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[PHOTO] SENTINEL BENEFIT PROVIDER
A Variable Universal Life Insurance Policy
Intended Primarily
for the Corporate Market
PROSPECTUS
Dated May 1, 2000, as amended December 1, 2000
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National Life Insurance Company - Home Office:
National Life Drive, Montpelier, Vermont 05604 - 1-800-278-3413
National Variable Life Insurance Account
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This Prospectus describes the Sentinel Benefit Provider Policy, a flexible
premium variable universal life insurance policy offered by National Life
Insurance Company. The policy has an insurance component and an investment
component. Owners of policies can make premium payments at various times
and in various amounts. You can also allocate premiums among a number of
funds with different investment objectives and you can increase or
decrease the death benefit payable under your policy. You may also choose
between two death benefit compliance tests at the time your policy is
issued.
We make certain deductions from premium payments. Then these premium
payments go to the National Variable Life Insurance Account, a separate
account of National Life. This separate account currently has thirty
subaccounts, each of which buys shares of specific fund portfolios. The
available funds are shown below.
<TABLE>
<S> <C> <C> <C>
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SENTINEL VARIABLE PRODUCTS ALGER AMERICAN FUND AMERICAN CENTURY VARIABLE DEUTSCHE ASSET
TRUST PORTFOLIOS, INC. MANAGEMENT FUNDS
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COMMON STOCK FUND GROWTH PORTFOLIO VP INCOME & GROWTH PORTFOLIO EAFE(R) EQUITY INDEX FUND
MID CAP GROWTH FUND LEVERAGED ALLCAP PORTFOLIO VP VALUE PORTFOLIO EQUITY 500 INDEX FUND
SMALL COMPANY FUND SMALL CAPITALIZATION PORTFOLIO SMALL CAP INDEX FUND
GROWTH INDEX FUND
MONEY MARKET FUND
Managed by National Life
Investment Management Company, Managed by Fred Alger Managed by American Century Managed by Bankers Trust
Inc. Management, Inc Investment Management, Inc. Company
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DREYFUS SOCIALLY RESPONSIBLE FIDELITY VARIABLE INSURANCE FIDELITY VARIABLE INSURANCE INVESCO VARIABLE
GROWTH FUND, INC. PRODUCTS FUND PRODUCTS FUND II INSURANCE FUNDS, INC.
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SOCIALLY RESPONSIBLE GROWTH OVERSEAS PORTFOLIO INVESTMENT GRADE BOND VIF - DYNAMICS FUND
FUND, INC. PORTFOLIO VIF - HEALTH SCIENCES
FUND
VIF - TECHNOLOGY FUND
Managed by The Dreyfus Managed by INVESCO Funds
Corporation Managed by Fidelity Investments Managed by Fidelity Investments Group, Inc.
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J.P. MORGAN SERIES TRUST II MARKET STREET FUND, INC. MORGAN STANLEY DEAN WITTER NEUBERGER BERMAN
UNIVERSAL INSTITUTIONAL FUNDS ADVISERS MANAGEMENT
INC. TRUST
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INTERNATIONAL OPPORTUNITIES BOND PORTFOLIO EMERGING MARKETS EQUITY PORTFOLIO* PARTNERS PORTFOLIO
PORTFOLIO MANAGED PORTFOLIO FIXED INCOME PORTFOLIO**
SMALL COMPANY PORTFOLIO HIGH YIELD PORTFOLIO**
U. S. REAL ESTATE PORTFOLIO*
*Managed by Morgan Stanley Asset
Management
Managed by J. P. Morgan Managed by Sentinel Advisors **Managed by Miller Anderson & Managed by Neuberger
Investment Management, Inc. Company Sherrerd, LLP Berman Management, Inc.
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STRONG VARIABLE INSURANCE STRONG OPPORTUNITY FUND II.
FUNDS, INC.
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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 in each subaccount will depend upon the investment results of
the funds you select. You bear the entire investment risk for all amounts
allocated to the various funds; there is no guaranteed minimum value for
any of the funds, and the value of your policy may be more or less than
premiums paid. You must receive, with this prospectus, current
prospectuses for all of the fund choices. They describe the investment
objectives and the risks of the funds.
The value of your policy will also reflects our charges which include cost
of insurance charges, the policy administration charge, the mortality and
expense risk charge, the separate account administration charge, and
certain other charges. During the first five years your policy will remain
in force if specified premiums are paid on time, or if the policy has
enough value to pay the monthly charges as they become due. After the
fifth year, the Policy will remain in force only so long as it has enough
value to pay the monthly charges as they become due.
We recommend that you read this prospectus carefully. It may also be
useful to keep it to refer to later. It may not be advantageous to
purchase this policy as a replacement for another type of life insurance
or as a means to obtain additional insurance protection if you already own
another variable universal life insurance policy.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
POLICY OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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Summary Description of the Policy..............................................................1
The Policy Offered....................................................................1
The Separate Account..................................................................1
Availability of Policy................................................................2
The Death Benefit.....................................................................2
Flexibility to Adjust Amount of Death Benefit.........................................2
Account Value.........................................................................3
Allocation of Net Premiums............................................................3
Transfers.............................................................................3
Free-Look Privilege...................................................................3
Charges Assessed in Connection with the Policy........................................4
Summary of Policy Expenses...................................................4
Premium Loads................................................................6
Monthly Deductions...........................................................7
Daily Charges Against the Separate Account...................................7
Transfer Charge..............................................................7
Other Charges................................................................7
Allocation of Charges to the Subaccounts.....................................7
Policy Lapse and Reinstatement........................................................7
Loan Privilege........................................................................8
Withdrawal of Net Account Value.......................................................8
Surrender of the Policy...............................................................9
Available Automated Fund Management Features..........................................9
Tax Treatment.........................................................................9
Illustrations of Death Benefits, Account Value and Net Cash Surrender Value...........9
National Life Insurance Company, The Separate Account, and The Funds...........................10
National Life Insurance Company.......................................................10
The Separate Account..................................................................10
Sentinel Variable Products Trust......................................................11
Common Stock Fund............................................................11
Mid Cap Growth Fund..........................................................11
Small Company Fund...........................................................11
Growth Index Fund............................................................11
Money Market Fund............................................................11
Alger American Fund...................................................................11
Alger American Growth Portfolio..............................................12
Alger American Leveraged AllCap Portfolio....................................12
Alger American Small Capitalization Portfolio................................12
American Century Variable Portfolios, Inc.............................................12
VP Income & Growth Portfolio.................................................12
VP Value Portfolio...........................................................12
Deutsche Asset Management VIT Funds...................................................13
EAFE(R) Equity Index Fund....................................................13
Equity 500 Index Fund........................................................13
Small Cap Index Fun..........................................................13
Dreyfus Socially Responsible Growth Fund, Inc.........................................13
Fidelity Variable Insurance Products Fund and Fidelity Variable Insurance
Products Fund II...................................................................14
VIP I Overseas Portfolio.....................................................14
VIP II Investment Grade Bond Portfolio.......................................14
INVESCO Variable Insurance Funds, Inc.................................................14
VIF-Dynamics Fund............................................................15
VIF-Health Sciences Fund.....................................................15
VIF-Technology Fund..........................................................15
</TABLE>
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<TABLE>
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J. P. Morgan Series Trust II..........................................................15
International Opportunities Portfolio........................................15
Small Company Portfolio......................................................16
Market Street Fund, Inc...............................................................16
Bond Portfolio...............................................................16
Managed Portfolio............................................................16
Morgan Stanley Dean Witter Universal Institutional Funds..............................16
Emerging Markets Equity Portfolio............................................17
Fixed Income Portfolio.......................................................17
High Yield Portfolio.........................................................17
U. S. Real Estate Portfolio..................................................17
Neuberger Berman Advisers Management Trust............................................17
Partners Portfolio...........................................................17
Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund, Inc................18
Mid Cap Growth Fund II ......................................................18
Strong Opportunity Fund II...................................................18
Resolving Material Conflicts..........................................................18
Other Matters Relating to the Funds...................................................19
Detailed Description of Policy Provisions.............................................19
Death Benefit.........................................................................19
General......................................................................19
Federal Income Tax Law Compliance Test Options...............................19
Death Benefit Options........................................................20
Option A.....................................................................20
Option B.....................................................................21
Change in Death Benefit Option...............................................21
How the Death Benefit May Vary...............................................22
Ability to Adjust Face Amount.........................................................22
Increase.....................................................................22
Decrease.....................................................................22
How the Duration of the Policy May Vary...............................................23
Account Value.........................................................................23
Determination of Number of Units for the Separate Account....................23
Determination of Unit Value..................................................23
Net Investment Factor........................................................23
Calculation of Account Value.................................................23
Payment and Allocation of Premiums....................................................24
Issuance of a Policy.........................................................24
Amount and Timing of Premiums................................................24
Premium Limitations..........................................................25
Allocation of Net Premiums...................................................25
Transfers....................................................................25
Policy Lapse.................................................................26
Reinstatement................................................................26
Charges and Deductions.........................................................................26
Premium Loads.........................................................................27
Monthly Deductions....................................................................27
Cost of Insurance Charge.....................................................27
Cost of Insurance Rate.......................................................28
Rate Class...................................................................28
Cost of Term Insurance.......................................................28
Policy Administration Charge.................................................29
Underwriting Charge..........................................................29
Mortality and Expense Risk Charge.....................................................29
Separate Account Administration Charge................................................29
Transfer Charge.......................................................................29
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Other Charges.........................................................................29
Possible Charge for National Life's Taxes.............................................30
Policy Rights and Privileges...................................................................30
Loan Privileges.......................................................................30
General......................................................................30
Interest Rate Charged........................................................30
Allocation of Loans and Collateral...........................................30
Interest Credited to Amounts Held as Collateral..............................30
Effect of Policy Loan........................................................30
Loan Repayments..............................................................31
Lapse With Loans Outstanding.................................................31
Tax Considerations...........................................................31
Surrender Privilege...................................................................31
Withdrawal of Net Account Value.......................................................31
Option A.....................................................................31
Option B.....................................................................32
Free-Look Privilege...................................................................33
Transfer Right for Change in Investment Policy........................................33
Available Automated Fund Management Features..........................................33
Other Policy Provisions........................................................................34
Indefinite Policy Duration...................................................34
Payment of Policy Benefits...................................................35
The Policy...................................................................35
Split Dollar Arrangements....................................................35
Assignments..................................................................36
Misstatement of Age and Sex..................................................36
Suicide......................................................................36
Incontestability.............................................................36
Dividends....................................................................36
Correspondence...............................................................36
Settlement Options...........................................................36
Payment of Interest Only.....................................................36
Payments for a Stated Time...................................................36
Payments for Life............................................................37
Payments of a Stated Amount..................................................37
Life Annuity.................................................................37
Joint and Two Thirds Annuity.................................................37
50% Survivor Annuity.........................................................37
Supplemental Term Insurance Rider..............................................................37
Federal Income Tax Considerations..............................................................37
Introduction..........................................................................37
Tax Status of the Policy..............................................................38
Tax Treatment of Policy Benefits......................................................38
In General...................................................................38
Modified Endowment Contracts.................................................39
Distributions Other Than Death Benefits from Modified Endowment Contracts....39
Distributions Other Than Death Benefits from Policies that are not
Modified Endowment Contracts............................................39
Investment in the Policy.....................................................39
Policy Loan Interest.........................................................39
Multiple Policies............................................................40
Business Uses of the Policy..................................................40
Continuation Beyond Age 100..................................................40
Special Rules for Employee Benefit Plans..............................................40
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<TABLE>
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Possible Tax Law Changes..............................................................40
Possible Charges for National Life's Taxes............................................40
Legal Developments Regarding Unisex Actuarial Tables...........................................41
Voting Rights..................................................................................41
Changes in Applicable Law, Funding and Otherwise...............................................42
Officers and Directors of National Life........................................................42
Distribution of Policies.......................................................................44
Policy Reports.................................................................................45
Third Party Administrator......................................................................45
State Regulation.............................................................................. 45
Experts........................................................................................45
Legal Matters..................................................................................46
Financial Statements...........................................................................46
Glossary.......................................................................................47
Appendix A-Illustration of Death Benefits, Account Values and
Net Cash Surrender Values.............................................................A-1
Financial Statements...........................................................................F-1
</TABLE>
THE POLICY MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT OFFER
THE POLICY IN ANY STATE IN WHICH WE MAY NOT LEGALLY OFFER THE POLICY. YOU
SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. WE DO NOT CLAIM THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
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<PAGE> 6
SUMMARY DESCRIPTION OF THE POLICY
You should read this summary of the policy provisions together with
the detailed information appearing later in this Prospectus. Unless otherwise
noted, this Prospectus assumes the Insured is alive. The precise meanings of
the few capitalized terms used in this summary can be found in the Glossary,
on pages 47 to 50.
THE POLICY OFFERED
The Sentinel Benefit Provider flexible premium variable universal
life insurance policy offered by this Prospectus is issued by National Life.
Its primary market is the corporate market. The policy allows you, subject to
certain limitations, to make premium payments in any amount and whenever you
like. As long as the policy remains in force, it will provide for:
(1) Life insurance coverage on the named insured person;
(2) A cash surrender value; and
(3) Surrender and withdrawal rights and policy loan privileges; and
(4) A variety of additional insurance benefits.
Life insurance is a long-term investment. You should consider your
need for insurance coverage and the policy's investment potential on a
long-term basis.
There is no fixed schedule for premium payments. You may, within
limits, increase or decrease the Face Amount and, if you have selected the
Guideline Premium Test to determine compliance with federal income tax law
(see "Federal Income Tax Law Compliance Test Options", page 19), you may
change the Death Benefit Option. The policy's value will fluctuate based on
the investment results of the chosen fund portfolios, as well as other
factors. The death benefit may also rise and fall, but not below the face
amount as long as the policy remains in force.
The failure to pay any particular amounts of premiums will not itself
cause the policy to lapse. Conversely, the payment of premiums in any amount
or frequency will not necessarily guarantee that the policy will remain in
force. In general, the Policy will lapse if it does not have enough value to
pay the monthly charges as they become due. During the first five years, the
policy will not lapse even if its value is not enough to pay the monthly
charges as they become due, if at least specified amounts of premiums have
been paid (these amounts are defined in the Glossary as the Cumulative Minimum
Monthly Premium).
THE SEPARATE ACCOUNT
The National Variable Life Insurance Account is divided into
subaccounts, thirty of which are available under this policy. Each of these
subaccounts purchases shares of a designated corresponding Portfolio that is
part of one of the following Funds: the Sentinel Variable Products Trust, the
Alger American Fund, the American Century Variable Portfolios, Inc., the
Deutsche Asset Management VIF Funds, the Dreyfus Socially Responsible Growth
Fund, the Fidelity Variable Insurance Products Fund I and the Fidelity
Variable Insurance Products Fund II, the INVESCO Variable Insurance Funds,
Inc., the J.P. Morgan Series Trust II, the Market Street Fund, the Morgan
Stanley Dean Witter Universal Institutional Funds, Inc., the Neuberger Berman
Advisers Management Trust, and the Strong Variable Insurance Funds, Inc., and
Strong
1
<PAGE> 7
Opportunity Fund II There is no assurance that the investment objectives of a
particular Portfolio will be met. You bear the entire investment risk on the
value of your policy.
AVAILABILITY OF POLICY
This Policy can be issued for Insureds with Issue Ages of at least
20. The insured person must be 85 years old or younger for policies
underwritten on the basis of full medical underwriting (65 or younger for
guaranteed issue and simplified issue). The Minimum Face Amount per Policy is
$5000. The Minimum Initial Premium per set of Policies purchased at the same
time and associated with a corporation or its affiliates, a trust or a
partnership, or for a Policy sold to an individual, is $50,000. The Policies
are available on a full medical underwriting basis, a simplified issue basis,
or a guaranteed issue basis. Before issuing a Policy on a full medical
underwriting basis, we will require that the person to be insured meets
certain underwriting standards satisfactory to us. The rate classes available
are Male non-smoker, Female non-smoker, Unisex non-smoker, Male smoker, Female
smoker, Unisex smoker, Male unismoker, female unismoker, and Unisex unismoker.
For full medical underwriting cases, preferred and substandard rate classes
may also apply. (See "Issuance of a Policy," Page 24.) In simplified issue
cases, the application will ask 3 medical questions about the person to be
insured.
THE DEATH BENEFIT
As long as the Policy remains in force, we will pay the death benefit to
the beneficiary when we receive proof of the insured person's death. When you
purchase the policy, you must choose between two different death benefit
compliance tests used to qualify the policy as life insurance under the
Internal Revenue Code: the cash value accumulation test or the guideline
premium test. Once chosen, the death benefit compliance test that applies to
the Policy cannot be changed. If the Guideline Premium Test is chosen, then
two death benefit options are available. Option A provides for the greater of
(a) the policy's face amount and (b) the Death Benefit Factor times the Cash
Surrender Value. Option B provides for the greater of (a) the policy's face
amount plus the Account Value and (b) the Death Benefit Factor times the Cash
Surrender Value. (See "Death Benefit Options," Page 20). If the cash value
accumulation test is chosen, only Option A is available. The total death
benefit will be the amount provided for under Option A or Option B, plus any
dividends payable and any coverage provided by the optional term rider, and
minus any outstanding policy loans and accrued interest, and any unpaid
monthly charges.
FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
You will have the ability to increase or decrease the face amount of
the policy. If you have elected the guideline premium test to qualify the
policy as life insurance for federal income tax purposes, you will also be
able to change the death benefit option from Option A to Option B, or from
Option B to Option A. (See "Change in Death Benefit Option," Page 21, and
"Ability to Adjust Face Amount," Page 22.)
Any change in death benefit option or in the face amount may affect
the charges under the policy. Any increase in the face amount will result in
an increase in monthly charges, since the policy will be providing more
insurance coverage. A decrease in face amount may also change the monthly
deductions. (See "Cost of Insurance Charge," Page 27)
If you have elected the guideline premium test and you request a
decrease in face amount that would result in total premiums exceeding the
maximum premium limitations applicable under the Internal Revenue Code for
life insurance, we will not allow the decrease.
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ACCOUNT VALUE
The Account Value is the total amount of value held in your policy at
any time. It equals the sum of the amounts held in the subaccounts of the
separate account, plus amounts held in the Loan Account. (See "Calculation of
Account Value," Page 23.)
The Account Value in the separate account will reflect the investment
performance of the chosen funds, any premiums paid, any transfers, any
withdrawals, any loans, any loan repayments, any loan interest charged and any
charges assessed on the policy. You bear the entire investment risk for
amounts in the separate account. There is no guaranteed minimum for the
portion of the Account Value in the separate account. Account Value in the
separate account may be more or less than the premiums allocated to the
separate account.
The Account Value in the Loan Account will reflect any amounts
transferred from the separate account as collateral for policy loans, plus
interest at 4%. The Loan Account will be reduced by loan repayments. (See
"Loan Privileges," Page 30.)
The Account Value affects the death benefit and the level of cost of
insurance charges.
ALLOCATION OF NET PREMIUMS
Net premiums (that is, premiums you pay minus the deductions we make
from premium payments) will generally go to the subaccounts of the separate
account in accordance with the percentages you have specified, either in the
application or as subsequently changed. Account Value cannot be allocated to
more than ten subaccounts at any one time.
Any net premiums received before the end of the "free look" period
will go initially to the Money Market Subaccount. For this purpose we will
assume that the free look period will end on the earliest of (a) the end of
the tenth day following receipt of the Policy by you, if we receive at our
Home Office a signed delivery receipt for the Policy on or before that date;
(b) the end of the day on which we receive at the Home Office a signed
delivery receipt for the Policy, if on or between the eleventh and nineteenth
days after the date the Policy is issued; or (c) 20 days after the date the
Policy is issued. On the first Valuation Date on or after the earliest of the
dates forth above, the amount in the Money Market Subaccount (including
investment experience) will go to each of the chosen subaccounts based on your
chosen percentages. (See "Allocation of Net Premiums," Page 25.)
TRANSFERS
You may transfer the amounts in the subaccounts of the separate
account among the subaccounts on any business day. Transfer requests must be
in writing and in a form acceptable to us. Currently you are allowed an
unlimited number of transfers without charge. However, we may in the future
impose a maximum charge of $25 on each transfer in excess of twelve transfers
in any one year. (See "Transfers," Page 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 paid on
your policy. This free-look period ends on the later of the end of the tenth
day after you receive the policy, or any longer period provided by state law.
To cancel the policy, you must return the policy to National Life or to an
agent of National Life within this period with a written request for
cancellation. (See "Free-Look Privilege," Page 33.)
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CHARGES ASSESSED IN CONNECTION WITH THE POLICY
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Summary of Policy Expenses.
Transaction Expenses
Premium Loads (as a percentage of Year 1: 13% of premiums
premiums paid)...............................paid up to the Target
Premium, 0.5% of premiums
paid in excess of Target
Premium;
Years 2 to 7: 15% of
premiums paid up to Target
Premium, 2.5% of premiums
paid in excess of Target
Premium; and
Years 8 and thereafter: 5%
of premiums paid up to
Target Premium, 2.5% of
premiums paid in excess
of Target Premium;
in each case plus an
amount equal to the
state and local premium
taxes actually assessed by
the jurisdiction in which
the insured person resides.
Transfer Charge..............................No current charge(1)
Daily Charges
Mortality and Expense Risk Charge............For years 1 - 7: 0.22% of
Account Value in the
separate account
For years 8 -10: 0.12% of
Account Value in the
separate account
For years 11-20: 0.02% of
Account Value in the
separate account
For year 21 and
thereafter: 0.00% of
Account Value in the
separate account(2)
Separate Account Administration
Charge.......................................0.10% of Account Value in
the separate account per year
Monthly Deductions
Cost of Insurance Charge.....................Varies by age, sex, rate
class-See below
Policy Administration Charge.................$66 per year(3)
Underwriting Charge..........................$20 in the first year,
$45 in each of years 2 -
5; only applies to
policies issued on the
basis of full medical
underwriting.
Supplemental Term Insurance Rider Charge..........Varies by age, sex, rate
class-See below
</TABLE>
(1) We reserve the right to impose in the future a transfer charge of up to
$25 for each transfer in excess of twelve transfers in any year.
(2) We reserve the right to increase the Mortality and Expense Risk Charge to
rates up to 0.60% annually of Account Value in the separate account at any
time.
(3) We reserve the right to increase the Policy Administration Charge up to an
amount equal to $96 per year.
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Annual Charges of Underlying Funds (for the year ended
December 31, 1999 and after expense reimbursement)(1)
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<CAPTION>
Management Other Total
Fee, after Expenses, Expenses,
expense after expense after expense
reimbursement reimbursement reimbursement
<S> <C> <C> <C>
Sentinel Variable Products Trust
Common Stock Fund 0.00% 0.48% 0.48%
Mid Cap Growth Fund 0.19% 0.52% 0.71%
Small Company Fund 0.05% 0.52% 0.57%
Growth Index Fund 0.04% 0.56% 0.60%
Money Market Fund 0.00% 0.40% 0.40%
Alger:
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Leveraged AllCap Portfolio 0.85% 0.08% 0.93%
Alger American Small Capitalization 0.85% 0.05% 0.90%
American Century Variable Portfolios, Inc.
VP Value Portfolio 1.00% 0.00% 1.00%
VP Income & Growth Portfolio 0.70% 0.00% 0.70%
Deutsche Asset Management VIT Funds
EAFE(R) Equity Index Fund 0.45% 0.20% 0.65%
Equity 500 Index Fund 0.20% 0.10% 0.30%
Small Cap Index Fund 0.35% 0.10% 0.45%
Dreyfus Socially Responsible Growth Fund, Inc.
Socially Responsible Growth Fund, Inc. 0.75% 0.04% 0.79%
Fidelity: Variable Insurance Products Fund I
Overseas Portfolio 0.73% 0.14% 0.87%
Fidelity: Variable Insurance Products Fund II
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%
Morgan Stanley Dean Witter Universal
Institutional Funds, Inc.
Emerging Markets Equity Portfolio 0.42% 1.37% 1.79%
Fixed Income Portfolio 0.14% 0.56% 0.70%
High Yield Portfolio 0.19% 0.61% 0.80%
U. S. Real Estate Portfolio 0.00% 1.10% 1.10%
</TABLE>
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<TABLE>
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Neuberger Berman Advisers Management Trust
Partners Portfolio 0.80% 0.07% 0.87%
Strong Variable Insurance Funds, Inc.
Mid Cap Growth Fund II 1.00% 0.10% 1.10%
Strong Opportunity Fund II 1.00% 0.10% 1.10%
</TABLE>
(1) The fund expenses shown above are assessed at the underlying fund
level and are not direct charges against the subaccounts. These underlying
fund expenses are taken into consideration in computing each underlying fund's
net asset value, which is the share price used to calculate the unit values of
the subaccounts. The management fees and other expenses are more fully
described in the prospectuses for each individual underlying fund. The
information relating to the underlying fund expenses was provided by the
underlying funds. We did not independently verify it. In the absence of any
voluntary fee waivers or expense reimbursements, the management fees, other
expenses, and total expenses of the funds listed below would have been as
follows:
<TABLE>
<CAPTION>
Management Fee Other Expenses Total Expenses
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<S> <C> <C> <C>
Sentinel Variable Products Trust:
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Common Stock Fund 0.47% 0.52% 0.99%
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Mid Cap Growth Fund 0.49% 0.52% 1.01%
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Small Company Fund 0.50% 0.52% 1.02%
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Growth Index Portfolio 0.30% 0.56% 0.86%
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Money Market Fund 0.25% 0.52% 0.77%
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Deutsche Asset Management VIT Funds
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EAFE(R) Equity Index Fund 0.45% 0.70% 1.15%
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Equity 500 Index Fund 0.20% 0.23% 0.43%
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Small Cap Index Fund 0.35% 0.83% 1.18%
--------------------------------------------------------------------------------------------------------------------
INVESCO Variable Insurance Funds, Inc.
--------------------------------------------------------------------------------------------------------------------
VIF Dynamics Fund 0.75% 1.53% 2.28%
--------------------------------------------------------------------------------------------------------------------
VIF Technology Fund 0.75% 0.78% 1.53%
--------------------------------------------------------------------------------------------------------------------
VIF Health Sciences Fund 0.75% 2.11% 2.86%
--------------------------------------------------------------------------------------------------------------------
J. P . Morgan International Opportunities Port. 0.60% 1.38% 1.98%
--------------------------------------------------------------------------------------------------------------------
J. P. Morgan Small Company Portfolio 0.60% 1.97% 2.57%
--------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Universal Institutional
Funds, Inc.
--------------------------------------------------------------------------------------------------------------------
Emerging Markets Equity Portfolio 1.25% 1.37% 2.62%
--------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 0.40% 0.56% 0.96%
--------------------------------------------------------------------------------------------------------------------
High Yield Portfolio 0.50% 0.61% 1.11%
--------------------------------------------------------------------------------------------------------------------
U.S. Real Estate Portfolio 0.80% 1.10% 1.90%
--------------------------------------------------------------------------------------------------------------------
Strong Mid Cap Growth Fund II 1.00% 0.20% 1.20%
--------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II 1.00% 0.20% 1.20%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
We anticipate that these reimbursement arrangements will continue,
but there are no legal obligations to continue these arrangements for any
particular period of time. If they are terminated, the affected portfolios'
expenses may increase.
Premium Loads. We will deduct a Premium Load from each premium
payment. The Premium Load consists of the Distribution Charge and the Premium
Tax Charge. The Distribution Charge is equal to, in the first year, 13% of the
premiums paid during the year up to the Target Premium, and 0.5% of premiums
paid in excess of the Target Premium. In the second through seventh years, the
Distribution Charge is equal to 15% of premiums paid during a year up to the
Target Premium, and 2.5% of premiums paid in excess of the Target Premium in a
year. After the seventh year, the Distribution Charge will be 5% of premiums
paid during a year up to the Target Premium, and 2.5% of premiums paid in
excess of the Target Premium in a year.
6
<PAGE> 12
The Premium Tax Charge will vary from state to state, and will be equal
to the actual amount of premium tax or retaliatory tax assessed on sales in
the jurisdiction in which the insured person resides. (See "Premium Loads,"
Page 27.)
Monthly Deductions. Starting on the day the policy is issued and in
each following month, we will assess the Cost of Insurance Charge, the Policy
Administration Charge, and, for policies issued on the basis of full medical
underwriting, the Underwriting Charge. Any applicable charge for the Term
Rider will also be assessed monthly. The monthly Cost of Insurance Charge will
be determined by multiplying the Net Amount at Risk by the applicable cost of
insurance rate(s). See "Cost of Insurance Charge," Page 27. The Policy
Administration Charge is $5.50 per month, This Charge may be changed but is
guaranteed never to be greater than $8.00 per month. (See "Policy
Administration Charge," Page 29.)
If a policy is issued with full medical underwriting. we will assess an
Underwriting Charge each month in the first five years. The Underwriting
Charge totals $20 in Policy Year 1, and $45 in each of the next four Policy
Years. Policies issued on the basis of guaranteed issue or simplified issue
will not be assessed an Underwriting Charge. (See "Underwriting Charge", Page
29.)
Daily Charges Against the Separate Account. We will assess a daily
charge for our assumption of certain mortality and expense risks we accept on
the Policy. The current annual rates are set forth below.
For years 1 - 7: 0.22% of Account Value in the separate account
For years 8 -10: 0.12% of Account Value in the separate account
For years 11-20: 0.02% of Account Value in the separate account;
and
For year 21 and thereafter: 0.00% of Account Value in the
separate account.
We may increase the above rates for the Mortality and Expense Risk Charge, but
the charge is guaranteed not to exceed 0.60% of Account Value in the separate
account at all times. (See "Mortality and Expense Risk Charge," Page 29.)
We also assess a daily separate account administration charge to cover
the expense of separate account administration. The annual rate of this charge
is 0.10% of Account Value in the separate account. (See "Separate Account
Administration Charge", page 29.)
Transfer Charge. Currently you are allowed an unlimited number of
transfers without charge. We have no current intent to impose a transfer
charge in the foreseeable future; however, we reserve the right to impose in
the future a charge of up to $25 for each transfer in excess of twelve
transfers in any year. (See "Transfer Charge," Page 29.)
Other Charges. The subaccounts of the separate account purchase shares
of the funds at net asset value, which reflects management fees and expenses
deducted from the assets of the funds.
Allocation of Charges to the Subaccounts. All of the above charges will
be allocated to the subaccounts of the separate account based on the
proportion that each subaccount's value bears to the total Account Value in
the separate account.
POLICY LAPSE AND REINSTATEMENT
During the first five Policy Years, a policy will not lapse if premiums
in a specified amount (defined in the Glossary as the Cumulative Minimum
Monthly Premium) have been paid, no matter what happens to the value of the
policy. If, however, the specified premiums have not been paid or the policy
is more than five years old, and the policy's value is not enough to pay the
7
<PAGE> 13
monthly charges as they become due, the policy will lapse after a 61-day grace
period unless a sufficient premium is paid.
You may reinstate a lapsed policy at any time within five years after
the beginning of the grace period, if you meet certain conditions, including
providing evidence of insurability satisfactory to us and the payment of a
sufficient premium. (See "Reinstatement," Page 26.)
LOAN PRIVILEGE
You may borrow against the policy. The maximum amount of all loans is
the Net Account Value less three times the next monthly deduction, and less
the loan interest due until the next policy anniversary. Policy loans and
repayments may be taken or made on any business day.
Policy loans will bear interest at the following fixed rates:
For years 1 - 7: 4.60%
For years 8 - 10: 4.50%
For years 11 - 20: 4.40%
For year 21 and thereafter: 4.35%.
Interest is payable at the end of each policy year. If interest is not
paid when due, it will be added to the outstanding loan balance. You may repay
policy loans at any time and in any amount. When the death benefit becomes
payable or the policy is surrendered we will deduct policy loans and accrued
interest from the proceeds otherwise payable.
When you take a policy loan, we will hold Account Value in the Loan
Account as collateral for the Policy loan. We will take Account Value from the
subaccounts of the separate account in proportion to the values in the
subaccounts. Account Value held in the Loan Account as collateral will earn
interest at an effective annual rate of 4%. (See "Loan Privileges," Page 30.)
Loans may cause a policy to lapse, depending upon the investment
performance of the Account Value and the amount of the loan. If a policy is
not a Modified Endowment Contract, lapse of a policy with loans outstanding
may result in adverse tax consequences. (See "Tax Treatment of Policy
Benefits," Page 38.)
WITHDRAWAL OF NET ACCOUNT VALUE
After the first policy anniversary, you may request a withdrawal of
Net Account Value on any business day. The withdrawal amount will be taken
from the subaccounts of the separate account in proportion to the values in
the subaccounts. If the guideline premium test for federal tax law compliance
and death benefit option A are in effect, we will reduce the face amount of
the policy by an amount equal to the lesser of (a) the amount of the
withdrawal and (b) the excess of the face amount plus any term insurance
amount provided by the Term Rider, divided by the Death Benefit Factor, over
the Cash Surrender Value just after the withdrawal, but in any case not less
than zero. If death benefit option B is in effect, the withdrawal will not
decrease the face amount. If the cash value accumulation test is in effect,
the withdrawal will result in a decrease in the face amount plus any term
insurance amount provided by the Term Rider of an amount equal to the
withdrawal amount times 1.00327374 (See "Withdrawal of Net Account Value,"
Page 31)
If a requested withdrawal would reduce the face amount below $5000,
the withdrawal will not be allowed.
8
<PAGE> 14
SURRENDER OF THE POLICY
You may at any time fully surrender your policy and receive the Net
Cash Surrender Value, if any, which will take into account any outstanding
policy loans and accrued interest (See "Surrender Privilege," Page 31.)
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
33.
TAX TREATMENT
We believe that a Policy issued on a standard rate class basis
generally should meet the Section 7702 definition of a life insurance
contract. For policies issued on a substandard basis, there is insufficient
guidance to determine if such a policy would in all situations satisfy the
Section 7702 definition of a life insurance contract. Assuming that a policy
qualifies as a life insurance contract for Federal income tax purposes, you
should not be deemed to be in constructive receipt of value under your policy
until there is a distribution from the policy. Moreover, death benefits
payable under a policy should be completely excludable from the gross income
of the beneficiary. As a result, the beneficiary generally should not be taxed
on these proceeds. (See "Tax Status of the Policy," Page 38.)
Under certain circumstances, a policy may be treated as a "Modified
Endowment Contract." If a policy is a Modified Endowment Contract, then all
pre-death distributions, including policy loans, will be treated first as a
distribution of taxable income and then as a return of basis or investment in
the contract. In addition, prior to age 59 1/2 any distributions generally
will be subject to a 10% penalty tax. (For further discussion on the
circumstances under which a Policy will be treated as a Modified Endowment
Contract, See "Tax Treatment of Policy Benefits," Page 38.)
If a policy is not a Modified Endowment Contract, distributions
generally will be treated first as a return of basis or investment in the
contract and then as disbursing taxable income. Moreover, loans will not be
treated as distributions. Finally, neither distributions nor loans from a
policy that is not a Modified Endowment Contract are subject to the 10%
penalty tax. (See "Distributions from Policies Not Classified as Modified
Endowment Contracts," Page 39.)
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUE AND NET CASH SURRENDER VALUE
Illustrations of how investment performance of the separate account
may cause the death benefit, the Account Value and the Net Cash Surrender
Value to vary are included in Appendix A commencing on Page A-1.
These illustrations of hypothetical values may help you to understand
the long-term effects of different levels of investment performance, of
charges and deductions, of electing one or the other death benefit option or
death benefit compliance test, and generally comparing and contrasting this
policy to other life insurance policies. Nonetheless, the illustrations are
based on hypothetical investment rates of return. THEY ARE NOT GUARANTEED.
Illustrations are not a representation of past or future performance. Actual
rates of return may be more or less than those reflected in the illustrations
and, therefore, actual values will differ from those illustrated.
9
<PAGE> 15
The following detailed description of the policy uses certain precise
terms which are capitalized. These terms have the meanings set out in the
Glossary, on pages 47 to 50.
NATIONAL LIFE INSURANCE COMPANY, THE SEPARATE ACCOUNT,
AND THE FUNDS.
NATIONAL LIFE INSURANCE COMPANY
National Life Insurance Company ("National Life", or "we") is
authorized to transact life insurance and annuity business in Vermont and in
50 other jurisdictions. National Life was originally chartered as a mutual
life insurance company in 1848 under Vermont law. It is now a stock life
insurance company, all of the outstanding stock of which is indirectly owned
by National Life Holding Company, a mutual insurance holding company
established under Vermont law on January 1, 1999. All policyholders of
National Life, including all the Owners of the Policies, are voting members of
National Life Holding Company. National Life assumes all insurance risks under
the Sentinel Benefit Provider policy offered by this Prospectus (the "Policy")
and its assets support the Policy's benefits. On December 31, 1999, National
Life's consolidated assets were over $9.4 billion. (See "Financial
Statements," Page F-1.)
THE SEPARATE ACCOUNT
The National Variable Life Insurance Account (the "Separate Account")
was established by National Life on February 1, 1985 under the provisions of
the Vermont Insurance Law. It is a separate investment account to which assets
are allocated to support the benefits payable under the Policies, other
variable life insurance policies National Life currently issues, and other
variable life insurance policies National Life may issue in the future.
The Separate Account's assets are the property of National Life. Each
Policy provides that the portion of the Separate Account's assets equal to the
reserves and other liabilities under the Policies (and other policies)
supported by the Separate Account will not be chargeable with liabilities
arising out of any other business that National Life may conduct. The portion
of the Separate Account's assets equal to the reserves and other liabilities
under the Policies may, however, be chargeable with liabilities arising from
other subaccounts of the Separate Account that fund other variable life
insurance policies. In addition to the net assets and other liabilities for
the Policies (and other policies), the Separate Account's net assets include
amounts derived from expenses charged to the Policies (and the other policies)
by National Life which it currently holds in the Separate Account, and may in
the future include amounts held to support other variable life insurance
policies issued by National Life. From time to time these additional amounts
will be transferred in cash by National Life to its general account.
The Separate Account is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act") as a
unit investment trust type of investment company. Such registration does not
involve any supervision of the management or investment practices or policies
of the Separate Account by the SEC. The Separate Account meets the definition
of a "Separate Account" under Federal securities laws.
You may choose among the Subaccount options described below. However,
a Policy may not allocate Account Value to more than ten Subaccounts at any
one time.
10
<PAGE> 16
SENTINEL VARIABLE PRODUCTS TRUST
The Common Stock, Mid Cap Growth, Small Company, Growth Index and Money
Market Subaccounts of the Variable Account invest in shares of Sentinel Variable
Products Trust, a "series" type of mutual fund which is registered with the SEC
under the 1940 Act as a diversified open-end management investment company. Each
series of Sentinel Variable Products Trust shares represents an interest in a
separate portfolio within the Trust. They are purchased and redeemed by the
corresponding Subaccounts of the Variable Account. Sentinel Variable Products
Trust sells and redeems its shares at net asset value without a sales charge.
The investment objectives of Sentinel Variable Products Trust's Funds are
set forth below. The investment experience of each of the Subaccounts of the
Variable Account depends on the investment performance of the corresponding
Fund. There is no assurance that any Fund will achieve its stated objective.
The Common Stock Fund. The Common Stock Fund seeks a combination of
growth of capital, current income, growth of income and relatively low risk as
compared with the stock market as a whole, by investing in a diverse group of
common stocks of well-established companies.
The Mid Cap Growth Fund. The Mid Cap Growth Fund seeks growth of
capital, by focusing its investments on common stocks of mid-sized growing
companies. Income is not a factor in selecting stocks.
The Small Company Fund. The Small Company Fund seeks growth of
capital, by investing mainly in common stocks of small companies that National
Life Investment Management believes have attractive growth potential and are
attractively valued. Income is not a factor in selecting stocks.
The Growth Index Fund. The Growth Index Fund seeks to match, as
closely as possible before expenses, the performance of the S&P 500/BARRA
Growth Index, by investing in common stocks of the companies comprising the
Index in approximately the same weightings as the Index.
The Money Market Fund. The Money Market Fund seeks as high a level of
current income as is consistent with stable principal values and liquidity by
investing exclusively in dollar-denominated money market instruments, including
U.S. government securities, bank obligations, repurchase agreements, commercial
paper, and other corporate debt obligations.
National Life Investment Management Company, Inc. ("NLIMC") manages
each of the Funds of Sentinel Variable Products Trust. NLIMC is registered with
the SEC as an investment adviser under the Investment Advisers Act of 1940.
NLIMC is a wholly owned subsidiary of National Life.
A full description of Sentinel Variable Products Trust, its investment
objectives and policies, its risks, expenses, and other aspects of its operation
is contained in the attached Prospectus for Sentinel Variable Products Trust,
which you should read together with this Prospectus.
ALGER AMERICAN FUND
The Separate Account has three Subaccounts which invest exclusively in
shares of Portfolios of the Alger American Fund. The Alger American Fund is a
"series" type mutual fund registered with the SEC as a diversified open-end
management investment company issuing a number of series of shares, each of
which represents an interest in a Portfolio of the Alger American Fund. Shares
of these Portfolios are purchased and redeemed by the Separate Account at net
asset value without a sales charge.
11
<PAGE> 17
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.
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
12
<PAGE> 18
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.
DEUTSCHE ASSET MANAGEMENT VIT FUNDS
The Separate Account has three Subaccounts which invest exclusively in
shares of funds of Deutsche Asset Management VIT Funds. Deutsche Asset
Management VIT Funds is a "series" type mutual fund registered with the SEC as
a diversified open-end management investment company issuing a number of
series of shares, each of which represents an interest in a fund of Deutsche
Asset Management VIT Funds.
The Deutsche VIT Equity 500 Index Subaccount, the Deutsche VIT Small Cap
Index Subaccount and the Deutsche VIT EAFE(R) Equity Index Subaccount of the
Separate Account invest in shares of the Equity 500 Index Fund, the Small Cap
Index Fund and the EAFE(R) Equity Index Fund, respectively, of Deutsche Asset
Management VIT Funds. Shares of these funds are purchased and redeemed by the
Separate Account at net asset value without a sales charge
The investment objectives of the funds of Deutsche Asset Management VIT
Funds in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
corresponding fund. There is no assurance that any fund will achieve its
stated objective.
The EAFE(R) Equity Index Fund seeks to match, as closely as possible,
before expenses, the performance of the Morgan Stanley Capital International
(MCSI) EAFE(R) Index ("EAFE(R) Index") which emphasizes stocks of companies in
major markets in Europe, Australia and the Far East performance. The
investment adviser attempts to invest in stocks and other securities that are
representative of the EAFE(R) Index as a whole.
The Equity 500 Index Fund seeks to match, as closely as possible,
before expenses, the performance of the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500 Index"), which emphasizes stocks of large U.S
companies. The investment adviser invests in a statistically selected sample
of the securities found in the S&P 500 Index.
The Small Cap Index Fund seeks to match, as closely as possible,
before expenses, the performance of the Russell 2000 Small Stock Index (the
"Russell 2000 Index"), which emphasizes stocks of small U.S. companies. The
investment adviser invests in a statistically selected sample of the
securities found in the Russell 2000 Index.
The EAFE(R) Equity Index Fund, the Equity 500 Index Fund, and the Small
Cap Index Fund and, are managed by Bankers Trust Company.
A full description of Deutsche Asset Management VIT Funds, the
investment objectives and policies of the funds, the risks, expenses and all
other aspects of their operation is contained in the attached Prospectuses for
these funds.
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.
13
<PAGE> 19
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 one Subaccount which invests exclusively in
shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund")
and one Subaccount which invests 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 Overseas Portfolio of the VIP Fund and the Investment Grade Bond
Portfolio of the VIP Fund II are managed by Fidelity Management and Research
Company ("FMR"). FMR has entered into a sub-advisory agreement with 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.
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.
Investment Grade Bond Portfolio. This Portfolio seeks as high a level
of current income as is consistent with the preservation of capital. It
normally invests in U.S. dollar-denominated investment-grade bonds (those of
medium and high quality).
A full description of the VIP Fund and VIP Fund II, the investment
objectives and policies of the Portfolios, the risks, expenses and other
aspects of their operation is contained in the attached Prospectuses for the
VIP Fund and VIP Fund II.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
The Variable Account has three Subaccounts which invests exclusively in
shares of the following three series of INVESCO Variable Investment Funds,
Inc.:
INVESCO VIF - Dynamics Fund
INVESCO VIF - Health Sciences Fund
INVESCO VIF - Technology Fund
14
<PAGE> 20
INVESCO Variable Investment Funds, Inc. is a mutual fund registered
with the SEC as a diversified open-end management investment company issuing
shares of a number of Funds. Shares of these Funds are purchased and
redeemed by the Variable Account at net asset value without a sales charge.
The investment objectives of the INVESCO Variable Investment Funds,
Inc. Funds in which the Subaccounts invest are set forth below. The
investment experience of each Subaccount depends upon the investment
performance of the underlying Fund. There is no assurance that any of these
Funds will achieve its stated objective.
INVESCO VIF - Dynamics Fund. This Fund seeks to make an investment
grow. It is actively managed. The Fund invests primarily in equity
securities that INVESCO believes will rise in price faster than other
securities, as well as in options and other investments whose values are
based upon the values of equity securities. The Fund invests primarily in
common stocks of mid-sized U.S. companies - those with market
capitalizations between $2 billion and $15 billion at the time of purchase -
but also has the flexibility to invest in other types of securities,
including preferred stocks, convertible securities and bonds.
INVESCO VIF - Health Sciences Fund. This Fund seeks to make an
investment grow. It is aggressively managed. Although the Fund can invest in
debt securities, it primarily invests in equity securities that INVESCO
believes will rise in price faster than other securities, as well as in
options and other investments whose values are based upon the values of
equity securities. The Fund invests primarily in equity securities of
companies that develop, produce or distribute products or services related
to health care. These companies include, but are not limited to, medical
equipment or supplies, pharmaceuticals, health care facilities, and applied
research and development of new products or services.
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.
15
<PAGE> 21
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.
MORGAN STANLEY DEAN WITTER UNIVERSAL INSTITUTIONAL FUNDS, INC.
The Variable Account has four Subaccounts which invests exclusively in
shares of the following four series of Morgan Stanley Dean Witter Universal
Institutional Funds, Inc.:
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<PAGE> 22
Emerging Markets Equity Portfolio
Fixed Income Portfolio
High Yield Portfolio
U.S. Real Estate Portfolio
The Universal Institutional 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. Shares of these
Portfolios are purchased and redeemed by the Variable Account at net asset
value without a sales charge.
The investment objectives of the Universal Institutional Funds, Inc.
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 any of
these Portfolios will achieve its stated objective.
Emerging Markets Equity Portfolio. This Portfolio seeks long term
capital appreciation by investing primarily in growth-oriented equity
securities of issuers in emerging market countries.
Fixed Income Portfolio. This Portfolio seeks above-average total return
over a market cycle of three to five years by investing primarily in a
diversified portfolio of fixed income securities.
High Yield Portfolio. This Portfolio seeks above-average total return
over a market cycle of three to five years by investing primarily in a
diversified portfolio of high yield securities.
U.S. Real Estate Portfolio. This Portfolio above average current
income and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
The Universal Institutional Funds, Inc. Emerging Markets Equity
Portfolio and U.S. Real Estate Portfolio are managed by Morgan Stanley Asset
Management. The Universal Institutional Funds, Inc. Fixed Income Portfolio
and High Yield Portfolio are managed by Miller Anderson & Sherrerd, LLP, an
affiliate of Morgan Stanley & Co. Incorporated. 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 Universal Institutional Funds, Inc. Emerging Markets Equity Portfolio,
Fixed Income Portfolio, High Yield Portfolio, and U.S. Real Estate Portfolio.
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
The Separate Account has one Subaccount which invests exclusively in
shares of the Partners Portfolio, a series of Neuberger Berman Advisers
Management Trust. Neuberger Berman Advisers Management Trust ("AMT") is
registered with the SEC as a diversified open-end management investment
company. AMT has nine separate series, which are called Portfolios. Shares of
each Portfolio represent an interest in that Portfolio.
The investment objectives of the Partners Portfolio are set forth below.
The investment experience of each Subaccount depends upon the investment
performance of the underlying Portfolio. There is no assurance that the
Portfolio will achieve its stated objective.
Partners Portfolio. To seek growth of capital. This Portfolio invests
mainly in common stock of mid-to large-capitalization companies. Its
investment co-managers seek securities believed to be undervalued based on
fundamentals such as low price-to-earnings ratios, consistent cash flows, and
the company's track record through all points of the market cycle. The
Portfolio generally considers selling a stock when it reaches the managers'
target price, when it fails to perform as expected, or when other
opportunities appear
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<PAGE> 23
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.
RESOLVING MATERIAL CONFLICTS
The participation agreements pursuant to which the Funds sell their
shares to Subaccounts of the Separate Account contain varying provisions
regarding termination. In general, each party may terminate a participation
agreement at its option with specified advance written notice, and may also
terminate in the event of specific regulatory or business developments.
Should an agreement between National Life and a Fund terminate, the
Subaccounts which invest in that Fund may not be able to purchase additional
shares of such Fund. In that event, you will no longer be able to transfer
Accumulated Values or allocate Net Premiums to Subaccounts investing in
Portfolios of such Fund.
Additionally, in certain circumstances, it is possible that a Fund or
a Portfolio of a Fund may refuse to sell its shares to a Subaccount despite
the fact that the participation agreement between the Fund and National Life
has not been terminated. Should a Fund or Portfolio of such Fund decide not
to sell its shares to National Life, we will not be able to honor your
requests to allocate cash values or net premiums to Subaccounts investing in
shares of that Fund or Portfolio.
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<PAGE> 24
The Funds are available to registered separate accounts of insurance
companies, other than National Life, offering variable annuity and variable
life insurance policies. As a result, there is a possibility that a material
conflict may arise between the interests of owners of Policies with Account
Value allocated to the Separate Account and the owners of life insurance
policies and variable annuities issued by such other companies whose values
are allocated to one or more other separate accounts investing in any one of
the Funds.
In the event of a material conflict, National Life will take any
necessary steps, including removing the Separate Account from that Fund, to
resolve the matter. The Board of Directors or Trustees of the Funds intend
to monitor events in order to identify any material conflicts that possibly
may arise and to determine what action, if any, should be taken in response
to those events or conflicts. See the individual Fund Prospectuses for more
information.
OTHER MATTERS RELATING TO THE FUNDS
We have entered into or may enter into agreements with Funds pursuant
to which the adviser or distributor pays National Life a fee based upon an
annual percentage of the average net asset amount invested by National Life on
behalf of the Separate Account and other separate accounts of National Life.
These percentages may differ, and National Life may be paid a greater
percentage by some investment advisers or distributors than other advisers or
distributors. These agreements reflect administrative services provided by
National Life.
The investment objectives and policies of certain Portfolios of the
Funds are similar to the investment objectives and policies of mutual fund
portfolios other than the Portfolios that may be managed by the investment
adviser or manager. The investment results of the Portfolios, however, may be
higher or lower than the results of such other portfolios. There can be no
assurance, and no representation is made, that the investment results of any
of the Portfolios will be comparable to the investment results of any other
portfolio, even if the other portfolio has the same investment adviser or
manager.
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, the Death Benefit of
the Policy will, upon due proof of the Insured's death (and fulfillment of
certain other requirements), be paid to the named Beneficiary in accordance
with the designated Death Benefit Option, unless the claim is contestable in
accordance with the terms of the Policy. The proceeds may be paid in cash or
under one of the Settlement Options set forth in the Policy. (See "Payment of
Policy Benefits," Page 35.) The Death Benefit payable under Option A will be
the greater of the Face Amount or the Death Benefit Factor times the Cash
Surrender Value on the date of death; under Option B, the Death Benefit will
be the greater of the Face Amount plus the Account Value on the date of death,
or the Death Benefit Factor times the Cash Surrender Value on the date of
death, in each case plus any Supplemental Term Insurance Amount, less any
outstanding Policy loan and accrued interest, and less any unpaid Monthly
Deductions.
Federal Income Tax Law Compliance Test Options. The Policy must
satisfy either of two death benefit compliance tests in order to qualify as
life insurance under section 7702 of the Internal Revenue Code: the Cash Value
Accumulation Test or the Guideline Premium Test. Each test effectively
requires that the Policy's Death Benefit, plus any outstanding Policy loans
and accrued interest, and any unpaid Monthly Deductions, must always be equal
to or greater than the Cash Surrender Value multiplied by a certain percentage
(the "Death Benefit Factor"). Thus, the Policy has been structured so that the
Death Benefit may increase above the Face Amount in order to comply with the
applicable test. The Death Benefit Factor for the Guideline Premium Test
varies only by age, as shown below:
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<PAGE> 25
<TABLE>
<CAPTION>
Death Death
Attained Age Benefit Factor Attained Age Benefit Factor
------------ -------------- ------------ --------------
<S> <C> <C> <C>
40 and under 250% 70 115%
45 215% 75-90 105%
50 185% 91 104%
55 150% 92 103%
60 130% 93 102%
65 120% 94 101%
95+ 100%
</TABLE>
For Attained Ages not shown, the percentages will decrease by a ratable
portion of each full year.
The Death Benefit Factor for the Cash Value Accumulation Test varies
by age and sex, and generally such Death Benefit Factors are different from
those for the Guideline Premium Test. The Guideline Premium Test also imposes
maximum premium limits, whereas the Cash Value Accumulation test does not.
You must select and specify on the application which of the two
federal tax death benefit compliance tests will apply. Once the Policy is
issued, you may not change this selection. In general, where maximum
accumulation of Account Value during the initial Policy Years is a primary
objective, the Cash Value Accumulation Test is more appropriate. If your
primary objective is the most economically efficient method of obtaining a
specified amount of coverage, the Guideline Premium Test is generally more
appropriate. You should take into account in considering the Guideline Premium
Test that both Option A and Option B are available, and that it is possible to
change from time to time between Option A and Option B. Since the selection of
the federal tax death benefit compliance test depends on complex factors and
may not be changed, prospective purchasers of the Policy should consult with a
qualified tax adviser before making this election.
Death Benefit Options. The Policy provides two Death Benefit Options:
Option A and Option B. Policies which use the Guideline Premium Test as the
federal tax death benefit compliance test may select either Death Benefit
Option A or Option B. You designate the Death Benefit Option in the
application, and you may change it as described in "Change in Death Benefit
Option," Page 21. Only Option A is available for Policies which use the Cash
Value Accumulation Test as the federal tax death benefit compliance test.
Option A. The Death Benefit is equal to the greater of (a) the Face
Amount of the Policy and (b) the Cash Surrender Value on the Valuation Date on
or next following the Insured's date of death multiplied by the applicable
Death Benefit Factor, in each case less any outstanding Policy loan and
accrued interest thereon, and less any unpaid Monthly Deductions.
Illustration of Option A -- For purposes of this illustration, assume
that the Insured is under Attained Age 40, the Guideline Premium Test has been
elected, and there is no Policy loan outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will generally
have a Death Benefit of $200,000, assuming no Policy loans outstanding and no
unpaid Monthly Deductions. The Death Benefit Factor for an Insured under
Attained Age 40 on the Policy Anniversary prior to the date of death is 250%.
Because the Death Benefit must be equal to or greater than 2.50 times the Cash
Surrender Value, any time the Cash Surrender Value exceeds $80,000 the Death
Benefit will exceed the Face Amount. Each additional dollar added to the Cash
Surrender Value will increase the Death Benefit by $2.50. Thus, a 35 year old
Insured with a Cash Surrender Value of $90,000 will have an Death Benefit of
$225,000 (2.50 x $90,000, and a Cash Surrender Value of $150,000 will have an
Death Benefit of $375,000 (2.50 x $150,000).
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<PAGE> 26
Similarly, any time the Cash Surrender Value exceeds $80,000, each
dollar taken out of the Cash Surrender Value will reduce the Death Benefit by
$2.50. If at any time, however, the Cash Surrender Value multiplied by the
specified percentage is less than the Face Amount, the Death Benefit will be
the Face Amount of the Policy.
If the Cash Value Accumulation Test for tax compliance applies to a
Policy, the Death Benefit Factors will be different but the above example
otherwise applies.
Option B. The Death Benefit is equal to the greater of (a) the Face
Amount of the Policy plus the Account Value and (b) the Cash Surrender Value
on the Valuation Date on or next following the Insured's date of death
multiplied by the applicable Death Benefit Factor (shown in the table above),
in each case less any outstanding Policy loan and accrued interest thereon,
and less any unpaid Monthly Deductions. As noted above, Option B is only
available for Policies on which the Guideline Premium Test has been elected.
Illustration of Option B -- For purposes of this illustration, assume
that the Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option B, a Policy with a face amount of $200,000 will generally
have an Death Benefit of $200,000 plus the Cash Surrender Value, assuming no
Policy loans outstanding and no unpaid Monthly Deductions. Thus, for example,
a Policy with a $50,000 Cash Surrender Value will have a Death Benefit of
$250,000 ($200,000 plus $50,000). Since the applicable Death Benefit Factor is
250%, the Death Benefit will be at least 2.50 times the Cash Surrender Value.
As a result, if the Cash Surrender Value exceeds $133,333, the Death Benefit
will be greater than the Face Amount plus the Cash Surrender Value. Each
additional dollar added to the Cash Surrender Value above $133,333 will
increase the Death Benefit by $2.50. An Insured with a Cash Surrender Value of
$150,000 will have a Death Benefit of $375,000 (2.50 x $150,000), and a Cash
Surrender Value of $200,000 will yield a Death Benefit of $500,000 (2.50 x
$200,000). Similarly, any time the Cash Surrender Value exceeds $133,333, each
dollar taken out of the Cash Surrender Value will reduce the Death Benefit by
$2.50. If at any time, however, the Cash Surrender Value multiplied by the
specified percentage is less than the Face Amount plus the Cash Surrender
Value, the Death Benefit will be the Face Amount plus the Cash Surrender
Value.
At Attained Age 99, Option B automatically becomes Option A.
Change in Death Benefit Option. After the first Policy Year, the Death
Benefit Option in effect for Policies which have elected the Guideline Premium
Test as the federal tax death benefit compliance test may be changed by
sending National Life a written request. No charges will be imposed to make a
change in the Death Benefit Option. The effective date of any such change will
be the Policy Anniversary on or next following the date we receive the written
request. Only one change in Death Benefit Option is permitted in any one
Policy Year.
On the effective date of a change in Death Benefit Option, the Face
Amount is adjusted so that there will be no change in the Death Benefit or the
Net Amount at Risk. In the case of a change from Option B to Option A, the
Face Amount must be increased by the Account Value. In the case of a change
from Option A to Option B, the Face Amount must be decreased by the Account
Value. The change from Option A to Option B will not be allowed if it would
reduce the Face Amount to less than the Minimum Face Amount.
On the effective date of the change, the Death Benefit, Account Value
and Net Amount at Risk (and therefore the Cost of Insurance Charges) are
unchanged. However, after the effective date of the change, the pattern of
future Death Benefits, Account Value, Net Amount at Risk and Cost of Insurance
Charges will be different than if the change had not been made..
If a change in the Death Benefit Option would result in cumulative
premiums exceeding the maximum premium limitations under the Internal Revenue
Code for life insurance (such limitations apply only to
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<PAGE> 27
Policies to which the Guideline Premium Test for federal income tax law
compliance has been elected), we will not effect the change.
A change in the Death Benefit Option may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 38.)
How the Death Benefit May Vary. The amount of the Death Benefit may vary
with the Account Value in the following circumstances. The Death Benefit under
Option A will vary with the Account Value whenever the Death Benefit Factor
multiplied by the Cash Surrender Value exceeds the Face Amount of the Policy.
The Death Benefit under Option B will always vary with the Account Value
because the Death Benefit equals the greater of (a) the Face Amount plus the
Account Value and (b) the Cash Surrender Value multiplied by the Death Benefit
Factor.
ABILITY TO ADJUST FACE AMOUNT
Subject to certain limitations, you may increase or decrease the
Policy's Face Amount by submitting a written application to National Life. The
effective date of an increase will be the Monthly Policy Date on or next
following our approval of the request, and the effective date of a decrease is
the Monthly Policy Date on or next following the date that we receive the
written request. An increase or decrease in Face Amount may have federal tax
consequences. (See "Tax Treatment Of Policy Benefits," Page 38.) The effect of
changes in Face Amount on Policy charges, as well as other considerations, are
described below. The Face Amount, and any change in Face Amount, do not
include any coverage provided by the Term Rider, if it has been elected.
Increase. To obtain an increase in the Face Amount, you should submit
an application for the increase. We reserve the right to require evidence
satisfactory to us of the Insured's insurability, if the Net Amount at Risk
would increase. For Policies issued on the basis of guaranteed issue
underwriting, increases in Face Amount are limited to a maximum of 10%
without medical underwriting. Automated annual increases in Face Amount of
specified percentages may be elected. You may not increase the Face Amount
after the Insured's Attained Age 85 (Attained Age 65 in the case of
guaranteed issue or simplified issue underwriting).
On the effective date of an increase, and taking the increase into
account, the Net Account Value must be greater than the Monthly Deductions
then due. If the Net Account Value is not sufficient, the increase will not
take effect until you make a sufficient additional premium payment to
increase the Net Account Value.
An increase in the Face Amount will generally affect the total Net
Amount at Risk which will increase the monthly Cost of Insurance Charges. In
addition, the Insured may be in a different Rate Class as to the increase in
insurance coverage. An increase in premium payment or frequency may be
appropriate after an increase in Face Amount. (See "Cost of Insurance
Charge," Page 27.)
Decrease. By providing a written request, you may decrease the Face
Amount of the Policy. The Face Amount after any decrease may not be less
than the Minimum Face Amount, which is generally currently $5000, or may not
be less than the minimum amount for which the Policy qualify as life
insurance for federal income tax purposes under the Internal Revenue Code.
A decrease in the Face Amount generally will decrease the total Net
Amount at Risk, which will decrease your monthly Cost of Insurance Charges.
For purposes of determining the Cost of Insurance Charge, any decrease
in the Face Amount will reduce the Face Amount in the following order: (a)
the increase in Face Amount provided by the most recent increase; (b) the
next most recent increases, in inverse chronological order; and (c) the Face
Amount on the Date of Issue.
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<PAGE> 28
HOW THE DURATION OF THE POLICY MAY VARY
The Policy will remain in force as long as the Net Account Value of
the Policy is sufficient to pay the Monthly Deductions and the charges under
the Policy. When the Net Account Value is insufficient to pay the charges and
the Grace Period expires without an adequate premium payment the Policy will
lapse and terminate without value. Notwithstanding the foregoing, during the
first five Policy Years the Policy will not lapse if, as of the Monthly Policy
Date that the Net Account Value of the Policy first becomes insufficient to
pay the charges, the Cumulative Minimum Monthly Premium has been paid. You
have certain rights to reinstate the Policy, if it should lapse. (See
"Reinstatement," Page 26.)
ACCOUNT VALUE
The Account Value is the total amount of value held under the Policy
at any time. It is equal to the sum of the Policy's values in the Separate
Account and the Loan Account. In Policy Years one and two, the Cash Surrender
Value is the Account Value reflecting the Distribution Charge Refund. After
the second Policy Anniversary, the Cash Surrender Value is equal to the
Account Value. There is no guaranteed minimum for the Account Value in any of
the Subaccounts of the Separate Account and, because the Account Value on any
future date depends upon a number of variables, it cannot be predetermined.
The Net Account Value and Net Cash Surrender Value will reflect the
Net Premiums paid, investment performance of the chosen Subaccounts of the
Separate Account, any transfers, any Withdrawals, any loans, any loan
repayments, any loan interest, and charges assessed in connection with the
Policy.
Determination of Number of Units for the Separate Account. Amounts
allocated, transferred or added to a Subaccount of the Separate Account under
a Policy are used to purchase units of that Subaccount; units are redeemed
when amounts are deducted, transferred or withdrawn. The number of units a
Policy has in a Subaccount equals the number of units purchased minus the
number of units redeemed up to such time. For each Subaccount, the number of
units purchased or redeemed in connection with a particular transaction is
determined by dividing the dollar amount by the unit value.
Determination of Unit Value. The unit value of a Subaccount is equal
to the unit value on the immediately preceding Valuation Date multiplied by
the Net Investment Factor for that Subaccount on that Valuation Date.
Net Investment Factor. Each Subaccount of the Separate Account has
its own Net Investment Factor. The Net Investment Factor measures the daily
investment performance of the Subaccount. The factor will increase or
decrease, as appropriate, to reflect net investment income and capital gains
or losses, realized and unrealized, for the securities of the underlying
portfolio or series.
The asset charges for mortality and expense risks and for separate
account administration will be deducted in determining the applicable Net
Investment Factor. (See "Charges and Deductions - Mortality and Expense Risk
Charge," Page 29, and "Charges and Deductions - Separate Account
Administration Charge," Page 29.)
Calculation of Account Value. The Account Value is determined first
on the Date of Issue and thereafter on each Valuation Date. On the Date of
Issue, the Account Value will be the Net Premiums received, plus any earnings
prior to the Date of Issue, less the Monthly Deduction due on the Date of
Issue. On each Valuation Date after the Date of Issue, the Account Value will
be:
(1) The aggregate of the values attributable to the Policy in
the Separate Account, determined by multiplying the number
of units the Policy has in each Subaccount of the Separate
Account by such Subaccount's unit value on that date; plus
(2) The value attributable to the Policy in the Loan Account.
23
<PAGE> 29
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy. To purchase a Policy, you must apply to us
through a licensed National Life agent who is also a registered
representative of Equity Services, Inc. ("ESI") or a broker/dealer having a
Selling Agreement with ESI or a broker/dealer having a Selling Agreement
with such a broker/dealer. The Minimum Initial Premium must be submitted
when the Policy is delivered. The Minimum Face Amount of a Policy is
generally $5000. The Minimum Initial Premium per set of Policies purchased
at the same time and associated with a corporation or its affiliates, a
trust or a partnership, or for a Policy owned by an individual, is $50,000.
This Policy can be issued for Insureds with Issue Ages of at least
20. The maximum Issue Age for full medical underwriting is 85. The maximum
Issue Age for guaranteed underwriting and simplified issue underwriting is 65.
The Minimum Face Amount is $5000. The Policies are available on a full medical
underwriting basis, a simplified issue basis, or a guaranteed issue basis.
Before issuing a Policy on a full medical underwriting basis, we will require
that the proposed Insured meet certain underwriting standards satisfactory to
us. In simplified issue cases, the application will ask 3 medical questions
about the Insured. We reserve the right to revise our rules from time to time
to specify a different Minimum Face Amount for subsequently issued policies.
Acceptance is subject to our underwriting rules. We reserve the right to
reject an application for any reason permitted by law.
Amount and Timing of Premiums. Each subsequent premium payment must
be at least $300. Subject to certain limitations described below, you have
considerable flexibility in determining the amount and frequency of premium
payments.
At the time of application, you may select a Planned Periodic Premium
schedule, based on a periodic billing mode of annual, semi-annual, or
quarterly payments. You may request us to send a premium reminder notice at
the specified interval. You may change the Planned Periodic Premium
frequency and amount. Payments may be made by wire transfer or by check.
You are not required to pay the Planned Periodic Premiums in
accordance with the specified schedule. You may pay premiums in any amount
(subject to the $300 minimum and the limitations described in the next
section), frequency and time period. Payment of the Planned Periodic
Premiums will not, however, guarantee that the Policy will remain in force
(except that if such premiums are at least equal to the Cumulative Minimum
Monthly Premium, then the Policy will remain in force for at least 5 years).
Instead, the duration of the Policy depends upon the Policy's Net Account
Value. Thus, even if Planned Periodic Premiums are paid, the Policy will
lapse whenever the Net Account Value is insufficient to pay the Monthly
Deductions and any other charges under the Policy and if a Grace Period
expires without an adequate payment by you (unless the Policy is in its
first five years, and the Cumulative Minimum Monthly Premium has been paid).
Any payments made while there is an outstanding Policy loan will be
applied as premium payments rather than loan repayments, unless we are
notified in writing that the amount is to be applied as a loan repayment. No
premium payments may be made after the Insured reaches Attained Age 99.
However, loan repayments will be permitted after Attained Age 99.
Higher premium payments under Death Benefit Option A, until the Death
Benefit Factor times the Cash Surrender Value exceeds the Face Amount, will
generally result in a lower Net Amount at Risk, and lower Cost of Insurance
Charges against the Policy. Conversely, lower premium payments in this
situation will result in a higher Net Amount at Risk, which will result in
higher Cost of Insurance Charges under the Policy.
Under Death Benefit Option B, until the Death Benefit Factor times
the Cash Surrender Value exceeds the Face Amount plus the Account Value, the
level of premium payments will not affect the Net Amount at Risk. (However,
both the Account Value and Death Benefit will be higher if premium payments
are higher, and lower if premium payments are lower.)
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<PAGE> 30
Under either Death Benefit Option, if the Death Benefit is based on
the Death Benefit Factor times the Cash Surrender Value, then higher premium
payments will result in a higher Net Amount at Risk, and higher Cost of
Insurance Charges. Lower premium payments will result in a lower Net Amount at
Risk, and lower Cost of Insurance Charges.
Premium Limitations. With regard to a Policy's inside build-up, in
the case of Policies to which the Guideline Premium Test for federal income
tax law compliance applies, the Internal Revenue Code of 1986 (the "Code")
provides for exclusion of the Death Benefit from gross income if total
premium payments do not exceed certain stated limits. In no event can the
total of all premiums paid under such a Policy exceed such limits. If at any
time a premium is paid which would result in total premiums exceeding such
limits, we will only accept that portion of the premium which would make
total premiums equal the maximum amount which may be paid under the Policy.
The excess will be promptly refunded, and in the cases of premiums paid by
check, after such check has cleared. If there is an outstanding loan on the
Policy, the excess may instead be applied as a loan repayment.
The maximum premium limitations set forth in the Code depend in part
upon the amount of the Death Benefit at any time. As a result, any Policy
changes which affect the amount of the Death Benefit may affect whether
cumulative premiums paid under the Policy exceed the maximum premium
limitations. To the extent that any such change would result in cumulative
premiums exceeding the maximum premium limitations, we will not effect such
change. (See "Federal Income Tax Considerations," Page 37.)
Unless the Insured provides satisfactory evidence of insurability, we
reserve the right to limit the amount of any premium payment if it increases
the Net Amount at Risk.
For Policies to which the Cash Value Accumulation Test for federal
income tax law compliance applies, the Internal Revenue Code does not
provide any limits on premium payments in determining whether a policy
qualifies as life insurance under the Code.
Allocation of Net Premiums. The Net Premium equals the premium paid
less the Premium Loads. In the application for the Policy, you will indicate
how Net Premiums should be allocated among the Subaccounts of the Separate
Account. You may change these allocations at any time by written notice to
the Third Party Administrator. The percentages of each Net Premium that may
be allocated to any Subaccount must be in whole numbers of not less than 5%,
and the sum of the allocation percentages must be 100%. Except in the
circumstances described in the following paragraph, National Life will
allocate the Net Premiums as of the Valuation Date it receives such premium
at its Home Office or at the office of the Third Party Administrator, based
on the allocation percentages then in effect.
Any portion of the Initial Premium and any subsequent premiums
received by National Life before the end of the free-look period will be
allocated to the Money Market Subaccount. For this purpose, we will assume
that the free-look period will end on the earliest of (a) the end of the
tenth day following receipt of the Policy by you, if we receive at our Home
Office a signed delivery receipt for the Policy on or before that date; (b)
the end of the day on which we receive at the Home Office a signed delivery
receipt for the Policy, if on or between the eleventh and nineteenth days
after the date the Policy is issued; or (c) 20 days after the date the
Policy is issued. On the earliest Valuation Date set forth above, we will
allocate the amount in the Money Market Subaccount to each of the
Subaccounts selected in the application based on the allocation percentage
set forth in the application for such Subaccount.
The values of the Subaccounts will vary with their investment
experience. You bear the entire investment risk. You should periodically
review your allocation percentages in light of market conditions and your
overall financial objectives.
Transfers. You may transfer the Account Value among the Subaccounts
of the Separate Account on any business day by making a written transfer
request to us. Transfer requests must be in a form acceptable to us. Transfers
among the Subaccounts of the Separate Account are made as of the Valuation
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Date on which the request for transfer is received at the office of the Third
Party Administrator. You may transfer all or part of the amount in one of the
Subaccounts of the Separate Account to another Subaccount or Subaccounts.
However, Account Value may not be allocated to more than ten Subaccounts at
any one time.
Currently an unlimited number of transfers is permitted without
charge, and we have no current intent to impose a transfer charge in the
foreseeable future. However, we reserve the right, upon prior notice to Policy
Owners, to change this policy so as to deduct a transfer charge of up to $25
from each transfer in excess of the twelfth transfer during any one Policy
Year. All transfers effected on the same Valuation Date are treated as one
transfer transaction. Transfers resulting from Policy loans, the exercise of
the transfer right for change of investment policy, and the reallocation from
the Money Market Subaccount following the free look period after the Date of
Issue, will not be subject to a transfer charge and will not count against the
twelve free transfers in any Policy Year. Under present law, transfers are not
taxable transactions.
Policy Lapse. The failure to make a premium payment will not itself
cause a Policy to lapse. Lapse will only occur when the Net Account Value is
insufficient to cover the Monthly Deductions and other charges under the
Policy and the Grace Period expires without a sufficient payment. During the
first five Policy Years, the Policy will not lapse so long as the Cumulative
Minimum Monthly Premium has been paid.
The Policy provides for a 61-day Grace Period that is measured from
the date on which notice is sent by National Life. The Policy does not lapse,
and the insurance coverage continues, until the expiration of this Grace
Period. In order to prevent lapse, you would have to during the Grace Period
make a premium payment equal to the sum of any amount by which the past
Monthly Deductions have been in excess of Net Account Value, plus three times
the Monthly Deduction due the date the Grace Period began. The notice sent by
National Life will specify the payment required to keep the Policy in force.
Failure to make a payment at least equal to the required amount within the
Grace Period will result in lapse of the Policy without value.
Reinstatement. A Policy that lapses without value may be reinstated
at any time within five years after the beginning of the Grace Period by
submitting evidence of the Insured's insurability satisfactory to National
Life and payment of an amount sufficient to provide for two times the Monthly
Deduction due on the date the Grace Period began plus three times the Monthly
Deduction due on the effective date of reinstatement, which is, unless
otherwise required by state law, the Monthly Policy Date on or next following
the date the reinstatement application is approved. Upon reinstatement, the
Account Value will be based upon the premium paid to reinstate the Policy and
the Policy will be reinstated with the same Date of Issue as it had prior to
the lapse. The Policy Protection Period may not be reinstated.
For Policies that are intended to be used in multiple employer
welfare benefit plans established under Section 419A(f)(6) of the Internal
Revenue Code, you should be aware that there is a risk that the intended tax
consequences of such a plan may not be realized. Congress is currently
considering legislation that might remove some or all of the tax advantage of
these plans and the Internal Revenue Service has raised questions about
certain of these arrangements under existing law. We do not guarantee any
particular tax consequences of any use of the Policies, including but not
limited to use in these so-called "Section 419 plans." We recommend that you
seek independent tax advice with respect to applications in which you seek
particular tax
consequences.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate
National Life for (a) providing the insurance and other benefits set forth in
the Policy; (b) administering the Policy; (c) assuming certain mortality and
other risks in connection with the Policy; and (d) incurring expenses in
distributing the Policy including costs associated with printing prospectuses
and sales literature and sales compensation. National
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Life may realize a profit from any charges. Any such profit may be used for
any purpose, including payment of distribution expenses.
PREMIUM LOADS
A Premium Load will be deducted from each premium payment. The Premium
Load consists of the Distribution Charge and the Premium Tax Charge.
The Distribution Charge is equal to, in Policy Year 1, 13% of premiums
paid during the Policy Year up to the Target Premium, and 0.5% of premiums
paid in excess of the Target Premium. In Policy Years 2 through 7, the
Distribution Charge is equal to 15% of premiums paid during a Policy Year up
to the Target Premium, and 2.5% of premiums paid in excess of the Target
Premium in any such Policy Year. In Policy Years 8 and thereafter, the
Distribution Charge will be 5% of premiums paid during a Policy Year up to the
Target Premium, and 2.5% of premiums paid in excess of the Target Premium in
any such Policy Year. For this purpose, the Target Premium equals 1.25 times
the annual whole life premium which would be calculated for the Policy using
the applicable 1980 Commissioners Standard Ordinary Mortality Table and an
interest rate of 3.5%.
The Premium Tax Charge will vary from state to state, and will be equal
to the actual amount of premium tax or retaliatory tax assessed on sales in
the jurisdiction in which the Policy is sold. Currently Vermont-domiciled
insurance companies are assessed a premium tax or a retaliatory tax on sales
of life insurance in all states. Premium taxes generally range from 2% to
3.5%. Premium taxes may range up to 4% for certain cities in South Carolina
and 12% for certain jurisdictions in Kentucky.
MONTHLY DEDUCTIONS
Charges will be deducted from the Account Value on the Date of Issue and
on each Monthly Policy Date. The Monthly Deduction consists of four components
- (a) the Cost of Insurance Charge, (b) the Policy Administration Charge, (c)
for Policies issued on the basis of full medical underwriting, the
Underwriting Charge, and (d) for Policies containing a Term Rider, the charges
associated with the Term Rider. Because portions of the Monthly Deduction,
such as the Cost of Insurance Charge, can vary from Policy Month to Policy
Month, the Monthly Deduction may vary in amount from Policy Month to Policy
Month. The Monthly Deduction will be deducted on a pro rata basis from the
Subaccounts of the Separate Account.
Cost of Insurance Charge. The monthly Cost of Insurance Charge is
calculated by multiplying the cost of insurance rate or rates by the Net
Amount at Risk for each Policy Month. Because both the Net Amount at Risk and
the variables that determine the cost of insurance rate, such as the Insured's
age and the Duration of the Policy, may vary, the Cost of Insurance Charge
will likely be different from month to month.
(1) Net Amount At Risk. The Net Amount at Risk on any
Monthly Policy Date is approximately the amount by which the Death Benefit
exceeds the Account Value. It measures the amount that National Life would
have to pay in excess of the Policy's Account Value if the Insured died. The
actual calculation uses the Death Benefit divided by 1.00327234 to take into
account assumed monthly earnings at an annual rate of 4%. The Net Amount at
Risk is determined separately for the Face Amount on the Date of Issue and any
increases in Face Amount. In determining the Net Amount at Risk for each
increment of Face Amount, the Account Value is first applied to the Face
Amount on the Date of Issue. If the Account Value exceeds the Face Amount on
the Date of Issue, the excess is then applied to any increases in Face Amount
in the order such increases took effect.
If the Net Amount at Risk increases, your monthly Cost of Insurance
Charge will increase proportionately. The Net Amount at Risk may increase if,
for example, the Death Benefit is based on the Face Amount and the Account
Value decreases because of negative investment results. The Net Amount at Risk
may also increase if the Death Benefit is based on the Death Benefit Factor
times the Cash Surrender Value and the Account Value rises because of positive
investment results. The Net Amount at Risk may
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decrease in the opposite situations, and if it does, your monthly Cost of
Insurance Charge will decrease proportionately.
(2) Cost of Insurance Rate. Policies may be issued
(a) after full medical underwriting of the proposed
Insured,
(b) on a guaranteed issue basis, where no medical
underwriting is required prior to issuance of a
Policy, or
(c) on a simplified underwriting basis, under which
medical underwriting is limited to requiring the
proposed Insured to answer three medical questions
on the application.
Current cost of insurance rates for Policies issued on a guaranteed issue
basis or a simplified underwriting basis are higher than current standard cost
of insurance rates for healthy Insureds who undergo medical underwriting.
Guaranteed Rates. The guaranteed maximum cost of insurance
rates are set forth in the Policy, and will depend on the Insured's Attained
Age, Rate Class, and the applicable 1980 Commissioners Standard Ordinary
Smoker/Nonsmoker/Unismoker Mortality Table. If you are based in Montana you
must generally select a "unisex" Rate Class.
Current Rates and How They are Determined. The actual cost
of insurance rates used ("current rates") will depend on the Insured's
Attained Age, Rate Class, underwriting method, and Duration. These current
cost of insurance rates are set based on National Life's anticipated mortality
experience. Generally rates are higher for an older insured, if the Insured is
a smoker, or if the Insured is in a substandard rate class (usually because of
a health issue). Generally rates are lower for insureds in a fully medically
underwritten preferred rate class. Rates may also be higher for a Policy that
has a longer Duration, compared to another Policy with identical
characteristics and a shorter Duration. As noted above, rates for Policies
issued on the basis of guaranteed issue or simplified issue will generally be
higher. We periodically review the adequacy of our current cost of insurance
rates and may adjust their level if our anticipated mortality experience
changes. However, our cost of insurance rates will never exceed guaranteed
maximum cost of insurance rates. Any change in the current cost of insurance
rates will apply to all persons of the same Issue Age, Rate Class,
underwriting method, and with Policies of the same Duration.
A cost of insurance rate is determined separately for the Face Amount
on the Date of Issue and any increases in Face Amount. In calculating the Cost
of Insurance Charge, the rate for the Rate Class on the Date of Issue is
applied to the Net Amount at Risk for the Face Amount on the Date of Issue
(see "Rate Class", below). For each increase in Face Amount, the rate for the
Rate Class applicable to the increase is used. If, however, the Death Benefit
is based on the Cash Surrender Value times the Death Benefit Factor, the rate
for the Rate Class for the Face Amount on the Date of Issue will be used for
the amount of the Death Benefit in excess of the total Face Amount.
Rate Class. The Rate Class of the Insured will affect the
guaranteed and current cost of insurance rates. National Life currently places
Insureds into, for each of guaranteed issue, simplified issue, and full
medical underwriting, male non-smoker, female non-smoker, unisex non-smoker,
male smoker, female smoker, unisex nonsmoker, unisex unismoker, male
unismoker, and female unismoker Rate Classes. For full medical underwriting
cases, preferred and substandard rate classes may also apply. Substandard,
Smoker, male, guaranteed issue and simplified issue Rate Classes reflect
higher mortality risks. The unisex Rate Classes are not available in certain
states.
Cost of Term Insurance. For Policies which include the Term
Rider, the cost of term insurance under the Rider will be the Supplemental
Term Insurance Amount, divided by 1.00327234, times the same cost of insurance
rates that apply to the Net Amount at Risk for the Face Amount.
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Policy Administration Charge. The Policy Administration
Charge, which is currently $5.50 per month, will be deducted from the Account
Value on the Date of Issue and each Monthly Policy Date as part of the Monthly
Deduction. The Policy Administration Charge may be increased, but is
guaranteed never to exceed $8.00 per month.
Underwriting Charge. Policies issued on the basis on full
medical underwriting will be assessed an Underwriting Charge, deducted monthly
as part of the Monthly Deduction. The Underwriting Charge totals $20 in Policy
Year 1, and $45 in each of the next four Policy Years. Policies issued on the
basis of guaranteed issue or simplified issue will not be assessed an
Underwriting Charge.
MORTALITY AND EXPENSE RISK CHARGE
A daily Mortality and Expense Risk Charge will be assessed against
the Separate Account. The current annual rates are set forth below for the
various Policy Years of a Policy.
For Policy Years 1 - 7: 0.22% of Account Value in the Separate
Account
For Policy Years 8 -10: 0.12% of Account Value in the Separate
Account
For Policy Years 11-20: 0.02% of Account Value in the Separate
Account; and
For Policy Year 21 and thereafter: 0.00% of Account Value in
the Separate Account.
We may increase the above rates for the Mortality and Expense Risk
Charge, but the charge is guaranteed not to exceed 0.60% of Account Value in
the Separate Account at all times.
SEPARATE ACCOUNT ADMINISTRATION CHARGE
A daily Separate Account Administration Charge is assessed against the
Separate Account for our expenses incurred in connection with separate account
administration. This daily charge is assessed at an annual rate of 0.10% of
the Account Value in each Subaccount of the Separate Account. This charge is
guaranteed not to increase.
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts. We
have no present intention to impose a transfer charge in the foreseeable
future. However, we reserve the right to impose in the future a transfer
charge of up to $25 on each transfer in excess of twelve transfers in any
Policy Year.
If imposed, the transfer charge will be deducted from the Subaccounts
based on the proportion that each Subaccount's value bears to the total
Account Value in the Separate Account. All transfers effected on the same
Valuation Date would be treated as one transfer transaction. The transfer
charge will not apply to transfers resulting from Policy loans, the exercise
of the transfer right due to the change in investment policy of a Subaccount,
or the initial reallocation of Account Values from the Money Market Subaccount
to other Subaccounts, These transfers will not count against the twelve free
transfers in any Policy Year.
OTHER CHARGES
The Separate Account purchases shares of the Funds at net asset
value. The net asset value of those shares reflect management fees and
expenses already deducted from the assets of the Funds' Portfolios. The fees
and expenses for the Funds and their Portfolios are described briefly in
connection with a general description of each Fund.
More detailed information is contained in the Funds' Prospectuses
which accompany this Prospectus.
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POSSIBLE CHARGE FOR NATIONAL LIFE'S TAXES
At the present time, National Life makes no charge for any Federal,
state or local taxes (other than state premium taxes or the DAC Tax) that the
Company incurs that may be attributable to the Separate Account or to the
Policies. National Life, however, reserves the right in the future to make a
charge for any such tax or other economic burden resulting from the
application of the tax laws that it determines to be properly attributable to
the Accounts or to the Policies. If any tax charges are made in the future,
they will be accumulated daily and transferred from the Separate Account to
National Life's general account. Any investment earnings on tax charges
accumulated in the Separate Account will be retained by National Life.
POLICY RIGHTS AND PRIVILEGES
LOAN PRIVILEGES
General. You may, on any Valuation Date, borrow money from National
Life using the Policy as the only security for the loan. The amount of these
loans may not exceed the Policy's Net Account Value on the date of receipt of
the loan request, minus three times the Monthly Deduction for the next Monthly
Policy Date. While the Insured is living, you may repay all or a portion of a
loan and accrued interest. Loans may be taken by making a written request to
the Third Party Administrator. Loan proceeds will be paid within seven days of
the Valuation Date on which a valid loan request is received at the office of
the Third Party Administrator.
Interest Rate Charged. The interest rate charged on Policy loans
will be as follows:
Policy Years 1 - 7 : 4.60% per year
Policy Years 8 - 10 : 4.50% per year
Policy Years 11 - 20 : 4.40% per year
Policy Years 21 and thereafter: 4.35% per year
Interest is charged from the date of the loan and will be added to the
loan balance at the end of the Policy Year and bear interest at the same rate.
Allocation of Loans and Collateral. When a Policy loan is taken,
Account Value is held in the Loan Account as Collateral for the Policy loan.
Account Value is taken from the Subaccounts of the Separate Account based upon
the proportion that each Subaccount's value bears to the total Account Value
in the Separate Account.
The Collateral for a Policy loan will initially be the loan amount.
Any loan interest due and unpaid will be added to the Policy loan. We will
take additional Collateral for such loan interest so added pro rata from the
Subaccounts of the Separate Account, and hold the Collateral in the Loan
Account. At any time, the amount of the outstanding loan under a Policy equals
the sum of all loans (including due and unpaid interest added to the loan
balance) minus any loan repayments.
Interest Credited to Amounts Held as Collateral. We will credit the
amount held in the Loan Account as Collateral with interest at an effective
annual rate of 4%.
Effect of Policy Loan. Policy loans, whether or not repaid, will have
a permanent effect on the Account Value, and may permanently affect the Death
Benefit under the Policy. The effect on the Account Value and Death Benefit
could be favorable or unfavorable, depending on whether the investment
performance of the Subaccounts is less than or greater than the interest being
credited on the amounts held as Collateral in the Loan Account while the loan
is outstanding. Compared to a Policy under which no loan is made, values under
a Policy will be lower when the credited interest rate on Collateral is less
than the investment experience of assets held in the Separate Account. The
longer a loan is outstanding, the greater
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<PAGE> 36
the effect a Policy loan is likely to have. The Death Benefit will be reduced
by the amount of any outstanding Policy loan.
Loan Repayments. We will assume that any payments made while there is
an outstanding loan on the Policy are premium payments, rather than loan
repayments, unless it receives written instructions that a payment is a loan
repayment. In the event of a loan repayment, the amount held as Collateral in
the Loan Account will be reduced by an amount equal to the repayment, and such
amount will be transferred to the Subaccounts of the Separate Account based on
the proportion that each Subaccount's value bears to the total Account Value
in the Separate Account.
Lapse With Loans Outstanding. The amount of an outstanding loan under
a Policy plus any accrued interest on outstanding loans is not part of Net
Account Value. Therefore, the larger the amount of an outstanding loan, the
more likely it is that the Policy could lapse. (See "How the Duration of the
Policy May Vary," Page 23 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 38.)
Tax Considerations. Any loans taken from a "Modified Endowment
Contract" will be treated as a taxable distribution. In addition, with certain
exceptions, a 10% additional income tax penalty will be imposed on the portion
of any loan that is included in income. (See "Distributions from Policies
Classified as Modified Endowment Contracts," Page 39.)
SURRENDER PRIVILEGE
At any time before the death of the Insured, you may surrender the
Policy for its Net Cash Surrender Value. The Net Cash Surrender Value will
equal the Cash Surrender Value less any Policy loan and accrued interest. The
Net Cash Surrender Value will be determined by National Life on the Valuation
Date it receives, at its Home Office or at the office of the Third Party
Administrator, a written surrender request signed by the Owner, and the
Policy. Coverage under the Policy will end on the day you mail or otherwise
send the written surrender request and the Policy to National Life. We will
ordinarily mail surrender proceeds to you within seven days of receipt of the
request. (See "Other Policy Provisions - Payment of Policy Benefits", Page
35.)
A surrender may have Federal income tax consequences. (See "Tax
Treatment of Policy Benefits," Page 38).
WITHDRAWAL OF NET ACCOUNT VALUE
Before the death of the Insured and on any Valuation Date after the
first Policy Anniversary, you may withdraw a portion of the Policy's Net
Account Value. The maximum Withdrawal is the Net Account Value on the date of
receipt of the Withdrawal request, minus three times the Monthly Deduction on
the most recent Monthly Policy Date.
The Withdrawal will be taken from the Subaccounts of the Separate
Account based upon the proportion that each Subaccount's value bears to the
total Account Value in the Separate Account.
The effect of a Withdrawal on the Death Benefit and Face Amount will
vary depending upon the Death Benefit Option and federal tax death benefit
compliance test in effect and whether the Death Benefit is based on the
applicable Death Benefit Factor times the Cash Surrender Value. (See "Death
Benefit Options," Page 20.)
Option A. The effect of a Withdrawal on the Face Amount and Death
Benefit under Option A and the Guideline Premium Test for tax law compliance
is as follows:
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If the Face Amount divided by the Death Benefit Factor times
the Cash Surrender Value exceeds the Account Value just after the
Withdrawal, a Withdrawal will reduce the Face Amount by the lesser
of such excess and the amount of the Withdrawal.
For the purposes of this illustration (and the following
illustrations of Withdrawals), assume that the Attained Age of the
Insured is under 40, there is no indebtedness and there is no Term
Insurance Amount. The applicable Death Benefit Factor is 250% for
an Insured with an Attained Age under 40, if the Guideline Premium
Test is in effect as the federal tax death benefit compliance test.
Under Option A, a Policy with a Face Amount of $300,000 and
an Account Value of $30,000 will have a Death Benefit of $300,000.
Assume that the Owner takes a Withdrawal of $10,000 The Withdrawal
will reduce the Account Value to $20,000 ($30,000 - $10,000) after
the Withdrawal. The Face Amount divided by the Death Benefit Factor
is $120,000 ($300,000 / 2.50), which exceeds the Account Value
after the Withdrawal by $100,000 ($120,000 - $20,000). The lesser
of this excess and the amount of the Withdrawal is $10,000, the
amount of the Withdrawal. Therefore, the Face Amount will be
reduced by $10,000 to $290,000.
If the Face Amount plus the Term Insurance Amount, divided
by the applicable Death Benefit Factor times the Cash Surrender
Value does not exceed the Cash Surrender Value just after the
Withdrawal, then the Face Amount is not reduced. The Face Amount
will be reduced by the lesser of such excess or the amount of the
Withdrawal.
A decrease in total insurance coverage shall apply first to
any Supplemental Term Insurance Amount provided by a Term Rider on
this Policy, then to any increase in Face Amount in reverse order
in which they were made, and then to the Face Amount on the Date of
Issue.
Under Option A, a policy with a Face Amount of $300,000, an
Account Value of $150,000, and no Term Insurance Amount will have a
Death Benefit of $375,000 ($150,000 x 2.50). Assume that the Owner
takes a Withdrawal of $10,000. The Withdrawal will reduce the
Account Value to $140,000 ($150,000 - $10,000). The Face Amount
divided by the applicable Death Benefit Factor is $120,000, which
does not exceed the Account Value after the Withdrawal. Therefore,
the Face Amount stays at $300,000 and the Death Benefit is $350,000
($140,000 x 2.50).
Option B. The Face Amount will never be decreased by a Withdrawal. A
Withdrawal will, however, always decrease the Death Benefit.
If the Death Benefit plus any outstanding Policy loans and
any unpaid Monthly Deductions equals the Face Amount plus the
Account Value, a Withdrawal will reduce the Account Value by the
amount of the Withdrawal and thus the Death Benefit will also be
reduced by the amount of the Withdrawal.
Under Option B, a Policy with a Face Amount of $300,000 and
an Account Value of $90,000 will have a Death Benefit of $390,000
($300,000 + $90,000), assuming no outstanding Policy loans and no
unpaid Monthly Deductions. Assume the Owner takes a Withdrawal of
$20,000. The Withdrawal will reduce the Account Value to $70,000
($90,000 - $20,000) and the Death Benefit to $370,000 ($300,000 +
$70,000). The Face Amount is unchanged.
If the Death Benefit immediately prior to the Withdrawal is
based on the applicable Death Benefit Factor times the Cash
Surrender Value, the Death Benefit will be reduced to equal the
greater of (a) the Face Amount plus the Account Value after
deducting the amount of the Withdrawal and Withdrawal Charge and
(b) the applicable Death Benefit Factor times the Cash Surrender
Value after deducting the amount of the Withdrawal.
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Under Option B, a Policy with a Face Amount of $300,000 and
an Account Value of $210,000 will have a Death Benefit of $525,000
($210,000 X 2.5), assuming no Policy loans outstanding and no unpaid
Monthly Deductions. Assume the Owner takes a Withdrawal of $60,000.
The Withdrawal will reduce the Account Value to $150,000 ($210,000 -
$60,000), and the Death Benefit to the greater of (a) the Face Amount
plus the Account Value, or $450,000 ($300,000 + $150,000) and (b) the
Death Benefit based on the applicable Death Benefit Factor times the
Cash Surrender Value, or $375,000 ($150,000 X 2.50). Therefore, the
Death Benefit will be $450,000. The Face Amount is unchanged.
If you have elected the Cash Value Accumulation Test for tax law
compliance, a Withdrawal will decrease Face Amount by an amount equal to the
amount withdrawn times 1.00327374.
Because a Withdrawal can affect the Face Amount and the Death Benefit
as described above, a Withdrawal may also affect the Net Amount at Risk which
is used to calculate the Cost of Insurance Charge under the Policy. (See "Cost
of Insurance Charge," 26.) Since a Withdrawal reduces the Net Account Value,
the likelihood that the Policy will lapse is increased. (See "Policy Lapse,"
Page 26.) A request for Withdrawal may not be allowed if such Withdrawal would
reduce the Face Amount below the Minimum Face Amount for the Policy. Also, if
a Withdrawal would result in cumulative premiums exceeding the maximum premium
limitations applicable under the Code for life insurance under the Guideline
Premium Test, we will not allow such Withdrawal.
You may request a Withdrawal only by sending a signed written request
to the Third Party Administrator. A Withdrawal will ordinarily be paid within
seven days of the Valuation Date on which a valid Withdrawal request is
received.
A Withdrawal of Net Account Value may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 38.)
FREE-LOOK PRIVILEGE
The Policy provides for a "free-look" period, during which you may
cancel the Policy and receive a refund equal to the premiums paid on the
Policy. This free-look period ends on the later of the end of the 10th day
after you receive the Policy, or any longer period provided by state law. To
cancel the Policy, you must return the Policy to National Life or to an agent
of National Life within this period with a written request for cancellation.
TRANSFER RIGHT FOR CHANGE IN INVESTMENT POLICY
If the investment policy of a Subaccount of the Separate Account is materially
changed, you may transfer the portion of the Account Value in such Subaccount
to another Subaccount, without regard to any limits on transfers or free
transfers.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer, at no charge to you, two automated fund management
features. Only one of these features may be active for any single Policy at
any time. We are not legally obligated to continue to offer these features.
Although we have no current intention to do so, we may cease offering one or
both these features at any time, after providing 60 days prior written notice
to all Owners who are then utilizing the features being discontinued
Dollar Cost Averaging. This feature permits you to automatically
transfer funds from the Money Market Subaccount to any other Subaccounts on a
monthly basis. You may elect Dollar Cost Averaging at issue by marking the
appropriate box on the initial application, and completing the appropriate
instructions. You may also begin a Dollar Cost Averaging program after issue
by filling out similar information on a change request form and sending it to
us at our Home Office.
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If you elect this feature, we will take the amount to be transferred
from the Money Market Subaccount and transfer it to the Subaccount or
Subaccounts designated to receive the funds, each month on the Monthly Policy
Date. If you elect Dollar Cost Averaging on your application for the Policy,
it will start with the Monthly Policy Date after the date that is 20 days
after issue. If you begin a Dollar Cost Averaging program after the free look
period is over, it will start on the next Monthly Policy Date. Dollar Cost
Averaging will continue until the amount in the Money Market Subaccount is
depleted. The minimum monthly transfer by Dollar Cost Averaging is $100,
except for the transfer which reduces the amount in the Money Market
Subaccount to zero. You may discontinue Dollar Cost Averaging at any time by
sending an appropriate change request form to the Home Office. You may not use
the dollar cost averaging feature to transfer Accumulated Value to the General
Account.
Dollar Cost Averaging allows you to move funds into the various
investment types on a more gradual and systematic basis than the frequency on
which you pay premiums. The dollar cost averaging method of investment is
designed to reduce the risk of making purchases only when the price of units
is high. The periodic investment of the same amount will result in higher
numbers of units being purchased when unit prices are lower, and lower numbers
of units being purchased when unit prices are higher. This technique will not,
however, assure a profit or protect against a loss in declining markets.
Moreover, for the dollar cost averaging technique to be effective, amounts
should be available for allocation from the Money Market Subaccount through
periods of low price levels as well as higher price levels.
Portfolio Rebalancing. This feature permits you to automatically
rebalance the value in the Subaccounts on a semi-annual basis, based on your
premium allocation percentages in effect at the time of the rebalancing. You
may elect it at issue by marking the appropriate box on the application, or,
after issue, by completing a change request form and sending it to our Home
Office.
In Policies utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer will take place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages,
starting with the Monthly Policy Date six months after the Date of Issue, and
then on each Monthly Policy Date six months thereafter. Policies electing
Portfolio Rebalancing after issue will have the first automated transfer occur
as of the Monthly Policy Date on or next following the date we receive the
election at our Home Office, and subsequent rebalancing transfers will occur
every six months from that date. You may discontinue Portfolio Rebalancing at
any time by submitting an appropriate change request form to us at our Home
Office.
If you change your Policy's premium allocation percentages, Portfolio
Rebalancing will automatically be discontinued unless you specifically direct
otherwise.
Portfolio Rebalancing will result in periodic transfers out of
Subaccounts that have had relatively favorable investment performance in
relation to the other Subaccounts to which a Policy allocates premiums, and
into Subaccounts which have had relatively unfavorable investment performance
in relation to the other Subaccounts to which the Policy allocates premiums.
Portfolio rebalancing does not guarantee a profit or protect against a loss.
OTHER POLICY PROVISIONS
Indefinite Policy Duration. The Policy can remain in force indefinitely
(in Texas and Maryland, however, the Policy matures at Attained Age 99 at
which time National Life will pay the Net Cash Surrender Value to the Owner in
one sum unless a Payment Option is chosen, and the Policy will terminate).
However, for a Policy to remain in force after the Insured reaches Attained
Age 99, if the Face Amount is greater than the Account Value, the Face Amount
will automatically be decreased to the current Account Value. Also, at
Attained Age 99 Option B automatically becomes Option A, and no premium
payments are allowed after Attained Age 99, although loan repayments are
allowed. The tax treatment of a Policy's Account Value after Age 100 is
unclear, and you may wish to discuss this treatment with a tax advisor.
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Payment of Policy Benefits. You may decide the form in which Death
Benefit proceeds will be paid. During the Insured's lifetime, you may arrange
for the Death Benefit to be paid in a lump sum or under a Settlement Option.
These choices are also available upon surrender of the Policy for its Net Cash
Surrender Value. If no election is made, payment will be made in a lump sum.
The Beneficiary may also arrange for payment of the Death Benefit in a lump
sum or under a Settlement Option. If paid in a lump sum, the Death Benefit
under a Policy will ordinarily be paid to the Beneficiary within seven days
after National Life receives proof of the Insured's death at its Home Office
and all other requirements are satisfied. If paid under a Settlement Option,
the Death Benefit will be applied to the Settlement Option within seven days
after National Life receives proof of the Insured's death at its Home Office
and all other requirements are satisfied.
Interest at the annual rate of 4% or any higher rate declared by us or
required by law is paid on the Death Benefit from the date of death until
payment is made.
Any amounts payable as a result of surrender, will ordinarily be paid
within seven days of receipt of written request at National Life's Home Office
or the office of the Third Party Administrator in a form satisfactory to
National Life. Any amounts payable as a result of a Withdrawal or Policy loan
will ordinarily be paid within seven days of the Valuation Date on which such
Withdrawal or Policy loan is validly requested.
Generally, the amount of a payment will be determined as of the date of
receipt by National Life or the Third Party Administrator of all required
documents. However, National Life may defer the determination or payment of
such amounts if the date for determining such amounts falls within any period
during which: (1) the disposal or valuation of a Subaccount's assets is not
reasonably practicable because the New York Stock Exchange is closed or
conditions are such that, under the SEC's rules and regulations, trading is
restricted or an emergency is deemed to exist; or (2) the SEC by order permits
postponement of such actions for the protection of National Life
policyholders.
We may postpone any payment under the Policy derived from an amount
paid by check or draft until we are is satisfied that the check or draft has
been paid by the bank upon which it was drawn.
The Policy. The Policy and a copy of the applications attached thereto
are the entire contract. Only statements made in the applications can be used
to void the Policy or deny a claim. The statements are considered
representations and not warranties. Only one of National Life's duly
authorized officers or registrars can agree to change or waive any provisions
of the Policy and only in writing. As a result of differences in applicable
state laws, certain provisions of the Policy may vary from state to state.
Split Dollar Arrangements. The Owner or Owners may enter into a Split
Dollar Arrangement between each other or another person or persons whereby the
payment of premiums and the right to receive the benefits under the Policy
(i.e., Net Cash Surrender Value or Death Benefit) are split between the
parties. There are different ways of allocating such rights.
For example, an employer and employee might agree that under a Policy
on the life of the employee, the employer will pay the premiums and will have
the right to receive the Net Cash Surrender Value. The employee may designate
the Beneficiary to receive any Death Benefit in excess of the Net Cash
Surrender Value. If the employee dies while such an arrangement is in effect,
the employer would receive from the Death Benefit the amount which the
employer would have been entitled to receive upon surrender of the Policy and
the employee's Beneficiary would receive the balance of the proceeds.
No transfer of Policy rights pursuant to a Split Dollar Arrangement
will be binding on National Life unless in writing and received by National
Life.
National Life does not impose any fee with respect to split dollar
arrangements.
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The parties who elect to enter into a Split Dollar Arrangement should
consult their own tax advisers regarding the tax consequences of such an
arrangement.
Assignments. You may assign any and all rights under the Policy. No
assignment binds National Life unless in writing and received by us. National
Life assumes no responsibility for determining whether an assignment is valid
or the extent of the assignee's interest. All assignments will be subject to
any Policy loan. The interest of any beneficiary or other person will be
subordinate to any assignment. A payee who is not also the Owner may not
assign or encumber Policy benefits, and to the extent permitted by applicable
law, such benefits are not subject to any legal process for the payment of any
claim against the payee.
Misstatement of Age and Sex. If it is found that the amount of any
benefit provided by the Policy is incorrect because of misstatement as to age
or sex (if applicable), the Account Value and the Death Benefit will be
equitably adjusted on the basis of the correct facts. When adjusting the
Account Value, the adjustment will take effect on the Monthly Policy Date on
or next following the date we have proof to our satisfaction of such
misstatement. When adjusting the Death Benefit the adjustment shall take
effect as of the Monthly Policy Date preceding the date of death.
Suicide. In the event of the Insured's suicide, while sane or insane,
within two years from the Date of Issue of the Policy (except where state law
requires a shorter period), or within two years of the effective date of a
reinstatement (unless otherwise required by state law), National Life's
liability is limited to the payment to the beneficiary of a sum equal to the
premiums paid less any Policy loan and accrued interest and any Withdrawals
(since the date of reinstatement, in the case of a suicide within two years of
the effective date of a reinstatement), or other reduced amount provided by
state law.
If the Insured commits suicide within two years (or shorter period
required by state law) from the effective date of any Policy change which
increases the Death Benefit and for which an application is required, the
amount which National Life will pay with respect to the increase will be the
Cost of Insurance Charges previously made for such increase (unless otherwise
required by state law).
Incontestability. The Policy will be incontestable after it has been in
force during the Insured's lifetime for two years from the Date of Issue (or
such other date as required by state law). Similar incontestability will apply
to an increase in Face Amount or reinstatement after it has been in force
during the Insured's lifetime for two years from its effective date.
Before such times, however, we may contest the validity of the Policy
(or changes) based on material misstatements in the initial or any subsequent
application.
Dividends. The Policy is participating; however, no dividends are
expected to be paid on the Policy. If dividends are ever declared, they will
be paid in cash. At the time of the Insured person's death, the Death Benefit
will be increased by dividends payable, if any.
Correspondence. All correspondence to you will be deemed to have been
sent to you if mailed to you at your last known address.
Settlement Options. In lieu of a single sum payment on death or
surrender, an election may be made to apply the Death Benefit under any one of
the fixed-benefit Settlement Options provided in the Policy. The options are
described below.
Payment of Interest Only. Interest at a rate of 3.5% per year will be
paid on the amount of the proceeds retained by National Life. Upon the earlier
of the payee's death or the end of a chosen period, the proceeds retained will
be paid to the payee or his or her estate.
Payments for a Stated Time. Equal monthly payments, based on an
interest rate of 3.5% per annum, will be made for the number of years
selected.
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Payments for Life. Equal monthly payments, based on an interest rate of
3.5% per annum, will be made for a guaranteed period and thereafter during the
life of a chosen person. Guaranteed payment periods may be elected for 0, 10,
15, or 20 years or for a refund period, at the end of which the total payments
will equal the proceeds placed under the option.
Payments of a Stated Amount. Equal monthly payments will be made until
the proceeds, with interest at 3.5% per year on the unpaid balance, have been
paid in full. The total payments in any year must be at least $10 per month
for each thousand dollars of proceeds placed under this option.
Life Annuity. Equal monthly payments will be made in the same manner as
in the above Payments for Life option except that the amount of each payment
will be the monthly income provided by National Life's then current settlement
rates on the date the proceeds become payable. No additional interest will be
paid.
Joint and Two Thirds Annuity. Equal monthly payments, based on an
interest rate of 3.5% per year, will be made while two chosen persons are both
living. Upon the death of either, two-thirds of the amount of those payments
will continue to be made during the life of the survivor. We may require proof
of the ages of the chosen persons.
50% Survivor Annuity. Equal monthly payments, based on an interest rate
of 3.5% per year, will be made during the lifetime of the chosen primary
person. Upon the death of the chosen primary person, 50% of the amount of
those payments will continue to be made during the lifetime of the secondary
chosen person. We may require proof of the ages of the chosen persons.
We may pay interest in excess of the stated amounts under the first
four options listed above, but not the last three. Under the first two, and
fourth options above, the payee has the right to change options or to withdraw
all or part of the remaining proceeds. For additional information concerning
the payment options, see the Policy.
SUPPLEMENTAL TERM INSURANCE RIDER
At your option, the Term Rider, which is subject to the restrictions
and limitations set forth in the Rider, may be included in a Policy. Election
of the Term Rider will result in the Death Benefit including the Supplemental
Term Insurance Amount. The charge for the Term Rider will be an amount
included in the Monthly Deduction equal to the Supplemental Term Insurance
Amount, divided by 1.00327234, times the cost of insurance rates which apply
based on the Insured's then Attained Age, sex (if applicable) and Rate Class
applicable to the Insured on the date of issue of the Term Rider. At issue,
costs can be decreased by purchasing a higher Supplemental Term Insurance
Amount through the use of the Term Rider, since there is no Target Premium
associated with the Supplemental Term Insurance Amount, which may have the
effect of reducing the Premium Loads. For Policies issued in the State of
Florida, the Supplemental Term Insurance Rider is not available after age 95.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the Federal
income tax considerations associated with the Policy and does not purport to
be complete or to cover all tax situations. This discussion is not intended as
tax advice. Counsel or other competent tax advisors should be consulted for
more complete information. This discussion is based upon understanding of the
present Federal income tax laws. No representation is made as to the
likelihood of continuation of the present Federal income tax laws or as to how
they may be interpreted by the Internal Revenue Service.
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TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for Federal income
tax purposes and to receive the tax treatment normally accorded life insurance
contracts under Federal tax law, a life insurance policy must satisfy certain
requirements which are set forth in the Internal Revenue Code. Guidance as to
how these requirements are to be applied is limited. Nevertheless, National
Life believes that a Policy issued on the basis of a standard rate class
should satisfy the applicable requirements. There is less guidance, however,
with respect to a policy issued on a substandard basis (i.e., a rate class
involving higher than standard mortality risk) and it is not clear whether
such a policy will in all cases satisfy the applicable requirements,
particularly if the Owner pays the full amount of premiums permitted under the
Policy. Nevertheless, National Life believes it reasonable to conclude that
such a Policy should be treated as a life insurance contract for Federal
income tax purposes. If it is subsequently determined that a Policy does not
satisfy the applicable requirements, National Life may take appropriate steps
to bring the policy into compliance with such requirements and National Life
reserves the right to modify the policy as necessary in order to do so.
In certain circumstances, owners of variable life insurance policies
have been considered for Federal income tax purposes to be the owners of the
assets of separate accounts supporting their contracts due to their ability to
exercise investment control over those assets. Where this is the case, the
policyowners have been currently taxed on income and gains attributable to
separate account assets. There is little guidance in this area, and some
features of the policy, such as the flexibility of Policy Owners to allocate
premium payments and Accumulated Values, have not been explicitly addressed in
published rulings. While National Life believes that the policy does not give
Policy Owners investment control over Separate Account assets, we reserve the
right to modify the policy as necessary to prevent the Policy Owner from being
treated as the owner of the Separate Account assets supporting the Policy.
In addition, the Code requires that the investments of the Separate
Account be "adequately diversified" in order for the policy to be treated as a
life insurance contract for Federal income tax purposes. It is intended that
the Separate Account, through the Funds, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a
life insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
In General. National Life believes that the death benefit under a
Policy should be excludible from the gross income of the beneficiary. Federal,
state and local estate, inheritance, transfer, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy Owner or beneficiary. A tax advisor should be consulted on these
consequences.
Depending on the circumstances, the exchange of a Policy, an increase
or decrease of a Policy's Face Amount, a change in the Policy's Death Benefit
Option (i.e., a change from Death Benefit Option A to Death Benefit Option B
or vice versa, a Policy loan, a Withdrawal, a surrender, a change in
ownership, or an assignment of the Policy may have Federal income tax
consequences. A tax advisor should be consulted before effecting any of these
policy changes.
Generally, as long as you are not subject to the Alternative Minimum
Tax, you will not be deemed to be in constructive receipt of the Account
Value, including increments thereof, until there is a distribution. The tax
consequences of distributions from, and loans taken from or secured by, a
Policy depend upon whether the Policy is classified as a "Modified Endowment
Contract". Whether a Policy is or is not a Modified Endowment Contract, upon a
complete surrender or lapse of a Policy or when benefits are paid at a
Policy's maturity date, if the amount received plus the amount of indebtedness
exceeds the total investment in the Policy, the excess will generally be
treated as ordinary income subject to tax
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Modified Endowment Contracts. Under the Internal Revenue Code,
certain life insurance contracts are classified as "Modified Endowment
Contracts," with less favorable tax treatment than other life insurance
contracts. Due to the flexibility of the Policy as to premium payments and
benefits, the individual circumstances of each Policy will determine whether
it is classified as a Modified Endowment Contract. The rules are too complex
to be summarized here, but generally depend on the amount of premium payments
made during the first seven policy years. Certain changes in a policy after it
is issued could also cause it to be classified as a Modified Endowment
Contract. A current or prospective Policy Owner should consult with a
competent advisor to determine whether a policy transaction will cause the
Policy to be classified as a Modified Endowment Contract.
Distributions Other Than Death Benefits from Modified Endowment
Contracts. Policies classified as Modified Endowment Contracts are subject to
the following tax rules:
(1) All distributions other than death benefits from a Modified
Endowment Contract, including distributions upon surrender
and withdrawals, will be treated first as distributions of
gain taxable as ordinary income and as tax-free recovery of
the Policy Owner's investment in the Policy only after all
gain has been distributed.
(2) Loans taken from or secured by a Policy classified as a
Modified Endowment Contract are treated as distributions and
taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount
subject to tax except where the distribution or loan is made
when the Policy Owner has attained age 59 1/2 or is
disabled, or where the distribution is part of a series of
substantially equal periodic payments for the life (or life
expectancy) of the Policy Owner or the joint lives (or joint
life expectancies) of the Policy Owner and the Policy
Owner's beneficiary or designated beneficiary.
If a Contract becomes a modified endowment contract,
distributions that occur during the contract year will be taxed as
distributions from a modified endowment contract. In addition, distributions
from a Contract within two years before it becomes a modified endowment
contract will be taxed in this manner. This means that a distribution made
from a Contract that is not a modified endowment contract could later become
taxable as a distribution from a modified endowment contract.
Distributions Other Than Death Benefits from Policies that are not
Modified Endowment Contracts. Distributions other than death benefits from a
Policy that is not classified as a Modified Endowment Contract are generally
treated first as a recovery of the Policy Owner's investment in the policy and
only after the recovery of all investment in the policy as taxable income.
However, certain distributions which must be made in order to enable the
Policy to continue to qualify as a life insurance contract for Federal income
tax purposes if policy benefits are reduced during the first 15 policy years
may be treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not classified as a
Modified Endowment Contract are generally not treated as distributions.
However, the tax consequences associated with preferred Policy loans is less
clear and a tax adviser should be consulted about such loans.
Finally, neither distributions from nor loans from or secured by a
Policy that is not a Modified Endowment Contract are subject to the 10 percent
additional income tax.
Investment in the Policy. Your investment in the Policy is generally
your aggregate premium payments. When a distribution is taken from the Policy,
your investment in the Policy is reduced by the amount of the distribution
that is tax-free.
Policy Loan Interest. In general, interest paid on any loan under a
Policy will not be deductible.
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Multiple Policies. All Modified Endowment Contracts that are issued
by National Life (or its affiliates) to the same Policy Owner during any
calendar year are treated as one Modified Endowment Contract for purposes of
determining the amount includible in the Policy Owner's income when a taxable
distribution occurs.
Business Uses of the Policy. Businesses can use the Policy in various
arrangements, including nonqualified deferred compensation or salary
continuance plans, split dollar insurance plans, executive bonus plans, tax
exempt and nonexempt welfare benefit plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the
particular facts and circumstances. If you are purchasing the Policy for any
arrangement the value of which depends in part on its tax consequences, you
should consult a qualified tax adviser. In recent years, moreover, Congress
has adopted new rules relating to life insurance owned by businesses. Any
business contemplating the purchase of a new Policy or a change in an existing
Policy should consult a tax adviser.
Continuation Beyond Age 100. The tax consequences of continuing the
Policy beyond the Insured's 100th year are unclear. You should consult a tax
adviser if you intend to keep the Policy in force beyond the Insured's 100th
year.
SPECIAL RULES FOR EMPLOYEE BENEFIT PLANS
If a trustee under a pension or profit-sharing plan, or similar
deferred compensation arrangement, owns a Policy, the Federal and state income
and estate tax consequences could differ. A tax adviser should be consulted
with respect to such consequences. Policies owned under these types of plans
may also be subject to restrictions under the Employee Retirement Income
Security Act of 1974 ("ERISA"). You should consult a qualified adviser
regarding ERISA.
The amounts of life insurance that may be purchased on behalf of a
participant in a pension or profit-sharing plan are limited.
The current cost of insurance for the net amount at risk is treated
as a "current fringe benefit" and must be included annually in the plan
participant's gross income. We report this cost (generally referred to as the
"P.S. 58" cost) to the participant annually.
If the plan participant dies while covered by the plan and the Policy
proceeds are paid to the participant's beneficiary, then the excess of the
death benefit over the Accumulated Value is not taxable. However, the
Accumulated Value will generally be taxable to the extent it exceeds the
participant's cost basis in the Policy.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the policy could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Policy.
POSSIBLE CHARGES FOR NATIONAL LIFE'S TAXES
At the present time, National Life makes no charge for any Federal,
state or local taxes (other than the charge for state premium taxes and the
DAC tax) that may be attributable to the Subaccounts or to the policies.
National Life reserves the right to charge the Subaccounts for any future
taxes or economic burden National Life may incur.
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LEGAL DEVELOPMENTS REGARDING UNISEX ACTUARIAL TABLES
In 1983, the United States Supreme Court held in Arizona Governing
Committee v. Norris that optional annuity benefits provided under an
employee's deferred compensation plan could not, under Title VII of the Civil
Rights Act of 1964, vary between men and women on the basis of sex. In that
case, the Court applied its decision only to benefits derived from
contributions made on or after August 1, 1983. Subsequent decisions of lower
federal courts indicate that in other factual circumstances the Title VII
prohibition of sex-distinct benefits may apply at an earlier date. In
addition, legislative, regulatory, or decisional authority of some states may
prohibit use of sex-distinct mortality tables under certain circumstances. The
Policies offered by this Prospectus, other than employee benefit plan Policies
(see "Special Rules For Employee Benefit Plans," Page 40) are based upon
actuarial tables which distinguish between men and women and, thus, the Policy
provides different benefits to men and women of the same age. Accordingly,
employers and employee organizations should consider, in consultation with
legal counsel, the impact of these authorities on any employment-related
insurance or benefits program before purchasing the Policy and in determining
whether an employee benefit plan Policy is appropriate.
VOTING RIGHTS
All of the assets held in the Subaccounts of the Separate Account will
be invested in shares of corresponding Portfolios of the Funds. The Funds do
not hold routine annual shareholders' meetings. Shareholders' meetings will be
called whenever each Fund believes that it is necessary to vote to elect the
Board of Directors of the Fund and to vote upon certain other matters that are
required by the 1940 Act or other applicable law or governing documents to be
approved or ratified by the shareholders of a mutual fund. National Life is
the legal owner of Fund shares and as such has the right to vote upon any
matter that may be voted upon at a shareholders' meeting. However, in
accordance with the SEC's view of present applicable law, we will vote the
shares of the Funds at meetings of the shareholders of the appropriate Fund or
Portfolio in accordance with instructions received from Owners. Fund shares
held in each Subaccount of the Separate Account for which no timely
instructions from Owners are received will be voted by us in the same
proportion as those shares in that Subaccount for which instructions are
received.
Each Owner having a voting interest will be sent proxy material and a
form for giving voting instructions. Owners may vote, by proxy or in person,
only as to the Portfolios that correspond to the Subaccounts in which their
Policy values are allocated. The number of shares held in each Subaccount
attributable to a Policy for which you may provide voting instructions will be
determined by dividing your Policy's Account Value in that Subaccount by the
net asset value of one share of the corresponding Portfolio as of the record
date for the shareholder meeting. Fractional shares will be counted. For each
share of a Portfolio for which Owners have no interest, we will cast votes,
for or against any matter, in the same proportion as Owners vote.
If required by state insurance officials, National Life may disregard
voting instructions if such instructions would require shares to be voted so
as to cause a change in the investment objectives or policies of one or more
of the Portfolios, or to approve or disapprove an investment policy or
investment adviser of one or more of the Portfolios. In addition, National
Life may disregard voting instructions in favor of certain changes initiated
by an Owner or the Fund's Board of Directors provided that National Life's
disapproval of the change is reasonable and is based on a good faith
determination that the change would be contrary to state law or otherwise
inappropriate, considering the portfolio's objectives and purposes, and the
effect the change would have on National Life. If we do disregard voting
instructions, we will advise you of that action and its reasons for such
action in the next semi-annual report to you.
Shares of the Funds are currently being offered to variable life
insurance and variable annuity separate accounts of life insurance companies
other than National Life that are not affiliated with National Life. National
Life understands that shares of these Funds also will be voted by such other
life insurance companies in accordance with instructions from their
policyholders invested in such separate accounts. This will dilute the effect
of your voting instructions.
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CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under
applicable Federal securities laws. To the extent that such laws or
regulations promulgated thereunder eliminate the necessity to solicit voting
instructions from Owners or restrict such voting rights, National Life
reserves the right to proceed in accordance with any such laws or regulations.
National Life also reserves the right, subject to compliance with
applicable law, including approval of Owners, if so required: (1) to make
changes in the form of the Separate Account, if in its judgment such changes
would serve the interests of Owners or would be appropriate in carrying out
the purposes of the Policies, for example: (i) operating the Separate Account
as a management company under the 1940 Act; (ii) deregistering the Separate
Account under the 1940 Act if registration is no longer required; (iii)
combining or substituting separate accounts; (iv) transferring the assets of
the Separate Account to another separate account; (v) making changes necessary
to comply with, obtain or continue any exemptions from the 1940 Act; or (vi)
making other technical changes in the Policy to conform with any action
described herein; (2) if in its judgment a Portfolio no longer suits the
investment goals of the Policy, or if tax or marketing conditions so warrant,
to substitute shares of another investment portfolio for shares of such
Portfolio; (3) to eliminate, combine, or substitute Subaccounts and establish
new Subaccounts, if in its judgment marketing needs, tax considerations, or
investment conditions so warrant; and (4) to transfer assets from a Subaccount
to another Subaccount or separate account if the transfer in our judgment
would best serve interests of Policy Owners or would be appropriate in
carrying out the purposes of the Policies; and (5) to modify the provisions of
the Policies to comply with applicable laws. We have reserved all rights in
respect of its corporate name and any part thereof, including without
limitation the right to withdraw its use and to grant its use to one or more
other separate accounts and other entities.
If your Policy has Account Value in a Subaccount that is eliminated, we
will give you at least 30 days notice before the elimination, and will request
that you designate the Subaccount or Subaccounts to which the Account Value in
the Subaccount to be eliminated should be transferred. If no such designation
is received prior to the date of the elimination, then the Account Value in
such Subaccount will be transferred to the Money Market Subaccount. In any
case, if in the future a transfer charge is imposed or limits on the number of
transfers or free transfers are established, no charge will be made for this
transfer, and it will not count toward any limit on transfers or free
transfers.
OFFICERS AND DIRECTORS OF NATIONAL LIFE
The officers and directors of National Life, as well as their principal
occupations during the past five years, are listed below.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION DURING THE PAST FIVE YEARS
----------------- --------------------------
<S> <C>
Patrick E. Welch 1997 to present - Chairman of the Board
Chairman of the Board, and Chief Executive Officer; 1992 to 1997 -
Chief Executive Officer Chairman of the Board, Chief Executive
Officer and President of GNA Corporation.
Thomas H. MacLeay 1996 to Present - President and Chief
President, Chief Operating Officer; 1993 to 1996 -
Operating Officer, Executive Vice President & Chief
and Director Financial Officer.
</TABLE>
42
<PAGE> 48
<TABLE>
<S> <C>
Robert E. Boardman 1994 to present - Chairman of Hickok &
Director Boardman Financial Network
1967 to present - President of Hickok &
Boardman Realty, Inc.
Earle H. Harbison, Jr. 1993 to present: Chairman of
Director Harbison Walker, Inc.
A. Gary Shilling 1978 to present - President of A.
Director Gary Shilling & Company, Inc.
James A. Mallon 1998 to present: Executive Vice President
Executive Vice President & Chief Marketing Officer; 1996 to 1998:
Chief Marketing Officer President & Chief Executive Officer -
Integon Life Insurance Corporation;
1993 to 1996: Senior Vice President & Chief
Marketing Officer - Commercial Union
Life Insurance Company of America.
William A. Smith 1998 to present: Executive Vice President
Executive Vice President & & Chief Financial Officer; 1994 to 1998 -
Chief Financial Officer Vice President and Controller, American
Express Financial Advisors
Rodney A. Buck 2000 to present - Executive Vice President
Executive Vice President & and Chief Investment Officer; 1996 to 2000
Chief Investment Officer - Senior Vice 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
Business & Customer Services 1998 - Vice President - Customer Services.
Michele S. Gatto 1999 to present: Senior Vice President &
Senior Vice President & General Counsel; 1997 to 1999 - Vice
General Counsel President, 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.
</TABLE>
43
<PAGE> 49
<TABLE>
<S> <C>
Charles C. Kittredge 2000 to present: Senior Vice President -
Senior Vice President - Marketing Marketing Development and Operations; 1997
Development and Operations to 2000: Senior Vice President - Sales and
Distribution; 1993 to 1997: - Vice
President - Agency Financial Planning &
Services.
Wade H. Mayo 2000 to present: Senior Vice President;
Senior Vice President 1993 to 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
Senior Vice President to 2000: Vice President & Director of
Agencies; 1990 to 1997: Vice President -
Southern Regional Office
Michael A. Tahan 1998 to present: Senior Vice President &
Senior Vice President & Chief Information Officer; 1991 to 1998 -
Chief Information Officer First Vice President & Chief Information
Officer-Merrill Lynch Asset Management.
</TABLE>
DISTRIBUTION OF POLICIES
Applications for the Policies are solicited by agents who are licensed
by state insurance authorities to sell National Life's variable life insurance
policies, and who are also registered representatives of Equity Services, Inc.
("ESI") or registered representatives of broker/dealers who have Selling
Agreements with ESI. ESI, a Vermont corporation formed on October 7, 1968,
whose address is National Life Drive, Montpelier, Vermont 05604, is a
registered broker/dealer under the Securities Exchange Act of 1934 (the "1934
Act") and a member of the National Association of Securities Dealers, Inc.
(the "NASD"). ESI is an indirect wholly-owned subsidiary of National Life. ESI
acts as the principal underwriter, as defined in the 1940 Act, of the
Policies, and for the Separate Account pursuant to an Underwriting Agreement
to which the Separate Account, ESI and National Life are parties.
National Life is seeking approval to sell the Policies in all states and
the District of Columbia. However, all approvals may not be obtained. The
Policies are offered and sold only in those states where their sale is lawful.
The insurance underwriting and the determination of a proposed Insured's
Rate Class and whether to accept or reject an application for a Policy is done
by National Life. National Life will refund any premiums paid if a Policy
ultimately is not issued or will refund the applicable amount if the Policy is
returned under the free look provision.
Dealers are compensated for sales of the Policies by dealer concessions.
During the first seven Policy Years, the gross dealer concession will not be
more than 15% of the premiums paid up to the target Premium and 2.5% of the
premiums paid in excess of the Target Premium. For Policy Years after Policy
Year 7, the gross dealer concession will not be more than 5% of the premiums
paid, up to the Target Premium, and 2.5% of the premiums in excess of the
Target Premium. In addition, dealers will be paid amounts equal to 0.10% per
annum of the Account Value in the Separate Account for the first twenty Policy
Years, and 0.05% per annum of such amount thereafter.
44
<PAGE> 50
The directors of ESI are Patrick E. Welch, Thomas H. MacLeay, Rodney A.
Buck, all of whose principal occupations are disclosed under "Directors and
Officers of National Life" above, and Joseph M. Rob, the Chairman and Chief
Executive Officer of ESI. ESI's other officers are:
<TABLE>
<S> <C>
Kenneth R. Ehinger President & Chief Operating Officer
John M. Grab, Jr. Senior Vice President & Chief Financial Officer
Stephen A. Englese Senior Vice President - Financial Products
Gregory D. Teese Vice President - Compliance
Budd A. Shedaker Assistant Vice President - Communications
D. Russell Morgan Counsel
Sharon E. Bernard Treasurer & Controller
Lisa A. Pettrey Secretary
JoAnn K. Morissette Assistant Secretary
</TABLE>
The principal business address of all these individuals is National Life
Drive, Montpelier, Vermont 05604.
POLICY REPORTS
Within 30 days after each Policy Anniversary, a statement will be sent
to you describing the status of your Policy, including setting forth the Face
Amount, the current Death Benefit, any Policy loans and accrued interest, the
current Account Value, the amount held as Collateral in the Loan Account, the
value in each Subaccount of the Separate Account, premiums paid since the last
report, charges deducted since the last report, any Withdrawals since the last
report, and the current Net Cash Surrender Value. In addition, a statement
will be sent to you showing the status of your Policy following the transfer
of amounts from one Subaccount of a Separate Account to another, the taking
out of a loan, a repayment of a loan, a Withdrawal and the payment of any
premiums (excluding those paid by bank draft or otherwise under the Automatic
Payment Plan).
You will receive a semi-annual report containing the financial
statements of each Fund in which your Policy has Account Value, as required by
the 1940 Act.
THIRD PARTY ADMINISTRATOR
McCamish Systems, LLC, which is located at 6425 Powers Ferry Road,
Third Floor, Atlanta, Georgia 30339, will act as administrator of the Policies
on behalf of National Life.
STATE REGULATION
National Life is subject to regulation and supervision by the Insurance
Department of the State of Vermont which periodically examines its affairs. It
is also subject to the insurance laws and regulations of all jurisdictions
where it is authorized to do business. A copy of the Policy form has been
filed with, and where required approved by, insurance officials in each
jurisdiction where the Policies are sold. National Life is required to submit
annual statements of its operations, including financial statements, to the
insurance departments of the various jurisdictions in which it does business
for the purposes of determining solvency and compliance with local insurance
laws and regulations.
EXPERTS
The Financial Statements listed on Page F-1 have been included in this
Prospectus, in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Actuarial matters included in the Prospectus have been examined by Kiri
Parankirinathan, A.S.A., M.A.A.A., President of Life Product Developers, Inc.
45
<PAGE> 51
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 Company, like other life insurance companies, is involved in
lawsuits, including class action lawsuits. In some class action and other
lawsuits involving insurance companies, substantial damages have been sought
and/or material settlement payments have been made. Although the Company
cannot predict the outcome of any litigation with certainty, the Company
believes that at the present time, there are no pending or threatened lawsuits
that are reasonably likely to have a material adverse impact on it or the
Variable Account.
FINANCIAL STATEMENTS
The financial statements of National Life and of the relevant
Subaccounts of the Separate Account appear on the following pages. The
financial statements of National Life should be distinguished from the
financial statements of the Separate Account and should be considered only as
bearing upon National Life's ability to meet its obligations under the
Policies.
46
<PAGE> 52
GLOSSARY
ACCOUNT VALUE The sum of the Policy's values in
the Separate Account and the Loan
Account.
ATTAINED AGE The Issue Age of the Insured plus
the number of full Policy Years which
have passed since the Date of Issue.
BENEFICIARY The person(s) or entity(ies) designated
to receive all or some of the Death
Benefit when the Insured dies. The
Beneficiary is designated in the
application or if subsequently changed,
as shown in the latest change filed
with National Life. The interest of any
Beneficiary who dies before the Insured
shall vest in the Owner unless
otherwise stated.
CASH SURRENDER VALUE The Account Value of the Policy
reflecting, in Policy Years
1 and 2, the Distribution Charge
Refund. The Cash Surrender Value is
equal to the Account Value on the
second Policy Anniversary and
thereafter.
COLLATERAL The Account Value in the Loan Account
which secures the amount of any Policy
loan.
CUMULATIVE MINIMUM MONTHLY PREMIUM The sum of the Minimum Monthly Premiums
in effect on each Monthly Policy Date
since the Date of Issue (including the
current month).
DAC TAX A tax attributable to Specified
Policy Acquisition Expenses under
Internal Revenue Code Section 848.
DATE OF ISSUE The date on which the Policy is issued,
which is set forth in the Policy. It is
used to determine Policy Years, Policy
Months and Monthly Policy Dates, as well
as to measure suicide and contestable
periods.
DEATH BENEFIT Under Option A, the greater of (a) the
Face Amount or (b) the Death Benefit
Factor times the Cash Surrender Value
on the date of death; under Option B,
the greater of (a) the Face Amount plus
the Account Value on the date of death,
or (b) the Death Benefit Factor times
the Cash Surrender Value on the date of
death; in each case plus any
Supplemental Term Insurance Amount,
less any outstanding Policy loan and
accrued interest, and less any unpaid
Monthly Deductions.
DEATH BENEFIT FACTOR A percentage specified in either the
Cash Value Accumulation Test or the
Guideline Premium Test for
qualification of a Policy as life
insurance under the Internal Revenue
Code, which when multiplied by the Cash
Surrender Value, must always be less
than or equal to the Death Benefit plus
any outstanding Policy loans, accrued
interest thereon, and any unpaid
Monthly Deductions, and minus any
dividends payable and any Supplemental
term Insurance Amount.
DEATH BENEFIT STANDARD The Death Benefit Factor multiplied by
the Cash Surrender Value of the Policy
on the date of the Insured's death,
less the amount of any Monthly
Deductions then due, and less any
outstanding Policy loans plus accrued
interest.
47
<PAGE> 53
DISTRIBUTION CHARGE An amount deducted from each premium to
cover the cost of distribution of the
Policy. The Distribution Charge is
equal to, in Policy Year 1, 13% of
premiums paid during the Policy Year up
to the Target Premium, and 0.5% of
premiums paid in excess of the target
premium during the Policy Year. In
Policy Years 2 through 7, the
Distribution Charge is equal to 15% of
premiums paid during a Policy Year up
to the Target Premium, and 2.5% of
premiums paid in excess of the Target
Premium in any such Policy Year. In
Policy Years 8 and thereafter, the
Distribution Charge will be 5% of
premiums paid during a Policy Year up
to the Target Premium, and 2.5% of
premiums paid in excess of the Target
Premium in any such Policy Year.
DISTRIBUTION CHARGE REFUND An amount which will be added to
Account Value as of the time of the
applicable first year premium payments,
to determine the proceeds payable to
the Owner upon surrender during in
Policy Years 1 or 2. Such amount shall
be equal to the lesser of (a) the
Premium Loads on all premiums paid in
the first Policy Year, less 2% of such
premiums paid in the first Policy Year,
or (b) one third of the Premium Loads
paid on all premiums paid in the first
Policy Year, plus 2% of such premiums,
less the Premium Tax Charge. The
Distribution Charge Refund is zero at
all times after the first Policy Year.
DURATION The number of full years the insurance
has been in force; for the Face Amount
on the Date of Issue, measured from the
Date of Issue; for any increase in Face
Amount, measured from the effective
date of such increase.
FACE AMOUNT The Face Amount of the Policy on the
Date of Issue plus any increases in
Face Amount and minus any decreases in
Face Amount.
GRACE PERIOD A 61-day period measured from the date on
which notice of pending lapse is sent by
National Life, during which the Policy
will not lapse and insurance coverage
continues. To prevent lapse, the Owner
must during the Grace Period make a
premium payment at least equal to three
times the Monthly Deduction due the
date when the Grace Period began, plus
any Premium Loads.
HOME OFFICE National Life's Home Office at National
Life Drive, Montpelier, Vermont 05604.
INSURED The person upon whose life the Policy
is issued.
ISSUE AGE The age of the Insured at his or her
birthday nearest the Date of Issue. The
Issue Age is stated in the Policy.
LOAN ACCOUNT Account Value which is held in National
Life's general account as Collateral
for Policy loans.
MINIMUM FACE AMOUNT The Minimum Face Amount is $5000.
MINIMUM INITIAL PREMIUM The minimum premium required to issue a
Policy. The Minimum Initial Premium per
set of Policies purchased at the same
time and associated with a corporation
or its affiliates, a trust, or a
partnership, is $50,000.
48
<PAGE> 54
MINIMUM MONTHLY PREMIUM An amount stated in the Policy, the
payment of which each month will keep
the Policy from entering a Grace Period
during the Policy Protection Period.
MONTHLY DEDUCTION The amount deducted in advance from the
Account Value on each Monthly Policy
Date. It includes the Policy
Administration Charge, the Cost of
Insurance Charge, and, if applicable,
the Underwriting Charge and the charge
for the Term Rider.
MONTHLY POLICY DATE The day in each calendar month which is
the same day of the month as the Date
of Issue, or the last day of any month
having no such date, except that
whenever the Monthly Policy Date would
otherwise fall on a date other than a
Valuation Date, the Monthly Policy Date
will be deemed to be the next Valuation
Date.
NET ACCOUNT VALUE The Account Value of a Policy less any
outstanding Policy loans and accrued
interest thereon.
NET AMOUNT AT RISK The amount by which (a) the Death
Benefit, plus any outstanding Policy
loans and accrued interest, and plus
any unpaid Monthly Deductions, and
divided by 1.0032734 (to take into
account earnings of 4% per annum solely
for the purpose of computing Net Amount
at Risk), exceeds (b) the Account
Value.
NET CASH SURRENDER VALUE The Cash Surrender Value of a policy
less any outstanding Policy Loans and
accrued interest thereon.
NET PREMIUM The remainder of a premium after the
deduction of the Premium Loads.
OWNER The person(s) or entity(ies) entitled
to exercise the rights granted in the
Policy.
POLICY ADMINISTRATION CHARGE A charge currently in the amount of
$5.50 per month included in the Monthly
Deduction, which is intended to
reimburse National Life for ordinary
administrative expenses. National Life
reserves the right to increase this
charge up to an amount equal to $8.00
per month.
POLICY ANNIVERSARY The same day and month as the Date of
Issue in each later year.
POLICY PROTECTION PERIOD The first five years after the Date of
Issue of a Policy during which the
Policy will not lapse regardless of
whether net Account value is sufficient
to cover the Monthly Deductions,
provided that premium payments at least
equal to the Cumulative Minimum Monthly
Premium have been paid.
POLICY YEAR A year that starts on the Date of Issue
or on a Policy Anniversary.
PREMIUM LOADS A charge deducted from each premium
payment, which consists of the
Distribution Charge and the applicable
Premium Tax Charge
PREMIUM TAX CHARGE A charge deducted from each premium
payment to cover the cost of all
applicable state and local premium
taxes.
49
<PAGE> 55
RATE CLASS The classification of the Insured for
cost of insurance purposes. The Rate
Classes are: for each of guaranteed
issue, simplified issue, and full
medical underwriting, there are male
non-smoker, female non-smoker, unisex
non-smoker, male smoker, female smoker,
unisex nonsmoker, unisex unismoker,
male unismoker, and female unismoker.
For full medical underwriting cases,
preferred and substandard rate classes
may also apply.
SUPPLEMENTAL TERM INSURANCE AMOUNT Additional insurance coverage provided
by the Term Rider, equal to, under Option
A, the Term Insurance Amount stated in
the Policy less any excess of (a) the
Policy's Death Benefit Standard over (b)
the Policy's Face Amount on the date of
the Insured's death, less the amount of
any Monthly Deductions then due, and less
any outstanding Policy loans and
accrued interest thereon, but not less
than zero. Under Option B, the
Supplemental Term Insurance Amount is
equal to the Term Insurance Amount
stated in the Policy less any excess of
(a) the Policy's Death Benefit Standard
over (b) the Policy's Face Amount on
the date of the Insured's death, plus
the Account Value of the Policy on the
date of the Insured's Death, less the
amount of any Monthly Deductions then
due, and less any outstanding Policy
loans and accrued interest thereon, but
not less than zero.
TARGET PREMIUM An amount equal to 1.25 times the
annual whole life premium which would
apply to a Policy calculated by using
the applicable 1980 Commissioners
Standard Ordinary Mortality Table and
an interest rate of 3.5%.
TERM INSURANCE AMOUNT An amount stated in the Policy on which
the Supplemental Term Insurance Amount
is based.
TERM RIDER An optional benefit that may be
included in a Policy at the owner's
option, which provides additional
insurance coverage in the form of the
Supplemental Term Insurance Amount.
THIRD PARTY ADMINISTRATOR The administrator of the Policy
appointed by National Life, McCamish
Systems, LLC, located at 6425 Powers
Ferry Road, Third Floor, Atlanta,
Georgia 30339.
VALUATION DATE Each day that the New York Stock
Exchange is open for business other
than the day after Thanksgiving and any
day on which trading is restricted by
directive of the Securities and
Exchange Commission. Unless otherwise
indicated, whenever an event occurs or
a transaction is to be effected on a
day that is not a Valuation Date, it
will be deemed to have occurred on the
next Valuation Date.
VALUATION PERIOD The time between two successive
Valuation Dates. Each Valuation Period
includes a Valuation Date and any
non-Valuation Date or consecutive
non-Valuation Dates immediately
preceding it.
WITHDRAWAL A payment made at the request of the
Owner pursuant to the right in the
Policy to withdraw a portion of the
Policy's Net Account Value.
50
<PAGE> 56
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, ACCOUNT VALUES
AND NET CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Account Values
and Net Cash Surrender Values of a Policy may change with the investment
experience of the Separate Account. The tables show how the Death Benefits,
Account Values and Net Cash Surrender Values of a Policy issued to an Insured
of a given age, sex and Rate Class would vary over time if the investment
return on the assets held in each Portfolio of each of the Funds were a
uniform, gross annual rate of 0%, 6% and 12%.
The tables on Pages A-2 to A-10 illustrate a Policy issued to a male
Insured, Age 40 in the full medical underwriting nonsmoker preferred Rate
Class with a Face Amount of $250,000 and Planned Periodic Premiums of $3,000
paid at the beginning of each Policy Year. The Death Benefits, Account Values
and Net Cash Surrender Values would be lower if the Insured was in a smoker or
substandard class, a guaranteed issue class or a simplified issue class, since
the cost of insurance charges are higher for these classes. Also, the values
would be different from those shown if the gross annual investment returns
averaged 0%, 6% and 12% over a period of years, but fluctuated above and below
those averages for individual Policy Years.
The second column of the tables show the amount to which the premiums
would accumulate if an amount equal to those premiums were invested to earn
interest, after taxes, at 5% compounded annually. The columns shown under the
heading "Guaranteed" assume that throughout the life of the policy, the
monthly charge for cost of insurance is based on the maximum level permitted
under the Policy (based on the applicable 1980 CSO Table); the columns under
the heading "Current" assume that throughout the life of the Policy, the
monthly charge for cost of insurance is based on the current cost of insurance
rate, and the Mortality and Expense Risk Charge and the Policy Administration
Charge are at the current rates.
The amounts shown in all tables reflect (1) the Mortality and Expense
Risk Charge, (2) the Separate Account Administration Charge, and (3) an
averaging of certain other asset charges described below that may be assessed
under the Policy. The other asset charges reflected in the Current and
Guaranteed illustrations equals an average of 0.83%. This total is based on an
assumption that an Owner allocates the Policy values equally among the
Subaccounts of the Separate Account. These asset charges take into account
expense reimbursement arrangements expected to be in place for 2000 for some
of the Portfolios. In the absence of the reimbursement arrangements for some
of the Portfolios, the other asset charges would have totalled an average of
1.20%. If the reimbursement agreements were discontinued, the Account Values
and Net Cash Surrender Values of a Policy which allocates Policy Values
equally among the Subaccounts would be lower than those shown in the following
tables. For information on Fund and Portfolio expenses, see the prospectuses
for the Funds accompanying this prospectus.
The tables also reflect the fact that no charges for Federal or state
income taxes are currently made against the Separate Account. If such a charge
is made in the future, it would take a higher gross annual rate of return to
produce the same Policy values.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums are paid and allocated as
indicated and no Policy loans are made. The tables are also based on the
assumption that the Owner has not requested an increase or decrease in the
Face Amount, that no Withdrawals have been made and no transfers have been
made in any Policy Year.
Upon request, National Life will provide a comparable illustration based
upon the proposed Insured's Age and Rate Class, the Death Benefit Option, the
Death Benefit compliance test, Face Amount and Planned Periodic Premiums
requested and the application of the Term Rider, if requested.
A-1
<PAGE> 57
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 PREFERRED
CASH VALUE ACCUMULATION TEST NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 0% (NET ANNUAL RATE OF RETURN OF -1.53% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT
CHARGES, -1.16% FOR THE FIRST SEVEN YEARS, -1.06%
FOR THE NEXT THREE YEARS, -0.96% FOR THE NEXT 10
YEARS, AND -0.94% FOR YEARS AFTER THE TWENTIETH
YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
Premium ---------- -------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,834 1,982 250,000 2,343 2,492 250,000
2 6,458 3,517 3,663 250,000 4,552 4,699 250,000
3 9,930 5,134 5,134 250,000 6,686 6,686 250,000
4 13,577 6,681 6,681 250,000 8,765 8,765 250,000
5 17,406 8,158 8,158 250,000 10,794 10,794 250,000
6 21,426 9,601 9,601 250,000 12,819 12,819 250,000
7 25,647 10,964 10,964 250,000 14,792 14,792 250,000
8 30,080 12,539 12,539 250,000 17,029 17,029 250,000
9 34,734 14,023 14,023 250,000 19,209 19,209 250,000
10 39,620 15,410 15,410 250,000 21,329 21,329 250,000
11 44,751 16,695 16,695 250,000 23,407 23,407 250,000
12 50,139 17,867 17,867 250,000 25,413 25,413 250,000
13 55,796 18,909 18,909 250,000 27,332 27,332 250,000
14 61,736 19,811 19,811 250,000 29,164 29,164 250,000
15 67,972 20,555 20,555 250,000 30,913 30,913 250,000
16 74,521 21,127 21,127 250,000 32,568 32,568 250,000
17 81,397 21,510 21,510 250,000 34,134 34,134 250,000
18 88,617 21,695 21,695 250,000 35,608 35,608 250,000
19 96,198 21,667 21,667 250,000 36,977 36,977 250,000
20 104,158 21,400 21,400 250,000 38,232 38,232 250,000
25 150,340 15,275 15,275 250,000 42,492 42,492 250,000
30 209,282 0 0 0 42,121 42,121 250,000
</TABLE>
The Death Benefit may, and the Account Values and Cash Surrender Values will,
differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD
BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE
TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT
FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SUBACCOUNTS OF THE SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE
SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY
AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR
SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-2
<PAGE> 58
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 PREFERRED
CASH VALUE ACCUMULATION TEST NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 6% (NET ANNUAL RATE OF RETURN OF 4.38% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT
CHARGES, 4.77% FOR THE FIRST SEVEN YEARS, 4.88% FOR
THE NEXT THREE YEARS, 4.98% FOR THE NEXT 10 YEARS,
AND 5.00% FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
Premium ---------- -------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,964 2,120 250,000 2,489 2,646 250,000
2 6,458 3,884 4,048 250,000 4,984 5,149 250,000
3 9,930 5,849 5,849 250,000 7,548 7,548 250,000
4 13,577 7,853 7,853 250,000 10,204 10,204 250,000
5 17,406 9,900 9,900 250,000 12,959 12,959 250,000
6 21,426 12,028 12,028 250,000 15,869 15,869 250,000
7 25,647 14,191 14,191 250,000 18,889 18,889 250,000
8 30,080 16,702 16,702 250,000 22,363 22,363 250,000
9 34,734 19,260 19,260 250,000 25,976 25,976 250,000
10 39,620 21,860 21,860 250,000 29,732 29,732 250,000
11 44,751 24,500 24,500 250,000 33,664 33,664 250,000
12 50,139 27,169 27,169 250,000 37,744 37,744 250,000
13 55,796 29,854 29,854 250,000 41,968 41,968 250,000
14 61,736 32,545 32,545 250,000 46,341 46,341 250,000
15 67,972 35,227 35,227 250,000 50,880 50,880 250,000
16 74,521 37,887 37,887 250,000 55,582 55,582 250,000
17 81,397 40,510 40,510 250,000 60,465 60,465 250,000
18 88,617 43,088 43,088 250,000 65,535 65,535 250,000
19 96,198 45,608 45,608 250,000 70,796 70,796 250,000
20 104,158 48,047 48,047 250,000 76,252 76,252 250,000
25 150,340 57,953 57,953 250,000 106,886 106,886 250,000
30 209,282 59,663 59,663 250,000 144,253 144,253 250,000
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD
BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE
TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT
FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SUBACCOUNTS OF THE SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE
SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY
AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR
SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
<PAGE> 59
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 PREFERRED
CASH VALUE ACCUMULATION TEST NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 12% (NET ANNUAL RATE OF RETURN OF 10.29% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT
CHARGES, 10.71% FOR THE FIRST SEVEN YEARS, 10.81%
FOR THE NEXT THREE YEARS, 10.92% FOR THE NEXT 10
YEARS, AND 10.95% FOR YEARS AFTER THE TWENTIETH
YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
Premium ---------- -------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,093 2,258 250,000 2,635 2,801 250,000
2 6,458 4,267 4,450 250,000 5,434 5,618 250,000
3 9,930 6,625 6,625 250,000 8,481 8,481 250,000
4 13,577 9,179 9,179 250,000 11,823 11,823 250,000
5 17,406 11,951 11,951 250,000 15,496 15,496 250,000
6 21,426 15,003 15,003 250,000 19,587 19,587 250,000
7 25,647 18,314 18,314 250,000 24,089 24,089 250,000
8 30,080 22,241 22,241 250,000 29,410 29,410 250,000
9 34,734 26,516 26,516 250,000 35,279 35,279 250,000
10 39,620 31,169 31,169 250,000 41,752 41,752 250,000
11 44,751 36,239 36,239 250,000 48,942 48,942 250,000
12 50,139 41,762 41,762 250,000 56,879 56,879 250,000
13 55,796 47,775 47,775 250,000 65,638 65,638 250,000
14 61,736 54,327 54,327 250,000 75,314 75,314 250,000
15 67,972 61,466 61,466 250,000 86,019 86,019 250,000
16 74,521 69,253 69,253 250,000 97,867 97,867 250,000
17 81,397 77,759 77,759 250,000 110,999 110,999 250,000
18 88,617 87,068 87,068 250,000 125,548 125,548 265,682
19 96,198 97,279 97,279 250,000 141,590 141,590 291,105
20 104,158 108,496 108,496 250,000 159,258 159,258 318,242
25 150,340 182,782 182,782 319,068 278,401 278,401 485,984
30 209,282 292,499 292,499 452,693 470,070 470,070 727,514
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD
BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE
TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT
FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SUBACCOUNTS OF THE SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE
SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY
AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR
SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
<PAGE> 60
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 PREFERRED
GUIDELINE PREMIUM TEST NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 0% (NET ANNUAL RATE OF RETURN OF -1.53% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT
CHARGES, -1.16% FOR THE FIRST SEVEN YEARS, -1.06%
FOR THE NEXT THREE YEARS, -0.96% FOR THE NEXT 10
YEARS, AND -0.94% FOR YEARS AFTER THE TWENTIETH
YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
Premium ---------- -------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,834 1,982 250,000 2,343 2,492 250,000
2 6,458 3,517 3,663 250,000 4,552 4,699 250,000
3 9,930 5,134 5,134 250,000 6,686 6,686 250,000
4 13,577 6,681 6,681 250,000 8,765 8,765 250,000
5 17,406 8,158 8,158 250,000 10,794 10,794 250,000
6 21,426 9,601 9,601 250,000 12,819 12,819 250,000
7 25,647 10,964 10,964 250,000 14,792 14,792 250,000
8 30,080 12,539 12,539 250,000 17,029 17,029 250,000
9 34,734 14,023 14,023 250,000 19,209 19,209 250,000
10 39,620 15,410 15,410 250,000 21,329 21,329 250,000
11 44,751 16,695 16,695 250,000 23,407 23,407 250,000
12 50,139 17,867 17,867 250,000 25,413 25,413 250,000
13 55,796 18,909 18,909 250,000 27,332 27,332 250,000
14 61,736 19,811 19,811 250,000 29,164 29,164 250,000
15 67,972 20,555 20,555 250,000 30,913 30,913 250,000
16 74,521 21,127 21,127 250,000 32,568 32,568 250,000
17 81,397 21,510 21,510 250,000 34,134 34,134 250,000
18 88,617 21,695 21,695 250,000 35,608 35,608 250,000
19 96,198 21,667 21,667 250,000 36,977 36,977 250,000
20 104,158 21,400 21,400 250,000 38,232 38,232 250,000
25 150,340 15,275 15,275 250,000 42,492 42,492 250,000
30 209,282 0 0 0 42,121 42,121 250,000
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD
BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE
TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT
FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SUBACCOUNTS OF THE SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE
SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY
AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR
SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
<PAGE> 61
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 PREFERRED
GUIDELINE PREMIUM TEST NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 6% (NET ANNUAL RATE OF RETURN OF 4.38% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT
CHARGES, 4.77% FOR THE FIRST SEVEN YEARS, 4.88% FOR
THE NEXT THREE YEARS, 4.98% FOR THE NEXT 10 YEARS,
AND 5.00% FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
Premium ---------- -------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,964 2,120 250,000 2,489 2,646 250,000
2 6,458 3,884 4,048 250,000 4,984 5,149 250,000
3 9,930 5,849 5,849 250,000 7,548 7,548 250,000
4 13,577 7,853 7,853 250,000 10,204 10,204 250,000
5 17,406 9,900 9,900 250,000 12,959 12,959 250,000
6 21,426 12,028 12,028 250,000 15,869 15,869 250,000
7 25,647 14,191 14,191 250,000 18,889 18,889 250,000
8 30,080 16,702 16,702 250,000 22,363 22,363 250,000
9 34,734 19,260 19,260 250,000 25,976 25,976 250,000
10 39,620 21,860 21,860 250,000 29,732 29,732 250,000
11 44,751 24,500 24,500 250,000 33,664 33,664 250,000
12 50,139 27,169 27,169 250,000 37,744 37,744 250,000
13 55,796 29,854 29,854 250,000 41,968 41,968 250,000
14 61,736 32,545 32,545 250,000 46,341 46,341 250,000
15 67,972 35,227 35,227 250,000 50,880 50,880 250,000
16 74,521 37,887 37,887 250,000 55,582 55,582 250,000
17 81,397 40,510 40,510 250,000 60,465 60,465 250,000
18 88,617 43,088 43,088 250,000 65,535 65,535 250,000
19 96,198 45,608 45,608 250,000 70,796 70,796 250,000
20 104,158 48,047 48,047 250,000 76,252 76,252 250,000
25 150,340 57,953 57,953 250,000 106,886 106,886 250,000
30 209,282 59,663 59,663 250,000 144,253 144,253 250,000
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD
BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE
TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT
FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SUBACCOUNTS OF THE SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE
SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY
AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR
SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE> 62
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 PREFERRED
GUIDELINE PREMIUM TEST NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 12% (NET ANNUAL RATE OF RETURN OF 10.29% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT
CHARGES, 10.71% FOR THE FIRST SEVEN YEARS, 10.81%
FOR THE NEXT THREE YEARS, 10.92% FOR THE NEXT 10
YEARS, AND 10.95% FOR YEARS AFTER THE TWENTIETH
YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
Premium ---------- -------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,093 2,258 250,000 2,635 2,801 250,000
2 6,458 4,267 4,450 250,000 5,434 5,618 250,000
3 9,930 6,625 6,625 250,000 8,481 8,481 250,000
4 13,577 9,179 9,179 250,000 11,823 11,823 250,000
5 17,406 11,951 11,951 250,000 15,496 15,496 250,000
6 21,426 15,003 15,003 250,000 19,587 19,587 250,000
7 25,647 18,314 18,314 250,000 24,089 24,089 250,000
8 30,080 22,241 22,241 250,000 29,410 29,410 250,000
9 34,734 26,516 26,516 250,000 35,279 35,279 250,000
10 39,620 31,169 31,169 250,000 41,752 41,752 250,000
11 44,751 36,239 36,239 250,000 48,942 48,942 250,000
12 50,139 41,762 41,762 250,000 56,879 56,879 250,000
13 55,796 47,775 47,775 250,000 65,638 65,638 250,000
14 61,736 54,327 54,327 250,000 75,314 75,314 250,000
15 67,972 61,466 61,466 250,000 86,019 86,019 250,000
16 74,521 69,253 69,253 250,000 97,867 97,867 250,000
17 81,397 77,759 77,759 250,000 110,999 110,999 250,000
18 88,617 87,068 87,068 250,000 125,566 125,566 250,000
19 96,198 97,279 97,279 250,000 141,739 141,739 250,000
20 104,158 108,496 108,496 250,000 159,708 159,708 250,000
25 150,340 184,840 184,840 250,000 284,457 284,457 347,037
30 209,282 312,272 312,272 362,235 492,048 492,048 570,776
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE
SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE
SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE
ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR
12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO
REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-7
<PAGE> 63
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 PREFERRED
GUIDELINE PREMIUM TEST NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 0% (NET ANNUAL RATE OF RETURN OF -1.53% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT
CHARGES, -1.16% FOR THE FIRST SEVEN YEARS, -1.06%
FOR THE NEXT THREE YEARS, -0.96% FOR THE NEXT 10
YEARS, AND -0.94% FOR YEARS AFTER THE TWENTIETH
YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
Premium ---------- -------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,829 1,977 251,829 2,342 2,491 252,342
2 6,458 3,503 3,648 253,503 4,549 4,696 254,549
3 9,930 5,105 5,105 255,105 6,678 6,678 256,678
4 13,577 6,632 6,632 256,632 8,751 8,751 258,751
5 17,406 8,083 8,083 258,083 10,769 10,769 260,769
6 21,426 9,495 9,495 259,495 12,781 12,781 262,781
7 25,647 10,818 10,818 260,818 14,737 14,737 264,737
8 30,080 12,344 12,344 262,344 16,951 16,951 266,951
9 34,734 13,770 13,770 263,770 19,104 19,104 269,104
10 39,620 15,088 15,088 265,088 21,190 21,190 271,190
11 44,751 16,293 16,293 266,293 23,226 23,226 273,226
12 50,139 17,371 17,371 267,371 25,179 25,179 275,179
13 55,796 18,306 18,306 268,306 27,035 27,035 277,035
14 61,736 19,085 19,085 269,085 28,787 28,787 278,787
15 67,972 19,687 19,687 269,687 30,444 30,444 280,444
16 74,521 20,099 20,099 270,099 31,989 31,989 281,989
17 81,397 20,302 20,302 270,302 33,429 33,429 283,429
18 88,617 20,288 20,288 270,288 34,757 34,757 284,757
19 96,198 20,041 20,041 270,041 35,959 35,959 285,959
20 104,158 19,536 19,536 269,536 37,022 37,022 287,022
25 150,340 12,007 12,007 262,007 39,867 39,867 289,867
30 209,282 0 0 0 37,109 37,109 287,109
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD
BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE
TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT
FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SUBACCOUNTS OF THE SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE
SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY
AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR
SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-8
<PAGE> 64
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 PREFERRED
GUIDELINE PREMIUM TEST NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 6% (NET ANNUAL RATE OF RETURN OF 4.38% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT
CHARGES, 4.77% FOR THE FIRST SEVEN YEARS, 4.88% FOR
THE NEXT THREE YEARS, 4.98% FOR THE NEXT 10 YEARS,
AND 5.00% FOR YEARS AFTER THE TWENTIETH YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
Premium ---------- -------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,958 2,115 251,958 2,488 2,645 252,488
2 6,458 3,868 4,031 253,868 4,981 5,145 254,981
3 9,930 5,815 5,815 255,815 7,539 7,539 257,539
4 13,577 7,795 7,795 257,795 10,186 10,186 260,186
5 17,406 9,807 9,807 259,807 12,929 12,929 262,929
6 21,426 11,889 11,889 261,889 15,820 15,820 265,820
7 25,647 13,994 13,994 263,994 18,815 18,815 268,815
8 30,080 16,429 16,429 266,429 22,257 22,257 272,257
9 34,734 18,893 18,893 268,893 25,826 25,826 275,826
10 39,620 21,374 21,374 271,374 29,525 29,525 279,525
11 44,751 23,869 23,869 273,869 33,384 33,384 283,384
12 50,139 26,361 26,361 276,361 37,371 37,371 287,371
13 55,796 28,832 28,832 278,832 41,474 41,474 291,474
14 61,736 31,264 31,264 281,264 45,695 45,695 295,695
15 67,972 33,634 33,634 283,634 50,044 50,044 300,044
16 74,521 35,919 35,919 285,919 54,510 54,510 304,510
17 81,397 38,097 38,097 288,097 59,107 59,107 309,107
18 88,617 40,149 40,149 290,149 63,830 63,830 313,830
19 96,198 42,051 42,051 292,051 68,674 68,674 318,674
20 104,158 43,766 43,766 293,766 73,626 73,626 323,626
25 150,340 47,856 47,856 297,856 99,821 99,821 349,821
30 209,282 38,195 38,195 288,195 126,975 126,975 376,975
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD
BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE
TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT
FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SUBACCOUNTS OF THE SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE
SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY
AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR
SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-9
<PAGE> 65
NATIONAL LIFE INSURANCE COMPANY
SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
$250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL
DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 PREFERRED
GUIDELINE PREMIUM TEST NONSMOKER
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF
RETURN 12% (NET ANNUAL RATE OF RETURN OF 10.29% FOR
GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT
CHARGES, 10.71% FOR THE FIRST SEVEN YEARS, 10.81%
FOR THE NEXT THREE YEARS, 10.92% FOR THE NEXT 10
YEARS, AND 10.95% FOR YEARS AFTER THE TWENTIETH
YEAR)
<TABLE>
<CAPTION>
Guaranteed Current
Premium ---------- -------
End of Accumulated Cash Cash
Policy at 5% Int. Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,087 2,253 252,087 2,634 2,800 252,634
2 6,458 4,250 4,432 254,250 5,430 5,614 255,430
3 9,930 6,587 6,587 256,587 8,471 8,471 258,471
4 13,577 9,109 9,109 259,109 11,802 11,802 261,802
5 17,406 11,836 11,836 261,836 15,459 15,459 265,459
6 21,426 14,825 14,825 264,825 19,525 19,525 269,525
7 25,647 18,050 18,050 268,050 23,992 23,992 273,992
8 30,080 21,862 21,862 271,862 29,263 29,263 279,263
9 34,734 25,984 25,984 275,984 35,064 35,064 285,064
10 39,620 30,438 30,438 280,438 41,446 41,446 291,446
11 44,751 35,252 35,252 285,252 48,512 48,512 298,512
12 50,139 40,446 40,446 290,446 56,282 56,282 306,282
13 55,796 46,040 46,040 296,040 64,817 64,817 314,817
14 61,736 52,059 52,059 302,059 74,194 74,194 324,194
15 67,972 58,523 58,523 308,523 84,512 84,512 334,512
16 74,521 65,458 65,458 315,458 95,855 95,855 345,855
17 81,397 72,893 72,893 322,893 108,342 108,342 358,342
18 88,617 80,866 80,866 330,866 122,088 122,088 372,088
19 96,198 89,412 89,412 339,412 137,216 137,216 387,216
20 104,158 98,559 98,559 348,559 153,861 153,861 403,861
25 150,340 154,220 154,220 404,220 266,035 266,035 516,035
30 209,282 228,208 228,208 478,208 447,421 447,421 697,421
</TABLE>
The Death Benefit may, and the Account Values and Net Cash Surrender Values
will, differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD
BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE
TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH
BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT
FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SUBACCOUNTS OF THE SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE
SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY
AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR
SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-10
<PAGE> 66
-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> 67
NATIONAL LIFE GROUP
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-2
<PAGE> 68
[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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
<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> 84
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> 85
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> 86
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> 87
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> 88
<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> 89
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> 90
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> 91
NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-26
<PAGE> 92
[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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
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> 107
<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> 108
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> 109
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> 110
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> 111
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> 112
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> 113
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> 114
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> 115
NATIONAL VARIABLE
LIFE INSURANCE ACCOUNT
(BENEFIT PROVIDER SEGMENT)
FINANCIAL STATEMENTS
*****
DECEMBER 31, 1999
F-50
<PAGE> 116
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of National Life Insurance Company and Policyholders
of National Variable Life Insurance Account -- Benefit Provider Segment
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of each of the sub-accounts
constituting the National Variable Life Insurance Account -- Benefit Provider
Segment (a segment within a Separate Account of National Life Insurance Company)
(the Segment) at December 31, 1999, and the results of each of their operations
and each of their changes in net assets for the period from February 12, 1999
through December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Segment's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1999 by
correspondence with the funds, provide a reasonable basis for the opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
March 31, 2000
F-51
<PAGE> 117
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
POLICYHOLDER
ACCOUNT
VALUES
------------
<S> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value
(policyholder accumulation units and unit value):
American Century VP Income & Growth (23,131.19 accumulation units at $7.98 unit value) $ 184,516
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 118
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 12, 1999 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET AMERICAN
FUND CENTURY
------------------- --------------------
MONEY INCOME &
MARKET GROWTH TOTAL
------------------- -------------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 2,988 $ - $ 2,988
EXPENSES:
Mortality and expense risk charges 174 - 174
--------------------------------------------------
Net investment income 2,814 - 2,814
--------------------------------------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from
shares sold - - -
Net unrealized appreciation
on investments - 8,302 8,302
--------------------------------------------------
Net realized and unrealized
gain on investments - 8,302 8,302
--------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,814 $ 8,302 $11,116
==================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 119
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM FEBRUARY 12, 1999 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARKET STREET AMERICAN
FUND CENTURY
--------------- ----------------
MONEY INCOME &
MARKET GROWTH TOTAL
--------------- ---------------- ------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,814 $ 8,302 $ 11,116
-----------------------------------------------
CAPITAL TRANSACTIONS:
Participant deposits 177,053 - 177,053
Transfers between investment
sub-accounts and general account, net (176,214) 176,214 -
Cost of insurance and administrative charges (3,653) - (3,653)
-----------------------------------------------
Total capital transactions (2,814) 176,214 173,400
-----------------------------------------------
Increase in net assets - 184,516 184,516
Net assets, beginning of period - - -
-----------------------------------------------
Net assets, end of period $ - $ 184,516 $ 184,516
===============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 120
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
(BENEFIT PROVIDER SEGMENT)
(A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Variable Life Insurance Account (the Variable Account) began operations
on March 11, 1996 and is registered as a unit investment trust under the
Investment Company Act of 1940, as amended. The operations of the Variable
Account are part of National Life Insurance Company (National Life). The
Variable Account was established by National Life as a separate investment
account to invest the net premiums received from the sale of certain variable
life insurance products. Equity Services, Inc., an indirect wholly-owned
subsidiary of National Life, is the principal underwriter for the variable life
insurance policies issued by National Life. Sentinel Advisors Company, an
indirectly-owned subsidiary of National Life, provides investment advisory
services for certain Market Street Fund, Inc. mutual fund portfolios.
National Life maintains three segments within the Variable Account. The Varitrak
Segment within the Variable Account was established on March 11, 1996 and is
used exclusively for National Life's flexible premium variable life insurance
products known collectively as Varitrak. On May 1, 1998, National Life
established the Estate Provider Segment within the Variable Account to be used
exclusively for National Life's flexible premium variable life insurance
products known collectively as Estate Provider. On February 12, 1999, National
Life established the Benefit Provider Segment (the Segment) within the Variable
Account to be used exclusively for National Life's flexible premium variable
life insurance products known collectively as Benefit Provider.
The Segment invests the accumulated policyholder account values in shares of
mutual fund portfolios within Market Street Fund, Inc., Alger American Fund,
American Century Variable Portfolios, JP Morgan Series Trust II, Strong Variable
Insurance Funds, Neuberger & Berman Advisers Management Trust, Goldman Sachs
Variable Insurance Trust, and BT Insurance Funds Trust. Net premiums received by
the Segment are deposited in investment portfolios as designated by the
policyholder, except for initial net premiums on new policies which are first
invested in the Market Street Fund Money Market Portfolio. Policyholders may
also direct the allocations of their account value between the various
investment portfolios within the Segment and a declared interest account (within
the General Account of National Life) through participant transfers.
There are twenty-three sub-accounts within the Segment. Each sub-account, which
invests exclusively in the shares of the corresponding portfolio, comprises the
accumulated policyholder account values of the underlying variable life
insurance policies investing in the sub-account.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States (GAAP). The preparation of
financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
in the preparation of the Segment's financial statements.
INVESTMENTS
The mutual fund portfolios consist of the Market Street Fund Money Market,
Market Street Fund Growth, Market Street Fund Aggressive Growth, Market Street
Fund Managed, Market Street Fund Bond, Market Street Fund International, Market
Street Fund Sentinel Growth, Alger American Fund Growth, Alger American Fund
Small Capitalization, BT Insurance Funds Trust Small Cap Index Fund, BT
Insurance Funds Trust EAFE Equity Index Fund, BT Insurance Funds Trust Equity
500 Index Fund, American
F-55
<PAGE> 121
Century Variable Portfolios VP Value, American Century Variable Portfolios VP
Income & Growth, JP Morgan Series Trust II International Opportunities, JP
Morgan Series Trust II Small Company, Strong Opportunity Fund II, Strong
Variable Insurance Funds Mid Cap Growth, Neuberger Berman Partners Portfolio,
Goldman Sachs Variable Insurance Trust International Equity, Goldman Sachs
Variable Insurance Trust Global Income, Goldman Sachs Variable Insurance Trust
CORE Small Cap Equity, and Goldman Sachs Variable Insurance Trust Mid Cap Value
(the Portfolios). The assets of each portfolio are held separate from the assets
of the other portfolios and each has different investment objectives and
policies. Each portfolio operates separately and the gains or losses in one
portfolio have no effect on the investment performance of the other portfolios.
INVESTMENT VALUATION
The investments in the Portfolios are valued at the closing net asset value per
share as determined by the portfolio at the end of each period. The change in
the difference between cost and market value is reflected as unrealized gain
(loss) in the Statement of Operations.
INVESTMENT TRANSACTIONS
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed) and dividend income (including capital gain
distributions) are recorded on the ex-dividend date. The cost of investments
sold is determined using the first-in, first-out basis (FIFO).
FEDERAL INCOME TAXES
The operations of the Segment are part of, and taxed with, the total operations
of National Life. Under existing federal income tax law, investment income and
capital gains attributable to the Segment are not taxed.
NOTE 3 - CHARGES AND EXPENSES
National Life deducts a daily charge from the Segment based on an annual rate of
0.4% in years 1-7 of each sub-account's net asset value for its assumption of
mortality and expense risks and for separate account administration. This rate
declines to an ultimate rate of 0.15% in years 21 and beyond. The mortality risk
assumed is that the insureds under the policies may die sooner than anticipated.
The expense risk assumed is that expenses incurred in issuing and administering
the policies may exceed expected levels.
Cost of insurance charges are deducted monthly from each policyholder's
accumulated account value for the insurance protection provided and are remitted
to National Life. These charges vary based on the net amount at risk, attained
age of the insured, and other factors.
NOTE 4 - INVESTMENTS
The number of shares held and cost for the portfolio at December 31, 1999 is set
forth below:
<TABLE>
<CAPTION>
Portfolio Shares Cost
--------- ------ ----
<S> <C> <C>
American Century Variable Portfolios
VP Income & Growth 23,064 $ 176,214
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-56
<PAGE> 122
NOTE 5 - PURCHASES AND SALES OF PORTFOLIO SHARES
Purchases and proceeds from sales of shares in the portfolios for the period
ended December 31, 1999 aggregated the following:
<TABLE>
<CAPTION>
Portfolio Purchases Proceeds
--------- --------- --------
<S> <C> <C>
Market Street Fund Money Market $ 180,041 $ 180,041
American Century Variable Portfolios
VP Income & Growth 176,214
</TABLE>
NOTE 6 - LOANS
Policyholders may obtain loans on any business day as outlined in the variable
life insurance policy. At the time a loan is granted, accumulated value equal to
the amount of the loan is designated as collateral and transferred from the
Segment to the General Account of National Life. Interest is credited by
National Life at predetermined rates on collateral held in the General Account.
This interest is periodically transferred to the Segment.
NOTE 7 - DISTRIBUTION OF NET INCOME
The Segment does not expect to declare dividends to policyholders from
accumulated net income. The accumulated net income will be distributed to
policyholders as withdrawals (in the form of death benefits, surrenders or
policy loans) in excess of the policyholders' net contributions to the Segment.
NOTE 8 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (IRC), a
variable universal life insurance contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
a variable universal life insurance contract for federal income tax purposes for
any period for which the investments of the segregated asset account on which
the contract is based are not adequately diversified. The IRC provides that the
adequately diversified requirement may be met if the underlying investments
satisfy either a statutory safe harbor test or diversification requirements set
forth in regulations issued by the Secretary of the Treasury.
National Life believes that the Segment satisfies the current requirements of
the regulations, and it intends that the Segment will continue to meet such
requirements.
F-57
