<Page>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 2002
1933 ACT REGISTRATION NO. 333-90438
1940 ACT REGISTRATION NO. 811-21028
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE
ACCOUNT Y
(EXACT NAME OF REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(NAME OF DEPOSITOR)
1300 South Clinton Street, Fort Wayne, Indiana 46802
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
Depositor's Telephone Number, including Area Code
(260) 455-2000
<Table>
Elizabeth Frederick, Esquire COPY TO:
The Lincoln National Life Insurance Company Lawrence A. Samplatsky, Esquire
1300 South Clinton Street The Lincoln National Life Insurance Company
P.O. Box 1110 350 Church St.
Fort Wayne, Indiana 46802 Hartford, CT 06103-1106
(NAME AND ADDRESS OF AGENT FOR SERVICE)
</Table>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable
after the effective date of the Registration Statement, and continuously
thereafter.
INDEFINITE NUMBER OF UNITS OF INTEREST IN VARIABLE LIFE INSURANCE CONTRACTS
(TITLE OF SECURITIES BEING REGISTERED)
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
<Page>
CROSS REFERENCE SHEET
(RECONCILIATION AND TIE)
REQUIRED BY INSTRUCTION 4 TO FORM S-6
<Table>
<Caption>
ITEM OF FORM N-8B-2 LOCATION IN PROSPECTUS
- ------------------- ----------------------
1 Cover Page; Highlights
2 Cover Page
3 *
4 Distribution of Policies
5 Lincoln Life, the Separate Account and the
General Account
6(a) Lincoln Life, the Separate Account and the
General Account
6(b) *
9 Legal Proceedings
10(a)-(c) Right-to-Examine Period; Policy Liquidity; Policy
Values Reports to Owners; Registration Statement
10(d) Policy Liquidity; Policy Values, Transfers and
Allocation Among Accounts
10(e) Lapse and Reinstatement
10(f) Funds -- Voting Rights
10(g)-(h) Lincoln Life, the Separate Account and the
General Account; Funds -- Substitution of
Securities
10(i) Premium Features; Transfers and Allocation Among
Accounts; Death Benefits; Policy Values; Tax
Issues; Payment of Death Benefit Proceeds
11 Cover Page; Funds
12 Funds; Financial Statements
13 Highlights; Charges and Fees
14 Application; Right-to-Examine Period; The Policy
15 Premium Features; Right-to Examine Period;
Transfers and Allocation Among Accounts
16 Lincoln Life, the Separate Account and the
General Account; Funds
17 Policy Liquidity; Transfers and Allocation Among
Accounts
18 Lincoln Life, the Separate Account and the
General Account; Policy Values; Financial
Statements
19 Reports to Owners
20 *
21 Policy Liquidity -- Policy Loans
22 Lincoln Life, the Separate Account and the
General Account
23 State Regulation
24 Other Policy Provisions
</Table>
<Page>
<Table>
<Caption>
ITEM OF FORM N-8B-2 LOCATION IN PROSPECTUS
- ------------------- ----------------------
25 Lincoln Life, the Separate Account and the
General Account
26 Highlights; Charges and Fees; Financial
Statements
27 Lincoln Life, the Separate Account and the
General Account
28 Directors and Officers of Lincoln Life
29 Lincoln Life, the Separate Account and the
General Account
30 *
31 *
32 *
33 *
34 *
35 Distribution of Policies
36 *
37 *
38 Distribution of Policies
39 Distribution of Policies
40 *
41(a) Distribution of Policies
42 *
43 *
44 Funds; Premium Features; Policy Values;
Highlights; Financial Statements
45 *
46 Policy Liquidity; Policy Values; Charges and
Fees; Transfers and Allocation Among Accounts
47 Lincoln Life, the Separate Account and the
General Account; Funds; Policy Values; Transfers
and Allocation Among Accounts
48 *
49 *
50 Lincoln Life, the Separate Account and the
General Account
51 Cover Page; Highlights; Death Benefits;
Beneficiary; Lapse and Reinstatement; Premium
Features; Financial Statements; Transfers and
Allocation Among Accounts
52 Funds
53 Tax Issues
54 *
55 *
</Table>
* Not Applicable
<Page>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT Y
HOME OFFICE LOCATION:
1300 SOUTH CLINTON STREET
P.O. BOX 1110
FORT WAYNE, INDIANA 46802
(800) 454-6265
ADMINISTRATIVE OFFICE
PERSONAL SERVICE CENTER MVLI
350 CHURCH STREET
HARTFORD, CT 06103-1106
(877)896-6206
- --------------------------------------------------------------------------------
A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
BENEFITS PAYABLE ON DEATH OF SECOND OF TWO INSUREDS
- --------------------------------------------------------------------------------
This Prospectus describes American Legacy SVUL-III, a flexible premium
variable life insurance contract (the "Policy"), offered by The Lincoln National
Life Insurance Company ("Lincoln Life", "Company", "we", "us", "our"). The
Policy provides death benefits when the second of the two named Insureds dies (a
"Second Death Policy").
The Policy features:
- flexible premium payments;
- a choice of one of three death benefit options; and
- a choice of underlying investment options.
It may not be advantageous to replace existing life insurance or an annuity
contract or supplement an existing flexible premium variable life insurance
contract with the Policy. You should carefully read this Prospectus and the
Prospectuses of the Funds furnished with this Prospectus, to understand the
Policy being offered.
You may allocate net premiums to the Sub-Accounts of our Flexible Premium
Variable Life Account Y ("Separate Account"). Each Sub-Account invests in one of
the Funds listed below:
<Table>
AMERICAN FUNDS INSURANCE SERIES (AFIS)
Asset Allocation Fund (Class 2)
Blue Chip Income and Growth Fund (Class2)
Bond Fund (Class 2)
Cash Management Fund (Class 2)
Global Discovery Fund (Class 2)
Global Growth Fund (Class 2)
Global Small Capitalization Fund (Class 2)
Growth Fund (Class 2)
Growth-Income Fund (Class 2)
High-Income Bond Fund (Class 2)
International Fund (Class 2)
New World Fund (Class 2)
U.S. Government/AAA-Rated Securities Fund (Class 2)
</Table>
TO BE VALID, THIS PROSPECTUS MUST HAVE THE CURRENT MUTUAL FUNDS' PROSPECTUSES
WITH IT. KEEP ALL FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS A
CRIMINAL OFFENSE TO STATE OTHERWISE.
THIS POLICY MAY NOT BE AVAILABLE IN ALL STATES, AND THIS PROSPECTUS ONLY OFFERS
THE POLICY FOR SALE IN JURISDICTIONS WHERE SUCH OFFER AND SALE ARE LAWFUL.
PROSPECTUS DATED:
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
CONTENTS PAGE
- -------- --------
HIGHLIGHTS........................... 3
Initial Choices To Be Made......... 3
Death Benefit...................... 4
Amount of Premium Payment.......... 4
Selection of Funding Vehicles...... 4
Insurance Charges and Fees......... 5
Fund Expenses...................... 6
Changes in Specified Amount........ 6
LINCOLN LIFE, THE SEPARATE ACCOUNT
AND THE GENERAL ACCOUNT............. 7
BUYING VARIABLE LIFE INSURANCE....... 8
Replacements....................... 10
APPLICATION.......................... 10
OWNERSHIP............................ 10
BENEFICIARY.......................... 11
INSUREDS............................. 11
THE POLICY........................... 11
Policy Specifications.............. 11
PREMIUM FEATURES..................... 12
Planned Premiums; Additional
Premiums.......................... 12
Limits on Right to Make Payments
of Additional and Planned
Premiums........................ 12
Premium Load; Net Premium
Payment......................... 13
RIGHT-TO-EXAMINE PERIOD.............. 13
TRANSFERS AND ALLOCATION AMONG
ACCOUNTS............................ 13
Allocation of Net Premium
Payments.......................... 13
Transfers.......................... 14
Limits on Frequent Transfers....... 14
Optional Sub-Account Allocation
Programs.......................... 15
Dollar Cost Averaging............ 15
Automatic Rebalancing............ 15
POLICY VALUES........................ 16
Valuation -- Fixed Account and
Separate Account.................. 16
Allocation of Premium Payments to
Separate Account.................. 16
Fixed Account and Loan Account
Value............................. 17
Accumulation Value................. 17
Net Accumulation Value............. 17
FUNDS................................ 18
Substitution of Securities......... 20
Voting Rights...................... 20
Fund Participation Agreement....... 20
CHARGES AND FEES..................... 21
Premium Charge..................... 21
Deductions Made Monthly............ 21
Monthly Deduction................ 21
Cost of Insurance Charge......... 22
Mortality and Expense Risk
Charge............................ 22
Surrender Charges.................. 22
Transaction Fee for Excess
Transfers......................... 24
DEATH BENEFITS....................... 24
Death Benefit Options.............. 24
Changes in Death Benefit Options
and Specified Amount.............. 25
</Table>
<Table>
<Caption>
CONTENTS PAGE
- -------- --------
Federal Income Tax Definition of
Life Insurance.................... 27
NOTICE OF DEATH OF INSUREDS.......... 27
PAYMENT OF DEATH BENEFIT PROCEEDS.... 27
Settlement Options................. 27
POLICY LIQUIDITY..................... 28
Policy Loans....................... 28
Partial Surrender.................. 29
Surrender of the Policy............ 30
Surrender Value.................. 30
Deferral of Payment and
Transfers......................... 30
ASSIGNMENT; CHANGE OF OWNERSHIP...... 30
LAPSE AND REINSTATEMENT.............. 31
Lapse of a Policy.................. 31
No Lapse Provision................. 31
Reinstatement of a Lapsed Policy... 33
COMMUNICATIONS WITH LINCOLN LIFE..... 33
Proper Written Form................ 33
Receipt of Written
Communications.................... 34
Telephone and Other Electronic
Communications.................... 34
OTHER POLICY PROVISIONS.............. 34
Issuance........................... 34
Date of Coverage................... 35
Right to Exchange the Policy....... 35
Incontestability................... 35
Misstatement of Age or Gender...... 35
Suicide............................ 36
Nonparticipating Policies.......... 36
Riders............................. 36
TAX ISSUES........................... 37
Taxation of Life Insurance
Contracts in General.............. 37
Policies which are MECS............ 38
Policies which are not MECS........ 39
Last Survivor Contract............. 39
Other Considerations............... 40
Tax Status of Lincoln Life......... 41
FAIR VALUE OF THE POLICY............. 41
DIRECTORS AND OFFICERS OF LINCOLN
LIFE................................ 41
DISTRIBUTION OF POLICIES............. 43
CHANGES OF INVESTMENT POLICY......... 43
STATE REGULATION..................... 44
REPORTS TO OWNERS.................... 44
ADVERTISING.......................... 44
LEGAL PROCEEDINGS.................... 45
EXPERTS.............................. 45
REGISTRATION STATEMENT............... 45
APPENDIX 1........................... 46
CORRIDOR PERCENTAGES............... 46
APPENDIX 2........................... 47
ILLUSTRATION OF ACCUMULATION
VALUES, SURRENDER VALUES, AND
DEATH BENEFIT PROCEEDS............ 47
FINANCIAL STATEMENTS.................
LINCOLN LIFE 12/31/01.............. S-1
LINCOLN LIFE 3/31/02 (unaudited)... S1Q-1
</Table>
2
<Page>
HIGHLIGHTS
This section is an overview of key Policy features. Your
Policy is a flexible premium variable life insurance policy.
Your Policy insures two Insureds. If one of the Insureds
dies, the Policy pays no death benefit. Your Policy will pay
the death benefit only when the second Insured dies. A
"second-to-die" policy might be suitable when both of the
Insureds have income of their own and only want to provide
financial support for their dependents if both of them
should die, or to provide liquidity to heirs when the Second
Insured dies. If replacement income or immediate cash
liquidity is needed upon the death of one Insured, this type
of policy may not be suitable.
The Policy's value may change on a:
1) fixed basis;
2) variable basis; or a
3) combination of both fixed and variable bases.
Review your personal financial objectives and discuss them
with a qualified financial counselor before you buy a
"second-to-die" variable life insurance policy. As a death
benefit is only paid upon the second Insured's death, this
Policy may, or may not, be appropriate for your financial
goals. If you are already entitled to favorable financial
tax treatment, you should satisfy yourself that this Policy
meets your other financial goals before you buy it. The
value of the Policy and, under one option, the death benefit
amount, depends on the investment results of the funding
options you select. Review this Prospectus and the Fund
Prospectus to achieve a clear understanding of any fund you
are considering.
At all times, your Policy must qualify as life insurance
under the Internal Revenue Code of 1986 (the "Code") to
receive favorable tax treatment under Federal law. If these
requirements are met, you may benefit from such tax
treatment. Lincoln Life reserves the right to return your
premium payments if they result in your Policy failing to
meet Code requirements.
We offer other variable life insurance policies and variable
annuity contracts with different features, benefits and
charges. These policies also provide values that vary in
accordance with the investment experience of a separate
account of Lincoln Life.
The state in which your policy is issued will govern whether
or not certain features, charges and fees will be allowed in
your Policy. You should refer to your Policy contract for
these state specific provisions.
INITIAL CHOICES TO BE MADE
The Policy Owner (the "Owner" or "you") is the person named
in the "Policy Specifications" who has all of the Policy
ownership rights. You, as the Owner, have four important
choices to make when the Policy is first purchased. You need
to choose:
1) one of the three Death Benefit Options;
2) the amount of premium you want to pay; and
3) the amount of your Net Premium Payment to be placed in
each of the funding options you select. The Net Premium
Payment is the balance of your Premium Payment that
remains after certain charges are deducted from it; and
4) whether to elect the Age 100 No Lapse Provision.
You may also choose from Riders offered for this Policy.
These may alter the benefits or charges in the Policy. They
also may vary by issue state, and may have tax consequences
to you.
3
<Page>
DEATH BENEFIT
The Death Benefit is the amount Lincoln pays to the
Beneficiary(ies) when the second Insured dies. Before we pay
the Beneficiary(ies), any outstanding loan account balances
or outstanding amounts due are subtracted from the Death
Benefit. We calculate the Death Benefit payable as of the
date of the second Insured's death.
When you purchase your Policy, you must choose one of three
Death Benefit Options:
1) the Specified Amount (as explained in the Death Benefits
Section) found on the Policy's Specification Page; or
2) the sum of the Specified Amount and the Net Accumulation
Value (as explained in the Policy Values Section); or
3) the sum of Specified Amount and the Accumulated Premiums
(all premiums paid minus the Cumulative Policy Factor (as
defined in the Death Benefits Options Section), if that
Factor is elected).
If you choose Death Benefit Option 1 or 2, you may also
choose a "No Lapse Provision" at the time of application.
See page 31.
AMOUNT OF PREMIUM PAYMENT
When you apply for your Policy, you must decide how much
premium to pay. Premium payments may be changed within the
limits described on page 12.
You may use the value of the Policy to pay the premiums due
and continue the Policy in force if sufficient values are
available for premium payments. Be careful; if the
investment options you choose do not do as well as you
expect, there may not be enough value to continue the Policy
in force without more premium payments. Charges against
Policy values for the cost of insurance (see page 22)
increase as the Insureds get older.
If your Policy lapses because your Monthly Premium Deduction
is larger than the Net Accumulation Value, you may reinstate
your Policy. More information is on page 33.
When you first receive your Policy you will have 10 days to
review it. [Some states allow more than 10 days.] Refer to
your Policy contract. This is called the "Right-to-Examine"
period. Use this time to review your Policy and make sure it
meets your needs. Depending upon the state of issue of your
Policy, your Initial Premium Payment, net of charges and
fees, will be allocated to the Cash Management Sub-Account,
or directly into the Sub-Accounts you selected. If you then
decide you do not want your Policy, we will refund either
Premium Payments made, or the Accumulation Value (plus any
charges and fees), again depending on the state of issue of
your Policy. See page 13.
SELECTION OF FUNDING VEHICLES
VARIABLE ACCOUNT
This Prospectus focuses on the Separate Account investment
information that makes up the "variable" part of the Policy.
If you put money into the variable funds, you take all the
investment risk on that money. This means that if the mutual
funds(s) you select go up in value, the value of your
Policy, net of charges and expenses, also goes up. If they
lose value, so does your Policy. Each fund has its own
investment objective. You should review each fund's
Prospectus before making your decision.
You must choose the Fund(s) in which you want to place each
Net Premium Payment. These "Sub-Accounts" make up the
Separate Account. Each Sub-Account invests in
4
<Page>
shares of a certain Fund. A Sub-Account is not guaranteed
and will increase or decrease in value according to the
particular Fund's investment performance. See page 18.
FIXED ACCOUNT
You may also use Lincoln Life's Fixed Account to fund your
Policy. Net Premium Payments made into the Fixed Account:
- become part of Lincoln Life's General Account;
- do not share the investment experience of the Separate
Account; and
- have a guaranteed minimum interest rate of 4% per year.
Interest beyond 4% is credited at Lincoln Life's discretion.
For additional information, see page 8.
INSURANCE CHARGES AND FEES
We deduct charges in connection with the Policy to
compensate us for providing the Policy's insurance benefit,
administering the Policy, assuming certain risks under the
Policy and for sales-related expenses we incur. Lincoln Life
may profit from any of these charges, including the
mortality and expense risk and cost of insurance charges,
and may use the profit for any purpose, including covering
shortfalls from other charges.
You will be charged:
- A premium load of no more than 8% from each Premium
Payment during the first Policy Year, and no more than 4%
thereafter.
- A $10 monthly deduction for administrative purposes.
- A monthly charge per $1000 of initial Specified Amount
for distribution associated expenses, for the first 120
months from issue date or from the date of an increase in
Specified Amount. The charge will never exceed $0.17 per
$1000 of Specified Amount.
- A Cost of Insurance charge based on sex, issue age,
duration and premium class of each Insured.
- A daily mortality and expense risk charge which is based
on duration at an annual rate of 0.80% in years 1-19,
0.40% in years 20 and beyond, and is guaranteed not to
exceed that.
The selection of certain Riders may increase the charges in
the Policy.
Each Fund has its own management fee charge, also deducted
daily. Each Fund's expense levels will affect its investment
results. The table on page 6 shows you the current expense
levels for each Fund.
Each Policy Year you will be allowed to make 24 transfers
between funding options. Beyond 24, a $25 fee may apply. See
page 14.
The Surrender Charge is the amount retained by us if you
totally surrender your Policy within the first 14 Policy
Years. Each time you request a partial surrender of your
Policy, we charge you an administrative fee of 2% of the
amount withdrawn, not to exceed $25. If you decrease the
Specified Amount, a pro-rata surrender charge may be
assessed. The maximum Surrender Charge will not exceed
$37.52 per $1,000 of Specified Amount. See page 22.
ESTATE TAX REPEAL RIDER. When issued, there is a one-time
administrative charge of not more than $250 for this Rider.
5
<Page>
You may borrow within described limits against the Policy.
If you borrow against your Policy, interest will be charged
to the Loan Account at an annual interest rate of 5% in
years 1-10, 4% in years 11+. Lincoln Life will credit 4%
interest on the Loan Account Value in all years. See page
28. Depending on the amount of premium you have paid, there
may be little, or no, cash value in your Policy to borrow or
surrender.
FUND EXPENSES
The investment advisor for each of the Funds deducts a daily
charge as a percent of the net assets in each fund as an
asset management charge. The charge reflects asset
management fees of the investment advisor (Management Fees),
and other expenses incurred by the funds (including 12b-1
fees for Class 2 shares and Other Expenses). The charge has
the effect of reducing the investment results credited to
the Sub-Accounts. Future Fund expenses will vary.
PORTFOLIO EXPENSE TABLE
<Table>
<Caption>
TOTAL
ANNUAL TOTAL
FUND FUND
OPERATING OPERATING
EXPENSES TOTAL EXPENSES
WITHOUT WAIVERS WITH
MANAGEMENT 12B-1 OTHER WAIVERS OR AND WAIVERS AND
FUND FEES FEES EXPENSES REDUCTIONS REDUCTIONS REIMBURSEMENTS
------------------------ ----------- --------- -------- ---------- ---------- --------------
AFIS Asset Allocation
Fund (Class 2)........ 0.43% 0.25% 0.02% 0.70% N/A 0.70%
AFIS Blue Chip Income
and Growth Fund
(Class 2)............. 0.50 0.25 0.01 0.76 N/A 0.76
AFIS Bond Fund
(Class 2)............. 0.48 0.25 0.01 0.74 N/A 0.74
AFIS Cash Management
Fund (Class 2)........ 0.45 0.25 0.01 0.71 N/A 0.71
AFIS Global Discovery
Fund (Class 2)........ 0.58 0.25 0.03 0.86 N/A 0.86
AFIS Global Growth Fund
(Class 2)............. 0.66 0.25 0.04 0.95 N/A 0.95
AFIS Global Small
Capitalization Fund
(Class 2)............. 0.80 0.25 0.03 1.08 N/A 1.08
AFIS Growth Fund
(Class 2)............. 0.37 0.25 0.01 0.63 N/A 0.63
AFIS Growth-Income Fund
(Class 2)............. 0.33 0.25 0.02 0.60 N/A 0.60
AFIS High-Income Bond
Fund (Class 2)........ 0.50 0.25 0.01 0.76 N/A 0.76
AFIS International Fund
(Class 2)............. 0.55 0.25 0.06 0.86 N/A 0.86
AFIS New World Fund
(Class 2)............. 0.85 0.25 0.06 1.16 N/A 1.16
AFIS U.S.
Government/AAA-Rated
Securities Fund
(Class 2)............. 0.46 0.25 0.01 0.72 N/A 0.72
</Table>
CHANGES IN SPECIFIED AMOUNT
The Initial Specified Amount is the amount originally chosen
by the Policy Owner and is equal to the Death Benefit.
Within certain limits, you may decrease or, with
satisfactory evidence of insurability, increase the
Specified Amount. The minimum specified amount is currently
$250,000. Such changes will affect other aspects of your
Policy. See page 25.
If your needs should call for you to increase or decrease
your Specified Amount at any time, discuss with your
financial adviser the appropriateness of this action and of
buying the additional coverage in another type of insurance.
6
<Page>
LINCOLN LIFE, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT
The Lincoln National Life Insurance Company (Lincoln Life)
(EIN 35-0472300), organized in 1905, is an Indiana stock
insurance corporation engaged primarily in the direct
issuance of life insurance contracts and annuities. Lincoln
Life is wholly owned by Lincoln National Corporation (LNC),
a publicly held insurance and financial services holding
company domiciled in Indiana.
On December 7, 2001, LNC sold its life reinsurance business
to Swiss Re Life & Health America Inc. (Swiss Re). This sale
included the indemnity reinsurance by Swiss Re of a block of
reinsurance business written on Lincoln Life paper. The
transaction also included a sale by Lincoln Life to Swiss Re
of four wholly-owned subsidiaries: Lincoln National
Reassurance Company and Lincoln National Health and Casualty
Insurance Company, Indiana Insurance companies; Special
Pooled Risk Administrators, Inc., a New Jersey company; and
Lincoln Re S.A., an Argentinean corporation. (See Note 9 of
the statutory-basis financial statements of Lincoln Life for
additional information regarding the sale.)
Lincoln Financial Group is the marketing name for Lincoln
National Corporation (NYSE:LNC) and its affiliates. With
headquarters in Philadelphia, Lincoln Financial Group has
consolidated assets of $95 million and annual consolidated
revenues of $6.4 billion. Through its wealth accumulation
and protection businesses, the company provides annuities,
life insurance, 401(k) plans, mutual funds, institutional
investment management and financial planning and advisory
services.
Lincoln Life Flexible Premium Variable Life Account Y
("Account Y") is a "separate account" of the company
established on December 17, 2001. Under Indiana law, the
assets of Account Y attributable to the Policies, though our
property, are not chargeable with liabilities of any other
business of Lincoln Life and are available first to satisfy
our obligations under the Policies. Account Y income, gains,
and losses are credited to or charged against Account Y
without regard to our other income, gains, or losses. Its
values and investment performance are not guaranteed. It is
registered with the Securities and Exchange Commission
("Commission") as a "unit investment trust" under the 1940
Act and meets the 1940 Act's definition of "separate
account". Such registration does not involve supervision by
the Commission of Account Y's or our management, investment
practices, or policies. We have numerous other registered
separate accounts which fund our variable life insurance
policies and variable annuity contracts.
Account Y is divided into Sub-Accounts, each of which is
invested solely in the shares of one of the Funds available
as funding vehicles under the Policies. On each Valuation
Day (any day on which the New York Stock Exchange is open),
Net Premium Payments allocated to Account Y will be invested
in Fund shares at net asset value, and monies necessary to
pay for deductions, charges, transfers and surrenders from
Account Y are raised by selling Fund shares at net asset
value.
The Funds and their investment objectives, which they may or
may not achieve, are described in "Funds". More Fund
information is in the Funds' prospectuses, which must
accompany or precede this prospectus and should be read
carefully. Some Funds have investment objectives and
policies similar to those of other funds managed by the same
investment adviser. Their investment results may be higher
or lower than those of the
7
<Page>
other funds, and there can be no assurance, and no
representation is made, that a Fund's investment results
will be comparable to the investment results of any other
fund.
We reserve the right to add, withdraw or substitute Funds,
subject to the conditions of the Policy in compliance with
regulatory requirements if, in our sole discretion, legal,
regulatory, marketing, tax or investment considerations so
warrant or in the event a particular Fund is no longer
available for investment by the Sub-Accounts. No
substitution will take place without prior approval of the
Commission, to the extent required by law.
Shares of the Funds may be used by us and other insurance
companies to fund both variable annuity contracts and
variable life insurance policies. While this is not
perceived as problematic, the Funds' governing bodies
(Boards of Directors/Trustees) have agreed to monitor events
to identify any material irreconcilable conflicts which
might arise and to decide what responsive action might be
appropriate. If a Sub-Account were to withdraw its
investment in a Fund because of a conflict, a Fund might
have to sell portfolio securities at unfavorable prices.
A Policy may also be funded in whole or in part through the
"Fixed Account", part of Lincoln Life's General Account
supporting its insurance and annuity obligations. We will
credit interest on amounts held in the Fixed Account as we
determine from time to time, but not less than 4% per year.
Interest, once credited, and Fixed Account principal are
guaranteed. Interests in the Fixed Account have not been
registered under the 1933 Act in reliance on exemptive
provisions. The Commission has not reviewed Fixed Account
disclosures, but they are subject to securities law
provisions relating to accuracy and completeness.
We have assigned full-time staff devoted to the development
of Business Continuity Plans in conjunction with a national
vendor. In addition, we have a site available in which to
recover our critical business functions in the event of a
disaster. We will conduct tests of our capabilities and
plans.
In accordance with money laundering laws and federal
economic sanction policy, the Company may be required in a
given instance to reject a premium payment and/or freeze a
Policyholder's account. This means we could refuse to honor
requests for transfer, withdrawals, surrenders, loans,
assignments, beneficiary changes or death benefit payments.
Once frozen, monies would be moved from the Separate Account
to a segregated interest-bearing account maintained for the
Policyholder, and held in that account until instructions
are received from the appropriate Regulator.
BUYING VARIABLE LIFE INSURANCE
The Policies this Prospectus offers are variable life
insurance policies which provide death benefit protection.
Investors not needing death benefit protection should
consider other forms of investment, as there are extra costs
and expenses of providing the insurance feature. Further,
life insurance purchasers who are risk-averse or want more
predictable premium levels and benefits may be more
comfortable buying more traditional, non-variable life
insurance. However, variable life insurance is a flexible
tool for financial and investment planning for persons
needing death benefit protection and willing to assume
investment risk and to monitor investment choices they have
made.
Flexibility starts with the ability to make differing levels
of premium payments. A young family just starting out may
only be able to pay modest premiums initially but hope to
increase premium payments over time. At first, this family
would be paying primarily for the insurance feature (perhaps
at ages where the insurance cost is relatively low) and
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later use a Policy more as a savings vehicle. A customer at
peak earning capacity may wish to pay substantial premiums
for a limited number of years prior to retirement, after
which Policy values may suffice, based on future expected
return results, though not guaranteed, to keep the Policy in
force for the expected lifetime and to provide, through
loans, supplemental retirement income. A customer may be
able to pay a large single premium, using the Policy
primarily as a savings and investment vehicle for potential
tax advantages.
Sufficient premiums must always be paid to keep a policy in
force, and there is a risk of lapse if premiums are too low
in relation to the insurance amount and if investment
results are less favorable than anticipated. The No Lapse
Provision, if elected, may help to assure a death benefit
even if investment results are unfavorable.
Flexibility also results from being able to select, monitor
and change investment choices within a Policy. With the wide
variety of fund options available, it is possible to
finetune an investment mix and change it to meet changing
personal objectives or investment conditions. Policy owners
should be prepared to monitor their investment choices on an
ongoing basis.
Variable life insurance has significant tax advantages under
current tax law. A transfer of values from one fund to
another within the Policy generates no taxable gain or loss.
And any investment income and realized capital gains within
a fund are automatically reinvested without being taxed to
the Policy owners. Policy values therefore accumulate on a
tax-deferred basis. These situations would normally result
in immediate tax liabilities in the case of direct
investment in mutual funds.
While these tax deferral features also apply to variable
annuities, liquidity (the ability of Policy owners to access
Policy values) is normally more easily achieved with
variable life insurance. Unless a policy has become a
"modified endowment contract" (see TAX ISSUES), an Owner can
borrow Policy values tax-free, without surrender charges and
at very low net interest cost. Policy loans can be a source
of retirement income. Variable annuity withdrawals are
generally taxable to the extent of accumulated income, may
be subject to surrender charges, and will result in penalty
tax if made before age 59 1/2.
Depending on the death benefit option chosen, accumulated
Policy values may also be part of the eventual death benefit
payable. If a Policy is heavily funded and investment
performance is very favorable, the death benefit may
increase even further because of tax law requirements that
the death benefit be a certain multiple of Policy value,
depending on the Insureds' ages (see DEATH BENEFITS). The
death benefit is income-tax free and may, with proper estate
planning, be estate-tax free. A tax advisor should be
consulted.
Certain costs and expenses of variable life insurance
ownership which are directly related to Policy values (i.e.
asset based costs) are not unlike those incurred through
investment in mutual funds or variable annuities. A
significant additional cost of variable life insurance is
the "cost of insurance" charge which is imposed on the
"amount at risk" (the death benefit less Policy value) and
increases as the insured grows older. This charge varies by
age, underwriting classification, smoking status and in most
states by gender. The effect of its increase can be seen in
illustrations in this Prospectus (see Appendix 2) or in
personalized illustrations available upon request. Surrender
Charges, which decrease over time, are another significant
additional cost if the Policy is not retained.
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REPLACEMENTS
Before purchasing the Policy to replace, or to be funded
with proceeds borrowed or withdrawn from, an existing life
insurance policy or annuity contract, an applicant should
consider a number of factors to determine whether doing so
is in his or her best interest. Will any commission be paid
to an agent or any other person with respect to the
replacement? Is coverage and comparable values available
from the Policy, as compared to his or her existing policy?
The Insured may no longer be insurable or the contestability
period may have elapsed with respect to the existing policy,
while the Policy could be contested. How much of the
surrender charge period under your old policy has elapsed?
(Your Policy with us will have a new surrender charge
period.) Will the surrender charges under this Policy be
lower or higher than under the old Policy? The insurance
risk under your Policy with us will not start until the
prior policy has been deemed surrendered. If you buy this
Policy you should consider these and similar matters before
deciding to replace this Policy or to withdraw funds from
it.
APPLICATION
Any person who wants to buy a Policy must first complete an
application on a form provided by Lincoln Life.
A complete application identifies the prospective Insureds
and provides sufficient information about them to permit
Lincoln Life to begin underwriting the risks under the
Policy. We require a medical history and examination of each
of the Insureds. Lincoln Life may decline to provide
insurance on the lives of the Insureds or, if it agrees to
provide insurance, it may place one or both Insureds into a
special underwriting category (these include preferred,
non-smoker standard, smoker standard, non-smoker substandard
and smoker substandard). The amount of the Cost of Insurance
deducted monthly from the Policy value after issue varies
among the underwriting categories as well as by Age and, in
most states, gender of the Insureds.
The applicant will select the Beneficiary or Beneficiaries
who are to receive Death Benefit Proceeds payable on the
Second Death, the initial face amount (the "Initial
Specified Amount") of the Death Benefit and which of three
methods of computing the Death Benefit is to be used. (See
DEATH BENEFITS, DEATH BENEFIT OPTIONS). The applicant will
also indicate both the frequency and amount of Premium
Payments. (See PREMIUM FEATURES). The applicant must also
determine how Policy values are initially to be allocated
among the available funding options following the expiration
of the Right-to-Examine Period. (See RIGHT-TO-EXAMINE
PERIOD).
OWNERSHIP
The Owner is the person or persons named as "Owner" in the
application, and on the Date of Issue will usually be
identified as " Owner" in the Policy Specifications. If no
person is identified as Owner in the Policy Specifications,
then the Insureds are the Owner. The person or persons
designated to be Owner of the Policy must have, or hold
legal title for the sole benefit of a person who has, an
"insurable interest" in the lives of each of the Insureds
under applicable state law. The Owner may be either or both
of the Insureds, or any other natural person or non-natural
entity. The Owner owns and exercises the rights under the
Policy prior to the Second Death.
The Owner is the person who is ordinarily entitled to
exercise the rights under the Policy so long as either of
the Insureds is living. These rights include the power to
select the Beneficiary and the Death Benefit Option. The
Owner generally also has the right to
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request policy loans, make partial surrenders or surrender
the Policy. The Owner may also name a new owner, assign the
Policy or agree not to exercise all of the Owner's rights
under the Policy.
If the Owner is a person other than the last surviving
Insured, and that Owner dies before the Second Death, the
Owner's rights in the Policy will belong to the Owner's
estate, unless otherwise specified to Lincoln Life.
BENEFICIARY
The Beneficiary is designated by the Owner or the Applicant
and is the person who will receive the Death Benefit
proceeds payable under the Policy. The person or persons
named in the application as "Beneficiary" are the
Beneficiaries of the Death Benefit under the Policy.
Multiple Beneficiaries will be paid in equal shares, unless
otherwise specified to Lincoln Life.
Except when Lincoln Life has acknowledged an assignment of
the Policy or an agreement not to change the Beneficiary,
the Owner may change the Beneficiary at any time while
either of the Insureds is living. Any request for a change
in the Beneficiary must be in a written form satisfactory to
Lincoln Life and submitted to Lincoln Life. Unless the Owner
has reserved the right to change the Beneficiary, such a
request must be signed by both the Owner and the
Beneficiary. On recordation, the change of Beneficiary will
be effective as of the date of signature or, if there is no
such date, the date recorded. No change of Beneficiary will
affect, or prejudice Lincoln Life as to, any payment made or
action taken by Lincoln Life before it was recorded.
If any Beneficiary dies before the Second Death, the
Beneficiary's potential interest shall pass to any surviving
Beneficiaries, unless otherwise specified to Lincoln Life.
If no named Beneficiary survives the Second Death, any Death
Benefit Proceeds will be paid to the Owner or the Owner's
executor, administrator or assignee.
INSUREDS
There are two Insureds under the Policy. At the Date of
Issue of the Policy the Owner must have an insurable
interest in each of the Insureds. On the Second Death, a
Death Benefit is payable under the Policy.
THE POLICY
The Policy is the life insurance contract described in the
Prospectus. The Date of Issue is the date on which we begin
life insurance coverage under a Policy. A Policy Year is the
twelve month period, beginning on the date of issue, during
which the Policy is in effect. The Policy Anniversary is the
day of the year the Policy was issued.
On issuance, a Policy will be delivered to the Owner. The
Policy sets forth the terms of the Policy, as applicable to
the Owner, and should be reviewed by the Owner on receipt to
confirm that it sets forth the features specified in the
application. The ownership and other options set forth in
the Policy are registered, and may be transferred, solely on
the books and records of Lincoln Life. Possession of the
Policy does not represent ownership or the right to exercise
the incidents of ownership with respect to the Policy. If
the Owner loses the form of Policy, Lincoln Life will issue
a replacement on request. Lincoln Life may impose a Policy
replacement fee.
POLICY SPECIFICATIONS
The Policy includes a "Policy Specifications" page, with
supporting schedules, in which is set forth certain
information applicable to the specific Policy. This
information
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includes the identity of the Owner, the Date of Issue, the
Initial Specified Amount, the Death Benefit Option selected,
the Insureds, the issue Ages, the Beneficiary, the initial
Premium Payment, the Surrender Charges, Expense Charges and
Fees, Guaranteed Maximum Cost of Insurance Rates, and the No
Lapse Premium if the No Lapse Provision has been selected.
PREMIUM FEATURES
The Policy permits flexible Premium Payments, meaning that
the frequency and the amount of Premium Payments may be
selected by the Owner. After the Initial Premium Payment is
paid there is no minimum premium required, unless to
maintain the No Lapse Provision. (See LAPSE AND
REINSTATEMENT No Lapse Provision). The initial Premium
Payment is due on the Effective Date (the date on which the
initial premium is applied to the Policy) and must be equal
to or exceed the amount necessary to provide for two Monthly
Deductions or, if selected, the No Lapse Premium.
If at least one of the Insureds is still living when the
younger Insured attains or would have attained Age 100, and
the Policy has not been surrendered, there are certain
changes under the Policy. We will no longer accept Premium
Payments, and will make no further monthly deductions.
Policy Values held in the Separate Account will be
transferred to the Fixed Account. We will no longer transfer
amounts to Sub-Accounts. The Policy will remain in force
until surrender or the Second Death.
PLANNED PREMIUMS; ADDITIONAL PREMIUMS
"Planned Premiums" are the amount of premium (as shown in
the Policy Specifications) the applicant chooses to pay
Lincoln Life on a scheduled basis. This is the amount for
which we send a premium reminder notice.
Any subsequent Premium Payments ("Additional Premiums") must
be sent directly to the Administrative Office. Additional
Premiums will be credited only when actually received by
Lincoln Life. Premium Payments may be billed with an annual,
semiannual, or quarterly frequency. Pre-authorized automatic
Additional Premium Payments can also be arranged at any
time.
Unless specifically otherwise directed, any payment received
(other than any Premium Payment necessary to prevent, or
cure, Policy Lapse) will be applied first to reduce Policy
indebtedness. There is no premium load on such payments to
the extent applied to reduce indebtedness.
LIMITS ON RIGHT TO MAKE PAYMENTS OF ADDITIONAL AND PLANNED
PREMIUMS
The Owner may increase Planned Premiums, or pay Additional
Premiums, subject to the following limitations and Lincoln
Life's right to limit the amount or frequency of Additional
Premiums.
Lincoln Life may require evidence of insurability if any
payment of Additional Premium (including Planned Premium)
would increase the difference between the Death Benefit and
the Accumulation Value. If Lincoln Life is unwilling to
accept the risk, the increase in premium will be refunded
without interest and without participation of such amounts
in any underlying investment.
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Lincoln Life may also decline any Additional Premium
(including Planned Premium) or a portion thereof that would
result in total Premium Payments exceeding the maximum
limitation for life insurance under federal tax laws. The
excess amount would be returned.
PREMIUM LOAD; NET PREMIUM PAYMENT
We deduct a maximum of 8% up-front from each premium payment
during the first year and a maximum of 4% up-front
thereafter. This amount, sometimes referred to as "premium
load," covers certain Policy-related state tax and federal
income tax liabilities and a portion of the sales expenses
incurred by Lincoln Life. The Premium Payment, net of the
premium load, is called the "Net Premium Payment."
RIGHT-TO-EXAMINE PERIOD
A Policy may be returned to Lincoln Life for cancellation on
or before 10 days after delivery to the Owner (or a greater
number of days if required by your state). This is called
the Right-to-Examine Period. If the Policy is returned for
cancellation within the Right-To-Examine Period, depending
on the state of issue of your Policy, we will refund to you
either all Premium Payments, or the Accumulation Value (plus
any charges and fees.) However, if a Premium Payment was
made by check, there may be a delay until the check clears.
If your issue state is one that requires return of Premium
Payments, your Initial Premium Payment received by Lincoln
Life, net of charges and fees, will be allocated to the Cash
Management Sub-Account on the Date of Issue. Typically 10
days (may be greater depending upon the issue state) from
the Date of Issue, your Cash Management Sub-Account value
will be automatically allocated among the Sub-Accounts and
the Fixed Account as designated by the Owner. If your Policy
has been backdated, your Net Premium Payment may be
allocated directly into the Sub-Accounts you have selected.
Please consult your Registered Representative or Lincoln
Life's Administrative Office for the exact number of days
before your funds will be moved from the Cash Management
Sub-Account. In either case, if the Policy is returned for
cancellation within the Right-to-Examine Period, we will
return any Premium Payments made.
If your issue state is one that provides for return of
Accumulation Value, your Initial Premium Payment received by
Lincoln Life, net of charges and fees, will be allocated
directly among the Sub-Accounts and the Fixed Account as
designated by the Owner. If the Policy is returned for
cancellation within the Right-to-Examine Period, we will
return the Accumulation Value, plus any charges and fees, as
of the date the returned Policy is received at Lincoln Life.
TRANSFERS AND ALLOCATION AMONG ACCOUNTS
ALLOCATION OF NET PREMIUM PAYMENTS
The allocation of Net Premium Payments among the Fixed
Account and Sub-Accounts may be set forth in the
application. An Owner may change the allocation of future
Net Premium Payments at any time. In any allocation, the
amount allocated to any Sub-Account must be in whole
percentages. No allocation can be made which would result in
a Sub-Account Value of less than $50 or a Fixed Account
Value of less than $2,500. Lincoln Life, at its sole
discretion, may waive minimum balance requirements on the
Sub-Accounts.
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TRANSFERS
The Owner may make transfers among the Sub-Accounts, on the
terms set forth below, at any time before the younger
Insured reaches or would have reached Age 100. The Owner
should carefully consider current market conditions and each
Sub-Account's investment policies and related risks before
allocating money to the Sub-Accounts.
Transfer of amounts from one Sub-Account to another or from
the Sub-Accounts to the Fixed Account are possible at any
time. Transfers from the Fixed Account to the Sub-Accounts
may be made in the first Policy Year only as provided for
under the Dollar Cost Averaging program. The amount of all
transfers in any other Policy Year may not exceed the
greater of 1) 25% of the Fixed Account Value as of the
immediately preceding anniversary of the Date of Issue, or
2) the total dollar amount transferred from the Fixed
Account in the immediately preceding Policy Year. Up to 24
transfer requests (a request may involve more than a single
transfer) may be made in any Policy Year without charge.
Lincoln Life reserves the right to impose a $25 fee for each
transfer in excess of 24 in any Policy Year. Lincoln Life
may further limit transfers from the Fixed Account at any
time.
Transfers must be made in proper written form, unless the
Owner has given written authorization to Lincoln Life to
accept telephone transactions. Authorization to engage in
telephone transactions and permitted telephone transactions
must be made in accordance with the procedures described in
COMMUNICATIONS WITH LINCOLN LIFE. You may also send your
request by facsimile to the Administrative Office. Written
transfer requests or adequately authenticated telephone
transfer requests received at the Administrative Office by
the close of the New York Stock Exchange (usually
4:00 PM Eastern Time) on a Valuation Day will be effected as
of that day. Otherwise, requests will be effective as of the
next Valuation Day.
Any transfer among the Sub-Accounts or to the Fixed Account
will result in the crediting and cancellation of
Accumulation Units based on the Accumulation Unit values
next determined after the Administrative Office receives a
request in proper written form or adequately authenticated
telephone transfer requests.
LIMITS ON FREQUENT TRANSFERS
The Policy is not designed to serve as a vehicle for
frequent trading, in response to short-term fluctuations in
the market. Such frequent trading can disrupt the management
of a Fund; increase trading and transaction costs and raise
expenses; disrupt planned investment strategies; force
unplanned portfolio turnover and adversely affect Fund
performance through asset swings that decrease the Fund's
ability to provide maximum investment return to all Policy
owners. Accordingly, organizations and individuals who use
market-timing investment strategies and make frequent
transfers should not purchase this Policy.
We reserve the right to restrict, in our sole discretion and
without prior notice, transfers initiated by a market-timing
organization, individual or other party authorized to give
transfer instructions on behalf of multiple policy owners.
Such restrictions could include:
(1) Not accepting transfer instructions from an agent acting
on behalf of more than one policy owner; and
(2) Not accepting preauthorized transfer forms from
market-timers or other entities acting on behalf of more
than one Policy owner at a time.
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We further reserve the right to impose, without prior
notice, restrictions on any transfers that we determine, in
our sole discretion, will disadvantage or potentially hurt
the rights or interests of other Policy owners or harm the
Funds. We will inform you in writing if we have restricted
any such transfer.
OPTIONAL SUB-ACCOUNT ALLOCATION PROGRAMS
The Owner may elect to participate in programs providing for
Dollar Cost Averaging or Automatic Rebalancing, but may
participate in only one program at any time.
DOLLAR COST AVERAGING
Dollar Cost Averaging systematically transfers specified
dollar amounts from the Cash Management Sub-Account or the
Fixed Account. Transfer allocations may be made to one or
more of the Sub-Accounts (not the Fixed Account) on a
monthly or quarterly basis. These transfers do not count
against the free transfers available. Transfers from the
Fixed Account can only be elected at the time the Policy is
issued. Transfers from the Cash Management Sub-Account may
be elected at any time while the Policy is in force. By
making allocations on a regularly scheduled basis, instead
of on a lump sum basis, an Owner may reduce exposure to
market volatility. Dollar Cost Averaging will not assure a
profit or protect against a declining market.
If the Owner elects Dollar Cost Averaging from either the
Cash Management Sub-Account or the Fixed Account the value
in that account must be at least $1,000 initially. The
minimum amount that may be allocated is $50 monthly.
An election for Dollar Cost Averaging is effective after the
Administrative Office receives a request from the Owner in
proper written form or by telephone, if adequately
authenticated. An election is effective within ten business
days, but only if there is sufficient value in the Cash
Management Sub-Account or the Fixed Account. Lincoln Life
may, in its sole discretion, waive Dollar Cost Averaging
minimum deposit and transfer requirements.
Dollar Cost Averaging terminates automatically: (1) if the
value in the Cash Management Sub-Account or the Fixed
Account is insufficient to complete the next transfer;
(2) one week after the Administrative Office receives a
request for termination in proper written form or by
telephone, if adequately authenticated; (3) after 12 or 24
months (as elected on the application); or (4) if the Policy
is surrendered.
Currently, there is no charge for Dollar Cost Averaging, but
Lincoln Life reserves the right to impose a charge.
From time to time, we may offer special interest rate
programs for Dollar Cost Averaging. Please consult your
Registered Representative to determine the current
availability and terms of these programs. We reserve the
right to modify, suspend or terminate a Dollar Cost
Averaging program. Any changes will not affect owners
currently participating in the Dollar Cost Averaging
program.
AUTOMATIC REBALANCING
Automatic Rebalancing periodically restores to a
pre-determined level the percentage of Policy value
allocated to each Sub-Account (e.g. 20% Cash Management,
50% Growth, 30% International). The Fixed Account is not
subject to rebalancing. The pre-determined level is the
allocation initially selected on the application, until
changed by the Owner. If Automatic Rebalancing is elected,
all Net Premium Payments allocated to the Sub-Accounts will
be subject to Automatic Rebalancing.
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The Owner may select Automatic Rebalancing on a quarterly,
semi-annual or annual basis. Automatic Rebalancing may be
elected, terminated or the allocation may be changed at any
time, effective within ten business days upon receipt by the
Administrative Office of a request in proper written form or
by telephone, if adequately authenticated.
Currently, there is no charge for Automatic Rebalancing, but
Lincoln Life reserves the right to impose a charge.
Automatic Rebalancing transfers are not counted against the
number of transfer requests available at no charge (See
Transfers).
POLICY VALUES
The "Accumulation Value" is the sum of the Fixed Account
Value, Separate Account Value and the Loan Account Value.
The Accumulation Value of the Policy depends on the
performance of the underlying investments. Policy values are
used to fund Policy fees and expenses, including the Cost of
Insurance. Premium Payments to meet your objectives will
vary based on the investment performance of the underlying
investments. A market downturn, affecting the Sub-Accounts
upon which the Accumulation Value of a particular Policy
depends, may require Additional Premium Payments beyond
those expected (unless the No Lapse Provision requirements
have been satisfied) to maintain the level of coverage or to
avoid lapse of the Policy. We strongly suggest you review
periodic statements to determine if Additional Premium
Payments may be necessary to avoid lapse of the Policy.
We will tell you at least annually the Accumulation Value,
the number of Accumulation Units which remain credited to
the Policy, the current Accumulation Unit values, the
Sub-Account values, the Fixed Account Value and the Loan
Account Value.
VALUATION -- FIXED ACCOUNT AND SEPARATE ACCOUNT
The portion of a Premium Payment remaining after deduction
of the premium charge is the "Net Premium Payment", and is
available for allocation to the Fixed Account and/or the
Separate Account, at your direction. We credit Net Premium
Payments to the Policy as of the date they are received.
(See "Communications with Lincoln Life" for an explanation
of how we determine when we have "received" a premium
payment.)
ALLOCATION OF PREMIUM PAYMENTS TO SEPARATE ACCOUNT
NUMBER OF UNITS. When you make premium payments, the portion
you allocate to each Sub-Account of the Separate Account is
converted into units of measure we call "Variable
Accumulation Units". The number of these units we credit to
you for each Sub-Account is determined by dividing the
amount you allocated to that Sub-Account by the value of a
Variable Accumulation Unit for that Sub-Account on the
Valuation Day on which the Premium Payment is received at
our Administrative Office, if it is received before
4:00 PM, New York time. If received at or after 4:00 PM, New
York time, we will use the value of a Variable Accumulation
Unit computed on the next Valuation Day.
The number of Variable Accumulation Units credited to a
Policy will not be changed by any subsequent change in the
value of a Variable Accumulation Unit. That value may vary
from Valuation Period to Valuation Period to reflect the
investment experience of the portfolio or fund used in a
particular Sub-Account and fees charged under the Policy.
VALUATION DAY; VALUATION PERIOD. Variable Accumulation Units
will be valued once daily as of the close of trading,
normally 4:00 PM, New York time, on each day that the New
York Stock Exchange (NYSE) is open and trading is
unrestricted ("Valuation Day"). On
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any day other than a Valuation Day, the Variable
Accumulation Unit value will not change. A "Valuation
Period" is the period starting at the close of trading on
the NYSE on a Valuation Day, and ending at the close of
trading on the next Valuation Day.
PER-UNIT VALUATION. To determine your Separate Account Value
on each Valuation Day we must first calculate the value of a
Variable Accumulation Unit for each Sub-Account. The
beginning value for each Sub-Account is established at the
inception of the Sub-Account, at an arbitrary amount.
Thereafter it may increase or decrease from Valuation Period
to Valuation period.
We determine each Variable Accumulation Unit value after the
first as follows:
(1) We calculate the total value of the Fund shares held in
the Sub-Account by multiplying the number of Fund shares
owned by the Sub-Account at the beginning of the
Valuation Period by the net asset value per share of the
Fund at the end of the Valuation Period, and then by
adding any dividend or other distribution of the Fund if
an ex-dividend date occurs during the Valuation Period;
(2) Next, we SUBTRACT the liabilities of the Sub-Account at
the end of the Valuation Period. These liabilities
include daily charges imposed on the Sub-Account, and
may include a charge or credit with respect to any taxes
paid or reserved for by us that we determine results
from the operation of the Separate Account; and
(3) We divide the result by the number of Variable
Accumulation Units outstanding at the beginning of the
Valuation Period.
In certain circumstances, and when permitted by law, it may
be prudent for us to use a different standard industry
method for this calculation, called the Net Investment
Factor method. We will achieve substantially the same result
using either method.
The daily charge imposed on a Sub-Account for any Valuation
Period is equal to the daily mortality and expense risk
charge multiplied by the number of calendar days in the
Valuation Period. The amount of Monthly Deduction allocated
to each Sub-Account will result in the cancellation of
Variable Accumulation Units that have an aggregate value, on
the date of such deduction, equal to the total amount by
which the Sub-Account is reduced.
FIXED ACCOUNT AND LOAN ACCOUNT VALUE
The Fixed Account Value and the Loan Account Value reflect
amounts allocated to Lincoln Life's general account through
payment of premiums or through transfers from the Separate
Account. Lincoln Life guarantees the Fixed Account Value.
ACCUMULATION VALUE
The "Accumulation Value" of a Policy is determined by:
1) multiplying the total number of Variable Accumulation
Units credited to the Policy for each Sub-Account by its
appropriate current Variable Accumulation Unit Value; and
2) if a combination of Sub-Accounts is elected, totaling the
resulting value; and
3) adding any values attributable to the Fixed Account and
the Loan Account. The Accumulation Value will be affected
by Monthly Deductions.
NET ACCUMULATION VALUE
The "Net Accumulation Value" is the Accumulation Value less
the Loan Account Value. The Net Accumulation Value
represents the net value of the Policy and is the basis for
calculating the Surrender Value.
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FUNDS
Each of the Sub-Accounts of the Separate Account is invested
solely in the shares of one of the Funds available under the
Policies. Each of the Funds, in turn, is an investment
portfolio of the American Funds Insurance Series (AFIS). A
given Fund may have a similar investment objective and
principal investment strategy to those for another mutual
fund managed by the same investment advisor or subadvisor.
However, because of timing of investments and other
variables, there will be no correlation between the two
investments. Even though the management strategy and the
objectives of the Funds are similar, investment results may
vary.
The portfolios and objectives are listed below. Additional
information is available in each Funds prospectus.
AMERICAN FUNDS INSURANCE SERIES is advised by Capital
Research and Management Company.
ASSET ALLOCATION FUND (CLASS 2): The fund seeks to
provide you with high total return (including income and
capital gains) consistent with preservation of capital
over the long-term by investing in a diversified
portfolio of common stocks and other equity securities;
bonds and other intermediate and long-term debt
securities, and money market instruments (debt
securities maturing in one year or less).
BLUE CHIP INCOME AND GROWTH FUND (CLASS 2): The fund
seeks to produce income exceeding the average yield on
U.S. stocks generally and to provide an opportunity for
growth of principal consistent with sound common stock
investing. The fund invests primarily in common stocks
of larger, more established companies in the U.S.
BOND FUND (CLASS 2): The fund seeks to maximize your
level of current income and preserve your capital by
investing primarily in bonds. The fund is designed for
investors seeking income and more price stability than
stocks, and capital preservation over the long-term.
CASH MANAGEMENT FUND (CLASS 2): The fund seeks to
provide you an opportunity to earn income on your cash
reserves while preserving the value of your investment
and maintaining liquidity by investing in a diversified
selection of high quality money market instruments.
GLOBAL DISCOVERY FUND (CLASS 2): The fund seeks to make
your investment grow over time by investing primarily in
stocks of companies in the services and information area
of the global economy. Companies in there service and
information area include, for example, those involved in
the fields of telecommunications, computer systems and
software, the Internet, broadcasting and publishing,
health care, advertising, leisure, tourism, financial
services, distribution and transportation. Providing you
with current income is a secondary consideration.
GLOBAL GROWTH FUND (CLASS 2): The fund seeks to make
your investment grow over time by investing primarily in
common stocks of companies located around the world. The
fund is designed for investors seeking capital
appreciation through stocks. Investors in the fund
should have a long-term perspective and be able to
tolerate potentially wide price fluctuations.
GLOBAL SMALL CAPITALIZATION FUND (CLASS 2): The fund
seeks to make your investment grow over time by
investing primarily in stocks of smaller companies
located around the world that typically have market
capitalizations of $50 million to
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$1.5 billion. The fund is designed for investors seeking
capital appreciation through stocks. Investors in the
fund should have a long-term perspective and be able to
tolerate potentially wide price fluctuations.
GROWTH FUND (CLASS 2): The fund seeks to make your
investment grow by investing primarily in common stocks
of companies that appear to offer superior opportunities
for growth of capital. The fund is designed for
investors seeking capital appreciation through stocks.
Investors in the fund should have a long-term
perspective and be able to tolerate potentially wide
price fluctuations.
GROWTH-INCOME FUND (CLASS 2): The fund seeks to make
your investment grow and provide you with income over
time by investing primarily in common stocks or other
securities which demonstrate the potential for
appreciation and/or dividends. The fund is designed for
investors seeking both capital appreciation and income.
HIGH-INCOME BOND FUND (CLASS 2): The fund seeks to
provide you with a high level of current income and
secondarily capital appreciation by investing primarily
in lower quality debt securities (rated Ba or BB or
below by Moody's Investors Service, Inc. or Standard &
Poor's Corporation), including those of non-U.S.
issuers. The fund may also invest in equity securities,
and securities that have both equity and debt
characteristics, that provide an opportunity for capital
appreciation.
INTERNATIONAL FUND (CLASS 2): The fund seeks to make
your investment grow over time by investing primarily in
common stocks of companies located outside the United
States. The fund is designed for investors seeking
capital appreciation through stocks. Investors in the
fund should have a long-term perspective and be able to
tolerate potentially wide price fluctuations.
NEW WORLD FUND (CLASS 2): The fund seeks to make your
investment grow over time by investing primarily in
stocks of companies with significant exposure to
countries which have developing economies and/or
markets. The fund may also invest in debt securities of
issuers, including issuers of lower rated bonds and
government securities in these countries. Investors in
the fund should have a long-term perspective and be able
to tolerate potentially wide price fluctuations.
U.S. GOVERNMENT/AAA-RATED SECURITIES FUND (CLASS 2): The
fund seeks to provide you with a high level of current
income, as well as preserve your investment. The fund
invests primarily in securities that are guaranteed by
the "full faith and credit" pledge of the U.S.
Government and securities that are rated AAA or Aaa by
Moody's Investors Service, Inc. or Standard & Poor's
Corporation or unrated but determined to be of
equivalent quality.
Several of the Funds may invest in non-investment grade,
high-yield, high-risk debt securities (commonly referred to
as "junk bonds"), as detailed in the individual Fund
Prospectuses. Also, take note that during extended periods
of low interest rates the yields of Cash Management
Sub-Accounts may become extremely low, and possibly
negative. Please review the Fund Prospectuses carefully.
There is no assurance that the investment objective of any
of the Funds will be met. You assume all of the investment
performance risk for the Sub-Accounts you select. There is
investment performance risk in each of the Sub-Accounts,
although the amount of such risk varies significantly among
the Sub-Accounts. Owners should read each Fund's prospectus
carefully and understand the risks before making or changing
investment choices. Additional Funds may, from time to time,
be made available as underlying investments. The right to
select among Funds will be limited by the terms
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and conditions imposed by Lincoln Life (SEE Allocation of
Net Premium Payments). Lincoln Life may make changes
(including substitutions) for some or all classes of Policy
Owners.
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Separate Account, or if, in our judgment,
further investment in such shares should cease to be
appropriate in view of the purpose of the Separate Account
or in view of legal, regulatory or federal income tax
restrictions, or for any other reason in our sole
discretion; we may substitute shares of another Fund. There
will be no substitution of securities in any Sub-Account
without prior approval of the Commission. Substitute funds
may have higher charges than the funds being replaced.
Substitutions may be made with respect to existing
investments or the investment of future premium payments, or
both. We may close Sub-Accounts to allocations of premium
payments or contract value, or both, at any time in our sole
discretion. The funds, which sell their shares to the
Sub-Accounts pursuant to participation agreements, also may
terminate these agreements and discontinue offering their
shares to the Sub-Accounts.
VOTING RIGHTS
Lincoln Life will vote the shares of each Fund held in the
Separate Account at special meetings of the shareholders of
the particular Fund in accordance with instructions received
by the Administrative Office in proper written form from
persons having a voting interest in the Separate Account.
Lincoln Life will vote shares for which it has not received
instructions in the same proportion as it votes shares in
the Separate Account for which it has received instructions.
The Funds do not hold regular meetings of shareholders.
The number of shares which a person has a right to vote will
be determined as of a date to be chosen by the appropriate
Trust not more than sixty (60) days prior to the meeting of
the particular Fund. Voting instructions will be solicited
by written communication at least fourteen (14) days prior
to the meeting.
To determine how many votes each Policy owner is entitled to
direct with respect to a Fund, first Lincoln Life will
calculate the dollar amount of your account value
attributable to that Fund. Second we will divide that amount
by $100.00. The result is the number of votes you may
direct.
FUND PARTICIPATION AGREEMENT
In order to make the Funds available, Lincoln Life has
entered into an agreement with the trust. In this agreement,
Lincoln Life must perform certain administrative services
for the Fund or its distributor. For these administrative
functions, Lincoln Life may be compensated by the Fund at an
annual rate of .25% of the assets attributable to the
Policies. The compensation comes from 12b-1 fees.
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CHARGES AND FEES
We deduct charges in connection with the Policy to
compensate us for providing the Policy's insurance benefit,
administering the Policy, assuming certain risks under the
Policy and for sales related expenses we incur. Lincoln Life
may profit from any of these charges. The profit from any
charges, including mortality and expense risk and cost of
insurance charges, may be used for any purpose, including
covering shortfalls from other charges.
The nature and amount of these charges are as follows:
PREMIUM CHARGE
We deduct a maximum premium charge of 8% of each Premium
Payment during the first year and a maximum of 4%
thereafter. This amount, sometimes referred to as "premium
load", is intended to cover a portion of our state premium
tax expenses, certain federal tax liabilities resulting from
the receipt of premiums, and a portion of our distribution
expenses. State premium tax rates vary from 0% to 4.0%.
DEDUCTIONS MADE MONTHLY
We make various expense deductions monthly. The Monthly
Deduction, including the Cost of Insurance Charge is made
from the Net Accumulation Value.
The Monthly Deductions are deducted proportionately from the
value of each underlying investment subject to the charge.
For Sub-Accounts, Variable Accumulation Units are canceled
and the value of the canceled Variable Accumulation Units is
withdrawn in the same proportion as their respective values
have to the Net Accumulation Value. The Monthly Deductions
are made on the Monthly Anniversary Day, the Date of Issue,
and the same day of each month thereafter, or if there is no
such date in a given month, the first Valuation Day of the
next month. If the day that would otherwise be a Monthly
Anniversary Day is not a Valuation Day, then the Monthly
Anniversary Day is the next Valuation Day.
If the Net Accumulation Value is insufficient to cover the
current Monthly Deduction, you have a 61-day period ("Grace
Period"), to make a payment sufficient to cover that
deduction. (See Lapse and Reinstatement: Lapse of a Policy).
If either Insured is still living when the younger Insured
would have attained Age 100 and the Policy has not been
surrendered, no further Monthly Deductions will be made and
the Separate Account Value will be transferred to the Fixed
Account. The Policy will then remain in force until
surrender or the Second Death.
MONTHLY DEDUCTION
Lincoln Life deducts a monthly charge per $1,000 of initial
Specified Amount for the first 120 months from Issue Date or
from the date of an increase in Specified Amount. The charge
is based on the younger Insured's age and the Specified
Amount. If an increase occurs, your current insurance age
will be your issue age for the new coverage. The charge will
never exceed $0.17 per $1000 of Specified Amount.
You will be charged a $10 monthly fee for administrative
purposes.
These charges compensate Lincoln Life for administrative
expenses associated with Policy issue and ongoing Policy
maintenance including premium billing and collection, policy
value calculation, confirmations, periodic reports and other
similar matters.
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If you select the Estate Tax Repeal Rider, there is a
one-time administrative charge of not more than $250.
COST OF INSURANCE CHARGE
The "Cost of Insurance" charge is the portion of the Monthly
Deduction designed to compensate Lincoln Life for the
anticipated cost of paying Death Benefits in excess of the
Accumulation Value, not including riders, supplementary
benefits or monthly expense charges.
The Cost of Insurance charge depends on the Age,
underwriting category and gender (in accordance with state
law) of both Insureds and the current "Net Amount at Risk"
(Death Benefit minus the Accumulated Value). The rate on
which the Monthly Deduction for the Cost of Insurance is
based will generally increase as the Insureds age, although
the Cost of Insurance charge could decline if the Net Amount
at Risk drops relatively faster than the Cost of Insurance
Rate increases.
The Cost of Insurance charge is determined by dividing the
Death Benefit at the previous Monthly Anniversary Day by
1.0032737 (the monthly equivalent of an annual rate of 4%),
subtracting the Accumulation Value at the previous Monthly
Anniversary Day, and multiplying the result (the Net Amount
at Risk) by the applicable Cost of Insurance Rate as
determined by Lincoln Life. The Guaranteed Maximum Cost of
Insurance Rates, per $1,000 of Net Amount at Risk, for
standard risks are based on the 1980 Commissioners Standard
Ordinary Mortality Tables, Age Nearest Birthday (1980 CSO,
Male or Female); or, for unisex rates, on the 1980 CSO-B
Table.
MORTALITY AND EXPENSE RISK CHARGE
Lincoln Life deducts a daily charge as a percentage of the
assets of the Separate Account as a mortality and expense
risk charge. The mortality risk assumed is that insureds may
live for a shorter period than estimated, and therefore, a
greater amount of death benefit will be payable. The expense
risk assumed is that expenses incurred in issuing and
administering the policies will be greater than estimated.
The mortality and expense risk charge is currently at an
annual rate of 0.80% in years 1-19, 0.40% in years 20+, and
is guaranteed not to exceed that.
SURRENDER CHARGES
A generally declining "Surrender Charge" may apply if the
Policy is totally surrendered, has a decrease in Specified
Amount, or lapses. The Surrender Charge varies by the Age of
the Insureds, the number of years since the Date of Issue or
the date of an increase in Specified Amount, and Specified
Amount. The duration of the Surrender Charge is 14 years for
full surrenders and 10 years for decreases in Specified
Amount.
The charge is in part a deferred sales charge and in part a
recovery of certain first year administrative costs. The
maximum Surrender Charge is included in each Policy and is
in compliance with each state's non-forfeiture law. Examples
of the Surrender Charge can be seen in Appendix 2. The
maximum Surrender Charge will not exceed $37.52 per $1000 of
the Specified Amount. The maximum Surrender Charge applies
to decreases in Specified Amount, even if the decrease
occurs after the Specified Amount was increased.
The Surrender Charge under a Policy is proportional to the
face amount of the Policy. Expressed as a percentage of the
face amount, it is higher for older than for younger issue
ages. The Surrender Charge cannot exceed Policy value, but
may equal Policy
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value, especially during the first two Policy years. All
Surrender Charges decline to zero over the 14 years
following issuance of the Policy or an increase in Specified
Amount. See, for example, the illustrations in Appendix 2
for issue ages 55 and 65.
Upon either a full surrender of the Policy or a decrease in
Specified Amount made at the request of the Owner, a charge
will be assessed based on the table of surrender charges
shown in the Policy Specifications, subject to the following
conditions.
For decreases in Specified Amount, excluding full surrender
of the Policy, no such charge will be applied under the
following circumstances:
1) where the decrease occurs after the tenth Policy
Anniversary following the issuance of the Initial
Specified Amount, or
2) where the decrease is directly caused by a Death Benefit
Option change, or
3) where the decrease is caused by a partial surrender of
Net Accumulation Value (i.e. withdrawal), or
4) where the decrease plus the sum of all prior decreases
does not exceed 25% of the Initial Specified Amount.
For all other decreases in Specified Amount, the charge will
be calculated as (1) minus (2), then divided by (3) and then
multiplied by (4), where:
(1) is the amount of this decrease plus any prior decreases,
(2) is the greater of an amount equal to 25% of the Initial
Specified Amount or the sum
of all prior decreases,
(3) is the Initial Specified Amount
(4) is the then applicable Surrender Charge from the table
in Policy Specifications.
Requests for decreases in Specified Amount may be limited by
Lincoln Life to the extent there is insufficient Net
Accumulation Value to cover the necessary charges.
Upon full surrender of the Policy, the charge will be
calculated as the entire amount shown in the table of
surrender charges multiplied by one minus the percentage of
Initial Specified Amount for which a Surrender Charge was
previously assessed. In no event will the charge assessed
upon a full surrender exceed the then current Net
Accumulation Value.
Separate surrender charges tables apply with respect to each
increase in Specified Amount. For purposes of calculating
charges for full surrenders of, or decreases in, such
increased Specified Amounts, the amount of the increase will
be considered a new "Initial Specified Amount". Upon an
increase in Specified Amount we will send you
(1) Supplemental Policy Specifications reflecting the
maximum additional surrender charge and (2) the new table of
surrender charges for the increase in Specified Amount.
Currently the minimum allowable increase in Specified Amount
is $1,000, however Lincoln Life may change this at any time.
Any charges for decreases in Specified Amount will be
assessed by withdrawing the amount from the Fixed and
Variable Sub-Accounts in proportion to which the balances
invested in such Fixed and Variable Sub-Accounts bear to the
Net Accumulation Value as of the date on which the deduction
is made, unless otherwise agreed in writing by Lincoln Life
and the Owner.
No Surrender Charge is imposed on a partial surrender, but
an administrative fee of 2% of the amount withdrawn (not to
exceed $25) is imposed, allocated pro-rata among the
Sub-Accounts from which the partial surrender proceeds are
taken. This administrative fee is deducted from the Policy's
remaining accumulation value.
Any surrenders, full or partial, may result in tax
implications. SEE TAX ISSUES.
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Based on its actuarial determination, Lincoln Life does not
anticipate that the Surrender Charge, together with the
portion of the premium load attributable to sales expense,
will cover all sales and administrative expenses which
Lincoln Life will incur in connection with the Policy. Any
such shortfall, including but not limited to payment of
sales and distribution expenses, would be available for
recovery from the general account of Lincoln Life, which
supports insurance and annuity obligations.
If you select the Estate Tax Repeal Rider, and if you
satisfy its special conditions, you will have a one-time
right to cancel your Policy without being subject to
Surrender Charges. This is a limited benefit, and it is
subject to our specific definition of Estate Tax Repeal as
defined in the Riders section of this Prospectus. All
surrenders of your Policy (as distinguished from the
cancellation provision in this Rider) are subject to the
Policy's normal surrender requirements. SEE RIDERS.
TRANSACTION FEE FOR EXCESS TRANSFERS
A $25 fee may apply for each transfer request in excess of
24 in any Policy Year. A single transfer request, either in
writing or by telephone, may consist of multiple
transactions.
DEATH BENEFITS
The Death Benefit Proceeds is the amount payable to the
Beneficiary upon the Second Death (the death of the second
of the two Insureds to die), in accordance with the Death
Benefit Option elected. Loans (if any) and overdue
deductions are deducted from the Death Benefit Proceeds
prior to payment.
The Specified Amount, which may not be less than $250,000,
is the amount requested by the Policy Owner at the time of
application for insurance. This amount, in combination with
a death benefit option, will define the death benefit. The
Specified Amount is a field on the Policy Specification
Page. The three Death Benefit Options are described below.
The applicant must consider a number of factors in selecting
the Specified Amount, including the amount of proceeds
required on the Second Death and the Owner's ability to make
Premium Payments. In evaluating this decision, the applicant
should consider that the greater the Net Amount at Risk, the
greater the monthly deductions for the Cost of Insurance.
DEATH BENEFIT OPTIONS
Three different Death Benefit Options are available under
the Policy. Regardless of which Death Benefit Option you
choose, the Death Benefit Proceeds payable under the Policy
is the greater of (a) the amount determined under the Death
Benefit Option in effect on the date of the second Insured's
Death, less (in each case) any indebtedness under the Policy
or (b) an amount determined by Lincoln Life equal to that
required by the Internal Revenue Code to maintain the Policy
as a life insurance policy, also referred to as the
"Corridor Death Benefit."
The "Corridor Death Benefit" is the applicable percentage
(the "Corridor Percentage") of the Accumulation Value
(rather than by reference to the Specified Amount) required
to maintain the Policy as a "life insurance contract" for
Federal income tax purposes. The Corridor Percentage is 250%
through the time the younger insured reaches Age 40 and
decreases in accordance with the table in Appendix 1 to 100%
when the younger Insured reaches Age 95.
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Death Benefit Option 1 provides Death Benefit Proceeds equal
to the Specified Amount (a minimum of $250,000). If
Option 1 is selected, the Policy pays level Death Benefit
Proceeds unless the Minimum Death Benefit exceeds the
Specified Amount. (See DEATH BENEFITS, Federal Income Tax
Definition of Life Insurance).
Death Benefit Option 2 provides Death Benefit Proceeds equal
to the sum of the Specified Amount plus the Net Accumulation
Value as of the date of the Second Death. If Option 2 is
selected, the Death Benefit Proceeds increase or decrease
over time, depending on the amount of premium paid and the
investment performance of the underlying Sub-Accounts.
Death Benefit Option 3 provides Death Benefit Proceeds equal
to the sum of the Specified Amount plus the Accumulated
Premiums (all premiums paid minus the Cumulative Policy
Factor, if that Factor is elected) up to the limit shown in
the Policy Specifications. Any premium paid that will cause
the Death Benefit Proceeds to exceed this limit will be
applied to the Policy, but will not increase the Death
Benefit. The Cumulative Policy Factor, normally used in
business situations, is calculated as the applicable monthly
rate then used by the Internal Revenue Service (IRS) to
determine the economic benefit attributable to life
insurance coverage, or an alternate table permitted by the
IRS, multiplied by the Specified Amount divided by 1000. If
Option 3 is selected, the Death Benefit Proceeds will
generally increase, depending on the amount of premium paid.
If for any reason the applicant fails to affirmatively elect
a particular Death Benefit Option, Death Benefit Option 1
shall apply until changed as provided below. The ability of
the Owner to support the Policy is an important factor in
selecting between the Death Benefit Options, because the
greater the Net Amount at Risk at any time, the more that
will be deducted from the value of the Policy to pay the
Cost of Insurance.
Owners who prefer insurance coverage that generally does not
vary in amount and generally has lower Cost of Insurance
Charges should elect Option 1. Owners who prefer to have
favorable investment experience reflected in increased
insurance coverage should select Option 2. Owners who have a
need to recover at death the amount of premiums paid should
select Option 3. Under Options 1 and 3, any Surrender Value
at the time of the Insured's Death will revert to Lincoln
Life.
CHANGES IN DEATH BENEFIT OPTIONS AND SPECIFIED AMOUNT
All requests for changes between Death Benefit Options and
changes in the Specified Amount must be submitted in proper
written form to the Administrative Office. The minimum
increase in Specified Amount currently permitted is $1,000.
If requested, a supplemental application and evidence of
insurability must also be submitted to Lincoln Life. Any
increase in the Specified Amount will increase the amount of
the Surrender Charge applicable to the policy.
In a change from Death Benefit Option 1 to Death Benefit
Option 2, the Specified Amount will be reduced by the
Accumulation Value as of the effective date of change. In a
change from Death Benefit Option 2 to Death Benefit
Option 1, the Specified Amount will be increased by the
Accumulation Value as of the effective date of change.
In a change from Death Benefit Option 1 to Death Benefit
Option 3, the Specified Amount will remain the same. In a
change from Death Benefit Option 3 to Death Benefit Option
1, the Specified Amount will be increased by Accumulated
Premiums (less the Cumulative Policy Factor if that Factor
is elected) as of the effective date of change.
In a change from Death Benefit Option 2 to Death Benefit
Option 3, the Specified Amount will be increased by the
Accumulation Value as of the effective date of change.
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In a change from Death Benefit Option 3 to Death Benefit
Option 2, if the Accumulation Values is greater than the
Accumulated Premium (less Cumulative Policy Factor if that
Factor elected), the Specified Amount will be reduced by the
Accumulation Value less Accumulated Premium (plus Cumulative
Policy Factor if that Factor is elected) as of the effective
date of change; if the Accumulation Values is less than the
Accumulated Premium (less the Cumulative Policy Factor if
elected), the Specified Amount will be increased by the
Accumulated Premium (less the Cumulative Policy Factor if
that Factor is elected) less the Accumulation Value as of
the effective date of change.
If you want to increase your Specified Amount, you should
note that an increase normally triggers a number of
additional requirements, such as a separate surrender charge
period, higher surrender charges overall, and a new
incontestability period. Before requesting an increase in
Specified Amount, consult your financial adviser to
determine whether an increase is appropriate for your
particular situation.
Any reductions in Specified Amount will be made against the
initial Specified Amount and any later increase in the
Specified Amount on a last in, first out basis. A
transaction Fee of 2% of the amount surrendered (not to
exceed $25) is charged for each partial surrender. Any
increase in the Specified Amount will increase the amount of
the Surrender Charge applicable to the Policy.
Upon a decrease in Specified Amount made at the request of
the Owner, a charge may be assessed based on the applicable
Table of Surrender Charges in your Policy Specifications
(subject to the following conditions).
For decreases in Specified Amount, excluding full surrender
of the policy, no such charge will be applied under the
following circumstances:
1) where the decrease occurs after the tenth Policy
Anniversary following the issuance of the Initial
Specified Amount, or
2) where the decrease is directly caused by a Death Benefit
Option change, or
3) where the decrease is caused by a partial surrender of
Net Accumulation Value (i.e. withdrawal), or
4) where the decrease plus the sum of all prior decreases
does not exceed 25% of the Initial Specified Amount.
For all other decreases in Specified Amount, the charge will
be calculated as (1) minus (2), then divided by (3) and then
multiplied by (4), where:
1) is the amount of this decrease plus any prior decreases,
2) is the greater of an amount equal to 25% of the Initial
Specified Amount or the sum of all prior decreases,
3) is the Initial Specified Amount, and
4) is the then applicable surrender charge from the table in
Policy Specifications.
Separate Surrender Charges tables apply with respect to each
increase in Specified Amount. For purposes of calculating
charges for decreases in such increased Specified Amount,
the amount of the increase will be considered a new Initial
Specified Amount.
For charges made for decreases in Specified Amount, unless
otherwise agreed to in writing, Lincoln Life will withdraw
the amount from the Fixed and Variable Sub-Accounts in their
proportion to the Net Accumulation Value as of the date on
which the deduction is made. We may limit requests for
decreases in Specified Amount to the extent there is
insufficient Net Accumulation Value to cover the necessary
charges.
We may decline any request for a change between Death
Benefit Options or increase in the Specified Amount. We may
also decline any request for change of the Death Benefit
Option or reduction of the Specified Amount if, after the
change, the Specified Amount
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would be less than the minimum Specified Amount or would
reduce the Specified Amount below the level required to
maintain the Policy as life insurance for purposes of
Federal income tax law.
Any change is effective on the first Monthly Anniversary Day
on or after the date of approval of the request by Lincoln
Life, unless the Monthly Deduction Amount would increase as
a result of the change. In that case, the change is
effective on the first Monthly Anniversary Day on which the
Accumulation Value is equal to or greater than the Monthly
Deduction Amount, as increased.
FEDERAL INCOME TAX DEFINITION OF LIFE INSURANCE
The amount of the Death Benefit must satisfy certain
requirements under the Code if the policy is to qualify as
insurance for federal income tax purposes. The amount of the
Death Benefit Proceeds required to be paid under the Code to
maintain the Policy as life insurance under each of the
Death Benefit Options (see INSURANCE COVERAGE PROVISIONS,
Death Benefit) is equal to the product of the Accumulation
Value and the applicable Corridor Percentage. A table of
Corridor Percentages is in Appendix I.
NOTICE OF DEATH OF INSUREDS
Due Proof of Death must be furnished to Lincoln Life at the
Administrative Office as soon as reasonably practicable
after the death of each Insured. "Due Proof of Death" must
be in proper written form and includes a certified copy of
an official death certificate, a certified copy of a decree
of a court of competent jurisdiction as to the finding of
death, or any other proof of death satisfactory to Lincoln
Life.
PAYMENT OF DEATH BENEFIT PROCEEDS
The Death Benefit Proceeds under the Policy will ordinarily
be paid within seven days, if in a lump sum, or in
accordance with any Settlement Option selected by the Owner
or the Beneficiary after receipt at the Administrative
Office of Due Proof of Death of both Insureds. SEE
SETTLEMENT OPTIONS. The amount of the Death Benefit Proceeds
under Option 2 and Option 3 will be determined as of the
date of the Second Death. Payment of the Death Benefit
Proceeds may be delayed if the Policy is contested or if
Separate Account values cannot be determined.
We offer a checkbook service in which the Death Benefit
proceeds are transferred into an interest-bearing account,
in the Beneficiary's name as owner of the account. Your
Beneficiary has quick access to the funds and is the only
one authorized to transfer funds from the account. This
service allows the Beneficiary additional time to decide how
to manage Death Benefit Proceeds with the balance earning
interest from the day the account is opened. Your
Beneficiary will have the choice of leaving the proceeds in
this account or writing checks immediately -- even a check
for the entire amount.
SETTLEMENT OPTIONS
There are several ways in which the Beneficiary may receive
the Death Benefit Proceeds, or in which the Owner may choose
to receive payments upon surrender of the Policy.
The Owner may elect a Settlement Option before the Second
Death; after the Second Death, if the Owner has not
irrevocably selected a Settlement Option, the Beneficiary
may elect one of the Settlement Options. If no Settlement
Option is selected, the Death Benefit Proceeds will be paid
in a lump sum.
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If the Policy is assigned as collateral security, Lincoln
Life will pay any amount due the assignee in one lump sum.
Any remaining Death Benefit Proceeds will be paid as
elected.
A request to elect, change, or revoke a Settlement Option
must be received in proper written form by the
Administrative Office before payment of the lump sum or
under any Settlement Option. The first payment under the
Settlement Option selected will become payable on the date
proceeds are settled under the option. Payments after the
first payment will be made on the first day of each month.
Once payments have begun, the Policy cannot be surrendered
and neither the payee nor the Settlement Option may be
changed.
There are at least four Settlement Options:
The first Settlement Option is an annuity for the
lifetime of the payee.
The second Settlement Option is an annuity for the
lifetime of the payee, with monthly payments guaranteed
for 60, 120, 180, or 240 months.
Under the third Settlement Option, Lincoln Life makes
monthly payments for a stated number of years, at least
five but no more than thirty.
The fourth Settlement Option, provides that Lincoln Life
pays interest annually on the sum left with Lincoln Life
at a rate of at least 3% per year, and pays the amount
on deposit on the payee's death.
Any other Settlement Option offered by Lincoln Life at the
time of election may also be selected.
POLICY LIQUIDITY
The accumulated value of the Policy is available for loans
or withdrawals. Subject to certain limitations, the Owner
may borrow against the Surrender Value of the Policy, may
make a partial surrender of some of the Surrender Value of
the Policy and may fully surrender the Policy for its
Surrender Value. Note, however, that depending on the
Premium Payments made, or if the Owner has requested a
substantial reduction in Specified Amount, there may be
little or no Surrender Value available.
POLICY LOANS
The Owner may at any time contract for Policy Loans up to an
aggregate amount not to exceed 90% of the Surrender Value at
the time a Policy Loan is made. It is a condition to
securing a Policy Loan that the Owner execute a loan
agreement and that the Policy be assigned to Lincoln Life
free of any other assignments. The Loan Account is the
account in which Policy indebtedness (outstanding Loans and
interest) accrues once it is transferred out of the Fixed
Account or Sub-Accounts. Interest on Policy Loans accrues at
an annual rate of 5% in years 1-10, 4% in years 11+. Loan
interest is payable to Lincoln Life (for its account) once a
year in arrears on each Policy Anniversary, or earlier upon
full surrender or other payment of proceeds of a Policy.
The amount of a loan, plus any accrued but unpaid interest,
is added to the outstanding Policy Loan balance. Unless paid
in advance, any loan interest due will be transferred from
the values in the Fixed Account and each Sub-Account, and
treated as an additional Policy Loan, and added to the Loan
Account Value.
We pay interest to your Loan Account value, at an annual
rate of 4% in all years, so the net cost of a Policy Loan is
1% in years 1-10 and 0% thereafter.
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If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, transfers from each for loans and
loan interest will be made in proportion to the assets in
each Sub-Account at that time, unless Lincoln Life is
instructed otherwise in proper written form at the
Administrative Office. Repayments on the loan and interest
credited on the Loan Account Value will be allocated
according to the most recent Premium Payment allocation at
the time of the repayment.
A Policy Loan, whether or not repaid, affects the proceeds
payable upon the Second Death and the Accumulation Value.
The longer a Policy Loan is outstanding, the greater the
effect is likely to be. While an outstanding Policy Loan
reduces the amount of assets invested, depending on the
investment results of the Sub-Accounts, the effect could be
favorable or unfavorable.
If at any time the total indebtedness against the Policy,
including interest accrued but not due, equals or exceeds
the then current Accumulation Value less Surrender Charges,
the Policy will terminate without value subject to the
conditions in the Grace Period Provision, unless the No
Lapse Provision is in effect. (SEE LAPSE AND REINSTATEMENT,
Lapse of a Policy)
If a Policy lapses while a loan is outstanding, adverse tax
consequences may result.
PARTIAL SURRENDER
You may make a partial surrender at any time before the
Second Death by request to the Administrative Office in
proper written form or by telephone, if telephone
transactions have been authorized by the Owner. Each time
you request a partial surrender of your Policy, we charge
you 2% of the amount withdrawn not to exceed $25. Total
partial surrenders may not exceed 90% of the Surrender Value
of the Policy. Each partial surrender may not be less than
$500. Partial surrenders are subject to other limitations as
described below.
Partial surrenders may reduce the Specified Amount and, in
each case, reduce the Death Benefit Proceeds. To the extent
that a requested partial surrender would cause the Specified
Amount to be less than $250,000, the partial surrender will
not be permitted by Lincoln Life. In addition, if following
a partial surrender and the corresponding decrease in the
Specified Amount, the Policy would not comply with the
maximum premium limitations required by federal tax law, the
surrender may be limited to the extent necessary to meet the
federal tax law requirements.
The effect of partial surrenders on the Death Benefit
Proceeds depends on the Death Benefit Option elected under
the Policy. If Death Benefit Option 1 has been elected, a
partial surrender would reduce the Accumulation Value and
the Specified Amount. The reduction in the Specified Amount,
which would reduce any past increases on a last in, first
out basis, reduces the amount of the Death Benefit Proceeds.
If Death Benefit Option 2 has been elected, a partial
surrender would reduce the Accumulation Value, but would not
reduce the Specified Amount. The reduction in the
Accumulation Value reduces the amount of the Death Benefit
Proceeds.
If Death Benefit Option 3 is in effect, a partial surrender
will reduce the Accumulated Premiums, the Death Benefit, and
the Death Benefit Option 3 limit by the amount of the
partial surrender. If the amount of the partial surrender
exceeds the Accumulated Premiums, the Specified Amount will
be reduced by the excess amount.
If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, surrenders from each will be made
in proportion to the assets in each Sub-Account at
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the time of the surrender, unless Lincoln Life is instructed
otherwise in proper written form at the Administrative
Office. Lincoln Life may at its discretion decline any
request for a partial surrender.
SURRENDER OF THE POLICY
You may surrender the Policy at any time. On surrender of
the Policy, Lincoln Life will pay you, or assignee, the
Surrender Value (if any) next computed after receipt of the
request in proper written form at the Administrative Office.
All coverage under the Policy will automatically terminate
if the Owner makes a full surrender.
We offer a personalized checkbook service for surrenders of
your Policy. Once your request is processed, proceeds are
placed in an interest-bearing account in your name. You have
complete access to your proceeds through check writing
privileges. You have the choice of leaving proceeds in this
account or you may write checks immediately--even a check
for the entire amount.
SURRENDER VALUE
The "Surrender Value" of a Policy is the amount the Owner
can receive in a lump sum by surrendering the Policy. The
Surrender Value is the Net Accumulation Value less the
Surrender Charge (SEE CHARGES AND FEES, Surrender Charge).
All or part of the Surrender Value may be applied to one or
more of the Settlement Options. Surrender Values are
illustrated in Appendix 2.
If you select the Estate Tax Repeal Rider, and if you
satisfy its special conditions, you will have a one-time
right to cancel your Policy without being subject to
Surrender Charges. This is a limited benefit, and it is
subject to our specific definition of Estate Tax Repeal as
defined in the Riders section of this Prospectus. All
surrenders of your Policy (as distinguished from the
cancellation provision in this Rider) are subject to the
Policy's normal surrender requirements.SEE RIDERS".
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the Surrender Value from any
Sub-Accounts will be made within 7 days. Payment or transfer
from the Fixed Account may be deferred up to six months at
Lincoln Life's option. If Lincoln Life exercises its right
to defer any payment from the Fixed Account, interest will
accrue and be paid as required by law from the date the
recipient would otherwise have been entitled to receive the
payment.
ASSIGNMENT; CHANGE OF OWNERSHIP
While either Insured is living, the Owner may assign the
Owner's rights in the Policy, including the right to change
the beneficiary designation. The assignment must be in
proper written form, signed by the Owner and recorded at the
Administrative Office. No assignment will affect, or
prejudice Lincoln Life as to, any payment made or action
taken by Lincoln Life before it was recorded. Lincoln Life
is not responsible for any assignment not submitted for
recording, nor is Lincoln Life responsible for the
sufficiency or validity of any assignment. Any assignment is
subject to any indebtedness owed to Lincoln Life at the time
the assignment is recorded and any interest accrued on such
indebtedness after recordation of any assignment.
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Once recorded, the assignment remains effective until
released by the assignee in proper written form. So long as
an effective assignment remains outstanding, the Owner will
not be permitted to take any action with respect to the
Policy without the consent of the assignee in proper written
form.
So long as either Insured is living, the Owner may name a
new Owner by recording a change in ownership in proper
written form at the Administrative Office. On recordation,
the change will be effective as of the date of execution of
the document of transfer or, if there is no such date, the
date of recordation. No such change of ownership will
affect, or prejudice Lincoln Life as to, any payment made or
action taken by Lincoln Life before it was recorded. Lincoln
Life may require that the Policy be submitted to it for
endorsement before making a change.
LAPSE AND REINSTATEMENT
LAPSE OF A POLICY
Except as provided by the No Lapse Provision, if at any time
the Net Accumulation Value is insufficient to pay the
Monthly Deduction, the Policy is subject to lapse and
automatic termination of all coverage under the Policy. The
Net Accumulation Value may be insufficient to pay the Cost
of Insurance
(1) because it has been exhausted by earlier deductions,
(2) due to poor investment performance,
(3) due to partial surrenders,
(4) due to indebtedness for Policy Loans,
(5) due to substantial reductions in Specified Amount,
(6) due to the terms of certain Riders added to the Policy,
or
(7) because of some combination of these factors.
If Lincoln Life has not received a Premium Payment or
payment of indebtedness on Policy Loans necessary so that
the Net Accumulation Value is sufficient to pay the Monthly
Deduction Amount on a Monthly Anniversary Day, Lincoln Life
will send a written notice to the Owner and any assignee of
record. The notice will state the amount of the Premium
Payment or of indebtedness on Policy Loans necessary such
that the Net Accumulation Value is at least equal to two
times the Monthly Deduction Amount. If the minimum required
amount set forth in the notice is not paid to Lincoln Life
on or before the day that is the later of (a) 31 days after
the date of mailing of the notice, and (b) 61 days after the
date of the Monthly Anniversary Day with respect to which
such notice was sent (together the "Grace Period"), then the
policy shall terminate and all coverage under the policy
shall lapse without value. If the Second Death occurs during
the Grace Period, Death Benefit Proceeds will be paid, but
will be reduced, in addition to any other reductions, by any
unpaid Monthly Deductions. If the Second Death occurs after
the Policy has lapsed, no Death Benefit Proceeds will be
paid.
NO LAPSE PROVISION
Your Policy includes a No Lapse Provision. This means that
your Policy will not lapse as long as you have paid the
required No Lapse premium.
The No Lapse Premium is the cumulative premium required to
have been paid by each Monthly Anniversary Day to prevent
the Policy from lapsing. There are three levels of No Lapse
protection:
1) a guarantee to younger insured age 100 (if desired, you
must elect this level),
2) a guarantee for the first 20 Policy Years, and
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3) a guarantee for the first 10 Policy Years.
Availability of the No Lapse Provision may vary in some
states. Where available, there is no additional charge for
this provision under the Policy and it is only available
with Death Benfit Options 1 and 2. To obtain the Age 100 No
Lapse, you must select Age 100 at the time of application in
addition to paying the required No Lapse Premium.
If elected, a payment of the Age 100 No Lapse Premium is due
as of the Date of Issue and each Monthly Anniversary Day to
guarantee the Policy will not lapse before the younger
Insured reaches age 100. As long as the sum of all premium
payments, less any indebtedness and partial surrenders, is
at least equal to the Age 100 No Lapse premiums due since
the Date of Issue, the Policy will not lapse until the
Insured reaches age 100, even if the Net Accumulation Value
is insufficient to meet the Monthly Deductions.
However, the Age 100 No Lapse Provision will terminate upon
the earliest of the following:
1) the premium requirement is not met,
2) there is a change in the Death Benefit Option or
3) the younger Insured reaches age 100.
A separate grace period of at least 61 days will be granted
for the Age 100 No Lapse Premium if on any Monthly
Anniversary Day it is determined that the Age 100 No Lapse
Premium has not been met. At least 31 days before the end of
that period, we will notify the Owner of the amount of
premium necessary to maintain the Age 100 No Lapse
Provision. Once the Age 100 No Lapse Provision is
terminated, it cannot be reinstated. However, you may
qualify for either the 20 Year No Lapse Provision or the 10
Year No Lapse Provision as follows.
Under the 20 Year No Lapse Provision, the Policy will not
lapse during the first 20 Policy Years, even if the Net
Accumulation Value is insufficient to meet the Monthly
Deductions as long as the sum of all premium payments less
any partial surrenders, accumulated at 4% annual interest,
and less any indebtedness, is at least equal to the sum of
the 20 Year No Lapse Premiums shown in the Policy
Specifications due since the Date of Issue, accumulated at
4% annual interest.
The 20 Year No Lapse Provision will terminate upon the
earliest of the following to occur:
1) there is a change in the Death Benefit Option,
2) the younger Insured reaches Age 100, or
3) the 21st Policy Year has begun.
After 20 years there is no longer any No Lapse protection,
and from that point on payments must be sufficient to cover
your Monthly Deductions.
Should you not have sufficient required premiums for the 20
Year No Lapse Provision, you may qualify for the 10 Year No
Lapse Provision. Under this Provision, the Policy will not
lapse during the first 10 Policy Years, even if the Net
Accumulation Value is insufficient to meet the Monthly
Deductions as long as the sum of all premium payments less
any partial surrenders, accumulated at 4% annual interest,
and less any indebtedness, is at least equal to the sum of
the 10 Year No Lapse Premiums shown in the Policy
Specifications due since the Date of Issue, accumulated at
4% annual interest.
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The 10 Year No Lapse Provision will terminate upon the
earliest of the following to occur:
1) there is a change in the Death Benefit Option,
2) the younger Insured reaches Age 100, or
3) the 11th Policy Year has begun.
After 10 years the 10-year No Lapse Protection expires.
However, you may still qualify for the 20-year provision, by
satisfying those requirements; in the alternative, you may
simply pay sufficient amounts to cover your Monthly
Deductions.
The Age 100 No Lapse Provision will be permanently lost if,
at any time, you fail to pay the necessary premium amounts
before the end of the Age 100 No Lapse Premium Grace Period.
If you fail to satisfy the requirements for the 20- and 10-
year No Lapse Provisions and you have paid insufficient
premium to cover your Monthly Deduction, the Policy, after
notice, will lapse.
The monthly applicable No Lapse premium will be printed on
the Policy Specification Sheet. To determine if you are
meeting the cumulative pay-in requirements to retain the No
Lapse protection, review your most recent Quarterly
Statement or contact our Administrative Office.
REINSTATEMENT OF A LAPSED POLICY
After the Policy has lapsed due to the failure to make a
necessary payment before the end of an applicable Grace
Period, and assuming the No Lapse Provision does not apply,
it may be reinstated provided (a) it has not been
surrendered, (b) there is an application for reinstatement
in proper written form, (c) evidence of insurability of both
insureds is furnished to Lincoln Life and it agrees to
accept the risk, (d) Lincoln Life receives a payment
sufficient to keep the Policy in force for at least two
months, and (e) any accrued loan interest is paid. The
effective date of Lincoln Life approves the application for
reinstatement, Surrender Charge will be reinstated as of the
Policy Year in which the Policy lapsed.
If the Policy is reinstated, such reinstatement is effective
on the Monthly Anniversary Day following Lincoln Life
approval. The Accumulation Value at reinstatement will be
the Net Premium Payment then made less all Monthly
Deductions due.
If the Surrender Value is not sufficient to cover the full
Surrender Charge at the time of lapse, the remaining portion
of the Surrender Charge will also be reinstated at the time
of Policy reinstatement.
COMMUNICATIONS WITH LINCOLN LIFE
PROPER WRITTEN FORM
Whenever this Prospectus refers to a communication "in
proper written form," it means in writing, in form and
substance reasonably satisfactory to Lincoln Life, received
at the Administrative Office. You may also send your
communication by facsimile to the Administrative Office.
We will process your requests once we receive all letters,
forms or other necessary documents, completed to our
satisfaction. Proper written form may require, among other
things, a signature guarantee or some other proof of
authenticity. We do not generally require a signature
guarantee, but may ask for one if it appears that your
signature has
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changed, if the signature does not appear to be yours, if we
have not received a properly completed application or
confirmation of an application, or for other reasons to
protect you and the Company.
RECEIPT OF WRITTEN COMMUNICATIONS
Once your Policy is in force, the effective date of
payments, forms and requests you send us is usually
determined by the day and time we receive the item in proper
form at the mailing address that appears in this Prospectus.
Planned periodic premium payments, loan requests, transfer
requests, loan payments or withdrawal or surrender requests
that we receive in proper form before 4:00 p.m. Eastern time
on a business day will normally be effective as of the end
of that day, unless the transaction is scheduled to occur on
another business day. If we receive your payment or request
on or after 4:00 p.m. Eastern time on a business day, your
payment or request will be effective as of the end of the
next business day. If a scheduled transaction falls on a day
that is not a business day, we'll process it as of the end
of the next business day.
Other forms, notices and requests are normally effective as
of the next business day after we receive them in proper
form, unless the transaction is scheduled to occur on
another business day. Change of owner and beneficiary forms
are effective as of the day you sign the change form, once
we receive them in proper form.
TELEPHONE AND OTHER ELECTRONIC COMMUNICATIONS
We allow telephone and other electronic transactions only
when you provide us proper written authorization. To effect
a permitted transaction using the telephone or other
electronic means, the Owner, or his/her authorized
representative, may have to provide the following: Policy
number, partial Social Security number, personal
identification number (PIN), and/or such other information
as we may require to verify the identity and authority of
the caller. We disclaim all liability for losses and other
consequences resulting from unauthorized or fraudulent
telephone or electronic transactions. In addition, we are
not responsible for the consequences of instructions that
fail to reach us in a timely manner. The Company believes
that the procedures as stated above are reasonable and
acknowledges that, if it does not follow these procedures,
it may be liable for such losses.
If you have been issued a PIN number to make telephone or
other electronic transactions to your account, be careful
not to give it out to anyone. We will not be responsible for
its misuse or for improper or unauthorized account
transactions using your PIN.
Please note that telephone, facsimile and/or Internet access
may not always be available. Any telephone, facsimile or
Internet hookup, whether it is yours, your service
provider's or your agent's, can experience outages or
slowdowns arising from a variety of causes not of our
making. These outages or slowdowns may result in delayed or
lost instructions from you, and we will not be responsible
for these "failed" transmissions. If you are experiencing
problems, you should send your request in writing to our
Administrative Office.
OTHER POLICY PROVISIONS
ISSUANCE
A Policy may only be issued upon receipt of satisfactory
evidence of insurability, and generally only when both
Insureds are at least Age 18 but are less than Age 85.
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DATE OF COVERAGE
The date of coverage will be the Date of Issue, provided the
initial premium has been paid and the Policy has been
accepted by the Owner (1) while both Insureds are alive and
(2) prior to any change in the health and insurability of
the Insureds as represented in the application.
RIGHT TO EXCHANGE THE POLICY
The Owner may exchange the policy for separate single life
policies on each of the Insureds under any of the following
circumstances; 1) a change in the Internal Revenue Code
(IRC) that would result in a less favorable tax treatment of
the Insurance provided under the policy, 2) the Insureds are
legally divorced while the policy is in force, or 3) the
Insureds' business is legally dissolved while the policy is
in force.
Such a policy split is subject to all of the following
conditions; 1) both insureds are alive and the policy is in
force at the time of the change in circumstances noted
above, 2) evidence of insurability satisfactory to Lincoln
Life is furnished, unless a) the exchange is applied for
within twelve months of the enactment of the change in the
IRC, or b) the exchange is applied for within 24 months of
the date of legal divorce with the split to become effective
after twenty-four months following the date of legal
divorce, 3) the amount of insurance of each new policy is
not larger than one half the Amount of Insurance then in
force under the policy, 4) the premium for each new policy
is determined according to Lincoln Life's rates then in
effect for that policy based on each Insured's then attained
age and sex, and 5) any other requirements as determined by
Lincoln Life are met.
The new policies will not take effect until the date all
such requirements are met. There will be no surrender charge
under the existing Policy when it is split into two new
policies. However, the two new policies will incur new
premium loads, surrender and other charges from their
effective date.
INCONTESTABILITY
Lincoln Life will not contest payment of the Death Benefit
Proceeds based on the initial Specified Amount after the
Policy has been in force for two years from the Date of
Issue so long as both Insureds were alive during those two
years. For any increase in Specified Amount requiring
evidence of insurability, Lincoln Life will not contest
payment of the Death Benefit Proceeds based on such an
increase after it has been in force for two years from its
effective date so long as both Insureds were alive during
those two years.
MISSTATEMENT OF AGE OR GENDER
If the Age or gender of either of the Insureds has been
misstated, the affected benefits will be adjusted. The
amount of the Death Benefit Proceeds will be 1. multiplied
by 2. and then the result added to 3. where:
1. is the Net Amount at Risk at the time of the Second
Death;
2. is the ratio of the monthly Cost of Insurance applied
in the Policy month of death to the monthly Cost of
Insurance that should have been applied at the true
Age and gender in the Policy month of death; and
3. is the Accumulation Value at the time of the Second
Death.
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SUICIDE
If the Second Death is by suicide, while sane or insane,
within two years from the Date of Issue, Lincoln Life will
upon the Second Death pay no more than the sum of the
premiums paid, less any indebtedness and the amount of any
partial surrenders. If the Second Death is by suicide, while
sane or insane, within two years from the date an
application is accepted for an increase in the Specified
Amount, Lincoln Life will upon the Second Death pay no more
than a refund of the monthly charges for the cost of such
additional benefit.
NONPARTICIPATING POLICIES
These are nonparticipating Policies on which no dividends
are payable. These Policies do not share in the profits or
surplus earnings of Lincoln Life.
RIDERS
We may offer you Riders to the Policy from time to time.
Riders may alter the benefits or charges in your Policy,
they may vary by state of issue, and their election may have
tax consequences for you. Also, if you elect a particular
Rider, it may restrict the term of your Policy, or of other
Riders in force. Riders may be available other than those
listed here. Consult your financial and tax advisers before
adding Riders to, or deleting them from your Policy.
ACCOUNTING VALUE RIDER
This Rider, if desired, must be selected at time of
application, provided you meet the underwriting and minimum
premium requirements. If the Policy is fully surrendered in
the first five Policy years (the Accounting Value Surrender
Period), this Rider provides enhanced cash surrender values
by using a table of alternate surrender charges. It does not
provide for any enhanced value for partial surrenders and
loans. There is no charge for this Rider.
ESTATE TAX REPEAL RIDER
This Rider, if desired, must be selected at the time of
application. It may be added to existing Policies, subject
to state availability. Under this Rider, in the event of
Estate Tax Repeal as defined below, you may elect to cancel
your Policy for an amount equal to the Surrender Value of
the Policy plus the applicable Surrender Charge. This amount
is determined as of the date of cancellation, and no
surrender charge is applied. The amount you receive is
called the Cancellation Refund Amount. Any Policy loan or
indebtedness that exists at the time you request
cancellation of your Policy is subtracted from this
Cancellation Refund Amount.
For purposes of this Rider, Estate Tax Repeal will be deemed
to have occurred if federal legislation is enacted into law
that extends the estate tax repeal provisions set forth in
the Economic Growth and Tax Relief Reconciliation Act of
2001 (H.R. 1836) at least two years beyond January 1, 2011.
This new legislation must be in effect on January 1, 2010 or
must be enacted during the calendar year 2010. The Start
Date for this Rider (the date that begins the 12-month
"window" for you to exercise the Rider) is the later of
1) January 1, 2010 or 2) the date in 2010 upon which
legislation is enacted that triggers Estate Tax Repeal, but
no later than December 31, 2010.
Upon issue, there is a one-time administrative charge of not
more than $250 for this Rider.
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This Rider terminates on the earliest of:
1) one year from the Start Date;
2) December 31, 2010, provided no Estate Tax Repeal, as
defined above, has been enacted;
3) the date you request to terminate the Rider;
4) termination of the Policy; or
5) full surrender of the Policy prior to the Start Date.
If the Policy lapses but is reinstated, the Rider will
likewise be reinstated, provided such reinstatement occurs
before 1) or 2) above.
TAX ISSUES
INTRODUCTION. The Federal income tax treatment of the policy
is complex and sometimes uncertain. The Federal income tax
rules may vary with your particular circumstances. This
discussion does not include all the Federal income tax
rules that may affect you and your policy, and is not
intended as tax advice. This discussion also does not
address other Federal tax consequences, such as estate,
gift,and generation skipping transfer taxes, or any state
and local income, estate, and inheritance tax consequences,
associated with the policy. As a result, you should always
consult a tax adviser about the application of federal and
state tax rules to your individual situation.
TAXATION OF LIFE INSURANCE CONTRACTS IN GENERAL
TAX STATUS OF THE POLICY. Section 7702 of the Code
establishes a statutory definition of life insurance for
Federal tax purposes. We believe that the policy will meet
the statutory definition of life insurance, which places
limitations on the amount of premium payments that may be
made and the contract values that can accumulate relative to
the death benefit. As a result, the death benefit payable
under the policy will generally be excludable from the
beneficiary's gross income, and interest and other income
credited under the policy will not be taxable unless certain
withdrawals are made (or are deemed to be made) from the
policy prior to the insured's death, as discussed below.
This tax treatment will only apply, however, if (1) the
investments of the Separate Account are "adequately
diversified" in accordance with Treasury Department
regulations, and (2) we, rather than you, are considered the
owner of the assets of the Separate Account for Federal
income tax purposes.
INVESTMENTS IN THE SEPARATE ACCOUNT MUST BE DIVERSIFIED. For
a policy to be treated as a life insurance contract for
Federal income tax purposes, the investments of the Separate
Account must be "adequately diversified." IRS regulations
define standards for determining whether the investments of
the Separate Account are adequately diversified. If the
Separate Account fails to comply with these diversification
standards, you could be required to pay tax currently on the
excess of the contract value over the contract premium
payments. Although we do not control the investments of the
subaccounts, we expect that the subaccounts will comply with
the IRS regulations so that the Separate Account will be
considered "adequately diversified."
RESTRICTION ON INVESTMENT OPTIONS. Federal income tax law
limits your right to choose particular investments for the
policy. Because the IRS has not issued guidance specifying
those limits, the limits are uncertain and your right to
allocate contract values among the subaccounts may exceed
those limits. If so, you would be treated as the owner of
the assets of the Separate Account and thus subject to
current taxation on the income and gains from those assets.
We do not know what limits may be set by the
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IRS in any guidance that it may issue and whether any such
limits will apply to existing policies. We reserve the right
to modify the policy without your consent to try to prevent
the tax law from considering you as the owner of the assets
of the Separate Account.
NO GUARANTEES REGARDING TAX TREATMENT. We make no guarantee
regarding the tax treatment of any policy or of any
transaction involving a policy. However, the remainder of
this discussion assumes that your policy will be treated as
a life insurance contract for Federal income tax purposes
and that the tax law will not impose tax on any increase in
your contract value until there is a distribution from your
policy.
TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In
general, the amount of the death benefit payable from a
policy because of the death of the insured is excludable
from gross income. Certain transfers of the policy for
valuable consideration, however, may result in a portion of
the death benefit being taxable.
If the death benefit is not received in a lump sum and is,
instead, applied under one of the settlement options,
payments generally will be prorated between amounts
attributable to the death benefit which will be excludable
from the beneficiary's income and amounts attributable to
interest (accruing after the insured's death) which will be
includible in the beneficiary's income.
TAX DEFERRAL DURING ACCUMULATION PERIOD. Under existing
provisions of the Code, except as described below, any
increase in your contract value is generally not taxable to
you unless amounts are received (or are deemed to be
received) from the policy prior to the insured's death. If
there is a total withdrawal from the policy, the surrender
value will be includible in your income to the extent the
amount received exceeds the "investment in the contract."
(If there is any debt at the time of a total withdrawal,
such debt will be treated as an amount received by the
owner.) The "investment in the contract" generally is the
aggregate amount of premium payments and other consideration
paid for the policy, less the aggregate amount received
under the policy previously to the extent such amounts
received were excludable from gross income. Whether partial
withdrawals (or other amounts deemed to be distributed) from
the policy constitute income to you depends, in part, upon
whether the policy is considered a "modified endowment
contract" (a "MEC") for Federal income tax purposes.
POLICIES WHICH ARE MECS
CHARACTERIZATION OF A POLICY AS A MEC. A policy will be
classified as a MEC if premiums are paid more rapidly than
allowed by a "7-pay test" under the tax law or if the policy
is received in exchange for another policy that is a MEC. In
addition, even if the policy initially is not a MEC, it may
in certain circumstances become a MEC. These circumstances
would include a later increase in benefits, any other
material change of the policy (within the meaning of the tax
law), and a withdrawal or reduction in the death benefit
during the first seven contract years.
TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES
UNDER MECS. If the policy is a MEC, withdrawals from the
policy will be treated first as withdrawals of income and
then as a recovery of premium payments. Thus, withdrawals
will be includible in income to the extent the contract
value exceeds the investment in the policy. The Code treats
any amount received as a loan under a policy, and any
assignment or pledge (or agreement to assign or pledge) any
portion of your contract value, as a withdrawal of such
amount or portion. Your investment in the policy is
increased by the amount includible in income with respect to
such assignment, pledge, or loan.
38
<Page>
PENALTY TAXES PAYABLE ON WITHDRAWALS. A 10% penalty tax may
be imposed on any withdrawal (or any deemed distribution)
from your MEC which you must include in your gross income.
The 10% penalty tax does not apply if one of several
exceptions exists. These exceptions include withdrawals or
surrenders that: you receive on or after you reach age
59 1/2, you receive because you became disabled (as defined
in the tax law), or you receive as a series of substantially
equal periodic payments for your life (or life expectancy).
SPECIAL RULES IF YOU OWN MORE THAN ONE MEC. In certain
circumstances, you must combine some or all of the life
insurance contracts which are MECs that you own in order to
determine the amount of withdrawal (including a deemed
withdrawal) that you must include in income. For example, if
you purchase two or more MECs from the same life insurance
company (or its affiliates) during any calendar year, the
Code treats all such policies as one contract. Treating two
or more policies as one contract could affect the amount of
a withdrawal (or a deemed withdrawal) that you must include
in income and the amount that might be subject to the 10%
penalty tax described above.
POLICIES WHICH ARE NOT MECS
TAX TREATMENT OF WITHDRAWALS. If the policy is not a MEC,
the amount of any withdrawal from the policy will generally
be treated first as a non-taxable recovery of premium
payments and then as income from the policy. Thus, a
withdrawal from a policy that is not a MEC will not be
includible in income except to the extent it exceeds the
investment in the policy immediately before the withdrawal.
CERTAIN DISTRIBUTIONS REQUIRED BY THE TAX LAW IN THE FIRST
15 POLICY YEARS. Section 7702 places limitations on the
amount of premium payments that may be made and the contract
values that can accumulate relative to the death benefit.
Where cash distributions are required under Section 7702 in
connection with a reduction in benefits during the first 15
years after the policy is issued (or if withdrawals are made
in anticipation of a reduction in benefits, within the
meaning of the tax law, during this period), some or all of
such amounts may be includible in income. A reduction in
benefits may occur when the face amount is decreased,
withdrawals are made, and in certain other instances.
TAX TREATMENT OF LOANS. If your policy is not a MEC, a loan
you receive under the policy is generally treated as your
indebtedness. As a result, no part of any loan under such a
policy constitutes income to you so long as the policy
remains in force. Nevertheless, in those situations where
the interest rate credited to the loan account equals the
interest rate charged to you for the loan, it is possible
that some or all of the loan proceeds may be includible in
your income. If a policy lapses (or if all contract value is
withdrawn) when a loan is outstanding, the amount of the
loan outstanding will be treated as withdrawal proceeds for
purposes of determining whether any amounts are includible
in your income.
LAST SURVIVOR CONTRACT
Although we believe that the policy, when issued as a last
survivor contract, complies with Section 7702 of the Code,
the manner in which Section 7702 should be applied to last
survivor contracts is not directly addressed by Section
7702. In the absence of final regulations or other guidance
issued under Section 7702 regarding this form of contract,
there is necessarily some uncertainty whether a last
survivor contract will meet the
39
<Page>
Section 7702 definition of a life insurance contract. As a
result, we may need to return a portion of your premium
(with earnings) and impose higher cost of insurance charges
in the future.
Due to the coverage of more than one insured under the
policy, there are special considerations in applying the
7-pay test. For example, a reduction in the death benefit at
any time, such as may occur upon a partial surrender, may
cause the policy to be a MEC. Also and more generally, the
manner of applying the 7-pay test is somewhat uncertain in
the case of policies covering more than one insured.
OTHER CONSIDERATIONS
INSURED LIVES PAST AGE 100. If the younger insured survives
beyond the end of the mortality table used to measure
charges under the policy, which ends at age 100, we believe
the policy will continue to qualify as life insurance for
Federal tax purposes. However, there is some uncertainty
regarding this treatment, and it is possible that you would
be viewed as constructively receiving the cash value in the
year the younger insured attains age 100.
COMPLIANCE WITH THE TAX LAW. We believe that the maximum
amount of premium payments we have determined for the
policies will comply with the Federal tax definition of life
insurance. We will monitor the amount of premium payments,
and, if the premium payments during a contract year exceed
those permitted by the tax law, we will refund the excess
premiums within 60 days of the end of the policy year and
will pay interest and other earnings (which will be
includible in income subject to tax) as required by law on
the amount refunded. We also reserve the right to increase
the death benefit (which may result in larger charges under
a policy) or to take any other action deemed necessary to
maintain compliance of the policy with the Federal tax
definition of life insurance.
DISALLOWANCE OF INTEREST DEDUCTIONS. If an entity (such as a
corporation or a trust, not an individual) purchases a
policy or is the beneficiary of a policy issued after June
8, 1997, a portion of the interest on indebtedness unrelated
to the policy may not be deductible by the entity. However,
this rule does not apply to a policy owned by an entity
engaged in a trade or business which covers the life of an
individual who is a 20-percent owner of the entity, or an
officer, director, or employee of the trade or business, at
the time first covered by the policy. This rule also does
not apply to a policy owned by an entity engaged in a trade
or business which covers the joint lives of the 20% owner of
the entity and the owner's spouse at the time first covered
by the policy.
FEDERAL INCOME TAX WITHHOLDING. We will withhold and remit
to the IRS a part of the taxable portion of each
distribution made under a policy unless you notify us in
writing at or before the time of the distribution that tax
is not to be withheld. Regardless of whether you request
that no taxes be withheld or whether the Company withholds a
sufficient amount of taxes, you will be responsible for the
payment of any taxes and early distribution penalties that
may be due on the amounts received. You may also be required
to pay penalties under the estimated tax rules, if your
withholding and estimated tax payments are insufficient to
satisfy your total tax liability.
CHANGES IN THE POLICY OR CHANGES IN THE LAW. Changing the
owner, exchanging the contract, and other changes under the
policy may have tax consequences (in addition to those
discussed herein) depending on the circumstances of such
change. The above
40
<Page>
discussion is based on the Code, IRS regulations, and
interpretations existing on the date of this Prospectus.
However, Congress, the IRS, and the courts may modify these
authorities, sometimes retroactively.
TAX STATUS OF LINCOLN LIFE
Under existing Federal income tax laws, Lincoln Life does
not pay tax on investment income and realized capital gains
of the Separate Account. Lincoln Life does not expect that
it will incur any Federal income tax liability on the income
and gains earned by the Separate Account. We, therefore, do
not impose a charge for Federal income taxes. If Federal
income tax law changes and we must pay tax on some or all of
the income and gains earned by the Separate Account, we may
impose a charge against the Separate Account to pay the
taxes.
FAIR VALUE OF THE POLICY
It is sometimes necessary for tax and other reasons to
determine the "fair value" of the Policy. The fair value of
the Policy is measured differently for different purposes.
It is not necessarily the same as the Accumulation Value or
the Net Accumulation Value, although the amount of the Net
Accumulation Value will typically be important in valuing
the Policy for this purpose. For some but not all purposes,
the fair value of the Policy may be the Surrender Value of
the Policy. The fair value of the Policy may be impacted by
developments other than the performance of the underlying
investments. For example, without regard to any other
factor, it increases as the Insureds grow older. Moreover,
on the death of the first of the Insureds to die, it tends
to increase significantly. The Owner should consult with his
or her advisors for guidance as to the appropriate
methodology for determining the fair value of the Policy for
a particular purpose.
DIRECTORS AND OFFICERS OF LINCOLN LIFE
The following persons are Directors and Officers of Lincoln
Life. Except as indicated below, the address of each is
1300 South Clinton Street, Fort Wayne, Indiana 46802 and
each has been employed by Lincoln Life or its affiliates for
more than five years.
<Table>
<Caption>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
---------------------------------- ------------------------------------------
JON A. BOSCIA Chief Executive Officer and Chairman of
PRESIDENT AND DIRECTOR the Board of Directors
1500 Market Street [3/01-present]Lincoln National
Suite 3900 Corporation; President and Director
Philadelphia, PA 19102 [12/99-present] The Lincoln National Life
Insurance Company. Formerly: President,
Chief Executive Officer and Director
[1/98-3/01], Lincoln National Corporation;
President, Chief Executive Officer and
Director [10/96-1/98], The Lincoln
National Life Insurance Company.
JANET CHRZAN Senior Vice President and Chief Financial
SENIOR VICE PRESIDENT AND CHIEF Officer [4/00-present]. Formerly: Vice
FINANCIAL OFFICER President and Treasurer [8/95-4/00], The
Lincoln National Life Insurance Company.
</Table>
41
<Page>
<Table>
<Caption>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
---------------------------------- ------------------------------------------
JOHN H. GOTTA Chief Executive Officer of Life Insurance,
CHIEF EXECUTIVE OFFICER OF LIFE Executive Vice President, Assistant
INSURANCE, EXECUTIVE VICE Secretary and Director [12/99-present].
PRESIDENT, ASSISTANT SECRETARY AND Formerly: Senior Vice President and and
DIRECTOR Assistant Secretary [4/98-12/99], Senior
350 Church Street Vice President [2/98-4/98, Vice President
Hartford, CT 06103 and General Manager [1/98-2/98], The
Lincoln National Life Insurance Company;
Senior Vice President [3/96-12/97],
Connecticut General Life Insurance
Company.
CHARLES E. HALDEMAN, JR. Director [7/00-present], The Lincoln
DIRECTOR National Life Insurance Company;
One Commerce President, Chief Executive Officer and
2005 Market Street Director [1/00-present], Lincoln National
Philadelphia, PA 19103 Investment Companies, Incorporated;
President, Chief Executive Officer and
Director [1/00-present], Delaware
Management Holdings, Incorporated;
President and Director [7/00-present],
Lincoln Investment Management,
Incorporated. Formerly: President and
Chief Operating Officer [2/98-1/00],
United Asset Management Corporation;
Director and Partner 1/85-12/99], Cooke &
Bieler, Incorporated.
J. MICHAEL HEMP President and Director [7/97-present],
SENIOR VICE PRESIDENT Lincoln Financial Advisors Incorporated;
350 Church Street Senior Vice President [formerly Vice
Hartford, CT 06103 President] [10/95-present], The Lincoln
National Life Insurance Company.
BARBARA S. KOWALCZYK Senior Vice President, Corporation
DIRECTOR Planning [5/94-present], Lincoln National
Centre Square Corporation; Director and Member of the
West Tower Investment Committee [12/01-present], The
1500 Market Street Lincoln National Life Insurance Company,
Suite 3900 Senior Vice President and Director
Philadelphia, PA 19102 [present] Lincoln National Management
Corporation; Director [present], Lincoln
Life & Annuity Company of New York.
GARY W. PARKER Senior Vice President and Chief Product
SENIOR VICE PRESIDENT AND CHIEF Officer [3/00-present], Vice President,
PRODUCT OFFICER Product Management [7/98-3/00], The
350 Church Street Lincoln National Life Insurance Company.
Hartford, CT 06103 Formerly: Senior Vice President, Life
Products [10/97-6/98], Vice President,
Marketing Services [9/89-10/97], Life of
Virginia.
SEE YENG QUEK Chief Investment Officer and Director
CHIEF INVESTMENT OFFICER AND [5/01-present], The Lincoln National Life
DIRECTOR Insurance Company; Senior Vice President
One Commerce Square [8/00-present], Delaware Investments.
Philadelphia, PA 19103 Formerly: Vice President [2/93-7/00],
Conseco Capital Management, Incorporated.
</Table>
42
<Page>
<Table>
<Caption>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
---------------------------------- ------------------------------------------
LORRY J. STENSRUD Chief Executive Officer of Annuities,
CHIEF EXECUTIVE OFFICER OF Executive Vice President and Director
ANNUITIES, EXECUTIVE VICE [6/00-present], The Lincoln National Life
PRESIDENT AND DIRECTOR Insurance Company. Formerly: President and
Chief Executive Officer [6/95-6/00], Cova
Life Insurance (Xerox Life).
RICHARD C. VAUGHAN Executive Vice President and Chief
DIRECTOR Financial Officer [1/95-present].
Centre Square
West Tower
1500 Market Street
Suite 3900
Philadelphia, PA 19102
</Table>
DISTRIBUTION OF POLICIES
Lincoln Life intends to offer the Policy in all
jurisdictions where it is licensed to do business. American
Fund Distributors, Inc. ("AFD"), organized in 1972 under
California law is the principal underwriter for the
Policies. AFD is registered with the Commission under the
Securities Exchange Act of 1934 as a broker-dealer and is a
member of the National Association of Securities Dealers
("NASD"). The principal underwriter has responsibility for
establishing a selling plan for the Policies. The principal
business address of AFD is 333 S. Hope Street, 52nd Floor,
Los Angeles, CA 90071 (EIN 95-2769620). The Principal
Underwriting Agreement between Lincoln Life and AFD was
effective August 1, 2002 with no established termination
date.
The Policy may be sold by individuals who, in addition to
being appointed as life insurance agents for Lincoln, are
also registered representatives with broker-dealers who
maintain selling agreements with AFD and Lincoln. Registered
representatives may receive commission and service fees up
to 60% of the first year premium, plus up to 5% of all other
premiums paid. In lieu of premium-based commission, we may
pay equivalent amounts over time based on Accumulation
Value. Registered representatives are also eligible for cash
bonuses and "non-cash compensation." The latter (as defined
in NASD Rule 2820) is represented by such things as office
space, computers, club credit, prizes, awards, training and
education meetings.
Additionally, the broker-dealer may receive compensation on
the first year premium and all additional premiums and/or
reimbursements for portions of Policy sales expenses. In
some situations, the broker-dealer may elect to share its
commission or expense reimbursement allowance with the
Registered Representative. Depending on the particular
selling arrangements, there may be others whom we compensate
for distribution activities. For example, we may compensate
certain "wholesalers," who control access to certain selling
offices, for access to those offices.
All compensation is paid from our resources, which include
fees and charges imposed under the Policy.
CHANGES OF INVESTMENT POLICY
Lincoln Life may materially change the investment policy of
the Separate Account. Lincoln Life must inform the Owners
and obtain all necessary regulatory approvals. Any change
must be submitted to the various state insurance departments
which shall disapprove it if deemed detrimental to the
interests of the Owners or if it renders Lincoln Life's
operations hazardous to the public. If an Owner objects, the
Policy may be
43
<Page>
converted to a substantially comparable fixed benefit life
insurance policy offered by Lincoln Life on the life of the
Insureds. The Owner has the later of 60 days (6 months in
Pennsylvania) from the date of the investment policy change
or 60 days (6 months in Pennsylvania) from being informed of
such change to make this conversion. Lincoln Life will not
require evidence of insurability for this conversion.
The new policy will not be affected by the investment
experience of any separate account. The new policy will be
for an amount of insurance not exceeding the Death Benefit
of the Policy converted on the date of such conversion.
STATE REGULATION
Lincoln Life is subject to the laws of Indiana governing
insurance companies and to regulation by the Indiana
Insurance Department. An annual statement in a prescribed
form is filed with the Insurance Department each year
covering the operation of Lincoln Life for the preceding
year and its financial condition as of the end of such year.
Regulation by the Insurance Department includes periodic
examination to determine Lincoln Life's contract liabilities
and reserves so that the Insurance Department may certify
the items are correct. Lincoln Life's books and accounts are
subject to review by the Insurance Department at all times
and a full examination of its operations is conducted
periodically by the Indiana Department of Insurance. Such
regulation does not, however, involve any supervision of
management or investment practices or policies.
A blanket bond with a per event limit of $25 million and an
annual policy aggregate limit of $50 million covers all of
the officers and employees of the Company. The directors,
officers and employees of the Principal Underwriter are
covered under blanket fidelity bonds which provide coverage
of up to $25,000,000 per occurrence and $65,000,000 in the
aggregate.
REPORTS TO OWNERS
Lincoln Life maintains Policy records and will mail to each
Owner, at the last known address of record, an annual
statement showing the amount of the current Death Benefit,
the Accumulation Value, and Surrender Value, premiums paid
and monthly charges deducted since the last report, the
amounts invested in each Sub-Account and any Loan Account
Value.
Owners will also be sent annual reports containing financial
statements for the Separate Account and annual and
semi-annual reports of the Funds as required by the 1940
Act.
Policy Owners will receive statements of significant
transactions such as: changes in Specified Amount or Death
Benefit Option; transfers among Sub-Accounts; Premium
Payments; loans and repayment of loans; reinstatement; and
termination.
ADVERTISING
We are also ranked and rated by independent financial rating
services, including Moody's, Standard & Poor's, Duff &
Phelps and A.M. Best Company. The purpose of these ratings
is to reflect our financial strength or claims-paying
ability. The ratings are not intended to reflect the
investment experience or financial strength of the Variable
Account. We may advertise these ratings from time to time.
In addition, we may include in certain advertisements,
endorsements in the form of a list of organizations,
individuals or other parties which recommend Lincoln Life or
the Policies. Furthermore,
44
<Page>
we may occasionally include in advertisements comparisons of
currently taxable and tax deferred investment programs,
based on selected tax brackets, or discussions of
alternative investment vehicles and general economic
conditions.
We are a member of the Insurance Marketplace Standards
Association ("IMSA") and may include the IMSA logo and
information about IMSA membership in our advertisement.
Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services
for individually sold life insurance and annuities.
LEGAL PROCEEDINGS
Lincoln Life is involved in various pending or threatened
legal proceedings arising from the conduct of its business.
Most of these proceedings are routine and in the ordinary
course of business. In some instances they include claims
for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for equitable relief.
Lincoln Life has settled its potential liability from the
sale of interest sensitive universal and participating whole
life insurance policies alleged in class action lawsuits
against it. The settlement became final in 2001.
After consultation with legal counsel and review of
available facts, it is management's opinion that the
ultimate liability, if any, under the suits and settlement
described above will not have a material adverse effect on
the financial position of Lincoln Life.
EXPERTS
The statutory-basis financial statements of Lincoln Life for
the year ended December 31, 2001 appearing in this
Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, 2300 National City
Center, 110 West Berry Street, Fort Wayne, Indiana 46802, as
set forth in their report also appearing elsewhere in this
Prospectus and in the Registration Statement. The financial
statements audited by Ernst & Young LLP, have been included
herein in reliance on their report given on their authority
as experts in accounting and auditing.
Legal matters in connection with the Policies described
herein are being passed upon by Robert A. Picarello, Esq.,
as stated in the Opinion filed as an Exhibit to the
Registration Statement.
Actuarial matters included in this Prospectus have been
examined by Vaughn W. Robbins, FSA, as stated in the Opinion
filed as an Exhibit to the Registration Statement
REGISTRATION STATEMENT
A Registration Statement has been filed with the Commission
under the Securities Act of 1933, as amended, with respect
to the Policies offered hereby. This Prospectus does not
contain all the information set forth in the Registration
Statement and amendments thereto and exhibits filed as a
part thereof, to all of which reference is hereby made for
further information concerning the Separate Account, Lincoln
Life, and the Policies offered hereby. Statements contained
in this Prospectus as to the content of Policies and other
legal instruments are summaries. For a complete statement of
the terms thereof, reference is made to such instruments as
filed.
45
<Page>
APPENDIX 1
CORRIDOR PERCENTAGES
<Table>
<Caption>
ATTAINED AGE OF THE YOUNGER
INSURED (NEAREST BIRTHDAY) CORRIDOR PERCENTAGE
- --------------------------- -------------------
0-40 250%
41 243
42 236
43 229
44 222
45 215
46 209
47 203
48 197
49 191
50 185
51 178
52 171
53 164
54 157
55 150
56 146
57 142
58 138
59 134
60 130
61 128
62 126
63 124
64 122
65 120
66 119
67 118
68 117
69 116
70 115
71 113
72 111
73 109
74 107
75-90 105
91 104
92 103
93 102
94 101
95-99 100
</Table>
46
<Page>
APPENDIX 2
ILLUSTRATIONS OF ACCUMULATION VALUES, SURRENDER VALUES, AND
DEATH BENEFIT PROCEEDS
The illustrations in this Prospectus have been prepared to
help show how values under the Policies change with
investment performance. The illustrations show how
Accumulation Values, Surrender Values and Death Benefit
Proceeds under a Policy would vary over time if the
hypothetical gross investment rates of return were a uniform
annual effective rate of either 0%, 6% or 12%. Actual
returns will fluctuate over time and likely will be both
positive and negative. The hypothetical gross investment
rate of return may indeed average 0%, 6%, or 12% over a
period of years. However, it may fluctuate above and below
those averages throughout the years shown. In that case, the
actual Accumulation Values, Surrender Values and Death
Benefit Proceeds could be substantially less than those
shown, and may, under certain circumstances, result in the
lapse of the Policy unless the Owner pays more than the
stated Premium. The illustrations also assume there are no
Policy Loans or Partial Surrenders, no additional Premium
Payments are made other than shown, no Accumulation Values
are allocated to the Fixed Account, and there are no changes
in the Specified Amount or Death Benefit Option, and that
the No-Lapse Provision is not selected.
The amounts shown for the Accumulation Value, Surrender
Value and Death Benefit Proceeds as of each Policy
Anniversary reflect the fact that charges are made and
expenses applied which lower investment return on the assets
held in the Sub-Accounts. Daily charges are made against the
assets of the Sub-Accounts for assuming mortality and
expense risks. The mortality and expense risk charge is
equivalent to an annual effective rate of 0.80% of the daily
net asset value of the Separate Account in years 1-19, 0.40%
in years 20+, and is guaranteed not to exceed that. In
addition, the amounts shown also reflect the deduction of
Fund investment advisory fees and other expenses which will
vary depending on which funding vehicle is chosen but which
are assumed for purposes of these illustrations to be
equivalent to an annual effective rate of 0.81% of the daily
net asset value of the Separate Account. This rate reflects
an arithmetic average of total Fund portfolio annual
expenses for the year ending December 31, 2001.
Considering charges for mortality and expense risks and the
assumed Fund expenses, gross annual rates of 0%, 6% and 12%
correspond to net investment experience at annual rates of
-1.60%, 4.36% and 10.31% in years 1-19, -1.20%, 4.76% and
10.71% in years 20+.
The illustrations also reflect the fact that the Company
makes monthly charges for providing insurance protection.
Current values reflect current Cost of Insurance charges and
guaranteed values reflect the maximum Cost of Insurance
charges guaranteed in the Policy. The values shown are for
Policies which are issued as preferred and standard.
Policies issued on a substandard basis would result in lower
Accumulation Values and Death Benefit Proceeds than those
illustrated.
The illustrations also reflect the fact that the Company
deducts a premium load of 8.0% from each Premium Payment
during the first Policy Year, 4% thereafter.
47
<Page>
The Surrender Values shown in the illustrations reflect the
fact that the Company will deduct a Surrender Charge from
the Policy's Accumulation Value for any Policy surrendered
in full during the first fifteen Policy Years. Surrender
Charges reflect, in part, age and Specified Amount, and are
shown in the illustrations.
In addition, the illustrations reflect the fact that the
Company deducts a monthly administrative charge at the
beginning of each Policy Month. This monthly administrative
expense charge is a flat dollar charge per month for all
years. Current values reflect a current flat dollar monthly
administrative expense charge of $10.
Upon request, the Company will furnish a comparable
illustration based on the proposed insureds' ages, gender
classification, smoking classification, risk classification
and premium payment requested.
The illustrations do not reflect the selection of any Rider
or charges or fees associated with any Rider available under
the Policy.
48
<Page>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,500 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<Table>
<Caption>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- --------- --------- --------- -------- -------- ---------
1 14,175 1,000,000 1,000,000 1,000,000 10,834 11,528 12,223
2 29,059 1,000,000 1,000,000 1,000,000 21,901 23,993 26,170
3 44,687 1,000,000 1,000,000 1,000,000 32,603 36,808 41,355
4 61,096 1,000,000 1,000,000 1,000,000 42,917 49,958 57,879
5 78,326 1,000,000 1,000,000 1,000,000 52,816 63,426 75,849
6 96,417 1,000,000 1,000,000 1,000,000 62,265 77,189 95,380
7 115,413 1,000,000 1,000,000 1,000,000 71,221 91,209 116,588
8 135,359 1,000,000 1,000,000 1,000,000 79,621 105,433 139,590
9 156,302 1,000,000 1,000,000 1,000,000 87,384 119,787 164,503
10 178,292 1,000,000 1,000,000 1,000,000 94,413 134,181 191,449
11 201,381 1,000,000 1,000,000 1,000,000 101,871 149,825 221,919
12 225,625 1,000,000 1,000,000 1,000,000 108,375 165,377 254,885
13 251,082 1,000,000 1,000,000 1,000,000 113,823 180,743 290,579
14 277,811 1,000,000 1,000,000 1,000,000 118,111 195,832 329,280
15 305,876 1,000,000 1,000,000 1,000,000 121,103 210,520 371,305
20 468,710 1,000,000 1,000,000 1,000,000 107,179 270,380 648,291
25 676,532 0 1,000,000 1,190,242 0 270,032 1,133,563
30 941,771 0 1,000,000 2,039,655 0 80,398 1,942,529
<Caption>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR GROSS 0% GROSS 6% GROSS 12% CHARGE
- --------------------- -------- -------- --------- ---------
1 0 0 0 13,680
2 8,221 10,313 12,490 13,680
3 19,343 23,548 28,095 13,260
4 30,157 37,198 45,119 12,760
5 40,616 51,226 63,649 12,200
6 50,545 65,469 83,660 11,720
7 60,101 80,089 105,468 11,120
8 69,741 95,553 129,710 9,880
9 78,744 111,147 155,863 8,640
10 87,013 126,781 184,049 7,400
11 95,691 143,645 215,739 6,180
12 103,435 160,437 249,945 4,940
13 110,123 177,043 286,879 3,700
14 116,151 193,872 327,320 1,960
15 121,103 210,520 371,305 0
20 107,179 270,380 648,291 0
25 0 270,032 1,133,563 0
30 0 80,398 1,942,529 0
</Table>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Guaranteed cost of insurance
rates assumed. Guaranteed mortality and
expense risk charges, administrative fees and
premium load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment returns will fluctuate over time
and likely will be both positive and negative.
Depending upon the timing, the Owners'
allocations to each Fund, the Funds' rates of
return and degree of fluctuation; the actual
values could be substantially less than those
shown, and may, under certain circumstances,
result in lapse of the Policy unless the Owner
pays more that the stated Premium.
Accumulation Values, Surrender Values and
Death Benefit Proceeds for a Policy would be
different from those shown if the actual
investment rates of return averaged 0%, 6% and
12% over a period of years, but fluctuated
above or below those averages for individual
Policy Years. No representations can be made
that these rates of return will in fact be
achieved for any one year or sustained over a
period of time.
The amounts shown in these illustrations
reflect (1) the deduction of guaranteed
mortality and expense risk charges and
(2) assumed Fund total expenses of 0.81% per
year. See "Fund Expenses".
49
<Page>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,500 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<Table>
<Caption>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- --------- --------- --------- -------- -------- ---------
1 14,175 1,000,000 1,000,000 1,000,000 10,834 11,528 12,223
2 29,059 1,000,000 1,000,000 1,000,000 22,011 24,107 26,287
3 44,687 1,000,000 1,000,000 1,000,000 32,997 37,219 41,785
4 61,096 1,000,000 1,000,000 1,000,000 43,792 50,889 58,867
5 78,326 1,000,000 1,000,000 1,000,000 54,402 65,139 77,695
6 96,417 1,000,000 1,000,000 1,000,000 64,828 79,996 98,451
7 115,413 1,000,000 1,000,000 1,000,000 75,074 95,487 121,332
8 135,359 1,000,000 1,000,000 1,000,000 85,142 111,640 146,561
9 156,302 1,000,000 1,000,000 1,000,000 95,036 128,483 174,378
10 178,292 1,000,000 1,000,000 1,000,000 104,737 146,026 205,032
11 201,381 1,000,000 1,000,000 1,000,000 115,529 165,621 240,178
12 225,625 1,000,000 1,000,000 1,000,000 126,132 186,057 278,938
13 251,082 1,000,000 1,000,000 1,000,000 136,515 207,336 321,657
14 277,811 1,000,000 1,000,000 1,000,000 146,634 229,453 368,711
15 305,876 1,000,000 1,000,000 1,000,000 156,467 252,425 420,538
20 468,710 1,000,000 1,000,000 1,000,000 199,298 380,569 772,842
25 676,532 1,000,000 1,000,000 1,441,252 225,991 536,338 1,372,621
30 941,771 1,000,000 1,000,000 2,482,643 202,677 713,112 2,364,422
<Caption>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR GROSS 0% GROSS 6% GROSS 12% CHARGE
- --------------------- -------- -------- --------- ---------
1 0 0 0 13,680
2 8,331 10,427 12,607 13,680
3 19,737 23,959 28,525 13,260
4 31,032 38,129 46,107 12,760
5 42,202 52,939 65,495 12,200
6 53,108 68,276 86,731 11,720
7 63,954 84,367 110,212 11,120
8 75,262 101,760 136,681 9,880
9 86,396 119,843 165,738 8,640
10 97,337 138,626 197,632 7,400
11 109,349 159,441 233,998 6,180
12 121,192 181,117 273,998 4,940
13 132,815 203,636 317,957 3,700
14 144,674 227,493 366,751 1,960
15 156,467 252,425 420,538 0
20 199,298 380,569 772,842 0
25 225,991 536,338 1,372,621 0
30 202,677 713,112 2,364,422 0
</Table>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment returns will fluctuate over time
and likely will be both positive and negative.
Depending upon the timing, the Owners'
allocations to each Fund, the Funds' rates of
return and degree of fluctuation; the actual
values could be substantially less than those
shown, and may, under certain circumstances,
result in lapse of the Policy unless the Owner
pays more that the stated Premium.
Accumulation Values, Surrender Values and
Death Benefit Proceeds for a Policy would be
different from those shown if the actual
investment rates of return averaged 0%, 6% and
12% over a period of years, but fluctuated
above or below those averages for individual
Policy Years. No representations can be made
that these rates of return will in fact be
achieved for any one year or sustained over a
period of time.
The amounts shown in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.81% per year. See "Fund
Expenses".
50
<Page>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,500 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<Table>
<Caption>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- ---------- ---------- ---------- -------- -------- ----------
1 22,575 1,000,000 1,000,000 1,000,000 17,479 18,592 19,706
2 46,279 1,000,000 1,000,000 1,000,000 34,861 38,207 41,689
3 71,168 1,000,000 1,000,000 1,000,000 51,023 57,712 64,951
4 97,301 1,000,000 1,000,000 1,000,000 65,849 76,970 89,501
5 124,741 1,000,000 1,000,000 1,000,000 79,204 95,828 115,348
6 153,553 1,000,000 1,000,000 1,000,000 90,922 114,097 142,482
7 183,806 1,000,000 1,000,000 1,000,000 100,770 131,523 170,855
8 215,571 1,000,000 1,000,000 1,000,000 108,429 147,761 200,363
9 248,925 1,000,000 1,000,000 1,000,000 113,481 162,370 230,847
10 283,946 1,000,000 1,000,000 1,000,000 115,430 174,827 262,130
11 320,718 1,000,000 1,000,000 1,000,000 115,559 186,449 296,011
12 359,329 1,000,000 1,000,000 1,000,000 111,458 194,852 330,700
13 399,871 1,000,000 1,000,000 1,000,000 102,497 199,382 366,238
14 442,439 1,000,000 1,000,000 1,000,000 87,960 199,301 402,767
15 487,136 1,000,000 1,000,000 1,000,000 66,913 193,652 440,484
20 746,464 0 1,000,000 1,000,000 0 14,755 662,148
25 1,077,439 0 0 1,155,816 0 0 1,100,777
30 1,499,857 0 0 1,938,938 0 0 1,919,740
<Caption>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR GROSS 0% GROSS 6% GROSS 12% CHARGE
- --------------------- -------- -------- ---------- ---------
1 0 0 0 25,100
2 9,761 13,107 16,589 25,100
3 26,963 33,652 40,891 24,060
4 42,849 53,970 66,501 23,000
5 57,244 73,868 93,388 21,960
6 70,042 93,217 121,602 20,880
7 80,930 111,683 151,015 19,840
8 90,789 130,121 182,723 17,640
9 98,041 146,930 215,407 15,440
10 102,190 161,587 248,890 13,240
11 104,539 175,429 284,991 11,020
12 102,638 186,032 321,880 8,820
13 96,017 192,902 359,758 6,480
14 84,900 196,241 399,707 3,060
15 66,913 193,652 440,484 0
20 0 14,755 662,148 0
25 0 0 1,100,777 0
30 0 0 1,919,740 0
</Table>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Guaranteed cost of insurance
rates assumed. Guaranteed mortality and
expense risk charges, administrative fees and
premium load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment returns will fluctuate over time
and likely will be both positive and negative.
Depending upon the timing, the Owners'
allocations to each Fund, the Funds' rates of
return and degree of fluctuation; the actual
values could be substantially less than those
shown, and may, under certain circumstances,
result in lapse of the Policy unless the Owner
pays more that the stated Premium.
Accumulation Values, Surrender Values and
Death Benefit Proceeds for a Policy would be
different from those shown if the actual
investment rates of return averaged 0%, 6% and
12% over a period of years, but fluctuated
above or below those averages for individual
Policy Years. No representations can be made
that these rates of return will in fact be
achieved for any one year or sustained over a
period of time.
The amounts shown in these illustrations
reflect (1) the deduction of guaranteed
mortality and expense risk charges and
(2) assumed Fund total expenses of 0.81% per
year. See "Fund Expenses".
51
<Page>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,500 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<Table>
<Caption>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- ---------- ---------- ---------- -------- ---------- ----------
1 22,575 1,000,000 1,000,000 1,000,000 17,479 18,592 19,706
2 46,279 1,000,000 1,000,000 1,000,000 35,419 38,782 42,281
3 71,168 1,000,000 1,000,000 1,000,000 52,972 59,749 67,077
4 97,301 1,000,000 1,000,000 1,000,000 70,148 81,532 94,331
5 124,741 1,000,000 1,000,000 1,000,000 86,960 104,173 124,307
6 153,553 1,000,000 1,000,000 1,000,000 103,416 127,717 157,293
7 183,806 1,000,000 1,000,000 1,000,000 119,528 152,209 193,611
8 215,571 1,000,000 1,000,000 1,000,000 135,304 177,698 233,614
9 248,925 1,000,000 1,000,000 1,000,000 150,755 204,236 277,699
10 283,946 1,000,000 1,000,000 1,000,000 165,696 231,688 326,127
11 320,718 1,000,000 1,000,000 1,000,000 182,114 262,135 381,448
12 359,329 1,000,000 1,000,000 1,000,000 198,182 293,852 442,471
13 399,871 1,000,000 1,000,000 1,000,000 213,659 326,679 509,637
14 442,439 1,000,000 1,000,000 1,000,000 228,186 360,368 583,423
15 487,136 1,000,000 1,000,000 1,000,000 241,522 394,790 664,538
20 746,464 1,000,000 1,000,000 1,280,994 270,614 569,245 1,219,994
25 1,077,439 1,000,000 1,000,000 2,259,187 194,062 759,815 2,151,607
30 1,499,857 0 1,031,489 3,719,163 0 1,021,276 3,682,340
<Caption>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR GROSS 0% GROSS 6% GROSS 12% CHARGE
- --------------------- -------- ---------- ---------- ---------
1 0 0 0 25,100
2 10,319 13,682 17,181 25,100
3 28,912 35,689 43,017 24,060
4 47,148 58,532 71,331 23,000
5 65,000 82,213 102,347 21,960
6 82,536 106,837 136,413 20,880
7 99,688 132,369 173,771 19,840
8 117,664 160,058 215,974 17,640
9 135,315 188,796 262,259 15,440
10 152,456 218,448 312,887 13,240
11 171,094 251,115 370,428 11,020
12 189,362 285,032 433,651 8,820
13 207,179 320,199 503,157 6,480
14 225,126 357,308 580,363 3,060
15 241,522 394,790 664,538 0
20 270,614 569,245 1,219,994 0
25 194,062 759,815 2,151,607 0
30 0 1,021,276 3,682,340 0
</Table>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment returns will fluctuate over time
and likely will be both positive and negative.
Depending upon the timing, the Owners'
allocations to each Fund, the Funds' rates of
return and degree of fluctuation; the actual
values could be substantially less than those
shown, and may, under certain circumstances,
result in lapse of the Policy unless the Owner
pays more that the stated Premium.
Accumulation Values, Surrender Values and
Death Benefit Proceeds for a Policy would be
different from those shown if the actual
investment rates of return averaged 0%, 6% and
12% over a period of years, but fluctuated
above or below those averages for individual
Policy Years. No representations can be made
that these rates of return will in fact be
achieved for any one year or sustained over a
period of time.
The amounts shown in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.81% per year. See "Fund
Expenses".
52
The Lincoln National Life Insurance Company
Balance Sheets -- Statutory Basis
December 31
2001 2000
--------- ---------
(in millions)
-------------------
Admitted assets
Cash and investments:
Bonds $23,421.0 $21,852.5
-----------------------------------------
Preferred stocks 223.6 261.7
-----------------------------------------
Unaffiliated common stocks 107.6 161.7
-----------------------------------------
Affiliated common stocks 623.5 743.0
-----------------------------------------
Mortgage loans on real estate 4,098.7 4,102.0
-----------------------------------------
Real estate:
-----------------------------------------
Properties occupied by the company 6.2 10.5
-----------------------------------------
Properties held for sale 243.6 261.2
-----------------------------------------
Policy loans 1,708.7 1,723.5
-----------------------------------------
Short-term investments 798.1 1,427.9
-----------------------------------------
Other investments 466.6 485.0
-----------------------------------------
Cash and cash equivalents 1,899.4 20.5
--------- ---------
-----------------------------------------
Total cash and investments
----------------------------------------- 33,597.0 31,049.5
Premiums and fees in course of collection
----------------------------------------- 3.1 111.5
Accrued investment income
----------------------------------------- 457.2 444.2
Reinsurance recoverable
----------------------------------------- 550.4 450.7
Funds withheld by ceding companies
----------------------------------------- 154.1 74.4
Company owned policies and contracts
----------------------------------------- 361.4 335.0
Net deferred federal income taxes
----------------------------------------- 180.2 --
Goodwill
----------------------------------------- 33.1 38.4
Other admitted assets
----------------------------------------- 130.9 106.2
Separate account assets 38,636.5 43,904.6
----------------------------------------- --------- ---------
Total admitted assets $74,103.9 $76,514.5
----------------------------------------- ========= =========
S-2
December 31
2001 2000
--------- ---------
(in millions)
--------------------
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
- ------------------------------------------------------------
Future policy benefits and claims $28,071.8 $27,828.0
- ------------------------------------------------------------
Dividends payable 65.1 77.7
- ------------------------------------------------------------
Other policyholder liabilities 56.0 220.5
- ------------------------------------------------------------ --------- ---------
Total policy and contract liabilities 28,192.9 28,126.2
- ------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 869.5 639.8
- ------------------------------------------------------------
Funds held under reinsurance treaties 1,693.1 849.6
- ------------------------------------------------------------
Asset valuation reserve 454.5 534.1
- ------------------------------------------------------------
Interest maintenance reserve 7.7 20.9
- ------------------------------------------------------------
Income taxes payable to parent 537.4 20.1
- ------------------------------------------------------------
Other liabilities 965.8 516.7
- ------------------------------------------------------------
Short-term loan payable to parent company 200.0 199.5
- ------------------------------------------------------------
Net transfers due from separate accounts (967.0) (976.1)
- ------------------------------------------------------------
Separate account liabilities 38,634.0 43,904.6
- ------------------------------------------------------------ --------- ---------
Total liabilities 70,587.9 73,835.4
- ------------------------------------------------------------
Capital and surplus:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares--10 million
(owned by Lincoln National Corporation) 25.0 25.0
--------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 1,250.0
--------------------------------------------------------
Paid-in surplus 1,520.4 2,006.1
--------------------------------------------------------
Unassigned surplus (deficit) 720.6 (602.0)
-------------------------------------------------------- --------- ---------
Total capital and surplus 3,516.0 2,679.1
-------------------------------------------------------- --------- ---------
Total liabilities and capital and surplus $74,103.9 $76,514.5
-------------------------------------------------------- ========= =========
See accompanying notes.
S-3
The Lincoln National Life Insurance Company
Statements of Operations -- Statutory Basis
Year ended December 31
2001 2000 1999
--------- --------- ---------
(in millions)
------------------------------
Premiums and other revenues:
Life and annuity premiums $ 7,681.0 $ 7,985.7 $ 8,001.4
- --------------------------------------------------------------
Accident and health premiums (286.1) 115.7 (258.2)
- --------------------------------------------------------------
Net investment income 2,128.4 2,125.5 2,203.2
- --------------------------------------------------------------
Amortization of interest maintenance reserve 21.2 21.6 29.1
- --------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 966.1 568.4 472.3
- --------------------------------------------------------------
Reserve adjustment on reinsurance ceded 32.0 407.5 (469.6)
- --------------------------------------------------------------
Expense charges on deposit funds 56.7 118.2 146.5
- --------------------------------------------------------------
Separate account investment management and administration service fees 574.3 624.8 473.9
- --------------------------------------------------------------
Other income 175.2 166.2 88.8
--------- --------- ---------
- --------------------------------------------------------------
Total revenues 11,348.8 12,133.6 10,687.4
- --------------------------------------------------------------
Benefits and expenses:
Benefits and settlement expenses 8,686.7 8,950.3 8,504.8
- -------------------------------------------------------------- 1,691.1 2,466.2 1,618.4
Underwriting, acquisition, insurance and other expenses --------- --------- ---------
- --------------------------------------------------------------
Total benefits paid or provided 10,377.8 11,416.5 10,123.2
- --------------------------------------------------------------
Gain from operations before dividends to policyholders, income taxes and net
realized gain (loss) on investments 971.0 717.1 564.2
- --------------------------------------------------------------
Dividends to policyholders 75.2 80.2 80.3
--------- --------- ---------
- --------------------------------------------------------------
Gain from operations before federal income taxes and net realized gain (loss) on
investments 895.8 636.9 483.9
- --------------------------------------------------------------
Federal income taxes 456.5 94.9 85.4
--------- --------- ---------
- --------------------------------------------------------------
Gain from operations before net realized gain (loss) on investments 439.3 542.0 398.5
- --------------------------------------------------------------
Net realized gain (loss) on investments, net of income tax expense and excluding
net transfers to the interest maintenance reserve (260.3) 27.9 114.4
--------- --------- ---------
- --------------------------------------------------------------
Net income $ 179.0 $ 569.9 $ 512.9
- -------------------------------------------------------------------------------- ========= ========= =========
See accompanying notes.
S-4
The Lincoln National Life Insurance Company
Statements of Changes in Capital and Surplus -- Statutory Basis
Unassigned Total
Common Surplus Paid-in Surplus Capital and
Stock Notes Surplus (Deficit) Surplus
------ -------- -------- ---------- -----------
(in millions)
-----------------------------------------------
Balances at January 1, 1999 $25.0 $1,250.0 $1,930.1 $ (640.6) $2,564.5
- ------------------------------------------------------
Net income -- -- -- 512.9 512.9
- ------------------------------------------------------
Increase in difference in cost and admitted investment
amounts -- -- -- (101.9) (101.9)
- ------------------------------------------------------
Increase in nonadmitted assets -- -- -- (22.9) (22.9)
- ------------------------------------------------------
Decrease in liability for reinsurance in unauthorized
companies -- -- -- 26.0 26.0
- ------------------------------------------------------
Gain on reinsurance transaction -- -- -- 71.8 71.8
- ------------------------------------------------------
Increase in asset valuation reserve -- -- -- (6.4) (6.4)
- ------------------------------------------------------
Paid-in surplus -- -- 12.5 -- 12.5
- ------------------------------------------------------
Dividends to Lincoln National Corporation -- -- -- (530.0) (530.0)
- ------------------------------------------------------ ----- -------- -------- -------- --------
Balances at December 31, 1999 25.0 1,250.0 1,942.6 (691.1) 2,526.5
- ------------------------------------------------------
Net income -- -- -- 569.9 569.9
- ------------------------------------------------------
Decrease in difference in cost and admitted investment
amounts -- -- -- 17.2 17.2
- ------------------------------------------------------
Increase in nonadmitted assets -- -- -- (21.9) (21.9)
- ------------------------------------------------------
Decrease in liability for reinsurance in unauthorized
companies -- -- -- 0.6 0.6
- ------------------------------------------------------
Amortization of gain on reinsurance transaction -- -- -- (7.9) (7.9)
- ------------------------------------------------------
Change in policy reserve valuation basis -- -- -- (5.6) (5.6)
- ------------------------------------------------------
Increase in asset valuation reserve -- -- -- (43.2) (43.2)
- ------------------------------------------------------
Paid-in surplus -- -- 63.5 -- 63.5
- ------------------------------------------------------
Dividends to Lincoln National Corporation -- -- -- (420.0) (420.0)
- ------------------------------------------------------ ----- -------- -------- -------- --------
Balances at December 31, 2000 25.0 1,250.0 2,006.1 (602.0) 2,679.1
- ------------------------------------------------------
Net income -- -- -- 179.0 179.0
- ------------------------------------------------------
Cumulative effect of adoption of codification -- -- -- 8.7 8.7
- ------------------------------------------------------
Decrease in difference in cost and admitted investment
amounts -- -- -- 77.7 77.7
- ------------------------------------------------------
Increase in nonadmitted assets -- -- -- (162.8) (162.8)
- ------------------------------------------------------
Increase in liability for reinsurance in unauthorized
companies -- -- -- (59.4) (59.4)
- ------------------------------------------------------
Gain on reinsurance transaction -- -- -- 1,027.0 1,027.0
- ------------------------------------------------------
Change in net deferred income taxes -- -- -- 169.8 169.8
- ------------------------------------------------------
Curtailment gain on employee benefit plans -- -- -- 12.4 12.4
- ------------------------------------------------------
Decrease in asset valuation reserve -- -- -- 70.2 70.2
- ------------------------------------------------------
Paid-in surplus -- -- 9.3 -- 9.3
- ------------------------------------------------------
Dividends to Lincoln National Corporation -- -- (495.0) -- (495.0)
- ------------------------------------------------------ ----- -------- -------- -------- --------
Balances at December 31, 2001 $25.0 $1,250.0 $1,520.4 $ 720.6 $3,516.0
- ------------------------------------------------------ ===== ======== ======== ======== ========
See accompanying notes.
S-5
The Lincoln National Life Insurance Company
Statements of Cash Flow -- Statutory Basis
Year ended December 31
2001 2000 1999
---------- --------- ---------
(in millions)
--------------------------------
Operating activities
Premiums, policy proceeds and other considerations received
- ----------------------------------------------------------------------- $ 7,579.5 $ 8,082.8 $ 7,671.1
Allowances and reserve adjustments received (paid) on reinsurance ceded
- ----------------------------------------------------------------------- 802.8 610.1 (19.9)
Investment income received
- ----------------------------------------------------------------------- 1,990.1 2,109.8 2,168.6
Separate account investment management and administration service fees
received
- ----------------------------------------------------------------------- 574.2 624.8 470.6
Benefits paid
- ----------------------------------------------------------------------- (8,723.5) (9,843.9) (8,699.4)
Underwriting, acquisition, insurance and other expenses paid
- ----------------------------------------------------------------------- (1,926.6) (1,796.4) (1,734.5)
Proceeds related to reinsurance agreements
- ----------------------------------------------------------------------- 1,472.8 -- 71.8
Federal income taxes paid
- ----------------------------------------------------------------------- (66.6) (16.3) (81.2)
Dividends to policyholders
- ----------------------------------------------------------------------- (87.7) (82.6) (82.8)
Other income received and expenses paid, net 1,194.0 (48.9) 252.1
- ----------------------------------------------------------------------- ---------- --------- ---------
Net cash provided by (used in) operating activities
- ----------------------------------------------------------------------- 2,809.0 (360.6) 16.4
Investing activities
Sale, maturity or repayment of investments
- ----------------------------------------------------------------------- 9,473.3 5,845.5 6,557.7
Proceeds from sale of subsidiaries
- ----------------------------------------------------------------------- 330.8 -- --
Purchase of investments
- ----------------------------------------------------------------------- (10,841.1) (4,719.6) (5,940.8)
Other sources (uses) including reinsured policy loans 13.3 (344.6) (497.0)
- ----------------------------------------------------------------------- ---------- --------- ---------
Net cash (used in) provided by investing activities
- ----------------------------------------------------------------------- (1,023.7) 781.3 119.9
Financing activities
Surplus paid-in
- ----------------------------------------------------------------------- 9.3 63.5 12.5
Proceeds from borrowings from shareholder
- ----------------------------------------------------------------------- 200.0 180.0 205.0
Repayment of borrowings from shareholder
- ----------------------------------------------------------------------- (180.0) (205.0) (140.0)
Deposits on deposit type contract funds
- ----------------------------------------------------------------------- (5.5) -- --
Withdrawals on deposit type contract funds
- ----------------------------------------------------------------------- (65.0) -- --
Dividends paid to shareholder (495.0) (420.0) (530.0)
- ----------------------------------------------------------------------- ---------- --------- ---------
Net cash provided by (used in) financing activities (536.2) (381.5) (452.5)
- ----------------------------------------------------------------------- ---------- --------- ---------
Net increase (decrease) in cash and short-term investments
- ----------------------------------------------------------------------- 1,249.1 39.2 (316.2)
Cash and short-term investments at beginning of year 1,448.4 1,409.2 1,725.4
- ----------------------------------------------------------------------- ---------- --------- ---------
Cash and short-term investments at end of year $ 2,697.5 $ 1,448.4 $ 1,409.2
- ----------------------------------------------------------------------- ========== ========= =========
See accompanying notes.
S-6
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements
December 31, 2001
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization and Operations
The Lincoln National Life Insurance Company (the "Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in Indiana.
As of December 31, 2001, the Company owned 100% of the outstanding common stock
of two insurance company subsidiaries and eight non-insurance subsidiaries,
including three limited liability companies.
The Company's principal businesses consist of underwriting annuities and life
insurance contracts through multiple distribution channels. The Company is
licensed and sells its products in 49 states, Canada and several territories of
the United States.
Use of Estimates
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect the amounts reported
in the statutory-basis financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more information
becomes known, which could impact the amounts reported and disclosed herein.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Insurance Department"), which practices differ from accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
Investments
Bonds and preferred stocks are reported at cost or amortized cost or fair
value based on their National Association of Insurance Commissioners' ("NAIC")
rating. For GAAP, the Company's bonds and preferred stocks are classified as
available-for-sale and, accordingly, are reported at fair value with changes
in the fair values reported directly in shareholder's equity after adjustments
for related amortization of deferred acquisition costs, additional
policyholder commitments and deferred income taxes.
Effective January 1, 2001 if it is determined that a decline in the fair value
of a bond is other than temporary, the cost basis of the bond is written down
to fair value. The provision for such declines is charged to realized loss.
Impairment is considered to have occurred if it is probable that the Company
will be unable to collect all amounts due according to the contractual terms
of a debt security in effect at the date of aquisition.
All mortgage-backed/asset-backed securities (e.g., CMOs) are adjusted for the
effects of changes in prepayment assumptions on the related accretion of
discount or amortization of premium of such securities using the retrospective
method. If it is determined that a decline in fair value is other than
temporary, the cost basis of the security is written down to the undiscounted
estimated future cash flows. Prior to April 1, 2001 under GAAP, the Company
accounted for the effects of changes in prepayment assumptions in the same
manner. Effective April 1, 2001 for GAAP purposes, all securities, purchased
or retained, that represent beneficial interests in securitized assets, other
than securitized assets that are of high credit quality securities, are
adjusted using the prospective method when there is a change in estimated
future cash flows. If it is determined that a decline in fair value is other
than temporary, the cost basis of the security is written down to its fair
value. If high credit quality securities are adjusted, the retrospective
method is used.
Derivative instruments that meet the criteria of an effective hedge are valued
and reported in a manner that is consistent with the hedged asset or
liability. Embedded derivatives are not accounted for separately from the host
contract. Under GAAP, all derivatives are reported on the balance sheet at
fair value, the effective and ineffective portions of a single hedge are
accounted for separately, an embedded derivative within a contract that is not
clearly and closely related to the economic characteristics and risks of the
host contract is accounted for separately from the host contract and valued
and reported at fair value, and the change in fair value for cash flow hedges
is credited or charged directly to a separate component of shareholder's
equity rather than to income as required for fair value hedges.
Investments in real estate are reported net of related obligations rather than
on a gross basis. Real estate owned and occupied by the Company is classified
as a real estate investment rather than reported as an operating asset, and
investment income and operating expenses include rent for the Company's
occupancy of those properties. Changes between depreciated cost and admitted
asset investment amounts are credited or charged directly to unassigned
surplus rather than to income, as would be required under GAAP.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the interest maintenance reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income taxes and transfers to the IMR. Under GAAP, realized capital
gains and losses are reported in net income, on a pre-tax basis, in the period
that the asset giving rise to the gain or loss is sold. Such realized capital
gains and losses are reported net of associated amortization of deferred
acquisition costs and investment expenses, using the specific identification
method.
The asset valuation reserve ("AVR") provides a valuation allowance for
invested assets. The AVR is determined by an NAIC prescribed formula, and is
reported as a liability, with changes reflected directly in unassigned
surplus. AVR is not recognized for GAAP.
S-7
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Subsidiaries
The accounts and operations of the Company's subsidiaries are not consolidated
with the accounts and operations of the Company as would be required by GAAP.
Policy Acquisition Costs
The costs of acquiring and renewing business are expensed when incurred. Under
GAAP, acquisition costs related to traditional life insurance, to the extent
recoverable from future policy revenues, are deferred and amortized over the
premium-paying period of the related policies using assumptions consistent
with those used in computing policy benefit reserves. For universal life
insurance, annuity and other investment-type products, deferred policy
acquisition costs, to the extent recoverable from future gross profits, are
amortized generally in proportion to the present value of expected gross
profits from surrender charges and investment, mortality, expense margins and
actual realized gain (loss) on investments.
Nonadmitted Assets
Certain assets designated as "nonadmitted," principally past-due agents'
balances, furniture and equipment, certain receivables, and other assets not
specifically identified as an admitted asset within the NAIC Accounting
Practices and Procedures Manual ("NAIC APPM"), are excluded from the
accompanying balance sheets and are charged directly to unassigned surplus.
Under GAAP, such assets are included in the balance sheet.
Universal Life and Annuity Policies
Revenues for universal life policies and annuity policies consist of the
entire premium received. Under GAAP, premiums received in excess of policy
charges are not recognized as premium revenue. Death benefits paid, policy and
contract withdrawals, and the change in policy reserves on universal life
policies and annuity policies are reported as benefits and settlement expenses
in the accompanying statements of income. Under GAAP, withdrawals are treated
as a reduction of the policy or contract liabilities and benefits represent
the excess of benefits paid over the policy account value and interest
credited to the account values.
Benefit Reserves
Certain policy reserves are calculated based on statutorily required interest
and mortality assumptions rather than on estimated expected experience or
actual account balances as would be required under GAAP.
Reinsurance
Premiums, claims and policy benefits and contract liabilities are reported in
the accompanying financial statements net of reinsurance amounts. For GAAP,
assets and liabilities related to reinsurance ceded contracts are reported on
a gross basis, except for certain reinsurance contracts that provide statutory
surplus relief to other insurance companies, for which a right of offset
exists.
A liability for reinsurance balances has been provided for unsecured policy
reserves and unearned premiums ceded to reinsurers not authorized by the
Insurance Department to assume such business. Changes to those amounts are
cred ited or charged directly to unassigned surplus. Under GAAP, an allowance
for amounts deemed uncollectible is established through a charge to income.
Commission allowances on business ceded are reported as income when received
rather than being deferred and amortized with deferred policy acquisition
costs. Business assumed under 100% indemnity reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of the
transaction and the excess of the purchase price over the sum of the amounts
assigned to assets acquired less liabilities assumed is recorded as goodwill
and amortized over future periods, not to exceed 40 years, in accordance with
benefits expected to be derived from the acquisitions. On a statutory-basis,
the ceding commission is expensed when paid and reinsurance premiums and
benefits are accounted for on bases consistent with those used in accounting
for the original policies issued and the terms of the reinsurance contracts.
Under statutory accounting, the initial gain from a reinsurance transaction is
recognized as a separate a component of surplus (net of tax) and is recorded
in income over time at the rate that earnings on the reinsured business are
expected to emerge. Under GAAP, the gain is recognized as deferred revenue (a
liability), net of DAC adjustments and is amortized into earnings over time at
the rate that earnings on the reinsured business are expected to emerge.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using traditional
reinsurance accounting; whereas, such contracts are accounted for using
deposit accounting under GAAP.
Employee Benefits
For purposes of calculating the Company's pension and postretirement benefit
obligations, only vested participants and current retirees are included in the
valuation. Under GAAP, active participants not currently eligible also would
be included.
Deferred Income Taxes
Prior to January 1, 2001, deferred federal income taxes were not provided for
differences between the financial statement amounts and tax bases of assets
and liabilities. Effective January 1, 2001, deferred federal income taxes are
provided; however, deferred tax assets are limited to 1) the amount of federal
income taxes paid in prior years that can be recovered through loss carrybacks
for existing temporary differences that reverse by the end of the subsequent
calendar year, plus 2) the lesser of the remaining gross deferred tax assets
expected to be realized within one year of the balance sheet date or 10% of
capital and surplus excluding any net deferred tax assets, EDP equipment and
operating software and any net positive goodwill, plus 3) the amount of
remaining gross deferred tax assets that can be offset against existing gross
deferred tax liabilities. The remaining deferred tax assets are non-admitted.
Deferred taxes do not include amounts for state taxes. Under GAAP, states taxes
S-8
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
are included in the computation of deferred taxes, a deferred tax asset is
recorded for the amount of gross deferred tax assets expected to be realized
in future years, and a valuation allowance is established for deferred tax
assets not realizable.
Policyholder Dividends
Policyholder dividends are recognized when declared rather than over the term
of the related policies.
Surplus Notes Due to LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory basis, interest on surplus notes is not accrued until approval
is received from the Indiana Insurance Commissioner whereas, under GAAP,
interest would be accrued periodically based on the outstanding principal and
the interest rate.
Statements of Cash Flows
Cash, cash equivalents, and short-term investments in the statements of cash
flows represent cash balances and investments with initial maturities of one
year or less. Under GAAP, the corresponding caption of cash and cash
equivalents include cash balances and investments with initial maturities of
three months or less.
A reconciliation of the Company's capital and surplus and net income (loss),
as determined in accordance with statutory accounting practices, to amounts
determined in accordance with GAAP is as follows:
Capital and Surplus Net Income (Loss)
-----------------------------------------------
December 31 Year ended December 31
2001 2000 2001 2000 1999
--------- --------- --------------------------
(in millions) (in millions)
--------- --------- --------------------------
Amounts reported on a statutory-basis................................ $ 3,516.0 $ 2,679.1 $ 179.0 $ 569.9 $ 512.9
GAAP adjustments:
Deferred policy acquisition costs, present value of future profits
and goodwill...................................................... 3,657.5 3,812.6 305.1 287.9 135.0
Policy and contract reserves....................................... (1,946.0) (2,129.9) (221.9) (142.3) (97.3)
Policyholders' share of earnings and surplus on participating
business.......................................................... (96.2) (131.1) (3.3) (.3) (1.8)
Statutory deferred gain in surplus................................. (1,042.4) (63.9) -- -- --
Deferred income taxes.............................................. (257.8) 185.2 310.8 (108.3) (117.4)
Interest maintenance reserve....................................... 7.7 20.9 (12.9) (51.4) (87.2)
Asset valuation reserve............................................ 454.5 534.1 -- -- --
Nonadmitted assets................................................. 731.1 196.1 -- -- --
Unrealized gain (loss) on investments.............................. 362.0 38.7 -- -- --
Net realized loss on investments................................... (2.8) (156.5) 48.8 18.9 (32.4)
Investments in subsidiary companies................................ 567.8 523.3 77.8 61.8 39.1
Surplus notes and related interest................................. (1,250.0) (1,250.0) -- -- 1.5
Other, net......................................................... 197.5 (59.8) (187.3) 12.7 129.8
--------- --------- ------- ------- -------
Net increase (decrease).............................................. 1,382.9 1,519.7 317.1 79.0 (30.7)
--------- --------- ------- ------- -------
Amounts reported on a GAAP basis..................................... $ 4,898.9 $ 4,198.8 $ 496.1 $ 648.9 $ 482.2
========= ========= ======= ======= =======
Other significant accounting practices are as follows:
Investments
Bonds not backed by other loans are principally stated at amortized cost and
the discount or premium is amortized using the scientific method.
Mortgage-backed bonds (e.g., CMO's) are valued at amortized cost and income is
recognized using a constant effective yield based on anticipated prepayments
and the estimated economic life of the securities. When actual prepayments
differ significantly from anticipated prepayments, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied since the
acquisition of the securities (i.e., the retrospective method). The Company has
elected to use actual cost data as of January 1, 1994 as the cost of applying
the retrospective adjustment method to securities purchased prior to that date.
Redeemable preferred stocks, which have the characteristics of debt securities
and are rated as medium quality or better, are reported at cost or amortized
cost. All other preferred stocks are recorded at market value.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related net unrealized capital
gains (losses) are reported in unassigned surplus along with any adjustment for
federal income taxes. Prior to January 1, 2001, the related net unrealized
capital gains (losses) were reported in unassigned surplus without any
adjustment for federal income taxes.
There are no restrictions on common or preferred stock.
Short-term investments include investments with remaining maturities of one
year or less at the date of acquisition and are principally stated at amortized
cost.
Cash equivalents are short-term, highly liquid investments with original
maturities of three months or less, and are principally stated at amortized
cost.
S-9
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life insurance
and annuity products. The Company values all derivative instruments that
qualify for hedge accounting, and meet the criteria of an effective hedge, on a
basis consistent with that of the item hedged, with the related net unrealized
capital gain or loss reported in unassigned surplus, when applicable, along
with any adjustment for federal income taxes. Prior to January 1, 2001, the
related net unrealized capital gains and losses were reported in unassigned
surplus without any adjustment for federal income taxes. The Company accounts
for derivatives securities that do not meet the criteria to qualify for hedge
accounting at fair value, and the related changes in fair value are recognized
in current operations. The fair values of the Company's derivative securities
are based on industry standard pricing models that are commercially available.
Upon termination, gains and losses on those derivative instruments that qualify
for hedge accounting are included in the carrying values of the underlying
hedged items or deferred in IMR, where applicable, and are amortized over the
remaining lives of the hedged items as adjustments to investment income. Any
unamortized gains or losses are recognized when the underlying hedged items are
sold.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate fluctuations,
the widening of bond yield spreads over comparable maturity U.S. government
obligations or foreign exchange risk. Moreover, the derivatives used to hedge
those exposures are designated as hedges and reduce the indicated risk by
demonstrating a high correlation between changes in the value of the
derivatives and the items being hedged at both the inception of the hedge and
throughout the hedge period. Should such criteria not be met or if the hedged
items are sold, terminated or matured, the change in value of the derivatives
is included in net income.
The Company's insurance subsidiaries are reported at their underlying statutory
equity. The Company's noninsurance subsidiaries, which have no significant
ongoing operations other than for the Company and its affiliates, are reported
based on the underlying GAAP equity of the subsidiaries, adjusted to a
statutory basis. The net change in the subsidiaries' equity is included in the
change in net unrealized capital gains or losses. Prior to January 1, 2001, the
Company reported its noninsurance subsidiaries based on the underlying GAAP
equity of the subsidiaries.
The Company has minor ownership interests in joint ventures and carries these
investments based on its interest in the underlying GAAP equity of the investee.
Mortgage loans on real estate are reported at aggregate unpaid balances, less
allowances for impairment. A mortgage loan is considered to be impaired, when,
based on current information and events, it is probable that the Company will
be unable to collect all principal and interest amounts due according to the
contractual terms of the mortgage agreement. The impairment is considered to be
other than temporary when management determines foreclosure is probable. Then
the mortgage loan is written down to fair value and a realized loss is
recognized.
Policy loans are reported at unpaid balances.
Real estate occupied by the Company is reported at depreciated cost, net of
related obligations. Real estate that the Company has the intent to sell is
reported at the lower of depreciated cost or fair value, net of related
obligations. Prior to January 1, 2001, real estate, other than that occupied by
the Company was reported at the lower of depreciated cost or fair value.
Depreciation is calculated on a straight-line basis over the estimated useful
lives of the properties.
Realized capital gains and losses on investments sold are determined using the
specific identification method. Changes in admitted asset carrying amounts of
bonds, mortgage loans and common and preferred stocks, which result from
impairment or premium and discount amortization are credited or charged to
income. Other changes in the admitted asset carrying amounts of bonds, mortgage
loans and common and preferred stocks are credited or charged directly to
unassigned surplus.
Loaned Securities
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the cash collateral received which is typically
greater than the market value of the related securities loaned. In other
instances, the Company will hold as collateral securities with a market value
at least equal to the securities loaned. Securities held as collateral are not
recorded in the Company's balance sheet in accordance with accounting guidance
for secured borrowings and collateral. The Company's agreements with third
parties generally contain contractual provisions to allow for additional
collateral to be obtained when necessary. The Company values collateral daily
and obtains additional collateral when deemed appropriate.
Goodwill
Goodwill, which represents the excess, subject to certain limitations, of the
ceding commission over statutory-basis net assets of business purchased under
an assumption reinsurance agreement, is amortized on a straight-line basis over
ten years. Goodwill is evaluated periodically for impairment, and if determined
to be impaired, is written down to fair value, with the amount of the write
down recorded as a realized loss.
Premiums
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of the
policies.
Benefits
Life, annuity and accident and health benefit reserves are computed in
accordance with actuarial standards. The reserves are based on actuarial
assumptions that produce reserves at
S-10
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
least as great as those called for in any contract provision as to reserve
basis and method, and are in accordance with all other contract provisions. The
reserves are at least as great as the minimum aggregate amounts required by the
Insurance Department.
The Company waives deduction of deferred fractional premiums on the death of
life and annuity policy insureds and returns any premium beyond the date of
death. Surrender values on policies do not exceed the corresponding benefit
reserves.
Ordinary policies issued substandard are valued on the multiple table reserve
basis. A reserve of 50% of the net extra premiums is carried on policies with
flat extra premiums.
As of December 31, 2001, the Company has $71.4 million in reserves on $11.2
billion of insurance inforce on the life line of business, for which the gross
premiums are less than the net premiums according to the standard of valuation
required by the Insurance Department. The Company anticipates investment income
as a factor in the premium deficiency
calculation.
Tabular interest, tabular reserves less actual reserves released and tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest on funds not involving life contingencies has been determined
by formula or from the basic data for such items.
Net of reinsurance, liabilities related to guaranteed investment contracts are
equal to fund balances. Other deposit-type liabilities, such as supplemental
contracts without life contingencies, annuities certain and dividend
accumulations, are calculated by discounting the liabilities at prescribed
interest rates.
Reinsurance Ceded and Assumed
Reinsurance premiums, benefits paid and claims and claim adjustment expenses
are accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts. Certain
business is transacted on a funds withheld basis and investment income on
investments managed by the Company are reported in net investment income.
The Company enters into reinsurance agreements with other companies in the
normal course of business. Prior to the acquisition of LNC's reinsurance
operations by Swiss Re on December 7, 2001, LNC's insurance subsidiaries
assumed reinsurance from unaffiliated companies. The transaction with Swiss Re
involved a series of indemnity reinsurance transactions combined with the sale
of certain stock companies that comprised LNC's reinsurance operations. Assets
and liabilities on the balance sheets, and premiums and benefits on the
statements of operations, which result from reinsurance contracts, are netted
in accordance with accounting practices prescribed by the Indiana Department of
Insurance, including the Swiss Re indemnity reinsurance transactions.
Pension Benefits
Costs associated with the Company's defined benefit pension plans are
systematically accrued during the expected period of active service of the
covered employees.
Income Taxes
The Company and eligible subsidiaries have elected to file consolidated federal
and state income tax returns with LNC and certain LNC subsidiaries. Pursuant to
an intercompany tax sharing agreement with LNC, the Company provides for income
taxes on a separate return filing basis. The tax sharing agreement also
provides that the Company will receive benefit for net operating losses,
capital losses and tax credits which are not usable on a separate return basis
to the extent such items may be utilized in the consolidated income tax returns
of LNC.
Stock Options
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of the
intrinsic value method, compensation cost is the excess, if any, of the quoted
market price of LNC's common stock at the grant date, or other measurement
date, over the amount an employee or agent must pay to acquire the stock.
Assets Held in Separate Accounts and Liabilities Related to Separate Accounts
Separate account assets and liabilities reported in the accompanying balance
sheets represent segregated funds administered and invested for the exclusive
benefit of pension and variable life and annuity contractholders and for which
the contractholders, rather than the Company, bear the investment risk.
Separate account assets and liabilities are reported at fair value. The
operations of the separate accounts are not included in the accompanying
financial statements. Policy administration and investment management fees
charged on separate account policyholder deposits are reported as separate
account investment management and administration service fees. Mortality
charges on variable universal life contracts are reported as expense charges on
deposit funds in the accompanying statements of operations. Fees charged
relative to variable life and annuity administration agreements for separate
account products sold by other insurance companies and not recorded on the
Company's financial statements are included in separate account
investment management and administration service fees.
Reclassifications
Certain amounts reported in the prior years' statutory-basis financial
statements have been reclassified to conform with the presentation adopted in
the current year. These reclassifications had no effect on unassigned surplus
or net income of the prior years.
- --------------------------------------------------------------------------------
2. Accounting Change and Permitted Statutory Accounting Practice
The Company prepares its statutory-basis financial statements in conformity
with accounting practices prescribed or permitted by the State of Indiana.
Effective January 1, 2001, the State of Indiana required that insurance
companies domiciled in Indiana prepare their statutory-basis financial
statements in accordance with the NAIC APPM.
Accounting changes adopted to conform to the provisions of the NAIC APPM are
reported as changes in accounting princi-
S-11
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
- --------------------------------------------------------------------------------
2. Accounting Change and Permitted Statutory Accounting Practice (continued)
ples. The cumulative effect of changes in accounting principles is reported as
an adjustment to unassigned surplus in the period of the change. The cumulative
effect is the difference between the amount of capital and surplus at the
beginning of the year and the amount of capital and surplus that would have
been reported at that date if the new accounting principles had been applied
retroactively for all prior periods. As a result of these changes, the Company
reported a change of accounting principle, as an adjustment that increased
capital and surplus by $8.7 million as of January 1, 2001. Included in this
total adjustment are the following items:
Increase
(Decrease)
Surplus
-------------
(in millions)
-------------
Deferred tax asset............................ $110.8...
Employee benefit plans........................ 18.2...
AVR beginning value adjustment for other asset
changes...................................... 9.4...
Cost of collection............................ 2.0...
Home office real estate....................... (3.8)...
Mortgage loans impairment..................... (5.2)...
Derivatives................................... (9.6)...
Company owned furniture, equipment and
plane........................................ (11.7)...
Bonds and stocks.............................. (41.0)...
Tax deficiency reserve........................ (60.4)...
------
Total......................................... $ 8.7
======
In 2001, the Company received written approval from the Insurance Department to
pay dividends from paid-in surplus, instead of from unassigned surplus, if
there is no earned surplus, or an insufficient amount of earned surplus, to pay
the requested dividend, subject to the Indiana Insurance Commission's approval.
The Insurance Department also granted the Company permission to retroactively
reclassify dividends paid from earned surplus in 2001 to paid-in surplus.
Dividends paid in 2001 from paid-in surplus, after the retroactive adjustment,
totaled $495.0 million.
The Insurance Department recognizes only statutory accounting practices
prescribed or permitted by the State of Indiana for determining and reporting
the financial condition and results of operations of an insurance company for
determining its solvency under the Indiana Insurance Law. The NAIC APPM has
been adopted as a component of prescribed or permitted practices by the state
of Indiana, however; Indiana has required the use of particular mortality
tables to compute reserves for certain types of life insurance policies, which
result in higher reserves than would be required under NAIC APPM. The use of
the mortality tables required by Indiana, rather than reserve calculation
pursuant to NAIC APPM, resulted in a decrease to gain from operations before
federal income taxes and net realized loss on investments for the year ended
December 31, 2001 of $68.9 million, and a decrease to capital and surplus as of
December 31, 2001 of $162.7 million.
- --------------------------------------------------------------------------------
3. Investments
The cost or amortized cost, gross unrealized gains and losses and the fair
value of investments in bonds at December 31, 2001, and 2000 are summarized as
follows:
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in millions)
-----------------------------------------
At December 31, 2001:
Corporate........... $19,283.8 $665.0 $488.5 $19,460.3
U.S. government..... 325.8 55.9 4.7 377.0
Foreign government.. 765.6 43.7 3.8 805.5
Mortgage-backed..... 3,016.0 114.8 22.7 3,108.1
State and municipal. 29.8 .3 .6 29.5
--------- ------ ------ ---------
$23,421.0 $879.7 $520.3 $23,780.4
========= ====== ====== =========
At December 31, 2000:
Corporate........... $17,205.5 $430.8 $542.0 $17,094.3
U.S. government..... 324.2 64.2 2.5 385.9
Foreign government.. 812.6 35.9 27.9 820.6
Mortgage-backed..... 3,499.0 89.9 34.2 3,554.7
State and municipal. 11.2 -- .1 11.1
--------- ------ ------ ---------
$21,852.5 $620.8 $606.7 $21,866.6
========= ====== ====== =========
The cost or amortized cost of bonds at December 31, 2001 and 2000 has been
reduced by adjustments of $248.7 million and $58.3 million, respectively, to
decrease cost or amortized cost as a result of write-downs of these investments
due to impairment and/or the Securities Valuation Office of the NAIC ("SVO")
designating certain investments as in or near default.
S-12
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
3. Investments (continued)
A summary of the cost or amortized cost and the fair value of investments in
bonds at December 31, 2001, by contractual maturity, is as follows:
Cost or
Amortized Fair
Cost Value
--------- ---------
(in millions)
--------- ---------
Maturity:
In 2002.................... $ 711.6 $ 723.7
In 2003-2006............... 4,918.6 5,035.2
In 2007-2011............... 7,682.8 7,662.6
After 2011................. 7,092.1 7,250.8
Mortgage-backed securities. 3,015.9 3,108.1
--------- ---------
Total........................ $23,421.0 $23,780.4
========= =========
The expected maturities may differ from the contractual maturities in the
foregoing table because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
Proceeds from sales of investments in bonds during 2001, 2000 and 1999 were
$5.6 billion, $2.9 billion and $5.4 billion, respectively. Gross gains during
2001, 2000 and 1999 of $146.3 million, $56.0 million and $95.4 million,
respectively, and gross losses of $171.4 million, $116.5 million and $195.5
million, respectively, were realized on those sales.
At December 31, 2001 and 2000, investments in bonds, with an admitted asset
value of $21.4 million and $99.9 million, respectively, were on deposit with
state insurance departments to satisfy regulatory requirements. At December 31,
2001, the Company held foreign-currency dominated securities with a U.S. dollar
equivalent par value of $80.1 million.
At December 31, 2001, the Company held unrated or less-than-investment grade
corporate bonds of $1.7 billion, with an aggregate fair value of $1.6 billion.
Those holdings amounted to 7.34% of the Company's investments in bonds and less
than 4.89% of the Company's total admitted assets. The Company performs
periodic evaluations of the relative credit standing of the issuers of these
bonds.
Unrealized gains and losses on investments in unaffiliated common stocks are
reported directly in unassigned surplus. The cost or amortized cost of
preferred stock and unaffiliated common stock, gross unrealized gains and
losses and the fair value of such investments at December 31, 2001, and 2000
are as follows:
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(in millions)
--------- ---------- ---------- -----
At December 31,
2001:
Preferred stocks. $223.6 $ 5.5 $ .6 228.5
=====================================
Unaffiliated
common stocks... 107.4 15.2 15.1 107.5
=====================================
At December 31,
2000:
Preferred stocks. 261.7 2.9 25.1 239.5
=====================================
Unaffiliated
common stocks... 145.7 30.7 14.7 161.7
=====================================
The cost or amortized cost of preferred stocks at December 31, 2001 and 2000
has been reduced by adjustments of $14.9 million and $7.6 million,
respectively, to decrease amortized cost as a result of write-downs of these
investments due to impairment and/or the SVO designating certain investments as
low or lower quality.
During 2001, the minimum and maximum lending rates for mortgage loans were 6.3%
and 10.0%, respectively. At the issuance of a loan, the percentage of loan to
value on any one loan does not exceed 79.5%. At December 31, 2000, the Company
held mortgages aggregating $5.0 million with interest overdue beyond 180 days
(excluding accrued interest). No interest was past due 180 days or more on
mortgages at December 31, 2001. At December 31, 2001 and 2000 impaired loans
with a related allowance ($2.5 million and $5.2 million, respectively) for
credit losses are $21.7 million and $24.1 million, respectively. The average
recorded investment in impaired loans is $23.3 million and $30.l million at
December 31, 2001 and 2000, respectively. The Company recognized interest
income of $2.8 million during the period the loans were impaired for each of
the years ended December 31, 2001 and 2000. At December 31, 2001 and 2000,
there was no nonadmitted interest due on these mortgage loans. Mortgage loans
balances do not include any taxes, assessments or amounts advanced as of
December 31, 2001 or 2000. There are no impaired mortgage loans without an
allowance for credit losses at December 31, 2001 or 2000.
All properties covered by mortgage loans have fire insurance at least equal to
the excess of the loan over the maximum loan that would be allowed on the land
without the building.
The total recorded investment in restructured mortgage loans, at December 31,
2001 and 2000 is $5.2 million and $4.1 million, respectively. The realized
capital losses related to these loans were $.7 million and $.5 million at
December 31, 2001 and 2000, respectively. The Company accrues interest income
on impaired loans to the extent deemed collectible (delinquent less than 90
days) and the loan continues to perform under its original or restructured
contractual terms. Interest income on non-performing loans generally is
recognized on a cash basis.
S-13
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
3. Investments (continued)
Components of the Company's investments in real estate are summarized as
follows:
December 31
2001 2000
--------------
(in millions)
--------------
Properties occupied by the Company:
Land............................. $ 1.8 $ 2.5
Buildings........................ 4.9 10.5
Less accumulated depreciation.... (.5) (2.5)
------ ------
6.2 10.5
Properties held for sale:
Land............................. 41.3 45.8
Buildings........................ 219.3 238.3
Other............................ 19.9 16.3
Less accumulated depreciation.... (36.9) (39.2)
------ ------
243.6 261.2
------ ------
Total real estate.................. $249.8 $271.7
====== ======
The major categories of net investment income are as follows:
Year ended December 31
2001 2000 1999
--------------------------
(in millions)
--------------------------
Income:
Bonds........................... $1,724.3 $1,744.3 $1,840.6
Preferred stocks................ 22.0 21.3 20.3
Unaffiliated common stocks...... 2.4 4.9 6.3
Affiliated common stocks........ 79.8 10.2 7.8
Mortgage loans on real estate... 326.5 328.1 321.0
Real estate..................... 42.3 41.4 57.8
Policy loans.................... 111.0 109.8 101.7
Other investments............... 70.5 58.7 50.6
Cash and short-term investments. 58.2 77.9 95.9
-------- -------- --------
Total investment income........... 2,437.0 2,396.6 2,502.0
Expenses:
Depreciation.................... 10.5 12.8 14.4
Other........................... 298.1 258.3 284.4
-------- -------- --------
Total investment expenses......... 308.6 271.1 298.8
-------- -------- --------
Net investment income............. $2,128.4 $2,125.5 $2,203.2
======== ======== ========
Nonadmitted accrued investment income at December 31, 2001 amounted to $9.9
million and consists principally of investment income on bonds that is over 90
days past due. No accrued investment income was nonadmitted at December 31,
2000.
Net realized capital gains (losses) on investments are reported net of federal
income taxes and amounts transferred to the IMR as follows:
2001 2000 1999
-----------------------
(in millions)
-----------------------
Net realized capital gains (losses) on investments.................................................. $(235.1) $(60.3) $ 20.8
Less amount transferred to IMR (net of related taxes (credits) of $4.3, ($16.0) and ($31.4) in 2001,
2000 and 1999, respectively)....................................................................... 7.9 (29.7) (58.3)
------- ------ ------
(243.0) (30.6) 79.1
Less federal income taxes (credits) on realized gains (losses)...................................... 17.3 (58.5) (35.3)
------- ------ ------
Net realized capital gains (losses) net of income tax expense and excluding net transfers to the IMR $(260.3) $ 27.9 $114.4
======= ====== ======
S-14
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
4. Subsidiaries
At December 31, 2001, the Company owned 100% of the outstanding common stock of
two insurance company subsidiaries: First Penn-Pacific Life Insurance Company
("First Penn") and Lincoln Life & Annuity Company of New York ("LNY"). At
December 31, 2000, the Company also owned 100% of the outstanding common stock
of two other insurance subsidiaries, Lincoln National Health &
Casualty Insurance Company and Lincoln National Reassurance Company, which were
sold during 2001. A realized loss of $12.5 million was realized on these sales.
The Company owns 100% of the outstanding common stock of five
non-insurance company subsidiaries: Lincoln National Insurance Associates
("LNIA"), Lincoln Financial Distributors, Inc. ("LFD"), which was formerly
known as Sagemark Consulting, Inc., Wakefield Tower Alpha Limited
("Wakefield"), Lincoln Realty Capital Corporation ("LRCC") and Lincoln Life &
Annuity Distributors, Inc. ("LLAD").
Statutory-basis financial information related to the insurance subsidiaries is
summarized as follows (in millions):
December 31, 2001 December 31, 2000
-----------------------------------
First First
Penn LNY Penn LNY
-----------------------------------
Cash and invested
assets.............. $1,487.4 $1,945.7 $1,376.9 $1,947.0
Other assets......... 81.1 42.4 41.6 41.7
Separate account
asset............... -- 356.4 -- 329.8
-------- -------- -------- --------
Total admitted
assets.............. $1,568.5 $2,344.5 $1,418.5 $2,318.5
======== ======== ======== ========
Insurance reserves... $1,415.1 $1,760.7 $1,305.3 $1,772.1
Other liabilities.... 76.4 36.8 41.8 48.0
Separate account
liabilities......... -- 356.4 -- 329.8
Capital and surplus.. 77.0 190.6 71.4 168.6
-------- -------- -------- --------
Total liabilities and
capital and
surplus............. $1,568.5 $2,344.5 $1,418.5 $2,318.5
======== ======== ======== ========
Year ended
December 31, 2001 December 31, 2000
----------------------------------
First First
Penn LNY Penn LNY
------ ------- -------- -------
Revenues............. $349.7 $395.0 $327.6 $389.8
Benefits and expenses 343.2 363.4 322.2 341.8
Net realized losses.. (8.2) (12.2) -- (2.2)
------ ------ ------ ------
Net income (loss).... $ (1.7) $ 19.4 $ 5.4 $ 45.8
====== ====== ====== ======
LNIA was purchased in 1998 for $.6 million and has an admitted asset value of
$2.0 million at December 31, 2001. LFD is a broker dealer that was acquired in
connection with a reinsurance transaction completed in 1998 and has an admitted
asset value of $7.0 million at December 31, 2001. Wakefield was formed in 1999
to engage in the ownership and management of investments and has an admitted
asset value of $280.6 million at December 31, 2001. Wakefield's assets as of
December 31, 2001 consist entirely of investments in bonds. LRCC was formed in
1999 to engage in the management of certain real estate investments. It was
capitalized with cash and three real estate investments of $12.7 million and
has an admitted asset value of $26.3 million at December 31, 2001. LLAD was
formed in 2000 to distribute the Company's products to its customers and has an
admitted asset value of $40.0 million at December 31, 2001.
The carrying value of all affiliated common stocks, was $623.5 and $743.0
million at December 31, 2001 and 2000, respectively. The cost basis of
investments in subsidiaries as of December 31, 2001 and 2000 was $750.2 million
and $1.1 billion, respectively. Included in the change in differences in cost
and admitted investment amounts in the Statement of Changes in Capital and
Surplus is a net decrease in the unrealized loss on investments in subsidiaries
for the year ended December 31, 2001 of $61.7 million, related to the change in
carrying values of the Company's investments in its subsidiaries and affiliates.
During 2001, 2000 and 1999, the subsidiaries paid dividends to the Company of
$74.6 million, $11 million and $5.2 million, respectively.
The Company has no investments in subsidiaries, controlled entities, affiliated
entities, joint ventures, partnerships or limited liability companies that
exceed 10% of its admitted assets.
The Company did not recognize any impairment write-downs for its investments in
subsidiaries during the statement period.
S-15
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
5. Federal Income Taxes
Income before federal income taxes differs from taxable income in 2001
principally due to tax expense on the deferred gain from the sale of the
reinsurance operations (see Note 9), offset by tax-exempt investment income and
dividends-received tax deductions. In 2000 and 1999, income before federal
income taxes differs from taxable income principally due to tax exempt
investment income and dividends-received tax deductions.
Capital gains (losses) of $63.7 million, ($174.0 million) and ($151.7 million),
were recognized in 2001, 2000 and 1999, respectively. The losses were carried
back to recover taxes paid in prior years.
The Company paid (received) $9.6 million, ($42.6 million) and $45.3 million to
(from) LNC in 2001, 2000 and 1999, respectively, for federal income taxes.
The components of the net deferred tax asset are as follows:
December 31, January 1,
2001 2001
----------------------
(in millions)
----------------------
Gross deferred tax assets....... $ 797.5 $ 721.8
Gross deferred tax liabilities.. (156.1) (250.2)
Deferred tax assets non-admitted (461.2) (360.8)
------- -------
Net deferred tax asset.......... $ 180.2 $ 110.8
======= =======
The components of income tax expense are as follows:
2001 2000 1999
-----------------------
(in millions)
-----------------------
Current federal income tax:
Federal income tax expense on
operations........................ $456.5 $ 94.9 $ 85.4
Federal income tax expense
(credit) on realized gains
(losses).......................... 17.3 (58.5) (35.3)
------- ------ ------
Total current federal income tax in
net income.......................... 473.8 36.4 50.1
Change in deferred tax:
Change in deferred tax assets...... (75.7) -- --
Change in deferred tax liabilities. (94.1) -- --
Change in non-admitted deferred
tax asset......................... 100.4 -- --
------- ------ ------
Net change in net deferred tax asset. (69.4) -- --
------- ------ ------
Total federal income tax............. $ 404.4 $ 36.4 $ 50.1
======= ====== ======
The Company's income tax expense differs from the amount obtained by applying
the federal statutory rate of 35% to Net Gain from Operations After Dividends
to Policyholders for the following reasons:
2001 2000 1999
----------------------
(in millions)
----------------------
Expected federal income tax
expense............................ $313.5 $222.9 $169.4
Gain from sale of reinsurance
agreements......................... 310.0 (2.8) 25.1
Tax preferred investment income..... (99.5) (71.9) (60.9)
Income tax credits.................. (39.0) (17.5) (16.7)
Amortization of capitalized software (14.5) (13.6) (11.8)
(Payment) accrual of contingency
items.............................. (14.3) 15.7 21.8
Other amounts....................... 0.3 (37.9) (41.5)
------ ------ ------
Tax expense on net income before
realized capital gains (losses).... 456.5 94.9 85.4
Tax on realized capital gains....... 17.3 (58.5) (35.3)
------ ------ ------
Total income tax expense............ $473.8 $ 36.4 $ 50.1
====== ====== ======
Under prior income tax law, one-half of the excess of a life insurance
company's income from operations over its taxable investment income was not
taxed, but was set aside in a special tax account designated as "Policyholders'
Surplus." The Company has approximately $187 million of untaxed "Policyholders'
Surplus" on which no payment of federal income taxes will be required unless it
is distributed as a dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not believe that any
significant portion of the account will be taxed in the foreseeable future and
no related tax liability has been recognized. If the entire balance of the
account became taxable under the current federal income tax rate, the tax would
be approximately $65.5 million. No deferred tax liabilities are recognized
related to the Policyholders' Surplus Account.
- --------------------------------------------------------------------------------
6. Reserves and Reinsurance
The balance sheet caption "Reinsurance recoverable" includes amounts
recoverable from other insurers for claims paid by the Company of $183.1 and
$123.5 million at December 31, 2001 and 2000, respectively.
The balance sheet caption, "Total policy and contract liabilities," has been
reduced for insurance ceded in the amounts of $6.6 billion and $5.2 billion as
of December 31, 2001 and 2000, respectively.
Reinsurance transactions, excluding assumption reinsurance, included in the
income statement captions, "Life and annuity premiums" and "Accident and health
premiums" are as follows:
Year ended December 31
2001 2000 1999
-------- -------- --------
(in millions)
---------------------------
Insurance assumed....... $2,630.9 $3,952.9 $2,606.5
Insurance ceded......... 3,200.8 2,766.6 1,675.1
-------- -------- --------
Net reinsurance premiums $ (569.9) $1,186.3 $ 931.4
======== ======== ========
S-16
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
6. Reserves and Reinsurance (continued)
The income statement caption, "Benefits and settlement expenses," is net of
reinsurance recoveries of $3.3 billion, $1.9 billion and $2.6 billion for 2001,
2000 and 1999, respectively.
Deferred and uncollected life insurance premiums and annuity considerations
included in the balance sheet caption, "Premiums and fees in course of
collection," are as follows:
December 31, 2001
----------------------
Net of
Gross Loading Loading
------ ------- -------
(in millions)
----------------------
Ordinary new business $ 5.4 $(7.0) $ (1.6)
Ordinary renewal..... (73.5) (2.5) (76.0)
Group life........... 6.9 1.0 7.9
------ ----- ------
$(61.2) $(8.5) $(69.7)
====== ===== ======
December 31, 2000
------------------------
Net of
Gross Loading Loading
------ -------- --------
(in millions)
------------------------
Ordinary new business $ 13.0 $ 8.1 $ 4.9
Ordinary renewal..... 57.9 15.7 42.2
Group life........... 9.7 .2 9.5
------ -------- --------
$ 80.6 $ 24.0 $ 56.6
====== ======== ========
At December 31, 2001, the Company's annuity reserves and deposit fund
liabilities, including separate accounts, which are subject to discretionary
withdrawal with adjustment, subject to discretionary withdrawal without
adjustment and not subject to discretionary withdrawal provisions are
summarized as follows:
Amount Percent
--------- -------
(in millions)
----------------
Subject to discretionary withdrawal with
adjustment:
With market value adjustment............. $2,367.0 4%
At book value, less surrender charge..... 2,457.5 5%
At market value.......................... 36,344.6 64%
--------- ---
Total...................................... 41,169.1 73%
Subject to discretionary withdrawal
without adjustment at book value
with minimal or no charge or
adjustment................................ 12,594.2 22%
Not subject to discretionary withdrawal.... 2,906.3 5%
--------- ---
Total annuity reserves and deposit fund.... 56,669.6 100%
========= ===
Less reinsurance ceded..................... 1,225.3
---------
Net annuity reserves and deposit fund
liabilities, including separate accounts. $55,444.3
=========
At December 31, 2001, the Company had variable annuity policies and variable
universal life policies with guaranteed minimum death benefits as follows:
Amount of
Subjected Reserve Held Reinsurance
Account (Net of Reserve
Value Reinsurance) Credit
--------- ------------ -----------
(in millions)
----------------------------------
Variable annuity $37,843.8 $46.7 $9.2
Variable life... 114.7 23.8 --
--------- ----- ----
Total........... $37,958.5 $70.5 $9.2
========= ===== ====
- --------------------------------------------------------------------------------
7. Capital and Surplus
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1.25 billion. The first note, for $500.0 million, issued to LNC, calls for the
Company to pay the principal amount of the notes on or before March 31, 2028,
with interest to be paid quarterly at an annual rate of 6.56%. Subject to
approval by the Indiana Insurance Commissioner, LNC also has a right to redeem
the note for immediate repayment in total or in part once per year on the
anniversary date of the note, but not before January 5, 2003. Any payment of
interest or repayment of principal may be paid only out of the Company's
earnings, only if the Company's surplus exceeds specified levels ($2.3 billion
at December 31, 2001), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750.0 million, issued to LNC, calls for the Company to pay
the principal amount of the notes on or before December 31, 2028, with interest
to be paid quarterly at an annual rate of 6.03%. Subject to approval by the
Indiana Insurance Commissioner, LNC also has a right to redeem the note for
immediate repayment in total or in part once per year on the anniversary date
of the note, but not before December 18, 2003. Any payment of interest or
repayment of principal may be paid only out of the Company's earnings, only if
the Company's surplus exceeds specified levels ($2.4 billion at December 31,
2001), and subject to approval by the Indiana Insurance Commissioner.
S-17
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
7. Capital and Surplus (continued)
A summary of the terms of these surplus notes follows (in millions):
Principal
Outstanding Current Inception Accrued
at Year to Date Interest at
Principal December 31, Interest Interest December 31,
Date Issued Amount of Note 2001 Paid Paid 2001
----------- -------------- ------------ -------- --------- ------------
January 5, 1998.. $ 500.0 $ 500.0 $41.0 $130.7 --
December 18, 1998 750.0 750.0 56.5 137.2 --
-------- -------- ----- ------ -------
Total............ $1,250.0 $1,250.0 $97.5 $267.9 --
======== ======== ===== ====== =======
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount of
capital and surplus maintained by a life insurance company is to be determined
based on the various risk factors related to it. At December 31, 2001, the
Company exceeds the RBC requirements.
The payment of dividends by the Company to LNC is limited and cannot be made
except from earned profits of the Company and, in certain circumstances,
without prior approval of the Indiana Insurance Commissioner. Ordinary
dividends to LNC are restricted to the greater of 2001 statutory basis net
income or 10% of statutory basis capital and surplus at December 31, 2001. In
2002, the Company can pay dividends of $300.6 million without the prior
approval of the Indiana Insurance Commissioner, based on unassigned surplus
available as stated in the December 31, 2001 Annual Statement filed with the
Insurance Department (see Note 14).
Total assets have been decreased by $813.6 million for non-admitted assets as
required by statutory guidance.
The Company is recognized as an accredited reinsurer in the state of New York,
which effectively enables it to conduct reinsurance business with unrelated
insurance companies that are domiciled within the state of New York. As a
result, in addition to regulatory restrictions imposed by the State of Indiana,
the Company is also subject to the regulatory requirements that the State of
New York imposes upon accredited reinsurers.
- --------------------------------------------------------------------------------
8. Employee Benefit Plans
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans, supplemental
retirement plans, a salary continuation plan, supplemental executive retirement
plan and postretirement medical and life insurance plans for its employees and
agents (including the Company's employees and agents). The aggregate expenses
and accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis Statements of Operations or Balance
Sheets for any of the periods shown.
LNC has various incentive plans for employees, agents and directors of LNC and
its subsidiaries that provide for the issuance of stock options, stock
appreciation rights, restricted stock awards and stock incentive awards. These
plans are comprised primarily of stock option incentive plans. Stock options
awarded under the stock option incentive plans are granted with an exercise
price equal to the market value of LNC stock at the date of grant and, subject
to termination of employment, expire ten years from the date of grant. Such
options are transferable only upon death. Options granted prior to 1992 are
exercisable one year after the date of grant and options issued subsequent to
1991 become exercisable in 25% increments over the four-year period following
the option grant anniversary date. A "reload option" feature was added on May
14, 1997. In most cases, persons exercising an option after that date have been
granted new options in an amount equal to the number of matured shares tendered
to exercise the original option award. The reload options are granted for the
remaining term of the related original option and have an exercise price equal
to the market value of LNC stock at the date of the reload award. Reload
options can be exercised two years after the grant date if the value of the new
option has appreciated by at least 25%.
In 2000, as a result of changes in the interpretation of the existing
accounting rules for stock options, LNC and the Company decided not to continue
issuing stock options to agents that do not meet the stringent definition of a
common law employee. In the first quarter of 2000, LNC adopted a stock
appreciation right ("SAR") program as a replacement to the agent stock option
program. The first awards under this program were also made in the first
quarter of 2000. The SARs under this program are rights on LNC stock that are
cash settled and become exercisable in 25% increments over the four year period
following the SAR grant date. SARs are granted with an exercise price equal to
the market value of LNC stock at the date of grant and, subject to termination
of employment, expire five years from the date of grant. Such SARs are
transferable only upon death.
LNC recognizes compensation expense for the SAR program based on the fair value
method using an option-pricing model. Compensation expense and the related
liability are recognized on a straight-line basis over the vesting period of
the SARs. The SAR liability is marked-to-market through net income. This
accounting treatment causes volatility in income as a result of changes in the
market value of LNC stock. LNC hedges this volatility by purchasing call
options on LNC stock. Call options hedging the vested SARs are also
marked-to-market through net income. The compensation expense and hedge income
(expense) do not affect the statutory-basis financial statements of the Company.
S-18
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
- --------------------------------------------------------------------------------
8. Employee Benefit Plans (continued)
As of December 31, 2001, there were 4,277,588 and 1,277,275 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 2,718,859 and
806,307, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $13.86 to $56.75. During 2001, 2000 and
1999, 3,175,782, 935,986 and 1,044,078 options became exercisable,
respectively, 946,843, 190,100 and 318,421 options were exercised,
respectively, and 227,141, 383,364 and 82,024 options forfeited, respectively.
As of December 31, 2001, there were 8,475 and 1,111,467 shares of LNC common
stock subject to SARs granted to Company employees and agents, respectively,
under the SAR pro gram. Of the SARs granted, 102,297 granted to agents, were
exercisable as of that date. The exercise prices of the outstanding SARs range
from $24.72 to $48.19. During 2001 and 2000, 177,485 and 8,500 SARs became
exercisable, respectively, 15,200 and 5,100 SARs were forfeited, respectively
and in 2001, 63,388 SARs were exercised. No SARs were exercised in 2000.
Effective July 1, 1999, the Company's agent postretirement plan was changed to
require agents retiring on or after that date to pay the full premium costs.
This change to the Plan resulted in a one-time curtailment gain of $1.4 million
in 1999.
- --------------------------------------------------------------------------------
9. Restrictions, Commitments and Contingencies
Marketing and Compliance Matters
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances, companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due to
the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time; however,
it is management's opinion that such future development will not materially
affect the financial position of the Company.
Group Pension Annuities
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these liabilities.
Due to the long-term nature of group pension annuities and the resulting
inability to exactly match cash flows, a risk exists that future cash flows
from investments will not be reinvested at rates as high as currently earned by
the portfolio. Accordingly, these liabilities may prove to be deficient or
excessive. However, it is management's opinion that such future development
will not materially affect the financial position of the Company.
Leases
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25-year lease period with options to
renew for six additional terms of five years each. The agreements also provide
the Company with the right of first refusal to purchase the properties during
the term of the lease, including renewal periods, at a price as defined in the
agreements. The Company also has the option to purchase the leased properties
at fair market value as defined in the agreements on the last day of the
initial 25-year lease ending in 2009 or on the last day of any of the renewal
periods. Rental expense on these leases was $28.4 million in 2001. The company
receives rental income from affiliates for their use of a portion of the home
office properties, which partially offsets rental expense. Such rental income
amounted to $3.2 million in 2001. Total rental expense on other operating
leases in 2001 was $12.0 million. Total rental expense on all operating leases
in 2000 and 1999 was $45.6 million and $44.5 million, respectively. At December
31, 2001, future minimum rental commitments are as follows (in millions):
2002...... $ 37.9
2003...... 35.0
2004...... 34.1
2005...... 33.1
2006...... 33.4
Thereafter 64.8
------
$238.3
======
Information Technology Commitment
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne operations.
Total costs incurred in 2001, 2000 and 1999 were $62.8 million, $65.1 million
and $67.4 million respectively. Future minimum annual costs range from $40.9
million to $56.8 million, however future costs are dependent on usage and could
exceed these amounts.
Reinsurance Contingencies
On December 7, 2001, Swiss Re Life & Health America, Inc. ("Swiss Re") acquired
LNC's reinsurance operation for $2.0 billion. In addition, LNC retained
approximately $500.0 million of statutory capital supporting the reinsurance
operation. The transaction structure involved a series of indemnity reinsurance
transactions combined with the sale of certain stock companies that comprised
the LNC's reinsurance operation. Two of the stock companies sold, Lincoln
National Health & Casualty Insurance Company and Lincoln National Reassurance
Company, were wholly-owned subsidiaries of the Company. As a result, and
because a significant amount of the reinsurance business subject to the
indemnity reinsurance transactions was written through the Company, the Company
S-19
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
9. Restrictions, Commitments and Contingencies (continued)
received $1.84 billion of the $2.0 billion proceeds and retained approximately
$250.0 million of the statutory capital.
A pre-tax loss of $12.5 million was recognized by the Company on the sale of
the subsidiaries. A statutory gain of $1.5 billion was generated under the
indemnity reinsurance agreements. This gain was reported as a direct adjustment
to unassigned surplus (net of related income taxes) and recognition of the
surplus increase as income will be reported on a net-of-tax basis as earnings
emerge from the business reinsured, in accordance with the requirements of
Statement on Statutory Accounting Principles No. 61, Life, Deposit-Type, and
Accident and Health Reinsurance. During 2001, the Company recognized as income
$8.0 million of the deferred gain.
LNC and Swiss Re have not agreed upon the final closing financial statements
associated with the December 7, 2001 transactions. There are currently disputed
matters of approximately $500.0 million, which relate primarily to personal
accident business reserves and recoverables. LNC's ongoing indemnification to
Swiss Re on the underlying reinsurance business is limited to the personal
accident business. Pursuant to the purchase agreement, LNC's exposure is capped
at $100.0 million for net future payments under the personal accident programs
in excess of $148.0 million, which represents the personal accident
liabilities, net of the assets held for reinsurance recoverable at December 31,
2000. Up to $200.0 million of net payments in excess of the net liabilities
will be shared on a 50/50 basis between LNC and Swiss Re. LNC has no continuing
indemnification risk to Swiss Re on other reinsurance lines of business.
Under the timeframe provided for within the acquisition agreement for dispute
resolution, it is probable that the earliest point that these matters will be
agreed upon would be the second quarter of 2002. If the parties are unable to
reach agreement, and these matters go to arbitration, an ultimate resolution of
these matters may take several additional months. Upon reaching agreement as to
the final closing financial statements, it is possible that the Company could
record adjustments to the realized loss on the sale of subsidiaries, to income,
or to the amount of gain reported as a direct adjustment to unassigned surplus.
Another aspect of a potential dispute resolution could result in LNC and the
Company agreeing to transfer assets to Swiss Re until the adequacy of certain
reserves and related recoverables can be determined. In that event, LNC and the
Company's future investment income would be reduced to the extent that any such
dispute resolution would result in Swiss Re's retention of the related
investment income during the timeframe that Swiss Re would hold the invested
assets. While uncertainty exists as to how these disputed matters will finally
be resolved, at the present time the Company believes the amounts reported
within the Company's statutory-basis financial statements as of and for the
year ended December 31, 2001 represent the best estimate of the ultimate
outcome of Swiss Re's acquisition of the Company's reinsurance business.
Other Insurance Ceded and Assumed
On November 1, 1999, the Company closed its previously announced agreement to
transfer a block of disability income business to MetLife. Under this indemnity
reinsurance agree- ment, the Company transferred $490.8 million of cash to
MetLife representing the statutory reserves transferred on this business less
$17.8 million of purchase price consideration. In accordance with statutory
accounting rules on indemnity reinsurance, the gain on sale was reported on a
net-of-tax basis as a direct adjustment to surplus. At December 31, 2001, the
surplus component of the gain ($64.8 million) related to this transaction is
included in the total surplus gain component associated with the aquisition of
LNC's reinsurance operations by Swiss Re and is being recognized in income at
the rate that earnings are expected to emerge on this reinsurance business.
The Company cedes insurance to other companies. The portion of risks exceeding
the Company's retention limit is reinsured with other insurers. The Company
limits its maximum coverage that it retains on an individual to $10 million.
Portions of the Company's deferred annuity business have also been coinsured
with other companies to limit its exposure to interest rate risks. At December
31, 2001, the reserves associated with these reinsurance arrangements totaled
$1.1 billion. To cover products other than life insurance, the Company acquires
other insurance coverages with retentions and limits that management believes
are appropriate for the circumstances. The accompanying financial statements
reflect premiums, benefits and reserves for policy benefits, net of insurance
ceded. The Company remains liable if its reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American States Financial Corporation
("American States") and proceeds from the January 5, 1998 surplus note, were
used to finance an indemnity reinsurance transaction whereby the Company and
LNY reinsured 100% of a block of individual life insurance and annuity business
from CIGNA. In 1999, the Company and CIGNA reached an agreement through
arbitration on the final statutory-basis values of the assets and liabilities
reinsured. As a result, the Company's ceding commission for this transaction
was reduced by $58.6 million in 1999.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 2001, the Company provided $75.3 million of
statutory-basis surplus relief to other insurance companies under reinsurance
transactions. The Company retroceded 100% of this accepted surplus relief to
its off-shore reinsurance affiliates. Generally, such amounts are offset by
corresponding receivables from the ceding company, which are secured by future
profits on the reinsured business. However, the Company is subject to the risk
that the ceding company may become insolvent and the right of offset would not
be permitted.
The regulatory required liability for unsecured reserves ceded to unauthorized
reinsurers was $76.1 million and $16.7 million at December 31, 2001 and 2000,
respectively. Amounts payable or recoverable for reinsurance on policy and
contract liabilities are not subject to periodic or maximum limits. At December
31, 2001, the Company's reinsurance recoverables are not material and no
individual reinsurer owed the Company an amount that was equal to or greater
than 3% of the Company's surplus.
S-20
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
9. Restrictions, Commitments and Contingencies (continued)
In 2001 and 2000, the Company did not commute any ceded reinsurance. During
2001, the Company recorded reinsurance credits on existing policies of $656.9
million as a result of new or amended reinsurance agreements.
Neither the Company nor any of its affiliates control any non-affiliated
reinsurers with which they do business. No policies issued by the Company have
been reinsured with a foreign company, which is controlled, either directly or
indirectly, by a party not primarily engaged in the business of insurance. The
Company does not have any reinsurance agreements in effect under which the
reinsurer may unilaterally cancel the agreement. At December 31, 2001 there are
no reinsurance agreements in effect such that the amount of losses paid or
accrued exceed the total direct premium collected.
Surplus would be reduced by $402.4 million at December 31, 2001 if all
reinsurance agreements were cancelled. In 2001, the Company established
provisions for uncollectible reinsurance on personal accident reinsurance
programs in the amount of $105.4 million and the Company wrote off ceded
reinsurance balances in the amount of $89.0 million, related to personal
accident reinsurance programs based on a refined analysis of the underlying
information.
Vulnerability from Concentrations
At December 31, 2001, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 2001, 30% of such mortgages, or $1.2 billion, involved properties
located in Texas and California. Such investments consist of first mortgage
liens on completed income-producing properties and the mortgage outstanding on
any individual property does not exceed $38.7 million.
At December 31, 2001, the Company did not have a concentration of: 1) business
transactions with a particular customer or lender; 2) sources of supply of
labor or services used in the business; or 3) a market or geographic area in
which business is conducted that makes it vulnerable to an event that is at
least reasonably possible to occur in the near term and which could cause a
severe impact to the Company's financial con- dition. Although the Company does
not have any significant concentration of customers, the Company's annuities
division has a long-standing distribution relationship with American Funds
Distributors that is significant to the Company. In 2001, the American Legacy
Variable Annuity sold through American Funds Distributors accounted for
approximately 21% of the Company's total gross annuity deposits. The
relationship with American Funds Distributors is highly valued by the Company.
Both the Company and American Funds Distributors are continuously seeking ways
to increase sales and to retain the existing business.
Other Contingency Matters
The Company is involved in various pending or threatened legal proceedings,
including purported class actions, arising from the conduct of business. Most
of these proceedings are routine in the ordinary course of business. The
Company maintains professional liability insurance coverage for certain claims
in excess of $5.0 million. The degree of applicability of this coverage will
depend on the specific facts of each proceeding. In some instances, these
proceedings include claims for unspecified or substantial punitive damages and
similar types of relief in addition to amounts for alleged contractual
liability or requests for equitable relief. After consultation with legal
counsel and a review of available facts, it is management's opinion that these
proceedings ultimately will be resolved without materially affecting the
financial position of the Company.
During the fourth quarter of 2000, the Company reached an agreement in
principle to settle all class action lawsuits alleging fraud in the sale of
non-variable universal life and participating whole life insurance policies. It
requires that the Company provide benefits and a claim process to policyholders
who purchased non-variable universal life and participating whole life policies
between January 1, 1981 and December 31, 1998. The settlement covers
approximately 431,000 policies. Owners of approximately 4,300 policies have
excluded themselves (opted-out) from the settlement and, with respect to these
policies, will not be bound by the settlement. Total charges recorded during
2000 for this settlement were $64.7 million. With the court's approval of the
settlement in the second quarter of 2001 and the expiration in the third
quarter of 2001 of the time to file an appeal, the case was concluded for all
policyholders not previously opting out. During the third quarter of 2001,
settlement was reached with some of the owners of policies who opted-out of the
original settlement. Overall, the third quarter developments relating to these
matters were slightly favorable when compared to the assumptions underlying the
estimates made in 2000 when the related charges were taken; however, there is
continuing uncertainty as to the ultimate costs of settling the remaining
opt-out cases. It is management's opinion that such future developments will
not materially affect the consolidated financial position of the Company.
State guaranty funds assess insurance companies to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments
may be partially recovered through a reduction in future premium taxes in some
states. The Company has accrued for expected assessments net of estimated
future premium tax deductions.
Derivatives
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
government obligations and foreign exchange risks. In addition, the Company is
subject to the risks associated with changes in the value of its derivatives;
however, such changes in value generally are offset by changes in the value of
the items being hedged by such contracts. The contract or notional amounts of
these instruments reflect the extent of involvement in the various types of
financial instruments. Outstanding derivatives with off-balance-sheet risks,
shown in notional or contract amounts along with their carrying value and
estimated fair values, are as follows:
S-21
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
9. Restrictions, Commitments and Contingencies (continued)
Assets
-----------------------------
Notional or Carrying Fair Carrying Fair
Contracts/Amounts Value Value Value Value
------------------------------------------------
December 31 December 31 December 31
------------------------------------------------
2001 2000 2001 2001 2000 2000
------------------------------------------------
(in millions)
------------------------------------------------
Interest rate derivatives:
Interest rate cap agreements. $1,258.8 $1,558.8 $ .6 $ .6 $ 2.7 $ 0.4
Swaptions.................... 1,752.0 1,752.0 .1 .1 8.2 0.9
Interest rate swaps.......... 335.1 708.2 -- 21.0 -- 38.1
--------- -------- ---- ----- ----- -----
3,345.9 4,019.0 .7 21.7 10.9 39.4
Foreign currency derivatives:
Foreign currency swaps....... 94.6 37.5 3.8 5.9 2.6 2.5
--------- -------- ---- ----- ----- -----
$ 3,440.5 $4,056.5 $4.5 $27.6 $13.5 $41.9
========= ======== ==== ===== ===== =====
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as follows:
Interest Rate Caps Swaptions
-------------------------------------
2001 2000 2001 2000
-------------------------------------
(in millions)
-------------------------------------
Balance at beginning of year $1,558.8 $2,508.8 $1,752.0 $1,837.5
Terminations and maturities. (300.0) (950.0) -- (85.5)
-------- -------- -------- --------
Balance at end of year...... $1,258.8 $1,558.8 $1,752.0 $1,752.0
======== ======== ======== ========
Financial
Interest Rate Swaps Spread-Locks Futures
----------------------------------------------
2001 2000 2001 2000 2001 2000
----------------------------------------------
Balance at beginning of year $ 708.2 $ 630.9 $ -- $ -- $ -- $ --
New contracts............... -- 652.2 -- 100.0 -- 267.2
Terminations and maturities. (373.1) (574.9) -- (100.0) -- (267.2)
------- ------- ---- ------- ---- -------
Balance at end of year...... $ 335.1 $ 708.2 $ -- $ -- $ -- $ --
======= ======= ==== ======= ==== =======
S-22
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
9. Restrictions, Commitments and Contingencies (continued)
Foreign
Put Options Currency Swaps
----------------------------
2001 2000 2001 2000
---------------------------
Balance at beginning of year $ -- $ 21.3 $ 37.5 $44.2
New contracts............... -- -- 80.9 --
Terminations and maturities. -- (21.3) (23.8) (6.7)
---- ------ ------ -----
Balance at end of year...... $ -- $ -- $ 94.6 $37.5
==== ====== ====== =====
Interest Rate Cap Agreements
The interest rate cap agreements, which expire in 2002 through 2006, entitle
the Company to receive payments from the counterparties on specified future
dates, contingent on future interest rates. For each cap, the amount of such
payments, if any, is determined by the excess of a market interest rate over a
strike rate specified in the cap agreement multiplied by the notional amount.
The purpose of the Company's interest rate cap agreement program is to hedge
against the negative impact of a significant and sustained rise in interest
rates in its fixed annuity line of business. At December 31, 2001, the interest
rate caps are recorded at market value ($.6 million) in other investments on
the balance sheet. All changes in market value are recorded in net realized
gain (loss) on investments in the statement of operations. At December 31,
2000, the premiums paid for the interest rate caps were included in other
investments (amortized cost of $2.7 million) and were being amortized over the
terms of the agreements.
Swaptions
Swaptions, which expire in 2002 and 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
specified in the swaption agreement multiplied by the notional amount. The
purpose of the Company's swaption program is to hedge against the negative
impact of a significant and sustained rise in interest rates in its fixed
annuity line of business. At December 31, 2001 the swaptions are recorded at
market value ($.1 million) in other investments on the Balance Sheet. All
changes in market value are recorded in net realized gain (loss) on investments
in the Statement of Operations. At December 31, 2000, the premiums paid for the
swaptions were included in other investments (amortized cost of $8.2 million)
and were being amortized over the terms of the agreements. Amortization was
included in net investment income.
Interest Rate Swap Agreements
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An interest
rate swap is a contractual agreement to exchange payments at one or more times
based on the actual or expected price, level, performance or value of one or
more underlying interest rates. The Company is required to pay the counterparty
the stream of variable interest payments based on the coupon payments from the
hedged bonds, and in turn, receives a fixed payment from the counterparty at a
predetermined interest rate. The net re ceipts/payments from interest rate
swaps are recorded in net investment income. The Company also uses interest
rate swap agreements to hedge its exposure to interest rate fluctuations
related to the forecasted purchase of assets to support newly acquired blocks
of business and certain other portfolios of assets. Once the assets are
purchased, the gains (losses) resulting from the termination of the swap
agreements are applied to the basis of the assets. The gains (losses) are
recognized in earnings over the life of the assets. The interest rate swap
agreements for forecasted purchase of assets outstanding at December 31, 2000,
related to certain asset portfolio purchases completed in 2001. As a result, no
interest rate swap positions hedging forecasted purchases were outstanding at
December 31, 2001. Interest rate swaps are valued at amortized cost and
recorded in other investments on the balance sheet. All such derivatives
instruments owned at December 31, 2001 and 2000 were entered into
"at-the-market" and therefore have an amortized cost basis of zero.
Spread-Lock Agreements
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
government security is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity government
security and the price sensitivity of the swap at that time. The purpose of the
Company's spread-lock agreements program is to protect against widening of
spreads. While spread-lock agreements are used periodically, there are no
spread-lock agreements outstanding at December 31, 2001 or 2000.
Financial Futures Contracts
The Company used exchange-traded financial futures contracts to hedge against
interest rate risks on a portion of its fixed maturity securities. Financial
futures contracts obligate the Company to buy or sell a financial instrument at
a specified future date for a specified price. They may be settled in cash or
through delivery of the financial instrument. Cash settlements on the change in
market values of financial futures contracts are made daily. There are no
financial futures contracts outstanding at December 31, 2001 or 2000.
Put Options
The Company used put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed maturity
investments. The risk hedged is a drop in bond prices due to credit concerns
with international bond issuers. The put options allowed the Company to put the
bonds back to the counterparties at original par. The put options were sold in
2000.
S-23
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
9. Restrictions, Commitments and Contingencies (continued)
Foreign Currency Swaps
The Company uses foreign currency swaps, which are traded over-the-counter, to
hedge some of the foreign exchange risk of investments in fixed maturity
securities denominated in foreign currencies. A foreign currency swap is a
contractual agreement to exchange the currencies of two different countries at
a rate of exchange in the future. The carrying value of the Company's foreign
currency swaps ($3.8 million) represents fluctuations in the spot exchange rate
from the trade date to December 31, 2001 and is included in other investments
on the balance sheet.
Additional Derivative Information
Expenses for the agreements and contracts described above amounted to $3.5
million, $7.3 million and $6.2 million in 2001, 2000 and 1999, respectively.
Deferred gains of $31.2 million as of December 31, 2001 were primarily the
result of terminated interest rate swaps. The deferred gains are included with
the related fixed maturity securities to which the hedge applied and are being
amortized over the life of the securities to which the respective hedges
applied.
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. That exposure
includes settlement risk (i.e., the risk that the counterparty defaults after
the Company has delivered funds or securities under terms of the contract) that
would result in an accounting loss and replacement cost risk (i.e., the cost to
replace the contract at current market rates should the counterparty default
prior to settlement date). To limit exposure associated with counterparty
nonperformance, the Company enters into master netting agreements with its
counterparties.
The Company is required to put up collateral for any futures contracts that are
entered into. The amount of collateral that is required is determined by the
exchange on which the contract is traded. The Company currently puts up cash
and U.S. Treasury Bonds to satisfy this collateral requirement.
The current credit exposure of the Company's derivative contracts is limited to
the fair value at the reporting date. Credit risk is managed by entering into
transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize its exposure
to credit risk through the use of various credit monitoring techniques. All of
the net credit exposure for the Company from derivative contracts is with
investment grade counterparties.
- --------------------------------------------------------------------------------
10. Fair Value of Financial Instruments
The following methodologies and assumptions were used to determine the
estimated fair values of the Company's financial instruments. Considerable
judgment is required to develop these fair values. Accordingly, the estimates
shown are not necessarily indicative of the amounts that would be realized in a
one-time, current market exchange of all of the Company's financial instruments.
Bonds
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained from
independent pricing services. In the case of private placements, fair values
are estimated by discounting expected future cash flows using a current market
rate applicable to the coupon rate, credit quality and maturity of the
investments.
Unaffiliated Common Stock and Preferred Stock
Fair values of unaffiliated common and preferred stock are based on quoted
market prices, where available. For stock not actively traded, fair values are
based on values of issues of comparable yield and quality.
Mortgage Loans on Real Estate
The estimated fair value of mortgage loans on real estate was established using
a discounted cash flow method based on credit rating, maturity and future
income. The ratings for mortgages in good standing are based on property type,
location, market conditions, occupancy, debt service coverage, loan to value,
caliber of tenancy, borrower and payment record. Fair values for impaired
mortgage loans are based on: 1) the present value of expected future cash flows
discounted at the loan's effective interest rate; 2) the loan's market price;
or 3) the fair value of the collateral if the loan is collateral dependent.
Policy Loans
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates consistent
with the maturity durations assumed. These durations are based on historical
experience.
Other Investments and Cash and Short-Term Investments
The carrying values for assets classified as other investments, cash and cash
equivalents and short-term investments in the accompanying statutory-basis
balance sheets approximate their fair value.
Investment-Type Insurance Contracts
The balance sheet caption "policy and contract liabilities" includes contracts
that are considered to be investment-type contracts for GAAP purposes (i.e.,
universal life, annuity and guaranteed interest contracts). The fair values for
the majority of these contracts are based on their approximate surrender
values. The fair values for the certain guaranteed interest and similar
contracts are estimated using discounted cash flow calculations. These
calculations are based on interest rates currently offered on similar contracts
with maturities that are consistent with those remaining for the contracts
being valued.
The remainder of the balance sheet caption "policy and contract liabilities"
that do not fit the definition of "investment-type insurance contracts" for
GAAP are considered insurance contracts. Fair value disclosures are not
required for these insurance contracts and fair values have not been determined
by the Company. It is the Company's position that the disclosure
S-24
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
10. Fair Value of Financial Instruments (continued)
of the fair value of these insurance contracts is important because readers of
these financial statements could draw inappropriate conclusions about the
Company's capital and surplus determined on a fair value basis. It could be
misleading if only the fair value of assets and liabilities defined as
financial instruments are disclosed. The Company and other companies in the
insurance industry are monitoring the related actions of the various
rule-making bodies and attempting to determine an appropriate methodology for
estimating and disclosing the "fair value" of their insurance contract
liabilities.
Short-Term Debt
The carrying value of short-term debt approximates fair value.
Surplus Notes due to LNC
Fair values for surplus notes are estimated using discounted cash flow analysis
based on the Company's current incremental borrowing rate for similar types of
borrowing arrangements.
Derivatives
The Company employs several different methods for determining the fair value of
its derivative instruments. Fair values for these contracts are based on
current settlement values. These values are based on quoted market prices for
the financial futures contracts and industry standard models that are
commercially available for all other derivatives.
Investment Commitments
Fair values for commitments to make investments in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real estate
are based on the difference between the value of the committed investments as
of the date of the accompanying balance sheets and the commitment date. These
estimates would take into account changes in interest rates, the
counterparties' credit standing and the remaining terms of the commitments.
Separate Accounts
Assets held in separate accounts are reported in the accompanying
statutory-basis balance sheets at fair value. The related liabilities are also
reported at fair value in amounts equal to the separate account assets. Seed
money deposited into the separate account by the Company is included as a
separate account asset, but not as a separate account liability.
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
December 31
2001 2000
---------------------- -----------------------
Carrying Carrying
Assets (Liabilities) Value Fair Value Value Fair Value
- --------------------------------------------------------------------------------------------------------------
(in millions)
----------------------------------------------
Bonds......................................................... $ 23,421.0 $ 23,780.4 $ 21,852.5 $ 21,866.6
Preferred stocks.............................................. 223.6 228.5 261.7 239.5
Unaffiliated common stocks.................................... 107.6 107.6 161.7 161.7
Mortgage loans on real estate................................. 4,098.7 4,241.0 4,102.0 4,132.8
Policy loans.................................................. 1,708.7 1,849.2 1,723.5 1,845.0
Other investments............................................. 466.6 466.6 485.0 485.0
Cash and short-term investments............................... 2,697.5 2,697.5 1,448.4 1,448.4
Investment-type insurance contracts:
Deposit contracts and certain guaranteed interest contracts. (17,545.0) (17,257.7) (16,126.3) (15,850.5)
Remaining guaranteed interest and similar contracts......... (122.3) (128.6) (243.8) (247.9)
Short-term debt............................................... (200.0) (200.0) (199.5) (199.5)
Surplus notes due to LNC...................................... (1,250.0) (1,160.7) (1,250.0) (1,074.5)
Derivatives................................................... 4.5 27.6 13.5 41.9
Investment commitments........................................ -- (5.4) -- (2.2)
Separate account assets....................................... 38,636.5 38,636.5 43,904.6 43,904.6
Separate account liabilities.................................. (38,634.0) (38,634.0) (43,904.6) (43,904.6)
- --------------------------------------------------------------------------------
11. Transactions With Affiliates
LLAD has a nearly exclusive general agent's contract with the Company under
which it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional offices.
For providing these selling and marketing services, the Company paid LLAD
override commissions of $52.0 million, $57.5 million and $60.4 million in 2001,
2000 and 1999, respectively. LLAD incurred expenses of $34.9 million, $112.9
million and $113.4 million in 2001, 2000 and 1999, respectively, in excess of
the override commissions and operating expense allowances received from the
Company, which the Company is not required to reimburse.
Cash and short-term investments at December 31, 2001 and 2000 include the
Company's participation in a short-term cash management program with LNC of
$297.9 million and $377.7 million, respectively. Related investment income
amounted to $13.9 million, $24.0 million and $16.7 million in 2001, 2000 and
1999, respectively. The short-term loan payable to parent company at December
31, 2001 and 2000 represents notes payable to LNC.
The Company provides services to and receives services from affiliated
companies, which resulted in a net payment of $78.0
S-25
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
11. Transactions With Affiliates (continued)
million, $65.7 million and $49.4 million in 2001, 2000 and 1999, respectively,
which is included in underwriting, acquisition, insurance and other expenses.
The Company cedes and accepts reinsurance from affiliated companies. Premiums
in the accompanying statements of income include premiums on insurance business
accepted under reinsurance contracts and exclude premiums ceded to other
affiliated companies, as follows:
Year ended December 31
2001 2000 1999
------ -------- ------
(in millions)
----------------------
Insurance assumed $ 46.4 $ 21.2 $ 19.7
Insurance ceded.. 950.7 2,192.1 777.6
The balance sheets include reinsurance balances with affiliated companies as
follows:
December 31
2001 2000
-------- --------
(in millions)
-----------------
Policy and contract liabilities assumed $ 331.1 $ 584.4
Policy and contract liabilities ceded.. 1,311.5 1,682.8
Amounts recoverable on paid and
unpaid losses......................... 229.3 286.9
Reinsurance payable on paid losses..... 20.4 9.3
Funds held under reinsurance treaties--
net liability......................... 1,588.3 3,294.6
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under reinsurance
treaties, which totaled $1.0 billion and $814.6 million at December 31, 2001
and 2000, respectively, and is the beneficiary on letters of credit aggregating
to $156.6 million and $709.5 million at December 31, 2001 and 2000,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31, 2001
and 2000, LNC guaranteed $156.6 million and $709.5 million, respectively, of
these letters of credit. At December 31, 2001 and 2000, the Company has a
receivable (included in the foregoing amounts) from affiliated insurance
companies in the amount of $75.3 million and $133.7 million, respectively, for
statutory surplus relief received under financial reinsurance ceded agreements.
- --------------------------------------------------------------------------------
12. Separate Accounts
Separate account assets held by the Company consist primarily of mutual funds,
long-term bonds, common stocks and short-term investments and are carried at
fair value. Substantially none of the separate accounts have any minimum
guarantees and the investment risks associated with market value changes are
borne entirely by the policyholder.
Separate account premiums and annuity considerations amounted to $4.4 billion,
$5.7 billion and $4.6 billion in 2001, 2000 and 1999, respectively. Reserves
for separate accounts with assets at fair value were $37.6 billion and $42.9
billion at December 31, 2001 and 2000, respectively. All reserves are subject
to discretionary withdrawal at market value.
A reconciliation of transfers to the Company from the separate accounts is as
follows:
Year ended December 31
2001 2000 1999
--------- --------- ---------
(in millions)
-------------------------------
Transfers as reported in the
Summary of Operations
of the separate accounts:
Transfers to separate
accounts................. $ 4,440.7 $ 5,719.2 $ 4,573.2
Transfers from separate
accounts................. (4,500.8) (5,830.0) (4,933.8)
--------- --------- ---------
Net transfers from separate
accounts as reported in
the Summary of
Operations in
underwriting acquisition
and other expenses......... $ (60.1) $ (110.8) $ (360.6)
========= ========= =========
S-26
The Lincoln National Life Insurance Company
Notes to Statutory-Basis Financial Statements (continued)
- --------------------------------------------------------------------------------
13. Sales, Transfers and Servicing of Financial Assets
As part of the Company's asset management program, securities are sold and
reacquired within 30 days of the sale date to enhance the Company's yield on
its investment portfolio. The details by NAIC designation 3 or below of
securities sold during 2001 and reacquired within 30 days of the sale date are:
Book
Value of Cost of
Number of Securities Securities Gain
Transactions Sold Repurchased (Loss)
------------ ---------- ----------- ------
(in millions)
-----------------------------------------
Bonds:
NAIC 3. 83.0 $155.8 $151.9 $ (.1)
NAIC 4. 249.0 355.9 370.3 (3.7)
NAIC 5. -- -- 27.3 (0.2)
NR..... 21.0 41.8 549.4 (4.0)
- --------------------------------------------------------------------------------
14. Reconciliation to Statutory Annual Statement
In connection with the indemnity reinsurance agreements, the Company and Swiss
Re also entered into an administrative services agreement whereby Swiss Re
provides administrative services, including accounting services to the Company.
In connection with the December 31, 2001 statutory financial statements, Swiss
Re provided the Company with certain year-end financial information regarding
the business that had been reinsured by Swiss Re. Although the Company
disagreed with several adjustments made by Swiss Re, the Company was not
provided with sufficient information to reverse the effects of these
adjustments from the Annual Statement financial statements and related exhibits
and schedules. The Company did, however, record an adjustment to reverse the
net effect of the disputed items in the Annual Statement filed with the
Insurance Department by recognizing miscellaneous revenue and a miscellaneous
asset. Because the asset was not specifically identified as an asset within the
NAIC APPM, the Company non-admitted the asset in the December 31, 2001 Annual
Statement. Subsequent to the Annual Statement filing, the Company obtained
additional information regarding the adjustments Swiss Re had made to the
statutory financial information provided to the Company. The Company reversed
those adjustments prior to completion of the accompanying statutory-basis
financial statements. The adjustments that were reversed were principally
associated with reinsurance recoverables for paid and unpaid losses.
The following is a reconciliation of amounts previously reported to state
regulatory authorities in the 2001 Annual Statement, and as reported in the
accompanying statutory-basis financial statements:
(in millions)
Capital and surplus as reported in the Company's Annual Statement................................... $3,096.0
Increase in surplus resulting from reversal of Swiss Re entries..................................... 420.0
---------
Capital and surplus as reported in the accompanying audited statutory-basis balance sheet........... $3,516.0
=========
Statutory net income as reported in the Company's Annual Statement.................................. $ 67.7
Increase in net income resulting from reversal of Swiss Re entries.................................. 111.3
---------
Statutory net income as reported in the accompanying audited statutory-basis statement of operations $ 179.0
=========
S-27
Report of Independent Auditors
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of The Lincoln
National Life Insurance Company (the "Company"), a wholly-owned subsidiary of
Lincoln National Corporation, as of December 31, 2001 and 2000, and the related
statutory-basis statements of operations, changes in capital and surplus and
cash flow for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance, which practices differ from
accounting principles generally accepted in the United States. The variances
between such practices and accounting principles generally accepted in the
United States and the effects on the accompanying financial statements are also
described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States,
the financial position of The Lincoln National Life Insurance Company at
December 31, 2001 and 2000, or the results of its operations or its cash flow
for each of the three years in the period ended December 31, 2001.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Lincoln
National Life Insurance Company at December 31, 2001 and 2000, and the results
of its operations and its cash flow for each of the three years in the period
ended December 31, 2001, in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance.
As discussed in Note 2 to the financial statements, in 2001 the Company changed
various accounting policies to be in accordance with the revised NAIC
Accounting Practices and Procedures Manual, as adopted by the Indiana
Department of Insurance.
/s/ Ernst & Young LLP
February 1, 2002
S-28
<Page>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
UNAUDITED FINANCIAL STATEMENTS 3/31/02
S1Q-1
<Page>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
(UNAUDITED)
<Table>
<Caption>
MARCH 31 MARCH 31
2002 2001
--------- ---------
(IN MILLIONS)
---------------------
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $24,314.8 $21,751.2
- ------------------------------------------------------------
Preferred stocks 222.6 311.6
- ------------------------------------------------------------
Unaffiliated common stocks 105.2 125.4
- ------------------------------------------------------------
Affiliated common stocks 645.4 734.7
- ------------------------------------------------------------
Mortgage loans on real estate 4,018.7 4,068.2
- ------------------------------------------------------------
Real estate
Properties occupied by the company 6.0 6.6
- ------------------------------------------------------------
Properties held for sale 234.7 287.7
- ------------------------------------------------------------
Policy loans 1,698.2 1,712.3
- ------------------------------------------------------------
Short-term investments 594.7 1,610.1
- ------------------------------------------------------------
Other investments 480.7 524.5
- ------------------------------------------------------------
Cash and cash equivalents 715.2 (71.9)
- ------------------------------------------------------------ --------- ---------
Total cash and investments 33,036.2 31,060.4
- ------------------------------------------------------------
Premiums and fees in course of collection 44.8 206.5
- ------------------------------------------------------------
Accrued investment income 474.0 458.3
- ------------------------------------------------------------
Reinsurance recoverable 306.6 233.1
- ------------------------------------------------------------
Funds withheld by ceding companies 137.0 82.8
- ------------------------------------------------------------
Net deferred federal income taxes 239.9 64.8
- ------------------------------------------------------------
Company owned policies and contracts 319.7 332.1
- ------------------------------------------------------------
Goodwill 31.7 37.1
- ------------------------------------------------------------
Other admitted assets 106.9 84.2
- ------------------------------------------------------------
Separate account assets 38,946.0 38,537.4
- ------------------------------------------------------------ --------- ---------
Total admitted assets $73,642.8 $71,096.7
- ------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Policy and contract liabilities:
Future policy benefits and claims $28,326.4 $27,957.1
- ------------------------------------------------------------
Dividends payable 65.6 68.4
- ------------------------------------------------------------
Other policyholder liabilities 42.2 96.1
- ------------------------------------------------------------ --------- ---------
Total policy and contract liabilities 28,434.2 28,121.6
- ------------------------------------------------------------
Amounts withheld or retained by Company as agent or
trustee 755.0 859.2
- ------------------------------------------------------------
Funds held under reinsurance treaties 1,501.1 890.9
- ------------------------------------------------------------
Asset valuation reserve 396.2 537.1
- ------------------------------------------------------------
Interest maintenance reserve -- 33.0
- ------------------------------------------------------------
Short term loan payable to parent 19.5 19.5
- ------------------------------------------------------------
Other liabilities 1035.4 535.9
- ------------------------------------------------------------
Net transfers due from separate accounts (964.1) (939.3)
- ------------------------------------------------------------
Separate account liabilities 38,896.7 38,536.6
- ------------------------------------------------------------ --------- ---------
Total liabilities 70,074.0 68,594.5
- ------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding -- 10 million
(owned by Lincoln National Corporation) 25.0 25.0
- ------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 1,250.0
- ------------------------------------------------------------
Paid-in surplus 1,520.4 2,006.1
- ------------------------------------------------------------
Unassigned surplus (deficit) 773.4 (778.9)
- ------------------------------------------------------------ --------- ---------
Total capital and surplus 3,568.8 2,502.2
- ------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $73,642.8 $71,096.7
- ------------------------------------------------------------ ========= =========
</Table>
See accompanying notes.
S1Q-2
<Page>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
(UNAUDITED)
<Table>
<Caption>
THREE MONTH PERIOD
ENDED MARCH 31
2002 2001
-------- --------
(IN MILLIONS)
-------------------
PREMIUMS AND OTHER REVENUES:
Life and annuity premiums $1,950.5 $2,042.2
- ------------------------------------------------------------
Accident and health premiums 10.4 13.3
- ------------------------------------------------------------
Net investment income 528.7 544.8
- ------------------------------------------------------------
Amortization of the interest maintenance reserve 2.8 4.4
- ------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 147.8 61.6
- ------------------------------------------------------------
Reserve adjustments on reinsurance ceded (47.6) 55.7
- ------------------------------------------------------------
Expense charges on deposit funds 11.3 19.5
- ------------------------------------------------------------
Separate account investment management and administration
service fees 138.8 147.8
- ------------------------------------------------------------
Other income 47.8 39.7
- ------------------------------------------------------------ -------- --------
Total revenues 2,790.5 2,929.0
- ------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 2,151.1 2,608.5
- ------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 518.0 169.9
- ------------------------------------------------------------ -------- --------
Total benefits paid or provided 2,669.1 2,778.4
- ------------------------------------------------------------ -------- --------
Gain from operations before dividends to policyholders,
income taxes and net realized loss on investments 121.4 150.6
- ------------------------------------------------------------
Dividends to policyholders 16.9 17.6
- ------------------------------------------------------------ -------- --------
Gain from operations before federal income taxes and net
realized loss on investments 104.5 133.0
- ------------------------------------------------------------
Federal income taxes (benefit) (27.0) 14.9
- ------------------------------------------------------------ -------- --------
Gain from operations before net realized loss on investments 131.5 118.1
- ------------------------------------------------------------
Net realized loss on investments (81.5) (73.2)
- ------------------------------------------------------------ -------- --------
Net income $ 50.0 $ 44.9
- ------------------------------------------------------------ ======== ========
</Table>
See accompanying notes. S1Q-3
<Page>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
(UNAUDITED)
<Table>
<Caption>
UNASSIGNED TOTAL
COMMON SURPLUS PAID-IN SURPLUS CAPITAL AND
STOCK NOTES SURPLUS (DEFICIT) SURPLUS
------ -------- -------- ---------- -----------
(IN MILLIONS)
-------------------------------------------------------
BALANCES AT JANUARY 1, 2001 $25.0 $1,250.0 $2,006.1 $(602.0) $2,679.1
- --------------------------------------------------
Net income -- -- -- 44.9 44.9
- --------------------------------------------------
Cumulative effect of adoption of codification -- -- -- (4.2) (4.2)
- --------------------------------------------------
Decrease in difference in cost and admitted
investment amounts -- -- -- 68.9 68.9
- --------------------------------------------------
Increase in nonadmitted assets -- -- -- (122.3) (122.3)
- --------------------------------------------------
Amortization of gain on reinsurance transaction -- -- -- (1.8) (1.8)
- --------------------------------------------------
Increase in asset valuation reserve -- -- -- (12.4) (12.4)
- --------------------------------------------------
Dividends to Lincoln National Corporation -- -- -- (150.0) (150.0)
- -------------------------------------------------- ----- -------- -------- ------- --------
BALANCES AT MARCH 31, 2001 25.0 1,250.0 2,006.1 (778.9) 2,502.2
- -------------------------------------------------- ===== ======== ======== ======= ========
BALANCES AT JANUARY 1, 2002 25.0 1,250.0 1,520.4 720.6 3,516.0
- --------------------------------------------------
NET INCOME -- -- -- 50.0 50.0
- --------------------------------------------------
INCREASE IN DIFFERENCE IN COST AND ADMITTED
INVESTMENT AMOUNTS -- -- -- (8.6) (8.6)
- --------------------------------------------------
DECREASE IN NONADMITTED ASSETS -- -- -- 225.9 225.9
- --------------------------------------------------
AMORTIZATION OF GAIN ON REINSURANCE TRANSACTION -- -- -- (29.0) (29.0)
- --------------------------------------------------
CHANGE IN NET DEFERRED INCOME TAXES -- -- -- (182.7) (182.7)
- --------------------------------------------------
RECLASSIFICATION OF SEPARATE ACCOUNT SEED MONEY -- -- -- (47.9) (47.9)
- --------------------------------------------------
OTHER CHANGES IN SURPLUS IN SEPARATE ACCOUNTS -- -- -- 46.8 46.8
- --------------------------------------------------
DECREASE IN ASSET VALUATION RESERVE -- -- -- 58.3 58.3
- --------------------------------------------------
DIVIDENDS TO LINCOLN NATIONAL CORPORATION -- -- -- (60.0) (60.0)
- -------------------------------------------------- ----- -------- -------- ------- --------
BALANCES AT MARCH 31, 2002 $25.0 $1,250.0 $1,520.4 $ 773.4 $3,568.8
- -------------------------------------------------- ===== ======== ======== ======= ========
</Table>
See accompanying notes.
S1Q-4
<Page>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOW -- STATUTORY BASIS
(UNAUDITED)
<Table>
<Caption>
THREE MONTH PERIOD
ENDED MARCH 31
2002 2001
--------- ---------
(IN MILLIONS)
---------------------
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 1,843.4 $ 1,961.3
- ------------------------------------------------------------
Allowances and reserve adjustments received on reinsurance
ceded 132.8 361.9
- ------------------------------------------------------------
Investment income received 507.3 487.7
- ------------------------------------------------------------
Separate account investment management and administration
service fees 138.8 147.8
- ------------------------------------------------------------
Benefits paid (2,123.7) (2,477.0)
- ------------------------------------------------------------
Underwriting, insurance, and other expenses paid (346.4) (465.0)
- ------------------------------------------------------------
Net transfers (from) to separate accounts (104.4) 305.1
- ------------------------------------------------------------
Federal income taxes paid (482.6) (71.8)
- ------------------------------------------------------------
Dividends to policyholders (16.4) (19.5)
- ------------------------------------------------------------
Other income received and expenses paid, net 190.5 (143.9)
- ------------------------------------------------------------ --------- ---------
Net cash (used in) provided by operating activities (260.7) 86.6
- ------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 2,601.3 2,083.0
- ------------------------------------------------------------
Purchase of investments (3,518.0) (2,055.4)
- ------------------------------------------------------------
Other (uses) sources including reinsured policy loans (10.3) 305.7
- ------------------------------------------------------------ --------- ---------
Net cash (used in) provided by investing activities (927.0) 333.3
- ------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of borrowings from shareholder (200.0) (180.0)
- ------------------------------------------------------------
Dividends paid to shareholder -- (150.0)
- ------------------------------------------------------------ --------- ---------
Net cash used in financing activities (200.0) (330.0)
- ------------------------------------------------------------
Net (decrease) increase in cash and short-term investments (1,387.7) 89.9
- ------------------------------------------------------------
Total cash and short-term investments at beginning of period 2,697.5 1,448.4
- ------------------------------------------------------------ --------- ---------
Total cash and short-term investments at end of period $ 1,309.8 $ 1,538.3
- ------------------------------------------------------------ ========= =========
</Table>
See accompanying notes. S1Q-5
<Page>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENT -- STATUTORY BASIS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying financial statements of The Lincoln National Life Insurance
Company ("the Company") have been prepared in conformity with accounting
practices prescribed or permitted by the National Association of Insurance
Commissioners, except to the extent that Indiana State law differs, and except
that these financial statements do not contain complete notes. However, in the
opinion of management, these statements include all normal, recurring adjustment
necessary for a fair presentation of the results.
The Indiana Insurance Department recognizes only statutory accounting practices
prescribed or permitted by the state of Indiana for determining and reporting
the financial condition and results of operations of an insurance company, for
determining its solvency under the Indiana Insurance Law. The Company's
financial statements for March 31, 2002 were completed following the National
Association of Insurance Commissioners' (NAIC) Accounting Practices and
Procedures manual, version effective March 2002, (NAIC APPM). The NAIC APPM has
been adopted as a component of prescribed or permitted practices by the state of
Indiana, however, Indiana has adopted certain prescribed accounting practices
that differ from those found in the NAIC APPM. In addition, the Commissioner of
Insurance has the right to permit other specific practices that deviate from
prescribed practices.
These financial statements are unaudited. Operating results for the three months
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 2002. For further information,
refer to the statutory-basis financial statements and notes as of December 31,
2001, 2000, and 1999 included in this registration statement.
- --------------------------------------------------------------------------------
2. REINSURANCE CONTINGENCIES
On December 7, 2001, Swiss Re Life & Health America, Inc. ("Swiss Re") acquired
LNC's reinsurance operation for $2.0 billion. After giving affect to the
increased levels of capital needed within the Life Insurance and Lincoln
Retirement segments that result from the change in the ongoing mix of business
under LNC's internal capital allocation models, the disposition of LNC's
reinsurance operation has freed-up approximately $100 million of capital. The
transaction structure involved a series of indemnity reinsurance transactions
combined with the sale of certain stock companies that comprised the LNC's
reinsurance operation. Two of the stock companies sold, Lincoln National
Health & Casualty Insurance Company and Lincoln National Reassurance Company,
were wholly-owned subsidiaries of the Company. As a result, and because a
significant amount of the reinsurance business subject to the indemnity
reinsurance transactions was written through the Company, the Company received
$1.84 billion of the $2.0 billion proceeds and retained approximately
$250.0 million of the statutory capital.
A pre-tax loss of $12.5 million was recognized by the Company on the sale of the
subsidiaries. A statutory gain of $1.5 billion was generated under the indemnity
reinsurance agreements. This gain was reported as a direct adjustment to
unassigned surplus (net of related income taxes) and recognition of the surplus
increase as income will be reported on a net-of-tax basis as earnings emerge
from the business reinsured, in accordance with the requirements of Statement on
Statutory Accounting Principles No. 61, LIFE, DEPOSIT-TYPE, AND ACCIDENT AND
HEALTH REINSURANCE. During the first quarter 2002, the Company recognized as
income $19.6 million of the gain.
LNC and Swiss Re have not agreed upon the final closing financial statements
associated with the December 7, 2001 transactions. There are currently disputed
matters of approximately $500.0 million, which relate primarily to personal
accident business reserves and recoverables. LNC's ongoing indemnification to
Swiss Re on the underlying reinsurance business is limited to the personal
accident business. Pursuant to the purchase agreement, LNC's exposure is capped
at $100.0 million for net future payments under the personal accident programs
in excess of $148.0 million, which represents the personal accident liabilities,
net of the assets held for reinsurance recoverable at December 31, 2000. Up to
$200.0 million of net payments in excess of the net liabilities will be shared
on a 50/50 basis between LNC and Swiss Re. LNC has no continuing indemnification
risk to Swiss Re on other reinsurance lines of business.
Additional matters totaling approximately $270 million have been raised by Swiss
Re which if sustained as asserted would effectively result in a transfer of
assets from LNC without an assumption of the related liabilities by Swiss Re.
LNC and Swiss Re are continuing to discuss a variety of means for resolving the
total of approximately $770 million of disputed matters, including potential
approaches for settlement. At this point, LNC and Swiss Re differ on whether the
disputed matters should be decided by a very narrow dispute resolution process
set forth in the contract or by litigation. On April 24, 2002, Swiss Re filed a
legal action intended to compel LNC to submit a number of disputed matters to
this dispute resolution process. LNC contends that such dispute resolution
process is not an appropriate approach for resolution of certain of these
disputed matters. If the parties are unable to reach agreement, and these
matters are resolved by either the contractual dispute resolution process or
litigation, the timetable for an ultimate resolution of these matters may remain
uncertain for some time.
Upon reaching agreement as to the final closing financial statements, it is
possible that the Company could record
S1Q-6
<Page>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENT -- STATUTORY BASIS
(UNAUDITED) (CONTINUED)
2. REINSURANCE CONTINGENCIES (CONTINUED)
adjustments to the realized loss on the sale of subsidiaries, to net income, or
to the amount of gain reported as a direct adjustment to unassigned surplus.
Another aspect of a potential dispute resolution could result in LNC and the
Company agreeing to transfer assets to Swiss Re until the adequacy of certain
reserves and related recoverables can be determined. In that event, LNC and the
Company's future investment income would be reduced to the extent that any such
dispute resolution would result in Swiss Re's retention of the related
investment income during the time frame that Swiss Re would hold the invested
assets. While uncertainty exists as to how these disputed matters will finally
be resolved, at the present time the Company believes the amounts reported
within the Company's statutory-basis financial statements as of March 31, 2002
represent the best estimate of the ultimate outcome of Swiss Re's acquisition of
the Company's reinsurance business.
S1Q-7
<Page>
PART II
FEES AND CHARGES REPRESENTATION
Lincoln Life represents that the fees and charges deducted
under the Contracts, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by Lincoln Life.
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, the undersigned registrant
hereby undertakes to file with the Securities and Exchange
Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly
adopted pursuant to authority conferred in that section.
INDEMNIFICATION
(a)Brief description of indemnification provisions.
In general, Article VII of the By-Laws of The Lincoln
National Life Insurance Company (LNL) provides that LNL
will indemnify certain persons against expenses,
judgments and certain other specified costs incurred by
any such person if he/she is made a party or is
threatened to be made a party to a suit or proceeding
because he/she was a director, officer, or employee of
LNL, as long as he/she acted in good faith and in a
manner he/she reasonably believed to be in the best
interests of, or not opposed to the best interests of,
LNL. Certain additional conditions apply to
indemnification in criminal proceedings.
In particular, separate conditions govern indemnification
of directors, officers, and employees of LNL in
connection with suits by, or in the right of, LNL.
Please refer to Article VII of the By-Laws of LNL
(Exhibit No. 6(b) hereto) for the full text of the
indemnification provisions. Indemnification is permitted
by, and is subject to the requirements of, Indiana law.
(b)Undertaking pursuant to Rule 484 of Regulation C under
the Securities Act of 1933.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant
pursuant to the provisions described in Item 28(a) above
or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any
such action, suit or proceeding) is asserted by such
director, officer or controlling person in connection
with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
CONTENTS OF REGISTRATION STATEMENT
This Pre-Effective Amendment No. 1 to the Registration
Statement comprises the following papers and documents:
The facing sheet;
A cross-reference sheet (reconciliation and tie);
The Prospectus consisting of 87 pages;
The fees and charges representation;
The undertaking to file reports;
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Statements regarding indemnification;
Contents of Registration Statement;
Exhibit List;
The signatures;
Power of Attorney.
The written consents of the following persons:
Robert A. Picarello, Esq.
Vaughn W. Robbins, FSA
Ernst & Young LLP, Independent Auditors
Other Exhibits
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1. The following exhibits correspond to those required by
paragraph A of the instructions as to exhibits in Form N-8B-2:
(1) Resolution of the Board of Directors of The Lincoln National Life
Insurance Company and related documents authorizing establishment
of the Account.(3)
(2) Not applicable.
(3) (a) Form of Principal Underwriting Agreement - Incorporated by
Reference to Exhibit 1.(3)(a) of Pre-Effective Amendment No.
1 to Registration Statement No. 333-40745 (811-05164)
(Account F-ALEB) on Form S-6, filed April 28, 1998, EXCEPT
THAT the following sections are not incorporated by
Reference: Paragraph 9, Paragraph 15, the Schedule of
Commissions to Dealers and Remuneration to AFD, and Exhibit
1(3)(c ).
(b) Form of Selling Group Agreement.(3)
(c) Commission Schedule for Variable Life Policies.(3)
(4) Not applicable.
(5) (a) Form of Contract LN 656(4)
(b) Application Forms -- B11/B17(4)
(c) Addendum to Application for American Legacy -- Policy form
B15AL(3)
(d) Accounting Value Rider(4)
(e) Estate Tax Repeal Rider -- Policy Form LR511(2)
(6) (a) Articles of Incorporation of The Lincoln National Life
Insurance Company.(1)
(b) Bylaws of The Lincoln National Life Insurance Company.(1)
(7) Not applicable.
(8) Form of Fund Participation Agreement - Incorporated by
Reference to Exhibit 1.(8) of Pre-Effective Amendment No. 1
to Registration Statement No. 333-40745 (811-05164) (Account
F) on Form S-6, filed April 28, 1998.
(9) (a) Form of Service Agreement Between Delaware Management
Company, Inc., Delaware Service Company, and Lincoln
National Life Insurance Company - Incorporated by Reference
to the Initial Registration Statement for Reg. No. 333-40745
(811-05164) (Account F - ALEB) on Form S-6, filed
November 21, 1997.
(b.) Form of Indemnification Agreement between Capital Research
and Management Company and The Lincoln National Life
Insurance Company - Incorporated by Reference to
Exhibit 1.(9)(b) of Pre-Effective Amendment No. 1 to
Registration Statement No. 333-40745 (811-05164)
(Account F) on Form S-6, filed April 28, 1998.
(10) See Exhibit 1(3).
2. See Exhibit 1(3).
3. Opinion and Consent of Counsel.
4. Not applicable.
5. Not applicable.
6. Opinion and consent of Actuary.
7. Consent of Ernst & Young LLP, Independent Auditors.
8. Not applicable.
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* to be filed by amendment
- --------------------------
(1) Incorporated by reference to Registration Statement on Form N-4 (File No.
33-27783) (811-05721) filed on December 5, 1996.
(2) Incorporated by reference to Post-Effective Amendment No. 4 on Form S-6
(File No. 333-33782)(811-08579) filed on September 14, 2001.
(3) Incorporated by reference to Pre-Effective Amendment No. 1 on Form S-6 (File
No. 333-81882) (811-21028) filed on May 9, 2002.
(4) Incorporated by reference to Registration Statement on Form S-6
(File 333-90432)(811-08579) filed on June 13, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Lincoln Life Flexible Premium Variable Life Account Y, has duly caused this
Pre-Effective Amendment No. 1 to the Initial Registration Statement on Form S-6
(File No. 333-90438) to be signed on its behalf by the undersigned duly
authorized, in the City of Hartford and State of Connecticut on the 6th day of
August, 2002.
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE
LIFE
ACCOUNT Y (Registrant)
By /s/ GARY W. PARKER
------------------------------------
Gary W. Parker
SENIOR VICE PRESIDENT
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
(Depositor)
By /s/ GARY W. PARKER
------------------------------------
Gary W. Parker
SENIOR VICE PRESIDENT
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Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Initial Registration Statement on Form S-6
has been signed below on August 6, 2002 by the following persons, as officers
and directors of the Depositor, in the capacities indicated:
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<Caption>
SIGNATURE TITLE
--------- -----
/s/ JON A. BOSCIA* President and Director (Principal Executive
-------------------------------------- Officer)
Jon A. Boscia
/s/ JOHN H. GOTTA* Executive Vice President, Chief Executive Officer
-------------------------------------- of Life Insurance, Assistant Secretary, and
John H. Gotta Director
/s/ LORRY J. STENSRUD* Executive Vice President, Chief Executive Officer
-------------------------------------- of Lincoln Retirement, and Director
Lorry J. Stensrud
/s/ JANET CHRZAN* Senior Vice President, Chief Financial Officer and
-------------------------------------- Director (Principal Financial Officer and
Janet Chrzan Principal Accounting Officer)
/s/ SEE YENG QUEK*
-------------------------------------- Chief Investment Officer and Director
See Yeng Quek
/s/ C. E. HALDEMAN, JR.*
-------------------------------------- Director
Charles E. Haldeman, Jr.
/s/ RICHARD C. VAUGHAN*
-------------------------------------- Director
Richard C. Vaughan
/s/ BARBARA S. KOWALCZYK*
-------------------------------------- Director
Barbara S. Kowalczyk
</Table>
*By /s/ GARY W. PARKER
-----------------------------------
Gary W. Parker, pursuant to a Power
of Attorney filed with this
Pre-Effective Amendment No. 1 to
the Initial Registration Statement
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POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta,
Robert A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all Registration Statements on
Form S-6, Form N-8B-2 and/or Form N-6, or any successors to these Forms, and
amendments thereto, filed with the Securities and Exchange Commission under the
Securities Act of 1933, on behalf of the Company in its own name or in the name
of one of its Separate Accounts, hereby ratifying and confirming our signatures
as they may be signed by any of our attorneys-in-fact to any such Registration
Statement or amendment to said Registration Statement. The execution of this
document by each of the undersigned hereby revokes any and all Powers of
Attorney previously executed by said individual for this specific purpose.
WITNESS our hands and common seal on this 28th day of January, 2000.
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<Caption>
SIGNATURE TITLE
--------- -----
/s/ JON A. BOSCIA*
-------------------------------------- President and Director
Jon A. Boscia
/s/ RICHARD C. VAUGHAN*
-------------------------------------- Director
Richard C. Vaughan
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POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta,
Robert A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all Registration Statements on
Form S-6, Form N-8B-2 and/or Form N-6, or any successors to these Forms, and
amendments thereto, filed with the Securities and Exchange Commission under the
Securities Act of 1933, on behalf of the Company in its own name or in the name
of one of its Separate Accounts, hereby ratifying and confirming our signatures
as they may be signed by any of our attorneys-in-fact to any such Registration
Statement or amendment to said Registration Statement. The execution of this
document by each of the undersigned hereby revokes any and all Powers of
Attorney previously executed by said individual for this specific purpose.
WITNESS our hands and common seal on this 9th day of August, 2000.
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/s/ C. E. HALDEMAN, JR.*
-------------------------------------- Director
Charles E. Haldeman, Jr.
</Table>
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POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta,
Robert A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all Registration Statements on
Form S-6, Form N-8B-2 and/or Form N-6, or any successors to these Forms, and
amendments thereto, filed with the Securities and Exchange Commission under the
Securities Act of 1933, on behalf of the Company in its own name or in the name
of one of its Separate Accounts, hereby ratifying and confirming our signatures
as they may be signed by any of our attorneys-in-fact to any such Registration
Statement or amendment to said Registration Statement. The execution of this
document by each of the undersigned hereby revokes any and all Powers of
Attorney previously executed by said individual for this specific purpose.
WITNESS our hands and common seal on this 11th day of August, 2000.
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/s/ LORRY J. STENSRUD* Chief Executive Officer of Annuities, Executive
-------------------------------------- Vice President and Director
Lorry J. Stensrud
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STATE OF )
INDIANA
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
11th day of August, 2000
/s/ SHARLENE K. GEER
-------------------------------
Notary Public
Commission Expires 2/29/08
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/s/ JANET CHRZAN* Senior Vice President, Chief Financial Officer
-------------------------------------- and Director
Janet Chrzan
</Table>
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STATE OF )
INDIANA
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
11th day of August, 2000
/s/ JANET L. LINDENBERG
-------------------------------
Notary Public
Commission Expires 7/10/01
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POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta,
Robert A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all Registration Statements on
Form S-6, Form N-8B-2 and/or Form N-6, or any successors to these Forms, and
amendments thereto, filed with the Securities and Exchange Commission under the
Securities Act of 1933, on behalf of the Company in its own name or in the name
of one of its Separate Accounts, hereby ratifying and confirming our signatures
as they may be signed by any of our attorneys-in-fact to any such Registration
Statement or amendment to said Registration Statement. The execution of this
document by each of the undersigned hereby revokes any and all Powers of
Attorney previously executed by said individual for this specific purpose.
WITNESS our hands and common seal on this 3rd day of August, 2001.
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/s/ SEE YENG QUEK*
-------------------------------------- Chief Investment Officer and Director
See Yeng Quek
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POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta,
Robert A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all Registration Statements on
Form S-6, Form N-8B-2 and/or Form N-6, or any successors to these Forms, and
amendments thereto, filed with the Securities and Exchange Commission under the
Securities Act of 1933, on behalf of the Company in its own name or in the name
of one of its Separate Accounts, hereby ratifying and confirming our signatures
as they may be signed by any of our attorneys-in-fact to any such Registration
Statement or amendment to said Registration Statement. The execution of this
document by each of the undersigned hereby revokes any and all Powers of
Attorney previously executed by said individual for this specific purpose.
WITNESS our hands and common seal on this 4th day of January, 2002.
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/s/ BARBARA S. KOWALCZYK*
-------------------------------------- Director
Barbara S. Kowalczyk
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POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta,
Robert A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all Registration Statements on
Form S-6, Form N-8B-2 and/or Form N-6, or any successors to these Forms, and
amendments thereto, filed with the Securities and Exchange Commission under the
Securities Act of 1933, on behalf of the Company in its own name or in the name
of one of its Separate Accounts, hereby ratifying and confirming our signatures
as they may be signed by any of our attorneys-in-fact to any such Registration
Statement or amendment to said Registration Statement. The execution of this
document by each of the undersigned hereby revokes any and all Powers of
Attorney previously executed by said individual for this specific purpose.
WITNESS our hands and common seal on this 18th day of January, 2002.
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/s/ JOHN H. GOTTA* Executive Vice President, Chief Executive Officer
-------------------------------------- of Life Insurance, Assistant Secretary, and
John H. Gotta Director
</Table>