telephone transaction privilege,
you may also request a loan over the telephone. We limit the amount of a
Policy loan taken over the telephone to $25,000. (See "Telephone Transaction
Privilege," Page 35.) Loan proceeds will be paid within seven days of a valid
loan request.
Interest Rate Charged. The interest rate charged on Policy loans will be
at the fixed rate of 6% per year. At the end of the Policy Year, the loan
interest will be added to the loan balance. Any payments you make to cover
loan interest will be used to reduce the amount of the Policy loan.
Allocation of Loans and Collateral. When you take a Policy loan, we hold
Accumulated Value in the Fixed Account as Collateral for the Policy loan. You
may specify how you would like Accumulated Value to be taken from the
Subaccounts of the Variable Account to serve as the Collateral. If you do not
so specify, we will allocate the Policy loan to the Subaccounts in proportion
to the Accumulated Value in the Subaccounts. If the Accumulated Value in one
or more of the Subaccounts is insufficient to carry out your instructions, we
will not process the loan until we receive further instructions from you.
Non-loaned Accumulated Value in the Fixed Account will become Collateral for a
loan only to the extent that the Accumulated Value in the Variable Account is
insufficient.
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<PAGE> 35
The Collateral for a Policy loan will initially be the loan amount. Loan
interest will be added to the Policy loan. We will take additional Collateral
for such loan interest so added pro rata from the Subaccounts of the Variable
Account, and then, if the amounts in the Variable Account are insufficient,
from the non-loaned portion of the Fixed Account. At any time, the amount of
the outstanding loan under a Policy equals the sum of all loans (including
interest added to the loan balance) minus any loan repayments.
Interest Credited to Amounts Held as Collateral. As long as the Policy
is in force, we will credit the amount held in the Fixed Account as Collateral
with interest at effective annual rates we declare, but not less than 4% or
such higher minimum rate required under state law. The rate will apply to the
calendar year which follows the date of declaration.
Preferred Policy Loans. We currently intend to make preferred Policy
loans available at the beginning of Policy Year 11. For these preferred Policy
loans, we will charge interest at 4.25% per annum, and we will credit interest
on amounts held as Collateral in the Fixed Account at an annual rate of 4.0%.
We are not obligated to continue to make preferred loans available (except
where required by law, as in New York), and we will make such loans available
in our sole discretion. Preferred loans may not be treated as indebtedness for
federal income tax purposes.
Effect of Policy Loan. Policy loans, whether or not repaid, will have a
permanent effect on the Accumulated Value and the Cash Surrender Value, and
may permanently affect the Death Benefit under the Policy. The effect on the
Accumulated Value and Death Benefit could be favorable or unfavorable. It will
depend on whether the investment performance of the Subaccounts, and the
interest credited to the non-loaned Accumulated Value in the Fixed Account, is
less than or greater than the interest being credited on the amounts held as
Collateral in the Fixed Account. Compared to a Policy under which no loan is
made, values under a Policy will be lower when the credited interest rate on
Collateral is less than the investment experience of assets held in the
Variable Account and interest credited to the non-Collateral Accumulated Value
in the Fixed Account. The longer a loan is outstanding, the greater the effect
a Policy loan is likely to have. The Death Benefit will be reduced by the
amount of any outstanding Policy loan.
Loan Repayments. We will assume that any payments you make while a
Policy loan is outstanding are premium payments, rather than loan repayments,
unless you specify in writing that a payment is a loan repayment. In the event
of a loan repayment, the amount held as Collateral in the Fixed Account will
be reduced by an amount equal to the repayment, and such amount will be
transferred to the Subaccounts of the Variable Account and to the non-loaned
portion of the Fixed Account based on the Net Premium allocations in effect at
the time of the repayment.
Lapse With Loans Outstanding. The amount of an outstanding loan under a
Policy plus any accrued interest on outstanding loans is not part of Cash
Surrender Value. Therefore, the larger the amount of an outstanding loan, the
more likely it is that the Policy could lapse. (See "How the Duration of the
Policy May Vary," Page 22 and "Policy Lapse," Page 26.) In addition, if the
Policy is not a Modified Endowment Policy, lapse of the Policy with
outstanding loans may result in adverse federal income tax consequences. (See
"Tax Treatment of Policy Benefits," Page 45.)
Tax Considerations. Any loans taken from a "Modified Endowment Contract"
will be treated as a taxable distribution. In addition, with certain
exceptions, a 10% additional income tax penalty will be imposed on the portion
of any loan that is included in income. (See "Distributions Other Than Death
Benefits from Modified Endowment Contracts," Page 45.)
SURRENDER PRIVILEGE
You may surrender your Policy for its Cash Surrender Value at any time
before the death of the last to die of the two Insureds. The Cash Surrender
Value is the Accumulated Value minus any Policy loan and accrued interest and
less any Surrender Charge. We will calculate the Cash Surrender Value on the
Valuation Day we receive, at our Home Office, your signed written surrender
request, and the Policy. You may not request a surrender over the telephone.
Coverage under the Policy will end on the day you mail or otherwise send the
written surrender request and the Policy to us. We will normally mail
surrender proceeds to you within seven days of when we receive the request.
(See "Other Policy Provisions - Payment of Policy Benefits", Page 37.)
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A surrender may have Federal income tax consequences. (See "Tax Treatment of
Policy Benefits," Page 45.)
WITHDRAWAL OF CASH SURRENDER VALUE
You may withdraw a portion of the Policy's Cash Surrender Value at any
time before the death of the last to die of the two Insureds and after the
first Policy Anniversary. The minimum amount which may be withdrawn is $500.
The maximum Withdrawal is the Cash Surrender Value on the date we receive the
Withdrawal request, minus three times the Monthly Deduction for the most
recent Monthly Policy Date. However, if you elected the Guaranteed Death
Benefit Rider, and you obtain a Withdrawal which causes the Cumulative
Guarantee Premium to exceed the sum of premiums paid into the Policy, then the
Guaranteed Death Benefit Rider will enter a lapse pending notification period.
This means that the Guaranteed Death Benefit Rider (but not the Policy itself)
will lapse if a sufficient premium is not paid within the 61-day lapse pending
notification period.
A Withdrawal Charge will be deducted from the amount of the Withdrawal.
For a discussion of the Withdrawal Charge, see "Charges and Deductions -
Withdrawal Charge" on Page 30.
You may specify how you would like the Withdrawal to be taken from the
Subaccounts of the Variable Account. If you do not so specify, we will
allocate the Withdrawal to the Subaccounts in proportion to the Accumulated
Value in each Subaccount. If the Accumulated Value in one or more Subaccounts
is insufficient to carry out your instructions, we will not process the
Withdrawal until we get further instructions from you. You may take
Withdrawals from the Fixed Account only after the Accumulated Value in the
Variable Account is exhausted.
The effect of a Withdrawal on the Death Benefit and Face Amount will
vary depending upon the Death Benefit Option in effect and whether the
Unadjusted Death Benefit is based on the applicable percentage of Accumulated
Value. (See "Death Benefit Options," Page 19.)
Option A. The effect of a Withdrawal on the Face Amount and Unadjusted
Death Benefit under Option A can be described as follows:
If the Face Amount divided by the applicable percentage of Accumulated
Value exceeds the Accumulated Value just after the Withdrawal, a Withdrawal
will reduce the Face Amount and the Unadjusted Death Benefit by the lesser of
such excess and the amount of the Withdrawal.
For the purposes of this illustration (and the following illustrations
of Withdrawals), assume that the Attained Age of the younger Insured is under
40 and there is no indebtedness. The applicable percentage is 250% for a
younger Insured with an Attained Age under 40.
Under Option A, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $30,000 will have an Unadjusted Death Benefit of
$300,000. Assume that you take a Withdrawal of $10,000. The Withdrawal Charge
will be $25 and the amount paid to you will be $9,975. The Withdrawal will
reduce the Accumulated Value to $20,000 ($30,000 - $10,000) after the
Withdrawal. The Face Amount divided by the applicable percentage is $120,000
($300,000 / 2.50), which exceeds the Accumulated Value after the Withdrawal by
$100,000 ($120,000 - $20,000). The lesser of this excess and the amount of the
Withdrawal is $10,000, the amount of the Withdrawal. Therefore, the Unadjusted
Death Benefit and Face Amount will be reduced by $10,000 to $290,000.
If the Face Amount divided by the applicable percentage of Accumulated
Value does not exceed the Accumulated Value just after the Withdrawal, then
the Face Amount is not reduced. The Unadjusted Death Benefit will be reduced
by an amount equal to the reduction in Accumulated Value times the applicable
percentage (or equivalently, the Unadjusted Death Benefit is equal to the new
Accumulated Value times the applicable percentage).
Under Option A, a Policy with a Face Amount of $300,000 and an Accumulated
Value of $150,000 will have an Unadjusted Death Benefit of $375,000 ($150,000
x 2.50). Assume that you take a Withdrawal of $10,000. The Withdrawal Charge
will be $25 and the amount paid to you will be $9,975. The Withdrawal
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will reduce the Accumulated Value to $140,000 ($150,000 - $10,000). The Face
Amount divided by the applicable percentage is $120,000, which does not exceed
the Accumulated Value after the withdrawal. Therefore, the Face Amount stays
at $300,000 and the Unadjusted Death Benefit is $350,000 ($140,000 x 2.50).
Option B. The Face Amount will never be decreased by a Withdrawal. A
Withdrawal will, however, always decrease the Death Benefit.
If the Unadjusted Death Benefit equals the Face Amount plus the
Accumulated Value, a Withdrawal will reduce the Accumulated Value by the
amount of the Withdrawal. Thus the Unadjusted Death Benefit will also be
reduced by the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $90,000 will have an Unadjusted Death Benefit of $390,000
($300,000 + $90,000). Assume you take a Withdrawal of $20,000. The Withdrawal
Charge will be $25 and the amount we pay you will be $19,975. The Withdrawal
will reduce the Accumulated Value to $70,000 ($90,000 - $20,000) and the
Unadjusted Death Benefit to $370,000 ($300,000 + $70,000). The Face Amount is
unchanged.
If the Unadjusted Death Benefit immediately prior to the Withdrawal is
based on the applicable percentage of Accumulated Value, the Unadjusted Death
Benefit will be reduced to equal the greater of (a) the Face Amount plus the
Accumulated Value after deducting the amount of the Withdrawal and Withdrawal
Charge and (b) the applicable percentage of Accumulated Value after deducting
the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and an
Accumulated Value of $210,000 will have an Unadjusted Death Benefit of
$525,000 ($210,000 X 2.5). Assume you take a Withdrawal of $60,000. The
Withdrawal Charge will be $25 and the amount we pay you will be $59,975. The
Withdrawal will reduce the Accumulated Value to $150,000 ($210,000 - $60,000),
and the Unadjusted Death Benefit to the greater of (a) the Face Amount plus
the Accumulated Value, or $450,000 ($300,000 + $150,000) and (b) the
Unadjusted Death Benefit based on the applicable percentage of the Accumulated
Value, or $375,000 ($150,000 X 2.50). Therefore, the Unadjusted Death Benefit
will be $450,000. The Face Amount is unchanged.
Any decrease in Face Amount due to a Withdrawal will reduce Face Amount
in the order described under "Ability to Adjust Face Amount - Decrease" on
page 21.
Because a Withdrawal can affect the Face Amount and the Unadjusted
Death Benefit as described above, a Withdrawal may also affect the Net Amount
at Risk which is used to calculate the Cost of Insurance Charge under the
Policy. (See "Cost of Insurance Charge," Page 28.) Since a Withdrawal reduces
the Accumulated Value, the Cash Surrender Value of the Policy is reduced,
thereby increasing the likelihood that the Policy will lapse. (See "Policy
Lapse," Page 26.) Also, if a Withdrawal would result in cumulative premiums
exceeding the maximum premium limitations applicable under the Code for life
insurance, we will not allow that Withdrawal.
You may request a Withdrawal only by sending a signed written request to
us at our Home Office. You may not request a Withdrawal over the telephone. We
will normally pay a Withdrawal within seven days of receiving at our Home
Office a valid Withdrawal request.
A Withdrawal of Cash Surrender Value may have Federal income tax consequences.
(See "Tax Treatment of Policy Benefits," Page 45.)
FREE-LOOK PRIVILEGE
The Policy provides for a "free-look" period, during which you may
cancel the Policy and receive a refund equal to the premiums paid on the
Policy. This free-look period ends 10 days after you receive the Policy (or
any longer period provided by state law). To cancel the Policy, you must
return the Policy to us or to our agent within the free look period with a
written request for cancellation.
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TELEPHONE TRANSACTION PRIVILEGE
If you elect the telephone transaction privilege, either on the
application for the Policy or thereafter by providing us with a proper written
authorization, you may effect changes in premium allocation, transfers, and
loans of up to $25,000, and initiate or make changes in Dollar Cost Averaging
or Portfolio Rebalancing by providing instructions to us at our Home Office
over the telephone. We may suspend telephone transaction privileges at any
time, for any reason, if we deem such suspension to be in the best interests
of Policy Owners. You may, on the application or by a written authorization,
authorize your National Life agent to provide telephone instructions on your
behalf.
We will employ reasonable procedures to confirm that instructions we
receive by telephone are genuine. If we follow these procedures, we will not
be liable for any losses due to unauthorized or fraudulent instructions. We
may be liable for any such losses if we do not follow those reasonable
procedures. The procedures to be followed for telephone transfers will include
one or more of the following:
- requiring some form of personal identification prior to acting on
instructions received by telephone
- providing written confirmation of the transaction, and
- making a tape recording of the instructions given by telephone.
OTHER TRANSFER RIGHTS
Transfer Right for Policy. During the first two years following Policy
issue, you may, on one occasion, transfer the entire Accumulated Value in the
Variable Account to the Fixed Account, without regard to any limits on
transfers or free transfers.
Transfer Right for Change in Investment Policy. If the investment policy
of a Subaccount of the Variable Account is materially changed, you may
transfer Accumulated Value in that Subaccount to another Subaccount or to the
Fixed Account, without regard to any limits on transfers or free transfers.
Additional Transfer Right for Connecticut and Maryland Residents. For
Policies issued in Connecticut and Maryland, we offer a right to transfer the
entire Accumulated Value in the Policy to a fixed survivorship universal life
insurance contract, during the first 18 months after issue.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer, at no charge to you, two automated fund management
features. Only one of these two automated fund management features may be
operable at any time. We are not obligated to continue to offer these
features. Although we have no current intention to do so, we may stop offering
one or both of these features at any time, after providing 60 days prior
written notice to all Owners who are currently utilizing the features being
discontinued.
Dollar Cost Averaging. This feature permits you to automatically transfer
funds from the Money Market Subaccount to any other Subaccounts on a monthly
basis. You may elect Dollar Cost Averaging at issue by marking the appropriate
box on the initial application, and completing the appropriate instructions.
You may also begin a Dollar Cost Averaging program after issue by filling out
similar information on a change request form and sending it to us at our Home
Office.
If you elect this feature, we will take the amount to be transferred from
the Money Market Subaccount and transfer it to the Subaccount or Subaccounts
designated to receive the funds, each month on the Monthly Policy Date. If you
elect Dollar Cost Averaging on your application for the Policy, it will start
with the Monthly Policy Date after the date that the reallocation of the
Accumulated Value out of the Money Market Subaccount and into the other
Subaccounts occurs. If you begin a Dollar Cost Averaging program after the
free look period is over, it will start on the next Monthly Policy Date.
Dollar Cost Averaging will continue until the amount in the Money Market
Subaccount is depleted. The minimum monthly transfer by Dollar Cost Averaging
is $100, except for the transfer which reduces the amount in the Money Market
Subaccount to zero. You may discontinue Dollar Cost Averaging at any time by
sending an appropriate change request form to the Home Office. You may not use
the dollar cost averaging feature to transfer Accumulated Value to the Fixed
Account.
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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 quarterly, semi-annual or annual
basis, based on your premium allocation percentages in effect at the time of
the rebalancing. You may elect it at issue by marking the appropriate box on
the initial application, or, after issue, by completing a change request form
and sending it to the Home Office.
In Policies utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer will take place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages,
starting with the Monthly Policy Date three, six or twelve months after the
Date of Issue, and then on each Monthly Policy Date three, six or twelve
months thereafter. Policies electing Portfolio Rebalancing after issue will
have the first automated transfer occur as of the Monthly Policy Date on or
next following the date we receive the election at our Home Office, and
subsequent rebalancing transfers will occur every three, six or twelve months
from that date. You may discontinue Portfolio Rebalancing at any time by
submitting an appropriate change request form to us at our Home Office.
If you change your Policy's premium allocation percentages, Portfolio
Rebalancing will automatically be discontinued unless you specifically direct
otherwise.
Portfolio Rebalancing will result in periodic transfers out of
Subaccounts that have had relatively favorable investment performance in
relation to the other Subaccounts to which a Policy allocates premiums, and
into Subaccounts which have had relatively unfavorable investment performance
in relation to the other Subaccounts to which the Policy allocates premiums.
Portfolio rebalancing does not guarantee a profit or protect against a loss.
THE FIXED ACCOUNT
You may allocate some or all of the Net Premiums, and transfer some or
all of your Policy's Accumulated Value, to our Fixed Account. We credit
interest on Net Premiums and Accumulated Value allocated to the Fixed Account
at rates we declare (subject to a minimum guaranteed interest rate of 4%). The
principal, after deductions, is also guaranteed. The Fixed Account supports
National Life's insurance and annuity obligations. All assets in the Fixed
Account are subject to National Life's general liabilities from business
operations.
The Fixed Account has not, and is not required to be, registered with
the SEC under the Securities Act of 1933. The Fixed Account has not been
registered as an investment company under the Investment Company Act of 1940.
Therefore, the Fixed Account is generally not subject to regulation under the
1933 Act or the 1940 Act. The disclosures relating to this account which are
included in this Prospectus are for your information and have not been
reviewed by the SEC. However, such disclosures may be subject to certain
generally applicable provisions of the Federal securities laws relating to the
accuracy and completeness of statements made in prospectuses.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Accumulated Value in the Fixed Account is guaranteed to accumulate at
a minimum effective annual interest rate of 4%. We may credit the non-loaned
Accumulated Value in the Fixed Account with current rates in excess of the
minimum guarantee, but we are not obligated to do so. We have no specific
formula for determining current interest rates. Since we anticipate changing
the current interest rate from
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time to time, in our sole discretion, allocations to the Fixed Account made at
different times are likely to be credited with different current interest
rates. We will declare an interest rate each month to apply to amounts
allocated or transferred to the Fixed Account in that month. The rate declared
on these amounts will remain in effect for twelve months. At the end of the
12-month period, we may declare a new current interest rate on such amounts
and accrued interest thereon (which may be a different current interest rate
than the current interest rate on new allocations to the Fixed Account on that
date). We will determine any interest credited on the amounts in the Fixed
Account in excess of the minimum guaranteed rate of 4% per year in our sole
discretion. You assume the risk that interest credited may not exceed the
guaranteed minimum rate. Amounts allocated to the Fixed Account will not share
in the investment performance of our general account.
Amounts deducted from the non-loaned Accumulated Value in the Fixed
Account for Withdrawals, Policy loans, transfers to the Variable Account,
Monthly Deductions or other charges are, for the purpose of crediting
interest, accounted for on a last in, first out ("LIFO") method.
We may change the method of crediting interest from time to time, as long
as these changes do not reduce the guaranteed rate of interest below 4% per
annum or shorten the period for which the interest rate applies to less than
12 months.
Calculation of Non-loaned Accumulated Value in the Fixed Account. The
non-loaned Accumulated Value in the Fixed Account at any time is equal to
amounts allocated and transferred to it plus interest credited to it, minus
amounts deducted, transferred or withdrawn from it.
TRANSFERS FROM FIXED ACCOUNT
We allow only one transfer in each Policy Year from the amount of
non-loaned Accumulated Value in the Fixed Account to any or all of the
Subaccounts of the Variable Account. The amount you transfer from the Fixed
Account may not exceed the greater of 25% of the value of the non-loaned
Accumulated Value in such account at the time of transfer, or $1000. We will
make the transfer as of the Valuation Day we receive the written or telephone
request at our Home Office.
OTHER POLICY PROVISIONS
Indefinite Policy Duration. The Policy can remain in force indefinitely
(in New York, Texas and Maryland, however, the Policy matures at the younger
Insured's Attained Age 100, at which time we will pay the Cash Surrender Value
to you in one sum unless you have chosen a Payment Option, and the Policy will
terminate). However, for a Policy to remain in force after the younger Insured
reaches Attained Age 100, if the Face Amount is greater than the Accumulated
Value, the Face Amount will automatically be decreased to the current
Accumulated Value, and all Accumulated Value is transferred to the Fixed
Account. Also, at the younger Insured's Attained Age 100 Option B
automatically becomes Option A, and no premium payments are allowed after the
younger Insured's Attained Age 100. Loan repayments are allowed, however.
Monthly Deductions cease at the younger Insured's Attained Age 100. The tax
treatment of a Policy's Accumulated Value after Age 100 is unclear, and you
may wish to discuss this treatment with a tax advisor.
Payment of Policy Benefits. You can decide the form in which we pay Death
Benefit proceeds. During the lifetime of either of the two Insureds, you may
arrange for the Death Benefit to be paid in a lump sum or under a Settlement
Option. These choices are also available upon surrender of the Policy for its
Cash Surrender Value. If no election is made, payment will be made in a lump
sum. The Beneficiary may also arrange for payment of the Death Benefit in a
lump sum or under a Settlement Option. If paid in a lump sum, we will
ordinarily pay the Death Benefit to the Beneficiary within seven days after we
receive proof of the death of both of the Insureds at our Home Office, and all
other requirements are satisfied. If paid under a Settlement Option, the Death
Benefit will be applied to the Settlement Option within seven days after we
receive proof of the death of both of the Insureds at our Home Office, and all
other requirements are satisfied.
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We will pay interest on the Death Benefit from the date we receive due
proof of the death of the last to die of the two Insureds until payment is
made. The interest rate will be the highest of (a) 4% per annum, (b) any
higher rate we declare, or (c) any higher rate required by law.
We will normally pay the proceeds of a surrender, Withdrawal, or Policy
loan within seven days of when we receive a written request at our Home Office
in a form satisfactory to us.
We will generally determine the amount of a payment as of the Valuation
Day we receive all required documents. However, we may defer the determination
or payment of such amounts if the date for determining such amounts falls
within any period during which:
(1) the disposal or valuation of a Subaccount's assets is not
reasonably practicable because the New York Stock Exchange is closed or
conditions are such that, under the SEC's rules and regulations, trading is
restricted or an emergency is deemed to exist; or
(2) the SEC by order permits postponement of such actions for
the protection of our policyholders.
We also may defer the determination or payment of amounts from
the Fixed Account for up to six months.
Transactions will not be processed on the following days: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving, the day after Thanksgiving and Christmas Day. In
addition, Premium Payments will not be allocated and transactions will not
be effected to the Money Market Subaccount on Columbus Day and Veterans Day.
We may postpone any payment under the Policy derived from an amount paid
by check or draft until we are satisfied that the check or draft has been paid
by the bank upon which it was drawn.
The Contract. The Policy and the application are the entire contract.
Only statements made in the applications can be used to void the Policy or
deny a claim. The statements are considered representations and not
warranties. Only one of National Life's duly authorized officers or registrars
can agree to change or waive any provisions of the Policy, and only in
writing. As a result of differences in applicable state laws, certain
provisions of the Policy may vary from state to state.
Ownership. The Owner is named in the application or thereafter changed.
While either of the two Insureds is living, the Owner is entitled to exercise
any of the Policy's rights. If the Owner dies before the last to die of the
two Insureds, these rights will vest in the estate of the Owner, unless
otherwise provided.
Beneficiary. You designate the Beneficiary in the application for the
Policy. You may change the Beneficiary during the lifetime of either of the
two Insureds by sending us a written notice. The interest of any Beneficiary
who dies before the last to die of the two Insureds shall vest in you unless
you otherwise provide.
Change of Owner and Beneficiary. As long as the Policy is in force, you
may change the Owner or Beneficiary by sending us an acceptable written
request. The change will take effect as of the date the request is signed,
whether or not the Insureds are living when the request is received by us. We
will not be responsible for any payment made or action taken before we receive
the written request.
Split Dollar Arrangements. You may enter into a Split Dollar Arrangement
among the Owners or another person or persons under which the payment of
premiums and the right to receive the benefits under the Policy (i.e., Cash
Surrender Value or Death Benefit) are split between the parties. There are
different ways of allocating such rights.
For example, an employer and employee might agree that under a Policy on
the lives of the employee and his or her spouse, the employer will pay the
premiums and will have the right to receive the Cash Surrender Value. The
employee may designate the Beneficiary to receive any Death Benefit in excess
of the Cash Surrender Value. If the employee and his or her spouse both die
while such an arrangement is in
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effect, the employer would receive from the Death Benefit the amount which the
employer would have been entitled to receive upon surrender of the Policy and
the employee's Beneficiary would receive the balance of the proceeds.
No transfer of Policy rights pursuant to a Split Dollar Arrangement will
be binding on us unless in writing and received by us. We do not assess any
specific charge for Split Dollar Arrangements.
The parties who elect to enter into a Split Dollar Arrangement should
consult their own tax advisers regarding the tax consequences of such an
arrangement.
Assignments. You may assign any and all rights under the Policy. We are
not bound by an assignment unless it is in writing and we have received it at
our Home Office. We assume no responsibility for determining whether an
assignment is valid or the extent of the assignee's interest. All assignments
will be subject to any Policy loan. The interest of any Beneficiary or other
person will be subordinate to any assignment. A payee who is not also the
Owner may not assign or encumber Policy benefits, and to the extent permitted
by applicable law, such benefits are not subject to any legal process for the
payment of any claim against the payee.
Misstatement of Age and Sex. If the age or sex of either of the two
Insureds at the Date of Issue has been misstated in the application, we will
adjust the Accumulated Value of the Policy to be the amount that it would have
been had the Cost of Insurance Charges deducted been based on the correct age
and sex, or as otherwise required by state law. The adjustment will take place
on the Monthly Policy Date on or after the date on which we have proof to our
satisfaction of the misstatement. If both of the Insureds have died, we will
adjust the Accumulated Value as of the last Monthly Policy Date prior to the
last to die of the Insureds' death; however, if the Accumulated Value is
insufficient for that adjustment, the amount of the Unadjusted Death Benefit
will also be adjusted.
Suicide. If either Insured dies by suicide, while sane or insane, within
two years from the Date of Issue of the Policy (except where state law
requires a shorter period), or within two years of the effective date of a
reinstatement (unless otherwise required by state law), our liability is
limited to the payment to the Beneficiary of a sum equal to the premiums paid
less any Policy loan and accrued interest and any Withdrawals (since the date
of reinstatement, in the case of a suicide within two years of the effective
date of a reinstatement), or other reduced amount provided by state law.
If either Insured dies by suicide within two years (or shorter period
required by state law) from the effective date of any Policy change which
increases the Unadjusted Death Benefit and for which an application is
required, the amount which we will pay with respect to the increase will be
the Cost of Insurance Charges previously made for such increase (unless
otherwise required by state law).
Incontestability. The Policy will be incontestable after it has been in
force during both Insured's lifetimes for two years from the Date of Issue (or
such other date as required by state law). Similar incontestability will apply
to an increase in Face Amount or reinstatement after it has been in force
during both Insureds' lifetimes for two years from its effective date.
Before such times, however, we may contest the validity of the Policy (or
changes) based on material misstatements in the initial or any subsequent
application.
Dividends. The Policy is participating; however, no dividends are
expected to be paid on the Policy. If dividends are ever declared, they will
be paid in cash, or paid in the form required by the applicable state. At the
time of the death of the last to die of the two Insureds, the Death Benefit
will be increased by dividends payable, if any.
Correspondence. All correspondence to you is deemed to have been sent to
you if mailed to you at your last address known to us.
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Settlement Options. In lieu of a single sum payment on death or
surrender, you may elect to apply the Death Benefit under any one of the
fixed-benefit Settlement Options provided in the Policy. The options are
described below.
Payment of Interest Only. We will pay interest at a rate of
3.5% per year on the amount of the proceeds retained by us. Upon the
earlier of the payee's death or the end of a chosen period, the proceeds
retained will be paid to the payee or his or her estate.
Payments for a Stated Time. We will make equal monthly
payments, based on an interest rate of 3.5% per annum, for the number of
years you select.
Payments for Life. We will make equal monthly payments, based
on an interest rate of 3.5% per annum, for a guaranteed period and
thereafter during the life of a chosen person. Guaranteed payment periods
may be elected for 0, 10, 15, or 20 years or for a refund period, at the
end of which the total payments will equal the proceeds placed under the
option.
Payments of a Stated Amount. We will make equal monthly
payments until the proceeds, with interest at 3.5% per year on the unpaid
balance, have been paid in full. The total payments in any year must be
at least $10 per month for each thousand dollars of proceeds placed under
this option.
Life Annuity. We will make equal monthly payments in the same
manner as in the above Payments for Life option except that the amount of
each payment will be the monthly income provided by our then current
settlement rates on the date the proceeds become payable. No additional
interest will be paid.
Joint and Two Thirds Annuity. We will make equal monthly
payments, based on an interest rate of 3.5% per year, while two chosen
persons are both living. When either chosen person dies, we will continue
to make two-thirds of the amount of those payments during the life of the
survivor. We may require proof of the ages of the chosen persons.
50% Survivor Annuity. We will make equal monthly payments,
based on an interest rate of 3.5% per year, during the lifetime of the
chosen primary person. When the primary chosen person dies, we will
continue to pay 50% of the amount of those payments during the lifetime
of the secondary chosen person. We may require proof of the ages of the
chosen persons.
We may pay interest in excess of the stated amounts under the first four
options listed above, but not the last three. Under the first two, and the
fourth options above, the payee has the right to change options or to withdraw
all or part of the remaining proceeds. For additional information concerning
the payment options, see the Policy.
OPTIONAL BENEFITS
The following optional benefits, which are subject to the restrictions
and limitations set forth in the applicable Policy Riders, may be included in
a Policy at your option, if the Insureds meet any applicable underwriting
requirements. Election of any of these optional benefits may involve an
additional cost.
GUARANTEED DEATH BENEFIT
If you elect the Guaranteed Death Benefit Rider, we will guarantee that
the Policy will not lapse, regardless of the Policy's investment performance,
either for the entire lifetimes of the Insureds, or until the end of the year
that the younger Insured attains Age 80, whichever you elect. To be eligible
to elect the guarantee period until the end of the year that the younger
Insured attains Age 80, the Issue Age of the younger Insured must be 70 or
less. Riders which guarantee that the Policy will not lapse prior to the end
of the year that the younger Insured attains Age 80 will have lower Monthly
Guarantee Premiums (and therefore lower Cumulative Guarantee Premiums) than
Riders which guarantee that the Policy will not lapse for the entire lifetimes
of the Insureds.
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To keep this Rider in force, you must pay cumulative premiums greater
than the Cumulative Guarantee Premium from the Date of Issue. Your Policy will
be tested monthly for this qualification, and if not met, a notice will be
sent to you, who will have 61 days from the date the notice is mailed to pay a
premium sufficient to keep the Rider in force. The premium required will be an
amount equal to the Cumulative Guarantee Premium from the Date of Issue, plus
two times the Monthly Guarantee Premium, minus the sum of all premiums
previously paid. The Rider will be cancelled if a sufficient premium is not
paid during that 61-day period. The Rider cannot be reinstated. The amount of
the Monthly Guarantee Premium for each Policy electing the Guaranteed Death
Benefit Rider will be stated in the Data section of the Policy.
The cost of the Guaranteed Death Benefit Rider is $0.01 per thousand of
Face Amount per month. This Rider is available only at issue, and only if at
least 50% of the Face Amount consists of Basic Coverage.
If while the Guaranteed Death Benefit Rider is in force, the Accumulated
Value of the Policy is not sufficient to cover the Monthly Deductions, Monthly
Deductions will be made until the Accumulated Value of the Policy is
exhausted, and will thereafter be deferred, and collected at such time as the
Policy has positive Accumulated Value. For as long as Cash Surrender Value is
zero, failure to have paid the Cumulative Guarantee Premium as of any Monthly
Policy Date will cause the Guaranteed Death Benefit Rider to enter a 61 day
lapse pending notification period. If a sufficient premium, as set forth
above, is not paid during this period, the Rider will be cancelled and if the
Cash Surrender Value is still zero, the Policy will enter a Grace Period, and
will lapse if the Grace Period expires without a sufficient premium payment
(see "Payment and Allocation of Premiums - Policy Lapse", Page 26).
If you increase the Face Amount of your Policy or change the Death
Benefit Option from Option A to Option B, the Rider's guarantee will extend to
the increased Face Amount. The Monthly Guarantee Premiums will increase as a
result.
If you wish to keep the Rider in force, you must limit Withdrawals and
Policy loans to the excess of premiums paid over the sum of Monthly Guarantee
Premiums in effect since the Date of Issue. If you take a larger Policy loan
or Withdrawal, the Guaranteed Death Benefit Rider will enter a 61-day
lapse-pending notification period, and will be cancelled if a sufficient
premium is not paid.
THE GUARANTEED DEATH BENEFIT RIDER IS NOT AVAILABLE IN TEXAS OR
MASSACHUSETTS. THE LIFETIME GUARANTEE PERIOD IS NOT AVAILABLE IN NEW YORK. THE
GUARANTEE PERIOD THROUGH AGE 80 IS NOT AVAILABLE IN PENNSYLVANIA.
ADDITIONAL PROTECTION BENEFIT
The Additional Protection Benefit Rider may be used to provide a higher
Face Amount by adding Additional Coverage to the Policy. This Rider is
available at issue, or after issue by submitting an application to us with
evidence satisfactory to us of insurability of both Insureds. Additional
Coverage must be in an amount of at least $50,000, and cannot exceed three
times the Basic Coverage.
Adding to the Face Amount of the Policy through the Additional
Protection Benefit Rider can offer a cost savings over adding to the Face
Amount by increasing the Basic Coverage. Specifically, there is no Target
Premium, no Surrender Charge, and no per $1000 Monthly Administrative Charge
associated with Additional Coverage. The cost of the Rider is that a Cost of
Insurance Charge is included in the Monthly Deductions for the Additional
Coverage - the guaranteed cost of insurance rate applicable to the Additional
Coverage will generally be higher than the rate applicable to Basic Coverage,
but current cost of insurance rates may be either higher or lower for the
Additional Coverage than for the Basic Coverage.
THE ADDITIONAL PROTECTION BENEFIT RIDER IS NOT AVAILABLE IN NEW YORK.
POLICY SPLIT OPTION
If you elect the Policy Split Option Rider, you will have the right to
split the Face Amount and Accumulated Value of a Policy into two single life
whole life insurance contracts on the lives of each of the two Insureds, in
the event of divorce or a material change in federal estate tax law. The two
single life contracts may be any traditional whole life insurance, universal
or variable life insurance contract we are
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then offering. This Rider is available only at issue, only to Insureds legally
married to each other, only where both Insureds are not in a substandard Rate
Class with a rating in excess of 250% and not uninsurable, and only where
neither Insured is older than age 80. We will allow you to exercise the option
to split the Policy without evidence of insurability, but only within 180 days
of the date of a final divorce decree relating to the Insureds, or within 180
days of the occurrence of either of the following changes in federal estate
tax law: (1) an end to the Unlimited Marital Deduction, as defined in the
Code; and (2) a reduction of 50% or more of the percentage federal estate tax
rate applicable to the estate of the surviving spouse.
The two new policies will have an issue date of the date of the split,
and will be based on the Insureds' ages as of the date of the split. The Rate
Classes of each of the Insureds will be the Rate Class for such Insured for
the most recently issued coverage segment under the Policy. You may select the
face amounts of the new policies, as long as the total of the two face amounts
does not exceed the Face Amount of the Policy on the date of the split, and
neither of the face amounts on the two new policies exceeds 50% of the Face
Amount on the Policy. Increases on the Policy which contain a substandard
rating in excess of 250% will not be eligible for the split. If the face
amounts of the new policies are not equal, and the Policy is jointly owned,
then the consent of all Owners to the split is required. The Accumulated
Value, and any Policy loans and accrued interest, will be split in proportion
to the Face Amount split, and the total of the accumulated values and any
policy loans and accrued interest of the new individual contracts will equal
the Accumulated Value of the Policy. There will not be new suicide and
incontestability periods for the new individual policies as of the date of the
split if they had expired on the Policy prior to the split, but if such
periods had not expired, then the remaining time to expiration will be
transferred to the new Policies.
There is no cost for the Policy Split Option Rider, except that a fixed
charge of $200 will also be assessed at the time of the split to cover
administrative costs. You may cancel the Rider at any time. It will
automatically terminate on its exercise, on the date of death of the first of
the two Insureds to die, or on the date that the older of the Insureds reaches
Attained Age 85. Any other Riders applicable to the Policy will terminate upon
exercise of the Policy Split Option.
THE POLICY SPLIT OPTION IS NOT AVAILABLE IN PENNSYLVANIA. IN NEW YORK,
THERE IS A CHARGE FOR THE POLICY SPLIT OPTION RIDER. THE CHARGE VARIES BY
JOINT AGE.
ESTATE PRESERVATION RIDER
The Estate Preservation Rider is designed for use in situations in
which a Policy is issued outside of an irrevocable life insurance trust but is
expected to be transferred into such a trust within a year after the Date of
Issue. This Rider provides four years of additional last survivor term
coverage on the two Insureds. The goal of the rider is to provide a Death
Benefit including this Rider, net of incremental estate taxes owed as a result
of the Policy, at least equal to the Death Benefit provided by the Policy not
including the Rider. This Rider is available only at issue and only where the
Insureds are legally married to each other.
The cost of the Estate Preservation Rider is a charge for the death
benefit coverage included by this Rider, at the same rates that apply to the
Additional Coverage. The coverage provided by this Rider will be level,
regardless of whether Option A or Option B applies to the Face Amount of the
Policy. The amount of coverage will be the initial Face Amount multiplied by a
fraction the numerator of which is 0.55 and the denominator of which is
1-0.55, or 0.45. A factor of 0.55 is used in the above formula because the
maximum estate tax rate is currently 55%.
Any decrease in Face Amount during the first four Policy Years will
result in a proportionate reduction in the coverage provided by the Estate
Preservation Rider.
The Estate Preservation Rider will terminate on the first Policy
Anniversary, if the Owner of the Policy has not become an irrevocable life
insurance trust by that time. If the Owner has become an irrevocable life
insurance trust by such time, then the Rider will automatically terminate at
the end of the fourth Policy Year.
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TERM RIDER
The Term Rider allows you to add individual life term coverage on
either or both of the two Insureds. The Term Rider is available at any time,
subject to submission of an application with evidence of insurability
satisfactory to us, on Insureds with Issue Ages from 20 through 75. The Term
Rider coverage is renewable through age 80. The maximum amount of Term Rider
coverage for each Insured is 50% of the Face Amount of the Policy. Charges
included in the Monthly Deductions will include amounts associated with the
individual life term coverage. The cost of insurance rates for the Term Rider
will be set forth in the Rider.
Individual term life insurance coverage addresses different insurance
needs than the survivorship life insurance coverage provided by the Face
Amount of the Policy. Your determination of the usefulness of the Term Rider
should be based on your specific insurance needs. Consult your sales
representative for further information.
CONTINUING COVERAGE RIDER
The Continuing Coverage Rider allows you to extend coverage at the Face
Amount of a Policy beyond the younger Insured's Attained Age 100 if the Policy
is still in force at that time. This Rider is available only at issue and only
if the younger Insured is no older than Attained Age 75.
On the date that the extension of coverage occurs, the Policy's
Accumulated Value will be transferred to the Fixed Account, and no further
transfers will be permitted. The Monthly Deductions will be set to zero. No
further Premium Payments will be accepted. All other rights and benefits will
continue while the Policy is in force.
The charge is guaranteed never to exceed $3.50 per $1000 per month
applied to the Net Amount at Risk. The current charge for the Continuing
Coverage Rider is $2.50 per $1000 per month, applied to the Net Amount at
Risk. The charge will begin at the younger Insured's Attained Age 90. At the
time charges begin for this Rider, Policies with Death Benefit Option B will
automatically be changed to Death Benefit Option A.
The tax consequences associated with continuing a Policy beyond age
100 of the younger Insured are uncertain.
THE CONTINUING COVERAGE RIDER IS NOT AVAILABLE IN TEXAS, MARYLAND OR
NEW YORK.
ENHANCED DEATH BENEFIT RIDER
The Enhanced Death Benefit Rider may provide a higher Death Benefit at a
targeted age for the younger Insured. You select the target age. The Rider
operates by increasing the otherwise applicable specified percentages that are
shown in the Policy and which may be applied in determining the Death Benefit,
beginning 4 years prior to the targeted Attained Age and ending at Attained
Age 99 of the younger Insured, by the following percentages:
<TABLE>
<S> <C> <C>
Target Age - 4: 4% Target Age -1: 16% Attained Age - 97: 12%
Target Age - 3: 8% Target Age through Age 95: 20% Attained Age - 98: 8%
Target Age - 2: 12% Attained Age - 96: 16% Attained Age - 99: 4%
</TABLE>
The target age must be at least the later of the younger Insured's
Attained Age 70 and 15 years after the Date of Issue. The target age cannot be
more than Attained Age 95 of the younger Insured. Once you select it, you may
not change the target age. You may cancel this Rider at any time, but if you
do, you may not reinstate it.
There is no cost for the Enhanced Death Benefit Rider. However, if
the Rider's increases in the specified percentages result in an increase in
Death Benefit, the Net Amount at Risk will be higher than if the Rider did not
apply, and the Cost of Insurance Charges will be commensurately higher .
This Rider is available only at issue, and only where the younger
Insured's Issue Age is 80 or less.
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THE ENHANCED DEATH BENEFIT RIDER IS NOT AVAILABLE IN TEXAS.
AUTOMATIC INCREASE RIDER
The Automatic Increase Rider will provide for regular increases in Face
Amount. You may elect that such increases be effected annually in amounts
equal to either of 5% or 10% of the sum of the Face Amount of the Policy at
issue, plus all previous increases resulting from this Rider. You may also
elect annual increases of a level amount equal to your planned periodic
premiums for the Policy. In either case, the maximum increase that can be
effected by means of the Automatic Increase Rider is 100% of the Face Amount
of the Policy at issue.
Increases in Face Amount effected by means of the Automatic Increase
Rider will be similar to Additional Coverage in that there will be no Target
Premium , no Surrender Charge and no per $1000 Monthly Administrative Charge
associated with these increases.
The cost of the Rider is that the Cost of Insurance Charge for the Policy will
include amounts for the increase segments as they become effective. The cost
of insurance rates will be the same as the rates we apply to Basic Coverage at
issue. Guaranteed cost of insurance rates that will be applied to increases
effected through this Rider will be set forth in the Rider.
An Automatic Increase Rider terminates:
(a) at your request
(b) when the younger insured reaches Attained Age 81
(c) when the maximum total increase is reached
(d) on the death of the first to die of the Insureds, or
(e) when a requested decrease in Face Amount becomes effective.
Termination of the Rider does not cancel previously added increases.
This Rider is available only at issue, only if the younger Insured's
Issue Age is at least 20 and less than 71, and only if neither Insured has a
substandard rating in excess of 250%.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all tax situations. This discussion is not intended as
tax advice. Counsel or other competent tax advisors should be consulted for
more complete information. This discussion is based upon understanding of the
present Federal income tax laws. No representation is made as to the
likelihood of continuation of the present Federal income tax laws or as to how
they may be interpreted by the Internal Revenue Service.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for Federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under Federal tax law, a life insurance policy must satisfy certain
requirements which are set forth in the Internal Revenue Code. Guidance as to
how these requirements are to be applied is limited. In the absence of such
guidance there is some uncertainty as to whether the Policy will qualify as a
life insurance contract for Federal tax purposes. Nevertheless, National Life
believes it reasonable to conclude that a Policy will satisfy the applicable
requirements. If it is subsequently determined that a Policy does not satisfy
the applicable requirements, National Life may take appropriate steps to bring
the policy into compliance with such requirements and National Life reserves
the right to modify the policy as necessary in order to do so.
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In certain circumstances, owners of variable life insurance policies have
been considered for Federal income tax purposes to be the owners of the assets
of separate accounts supporting their contracts due to their ability to
exercise investment control over those assets. Where this is the case, the
policyowners have been currently taxed on income and gains attributable to
separate account assets. There is little guidance in this area, and some
features of the policy, such as the flexibility of Policy Owners to allocate
premium payments and Accumulated Values, have not been explicitly addressed in
published rulings. While National Life believes that the policy does not give
Policy Owners investment control over Variable Account assets, we reserve the
right to modify the policy as necessary to prevent the Policy Owner from being
treated as the owner of the Variable Account assets supporting the Policy.
In addition, the Code requires that the investments of the Variable
Account be "adequately diversified" in order for the policy to be treated as a
life insurance contract for Federal income tax purposes. It is intended that
the Variable Account, through the Funds, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
In General. National Life believes that the death benefit under a Policy
should be excludible from the gross income of the beneficiary. Federal, state
and local estate, inheritance, transfer, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy Owner or beneficiary. A tax advisor should be consulted on these
consequences.
Depending on the circumstances, the exchange of a Policy, an increase or
decrease of a Policy's Face Amount, a change in the Policy's Death Benefit
Option (i.e., a change from Death Benefit Option A to Death Benefit Option B
or vice versa), a Policy loan, a Withdrawal, a surrender, a change in
ownership, or an assignment of the Policy may have Federal income tax
consequences. A tax advisor should be consulted before effecting any of these
policy changes.
Generally, as long as you are not subject to the Alternative Minimum Tax,
you will not be deemed to be in constructive receipt of the Account Value,
including increments thereof, until there is a distribution. The tax
consequences of distribution from, and loans taken from or secured by, a
Policy depend upon whether the Policy is classified as a "Modified Endowment
Contract". Whether a Policy is or is not a Modified Endowment Contract, upon a
complete surrender or lapse of a Policy or when benefits are paid at a
Policy's maturity date, if the amount received plus the amount of indebtedness
exceeds the total investment in the Policy, the excess will generally be
treated as ordinary income subject to tax.
Modified Endowment Contracts. Under the Internal Revenue Code, certain
life insurance contracts are classified as "Modified Endowment Contracts,"
with less favorable tax treatment than other life insurance contracts. Due to
the flexibility of the Policy as to premium payments and benefits, the
individual circumstances of each Policy will determine whether it is
classified as a Modified Endowment Contract. The rules are too complex to be
summarized here, but generally depend on the amount of premium payments made
during the first seven policy years. Certain changes in a policy after it is
issued, such as a reduction in benefits, could also cause it to be classified
as a Modified Endowment Contract. A current or prospective Policy Owner should
consult with a competent advisor to determine whether a policy transaction
will cause the Policy to be classified as a Modified Endowment Contract.
Distributions Other Than Death Benefits from Modified Endowment
Contracts. Policies classified as Modified Endowment Contracts are subject to
the following tax rules:
(1) All distributions other than death benefits from a Modified Endowment
Contract, including distributions upon surrender and withdrawals, will be
treated first as distributions of gain taxable as ordinary income and as
tax-free recovery of the Policy Owner's investment in the Policy only after
all gain has been distributed.
(2) Loans taken from or secured by a Policy classified as a Modified
Endowment Contract are treated as distributions and taxed accordingly.
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<PAGE> 49
(3) A 10 percent additional income tax is imposed on the amount subject
to tax except where the distribution or loan is made when the Policy Owner has
attained age 59 1/2 or is disabled, or where the distribution is part of a
series of substantially equal periodic payments for the life (or life
expectancy) of the Policy Owner or the joint lives (or joint life
expectancies) of the Policy Owner and the Policy Owner's beneficiary or
designated beneficiary.
If a Contract becomes a modified endowment contract, distributions that
occur during the contract year will be taxed as distributions from a modified
endowment contract. In addition, distributions from a Contract within two
years before it becomes a modified endowment contract will be taxed in this
manner. This means that a distribution made from a Contract that is not a
modified endowment contract could later become taxable as a distribution from
a modified endowment contract.
Distributions Other Than Death Benefits from Policies that are not
Modified Endowment Contracts. Distributions other than death benefits from a
Policy that is not classified as a Modified Endowment Contract are generally
treated first as a recovery of the Policy Owner's investment in the policy and
only after the recovery of all investment in the policy as taxable income.
However, certain distributions which must be made in order to enable the
Policy to continue to qualify as a life insurance contract for Federal income
tax purposes if policy benefits are reduced during the first 15 policy years
may be treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not classified as a Modified
Endowment Contract are generally not treated as distributions. However, the
tax consequences associated with preferred Policy loans is less clear and a
tax adviser should be consulted about such loans.
Finally, neither distributions from nor loans from or secured by a Policy
that is not a Modified Endowment Contract are subject to the 10 percent
additional income tax.
Investment in the Policy. Your investment in the Policy is generally your
aggregate premium payments. When a distribution is taken from the Policy, your
investment in the Policy is reduced by the amount of the distribution that is
tax-free.
Policy Loan Interest. In general, interest paid on any loan under a
Policy will not be deductible.
Multiple Policies. All Modified Endowment Contracts that are issued by
National Life (or its affiliates) to the same Policy Owner during any calendar
year are treated as one Modified Endowment Contract for purposes of
determining the amount includible in the Policy Owner's income when a taxable
distribution occurs.
Continuation Beyond Age 100. The tax consequences of continuing the
Policy beyond the Insured's 100th year are unclear. You should consult a tax
adviser if you intend to keep the Policy in force beyond the Insured's 100th
year.
Policy Split Option. The policy split option permits a policy to be split
into two single life insurance policies. It is not clear whether exercising
the policy split option will be treated as a taxable transaction or whether
the individual policies would be classified as modified endowment contracts. A
tax advisor should be consulted before exercising the policy split option.
Other Tax Considerations. The Policy can be used in various arrangements,
including nonqualified deferred compensation or salary continuance plans,
split dollar insurance plans, executive bonus plans, tax exempt and nonexempt
welfare benefit plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances. If you are purchasing the Policy for any arrangement the value
of which depends in part on its tax consequences, you should consult a
qualified tax adviser.
Federal and state estate, inheritance, transfer, and other tax
consequences depend on the individual circumstances of each Policy Owner or
beneficiary. A tax advisor should be consulted on these consequences.
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The transfer of the Policy or designation of a beneficiary may have
federal, state, and/or local transfer and inheritance tax consequences,
including the imposition of gift, estate, and generation-skipping transfer
("GST") taxes. For example, the transfer of the Policy to, or the designation
as a beneficiary of, or the payment of proceeds to, a person who is assigned
to a generation which is two or more generations below the generation
assignment of the Policy Owner (e.g., a grandchild) may have GST tax
consequences under federal and state tax law. The individual situation of each
Policy Owner or beneficiary will determine the extent, if any, to which
federal, state, and local transfer and inheritance taxes may be imposed and
how ownership or receipt of Policy proceeds will be treated for purposes of
federal, state and local estate, inheritance, GST and other taxes.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the policy could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Policy.
POSSIBLE CHARGES FOR NATIONAL LIFE'S TAXES
At the present time, National Life makes no charge for any Federal, state
or local taxes (other than the charge for state premium taxes and the DAC tax)
that may be attributable to the Subaccounts or to the policies. National Life
reserves the right to charge the Subaccounts for any future taxes or economic
burden National Life may incur.
VOTING RIGHTS
We will invest all of the assets held in the Subaccounts of the Variable
Account in shares of corresponding Portfolios of the Funds. The Funds do not
hold routine annual shareholders' meetings. Shareholders' meetings will be
called whenever each Fund believes that it is necessary to vote to elect the
Board of Directors of the Fund and to vote upon certain other matters that are
required to be approved or ratified by the shareholders of a mutual fund.
We are the legal owner of Fund shares and as such have the right to vote
upon any matter that may be voted upon at a shareholders' meeting. However, in
accordance with the SEC's view of present applicable law, we will vote the
shares of the Funds at meetings of the shareholders of the appropriate Fund or
Portfolio in accordance with instructions of Policy Owners. We will vote Fund
shares for which Owners do not send timely instructions in the same proportion
as those shares in that Subaccount for which instructions are received.
If you have a voting interest, we will send you proxy material and a form
for giving voting instructions. You may vote, by proxy or in person, only as
to the Portfolios that correspond to the Subaccounts in which your Policy
values are allocated. The number of shares held in each Subaccount
attributable to a Policy for which you may provide voting instructions will be
determined by dividing your Policy's Accumulated Value in that account by the
net asset value of one share of the corresponding Portfolio as of the record
date for the shareholder meeting. We will count fractional shares. For each
share of a Portfolio for which Owners have no interest, we will cast votes,
for or against any matter, in the same proportion as Owners provide voting
instructions.
If required by state insurance officials, we may disregard voting
instructions if they would require shares to be voted so as to cause a change
in the investment objectives or policies of one or more of the Portfolios, or
to approve or disapprove an investment policy or investment adviser of one or
more of the Portfolios. In addition, we may disregard voting instructions in
favor of certain changes initiated by an Owner or a Fund's Board of Directors,
if our disapproval of the change is reasonable and is based on a good faith
determination that the change would be contrary to state law or otherwise
inappropriate, considering the portfolio's objectives and purposes, and the
effect the change would have on us. If we disregard voting instructions, we
will advise you of that action and our reasons in the next semi-annual report
to Owners.
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Shares of the Funds are currently being offered to variable life
insurance and variable annuity separate accounts of life insurance companies
other than National Life that are not affiliated with National Life. National
Life understands that shares of these Funds also will be voted by such other
life insurance companies in accordance with instructions from their
policyholders invested in such separate accounts. This will dilute the effect
of your voting instructions.
CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under
applicable Federal securities laws. If changes in these laws or regulations
eliminate the necessity to solicit your voting instructions or restrict such
voting rights, we may proceed in accordance with any such laws or regulations.
National Life also reserves the right, subject to compliance with
applicable law, including approval of Owners, if so required:
(1) to make changes in the form of the Variable Account, if in its
judgment such changes would serve the interests of Owners or would be
appropriate in carrying out the purposes of the Policies, for example:
(i) operating the Variable Account as a management company under the
1940 Act
(ii) deregistering the Variable Account under the 1940 Act if
registration is no longer required
(iii) combining or substituting separate accounts
(iv) transferring the assets of the Variable Account to another
separate account or to the Fixed Account
(v) making changes necessary to comply with, obtain or continue any
exemptions from the 1940 Act, or
(vi) making other technical changes in the Policy to conform with any
action described herein;
(2) if in its judgment a Portfolio no longer suits the investment goals of
the Policy, or if tax or marketing conditions so warrant, to substitute shares
of another investment portfolio for shares of such Portfolio;
(3) to eliminate, combine, or substitute Subaccounts and establish new
Subaccounts, if in its judgment marketing needs, tax considerations, or
investment conditions so warrant;
(4) to transfer assets from a Subaccount to another Subaccount or separate
account if the transfer in our judgment would best serve interests of Policy
Owners or would be appropriate in carrying out the purposes of the Policies;
and
(5) to modify the provisions of the Policies to comply with applicable
laws.
We have reserved all rights in respect of our corporate name
and any part thereof, including without limitation the right to withdraw its
use and to grant its use to one or more other separate accounts and other
entities.
If your Policy has Accumulated Value in a Subaccount that is eliminated,
we will notify you at least 30 days before the elimination, and will ask that
you name the Subaccount or Subaccounts (or the Fixed Account) to which the
Accumulated Value in that Subaccount should be transferred. If you do not name
a new Subaccount, then we will use the Money Market Subaccount. In any case,
if in the future we impose a transfer charge or limits on the number of
transfers or free transfers, no charge will be made for this transfer, and it
will not count toward any limit on transfers or free transfers.
OFFICERS AND DIRECTORS OF NATIONAL LIFE
The officers and directors of National Life, as well as their principal
occupations during the past five years, are listed below.
<TABLE>
<S> <C>
PRINCIPAL OCCUPATION
NAME AND POSITION DURING THE PAST FIVE YEARS
----------------- --------------------------
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
</TABLE>
48
<PAGE> 52
<TABLE>
<S> <C>
Thomas H. MacLeay 1996 to Present - President and
President, Chief Chief Operating Officer; 1993 to
Operating Officer, 1996 - Executive Vice President
and Director & Chief Financial Officer
Robert E. Boardman 1994 to present - Chairman of Hickok &
Director Boardman Financial Network
1967 to present - President of Hickok & Boardman
Realty, Inc.
Earle H. Harbison, Jr. 1993 to present: Chairman of
Director Harbison Walker, Inc.
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
James A. Mallon 1998 to present: Executive Vice President & Chief
Executive Vice President & Marketing Officer; 1996 to 1998: President & Chief
Chief Marketing Officer Executive Officer - Integon Life Insurance Corporation;
1993 to 1996: Senior Vice President & Chief Marketing
Officer - Commercial Union Life Insurance Company
Of America
William A. Smith 1998 to present: Executive Vice President & Chief
Executive Vice President & Financial Officer; 1994 to 1998 - Vice President and
Chief Financial Officer Controller, American Express Financial Advisors.
Rodney A. Buck 2000 to present - Executive Vice President and Chief
Executive Vice President & Investment Officer;1996 to 2000 - Senior Vice
Chief Investment Officer President and Chief Investment
Officer; 1996 to present - Chairman, President
& Chief Executive Officer, National Life Investment
Management Company, Inc. ("NLIMC"); 1998 to present -
Chief Executive Office - Sentinel Advisors Company
("SAC"); 1987 to 1997 - Senior Vice President - SAC.
Gregory H. Doremus 1998 to present: Senior Vice President -
Senior Vice President - New New Business & Customer Services; 1994 to 1998 -
Business & Customer Services Vice President - Customer Services.
Michele S. Gatto 1999 to present - Senior Vice President & General
Senior Vice President & Counsel; 1997 to 1999 - Vice President, General Counsel
General Counsel and Secretary, Massachusetts Casualty Insurance Company;
1986 to 1997 - Vice President, Assistant General Counsel,
Assistant Secretary/Treasurer, and other legal positions, The
Paul Revere Corporation
Charles C. Kittredge 2000 to present - Senior Vice President - Marketing
Senior Vice President - Marketing Development and Operations; 1997 to present:
Development and Operations Senior Vice President - Sales and Distribution;
1993 to 1997 - Vice President -Agency Financial Planning & Services
</TABLE>
49
<PAGE> 53
<TABLE>
<S> <C>
Wade H. Mayo 2000 to present: Senior Vice President; 1993 to
Senior Vice President present: President and Chief Executive Officer - Life Insurance Company of the
Southwest ("LSW"); 1996 to present: President - LSW National Holdings,
Inc.1989 to present: President & Director - Insurance Investors Life Insurance
Company
Joseph A. Miller 2000 to present: Senior Vice President; 1997 to
Senior Vice President 2000: Vice President & Director of Agencies;
1990 to 1997: Vice President - Southern Regional Office
Michael A. Tahan 1998 to present: Senior Vice President & Chief
Senior Vice President & Information Officer; 1991 to 1998 - First Vice President & Chief Information
Officer - Chief Information Officer - Merrill Lynch Asset
Management
</TABLE>
DISTRIBUTION OF POLICIES
We sell Policies through agents who are licensed by state insurance
authorities to sell our variable life insurance policies, and who are also
registered representatives of Equity Services, Inc. ("ESI") or registered
representatives of broker/dealers who have Selling Agreements with ESI. ESI,
whose address is National Life Drive, Montpelier, Vermont 05604, is a
registered broker/dealer under the Securities Exchange Act of 1934 (the
"1934 Act") and a member of the National Association of Securities Dealers,
Inc. (the "NASD"). ESI is an indirect wholly-owned subsidiary of National
Life, formed on October 7, 1968. ESI acts as the principal underwriter, as
defined in the 1940 Act, of the Policies, and for the Variable Account
pursuant to an Underwriting Agreement to which the Variable Account, ESI and
National Life are parties.
National Life is seeking approval to sell the Policies in all states and
the District of Columbia. However, all approvals may not be obtained. The
Policies are offered and sold only in those states where their sale is
lawful.
The directors of ESI are Patrick E. Welch, Thomas H. MacLeay, Rodney A.
Buck, all of whose principal occupations are disclosed under "Directors and
Officers of National Life" above, and Joseph M. Rob, the Chairman and Chief
Executive Officer of ESI. ESI's other officers are:
<TABLE>
<S> <C>
Kenneth R. Ehinger President & Chief Operating Officer
John M. Grab, Jr. Senior Vice President & Chief Financial Officer
Stephen A. Englese Senior Vice President - Financial Products
Gregory D. Teese Vice President - Compliance
Budd A. Shedaker Assistant Vice President - Communications
D. Russell Morgan Counsel
Sharon E. Bernard Treasurer & Controller
Lisa A. Pettrey Secretary
JoAnn K. Morissette Assistant Secretary
</TABLE>
The principal business address of all these individuals is National Life
Drive, Montpelier, Vermont 05604.
We do the insurance underwriting , determine a proposed Insured's Rate
Class, and determine whether to accept or reject an application for a
Policy. We will refund any premiums paid if a Policy ultimately is not
issued or will refund the applicable amount if the Policy is returned under
the free look provision.
Agents who are ESI registered representatives are compensated for sales
of the Policies on a commission and service fee basis and with other forms
of compensation. During the first Policy Year, agent commissions will not be
more than 50% of the premiums paid up to the Target Premium (which is a
function of Basic Coverage, and is shown in Appendix B to this Prospectus)
and 2% of the premiums paid in excess of that amount. For Policy Years 2
through 10, the agent commissions will not be more than 4% of
50
<PAGE> 54
the premiums paid up to the Target Premium, and 2% of premiums paid in
excess of that amount. For Policy Year 11 and thereafter, agent commissions
will be 1.5% of all premiums paid. For premiums received in the year
following an increase in Basic Coverage and attributable to the increase,
agent commissions will not be more than 48.5% up to the Target Premium for
the increase. Agents may also receive expense allowances, and will also
receive service fees, starting in Policy year 5, of 0.15% of unloaned
Accumulated Value. Full time agents of National Life who achieve specified
annual sales goals may be eligible for compensation in addition to the
amounts stated above.
Dealers other than ESI will receive gross concessions during the first
Policy Year of 85% of the premiums paid up to the Target Premium, and 4% of
the premiums paid in excess of that amount. For Policy Years 2 through 10,
the gross dealer concession will not be more than 4% of the premiums paid.
For Policy Year 11 and thereafter, the gross dealer concession will be 1.5%
of all premiums paid. For premiums received in the year following an
increase in Basic Coverage and attributable to the increase, the gross
dealer concession will not be more than 50% up to the Target Premium for the
increase. The aggregate amounts of sales load received by ESI in connection
with the Policies in 1998 and 1999 were $86,611.59 and $261,084.25,
respectively.
POLICY REPORTS
At least once each Policy Year we will send you a statement describing the
status of the Policy, including setting forth:
- the Face Amount
- the current Death Benefit
- any Policy loans and accrued interest
- the current Accumulated Value
- the non-loaned Accumulated Value in the Fixed Account
- the amount held as Collateral in the Fixed Account
- the value in each Subaccount of the Variable Account
- premiums paid since the last report
- charges deducted since the last report
- any Withdrawals since the last report, and
- the current Cash Surrender Value.
We currently plan to send such statements quarterly. In addition, we
will send you a statement showing the status of the Policy following the
transfer of amounts from one Subaccount of a Variable Account to another or
between the Fixed Account and the Variable Account, the taking out of a
loan, a repayment of a loan, a Withdrawal and the payment of any premiums
(excluding those paid by bank draft or otherwise under the Automatic Payment
Plan).
We will send you a semi-annual report containing the financial
statements of each Fund in which your Policy has Accumulated Value, as
required by the 1940 Act.
STATE REGULATION
We are subject to regulation and supervision by the Department of
Banking, Insurance, Securities and Health Care Administration of the State
of Vermont, which periodically examines our affairs. We are also subject to
the insurance laws and regulations of all jurisdictions where we are
authorized to do business. We have filed a copy of the Policy form with, and
where required obtained an approval by, insurance officials in each
jurisdiction where the Policies are sold. We are required to submit annual
statements of our operations, including financial statements, to the
insurance departments of the various jurisdictions in which we do business
for the purposes of determining solvency and compliance with local insurance
laws and regulations.
51
<PAGE> 55
INSURANCE MARKETPLACE STANDARDS ASSOCIATION
National Life is a member of the Insurance Marketplace Standards
Association ("IMSA"), and as such may include the IMSA logo and information
about IMSA membership in its advertisements. Companies that belong to IMSA
subscribe to a set of ethical standards covering the various aspects of sales
and service for individually sold life insurance and annuities.
EXPERTS
The Financial Statements listed on Page F-1 have been included in this
Prospectus, in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Actuarial matters included in the Prospectus have been examined by
Elizabeth H. MacGowan, F.S.A. MAAA, Actuary - Product Development of National
Life.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided
advice on legal matters relating to certain aspects of Federal securities law
applicable to the issue and sale of the Policies. Matters of Vermont law
pertaining to the Policies, including National Life's right to issue the
Policies and its qualification to do so under applicable laws and regulations
issued thereunder, have been passed upon by Michele S. Gatto, Senior Vice
President and General Counsel of National Life.
The Variable Account is not a party to any litigation. There are no
material legal proceedings involving National Life which are likely to have a
material adverse effect upon the Variable Account or upon the ability of
National Life to meet its obligations under the Policies. ESI is not engaged
in any litigation of any material nature. The Company, like other life
insurance companies, is involved in lawsuits, including class action lawsuits.
In some class action and other lawsuits involving insurance companies,
substantial damages have been sought and/or material settlement payments have
been made. Although the Company cannot predict the outcome of any litigation
with certainty, the Company believes that at the present time, there are no
pending or threatened lawsuits that are reasonably likely to have a material
adverse impact on it or the Variable Account.
FINANCIAL STATEMENTS
The financial statements of National Life and of the relevant
Subaccounts of the Variable Account appear on the pages beginning with Page
F-1 below. The financial statements of National Life should be distinguished
from the financial statements of the Variable Account and should be considered
only as bearing upon National Life's ability to meet its obligations under the
Policies.
52
<PAGE> 56
GLOSSARY
<TABLE>
<S> <C>
ACCUMULATED VALUE The sum of the Policy's values in
the Variable Account and the Fixed
Account.
ADDITIONAL COVERAGE One of the two types of coverage of
which the Face Amount is comprised,
which is provided by the Additional
Protection Benefit Rider; other type the
of coverage is Basic Coverage.
ADDITIONAL PROTECTION A benefit that may be included in the Policy
BENEFIT RIDER at your option, which provides Additional
Coverage.
ATTAINED AGE The Issue Age of the Insured plus
the number of full Policy Years which
have passed since the Date of Issue.
BASIC COVERAGE One of the two types of coverage of
which the Face Amount is comprised; the
other type is Additional Coverage,
provided by the Additional Protection
Benefit Rider.
BENEFICIARY The person(s) or entity(ies) designated
to receive all or some of the Death
Benefit on the death of the last to die
of the two Insureds. You designate the
Beneficiary in the application. If you
subsequently change Beneficiaries, then
the Beneficiary is as shown in the
latest change filed with us. The
interest of any Beneficiary who dies
before the last to die of the two
Insureds shall vest in you unless
otherwise stated.
CASH SURRENDER VALUE The Accumulated Value minus any
applicable Surrender Charge, and minus
any outstanding Policy loans and
accrued interest on such loans.
COLLATERAL The portion of the Accumulated Value in the
Fixed Account which secures the amount of any
Policy loan.
CODE The Internal Revenue Code of 1986, as amended.
CUMULATIVE GUARANTEE PREMIUM The sum of the Monthly Guarantee Premiums
in effect on each Monthly Policy Date
since the Date of Issue (including the
current month), plus all Withdrawals and
outstanding Policy loans and accrued
interest.
CUMULATIVE MINIMUM MONTHLY The sum of the Minimum Monthly Premiums in
PREMIUM effect on each Monthly Policy Date since
the Date of Issue (including the current
month), plus all Withdrawals and
outstanding Policy loans and accrued
interest.
DAC TAX A tax attributable to Specified Policy Acquisition
Expenses under Section 848 of the Code.
DATE OF ISSUE The date on which the Policy is
issued, which is set forth in the
Policy. It is used to determine Policy
Years, Policy Months and Monthly Policy
Dates, as well as to measure suicide and
contestable periods.
DEATH BENEFIT The Policy's Unadjusted Death Benefit, plus
any relevant additional benefits
provided by a supplementary benefit
Rider, less any outstanding Policy loan
and accrued interest, and less any
unpaid Monthly Deductions.
</TABLE>
53
<PAGE> 57
<TABLE>
<S> <C>
DURATION The number of full years the insurance
has been in force; for the Initial Face
Amount, measured from the Date of Issue;
for any increase in Face Amount,
measured from the effective date of such
increase.
FACE AMOUNT The Initial Face Amount plus any
increases in Face Amount and minus any
decreases in Face Amount. The Face
Amount is the sum of the Basic Coverage
and the Additional Coverage.
FIXED ACCOUNT The account which holds the assets of National
Life which are available to support its
insurance and annuity obligations.
GRACE PERIOD A 61-day period measured from the date on which
we send a notice of pending lapse, during which
the Policy will not lapse and insurance coverage
continues. To prevent lapse, you must during
the Grace Period make a premium payment equal to
the sum of any amount by which the past Monthly
Deductions have been in excess of Cash Surrender
Value, plus three times the Monthly Deduction
due the date the Grace Period began.
GUARANTEED DEATH BENEFIT RIDER An optional Rider that will guarantee that the
Policy will not lapse, either, prior to the end
of the year that the younger Insured attains
Age 80, or for the entire lifetimes of the
Insureds, whichever you elect, regardless of
investment performance, if the Cumulative
Guarantee Premium has been paid as of each
Monthly Policy Date.
HOME OFFICE National Life's Home Office at National Life
Drive, Montpelier, Vermont 05604.
INITIAL FACE AMOUNT The Face Amount of the Policy on the Date of
Issue. The Face Amount may be increased or
decreased after the first Policy Year.
INSUREDS The two persons upon whose lives the Policy is
issued.
ISSUE AGE The age of an Insured at his or her birthday
nearest the Date of Issue. The Issue Ages of
the two Insureds are stated in the Policy.
JOINT AGE The age assigned to the Policy, based on
characteristics of the two Insureds, used in
the calculation of the Target Premium and the
Surrender Charge. The Joint Age is set forth
in the Policy, and is discussed in Appendix B
of this Prospectus.
MINIMUM BASIC COVERAGE AMOUNT The Minimum Basic Coverage Amount is $100,000.
MINIMUM INITIAL PREMIUM The minimum premium required to issue a Policy.
It is equal to the Minimum Monthly Premium, or
if the Guaranteed Death Benefit Rider applies to
the Policy, the Monthly Guarantee Premium.
MINIMUM MONTHLY PREMIUM The monthly premium which, if paid, will
guarantee that the Policy will stay in force
during the first five Policy Years. This amount,
which includes any substandard charges and any
applicable Rider charges, is determined
separately for each Policy, based on the
requested Initial Face Amount, and the Issue
Ages, sexes and Rate Classes of the two
Insureds. This premium is stated in the Policy,
and will be restated upon changes in coverage.
</TABLE>
54
<PAGE> 58
<TABLE>
<S> <C>
MONTHLY ADMINISTRATIVE CHARGE A charge included in the Monthly
Deduction, which is intended to reimburse
us for ordinary administrative expenses
and distribution expenses.
MONTHLY DEDUCTION The amount deducted from the Accumulated
Value on each Monthly Policy Date. It
includes the Variable Account Charge, the
Monthly Administrative Charge, the Cost
of Insurance Charge, and the monthly cost
of any benefits provided by Riders.
MONTHLY GUARANTEE PREMIUM The monthly premium level which will keep the
Guaranteed Death Benefit Rider in force. If the
Guaranteed Death Benefit Rider applies only until
the younger Insured's Attained Age 81, then the
Monthly Guarantee Premium will be less than if you
elect to have the Guaranteed Death Benefit Rider
apply for the entire lifetimes of the two Insureds.
If the Guaranteed Death Benefit Rider applies to a
Policy, the Monthly Guarantee Premium will be
stated in the Policy.
MONTHLY POLICY DATE The day in each calendar month which is
the same day of the month as the Date of
Issue, or the last day of any month
having no such date, except that whenever
the Monthly Policy Date would otherwise
fall on a date other than a Valuation
Day, the Monthly Policy Date will be
deemed to be the next Valuation Day.
NET AMOUNT AT RISK The amount by which the Unadjusted Death
Benefit exceeds the Accumulated Value.
NET PREMIUM The remainder of a premium after the
deduction of the Premium Expense Charge.
OWNER The person(s) or entity(ies) entitled to
exercise the rights granted in the
Policy.
PLANNED PERIODIC PREMIUM The premium amount which you plan to pay at
the frequency selected. You may request a
reminder notice and may change the amount of
the Planned Periodic Premium. You are not
required to pay the designated amount.
POLICY ANNIVERSARY The same day and month as the Date of Issue
in each later year.
POLICY YEAR A year that starts on the Date of Issue or on
a Policy Anniversary.
PREMIUM EXPENSE CHARGE A charge deducted from each premium payment
which has two parts: one to cover the cost of
state and local premium taxes, and the federal
DAC Tax, and the other to cover distribution
expenses incurred in connection with the
Policies.
RATE CLASS The classification of an Insured for cost of
insurance purposes. The Rate Classes are:
preferred nonsmoker; nonsmoker; preferred
smoker; smoker; substandard and uninsurable.
RIDERS Optional benefits that you may elect to add to
the Policy at an additional cost.
SURRENDER CHARGE The amount deducted from the Accumulated Value
of the Policy upon lapse or surrender during
the first 10 Policy Years or 10 years following
an increase in Basic Coverage. The Surrender
Charge is shown in the Policy and is discussed
in Appendix B to this Prospectus.
</TABLE>
55
<PAGE> 59
<TABLE>
<S> <C>
TARGET PREMIUM The premium used in the determination of the
amount of the Premium Expense Charge. This
amount is shown in each Policy and is
discussed in Appendix B to this Prospectus.
UNADJUSTED DEATH BENEFIT Under Option A, the greater of the Face Amount or
the applicable percentage of the Accumulated
Value; under Option B, the greater of the Face
Amount plus the Accumulated Value, or the
applicable percentage of the Accumulated Value.
The Death Benefit Option is selected at time of
application but may be later changed.
VALUATION DAY Each day that the New York Stock Exchange is open for
business other than the day after Thanksgiving and any
day on which trading is restricted by directive of the
Securities and Exchange Commission. Unless otherwise
indicated, whenever under a Policy an event occurs or
a transaction is to be effected on a day that is not a
Valuation Date, it will be deemed to have occurred on
the next Valuation Date.
VALUATION PERIOD The time between two successive
Valuation Days. Each Valuation Period
includes a Valuation Day and any
non-Valuation Day or consecutive
non-Valuation Days immediately preceding
it.
WITHDRAWAL A payment made at your request pursuant
to the right in the Policy to withdraw a
portion of the Cash Surrender Value of
the Policy. The Withdrawal Charge will
be deducted from the Withdrawal Amount.
</TABLE>
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<PAGE> 60
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND
CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Accumulated Values
and Cash Surrender Values of a Policy may change with the investment
experience of the Variable Account. The tables show how the Death Benefits,
Accumulated Values and Cash Surrender Values of a Policy issued to two
Insureds of given age, sex and Rate Class would vary over time if the
investment return on the assets held in each Portfolio of each of the Funds
were a uniform, gross, annual rate of 0%, 6% and 12%.
The tables on Pages A-2 to A-7 illustrate a Policy issued with the Insureds
being a male age 55 and a female age 50, each in the Preferred Nonsmoker
Rate Class with a Face Amount of $1,000,000 and Planned Periodic Premiums of
$10,000 paid at the beginning of each Policy Year. Both Death Benefit Option
A and Death Benefit Option B, are illustrated. The Death Benefits,
Accumulated Values and Cash Surrender Values would be lower if either or
both of the Insureds were in a nonsmoker, preferred smoker, smoker,
substandard or uninsurable class since the cost of insurance charges are
higher for these classes. Also, the values would be different from those
shown if the gross annual investment returns averaged 0%, 6% and 12% over a
period of years, but fluctuated above and below those averages for
individual Policy Years. The net annual rate of return shown in the tables
is the gross annual rate reduced to reflect the average investment advisory
fee and average operating expenses of the Funds after reimbursement and the
Variable Account Charge.
The second column of the tables show the amount to which the premiums would
accumulate if an amount equal to those premiums were invested to earn
interest, after taxes, at 5% compounded annually. The columns shown under
the heading "Guaranteed" assume that throughout the life of the policy, the
monthly Cost of Insurance Charge, the Premium Expense Charge, the Variable
Account Charge, and the Monthly Administrative Charge are charged at the
maximum level. The columns under the heading "Current" assume that
throughout the life of the Policy, the monthly charge for the cost of
insurance is based on the current cost of insurance rates and that the
Premium Expense Charge, the Variable Account Charge and the Monthly
Administrative Charges are assessed at current levels.
The amounts shown in all tables reflect an averaging of certain other asset
charges described below that may be assessed under the Policy, depending
upon how premiums are allocated. The total of these asset charges reflected
in the Current and Guaranteed illustrations, not including the Variable
Account Charge, is 0.81%. This total charge is based on an assumption that
you allocate the Policy values equally among the Subaccounts of the Variable
Account.
These other asset charges reflect an investment advisory fee of 0.56%, which
represents a simple average of the fees incurred by the Portfolios during
1999 and expenses of 0.25%, which is based on a simple average of the actual
expenses incurred by the Portfolios during 1999. This total is based on the
assumption that you allocate the Policy value equally among the Subaccounts
of the Variable Account. These asset charges take into account expense
reimbursement arrangements expected to be in place for 2000 for some of the
Portfolios. In the absence of the reimbursement arrangements for some of the
Portfolios, the other asset charges, not including the Variable Account
Charge, would have totalled an average of 1.06%. If the reimbursement
arrangements were discontinued, the Accumulated Values and Cash Surrender
Values of a Policy which allocates Accumulated Value equally among the
Subaccounts would be lower than those shown in the following tables. For
information on Fund expenses, see the prospectuses for the Funds
accompanying this prospectus.
The tables also reflect the fact that no charges for Federal or state income
taxes are currently made against the Variable Accounts. If such a charge is
made in the future, it would take a higher gross annual rate of return to
produce the same Policy values.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums are paid and allocated
as indicated, no amounts are allocated to the Fixed Account, and no Policy
loans are made. The tables are also based on the assumption that you have
not requested an increase or decrease in the Face Amount, that no
Withdrawals have been made and no transfers have been made in any Policy
Year, and that no Riders have been purchased.
Illustrated values may vary based on Policy variations required by
individual states.
Upon request, we will provide a comparable illustration based upon the
proposed Insureds' Ages and Rate Classes, the Death Benefit Option, Face
Amount, Planned Periodic Premiums and Riders requested and state of issue.
A-1
<PAGE> 61
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM
ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.61% IN THE FIRST 10 YEARS and -1.11%
THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and -1.71% IN ALL
YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
------------------------------------- -------------------------------------
End of Accumulated Cash Cash
at 5%
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 7,628 0 1,000,000 7,636 0 1,000,000
2 21,525 15,009 5,009 1,000,000 15,033 5,033 1,000,000
3 33,101 22,127 12,127 1,000,000 22,173 12,173 1,000,000
4 45,256 28,956 18,956 1,000,000 29,031 19,031 1,000,000
5 58,019 35,471 25,471 1,000,000 35,581 25,581 1,000,000
6 71,420 41,643 33,477 1,000,000 41,794 33,628 1,000,000
7 85,491 47,440 41,273 1,000,000 47,637 41,470 1,000,000
8 100,266 52,824 48,658 1,000,000 53,365 49,199 1,000,000
9 115,779 57,758 55,592 1,000,000 58,984 56,818 1,000,000
10 132,068 62,195 62,028 1,000,000 64,486 64,319 1,000,000
11 149,171 66,075 66,075 1,000,000 71,553 71,553 1,000,000
12 167,130 69,328 69,328 1,000,000 78,493 78,493 1,000,000
13 185,986 71,860 71,860 1,000,000 85,291 85,291 1,000,000
14 205,786 73,553 73,553 1,000,000 91,921 91,921 1,000,000
15 226,575 74,274 74,274 1,000,000 98,361 98,361 1,000,000
16 248,404 73,872 73,872 1,000,000 104,581 104,581 1,000,000
17 271,324 72,184 72,184 1,000,000 110,542 110,542 1,000,000
18 295,390 69,029 69,029 1,000,000 116,193 116,193 1,000,000
19 320,660 64,218 64,218 1,000,000 121,476 121,476 1,000,000
20 347,193 57,510 57,510 1,000,000 126,315 126,315 1,000,000
25 501,135 0 0 0 145,736 145,736 1,000,000
30 697,608 0 0 0 134,132 134,132 1,000,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD
BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE
TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT
FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SUBACCOUNTS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE
SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY
AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR
SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-2
<PAGE> 62
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE
VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.29% IN THE FIRST 10 YEARS and 4.82%
THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and 4.19% IN ALL
YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
------------------------------------- -------------------------------------
End of Accumulated Cash Cash
at 5%
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 8,118 0 1,000,000 8,127 0 1,000,000
2 21,525 16,457 6,457 1,000,000 16,484 6,484 1,000,000
3 33,101 25,004 15,004 1,000,000 25,057 15,057 1,000,000
4 45,256 33,738 23,738 1,000,000 33,827 23,827 1,000,000
5 58,019 42,636 32,636 1,000,000 42,774 32,774 1,000,000
6 71,420 51,673 43,506 1,000,000 51,869 43,702 1,000,000
7 85,491 60,815 54,649 1,000,000 61,082 54,916 1,000,000
8 100,266 70,030 65,863 1,000,000 70,676 66,509 1,000,000
9 115,779 79,274 77,107 1,000,000 80,670 78,503 1,000,000
10 132,068 88,499 88,332 1,000,000 91,073 90,906 1,000,000
11 149,171 97,644 97,644 1,000,000 103,797 103,797 1,000,000
12 167,130 106,631 106,631 1,000,000 117,095 117,095 1,000,000
13 185,986 115,362 115,362 1,000,000 130,982 130,982 1,000,000
14 205,786 123,709 123,709 1,000,000 145,460 145,460 1,000,000
15 226,575 131,525 131,525 1,000,000 160,540 160,540 1,000,000
16 248,404 138,647 138,647 1,000,000 176,223 176,223 1,000,000
17 271,324 144,891 144,891 1,000,000 192,504 192,504 1,000,000
18 295,390 150,054 150,054 1,000,000 209,371 209,371 1,000,000
19 320,660 153,919 153,919 1,000,000 226,802 226,802 1,000,000
20 347,193 156,215 156,215 1,000,000 244,769 244,769 1,000,000
25 501,135 128,947 128,947 1,000,000 346,104 346,104 1,000,000
30 697,608 0 0 0 453,241 453,241 1,000,000
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD
BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE
TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT
FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SUBACCOUNTS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE
SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY
AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR
SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
<PAGE> 63
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE
VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.20% IN THE FIRST 10 YEARS and 10.76%
THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and 10.08% IN ALL
YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
------------------------------------- -------------------------------------
End of Accumulated Cash Cash
at 5%
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 8,609 0 1,000,000 8,618 0 1,000,000
2 21,525 17,965 7,965 1,000,000 17,993 7,993 1,000,000
3 33,101 28,118 18,118 1,000,000 28,178 18,178 1,000,000
4 45,256 39,121 29,121 1,000,000 39,228 29,228 1,000,000
5 58,019 51,030 41,030 1,000,000 51,200 41,200 1,000,000
6 71,420 63,903 55,737 1,000,000 64,155 55,989 1,000,000
7 85,491 77,804 71,637 1,000,000 78,161 71,994 1,000,000
8 100,266 92,799 88,632 1,000,000 93,587 89,420 1,000,000
9 115,779 108,963 106,796 1,000,000 110,584 108,417 1,000,000
10 132,068 126,370 126,204 1,000,000 129,305 129,139 1,000,000
11 149,171 145,100 145,100 1,000,000 152,117 152,117 1,000,000
12 167,130 165,230 165,230 1,000,000 177,362 177,362 1,000,000
13 185,986 186,834 186,834 1,000,000 205,295 205,295 1,000,000
14 205,786 209,981 209,981 1,000,000 236,187 236,187 1,000,000
15 226,575 234,748 234,748 1,000,000 270,348 270,348 1,000,000
16 248,404 261,225 261,225 1,000,000 308,118 308,118 1,000,000
17 271,324 289,522 289,522 1,000,000 349,873 349,873 1,000,000
18 295,390 319,776 319,776 1,000,000 396,032 396,032 1,000,000
19 320,660 352,170 352,170 1,000,000 447,061 447,061 1,000,000
20 347,193 386,907 386,907 1,000,000 503,490 503,490 1,000,000
25 501,135 606,286 606,286 1,000,000 894,126 894,126 1,000,000
30 697,608 967,434 967,434 1,000,000 1,549,080 1,549,080 1,626,534
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
<PAGE> 64
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE
VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
(NET ANNUAL RATE OF RETURN OF -1.61% IN THE FIRST 10 YEARS and -1.11%
THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and -1.71% IN ALL
YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
------------------------------------- -------------------------------------
End of Accumulated Cash Cash
at 5%
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 7,626 0 1,007,627 7,635 0 1,007,635
2 21,525 15,006 5,006 1,015,006 15,030 5,030 1,015,030
3 33,101 22,116 12,116 1,022,116 22,163 12,163 1,022,163
4 45,256 28,931 18,931 1,028,931 29,006 19,006 1,029,006
5 58,019 35,421 25,421 1,035,421 35,531 25,531 1,035,531
6 71,420 41,553 33,387 1,041,554 41,704 33,538 1,041,704
7 85,491 47,290 41,124 1,047,291 47,487 41,321 1,047,487
8 100,266 52,592 48,425 1,052,592 53,149 48,982 1,053,149
9 115,779 57,413 55,246 1,057,413 58,693 56,526 1,058,693
10 132,068 61,699 61,532 1,061,699 64,111 63,944 1,064,111
11 149,171 65,386 65,386 1,065,386 71,081 71,081 1,071,081
12 167,130 68,392 68,392 1,068,392 77,910 77,910 1,077,910
13 185,986 70,618 70,618 1,070,618 84,582 84,582 1,084,582
14 205,786 71,932 71,932 1,071,932 91,066 91,066 1,091,066
15 226,575 72,193 72,193 1,072,193 97,337 97,337 1,097,337
16 248,404 71,243 71,243 1,071,243 103,359 103,359 1,103,359
17 271,324 68,914 68,914 1,068,914 109,086 109,086 1,109,086
18 295,390 65,030 65,030 1,065,030 114,461 114,461 1,114,461
19 320,660 59,414 59,414 1,059,414 119,410 119,410 1,119,410
20 347,193 51,851 51,851 1,051,851 123,846 123,846 1,123,846
25 501,135 0 0 0 140,354 140,354 1,140,354
30 697,608 0 0 0 120,699 120,699 1,120,699
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
<PAGE> 65
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE
VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
(NET ANNUAL RATE OF RETURN OF 4.29% IN THE FIRST 10 YEARS and 4.82%
THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and 4.19% IN ALL
YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
------------------------------------- -------------------------------------
End of Accumulated Cash Cash
at 5%
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 8,118 0 1,008,118 8,126 0 1,008,126
2 21,525 16,454 6,454 1,016,454 16,480 6,480 1,016,480
3 33,101 24,992 14,992 1,024,992 25,045 15,045 1,025,045
4 45,256 33,708 23,708 1,033,708 33,798 23,798 1,033,798
5 58,019 42,575 32,575 1,042,575 42,713 32,713 1,042,713
6 71,420 51,560 43,393 1,051,559 51,755 43,588 1,051,755
7 85,491 60,619 54,453 1,060,620 60,885 54,719 1,060,885
8 100,266 69,712 65,545 1,069,712 70,379 66,212 1,070,379
9 115,779 78,782 76,616 1,078,783 80,253 78,087 1,080,253
10 132,068 87,767 87,600 1,087,767 90,515 90,348 1,090,515
11 149,171 96,585 96,585 1,096,585 103,066 103,066 1,103,066
12 167,130 105,137 105,137 1,105,137 116,156 116,156 1,116,156
13 185,986 113,294 113,294 1,113,294 129,794 129,794 1,129,794
14 205,786 120,892 120,892 1,120,892 143,973 143,973 1,143,973
15 226,575 127,746 127,746 1,127,746 158,691 158,691 1,158,691
16 248,404 133,642 133,642 1,133,642 173,933 173,933 1,173,933
17 271,324 138,347 138,347 1,138,347 189,676 189,676 1,189,676
18 295,390 141,604 141,604 1,141,604 205,879 205,879 1,205,879
19 320,660 143,143 143,143 1,143,143 222,488 222,488 1,222,488
20 347,193 142,639 142,639 1,142,639 239,426 239,426 1,239,426
25 501,135 92,844 92,844 1,092,844 332,022 332,022 1,332,022
30 697,608 0 0 0 409,118 409,118 1,409,118
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE> 66
NATIONAL LIFE
SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE
VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT
MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER
FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
(NET ANNUAL RATE OF RETURN OF 10.20% IN THE FIRST 10 YEARS and 10.76%
THEREAFTER FOR THE CURRENT ILLUSTRATIONS, and 10.08% IN ALL
YEARS FOR THE GUARANTEED ILLUSTRATIONS)
<TABLE>
<CAPTION>
Premiums Guaranteed Current
------------------------------------- -------------------------------------
End of Accumulated Cash Cash
at 5%
Policy Interest Accumulated Surrender Death Accumulated Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 8,609 0 1,008,609 8,618 0 1,008,618
2 21,525 17,961 7,961 1,017,961 17,990 7,990 1,017,990
3 33,101 28,105 18,105 1,028,105 28,165 18,165 1,028,165
4 45,256 39,087 29,087 1,039,087 39,193 29,193 1,039,193
5 58,019 50,956 40,956 1,050,956 51,125 41,125 1,051,125
6 71,420 63,760 55,593 1,063,760 64,011 55,844 1,064,011
7 85,491 77,547 71,380 1,077,547 77,903 71,736 1,077,903
8 100,266 92,367 88,200 1,092,367 93,182 89,015 1,093,182
9 115,779 108,267 106,101 1,108,268 109,991 107,825 1,109,991
10 132,068 125,293 125,126 1,125,293 128,478 128,311 1,128,478
11 149,171 143,477 143,477 1,143,477 150,987 150,987 1,150,987
12 167,130 162,841 162,841 1,162,841 175,851 175,851 1,175,851
13 185,986 183,384 183,384 1,183,384 203,302 203,302 1,203,302
14 205,786 205,072 205,072 1,205,072 233,587 233,587 1,233,587
15 226,575 227,855 227,855 1,227,855 266,981 266,981 1,266,981
16 248,404 251,656 251,656 1,251,656 303,776 303,776 1,303,776
17 271,324 276,378 276,378 1,276,378 344,289 344,289 1,344,289
18 295,390 301,903 301,903 1,301,903 388,853 388,853 1,388,853
19 320,660 328,094 328,094 1,328,094 437,824 437,824 1,437,824
20 347,193 354,760 354,760 1,354,760 491,578 491,578 1,491,578
25 501,135 482,417 482,417 1,482,417 855,234 855,234 1,855,234
30 697,608 535,743 535,743 1,535,743 1,415,944 1,415,944 2,415,944
</TABLE>
The Death Benefit may, and the Accumulated Values and Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCUMULATED VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCUMULATED VALUE AND CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-7
<PAGE> 67
APPENDIX B
JOINT AGE CALCULATION
To calculate Joint Age, the two insureds ages are converted to adjusted ages,
the difference in the adjusted ages is converted to an add-on, and the add-on is
added to the adjusted age of the younger insured.
Step1: Sex Adjustment
Make the following adjustment to each insured's age based on sex:
<TABLE>
<S> <C>
Male: Subtract 0
Female: Subtract 5
</TABLE>
Step2: Tobacco Adjustment
Take the results from Step 1 and make the following adjustment to each
insured's age based on tobacco use:
<TABLE>
<S> <C>
Male Tobacco: Add 3
Female Tobacco: Add 2
</TABLE>
Step3: Substandard Rating Adjustment:
Take the results from Step 2 and make the following adjustment to
each insured's age based on substandard rating table:
<TABLE>
<S> <C> <C> <C>
Table A (125%) Add 2 Table F (250%) Add 12
Table B (150%) Add 4 Table H (300%) Add 14
Table C (175%) Add 6 Table J (350%) Add 15
Table D (200%) Add 8 Table L (400%) Add 16
Table E (225%) Add 10 Table P (500%) Add 19
</TABLE>
If the adjusted age exceeds 100, then cap the adjusted age at 100.
Step 4: Uninsurables:
An adjusted age of 100 will be used for all uninsurables.
Step 5: Age Add-on:
Take the difference of the adjusted ages and determine the add-on from
the following table:
<TABLE>
<S> <C>
0 0
1-2 1
3-4 2
5-6 3
7-9 4
10-12 5
13-15 6
16-18 7
19-23 8
24-28 9
29-34 10
35-39 11
40-44 12
45-47 13
48-50 14
51-53 15
54-56 16
57-60 17
61-64 18
65-69 19
70-75 20
76-85 21
</TABLE>
Step 6: Joint Age:
Add the add-on from Step 5 to the younger adjusted age to get the
Joint Age.
B-1
<PAGE> 68
Target Premiums and Surrender Charges
(Annual rates per $1000 of Basic Coverage)
The initial surrender charge is level for the number of years indicated below.
Following this level period, the surrender charge decreases linearly by month
until it is zero at the beginning of the 11th year. These charges do not apply
to Policies issued in New York - see Appendix C for the initial surrender
charges that apply to Policies issued in New York.
<TABLE>
<CAPTION>
Initial Level Initial Level
Joint Target Surrender Period Joint Target Surrender Period
Age Premium Charge (in years) Age Premium Charge (in years)
--- ------- ------ ---------- --- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
15 or less 2.40 2.40 5 53 11.70 11.70 5
16 2.50 2.50 5 54 12.90 12.90 5
17 2.60 2.60 5 55 14.05 14.05 5
18 2.65 2.65 5 56 15.25 15.25 5
19 2.75 2.75 5 57 16.45 16.45 5
20 2.80 2.80 5 58 17.65 17.65 5
21 2.90 2.90 5 59 18.80 18.80 5
22 3.00 3.00 5 60 20.00 20.00 5
23 3.10 3.10 5 61 20.75 20.75 5
24 3.20 3.20 5 62 21.50 21.50 5
25 3.30 3.30 5 63 22.70 22.70 5
26 3.35 3.35 5 64 23.90 23.90 5
27 3.45 3.45 5 65 25.05 25.05 5
28 3.60 3.60 5 66 26.25 26.25 5
29 3.70 3.70 5 67 27.45 27.45 5
30 3.80 3.80 5 68 28.65 28.65 5
31 3.90 3.90 5 69 29.80 29.80 5
32 4.00 4.00 5 70 31.00 31.00 5
33 4.15 4.15 5 71 31.75 31.75 5
34 4.30 4.30 5 72 32.50 32.50 5
35 4.50 4.50 5 73 33.45 33.45 5
36 4.70 4.70 5 74 34.40 34.40 5
37 4.85 4.85 5 75 35.30 35.30 5
38 5.05 5.05 5 76 36.25 36.25 5
39 5.30 5.30 5 77 37.20 37.20 5
40 5.50 5.50 5 78 38.15 38.15 4
41 5.65 5.65 5 79 39.05 39.05 4
42 5.80 5.80 5 80 40.00 40.00 3
43 6.35 6.35 5 81 40.00 41.00 3
44 6.85 6.85 5 82 40.00 42.00 3
45 7.40 7.40 5 83 40.00 43.00 2
46 7.90 7.90 5 84 40.00 44.00 2
47 8.45 8.45 5 85 40.00 45.00 1
48 8.95 8.95 5 86 40.00 46.00 1
49 9.50 9.50 5 87 40.00 47.00 1
50 10.00 10.00 5 88 40.00 48.00 1
51 10.25 10.25 5 89 40.00 49.00 0
52 10.50 10.50 5 90 40.00 50.00 0
</TABLE>
B-2
<PAGE> 69
APPENDIX C
New York Surrender Charge Information
SENTINEL ESTATE PROVIDER - NEW YORK
Target Premiums and Surrender Charges
(Annual rates per $1,000 of Basic Coverage)
The initial surrender charge is level for the number of years indicated below.
Following this level period, the surrender charge decreases linearly by month
until it is zero at the beginning of the 11th year.
<TABLE>
<CAPTION>
Initial Level Initial Level
Target Surrender Period Target Surrender Period
Joint Age Premium Charge (years) Joint Age Premium Charge (years)
-------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 15 2.40 2.40 5 53 11.70 11.70 5
16 2.50 2.50 5 54 12.90 12.90 5
17 2.60 2.60 5 55 14.05 14.05 5
18 2.65 2.65 5 56 15.25 15.25 4
19 2.75 2.75 5 57 16.45 16.31 4
20 2.80 2.80 5 58 17.65 16.99 4
21 2.90 2.90 5 59 18.80 17.36 4
22 3.00 3.00 5 60 20.00 18.59 3
23 3.10 3.10 5 61 20.75 19.50 3
24 3.20 3.20 5 62 21.50 19.99 3
25 3.30 3.30 5 63 22.70 21.06 3
26 3.35 3.35 5 64 23.90 21.63 3
27 3.45 3.45 5 65 25.05 22.89 3
28 3.60 3.60 5 66 26.25 23.53 3
29 3.70 3.70 5 67 27.45 24.96 3
30 3.80 3.80 5 68 28.65 25.66 3
31 3.90 3.90 5 69 29.80 27.25 3
32 4.00 4.00 5 70 31.00 28.04 3
33 4.15 4.15 5 71 31.75 28.84 3
34 4.30 4.30 5 72 32.50 29.66 3
35 4.50 4.50 5 73 33.45 31.60 3
36 4.70 4.70 5 74 34.40 32.54 3
37 4.85 4.85 5 75 35.30 33.50 3
38 5.05 5.05 5 76 36.25 34.49 3
39 5.30 5.30 5 77 37.20 36.80 3
40 5.50 5.50 5 78 38.15 37.94 3
41 5.65 5.65 5 79 39.05 39.13 3
42 5.80 5.80 5 80 40.00 40.37 3
43 6.35 6.35 5 81 40.00 41.00 3
44 6.85 6.85 5 82 40.00 42.00 3
45 7.40 7.40 5 83 40.00 43.00 3
46 7.90 7.90 5 84 40.00 44.00 3
47 8.45 8.45 5 85 40.00 45.00 3
48 8.95 8.95 5 86 40.00 46.00 2
49 9.50 9.50 5 87 40.00 47.00 2
50 10.00 10.00 5 88 40.00 48.00 2
51 10.25 10.25 5 89 40.00 49.00 2
52 10.50 10.50 5 90 40.00 50.00 2
</TABLE>
C-1
<PAGE> 70
-UNAUDITED-
--------------------------------------------------------------------------------
On January 1, 1999, National Life Insurance Company (National Life) converted
from a mutual to a stock insurance company as part of a reorganization into a
mutual holding company corporate structure. Prior to the conversion,
policyowners held policy contractual and membership rights from National Life.
The contractual rights, as defined in the various insurance and annuity
policies, remained with National Life after the conversion. Membership interests
held by policyowners of National Life at December 31, 1998 were converted to
membership interests in National Life Holding Company, a mutual insurance
holding company created for this purpose. Policyholders of National Life with
policies issued after December 31, 1998 also become members of National Life
Holding Company.
As part of this reorganization, National Life established and began operating a
closed block (the Closed Block) on January 1, 1999. The Closed Block was
established pursuant to regulatory requirements as part of the reorganization,
and was established for the benefit of policyholders of participating policies
inforce at December 31, 1998. Notes 2, 11 and 13 of National Life's financial
statements provide additional information about the Closed Block.
Under current accounting guidance, National Life's assets, liabilities, pre-tax
net income and cash flows associated with the Closed Block were reclassified
into single line net presentations within National Life Insurance Company and
Subsidiaries' financial statements, and excluded from many of the disclosures
contained in the corresponding notes to those financial statements.
The American Institute of Certified Public Accountants has proposed changes to
the accounting treatment for Closed Blocks. Included in the proposal is the
presentation of Closed Block assets, liabilities, pre-tax net income and cash
flows in their normal categories, instead of the current single line net
presentations. It is currently anticipated that this proposal will be adopted
retroactively for all presented periods beginning with December 31, 2000
reporting.
Management of National Life has therefore elected to also include consolidated
financial statements prepared at the National Life Holding Company level. These
financial statements do not reflect the closed block single line net
presentation, and therefore should provide more comparable year to year
information for the reader.
--------------------------------------------------------------------------------
F-1
<PAGE> 71
NATIONAL LIFE GROUP
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-2
<PAGE> 72
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of
National Life Holding Company:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive income, changes in
equity, and cash flows present fairly, in all material respects, the financial
position of National Life Holding Company and its subsidiaries (the National
Life Group) at December 31, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of National Life Group's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 13 to the financial statements, on January 1, 1999,
National Life converted from a mutual to a stock insurance company as part of a
reorganization into a mutual holding company corporate structure. Members'
voting and liquidation rights in National Life were transferred to National Life
Holding Company as part of this reorganization.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 10, 2000
F-3
<PAGE> 73
NATIONAL LIFE GROUP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 296,468 $ 347,949
Available-for-sale debt and equity securities 5,110,272 5,438,784
Trading equity securities 11,793 -
Mortgage loans 1,162,956 1,098,504
Policy loans 761,235 776,363
Real estate investments 86,003 75,566
Other invested assets 150,963 113,696
-----------------------------------------------------------------------------------------------------
Total cash and invested assets 7,579,690 7,850,862
Deferred policy acquisition costs 538,127 416,733
Accrued investment income 118,273 119,249
Premiums and fees receivable 22,033 21,044
Deferred income taxes 101,183 21,541
Amounts recoverable from reinsurers 302,607 253,651
Present value of future profits of insurance acquired 113,851 45,539
Property and equipment, net 45,609 59,503
Other assets 130,081 133,702
Separate account assets 404,030 283,948
-----------------------------------------------------------------------------------------------------
Total assets $ 9,355,484 $ 9,205,772
=====================================================================================================
LIABILITIES:
Policy benefit liabilities $ 4,039,966 $ 3,907,114
Policyholders' accounts 3,503,328 3,348,132
Policyholders' deposits 46,189 38,520
Policy claims payable 39,262 31,900
Policyholders' dividends 53,552 54,757
Amounts payable to reinsurers 19,213 35,481
Collateral held on loaned securities 115,524 193,491
Other liabilities and accrued expenses 274,172 307,036
Debt 76,092 78,088
Separate account liabilities 400,867 264,421
-----------------------------------------------------------------------------------------------------
Total liabilities 8,568,165 8,258,940
-----------------------------------------------------------------------------------------------------
MINORITY INTERESTS 12,331 64,529
EQUITY:
Retained earnings 832,688 776,060
Accumulated other comprehensive (loss) income (57,700) 106,243
-----------------------------------------------------------------------------------------------------
Total equity 774,988 882,303
-----------------------------------------------------------------------------------------------------
Total liabilities, minority interests and equity $ 9,355,484 $ 9,205,772
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 74
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 383,395 $ 386,260
Policy and contract charges 54,624 48,463
Net investment income 565,818 550,339
Net investment gains 3,140 8,450
Mutual fund commission and fee income 56,232 49,670
Other income 19,847 17,271
-----------------------------------------------------------------------------------------
Total revenues 1,083,056 1,060,453
-----------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 112,923 98,252
Policy benefits 330,334 346,779
Policyholders' dividends 106,858 107,102
Interest credited to policyholders' accounts 207,736 208,505
Operating expenses 164,899 141,242
Sales practice remediation costs - 40,575
Policy acquisition expenses, net 76,862 90,323
-----------------------------------------------------------------------------------------
Total benefits and expenses 999,612 1,032,778
-----------------------------------------------------------------------------------------
Income before income taxes and minority interests 83,444 27,675
Income tax expense (benefit) 17,380 (1,020)
-----------------------------------------------------------------------------------------
Income before minority interests 66,064 28,695
Minority interests 9,436 8,507
-----------------------------------------------------------------------------------------
NET INCOME 56,628 20,188
OTHER COMPREHENSIVE INCOME, NET
Unrealized (losses) gains on securities, net (163,943) 21,226
-----------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE (LOSS) INCOME $ (107,315) $ 41,414
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 75
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAINED EARNINGS:
Balance at January 1 $ 776,060 $ 755,872
Net income 56,628 20,188
-----------------------------------------------------------------------------------------------------
Balance at December 31 $ 832,688 $ 776,060
=====================================================================================================
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Balance at January 1 $ 106,243 $ 85,017
Unrealized (losses) gains on available-for-sale securities, net (163,943) 21,226
-----------------------------------------------------------------------------------------------------
Balance at December 31 $ (57,700) $ 106,243
=====================================================================================================
TOTAL EQUITY:
Balance at December 31 $ 774,988 $ 882,303
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 76
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,628 $ 20,188
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Accrued investment income 976 6,541
Policy liabilities 82,699 87,367
Deferred policy acquisition costs (36,857) (7,580)
Policyholders' dividends (1,205) 1,362
Deferred income taxes 9,883 (13,330)
Net investment gains (3,140) (8,450)
Depreciation 7,339 6,977
Other 4,767 12,714
--------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 121,090 105,789
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 1,576,457 2,020,526
Cost of investments acquired (1,778,511) (2,236,001)
Acquisition of remaining interest in LSWNH, Inc. (61,632) -
Other 14,788 14,656
--------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (248,898) (200,819)
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' deposits, including interest credited 579,795 563,606
Policyholders' withdrawals, including policy charges (424,599) (452,184)
Net decrease in borrowings under repurchase agreements - (234,570)
Net (decrease) increase in securities lending liabilities (77,967) 173,726
Other (902) 20,221
--------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 76,327 70,799
--------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (51,481) (24,231)
CASH AND CASH EQUIVALENTS:
Beginning of year 347,949 372,180
--------------------------------------------------------------------------------------------------------------
End of year $ 296,468 $ 347,949
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 77
NATIONAL LIFE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Life Holding Company and its subsidiaries and affiliates (the National
Life Group) offer a broad range of financial products and services, including
life insurance, annuities, disability income insurance, mutual funds, and
investment advisory and administration services. The flagship company of the
organization, National Life Insurance Company (National Life), was chartered in
1848, and is also known by its registered trade name "National Life of Vermont".
National Life Group employs about 900 people, primarily concentrated in
Montpelier, Vermont and Dallas, Texas. On January 1, 1999, pursuant to a mutual
holding company reorganization, National Life converted from a mutual to a stock
life insurance company. All of National Life's outstanding shares are currently
held by its parent, NLV Financial Corp, which is the wholly-owned subsidiary of
National Life Holding Company. See Note 13 for more information.
The insurance operations within National Life Group develop and distribute
individual life insurance and annuity products. National Life Group markets this
diverse product portfolio to small business owners, professionals and other
middle to upper income individuals. National Life Group provides financial
solutions in the form of estate, business succession and retirement planning,
deferred compensation and other key executive fringe benefit plans, and asset
management. Insurance and annuity products are primarily distributed through
about 32 general agencies in major metropolitan areas, a system of managing
general agents, and independent brokers throughout the United States. National
Life Group has in excess of 300,000 policyholders and through its member
companies is licensed to do business in all 50 states and the District of
Columbia. About 26% of National Life Group's total collected premiums and
deposits are from residents of New York and California.
Members of the National Life Group also distribute and provide investment
advisory and administrative services to the Sentinel Group Funds, Inc. The
Sentinel Funds' $3.1 billion of net assets represent fourteen mutual funds
managed on behalf of about 117,000 individual, corporate and institutional
shareholders worldwide.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of National Life Group have
been prepared in conformity with accounting principles generally accepted in the
United States (GAAP).
The consolidated financial statements include the accounts of National Life
Group, which consists of National Life HoIding Company and its subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation. Certain reclassifications have been made to conform prior periods
to the current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INVESTMENTS
Cash and cash equivalents include highly liquid debt instruments purchased with
remaining maturities of three months or less.
F-8
<PAGE> 78
Available-for-sale and trading debt and equity securities are reported at
estimated fair value. Debt and equity securities that experience declines in
value that are other than temporary are written down with a corresponding charge
to net investment losses.
Mortgage loans are reported at amortized cost, less valuation allowances for the
excess, if any, of the amortized cost of impaired loans over the estimated fair
value of the related collateral. Changes in valuation allowances are included in
net investment gains and losses.
Policy loans are reported at their unpaid balance and are fully collateralized
by related cash surrender values.
Real estate investments are reported at depreciated cost. Real estate acquired
in satisfaction of debt is transferred to real estate at estimated fair value.
Investments in joint ventures and limited partnerships are generally carried at
cost.
Net realized investment gains and losses are recognized using the specific
identification method and are reported as net investment gains and losses.
Changes in the estimated fair values of available-for-sale debt and equity
securities are reflected in comprehensive income after adjustments for related
deferred policy acquisition costs, present value of future profits of insurance
acquired, income taxes and minority interests. Changes in the fair value of
trading equity securities are reflected in net investment gains and losses.
POLICY ACQUISITION EXPENSES
Commissions and other costs of acquiring business that vary with and are
primarily related to the production of new business are generally deferred.
Deferred policy acquisition costs for participating life insurance, universal
life insurance and investment-type annuities are amortized in relation to
estimated gross margins or profits. Amortization is adjusted retrospectively for
actual experience and when estimates of future gross margins or profits are
revised. Balances of deferred policy acquisition costs for these products are
adjusted for related unrealized gains and losses on available-for-sale debt and
equity securities through other comprehensive income, net of related income
taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance are amortized in relation to premium income using
assumptions consistent with those used in computing policy benefit liabilities.
Balances of deferred policy acquisition costs are regularly evaluated for
recoverability from product margins or profits.
PRESENT VALUE OF FUTURE PROFITS OF INSURANCE ACQUIRED
Present value of future profits of insurance acquired is the
actuarially-determined present value of future projected profits from policies
in force at the date of their acquisition, and is amortized in relation to gross
profits of those policies. Amortization is adjusted retrospectively for actual
experience and when estimates of future profits are revised.
GOODWILL
Goodwill is amortized over 20 years using the straight line method and is
periodically evaluated for recoverability.
F-9
<PAGE> 79
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
primarily depreciated over 39.5 years using the straight-line method. Furniture
and equipment is depreciated using accelerated depreciation methods over 7 years
and 5 years, respectively.
SEPARATE ACCOUNTS
Separate accounts are segregated funds relating to certain variable annuity and
variable life policies, and National Life's pension plans. Separate account
assets are primarily common stocks, bonds, mortgage loans, and real estate and
are carried at estimated fair value. Separate account liabilities reflect
separate account policyholders' interests in separate account assets, include
the actual investment performance of the respective accounts and are not
guaranteed. Separate account results relating to these policyholders' interests
are excluded from revenues and expenses.
POLICY LIABILITIES
Policy benefit liabilities for participating life insurance are developed using
the net level premium method, with interest and mortality assumptions used in
calculating policy cash surrender values. Participating life insurance terminal
dividends are accrued in relation to gross margins.
Policy benefit liabilities for non-participating life insurance, disability
income insurance and certain annuities are developed using the net level premium
method, with assumptions for interest, mortality, morbidity, withdrawals and
expenses based principally on company experience.
Policyholders' account balances for universal life insurance and investment-type
annuities represent amounts that inure to the benefit of the policyholders
(before surrender charges).
POLICYHOLDERS' DIVIDENDS
Policyholders' dividends are the pro-rata amount of dividends earned that will
be paid or credited at the next policy anniversary. Dividends are based on a
scale that seeks to reflect the relative contribution of each group of policies
to National Life's overall operating results. The dividend scale is approved
annually by National Life's Board of Directors. See additional information below
on dividends on contracts within the Closed Block.
RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES
Premiums from traditional life and certain annuities are recognized as revenue
when due from the policyholder. Benefits and expenses are matched with income by
providing for policy benefit liabilities and the deferral and amortization of
policy acquisition costs so as to recognize profits over the life of the
policies.
Premiums from universal life and investment-type annuities are reported as
increases in policyholders' accounts. Revenues for these policies consist of
mortality charges, policy administration fees and surrender charges deducted
from policyholders' accounts. Policy benefits charged to expense include benefit
claims in excess of related policyholders' account balances.
Premiums from disability income policies are recognized as revenue over the
period to which the premiums relate.
F-10
<PAGE> 80
FEDERAL INCOME TAXES
National Life Holding Company will file a consolidated tax return for the tax
year ended December 31, 1999. The income tax return will include all members
within the National Life Group except Life Insurance Company of the Southwest
(LSW) and Insurance Investors Life Insurance Company (IIL). LSW and IIL will
file a separate tax return due to tax regulatory requirements. Current federal
income taxes are charged or credited to operations based upon amounts estimated
to be payable or recoverable as a result of taxable operations for the current
year. Deferred income tax assets and liabilities are recognized based on
temporary differences between financial statement carrying amounts and income
tax bases of assets and liabilities using enacted income tax rates and laws.
MINORITY INTERESTS
Minority interests at December 31, 1999 represent minority partners interests in
entities within the National Life Group. Minority interests attributable to
common stockholders are carried on the equity method. Those attributable to
preferred stockholders are carried on the cost method, with dividends paid
reflected as minority interests within the consolidated financial statements.
CLOSED BLOCK
National Life established and began operating a closed block (the Closed Block)
on January 1, 1999. The Closed Block was established pursuant to regulatory
requirements as part of the reorganization into a mutual holding company
corporate structure. This Closed Block was established for the benefit of
policyholders of participating policies inforce at December 31, 1998. Included
in the block are traditional dividend paying life insurance policies, certain
participating term insurance policies, dividend paying flex premium annuities,
and other related liabilities. The Closed Block was established to protect the
policy dividend expectations related to these policies. The Closed Block is
expected to remain in effect until all policies within the Closed Block are no
longer inforce. Assets assigned to the Closed Block at January 1, 1999, together
with projected future premiums and investment returns, are reasonably expected
to be sufficient to pay out all future Closed Block policy benefits. Such
benefits include dividends paid out under the current dividend scale, adjusted
to reflect future changes in the underlying experience. See Note 11 for
additional information on the Closed Block's financial position and results of
operations.
F-11
<PAGE> 81
NOTE 3 - INVESTMENTS
DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair values of available-for-sale debt and
equity securities at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1999 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS) debt and equity
securities:
U.S. government obligations $ 281,194 $ 3,232 $ 19,020 $ 265,406
Government agencies, authorities
and subdivisions 118,459 4,010 3,100 119,369
Public utilities 380,253 10,687 17,275 373,665
Corporate 2,462,499 23,937 94,932 2,391,504
Private placements 735,597 9,818 30,172 715,243
Mortgage-backed securities 1,112,382 2,432 37,065 1,077,749
------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,090,384 54,116 201,564 4,942,936
Preferred stocks 134,852 2,708 8,109 129,451
Common stocks 33,032 7,169 2,316 37,885
------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity
securities $ 5,258,268 $ 63,993 $ 211,989 $ 5,110,272
========================================================================================================================
<CAPTION>
1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AFS debt and equity securities:
U.S. government obligations $ 315,567 $ 17,710 $ 1,024 $ 332,253
Government agencies, authorities
and subdivisions 124,411 13,626 29 138,008
Public utilities 392,211 21,944 678 413,477
Corporate 2,368,814 152,991 18,249 2,503,556
Private placements 670,467 36,929 10,501 696,895
Mortgage-backed securities 1,137,465 41,131 3,359 1,175,237
------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,008,935 284,331 33,840 5,259,426
Preferred stocks 140,932 2,567 3,538 139,961
Common stocks 37,847 2,373 823 39,397
------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity
securities $ 5,187,714 $ 289,271 $ 38,201 $ 5,438,784
========================================================================================================================
</TABLE>
F-12
<PAGE> 82
Unrealized gains and losses on available-for-sale debt and equity securities
included as a component of accumulated other comprehensive income and changes
therein for the years ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized (losses) gains on available-for-sale securities $ (399,066) $ 20,136
Net unrealized (losses) gains on separate accounts (2,652) 1,543
Related minority interests 8,672 (1,786)
Related deferred policy acquisition costs 116,725 17,139
Related present value of future profits of insurance acquired 16,353 (3,048)
Related deferred income taxes 96,025 (12,758)
-------------------------------------------------------------------------------------------------------------
(Decrease) increase in net unrealized gains (163,943) 21,226
Balance, beginning of year 106,243 85,017
-------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=============================================================================================================
<CAPTION>
1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, end of year includes:
Net unrealized (losses) gains on available-for-sale securities $ (147,996) $ 251,070
Net unrealized gains on separate accounts 3,163 5,815
Related minority interests - (8,672)
Related deferred policy acquisition costs 39,186 (77,539)
Related present value of future profits on insurance acquired 14,806 (1,547)
Related deferred income taxes 33,141 (62,884)
-------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=============================================================================================================
</TABLE>
Net other comprehensive (loss) income for 1999 and 1998 of $(163.9) million and
$21.2 million is presented net of reclassifications to net income for gross
gains realized during the period of $13.9 million and $9.0 million and net of
tax and deferred acquisition cost offsets of $9.4 million and $6.6 million,
respectively.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1999 are shown below (in thousands). Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Estimated Fair
Cost Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 125,445 $ 125,798
Due after one year through five years 1,386,200 1,355,240
Due after five years through ten years 1,607,586 1,545,609
Due after ten years 858,770 838,540
Mortgage-backed securities 1,112,383 1,077,749
--------------------------------------------------------------------------------------------------------------
Total $ 5,090,384 $ 4,942,936
==============================================================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 is shown below (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 921,594 $ 1,167,190
Gross realized gains $ 40,496 $ 22,969
Gross realized losses $ 24,312 $ 16,578
</TABLE>
F-13
<PAGE> 83
On January 1, 1999, National Life Group reclassified certain mutual fund
investments from an available-for-sale to a trading classification. The
cumulative gross unrealized gain reclassified into net investment gains was $0.6
million. For the year ended December 31, 1999, these securities recorded $0.9
million net investment income and $(0.5) million investment losses. Cost of
trading securities held at December 31, 1999 was $12.1 million. National Life
Group held no securities classified as trading prior to January 1, 1999.
National Life Group periodically lends certain U.S. government or corporate
bonds to approved counterparties to enhance the yield of its bond portfolio.
National Life receives cash collateral for at least 103% of the market value of
securities loaned. Collateral adequacy is evaluated daily and periodically
adjusted for changes in the market value of securities loaned. The carrying
values of securities loaned are unaffected by the transaction. Collateral held
(included in cash and cash equivalents) and the corresponding liability for
collateral held were $115.5 million and $193.5 million at December 31, 1999 and
1998, respectively.
National Life Group also periodically enters into repurchase agreements on U.S.
Treasury securities to enhance the yield of its bond portfolio. These
transactions are accounted for as financings because the securities received at
the end of the repurchase period are identical to the securities transferred.
There were no open transactions at December 31, 1999 or 1998.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
<S> <C> <C>
GEOGRAPHIC REGION
-----------------
New England 5.4% 3.8%
Middle Atlantic 9.1 9.7
East North Central 10.1 9.3
West North Central 5.4 4.5
South Atlantic 24.7 25.7
East South Central 5.6 5.0
West South Central 10.1 10.3
Mountain 15.9 17.7
Pacific 13.7 14.0
----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
======================================================================================================================
PROPERTY TYPE
-------------
Residential 0.1% 0.2%
Apartment 24.6 24.2
Retail 11.0 12.2
Office Building 34.9 35.0
Industrial 26.4 26.2
Hotel/Motel 1.8 0.8
Other Commercial 1.2 1.4
----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
======================================================================================================================
Total mortgage loans and real estate
(in thousands) $ 1,248,959 $ 1,174,070
======================================================================================================================
</TABLE>
F-14
<PAGE> 84
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 1,148,526 $ 1,077,637
Impaired loans without valuation allowances 6,943 11,757
-----------------------------------------------------------------------------------------------------------------
Subtotal 1,155,469 1,089,394
-----------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowances 10,600 10,244
Related valuation allowances (3,113) (1,134)
-----------------------------------------------------------------------------------------------------------------
Subtotal 7,487 9,110
-----------------------------------------------------------------------------------------------------------------
Total $ 1,162,956 $ 1,098,504
=================================================================================================================
Impaired loans:
Average recorded investment $ 19,771 $ 27,755
Interest income recognized $ 2,137 $ 3,124
Interest received $ 2,092 $ 2,818
</TABLE>
Impaired loans are mortgage loans where it is not probable that all amounts due
under the contractual terms of the loan will be received. Impaired loans without
valuation allowances are mortgage loans where the estimated fair value of the
collateral exceeds the recorded investment in the loan. For these impaired
loans, interest income is recognized on an accrual basis, subject to
recoverability from the estimated fair value of the loan collateral. For
impaired loans with valuation allowances, interest income is recognized on a
cash basis.
Activity in the valuation allowances for impaired mortgage loans for the years
ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
===================================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,993 $ 1,564
Impairment losses charged to valuation allowances - (2,217)
Changes to previously established valuation allowances (14) (2,642)
---------------------------------------------------------------------------------------------------
Increase/decrease in valuation allowances 1,979 (3,295)
Balance, beginning of year 1,134 4,429
---------------------------------------------------------------------------------------------------
Balance, end of year $ 3,113 $ 1,134
===================================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 404,195 $ 405,184
Equity securities dividends 2,385 6,380
Mortgage loan interest 94,258 90,991
Policy loan interest 46,393 47,189
Real estate income 11,698 12,802
Other investment income 29,943 12,363
------------------------------------------------------------------------------------------------------------------
Gross investment income 588,872 574,909
Less: investment expenses 23,054 24,570
------------------------------------------------------------------------------------------------------------------
Net investment income $ 565,818 $ 550,339
==================================================================================================================
</TABLE>
DERIVATIVES
National Life Group purchases over-the-counter options and exchange-traded
futures on the Standard & Poor's 500 (S&P 500) index to hedge obligations
relating to equity indexed products. When the S&P 500 index increases, increases
in the intrinsic value of the options and fair value of futures are offset by
F-15
<PAGE> 85
increases in equity indexed product account values. When the S&P 500 index
decreases, National Life Group's loss is the decrease in the fair value of
futures and is limited to the premium paid for the options.
National Life Group purchases options only from highly rated counterparties.
However, in the event a counterparty failed to perform, National Life Group's
loss would be equal to the fair value of the net options held from that
counterparty.
The option premium is expensed over the term of the option. Amortization of the
option premium is reflected in investment income. Interest credited includes
amounts that would be credited on the next policy anniversary based on the S&P
500 index's value at the reporting date, offset by changes in the intrinsic
value of options held and changes in the fair value of futures. The call options
are included in other invested assets and are carried at amortized cost plus
intrinsic value, if any, of the call options as of the valuation date.
The notional amounts and net book value of options and futures at December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 166,858 $ 79,754
Futures $ 5,439 $ 28,835
================================================================================================
Book values:
Options: Net amortized cost $ 17,800 $ 5,514
Intrinsic value 18,894 18,953
------------------------------------------------------------------------------------------------
Book value 36,694 24,467
Futures at fair value 890 463
------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 37,584 $ 24,930
================================================================================================
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments at
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------------------------
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 296,468 $ 296,468 $ 347,949 $ 347,949
Available-for-sale debt and equity securities 5,110,272 5,110,272 5,438,784 5,438,784
Trading equity securities 11,793 11,793 - -
Mortgage loans 1,162,956 1,177,342 1,098,504 1,180,630
Policy loans 761,235 724,953 776,363 743,687
Derivatives 37,584 35,528 24,930 28,496
Investment products 2,770,295 2,740,443 2,507,012 2,522,940
Debt 76,092 62,615 78,088 75,141
</TABLE>
For cash and cash equivalents carrying value approximates estimated fair value.
Debt and equity securities estimated fair values are based on quoted values
where available. Where quoted values are not available, estimated fair values
are based on discounted cash flows using current interest rates of similar
securities.
Mortgage loan fair values are estimated as the average of discounted cash flows
under different scenarios of future mortgage interest rates (including
appropriate provisions for default losses and borrower prepayments).
F-16
<PAGE> 86
For variable rate policy loans the unpaid balance approximates fair value. Fixed
rate policy loan fair values are estimated based on discounted cash flows using
the current variable policy loan rate (including appropriate provisions for
mortality and repayments).
Derivatives estimated fair values are based on quoted values.
Investment products include flexible premium annuities, single premium deferred
annuities and supplementary contracts not involving life contingencies.
Investment product fair values are estimated as the average of discounted cash
flows under different scenarios of future interest rates of A-rated corporate
bonds and related changes in premium persistency and surrenders.
Debt fair values are estimated based on discounted cash flows using current
interest rates of similar securities.
NOTE 4 - INSURANCE IN-FORCE AND REINSURANCE
National Life Group reinsures certain risks assumed in the normal course of
business. For individual life products, National Life Group generally retains no
more than $3.0 million of risk on any person (excluding accidental death
benefits and dividend additions). Reinsurance for life products is ceded under
yearly renewable term, coinsurance, and modified coinsurance agreements.
Disability income products are significantly reinsured under coinsurance and
modified coinsurance agreements.
National Life Group remains liable in the event any reinsurer is unable to meet
its assumed obligations. National Life Group regularly evaluates the financial
condition of its reinsurers and concentrations of credit risk of reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
Transactions between the open and Closed Block (see Notes 11 and 13) have been
excluded from the following schedule.
The effects of reinsurance for the years ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 439,562 $ 453,859
Reinsurance assumed 4,731 898
Reinsurance ceded (60,898) (68,497)
-----------------------------------------------------------------------------------------------------------
$ 383,395 $ 386,260
===========================================================================================================
Other income:
Direct $ 6,960 $ 3,694
Reinsurance ceded 12,887 13,577
-----------------------------------------------------------------------------------------------------------
$ 19,847 $ 17,271
===========================================================================================================
Increase in policy liabilities:
Direct increase in policy liabilities $ 129,448 $ 94,949
Reinsurance assumed - (4)
Reinsurance ceded (16,525) 3,307
-----------------------------------------------------------------------------------------------------------
$ 112,923 $ 98,252
===========================================================================================================
</TABLE>
F-17
<PAGE> 87
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Policy benefits:
Direct policy benefits $ 393,216 $ 416,919
Reinsurance assumed (2,479) 1,286
Reinsurance ceded (60,403) (71,426)
-----------------------------------------------------------------------------------------------------------
$ 330,334 $ 346,779
===========================================================================================================
Policyholders' dividends:
Direct policyholders' dividends $ 110,793 $ 110,630
Reinsurance ceded (3,935) (3,528)
-----------------------------------------------------------------------------------------------------------
$ 106,858 $ 107,102
===========================================================================================================
</TABLE>
NOTE 5 - DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes in the deferred policy acquisition costs
asset (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 416,733 $ 392,014
Acquisition costs deferred 73,648 57,318
Amortization to expense during the year (36,791) (49,738)
Adjustment to equity during the year 116,725 17,139
Purchase GAAP effect on purchase of LSWNH (Note 12) (32,188) -
---------------------------------------------------------------------------------------------------
Balance, end of year $ 538,127 $ 416,733
===================================================================================================
</TABLE>
NOTE 6 - FEDERAL INCOME TAXES
The components of federal income taxes and a reconciliation of the expected and
actual federal income taxes and income tax rates for the years ended December 31
were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 7,497 $ 17,144
Deferred 9,883 (18,164)
------------------------------------------------------------------- --------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Expected income taxes $ 29,206 35.0% $ 9,686 35.0%
Differential earnings amount (2,058) (2.5) (7,953) (28.7)
Affordable housing tax credit (6,509) (7.8) (6,638) (24.0)
Net change in tax reserves 2,033 2.4 5,035 18.2
Other, net (5,292) (6.3) (1,150) (4.2)
----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Effective federal income tax rate 20.8% (3.7)%
==================================================== ===================== =====================
</TABLE>
National Life Group received net federal income tax refunds of $9.4 million in
1999 and paid federal income taxes of $13.3 million in 1998.
F-18
<PAGE> 88
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Net unrealized loss on available-for-sale securities $ 33,141 -
Debt and equity securities 15,456 -
Policy liabilities 179,008 $ 185,294
Other liabilities and accrued expenses 51,609 67,291
Other 490 4,761
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 279,704 257,346
--------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 125,842 126,380
Present value of future profits of insurance acquired 37,908 17,683
Net unrealized gain on available-for-sale securities - 62,884
Debt and equity securities - 16,947
Other 14,771 11,911
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 178,521 235,805
--------------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 101,183 $ 21,541
==========================================================================================================================
</TABLE>
Management believes it is more likely than not that National Life Group will
realize the benefit of deferred tax assets.
National Life's federal income tax returns are routinely audited by the IRS. The
IRS has examined National Life's tax returns through 1995 and is currently
examining the years 1996 - 1998. In management's opinion adequate tax
liabilities have been established for all open years.
NOTE 7 - BENEFIT PLANS
National Life sponsors a qualified defined benefit pension plan covering
substantially all employees. The plan is administered by National Life's
Benefits Committee and is non-contributory, with benefits based on an employee's
retirement age, years of service and compensation near retirement. Plan assets
are primarily bonds and common stocks held in a National Life separate account
and funds invested in a group annuity contract issued by National Life. National
Life also sponsors other, non-qualified pension plans, including a
non-contributory defined benefit plan for general agents that provides benefits
based on years of service and sales levels, a contributory defined benefit plan
for certain employees, agents and general agents and a non-contributory defined
supplemental benefit plan for certain executives. These non-qualified defined
benefit pension plans are not funded.
National Life sponsors four defined benefit postretirement plans that provide
medical, dental and life insurance benefits to employees and agents.
Substantially all employees and agents may be eligible for retiree benefits if
they reach normal retirement age and meet certain minimum service requirements
while working for National Life. Most of the plans are contributory, with
retiree contributions adjusted annually, and contain cost sharing features such
as deductibles and copayments. The plans are not funded and National Life Group
pays for plan benefits on a current basis. The cost of these benefits is
recognized as earned.
During 1997, National Life offered enhanced pension and postretirement benefits
to employees meeting certain defined eligibility requirements. The program
resulted in special termination benefits for the expected present value of the
enhancements to benefits, curtailment gains for reductions in the pension
benefit obligations relating to assumed increases in future compensation levels
and settlement gains for the pro-rata recognition of actuarial gains on lump sum
settlements of pension benefit obligations. Some of the plan participants
elected to defer their lump sum payouts until 1998, which also deferred
recognition of the related settlement gain until 1998.
F-19
<PAGE> 89
The status of the defined benefit plans at December 31 was as follows (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 189,524 $ 162,986 $ 27,883 $ 24,759
Service cost (benefits earned during the current period) 4,194 2,849 581 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Actuarial (gains) losses (26,832) 34,444 (3,937) 1,939
Benefits paid (12,002) (22,185) (1,170) (1,061)
----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 167,144 $ 189,524 $ 25,233 $ 27,883
==================================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 100,045 $ 108,884
Actual return on plan assets 9,952 7,200
Benefits paid (5,747) (16,039)
------------------------------------------------------------------------------------------------
Plan assets, end of year $ 104,250 $ 100,045
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FUNDED STATUS:
Benefit obligation $ 167,144 $ 189,524 $ 25,233 $ 27,883
Plan assets (104,250) (100,045)
-------------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 62,894 89,479 25,233 27,883
Unrecognized actuarial gains (losses) 18,309 (11,259) 6,397 2,526
Unrecognized prior service cost (1,080) (1,152)
---------------------------------------------------------------------
Accrued benefit cost at September 30 81,203 78,220 30,550 29,257
Payments subsequent to measurement date (1,638) (1,518)
-------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost at December 31 $ 79,565 $ 76,702 $ 30,550 $ 29,257
===============================================================================================================================
</TABLE>
The components of net periodic benefit cost for the years ended December 31 were
as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 4,194 $ 2,849 $ 581 $ 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Expected return on plan assets (8,745) (9,078)
Net amortization and deferrals 281 (1,167) (66) (83)
Amortization of prior service cost 72 72
Settlement gains from 1997 early retirement program (3,131)
-----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating
expenses) $ 7,990 $ 903 $ 2,463 $ 2,235
=============================================================================================================================
</TABLE>
The total projected benefit obligation for non-qualified defined benefit pension
plans was $70.9 million and $81.4 million at December 31, 1999 and 1998,
respectively. The total accumulated benefit obligation (APBO) for these plans
was $67.7 million and $75.2 million at December 31, 1999 and 1998, respectively.
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.75% 6.75% 7.75% 6.75%
Rate of increase in future compensation levels 6.00% 5.00%
Expected long term return on plan assets 9.00% 9.00%
</TABLE>
F-20
<PAGE> 90
Health care cost trend rates grade to 5% in year 2000 and remain level
thereafter. Increasing the assumed health care trend rates by one percentage
point in each year would increase the APBO by about $2.4 million and the 1999
service and interest cost components of net periodic postretirement benefit cost
by about $0.1 million. Decreasing the assumed health care trend rates by one
percentage point in each year would reduce the APBO by about $2.0 million and
the 1999 service and interest cost components of net periodic postretirement
benefit cost by about $0.1 million. National Life Group uses the straight-line
method of amortization for prior service cost and unrecognized gains and losses.
National Life provides employee savings and 401(k) plans where up to 3% of an
employee's compensation may be invested by the employee in either plan with
matching funds contributed by the company. Employees below specified levels of
compensation also receive a foundation contribution of 1.5% of compensation.
Additional employee voluntary contributions may be made to the plans up to a set
maximum. Vesting and withdrawal privilege schedules are attached to the
Company's contributions.
National Life also provides a 401(k) plan for it's regular full-time agents
whereby accumulated funds may be invested by the agent in a group annuity
contract with National Life or in mutual funds sponsored by an affiliate of
National Life. Total annual contributions can not exceed certain limits that
vary based on total agent compensation. No National Life contributions are made
to the plan.
Life Insurance Company of the Southwest (LSW), an indirectly held wholly-owned
subsidiary of National Life, provides a 401(k) to its employees. Additional
voluntary employee contributions may be made to the plan subject to certain
limits. LSW's contributions to these plans generally vest within two years.
NOTE 8 - DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,692 $ 69,688
$70 million, maturing March 1, 2024 with interest payable semi-annually
on March 1 and September 1. The notes are unsecured and subordinated to
all present and future indebtedness, policy claims and prior claims. The
notes may be redeemed in whole or in part any time after March 1, 2004 at
predetermined redemption prices. All interest and principal payments
require prior written approval by the State of Vermont Department of
Banking, Insurance, Securities and Health Care Administration.
6.57% Term Note: 6,400 8,400
$6.4 million, maturing March 1, 2002 with interest payable semi-annually
on March 1 and September 1. The note is secured by subsidiary stock,
includes certain restrictive covenants and requires annual payments of
principal (see below).
---------------------------------------------------------------------------------------------------------------------------
Total debt $ 76,092 $ 78,088
===========================================================================================================================
</TABLE>
The aggregate annual scheduled maturities of debt for the next five years are as
follows (in thousands):
2000 2,000
2001 2,000
2002 2,400
2003 -
2004 -
F-21
<PAGE> 91
Interest paid was $6.3 million and $6.2 million in 1999 and 1998, respectively.
NOTE 9 - CONTINGENCIES
During 1997, several class action lawsuits were filed against National Life in
various states related to the sale of life insurance policies during the 1980's
and 1990's. National Life specifically denied any wrongdoing. National Life
agreed to a settlement of these class action lawsuits in June 1998. This
agreement was subsequently approved by the court in October 1998. The settlement
provides class members with various policy enhancement options and new product
purchase discounts. Class members may instead pursue alternative dispute
resolution according to predetermined guidelines. Qualifying members may also
opt out of the class action and pursue litigation separately against National
Life. Most of the alternative dispute resolution cases were settled by December
31, 1999. Management believes that while the ultimate cost of this litigation
(including those opting out of the class action) is still uncertain, it is
unlikely, after considering existing provisions, to have a material adverse
effect on National Life's financial position.
In late 1999, two lawsuits were filed against National Life and the State of
Vermont in Vermont related to National Life's conversion to a mutual holding
company structure. National Life and the State of Vermont specifically deny any
wrongdoing and intend to defend these cases vigorously. In the opinion of
National Life Group's management, based on advice from legal counsel, the
ultimate resolution of these lawsuits will not have a material effect on
National Life Group's financial position. However, liabilities related to these
lawsuits could be established in the near term if estimates of the ultimate
resolution of these proceedings are revised.
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133), which establishes accounting and reporting
standards for derivative instruments. FAS 133 requires that an entity recognize
all derivatives as either assets or liabilities at fair value in the statement
of financial position, and establishes special accounting for the following
three types of hedges: fair value hedges, cash flow hedges, and hedges of
foreign currency exposures of net investments in foreign operations. The
statement was originally effective for fiscal years beginning after June 15,
1999. In June, 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 (FAS 137). FAS 137 requires the application of FAS 133 for fiscal years
beginning after June 15, 2000. National Life Group is currently assessing the
impact of the adoption of FAS 133.
NOTE 11 - CLOSED BLOCK
Included within the financial statement categories in the 1999 Consolidated
Statement of Operations and Comprehensive Income is a net pre-tax contribution
from the Closed Block of $24.4 million. The Closed Block was established on
January 1, 1999 as part of the conversion to a mutual holding company corporate
structure (see Note 13). Summarized financial information for the Closed Block
effects included in the consolidated financial statements as of December 31,
1999 and for the year then ended is as follows (in thousands):
F-22
<PAGE> 92
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Cash and cash equivalents $ 122,982
Available-for-sale debt securities (amortized cost of $1,800.1 million) 1,771,494
Mortgage loans 380,986
Policy loans 640,490
Accrued investment income 53,387
Premiums and fees receivable 18,864
Deferred policy acquisition costs 312,588
Other assets 123,690
---------------------------------------------------------------------------------------------------------------------------------
Total assets $3,424,481
=================================================================================================================================
LIABILITIES:
Policy liabilities and accruals $3,629,560
Other liabilities 69,186
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities $3,698,746
=================================================================================================================================
<CAPTION>
1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES:
Premiums and other income $ 325,445
Net investment income 216,432
Realized investment gain 8,720
---------------------------------------------------------------------------------------------------------------------------------
Total revenues 550,597
---------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 66,324
Policy benefits 283,598
Policyholders' dividends 107,941
Interest credited to policyholders' accounts 13,294
Operating expenses 17,407
Policy acquisition expenses, net 37,662
---------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 526,226
---------------------------------------------------------------------------------------------------------------------------------
Pre-tax contribution from the Closed Block $ 24,371
=================================================================================================================================
</TABLE>
There were no mortgage valuation allowances on Closed Block mortgage loans at
December 31, 1999. Many expenses related to Closed Block operations are charged
to operations outside the Closed Block; accordingly, the contribution from the
Closed Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside the Closed Block are therefore
disproportionate to the actual business outside the Closed Block.
F-23
<PAGE> 93
NOTE 12 - ACQUISITION
On July 2, 1999, National Life Group acquired the outstanding one-third interest
in LSW National Holdings, Inc., (LSWNH) the parent of Dallas, Texas-based Life
Insurance Company of the Southwest (LSW), a financial services company
specializing in the sale of annuities. National Life Group had previously
purchased a two-thirds interest in the company in February, 1996.
The purchase price was $61.6 million in cash. Purchasing the remaining one-third
interest eliminated the ongoing provision for minority interests for the last
six months of 1999. The effect of the cash purchase on the consolidated
financial statements was to reduce minority interests by $39.7 million and
record net purchase GAAP adjustments of $21.9 million, which included intangible
assets for the present value of future profits of insurance acquired of $59.4
million and goodwill of $3.0 million.
Had the one-third purchase been made at January 1, 1998, pro-forma consolidated
net income would have increased by about $3.1 million and $2.2 million in 1999
and 1998, respectively. These pro-forma consolidated results are not necessarily
indicative of the actual results which might have occurred had National Life
Group owned all of LSWNH since that date. (unaudited)
NOTE 13 - REORGANIZATION INTO A MUTUAL HOLDING COMPANY
CORPORATE STRUCTURE
On January 1, 1999, National Life converted from a mutual to a stock insurance
company as part of a reorganization into a mutual holding company corporate
structure.
Prior to the conversion, policyowners held policy contractual and membership
rights from National Life. The contractual rights, as defined in the various
insurance and annuity policies, remained with National Life after the
conversion. Membership interests held by policyowners of National Life at
December 31, 1998 were converted to membership interests in National Life
Holding Company, a mutual insurance holding company created for this purpose.
National Life Holding Company currently owns all the outstanding shares of NLV
Financial, a stock holding company created for this purpose, which in turn
currently owns all the outstanding shares of National Life. National Life
Holding Company currently has no other assets, liabilities or operations other
than that related to its ownership of NLV Financial's outstanding stock.
Similarly, NLV Financial currently has no other assets, liabilities or
operations other than that related to its ownership of National Life's
outstanding stock. Under the terms of the reorganization, National Life Holding
Company must always hold a majority of the voting shares of NLV Financial.
This reorganization was approved by policyowners of National Life and was
completed with the approval of the Commissioner of the Vermont Department of
Banking, Insurance, Securities, and Health Care Administration (the
"Commissioner").
Under the provisions of the reorganization, National Life issued 2.5 million
common stock $1 par shares to its parent, NLV Financial as a transfer from
retained earnings. There were no dividends paid or declared in 1999 by National
Life. Dividends declared by National Life in excess of ten percent of statutory
surplus (see Note 14 for statutory information) require pre-approval by the
Commissioner.
F-24
<PAGE> 94
NOTE 14 - STATUTORY INFORMATION
National Life prepares statutory basis financial statements for regulatory
filings with insurance regulators in all 50 states and the District of Columbia.
A reconciliation of National Life's statutory surplus to GAAP equity at December
31 and statutory net income to GAAP net income for the years ended December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
Surplus/ Surplus/
Equity Net Income Equity Net Income
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 408,086 $ 25,923 $ 373,063 $ 67,841
Asset valuation reserve 79,207 69,994
Interest maintenance reserve 58,507 5,681 52,826 (4,114)
Surplus notes (70,716) (70,700)
Non-admitted assets 2,101 17,033
Investments 30,149 5,916 650 (4,471)
Deferred policy acquisition costs 445,704 17,250 428,453 (9,479)
Deferred income taxes 45,587 (3,837) 74,132 15,555
Policy liabilities (202,061) 10,063 (203,832) (6,476)
Policyholders' dividends 67,494 3,289 64,205 529
Benefit plans (29,475) (1,571) (27,904) 6,730
Sales remediation costs (40,575)
Other comprehensive income, net (57,700) 106,243
Other changes, net (1,895) (6,086) (1,860) (5,352)
----------------------------------------------------------------------------------------------------------------------------
GAAP equity/net income $ 774,988 $ 56,628 $ 882,303 $ 20,188
============================================================================================================================
</TABLE>
The New York Insurance Department recognizes only statutory accounting practices
for determining and reporting the financial condition and results of operations
of an insurance company and for determining solvency under the New York
Insurance Law. No consideration is given by the New York Insurance Department to
financial statements prepared in accordance with generally accepted accounting
principles in making such determinations.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance (Codification), which
will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC has recommended an
effective date of January 1, 2001. The Codification provides guidance for areas
which promulgated statutory accounting principles had not previously addressed,
and changes current promulgated guidance in other areas.
The Vermont Department of Banking, Insurance, Securities, and Health Care
Administration has adopted Codification effective January 1, 2001. The
Department may make changes to the promulgated guidance prior to the effective
date. National Life has not estimated the potential effect of the Codification
guidance on its reported results.
F-25
<PAGE> 95
NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-26
<PAGE> 96
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
Report of Independent Accountants
To the Board of Directors and Stockholder of
National Life Insurance Company:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive income, changes in
equity, and cash flows present fairly, in all material respects, the financial
position of National Life Insurance Company and its subsidiaries (National
Life) at December 31, 1999 and 1998, and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of National Life's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 13 to the financial statements, on January 1, 1999,
National Life converted from a mutual to a stock insurance company as part of a
reorganization into a mutual holding company corporate structure. Members'
voting and liquidation rights in National Life were transferred to National Life
Holding Company, the upstream parent of National Life, as part of this
reorganization.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 10, 2000
F-27
<PAGE> 97
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 173,485 $ 347,949
Available-for-sale debt and equity securities 3,338,777 5,438,784
Trading equity securities 11,793 -
Mortgage loans 781,970 1,098,504
Policy loans 120,745 776,363
Real estate investments 86,003 75,566
Other invested assets 151,044 113,696
----------------------------------------------------------------------------------------------------------------
Total cash and invested assets 4,663,817 7,850,862
Deferred policy acquisition costs 225,539 416,733
Accrued investment income 64,886 119,249
Premiums and fees receivable 3,168 21,044
Deferred income taxes 49,989 21,541
Amounts recoverable from reinsurers 302,607 253,651
Present value of future profits of insurance acquired 113,851 45,539
Property and equipment, net 45,609 59,503
Other assets 57,507 133,702
Closed block assets 3,424,481 -
Separate account assets 404,030 283,948
----------------------------------------------------------------------------------------------------------------
Total assets $ 9,355,484 $ 9,205,772
================================================================================================================
LIABILITIES:
Policy benefit liabilities $ 731,006 $ 3,907,114
Policyholders' accounts 3,258,761 3,348,132
Policyholders' deposits 42,468 38,520
Policy claims payable 16,419 31,900
Policyholders' dividends 325 54,757
Amounts payable to reinsurers 19,213 35,481
Collateral held on loaned securities 48,375 193,491
Other liabilities and accrued expenses 275,893 307,036
Debt 76,092 78,088
Closed block liabilities 3,698,746 -
Separate account liabilities 400,867 264,421
----------------------------------------------------------------------------------------------------------------
Total liabilities 8,568,165 8,258,940
----------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 12,331 64,529
STOCKHOLDER'S EQUITY:
Common stock (authorized 2.5 million shares at $1 par value, 2.5 million
shares issued and outstanding) 2,500 -
Additional paid in capital 5,000 -
Retained earnings 825,188 776,060
Accumulated other comprehensive (loss) income (57,700) 106,243
----------------------------------------------------------------------------------------------------------------
Total stockholder's equity 774,988 882,303
----------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and equity $ 9,355,484 $ 9,205,772
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 98
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 57,950 $ 386,260
Policy and contract charges 54,624 48,463
Net investment income 349,385 550,339
Net investment (losses) gains (5,580) 8,450
Mutual fund commission and fee income 56,232 49,670
Closed block income 24,371 -
Other income 19,862 17,271
----------------------------------------------------------------------------------------------------------------
Total revenue 556,844 1,060,453
----------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 46,599 98,252
Policy benefits 46,736 346,779
Policyholders' dividends (1,083) 107,102
Interest credited to policyholders' accounts 194,442 208,505
Operating expenses 147,505 141,242
Sales practice remediation costs - 40,575
Net deferral of policy acquisition costs 39,201 90,323
----------------------------------------------------------------------------------------------------------------
Total benefits and expenses 473,400 1,032,778
----------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 83,444 27,675
Income tax expense (benefit) 17,380 (1,020)
----------------------------------------------------------------------------------------------------------------
Income before minority interests 66,064 28,695
Minority interests 9,436 8,507
----------------------------------------------------------------------------------------------------------------
NET INCOME 56,628 20,188
OTHER COMPREHENSIVE (LOSS) INCOME, NET
Unrealized (losses) gains on securities, net (163,943) 21,226
----------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE (LOSS) INCOME $ (107,315) $ 41,414
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 99
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK:
Balance at January 1 $ - $ -
2.5 million shares at $1 par issued via equity transfer from retained
earnings pursuant to mutual holding company reorganization 2,500 -
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 2,500 $ -
================================================================================================================
ADDITIONAL PAID IN CAPITAL:
Balance at January 1 $ - $ -
Capital contributed via equity transfer from retained earnings
pursuant to mutual holding company reorganization 5,000 -
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 5,000 $ -
================================================================================================================
RETAINED EARNINGS:
Balance at January 1 $ 776,060 $ 755,872
Transfer to common stock pursuant to mutual holding company
reorganization (2,500)
Transfer to additional paid in capital pursuant to mutual holding company
reorganization (5,000)
Net income 56,628 20,188
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 825,188 $ 776,060
================================================================================================================
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Balance at January 1 $ 106,243 $ 85,017
Unrealized (losses) gains on available-for-sale securities, net (163,943) 21,226
----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ (57,700) $ 106,243
================================================================================================================
TOTAL STOCKHOLDER'S EQUITY:
Balance at December 31 $ 774,988 $ 882,303
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 100
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,628 $ 20,188
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Accrued investment income (67) 6,541
Policy liabilities (7,845) 87,367
Deferred policy acquisition costs (59,780) (7,580)
Policyholders' dividends 2,589 1,362
Deferred income taxes 21,134 (13,330)
Net realized investment gains 5,580 (8,450)
Depreciation 7,339 6,977
Other 9,463 12,714
-------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 35,041 105,789
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 1,063,475 2,020,526
Cost of available-for-sale investments acquired (1,241,086) (2,236,001)
Acquisition of remaining interest in LSWNH, Inc. (61,632) -
Other 2,648 14,656
-------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (236,595) (200,819)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' deposits, including interest credited 558,115 563,606
Policyholders' withdrawals, including policy charges (379,233) (452,184)
Net decrease in borrowings under repurchase agreements - (234,570)
Net (decrease) increase in securities lending liabilities (126,342) 173,726
Other (906) 20,221
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 51,634 70,799
-------------------------------------------------------------------------------------------------------------------
CLOSED BLOCK ACTIVITY, NET (24,544) -
-------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (174,464) (24,231)
CASH AND CASH EQUIVALENTS:
Beginning of year 347,949 372,180
-------------------------------------------------------------------------------------------------------------------
End of year $ 173,485 $ 347,949
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 101
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Life Insurance Company and its subsidiaries and affiliates (the
Company) offer a broad range of financial products and services, including life
insurance, annuities, disability income insurance, mutual funds, and investment
advisory and administration services. The flagship company of the organization,
National Life Insurance Company (National Life), was chartered in 1848, and is
also known by its registered trade name "National Life of Vermont". The Company
employs about 900 people, primarily concentrated in Montpelier, Vermont and
Dallas, Texas. On January 1, 1999, pursuant to a mutual holding company
reorganization, National Life converted from a mutual to a stock life insurance
company. All of National Life's outstanding shares are currently held by its
parent, NLV Financial Corp, which is the wholly-owned subsidiary of National
Life Holding Company. See Note 13 for more information.
The insurance operations within the Company develop and distribute individual
life insurance and annuity products. The Company markets this diverse product
portfolio to small business owners, professionals and other middle to upper
income individuals. The Company provides financial solutions in the form of
estate, business succession and retirement planning, deferred compensation and
other key executive fringe benefit plans, and asset management. Insurance and
annuity products are primarily distributed through about 32 general agencies in
major metropolitan areas, a system of managing general agents, and independent
brokers throughout the United States. The Company has in excess of 300,000
policyholders and through its member companies is licensed to do business in all
50 states and the District of Columbia. About 26% of the Company's total
collected premiums and deposits are from residents of New York and California.
Members of the Company also distribute and provide investment advisory and
administrative services to the Sentinel Group Funds, Inc. The Sentinel Funds'
$3.1 billion of net assets represent fourteen mutual funds managed on behalf of
about 117,000 individual, corporate and institutional shareholders worldwide.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have been
prepared in conformity with accounting principles generally accepted in the
United States (GAAP).
The consolidated financial statements include the accounts of National Life and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. Certain reclassifications have been made to
conform prior periods to the current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INVESTMENTS
Cash and cash equivalents include highly liquid debt instruments purchased with
remaining maturities of three months or less.
F-32
<PAGE> 102
Available-for-sale and trading debt and equity securities are reported at
estimated fair value. Debt and equity securities that experience declines in
value that are other than temporary are written down with a corresponding charge
to net investment losses.
Mortgage loans are reported at amortized cost, less valuation allowances for the
excess, if any, of the amortized cost of impaired loans over the estimated fair
value of the related collateral. Changes in valuation allowances are included in
net investment gains and losses.
Policy loans are reported at their unpaid balance and are fully collateralized
by related cash surrender values.
Real estate investments are reported at depreciated cost. Real estate acquired
in satisfaction of debt is transferred to real estate at estimated fair value.
Investments in joint ventures and limited partnerships are generally carried at
cost.
Net realized investment gains and losses are recognized using the specific
identification method and are reported as net investment gains and losses.
Changes in the estimated fair values of available-for-sale debt and equity
securities are reflected in comprehensive income after adjustments for related
deferred policy acquisition costs, present value of future profits of insurance
acquired, income taxes and minority interests. Changes in the fair value of
trading equity securities are reflected in net investment gains and losses.
POLICY ACQUISITION EXPENSES
Commissions and other costs of acquiring business that vary with and are
primarily related to the production of new business are generally deferred.
Deferred policy acquisition costs for participating life insurance, universal
life insurance and investment-type annuities are amortized in relation to
estimated gross margins or profits. Amortization is adjusted retrospectively for
actual experience and when estimates of future gross margins or profits are
revised. Balances of deferred policy acquisition costs for these products are
adjusted for related unrealized gains and losses on available-for-sale debt and
equity securities through other comprehensive income, net of related income
taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance are amortized in relation to premium income using
assumptions consistent with those used in computing policy benefit liabilities.
Balances of deferred policy acquisition costs are regularly evaluated for
recoverability from product margins or profits.
PRESENT VALUE OF FUTURE PROFITS OF INSURANCE ACQUIRED
Present value of future profits of insurance acquired is the
actuarially-determined present value of future projected profits from policies
in force at the date of their acquisition, and is amortized in relation to gross
profits of those policies. Amortization is adjusted retrospectively for actual
experience and when estimates of future profits are revised.
GOODWILL
Goodwill is amortized over 20 years using the straight line method and is
periodically evaluated for recoverability.
F-33
<PAGE> 103
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
primarily depreciated over 39.5 years using the straight-line method. Furniture
and equipment is depreciated using accelerated depreciation methods over 7 years
and 5 years, respectively.
SEPARATE ACCOUNTS
Separate accounts are segregated funds relating to certain variable annuity and
variable life policies, and National Life's pension plans. Separate account
assets are primarily common stocks, bonds, mortgage loans, and real estate and
are carried at estimated fair value. Separate account liabilities reflect
separate account policyholders' interests in separate account assets, include
the actual investment performance of the respective accounts and are not
guaranteed. Separate account results relating to these policyholders' interests
are excluded from revenues and expenses.
POLICY LIABILITIES
Policy benefit liabilities for participating life insurance are developed using
the net level premium method, with interest and mortality assumptions used in
calculating policy cash surrender values. Participating life insurance terminal
dividends are accrued in relation to gross margins.
Policy benefit liabilities for non-participating life insurance, disability
income insurance and certain annuities are developed using the net level premium
method, with assumptions for interest, mortality, morbidity, withdrawals and
expenses based principally on company experience.
Policyholders' account balances for universal life insurance and investment-type
annuities represent amounts that inure to the benefit of the policyholders
(before surrender charges).
POLICYHOLDERS' DIVIDENDS
Policyholders' dividends are the pro-rata amount of dividends earned that will
be paid or credited at the next policy anniversary. Dividends are based on a
scale that seeks to reflect the relative contribution of each group of policies
to National Life's overall operating results. The dividend scale is approved
annually by National Life's Board of Directors. See additional information below
on dividends on contracts within the Closed Block.
RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES
Premiums from traditional life and certain annuities are recognized as revenue
when due from the policyholder. Benefits and expenses are matched with income by
providing for policy benefit liabilities and the deferral and amortization of
policy acquisition costs so as to recognize profits over the life of the
policies.
Premiums from universal life and investment-type annuities are reported as
increases in policyholders' accounts. Revenues for these policies consist of
mortality charges, policy administration fees and surrender charges deducted
from policyholders' accounts. Policy benefits charged to expense include benefit
claims in excess of related policyholders' account balances.
Premiums from disability income policies are recognized as revenue over the
period to which the premiums relate.
F-34
<PAGE> 104
FEDERAL INCOME TAXES
National Life Holding Company will file a consolidated tax return for the tax
year ended December 31, 1999. The income tax return will include all members
within the Company except Life Insurance Company of the Southwest (LSW) and
Insurance Investors Life Insurance Company (IIL). LSW and IIL will file a
separate tax return due to tax regulatory requirements. Current federal income
taxes are charged or credited to operations based upon amounts estimated to be
payable or recoverable as a result of taxable operations for the current year.
Deferred income tax assets and liabilities are recognized based on temporary
differences between financial statement carrying amounts and income tax bases of
assets and liabilities using enacted income tax rates and laws.
MINORITY INTERESTS
Minority interests at December 31, 1999 represent minority partners interests in
entities within the Company. Minority interests attributable to common
stockholders are carried on the equity method. Those attributable to preferred
stockholders are carried on the cost method, with dividends paid reflected as
minority interests within the consolidated financial statements.
CLOSED BLOCK
National Life established and began operating a closed block (the Closed Block)
on January 1, 1999. The Closed Block was established pursuant to regulatory
requirements as part of the reorganization into a mutual holding company
corporate structure. This Closed Block was established for the benefit of
policyholders of participating policies inforce at December 31, 1998. Included
in the block are traditional dividend paying life insurance policies, certain
participating term insurance policies, dividend paying flex premium annuities,
and other related liabilities. The Closed Block was established to protect the
policy dividend expectations related to these policies. The Closed Block is
expected to remain in effect until all policies within the Closed Block are no
longer inforce. Assets assigned to the Closed Block at January 1, 1999, together
with projected future premiums and investment returns, are reasonably expected
to be sufficient to pay out all future Closed Block policy benefits. Such
benefits include dividends paid out under the current dividend scale, adjusted
to reflect future changes in the underlying experience. See Note 11 for
additional information on the Closed Block's financial position and results of
operations.
F-35
<PAGE> 105
NOTE 3 - INVESTMENTS
DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair values of available-for-sale debt and
equity securities at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1999 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS) debt and equity securities:
U.S. government obligations $ 185,524 $ 2,768 $ 14,925 $ 173,367
Government agencies, authorities
and subdivisions 61,524 1,095 2,035 60,584
Public utilities 295,172 8,447 15,371 288,248
Corporate 1,611,713 9,845 70,987 1,550,571
Private placements 449,531 2,763 20,307 431,987
Mortgage-backed securities 686,868 656 20,840 666,684
------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 3,290,332 25,574 144,465 3,171,441
Preferred stocks 134,852 2,708 8,109 129,451
Common stocks 33,032 7,169 2,316 37,885
------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 3,458,216 $ 35,451 $ 154,890 $ 3,338,777
========================================================================================================================
<CAPTION>
1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AFS debt and equity securities:
U.S. government obligations $ 315,567 $ 17,710 $ 1,024 $ 332,253
Government agencies, authorities
and subdivisions 124,411 13,626 29 138,008
Public utilities 392,211 21,944 678 413,477
Corporate 2,368,814 152,991 18,249 2,503,556
Private placements 670,467 36,929 10,501 696,895
Mortgage-backed securities 1,137,465 41,131 3,359 1,175,237
------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,008,935 284,331 33,840 5,259,426
Preferred stocks 140,932 2,567 3,538 139,961
Common stocks 37,847 2,373 823 39,397
------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity
securities $ 5,187,714 $ 289,271 $ 38,201 $ 5,438,784
========================================================================================================================
</TABLE>
F-36
<PAGE> 106
Unrealized gains and losses on available-for-sale debt and equity securities
included as a component of accumulated other comprehensive income and changes
therein for the years ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized (losses) gains on available-for-sale securities $ (399,066) $ 20,136
Net unrealized (losses) gains on separate accounts (2,652) 1,543
Related minority interests 8,672 (1,786)
Related deferred policy acquisition costs 116,725 17,139
Related present value of future profits of insurance acquired 16,353 (3,048)
Related deferred income taxes 96,025 (12,758)
-----------------------------------------------------------------------------------------------------------------------
(Decrease) increase in net unrealized gains (163,943) 21,226
Balance, beginning of year 106,243 85,017
-----------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=======================================================================================================================
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, end of year includes:
Net unrealized (losses) gains on available-for-sale securities $ (147,996) $ 251,070
Net unrealized gains on separate accounts 3,163 5,815
Related minority interests - (8,672)
Related deferred policy acquisition costs 39,186 (77,539)
Related present value of future profits on insurance acquired 14,806 (1,547)
Related deferred income taxes 33,141 (62,884)
-----------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=======================================================================================================================
</TABLE>
Net other comprehensive (loss) income for 1999 and 1998 of $(163.9) million and
$21.2 million is presented net of reclassifications to net income for gross
gains realized during the period of $13.9 million and $9.0 million and net of
tax and deferred acquisition cost offsets of $9.4 million and $6.6 million,
respectively.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1999 are shown below (in thousands). Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Estimated Fair
Cost Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 93,726 $ 93,678
Due after one year through five years 1,035,774 1,003,721
Due after five years through ten years 1,043,650 997,356
Due after ten years 430,312 410,002
Mortgage-backed securities 686,870 666,684
--------------------------------------------------------------------------------------------------------------
Total $ 3,290,332 $ 3,171,441
==============================================================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 is shown below (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 604,226 $ 1,167,190
Gross realized gains $ 25,885 $ 22,969
Gross realized losses $ 17,247 $ 16,578
</TABLE>
F-37
<PAGE> 107
On January 1, 1999, National Life Group reclassified certain mutual fund
investments from an available-for-sale to a trading classification. The
cumulative gross unrealized gain reclassified into net investment gains was $0.6
million. For the year ended December 31, 1999, these securities recorded $0.9
million net investment income and $(0.5) million investment losses. Cost of
trading securities held at December 31, 1999 was $12.1 million. National Life
Group held no securities classified as trading prior to January 1, 1999.
National Life Group periodically lends certain U.S. government or corporate
bonds to approved counterparties to enhance the yield of its bond portfolio.
National Life receives cash collateral for at least 103% of the market value of
securities loaned. Collateral adequacy is evaluated daily and periodically
adjusted for changes in the market value of securities loaned. The carrying
values of securities loaned are unaffected by the transaction. Collateral held
(included in cash and cash equivalents and closed block assets) and the
corresponding liability for collateral held (closed block portion included in
closed block liabilities) were $115.5 million and $193.5 million at December 31,
1999 and 1998, respectively.
National Life Group also periodically enters into repurchase agreements on U.S.
Treasury securities to enhance the yield of its bond portfolio. These
transactions are accounted for as financings because the securities received at
the end of the repurchase period are identical to the securities transferred.
There were no open transactions at December 31, 1999 or 1998.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------
<S> <C> <C>
GEOGRAPHIC REGION
-----------------
New England 4.3% 3.8%
Middle Atlantic 10.7 9.7
East North Central 8.7 9.3
West North Central 2.8 4.5
South Atlantic 24.1 25.7
East South Central 7.0 5.0
West South Central 12.9 10.3
Mountain 15.1 17.7
Pacific 14.4 14.0
-------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===================================================================================================================
PROPERTY TYPE
-------------
Residential 0.1% 0.2%
Apartment 19.7 24.2
Retail 9.5 12.2
Office Building 37.4 35.0
Industrial 29.4 26.2
Hotel/Motel 2.6 0.8
Other Commercial 1.3 1.4
-------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===================================================================================================================
Total mortgage loans and real estate
(in thousands) $ 867,973 $ 1,174,070
===================================================================================================================
</TABLE>
F-38
<PAGE> 108
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 767,540 $ 1,077,637
Impaired loans without valuation allowances 6,943 11,757
-----------------------------------------------------------------------------------------------------------------
Subtotal 774,483 1,089,394
-----------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowances 10,600 10,244
Related valuation allowances (3,113) (1,134)
-----------------------------------------------------------------------------------------------------------------
Subtotal 7,487 9,110
-----------------------------------------------------------------------------------------------------------------
Total $ 781,970 $ 1,098,504
=================================================================================================================
Impaired loans:
Average recorded investment $ 19,771 $ 27,755
Interest income recognized $ 2,137 $ 3,124
Interest received $ 2,092 $ 2,818
</TABLE>
Impaired loans are mortgage loans where it is not probable that all amounts due
under the contractual terms of the loan will be received. Impaired loans without
valuation allowances are mortgage loans where the estimated fair value of the
collateral exceeds the recorded investment in the loan. For these impaired
loans, interest income is recognized on an accrual basis, subject to
recoverability from the estimated fair value of the loan collateral. For
impaired loans with valuation allowances, interest income is recognized on a
cash basis.
Activity in the valuation allowances for impaired mortgage loans for the years
ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
============================================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,993 $ 1,564
Impairment losses charged to valuation allowances - (2,217)
Changes to previously established valuation allowances (14) (2,642)
------------------------------------------------------------------------------------------------------------
Increase/decrease in valuation allowances 1,979 (3,295)
Balance, beginning of year 1,134 4,429
------------------------------------------------------------------------------------------------------------
Balance, end of year $ 3,113 $ 1,134
============================================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 255,721 $ 405,184
Equity securities dividends 2,385 6,380
Mortgage loan interest 63,196 90,991
Policy loan interest 6,426 47,189
Real estate income 11,698 12,802
Other investment income 29,915 12,363
------------------------------------------------------------------------------------------------------------
Gross investment income 369,341 574,909
Less: investment expenses 19,956 24,570
------------------------------------------------------------------------------------------------------------
Net investment income $ 349,385 $ 550,339
============================================================================================================
</TABLE>
F-39
<PAGE> 109
DERIVATIVES
The Company purchases over-the-counter options and exchange-traded futures on
the Standard & Poor's 500 (S&P 500) Index to hedge obligations relating to
equity indexed products. When the S&P 500 Index increases, increases in the
intrinsic value of the options and fair value of futures are offset by increases
in equity indexed product account values. When the S&P 500 Index decreases, the
Company's loss is the decrease in the fair value of futures and is limited to
the premium paid for the options.
The Company purchases options only from highly rated counterparties. However, in
the event a counterparty failed to perform, the Company's loss would be equal to
the fair value of the net options held from that counterparty.
The option premium is expensed over the term of the option. Amortization of the
option premium is reflected in investment income. Interest credited includes
amounts that would be credited on the next policy anniversary based on the S&P
500 Index's value at the reporting date, offset by changes in the intrinsic
value of options held and changes in the fair value of futures. The call options
are included in other invested assets and are carried at amortized cost plus
intrinsic value, if any, of the call options as of the valuation date.
The notional amounts and net book value of options and futures at December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 166,858 $ 79,754
Futures $ 5,439 $ 28,835
==============================================================================================================
Book values:
Options: Net amortized cost $ 17,800 $ 5,514
Intrinsic value 18,894 18,953
--------------------------------------------------------------------------------------------------------------
Book value 36,694 24,467
Futures at fair value 890 463
--------------------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 37,584 $ 24,930
==============================================================================================================
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments at
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 173,485 $ 173,485 $ 347,949 $ 347,949
Available-for-sale debt and equity securities 3,338,777 3,338,777 5,438,784 5,438,784
Trading equity securities 11,793 11,793 - -
Mortgage loans 781,970 790,190 1,098,504 1,180,630
Policy loans 120,745 115,330 776,363 743,687
Derivatives 37,584 35,528 24,930 28,496
Investment products 2,600,657 2,578,402 2,507,012 2,522,940
Debt 76,092 62,615 78,088 75,141
</TABLE>
For cash and cash equivalents carrying value approximates estimated fair value.
Debt and equity securities estimated fair values are based on quoted values
where available. Where quoted values are not available, estimated fair values
are based on discounted cash flows using current interest rates of similar
securities.
F-40
<PAGE> 110
Mortgage loan fair values are estimated as the average of discounted cash flows
under different scenarios of future mortgage interest rates (including
appropriate provisions for default losses and borrower prepayments).
Mortgage loan fair values are estimated as the average of discounted cash flows
under different scenarios of future mortgage interest rates (including
appropriate provisions for default losses and borrower prepayments).
For variable rate policy loans the unpaid balance approximates fair value. Fixed
rate policy loan fair values are estimated based on discounted cash flows using
the current variable policy loan rate (including appropriate provisions for
mortality and repayments).
Derivatives estimated fair values are based on quoted values.
Investment products include flexible premium annuities, single premium deferred
annuities and supplementary contracts not involving life contingencies.
Investment product fair values are estimated as the average of discounted cash
flows under different scenarios of future interest rates of A-rated corporate
bonds and related changes in premium persistency and surrenders.
Debt fair values are estimated based on discounted cash flows using current
interest rates of similar securities.
NOTE 4 - INSURANCE IN-FORCE AND REINSURANCE
The Company reinsures certain risks assumed in the normal course of business.
For individual life products, The Company generally retains no more than $3.0
million of risk on any person (excluding accidental death benefits and dividend
additions). Reinsurance for life products is ceded under yearly renewable term,
coinsurance, and modified coinsurance agreements. Disability income products are
significantly reinsured under coinsurance and modified coinsurance agreements.
The Company remains liable in the event any reinsurer is unable to meet its
assumed obligations. The Company regularly evaluates the financial condition of
its reinsurers and concentrations of credit risk of reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies.
,
Transactions between the open and Closed Block (see Notes 11 and 13) have been
excluded from the following schedule. Reinsurance flows with outside parties
remain within the open block.
The effects of reinsurance for the years ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 114,117 $ 453,859
Reinsurance assumed 4,731 898
Reinsurance ceded (60,898) (68,497)
---------------------------------------------------------------------------------------------------------------
$ 57,950 $ 386,260
===============================================================================================================
Other income:
Direct $ 6,975 $ 3,694
Reinsurance ceded 12,887 13,577
---------------------------------------------------------------------------------------------------------------
$ 19,862 $ 17,271
===============================================================================================================
</TABLE>
F-41
<PAGE> 111
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in policy liabilities:
Direct increase in policy liabilities $ 63,124 $ 94,949
Reinsurance assumed - (4)
Reinsurance ceded (16,525) 3,307
---------------------------------------------------------------------------------------------------------------
$ 46,599 $ 98,252
===============================================================================================================
Policy benefits:
Direct policy benefits $ 109,618 $ 416,919
Reinsurance assumed (2,479) 1,286
Reinsurance ceded (60,403) (71,426)
---------------------------------------------------------------------------------------------------------------
$ 46,736 $ 346,779
===============================================================================================================
Policyholders' dividends:
Direct policyholders' dividends $ 2,852 $ 110,630
Reinsurance ceded (3,935) (3,528)
---------------------------------------------------------------------------------------------------------------
$ (1,083) $ 107,102
===============================================================================================================
</TABLE>
NOTE 5 - DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes in the deferred policy acquisition costs
asset (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 416,733 $ 392,014
Acquisition costs deferred 73,648 57,318
Amortization to expense during the year (36,791) (49,738)
Adjustment to equity during the year 116,725 17,139
Included in Closed Block assets (312,588) -
Purchase GAAP effect on purchase of LSWNH (Note 12) (32,188) -
----------------------------------------------------------------------------------------------
Balance, end of year $ 225,539 $ 416,733
==============================================================================================
</TABLE>
NOTE 6 - FEDERAL INCOME TAXES
The components of federal income taxes and a reconciliation of the expected and
actual federal income taxes and income tax rates for the years ended December 31
were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 7,497 $ 17,144
Deferred 9,883 (18,164)
------------------------------------------------------------------- --------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Expected income taxes $ 29,206 35.0% $ 9,686 35.0%
Differential earnings amount (2,058) (2.5) (7,953) (28.7)
Affordable housing tax credit (6,509) (7.8) (6,638) (24.0)
Net change in tax reserves 2,033 2.4 5,035 18.2
Other, net (5,292) (6.3) (1,150) (4.2)
----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Effective federal income tax rate 20.8% (3.7)%
==================================================== ===================== =====================
</TABLE>
F-42
<PAGE> 112
The Company received net federal income tax refunds of $9.4 million in 1999 and
paid federal income taxes of $13.3 million in 1998.
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Net unrealized loss on available-for-sale securities $ 29,383 -
Debt and equity securities 17,419 -
Policy liabilities 32,408 $ 185,294
Other liabilities and accrued expenses 51,609 67,291
Other 490 4,761
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 131,309 257,346
--------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 28,635 126,380
Present value of future profits of insurance acquired 37,908 17,683
Net unrealized gain on available-for-sale securities - 62,884
Debt and equity securities - 16,947
Other 14,777 11,911
--------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 81,320 235,805
--------------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 49,989 $ 21,541
==========================================================================================================================
</TABLE>
Management believes it is more likely than not that the Company will realize the
benefit of deferred tax assets.
National Life's federal income tax returns are routinely audited by the IRS. The
IRS has examined National Life's tax returns through 1995 and is currently
examining the years 1996 - 1998. In management's opinion adequate tax
liabilities have been established for all open years.
NOTE 7 - BENEFIT PLANS
National Life sponsors a qualified defined benefit pension plan covering
substantially all employees. The plan is administered by National Life's
Benefits Committee and is non-contributory, with benefits based on an employee's
retirement age, years of service and compensation near retirement. Plan assets
are primarily bonds and common stocks held in a National Life separate account
and funds invested in a group annuity contract issued by National Life. National
Life also sponsors other, non-qualified pension plans, including a
non-contributory defined benefit plan for general agents that provides benefits
based on years of service and sales levels, a contributory defined benefit plan
for certain employees, agents and general agents and a non-contributory defined
supplemental benefit plan for certain executives. These non-qualified defined
benefit pension plans are not funded.
National Life sponsors four defined benefit postretirement plans that provide
medical, dental and life insurance benefits to employees and agents.
Substantially all employees and agents may be eligible for retiree benefits if
they reach normal retirement age and meet certain minimum service requirements
while working for National Life. Most of the plans are contributory, with
retiree contributions adjusted annually, and contain cost sharing features such
as deductibles and copayments. The plans are not funded and National Life Group
pays for plan benefits on a current basis. The cost of these benefits is
recognized as earned.
During 1997, National Life offered enhanced pension and postretirement benefits
to employees meeting certain defined eligibility requirements. The program
resulted in special termination benefits for the expected present value of the
enhancements to benefits, curtailment gains for reductions in the pension
benefit obligations relating to assumed increases in future compensation levels
and settlement gains for
F-43
<PAGE> 113
the pro-rata recognition of actuarial gains on lump sum settlements of pension
benefit obligations. Some of the plan participants elected to defer their lump
sum payouts until 1998, which also deferred recognition of the related
settlement gain until 1998.
The status of the defined benefit plans at December 31 was as follows (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-----------------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 189,524 $ 162,986 $ 27,883 $ 24,759
Service cost (benefits earned during the current period) 4,194 2,849 581 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Actuarial (gains) losses (26,832) 34,444 (3,937) 1,939
Benefits paid (12,002) (22,185) (1,170) (1,061)
---------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 167,144 $ 189,524 $ 25,233 $ 27,883
=================================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 100,045 $ 108,884
Actual return on plan assets 9,952 7,200
Benefits paid (5,747) (16,039)
-----------------------------------------------------------------------------------------------
Plan assets, end of year $ 104,250 $ 100,045
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FUNDED STATUS:
Benefit obligation $ 167,144 $ 189,524 $ 25,233 $ 27,883
Plan assets (104,250) (100,045)
------------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 62,894 89,479 25,233 27,883
Unrecognized actuarial gains (losses) 18,309 (11,259) 6,397 2,526
Unrecognized prior service cost (1,080) (1,152)
----------------------------------------------------------------------
Accrued benefit cost at September 30 81,203 78,220 30,550 29,257
Payments subsequent to measurement date (1,638) (1,518)
------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost at December 31 $ 79,565 $ 76,702 $ 30,550 $ 29,257
==============================================================================================================================
</TABLE>
The components of net periodic benefit cost for the years ended December 31 were
as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 4,194 $ 2,849 $ 581 $ 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Expected return on plan assets (8,745) (9,078)
Net amortization and deferrals 281 (1,167) (66) (83)
Amortization of prior service cost 72 72
Settlement gains from 1997 early retirement program (3,131)
-----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating
expenses) $ 7,990 $ 903 $ 2,463 $ 2,235
=============================================================================================================================
</TABLE>
The total projected benefit obligation for non-qualified defined benefit pension
plans was $70.9 million and $81.4 million at December 31, 1999 and 1998,
respectively. The total accumulated benefit obligation (APBO) for these plans
was $67.7 million and $75.2 million at December 31, 1999 and 1998, respectively.
F-44
<PAGE> 114
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.75% 6.75% 7.75% 6.75%
Rate of increase in future compensation levels 6.00% 5.00%
Expected long term return on plan assets 9.00% 9.00%
</TABLE>
Health care cost trend rates grade to 5% in year 2000 and remain level
thereafter. Increasing the assumed health care trend rates by one percentage
point in each year would increase the APBO by about $2.4 million and the 1999
service and interest cost components of net periodic postretirement benefit cost
by about $0.1 million. Decreasing the assumed health care trend rates by one
percentage point in each year would reduce the APBO by about $2.0 million and
the 1999 service and interest cost components of net periodic postretirement
benefit cost by about $0.1 million. National Life Group uses the straight-line
method of amortization for prior service cost and unrecognized gains and losses.
National Life provides employee savings and 401(k) plans where up to 3% of an
employee's compensation may be invested by the employee in either plan with
matching funds contributed by the company. Employees below specified levels of
compensation also receive a foundation contribution of 1.5% of compensation.
Additional employee voluntary contributions may be made to the plans up to a set
maximum. Vesting and withdrawal privilege schedules are attached to the
Company's contributions.
National Life also provides a 401(k) plan for it's regular full-time agents
whereby accumulated funds may be invested by the agent in a group annuity
contract with National Life or in mutual funds sponsored by an affiliate of
National Life. Total annual contributions can not exceed certain limits that
vary based on total agent compensation. No National Life contributions are made
to the plan.
Life Insurance Company of the Southwest (LSW), an indirectly held wholly-owned
subsidiary of National Life, provides a 401(k) to its employees. Additional
voluntary employee contributions may be made to the plan subject to certain
limits. LSW's contributions to these plans generally vest within two years.
NOTE 8 - DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,692 $ 69,688
$70 million, maturing March 1, 2024 with interest payable semi-annually
on March 1 and September 1. The notes are unsecured and subordinated to
all present and future indebtedness, policy claims and prior claims. The
notes may be redeemed in whole or in part any time after March 1, 2004 at
predetermined redemption prices. All interest and principal payments
require prior written approval by the State of Vermont Department of
Banking, Insurance, Securities and Health Care Administration.
6.57% Term Note: 6,400 8,400
$6.4 million, maturing March 1, 2002 with interest payable semi-annually
on March 1 and September 1. The note is secured by subsidiary stock,
includes certain restrictive covenants and requires annual payments of
principal (see below).
-----------------------------------------------------------------------------------------------------------------------------
Total debt $ 76,092 $ 78,088
=============================================================================================================================
</TABLE>
F-45
<PAGE> 115
The aggregate annual scheduled maturities of debt for the next five years are as
follows (in thousands):
2000 $ 2,000
2001 2,000
2002 2,400
2003 -
2004 -
Interest paid was $6.3 million and $6.2 million in 1999 and 1998, respectively.
NOTE 9 - CONTINGENCIES
During 1997, several class action lawsuits were filed against National Life in
various states related to the sale of life insurance policies during the 1980's
and 1990's. National Life specifically denied any wrongdoing. National Life
agreed to a settlement of these class action lawsuits in June 1998. This
agreement was subsequently approved by the court in October 1998. The settlement
provides class members with various policy enhancement options and new product
purchase discounts. Class members may instead pursue alternative dispute
resolution according to predetermined guidelines. Qualifying members may also
opt out of the class action and pursue litigation separately against National
Life. Most of the alternative dispute resolution cases were settled by December
31, 1999. Management believes that while the ultimate cost of this litigation
(including those opting out of the class action) is still uncertain, it is
unlikely, after considering existing provisions, to have a material adverse
effect on National Life's financial position.
In late 1999, two lawsuits were filed against National Life and the State of
Vermont in Vermont related to National Life's conversion to a mutual holding
company structure. National Life and the State of Vermont specifically deny any
wrongdoing and intend to defend these cases vigorously. In the opinion of
National Life Group's management, based on advice from legal counsel, the
ultimate resolution of these lawsuits will not have a material effect on
National Life Group's financial position. However, liabilities related to these
lawsuits could be established in the near term if estimates of the ultimate
resolution of these proceedings are revised.
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133), which establishes accounting and reporting
standards for derivative instruments. FAS 133 requires that an entity recognize
all derivatives as either assets or liabilities at fair value in the statement
of financial position, and establishes special accounting for the following
three types of hedges: fair value hedges, cash flow hedges, and hedges of
foreign currency exposures of net investments in foreign operations. The
statement was originally effective for fiscal years beginning after June 15,
1999. In June, 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 (FAS 137). FAS 137 requires the application of FAS 133 for fiscal years
beginning after June 15, 2000. The Company is currently assessing the impact of
the adoption of FAS 133.
F-46
<PAGE> 116
NOTE 11 - CLOSED BLOCK
The Closed Block was established on January 1, 1999 as part of the conversion to
a mutual holding company corporate structure (see Note 13).
Summarized financial information for the Closed Block effects as of December 31,
1999 and for the year then ended is as follows (in thousands):
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Cash and cash equivalents $ 122,982
Available-for-sale debt securities (amortized cost of $1,800.1 million) 1,771,494
Mortgage loans 380,986
Policy loans 640,490
Accrued investment income 53,387
Premiums and fees receivable 18,864
Deferred policy acquisition costs 312,588
Other assets 123,690
----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,424,481
==================================================================================================================================
LIABILITIES:
Policy liabilities and accruals $ 3,629,560
Other liabilities 69,186
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 3,698,746
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES:
Premiums and other income $ 325,445
Net investment income 216,432
Realized investment gain 8,720
----------------------------------------------------------------------------------------------------------------------------------
Total revenues 550,597
----------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 66,324
Policy benefits 283,598
Policyholders' dividends 107,941
Interest credited to policyholders' accounts 13,294
Operating expenses 17,407
Policy acquisition expenses, net 37,662
----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 526,226
----------------------------------------------------------------------------------------------------------------------------------
Pre-tax contribution from the Closed Block $ 24,371
==================================================================================================================================
</TABLE>
There were no mortgage valuation allowances on Closed Block mortgage loans at
December 31, 1999. Many expenses related to Closed Block operations are charged
to operations outside the Closed Block; accordingly, the contribution from the
Closed Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside the Closed Block are therefore
disproportionate to the actual business outside the Closed Block.
F-47
<PAGE> 117
The Consolidated Statement of Cash Flows for 1999 is presented net of cash flows
and adjustments to operating cash flows attributable to the Closed Block cash
and short term investments of $(24.5) million. The Closed Block was initially
funded on January 1, 1999 with cash and securites totalling $2.2 billion.
NOTE 12 - ACQUISITION
On July 2, 1999, the Company acquired the outstanding one-third interest in LSW
National Holdings, Inc., (LSWNH) the parent of Dallas, Texas-based Life
Insurance Company of the Southwest (LSW), a financial services company
specializing in the sale of annuities. The Company had previously purchased a
two-thirds interest in the company in February, 1996.
The purchase price was $61.6 million in cash. Purchasing the remaining one-third
interest eliminated the ongoing provision for minority interests for the last
six months of 1999. The effect of the cash purchase on the consolidated
financial statements was to reduce minority interests by $39.7 million and
record net purchase GAAP adjustments of $21.9 million, which included intangible
assets for the present value of future profits of insurance acquired of $59.4
million and goodwill of $3.0 million.
Had the one-third purchase been made at January 1, 1998, pro-forma consolidated
net income would have increased by about $3.1 million and $2.2 million in 1999
and 1998, respectively. These pro-forma consolidated results are not necessarily
indicative of the actual results which might have occurred had the Company owned
all of LSWNH since that date. (unaudited)
NOTE 13 - REORGANIZATION INTO A MUTUAL HOLDING COMPANY
CORPORATE STRUCTURE
On January 1, 1999, National Life converted from a mutual to a stock insurance
company as part of a reorganization into a mutual holding company corporate
structure.
Prior to the conversion, policyowners held policy contractual and membership
rights from National Life. The contractual rights, as defined in the various
insurance and annuity policies, remained with National Life after the
conversion. Membership interests held by policyowners of National Life at
December 31, 1998 were converted to membership interests in National Life
Holding Company, a mutual insurance holding company created for this purpose.
National Life Holding Company currently owns all the outstanding shares of NLV
Financial, a stock holding company created for this purpose, which in turn
currently owns all the outstanding shares of National Life. National Life
Holding Company currently has no other assets, liabilities or operations other
than that related to its ownership of NLV Financial's outstanding stock.
Similarly, NLV Financial currently has no other assets, liabilities or
operations other than that related to its ownership of National Life's
outstanding stock. Under the terms of the reorganization, National Life Holding
Company must always hold a majority of the voting shares of NLV Financial.
This reorganization was approved by policyowners of National Life and was
completed with the approval of the Commissioner of the Vermont Department of
Banking, Insurance, Securities, and Health Care Administration (the
"Commissioner").
Under the provisions of the reorganization, National Life issued 2.5 million
common stock $1 par shares to its parent, NLV Financial as a transfer from
retained earnings and also transferred $5 million from retained earnings into
additional paid in capital. There were no dividends paid or declared in 1999 by
National Life. Dividends declared by National Life in excess of ten percent of
statutory surplus (see Note 14 for statutory information) require pre-approval
by the Commissioner.
F-48
<PAGE> 118
NOTE 14 - STATUTORY INFORMATION
National Life prepares statutory basis financial statements for regulatory
filings with insurance regulators in all 50 states and the District of Columbia.
A reconciliation of National Life's statutory surplus to GAAP equity at December
31 and statutory net income to GAAP net income for the years ended December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
Surplus/ Surplus/
Equity Net Income Equity Net Income
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 408,086 $ 25,923 $ 373,063 $ 67,841
Asset valuation reserve 79,207 69,994
Interest maintenance reserve 58,507 5,681 52,826 (4,114)
Surplus notes (70,716) (70,700)
Non-admitted assets 2,101 17,033
Investments 30,149 5,916 650 (4,471)
Deferred policy acquisition costs 445,704 17,250 428,453 (9,479)
Deferred income taxes 45,587 (3,837) 74,132 15,555
Policy liabilities (202,061) 10,063 (203,832) (6,476)
Policyholders' dividends 67,494 3,289 64,205 529
Benefit plans (29,475) (1,571) (27,904) 6,730
Sales remediation costs (40,575)
Other comprehensive income, net (57,700) 106,243
Other changes, net (1,895) (6,086) (1,860) (5,352)
-----------------------------------------------------------------------------------------------------------------------------
GAAP equity/net income $ 774,988 $ 56,628 $ 882,303 $ 20,188
=============================================================================================================================
</TABLE>
The New York Insurance Department recognizes only statutory accounting practices
for determining and reporting the financial condition and results of operations
of an insurance company and for determining solvency under the New York
Insurance Law. No consideration is given by the New York Insurance Department to
financial statements prepared in accordance with generally accepted accounting
principles in making such determinations.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance (Codification), which
will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC has recommended an
effective date of January 1, 2001. The Codification provides guidance for areas
which promulgated statutory accounting principles had not previously addressed,
and changes current promulgated guidance in other areas.
The Vermont Department of Banking, Insurance, Securities, and Health Care
Administration has adopted Codification effective January 1, 2001. The
Department may make changes to the promulgated guidance prior to the effective
date. National Life has not estimated the potential effect of the Codification
guidance on its reported results.
F-49
<PAGE> 119
NATIONAL VARIABLE
LIFE INSURANCE ACCOUNT
(ESTATE PROVIDER SEGMENT)
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999
F-50
<PAGE> 120
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of National Life Insurance Company
and Policyholders of National Variable Life Insurance Account -
Estate Provider Segment
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of each of the sub-accounts
constituting the National Variable Life Insurance Account -- Estate Provider
Segment (a segment within a Separate Account of National Life Insurance
Company) (the Segment) at December 31, 1999, and the results of each of their
operations and each of their changes in net assets for the year ended
December 31, 1999 and the period from May 1, 1998 through December 31, 1998,
in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Segment's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1999 by
correspondence with the funds, provide a reasonable basis for the opinion
expressed above.
/S/ PRICEWATERHOUSECOOPERS LLP
March 31, 2000
F-51
<PAGE> 121
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
POLICYHOLDER
ACCOUNT
VALUES
----------------
<S> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value
(policyholder accumulation units and unit value):
Market Street Fund Money Market (87,355.06 accumulation units at $12.72 unit value) $ 1,111,122
Market Street Fund Growth (22,399.80 accumulation units at $10.50 unit value) 235,245
Market Street Fund Aggressive Growth (5,483.25 accumulation units at $11.15 unit value) 61,159
Market Street Fund Managed (24,269.83 accumulation units at $10.51 unit value) 255,169
Market Street Fund Bond (23,729.56 accumulation units at $10.24 unit value) 242,908
Market Street Fund International (12,444.41 accumulation units at $12.26 unit value) 152,531
Market Street Fund Sentinel Growth (11,226.88 accumulation units at $14.69 unit value) 164,922
American Century Variable Portfolios VP Value (4,074.75 accumulation units at $9.32 unit value) 37,975
American Century Variable Portfolios VP Income & Growth (16,224.93 accumulation units at $12.89 unit value) 209,119
JP Morgan Series Trust II International Opportunities (5,512.70 acumulation units at $12.42 unit value) 68,479
JP Morgan Series Trust II Small Company (16,199.23 acumulation units at $12.09 unit value) 195,768
Strong Opportunity Fund II(4,716.77 accumulation units at $12.97 unit value) 61,198
Strong Variable Insurance Funds Mid Cap Growth (11,462.76 accumulation units at $22.07 unit value) 253,031
Neuberger Berman Partners Portfolio (13,913.06 accumulation units at $10.02 unit value) 139,372
Goldman Sachs International Equity (10,567.92 accumulation units at $13.08 unit value) 138,270
Goldman Sachs Global Income (1,149.40 accumulation units at $10.55 unit value) 12,126
Goldman Sachs CORE Small Cap Equity (9,590.49 accumulation units at $9.65 unit value) 92,525
Goldman Sachs Mid Cap Value (3,603.11 accumulation units at $8.47 unit value) 30,514
VIPF Growth (25,842.80 accumulation units at $16.56 unit value) 427,830
VIPF High Income (21,965.93 accumulation units at $9.76 unit value) 214,336
VIPF Index 500 (233,008.34 accumulation units at $13.34 unit value) 3,108,119
VIPF Contrafund (27,824.89 accumulation units at $14.10 unit value) 392,465
------------
Total Net Assets $ 7,604,183
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 122
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
AMERICAN CENTURY
MARKET STREET FUND VARIABLE PORTFOLIOS
----------------------------------------------------------------------- -----------------------
MONEY AGGRESSIVE SENTINEL VP INCOME &
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL GROWTH VP VALUE GROWTH
------- ------- ---------- ------- ---- ------------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions 40,526 $ 548 $ 496 $ 4,020 $ 164 $ 526 $ 735 $ 610 $ 4
EXPENSES:
Mortality and expense risk
charges 10,778 1,156 327 1,606 853 458 791 174 700
-------------------------------------------------------------------------------------------------
Net investment income (loss) 29,748 (608) 169 2,414 (689) 68 (56) 436 (696)
-------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold - 1,290 460 4,325 (220) 5,442 4,725 (181) 1,508
Net unrealized appreciation
(depreciation) on
investments - 762 9,017 (7,496) 1,716 13,170 35,074 (2,446) 20,046
-------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments - 2,052 9,477 (3,171) 1,496 18,612 39,799 (2,627) 21,554
-------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $29,748 $1,444 $9,646 $ (757) $ 807 $18,680 $39,743 $(2,191) $20,858
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 123
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
STRONG VARIABLE NEUBERGER
JP MORGAN SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
------------------------- ----------- --------------- ---------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
------------- ------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital
gain distributions $2,168 $ 4,033 $1,683 $ 5 $2,662
EXPENSES:
Mortality and expense risk
charges 144 632 156 421 764
-------------------------------------------------------------------
Net investment (loss) income 2,024 3,401 1,527 (416) 1,898
-------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss)
from shares sold 1,139 2,279 1,418 5,601 1,010
Net unrealized appreciation
(depreciation) on investments 6,017 51,818 3,679 50,886 2,934
-------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 7,156 54,097 5,097 56,487 3,944
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $9,180 $57,498 $6,624 $56,071 $5,842
===================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
-------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE
------------- ------ ---------- --------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital
gain distributions $ 8,786 $ 440 $ 194 $ 198
EXPENSES:
Mortality and expense risk
charges 424 37 408 129
-------------------------------------------
Net investment (loss) income 8,362 403 (214) 69
-------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss)
from shares sold 784 (82) 833 242
Net unrealized appreciation
(depreciation) on investments 15,215 (260) 14,070 (1,252)
-------------------------------------------
Net realized and unrealized gain
(loss) on investments 15,999 (342) 14,903 (1,010)
-------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $24,361 $ 61 14,689 $ (941)
===========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 124
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VIPF
-----------------------------------------------------
HIGH INDEX
GROWTH INCOME 500 CONTRAFUND TOTAL
------- ------ -------- ---------- --------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 9,731 $3,784 $ 14,921 $ 1862 $ 98,096
EXPENSES:
Mortality and expense risk charges 1,530 909 12,632 1,146 36,175
--------------------------------------------------------------------
Net investment income 8,201 2,875 2,289 716 61,921
--------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain (loss) from
shares sold 5,362 (692) 93,217 6,154 134,614
Net unrealized appreciation on
investments 56,306 2,934 256,118 41,349 569,657
--------------------------------------------------------------------
Net realized and unrealized gain on
investments 61,668 2,242 349,335 47,503 704,271
--------------------------------------------------------------------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $69,869 $5,117 $351,624 $48,219 $766,192
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 125
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
AMERICAN CENTURY
MARKET STREET FUND VARIABLE PORTFOLIOS
---------------------------------------------------------------------- ----------------------
MONEY AGGRESSIVE SENTINEL VP INCOME &
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL GROWTH VP VALUE GROWTH
------ ------ ---------- ------- ---- ------------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital
gain distributions $7,084 $ 19 $ - $ 358 $ - $ - $ - $ - $ 62
EXPENSES:
Mortality and expense risk charges 1,741 33 7 153 5 25 39 7 12
---------------------------------------------------------------------------------------------
Net investment (loss) income 5,343 (14) (7) 205 (5) (25) (39) (7) 50
---------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Net realized gain (loss) from
shares sold - 101 17 1,012 140 (432) 132 128 56
Net unrealized appreciation on
investments - 1,135 359 5,209 120 666 2,583 73 825
---------------------------------------------------------------------------------------------
Net realized and unrealized gain on
investments - 1,236 376 6,221 260 234 2,715 201 881
---------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $5,343 $1,222 $369 $6,426 $255 $209 $2,676 $194 $931
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 126
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
JP MORGAN STRONG VARIABLE NEUBERGER
SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
---------------------- ----------- --------------- ---------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
------------- ------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital gain
distributions $ - $ 358 $ 31 $ - $ -
EXPENSES:
Mortality and expense risk charges 3 33 25 3 18
-----------------------------------------------------------------
Net investment (loss) income (3) 325 6 (3) (18)
-----------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) from
shares sold 73 196 (375) 1 981
Net unrealized appreciation
(depreciation) on investments 37 1,341 1,166 709 152
-----------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 110 1,537 791 710 1,133
-----------------------------------------------------------------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $107 $1,862 $ 797 $707 $1,115
=================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE
------------- ------ ---------- -------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital gain
distributions $ 15 $ 72 $ 7 $17
EXPENSES:
Mortality and expense risk charges 4 4 9 3
------------------------------------------
Net investment (loss) income 11 68 (2) 14
------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) from
shares sold 146 8 (6) 2
Net unrealized appreciation
(depreciation) on investments 137 (61) 320 63
------------------------------------------
Net realized and unrealized gain
(loss) on investments 283 (53) 314 65
------------------------------------------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $294 $ 15 $312 $79
==========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 127
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
ESTATE PROVIDER SEGMENT
(A Segment within a Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
------------------------------------------
HIGH INDEX
GROWTH INCOME 500 CONTRAFUND TOTAL
------ ------ -------- ---------- --------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital gain
distributions $ - $ - $ - $ - $ 8,023
EXPENSES:
Mortality and expense risk charges 86 6 2,041 53 4,310
-------------------------------------------------------
Net investment (loss) income (86) (6) (2,041) (53) 3,713
-------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) from shares
sold 348 (3) 1,449 422 4,396
Net unrealized appreciation on
investments 3,862 47 110,537 4,347 133,627
-------------------------------------------------------
Net realized and unrealized gain on
investments 4,210 44 111,986 4,769 138,023
-------------------------------------------------------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $4,124 $38 $109,945 $4,716 $141,736
=======================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 128
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET FUND
--------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL
----------- -------- ---------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 29,748 $ 1,444 $ 9,646 $ (757) $ 807 $ 18,680
--------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 4,315,273 80,466 13,505 159,494 17,149 37,137
Transfers between investment
sub-accounts and general account, net (3,747,946) 142,903 36,708 53,839 219,508 95,714
Surrenders and lapses - (1,098) - - - (3,628)
Cost of insurance and administrative
charges (122,753) (12,573) (1,590) (27,116) (1,724) (2,826)
Miscellaneous (37,178) 237 (807) (59) 483 (77)
--------------------------------------------------------------------------------------
Total capital transactions 407,396 209,935 47,816 186,158 235,416 126,320
--------------------------------------------------------------------------------------
Increase in net assets 437,144 211,379 57,462 185,401 236,223 145,000
Net assets, beginning of period 673,978 23,866 3,697 69,768 6,685 7,531
--------------------------------------------------------------------------------------
Net assets, end of period $ 1,111,122 $235,245 $61,159 $255,169 $242,908 $152,531
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET
STREET AMERICAN CENTURY VARIABLE
FUND PORTFOLIOS
-------- -------------------------
SENTINEL VP INCOME &
GROWTH VP VALUE GROWTH
-------- --------- -----------
<S> <C> <C> <C>
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 39,743 $(2,191) $ 20,858
---------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 20,062 14,292 26,508
Transfers between investment
sub-accounts and general account, net 93,011 23,532 150,485
Surrenders and lapses (1,270) - -
Cost of insurance and administrative
charges (3,882) (2,041) (4,690)
Miscellaneous 1,311 (129) 329
---------------------------------------
Total capital transactions 109,232 35,654 172,632
---------------------------------------
Increase in net assets 148,975 33,463 193,490
Net assets, beginning of period 15,947 4,512 15,629
---------------------------------------
Net assets, end of period $164,922 $ 37,975 $209,119
=======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 129
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
STRONG VARIABLE NEUBERGER
JP MORGAN SERIES TRUST II STRONG INSURANCE FUNDS BERMAN
------------------------- ----------- --------------- ---------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
------------- ------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 9,180 $ 57,498 $ 6,624 $ 56,071 $ 5,842
------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 2,310 22,254 15,093 9,023 27,365
Transfers between investment
sub-accounts and general account, net 56,870 105,766 31,077 181,199 104,262
Surrenders and lapses - - (4,126) - -
Cost of insurance and administrative
charges (770) (4,462) (2,266) (1,650) (4,299)
Miscellaneous 2 188 8 (228) 372
------------------------------------------------------------------------------
Total capital transactions 58,412 123,746 39,786 188,344 127,700
------------------------------------------------------------------------------
Increase in net assets 67,592 181,244 46,410 244,415 133,542
Net assets, beginning of period 887 14,524 14,788 8,616 5,830
------------------------------------------------------------------------------
Net assets, end of period $68,479 $195,768 $61,198 $253,031 $139,372
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE
------------- ------ ---------- -------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 24,361 $ 61 $14,689 $ (941)
-------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 5,901 1,862 14,441 12,363
Transfers between investment
sub-accounts and general account, net 107,834 9,501 63,712 17,658
Surrenders and lapses - - - -
Cost of insurance and administrative
charges (1,731) (849) (1,526) (641)
Miscellaneous (76) (87) (1,104) (24)
-------------------------------------------------------
Total capital transactions 111,928 10,427 75,523 29,356
-------------------------------------------------------
Increase in net assets 136,289 10,488 90,212 28,415
Net assets, beginning of period 1,981 1,638 2,313 2,099
-------------------------------------------------------
Net assets, end of period $138,270 $12,126 $92,525 $30,514
=======================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 130
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VIPF
---------------------------------------------------------
HIGH INDEX
GROWTH INCOME 500 CONTRAFUND TOTAL
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 69,869 $ 5,117 $ 351,624 $ 48,219 $ 766,192
-------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 138,594 19,771 436,403 76,009 5,465,275
Transfers between investment
sub-accounts and general account, net 186,776 184,642 1,637,161 245,788 -
Surrenders and lapses (1,316) - (20,562) - (32,000)
Cost of insurance and administrative charges (22,833) (4,215) (96,545) (12,214) (333,196)
Miscellaneous 6,099 (117) 8,737 2,071 (20,049)
-------------------------------------------------------------------------
Total capital transactions 307,320 200,081 1,965,194 311,654 5,080,030
-------------------------------------------------------------------------
Increase in net assets 377,189 205,198 2,316,818 359,873 5,846,222
Net assets, beginning of period 50,641 9,138 791,301 32,592 1,757,961
-------------------------------------------------------------------------
Net assets, end of period $427,830 $214,336 $3,108,119 $392,465 $7,604,183
=========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 131
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
-----------------------------------------------------------------------------------
MONEY AGGRESSIVE SENTINEL
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL GROWTH
---------- ------ ---------- ------- ------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 5,343 $ 1,222 $ 369 $ 6,426 $ 255 $ 209 $ 2,676
-----------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 1,133,620 6,174 1,707 18,935 381 2,729 4,088
Transfers between investment
sub-accounts and general account, net (403,626) 17,492 1,741 47,176 6,234 5,084 9,796
Cost of insurance and administrative charges (24,756) (1,023) (120) (2,836) (48) (503) (490)
Miscellaneous (36,603) 1 - 67 (137) 12 (123)
-----------------------------------------------------------------------------------
Total capital transactions 668,635 22,644 3,328 63,342 6,430 7,322 13,271
-----------------------------------------------------------------------------------
Increase in net assets 673,978 23,866 3,697 69,768 6,685 7,531 15,947
Net assets, beginning of period - - - - - - -
-----------------------------------------------------------------------------------
Net assets, end of period $ 673,978 $23,866 $3,697 $69,768 $6,685 $7,531 $15,947
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY VARIABLE
PORTFOLIOS
-------------------------
VP INCOME &
VP VALUE GROWTH
--------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 194 $ 931
-------------------------
CAPITAL TRANSACTIONS:
Participant deposits 574 438
Transfers between investment
sub-accounts and general account, net 4,060 14,524
Cost of insurance and administrative charges (321) (265)
Miscellaneous 5 1
-------------------------
Total capital transactions 4,318 14,698
-------------------------
Increase in net assets 4,512 15,629
Net assets, beginning of period - -
-------------------------
Net assets, end of period $4,512 $15,629
=========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 132
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
STRONG VARIABLE
INSURANCE NEUBERGER
JP MORGAN SERIES TRUST II STRONG FUNDS BERMAN
------------------------- ----------- --------------- ---------
INTERNATIONAL SMALL OPPORTUNITY MID CAP PARTNERS
OPPORTUNITIES COMPANY FUND II GROWTH PORTFOLIO
------------- ------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $107 $ 1,862 $ 797 $ 707 $1,115
--------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 853 3,172 81 - 3,877
Transfers between investment
sub-accounts and general account, net - 10,026 14,545 7,965 1,242
Cost of insurance and administrative charges (60) (520) (541) (56) (308)
Miscellaneous (13) (16) (94) - (96)
--------------------------------------------------------------------
Total capital transactions 780 12,662 13,991 7,909 4,715
--------------------------------------------------------------------
Increase in net assets 887 14,524 14,788 8,616 5,830
Net assets, beginning of period - - - - -
--------------------------------------------------------------------
Net assets, end of period $887 $14,524 $14,788 $8,616 $5,830
====================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
--------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE
------------- ------ ---------- -------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 294 $ 15 $ 312 $ 79
--------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 674 595 1,808 238
Transfers between investment
sub-accounts and general account, net 1,173 1,073 199 1,847
Cost of insurance and administrative charges (138) (118) (61) (82)
Miscellaneous (22) 73 55 17
--------------------------------------------------
Total capital transactions 1,687 1,623 2,001 2,020
--------------------------------------------------
Increase in net assets 1,981 1,638 2,313 2,099
Net assets, beginning of period - - - -
--------------------------------------------------
Net assets, end of period $1,981 $1,638 $2,313 $2,099
==================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 133
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
ESTATE PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM MAY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIPF
-----------------------------------------------
HIGH INDEX
GROWTH INCOME 500 CONTRAFUND TOTAL
------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 4,124 $ 38 $109,945 $ 4,716 $ 141,736
-------------------------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 26,141 281 488,002 5,906 1,700,274
Transfers between investment
sub-accounts and general account, net 23,385 8,922 204,068 23,074 -
Cost of insurance and administrative charges (2,967) (104) (9,489) (1,105) (45,911)
Miscellaneous (42) 1 (1,225) 1 (38,138)
-------------------------------------------------------------
Total capital transactions 46,517 9,100 681,356 27,876 1,616,225
-------------------------------------------------------------
Increase in net assets 50,641 9,138 791,301 32,592 1,757,961
Net assets, beginning of period - - - - -
-------------------------------------------------------------
Net assets, end of period $50,641 $9,138 $791,301 $32,592 $1,757,961
=============================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE> 134
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(ESTATE PROVIDER SEGMENT)
(A Segment within a Separate Account of National Life Insurance Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Variable Life Insurance Account (the Variable Account) began operations
on March 11, 1996 and is registered as a unit investment trust under the
Investment Company Act of 1940, as amended. The operations of the Variable
Account are part of National Life Insurance Company (National Life). The
Variable Account was established by National Life as a separate investment
account to invest the net premiums received from the sale of certain variable
life insurance products. Equity Services, Inc., an indirect wholly-owned
subsidiary of National Life, is the principal underwriter for the variable life
insurance policies issued by National Life. Sentinel Advisors Company, an
indirectly-owned subsidiary of National Life, provides investment advisory
services for certain Market Street Fund, Inc. mutual fund portfolios.
National Life maintains three segments within the Variable Account. The Varitrak
Segment within the Variable Account was established on March 11, 1996 and is
used exclusively for National Life's flexible premium variable life insurance
products known collectively as Varitrak. On May 1, 1998, National Life
established the Estate Provider Segment (the Segment) within the Variable
Account to be used exclusively for National Life's flexible premium variable
life insurance products known collectively as Estate Provider. On February
12,1999, National Life established the Benefit Provider Segment within the
Variable Account to be used exclusively for National Life's flexible premium
variable universal life policy known collectively as Benefit Provider.
The Segment invests the accumulated policyholder account values in shares of
mutual fund portfolios within Market Street Fund, Inc., American Century
Variable Portfolios, JP Morgan Series Trust II, Strong Variable Insurance Funds,
Strong Opportunity Fund II, Neuberger Berman Advisers Management Trust, Goldman
Sachs Variable Insurance Trust, and Variable Insurance Products Fund and
Variable Insurance Products Fund II (VIPF). Net premiums received by the Segment
are deposited in investment portfolios as designated by the policyholder, except
for initial net premiums on new policies which are first invested in the Market
Street Fund Money Market Portfolio. Policyholders may also direct the
allocations of their account value between the various investment portfolios
within the Segment and a declared interest account (within the General Account
of National Life) through participant transfers.
There are twenty-two sub-accounts within the Segment. Each sub-account, which
invests exclusively in the shares of the corresponding portfolio, comprises the
accumulated policyholder account values of the underlying variable life
insurance policies investing in the sub-account.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States (GAAP). The preparation of
financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
in the preparation of the Segment's financial statements.
INVESTMENTS
The mutual fund portfolios consist of the Market Street Fund Money Market,
Market Street Fund Growth, Market Street Fund Aggressive Growth, Market Street
Fund Managed, Market Street Fund Bond, Market Street Fund International, Market
Street Fund Sentinel Growth, American Century Variable Portfolios VP Value,
American Century Variable Portfolios VP Income & Growth, JP Morgan Series Trust
II International Opportunities, JP Morgan Series Trust II Small Company, Strong
Opportunity Fund II, Strong Variable
F-65
<PAGE> 135
Insurance Funds Mid Cap Growth, Neuberger Berman Advisers Management Trust
Partners Portfolio, Goldman Sachs Variable Insurance Trust International Equity,
Goldman Sachs Variable Insurance Trust Global Income, Goldman Sachs Variable
Insurance Trust CORE Small Cap Equity, Goldman Sachs Variable Insurance Trust
Mid Cap Value (formerly Goldman Sachs Variable Insurance Trust Mid Cap Equity),
VIPF Growth, VIPF High Income, VIPF Contrafund, and VIPF Index 500 (the
Portfolios). The assets of each portfolio are held separate from the assets of
the other portfolios and each has different investment objectives and policies.
Each portfolio operates separately and the gains or losses in one portfolio have
no effect on the investment performance of the other portfolios.
INVESTMENT VALUATION
--------------------
The investments in the Portfolios are valued at the closing net asset value per
share as determined by the portfolio at the end of each period. The change in
the difference between cost and market value is reflected as unrealized gain
(loss) in the Statement of Operations.
INVESTMENT TRANSACTIONS
-----------------------
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed) and dividend income (including capital gain
distributions) are recorded on the ex-dividend date. The cost of investments
sold is determined using the first-in first-out basis.
FEDERAL INCOME TAXES
--------------------
The operations of the Segment are part of, and taxed with, the total operations
of National Life. Under existing federal income tax law, investment income and
capital gains attributable to the Segment are not taxed.
NOTE 3 - CHARGES AND EXPENSES
National Life deducts a daily charge from the Segment based on an annual rate of
.9% of each sub-account's net asset value for its assumption of mortality and
expense risks. The mortality risk assumed is that the insureds under the
policies may die sooner than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the policies may exceed expected
levels.
Cost of insurance charges are deducted monthly from each policyholder's
accumulated account value for the insurance protection provided and are remitted
to National Life. These charges vary based on the net amount at risk, attained
age of the insured, and other factors. As partial compensation for
administrative services provided, National Life also deducts a monthly
administrative charge from each policyholder's accumulated account value.
Certain deferred administrative and sales charges are deducted from the
policyholder's accumulated account value if the underlying variable life
insurance policy is surrendered or lapsed prior to the end of the fifteenth
policy year.
F-66
<PAGE> 136
NOTE 4 - INVESTMENTS
The number of shares held and cost for each of the portfolios at December 31,
1999 are set forth below:
<TABLE>
<CAPTION>
Portfolio Shares Cost
--------- ------ ----
<S> <C> <C>
Market Street Fund
Money Market 1,111,122 $1,111,122
Growth 12,421 233,348
Aggressive Growth 2,784 51,784
Managed 15,198 257,456
Bond 22,959 241,072
International 9,145 138,695
Sentinel Growth 9,271 127,265
American Century Variable Portfolios
VP Value 6,382 40,348
VP Income & Growth 26,140 188,248
JP Morgan Series Trust II
International Opportunities 4,951 62,426
Small Company Fund 11,702 142,609
Strong Opportunity Fund II 2,355 56,352
Strong Variable Insurance Funds
Mid Cap Growth 8,332 201,436
Neuberger Berman Advisers Management Trust
Partners Portfolio 7,096 136,285
Goldman Sachs Variable Insurance Trust
International Equity 9,556 122,918
Global Income 1,234 12,447
CORE Small Cap Equity 8,729 78,135
Mid Cap Value 3,624 31,703
VIPF
Growth 7,789 367,662
High Income 18,951 211,354
Index 500 18,566 2,741,465
Contrafund 13,464 346,769
----------
Total $6,900,899
==========
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-67
<PAGE> 137
NOTE 5 - PURCHASES AND SALES OF PORTFOLIO SHARES
Purchases and proceeds from sales of shares in the portfolios for the period
ended December 31, 1999 aggregated the following:
<TABLE>
<CAPTION>
Portfolio Purchases Proceeds
--------- --------- --------
<S> <C> <C>
Market Street Fund
Money Market 6,917,944 6,480,800
Growth 251,559 42,233
Aggressive Growth 89,019 41,033
Managed 312,808 124,237
Bond 247,455 12,728
International 177,863 51,475
Sentinel Growth 151,559 42,383
American Century Variable Portfolio
VP Value Fund 43,360 7,271
VP Income & Growth Fund 185,742 13,806
JP Morgan Series Trust II
International Opportunities 77,775 17,338
Small Company 144,835 17,687
Strong Opportunity Fund II 48,418 7,105
Strong Variable Insurance Funds
Mid Cap Growth 247,548 59,620
Neuberger Berman Advisers Management Trust
Partners Portfolio 149,731 20,134
Goldman Sachs Variable Insurance Trust
International Equity 148,844 28,554
Global Income Fund 14,203 3,373
CORE Small Cap Equity 112,737 37,427
Mid Cap Equity Value 32,916 3,491
VIPF
Growth 400,556 85,035
High Income 240,729 37,774
Index 500 2,432,677 465,193
Contrafund 378,127 65,757
</TABLE>
NOTE 6 - LOANS
Policyholders may obtain loans after the first policy year as outlined in the
variable life insurance policy. At the time a loan is granted, accumulated value
equal to the amount of the loan is designated as collateral and transferred from
the Segment to the General Account of National Life. Interest is credited by
National Life at predetermined rates on collateral held in the General Account.
This interest is periodically transferred to the Segment.
NOTE 7 - DISTRIBUTION OF NET INCOME
The Segment does not expect to declare dividends to policyholders from
accumulated net income. The accumulated net income will be distributed to
policyholders as withdrawals (in the form of death benefits, surrenders or
policy loans) in excess of the policyholders' net contributions to the Segment.
F-68
<PAGE> 138
NOTE 8- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (IRC), a
variable universal life contract, other than a contract issued in connection
with certain types of employee benefit plans, will not be treated as a variable
universal life contract for federal income tax purposes for any period for which
the investments of the segregated asset account on which the contract is based
are not adequately diversified. The IRC provides that the adequately diversified
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of the Treasury.
National Life believes that the Segment satisfies the current requirements of
the regulations, and it intends that the Segment will continue to meet such
requirements.
F-69
